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COVID-19 effects on warehouses lease agreements

Iris Cristofor
Iris Cristofor
Casiana Dusa
Casiana Dusa

In response to the challenges which the landlords are currently facing in Romania due to COVID-19, we aim to offer solutions by objectively examining the key legal and practical aspects at both domestic and international level. Hence, we have considered the performance of lease agreements during epidemics (SARS, COVID-19, Spanish Flu and Ebola) across various jurisdictions and legal systems.

1. Must the lessee pay the rent and service charge?

According to the Romanian Civil Code, the lease is defined as the agreement by which a Party (Lessor) grants the other Party (Lessee) the right to use an asset for a certain period of time, in exchange for a price (Rent). Therefore, as long as the Lessor provides the use of the leased asset to the Lessee, the latter has the obligation to pay the rent and service charge, as provided by the lease agreement. Consequently, the question is if such obligation can be waived if the Lessee cannot benefit by the leased space, due to certain governmental restrictions that may force it to suspend/interrupt its activity at the leased space.

The solution is different from case to case, taking into consideration how the restrictions affect the performance of the obligations of both Lessor and Lessee. For instance, in such context, if the object of the Lease is a warehouse and the Lessor can still grant the use of the premises, the Lessee’s obligation to pay the rent and service charge will remain valid irrespective of a possible restriction of its right to use its headquarters or places of business, caused by the suspension / interruption of its activity. Such a restriction has much less relevance considering that the Lessee may use the warehouse space to store products that are further sold on its online shop, not even in a physical space.

Furthermore, the restriction of the right of using the above locations on a temporary period of time, covering the emergency state due to COVID-19, is insignificant considering the long period of the commercial lease contracts for warehouses (usually 5-10 years), hence the financial difficulties cannot be invoked by the Lessee to waive its obligations. Such long – term contracts are usually concluded in consideration of the Lessee’s financial capabilities, that can obviously cover a 1-3 months rent, without undertaking any commercial activity.

In China, the Hong Kong Courts had a similar approach in a 2003 SARS epidemic-related case.[1] The Hong Kong Courts stated that a 10 days period during which the leased premises were affected by isolation, was insignificant in view of the two-year duration of the lease. The courts also expressed the view that even though the outbreak of SARS could arguably be considered an unforeseeable event, the effect of the isolation order did not go as far as to alter radically the fundamental rights and obligations arising from the tenancy agreement.[2]

In Germany, legal practitioners consider that tenants are not entitled to suspend or reduce the payment of the rent due to collapsing turnovers or official operating prohibitions.[3] Moreover, Jan-Marco Luczak, legal policy spokesman for Chancellor Angela Merkel’s conservatives, warned that it had not been the intention of lawmakers for “financially-strong corporations” to forgo rent payments and balk on contracts.[4]

We point out that the bottom-line of German civil law is the Latin principle pacta sunt servanda, which is also applicable by the Romanian legal system. According to this principle, all agreed contracts are legally binding must be performed. Based on this principle, it is also implied that in a lease contract, the risks will be taken and shared between the Parties.

Having deeply examined the views of legal practitioners, we agree with the opinion stating that the Lessee bears the risk of use, while the Lessor bears the risk of the continued usability of the leased object. Consequently, the obligation to pay the rent is only waived if the Lessor can no longer make the leased property available. Even in times of COVID-19, many, if not most, Lessors are easily able to continue to make the premises available for use as agreed in the underlying contract. In such a context, the Lessee is still obliged to pay the rent.[5]

Regarding the Lessee obligation to pay the rent during a pandemic, other states had the following approach:
– In 2007 in the United States, a Procurement Memorandum issued by the Department of Commerce of Washington D.C. stated that during pandemic influenza the contract performance shall continue without delay.[6]
– According to the Executive Order issued in the State of Arizona on 24th March 2020[7] regarding COVID-19, it is expressly confirmed that the tenants remain obligated to continue to pay rent.
– In Singapore, legal practitioners state that in general, in COVID-19 context, unless the tenancy agreement provides otherwise, there is prima facie no duty on the landlord to offer any concessions, such as rental rebates or waivers in the event of a pandemic outbreak, and the tenant continues to be bound by its obligations to promptly pay rent under the tenancy agreement.[8]
– In Australia, legal practitioners consider that in the context of COVID-19, the tenants cannot in principle waive the payment of the rent invoking such emergency situation, since according to most of commercial leases, the tenants are not permitted to withhold payments regardless of the circumstances. Moreover, a delay of more than fourteen days will entitle the landlord to terminate the lease and re-enter the premises.[9]
– According to the Ontario Government[10], in response to the evolving COVID-19 public health situation, no new eviction orders will be issued, however the Lessees must pay rent according to the Residential Tenancies Act, 2006.[11]
– In United Kingdom, following a decision by the Master of the Rolls with the Lord Chancellor’s agreement the court service will suspend all ongoing housing possession action, however the Lessees are still liable for their rent and should pay this as usual[12].

