Implications of the COVID-19 Crisis on Non-Residential Lease Agreements

Published 01 April 2020 by Bufete B. Buigas

The urgent measures adopted by the Government (RD 463/2020, of March 14th, together with RD 465/2020, of March 17th and RD-L 8/2020, of March 17th) significantly affect property lease contracts for commercial or professional use, other than a dwelling, since as long as the current state of alarm continues, commercial establishments and those others included in the Spanish Law 29/94 on Urban Leases must be kept closed by legal imperative, except for those carrying out any expressly permitted activities.

With regard to the impact of this closure statement, many doubts arise as to the consequences and implications on the business premises leases.

The question is whether the current situation of closure and fall or non-existence of income of shops and professionals may or may not lead to the suspension of contracts or the cessation of the obligation to pay the rent and even to their resolution.

Our rental regulations for urban properties only provide for the possibility of suspending contracts in certain cases referring to conservation works or works agreed by a competent authority that makes the home uninhabitable or, in the case of premises, unusable for its purpose.

However, our legal system (article 1255CC) is based on the principle of freedom of agreement between the parties, within the limits of the law, morality and public order. Therefore, in the first place, we must identify and study, in each case, in an exhaustive manner, the individual agreements and clauses that provide for this type of exceptional cases, and which may have as a consequence the suspension or termination of the contractual relationship, as well as other less definitive remedies, due to the impossibility by one of the parties to the contract to meet the obligations agreed prior to the present circumstances.

It shall be considered, for example, the duration agreed in the contracts and any arrangements to respond to certain situations, as well as faculties of withdrawal and other mechanisms for adjustment or assumption of risk.

The following step will be to consider the application of force majeure in the rental relationship in view of the effects of the pandemic. Article 1105 CC states that “no one shall be liable for events that could not have been foreseen, or which, if foreseen, were unavoidable”.

Force majeure exonerates from liability for non-performance of the debtor's obligation, only in the case of obligations to deliver a certain thing or to do something. As established by the case-law of the Supreme Court, the force majeure exception does not apply to obligations to deliver a generic thing (such as money), since the generic thing can be replaced by another of the same kind. Although temporary impossibility or delay in payment could be admitted, the total and definitive impossibility of meeting monetary debts is not contemplated. As a result, the tenant is not released from his financial obligations, even if unforeseeable and unavoidable circumstances arise, such as the COVID-19 pandemic and the public measures to combat it.

Notwithstanding the above, both our jurisprudence and doctrine have mechanisms that could provide a response to this situation. The so-called rebus sic stantibus clause allows for the suspension, modification or termination of the contract due to the supervening alteration of the concurrent circumstances and the break in the economic balance of the contract when it becomes impossible or very burdensome for one of the parties to fulfil the contract.

This clause requires:

  1. Supervening alteration of the circumstances of performance: Extraordinary alteration of the circumstances at the time of performance of the contract in relation to those concurrent at the time of its conclusion.
  1. Excessive hardship for one of the parties as a result of such alteration: Exorbitant and uncalculated disproportion between the performance of the contracting parties, annihilating the performance.
  1. The unpredictability of the event and its duration: there are reasonable expectations of duration.
  1. Lack of other means to remedy and prevent the damage (sentences of the Civil Chamber of the Supreme Court of May 17th 1987 and June 6th 1959).

Similarly, further the economic crisis in 2008, the STS of June 30th 2014, rec. 2250/2012, among others, is an example of this:

"... its impact must be relevant or significant with respect to the economic basis that initially informed the contract concluded and considering that such an event occurs when the excessive hardship operated by such a change is decisive both for the frustration of the economic purpose of the contract (viability of the contract), and when it represents a significant alteration or rupture of the relation of equivalence of the considerations (commutability of the contract) ...

These circumstances, which modify the primary economic purpose of the contract, are fully transferable to the way in which the COVID-19 crisis is affecting business premises leases, and therefore their invocation is appropriate to attempt to modify or terminate certain contracts by applying this doctrine.

Courts, favour the modification of the contract, in order to maintain the normal functioning of the commercial traffic, over its suspension or termination.

However, business obliged to be temporarily closed by RD 463/2020 of March 14th can be considered the most direct beneficiaries of the application of this doctrine, having suffered directly the consequences of the declaration of the state of alarm. Instead, leases in which the establishment is not obliged to close will require additional arguments to demonstrate the concurrence of the requirements for the application of the rebus sic stantibus clause, and that as a consequence there has been a substantial modification of the conditions in which the contract was signed. This would be the case for businesses that can remain open and fully operational, and yet have been severely affected by the current situation, to the point of compromising the fulfilment of their rental obligations. For this second case, the application by the courts of the aforementioned doctrine will be more restrictive, and the evidentiary activity will be fundamental.

In this context, it would be advisable to reach temporary agreements between lessors and lessees to mitigate the burden of the current situation in accordance with principles of fairness and proportionality, documented in writing in the greatest detail, given that total or partial remissions unilaterally by the lessor will not prevent compliance with tax obligations in the same terms as before the modification.