2. Can the force-majeure constitute a legal basis to waive the rent?

According to the Civil Code, unless otherwise agreed by the Parties or provided by the Law, the Party who is invoking the impossibility of performing the contractual obligations can be freed from liability when such impossibility is due to a force majeure event, which is defined as any event which is external, unpredictable, totally invincible and inevitable.

The COVID-19 pandemic does not constitute, per se, a force majeure case in the above context. Therefore, the Lessee cannot simply invoke a force majeure certificate as legal basis to exonerate from its obligations (See point 2.2. below for the conditions).

2.1. Can a force-majeure certificate be used to waive the rent?

The Romanian Chamber of Commerce and Industry (CCIR) can certify upon request the existence of a force majeure event, subject to certain conditions. However, note that such confirmation is not legally binding, since CCIR does not have the authority to intervene in a contract, but only to confirm the existence of a force majeure event which may (not must) free the non-performing party from liability. The importance of the certificate issued by the CCIR lies in its role of evidence which can be used when negotiating with the other party which may be accept or reject it, the Court taking the final decision.

A similar view was expressed by Dutch practitioners who reacted quite trenchantly in response to the large retailers requesting their Landlords to adjust or even to waive the rent, invoking COVID-19 as a force majeure cause. Indeed, it was stated that the special circumstances that would lead to force majeure on the part of the Tenant must be tested by a judge.[13]

2.2. What are the obligations and alternative ways for the Lessee to execute the Lease?

In order for COVID-19 to be considered a force majeure event, the non-performing Parties must prove that they had no alternative to execute their contractual obligations in the context of COVID-19 and that they took all the reasonable measures to mitigate the effects of such event. Therefore, a Lessee would be required to prove that it had no alternative to execute the contract, which in this case is almost impossible, considering that its obligation consists of rent (money) which is part of the so-called gender assetscategory (determined by the common characters of other assets belonging to the same kind, such as money, food, fuel etc.).

In the scenario where the object of the Lease is a warehouse, if the Lessee cannot obtain any financial means from its commercial spaces (so not the object of the Lease) which are closed to due public authorities’ decision, but it is still running its online sale platform or at least it is legally allowed to do so, it has a viable alternative to get revenues, being able to pay the rent for the warehouse he uses. Also, due to the restrictions imposed by the public authorities in the context of COVID-19, the population is using predominantly the online shopping, therefore the level of sales on online platforms is expected to grow rapidly.

Moreover, the COVID-19 business continuity plans of several companies involve the use of office spaces at least partially, if not entirely. For example, the IT equipments including the servers are stored in the office spaces and they are functioning in order to sustain the work activity from distance (in case of work from home).

Furthermore, the large retail giants whose assets worth billions of euros have much less reason to request their Landlords to adjust in any way the rent for the leased property, even more if this consists of a warehouse.

The international legal practitioners have a similar view. A force majeure clause is unlikely to be triggered if Covid-19 has prevented one method of performing the contract but alternative methods of performance still exist.[14]

Court of Justice of The European Union’s opinion. When ruling on force-majeure related matters, The Court of Justice of The European Union (CJEU) stated that the force majeure is applied when there are abnormal and unforeseeable circumstances, extraneous to the subject claiming them and whose effects could not have been avoided in spite of the exercise of all due care[15]. The CJUE further concluded that the force-majeure in EU Law requires the existence of both an objective element, concerning the abnormal circumstances which are extraneous to the party invoking them, and of a subjective element, represented by the obligation for this subject to exercise all due care against any possible effect of the unforeseeable event, by adopting adequate measures without incurring in disproportionate efforts.”[16] Following the CJUE reasoning, we consider that the expression “adequate measures” also alludes to finding alternative ways of performing the contractual obligation.

2.3. Can the Lessee request the postponement of rent payment based on the laws in force?

Specifically, the Article X of the Government Emergency Ordinance No 29/2020 (the “OUG No 29”) sets forth various measures supporting the performance of certain commercial agreements, detailing the “force majeure” arguments to be invoked by SMEs. In particular, the force majeure can be invoked only after the proved attempt of negotiation between the parties (by written / electronic means of proof), considering the exceptional conditions caused by the emergency situation. The OUG No 29 establishes a relative presumption than an event is force majeure subject to the following conditions:

(a) It is unexpected, absolutely invincible and inevitable, as defined by the Civil Code;

(b) It results from an act issued by the public authorities and the appliance of the measures imposed by the prevention and rebutment of pandemic directly affects the activities of SMEs; [Therefore, in case of a Lease, if the leased premises (warehouses/offices) are not affected by the actions of the public authorities, such as to legally hinder the access to the space, this condition is not fulfilled]

(c) The affectation is proved by the Emergency Situation Certificate.

We draw attention to the fact that on 8th of April 2020, a Draft Law[17] regarding the possibility of tenants to waive of rent payment during the emergency situation, is subject to the legislative process and has already been approved by the Senate and by various committees of the Chamber of Deputies. According to this Draft Law, the tenants can suspend upon request the rent payment for the use of the immovable assets registered as headquarters or places of business, if the activity of such tenants has been suspended or reduced due to certain acts issued by public authorities during the emergency situation. In this case, no tax shall be levied against the landlords that has not received the rent. Considering the reasons written by the legislator for approving this Draft Law, its intention is to avoid a payment without object, should the tenants’ use of the leased property be impossible. Moreover, it is expressly stated that such facilitation to suspend the rent payment is applicable only to the immovable assets registered as headquarters or places of business, which means that the tenants shall be still required to comply with their obligations corresponding to the lease of other spaces, such as warehouses.

2.4. What are the financial burdens of the Lessees during the state of emergency cause by COVID-19? Do they receive any financial support?

As a matter of principle, during the current situation, the businesses who face financial difficulties will suspend or interrupt their business, while their employees benefit from the technical unemployment allowance of 75% of the basic salary corresponding to the occupied job that is borne by the unemployment insurance budget to the extent of 75% of the average gross earning provided by law. Besides, the businesses are entitled to a series of fiscal benefits, compensations and exemptions. Among others, the payment of rent and utilities can also be negotiated.

Moreover, in the context of COVID-19 pandemic, the legal persons who are debtors in loan and leasing contracts can request the postponement of the payment of instalments, representing capital, interest and commissions, for a period up to 9 months[18], subject to certain conditions, as follows: (i) The debtor was granted a loan by a credit institution or a non-banking financial institution, through a credit / leasing agreement concluded before 30 March 2020; (ii) The maturity of the credit was not declared before this date; (iii) By March 16, 2020, when the emergency state was declared in Romania, there were no outstanding amounts registered in the name of the Debtor; (iii) The income of the Debtor has been affected by COVID-19; (iv) The Debtor must not be insolvency; (v) The Debtor has suspended its activity following the decisions issued by the authorities during the state of emergency and have obtained the certificate for emergency situations which shows a decrease in their the income as of March 2020 by at least 25% compared to the average of their income as for January and February 2020 or the partial or total interruption of the activity as a result of the decisions issued by the competent public authorities during the period of state emergency.

3. Emergency situation certificates. Matter of concern for landlords?

The emergency situation certificate (ESC) can be obtained online by submitting an affidavit. In our opinion, the ESC does not per sewaive the Lessees from their obligation to pay the rent, if the Lessors can ensure the use of the leased premises.

This certificate attests that the applicant’s activity has been affected in the context of COVID-19, however it cannot be used by a Lessee as a legal basis to avoid its due payments, if other conditions are not fulfilled, as mentioned above. Despite the fact that it can be obtained online, the applicant must be prepared at all times to provide the supporting documents in case of a control.

The Emergency Situation Certificates can be used to obtain economic facilities/support measures or to negotiate commercial contracts, having the role to complete the agreement of the parties rather than to act as a vehicle used for abusively breaking the contractual balance.

Conclusion

The ownership of a leased property can definitely be considered a business like any other, therefore being equally affected by COVID-19 negative effects, having a series of financial burdens. Also, several economic agents may depend on the landlord’ financial stability, its potential insolvency being likely to affect the Lessees businesses and consequently their employees. Therefore, it is crucial to protect this key category operating in the market, while the Lessees should not adopt an abusive approach by withholding their outstanding payments which may eventually have a boomerang effect.

Given our analysis above, we conclude that as long as the Lessor can ensure the use of the leased space, the Lessor has no legal basis to postpone or waive the rent, since its monetary obligation benefit by a myriad of alternative ways of execution. The Landlords and the Lessees should rather treat themselves as partners, rather as Creditor / Debtor, which is, in our opinion, the most efficient way to optimally face the impact of COVID-19.


[1] Li Ching Wing v. Xuan Yi Xiong, [2004] 1 HKLRD 754.
[2] Available here.
[3] Available here.
[4] Available here.
[5] Available here.
[6] www.osec.doc.gov/oam/acquistion_management/policy/procurement_memoranda_cancelled/documents/PM_2007-01.pdf.
[7] Governor Ducey’s Executive Order 2020-14, Arizona.
[8] Available here.
[9] Available here.
[10] Available here.
[11] Available here.
[12] Available here.
[13] See comment of Lawyer Evert Baart, here.
[14] Available here.
[15] See judgments Société Pipeline Méditerranée et Rhône, C‑314/06, SGS Belgium a. o.,C‑218/09 and Eurofit, C‑99/12).
[16] First City Trading a. o., C‑263/97, Société Pipeline Méditerranée et Rhône, C-314/06
[17] PL-x nr. 134/2020 – Draft Law regarding the waiver of rent payment during the period corresponding to the emergency situation
[18] See in particular Article 1(b), Article 2 and Article 6 of the Emergency Ordinance no. 37/2020 regarding the granting of certain facilities for loans granted by credit institutions and non-banking financial institutions in Romania to certain categories of debtors and Articles 15-16 of the Norm dated 2nd April 2020, regarding the application of the above Emergency Ordinance.


Iris Cristofor, Partner CRISTOFOR VLADU & ASOCIATII SCA
Casiana Dusa, Senior Associate CRISTOFOR VLADU & ASOCIATII SCA

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