Insights, Legal alerts / 30.03.2020

The impact of the coronavirus pandemic on lease relationships: a review of current law and court practice.

During the coronavirus pandemic, in order to minimize losses, lessees of office and retail premises are looking for arguments in favor of a reduction of the rental payment and/or extending the payment deadlines or even cancelling lease agreements altogether. This is an extremely acute question, in particular, for catering establishments in retail premises, for fitness centers and educational institutions whose activities are currently suspended.

In the current situation, lessees are increasingly having questions about whether it is possible to apply specific concepts provided for by current legislation in their relations with leaseholders to reduce rental payments / delay payments in this review, let us consider the main ones with regard to lease agreements:

 

Force Majeure

Exemption from civil liability because of a force majeure is provided for in para. 3 of art. 401 of the Civil Code of the Russian Federation (the “Civil Code”).

Speaking about this rule, it is necessary to take into account that, according to court practice, art. 401 of the Civil Code is to be applied to liability for failure to discharge an obligation only (for example, when considering the issue of a penalty for late rental payment) and will not be applied to give an exemption from the performance of the agreement (as, for example, with the issue of an exemption from rental payments / a reduction of rental payments) [1]

For par. 3 of art. 401 of the Civil Code to apply, as a general rule, three conditions must be met: (1) the specific circumstances must be extraordinary (that is, beyond the normal and mundane, or unusual [2], (2) they must be unavoidable, and (3) it must be objectively impossible to perform the relevant agreement because of the pandemic as a consequence. It should be noted that a violation of an obligation on the part of the debtor’s counterparties or the absence of the necessary means at the debtor’s disposal is not considered a force majeure.

Thus, even if the coronavirus pandemic qualifies as a force majeure (including by this being established in the lease agreement), but does not directly impede the performance of the lease agreement by the lessee (for example, the lessee’s activity is not officially suspended) , it is highly likely that the exemption from liability on the ground of para. 3 of art. 401 of the Civil Code will not apply to the lessee.

 

Termination of an obligation because it is impossible to discharge and termination of an obligation on the grounds of an Act issued by a State Body

According to art. 416 of the Civil Code, an obligation will terminate because it is impossible to discharge, if this is caused by a circumstance occurring after the obligation originated, and neither of the parties is answerable for such circumstance.

In the current court practice with respect to article 416 of the Civil Code, whether it is possible to apply this article to the lease agreement depends on whether the lessee has an objective opportunity to use the property. For example, in one case, the court indicated that the lessee is obliged to pay the rental payment if it has not proved that the property is impossible to discharge for its intended purpose and the property has not been returned to the leaseholder [3]. Also there is a position in court practice that the rental payment is expected to be collected if, for reasons beyond the control of the lessee, he was deprived of the opportunity to use the rented property [4].

The termination of obligations on the grounds of an Act issued by a State Body is a special case in which an obligation terminates through the impossibility to discharge it [5].

According to the article 417 of the Civil Code, if as a result of an act issued by a state body or local authority, an obligation has become impossible to perform in full or in part, such obligation shall be terminated in full or to the corresponding partial extent.

Despite the fact that today there are no examples in practice similar to the current pandemic situation, it seems that with respect to companies whose activities have officially been suspended, articles 416 and 417 of the Civil Code can be applied to.

 

A Material Change of Circumstances

As a general rule, according to art. 451 of the Civil Code, an essential change in the circumstances from which the parties proceeded when concluding the agreement will be a ground to amend or cancel it, unless the agreement stipulates otherwise. In this regard, to resolve the issue of whether art. 451 of the Civil Code applies to the lease agreement, first of all, you need to make sure that the agreement does not contain provisions that directly exclude the possibility of  amending or cancelling the lease agreement if there is a material change in circumstances.

Firstly, the Civil Code invites the parties to an agreement to independently agree to amend the agreement if a material change in circumstances occurs. In this regard, we recommend that lessees independently initiate negotiations with leaseholders regarding a reduction of the rental payment in these circumstances.

If it does not prove possible to agree, the parties may apply to a court; art. 451 of the Civil Code sets forth the conditions that must be observed to satisfy the requirements to amend an agreement through the court on this ground. However, it must be considered that in court practice a rather rigid approach has been developed in interpreting a material change in circumstances. In relation to a lease, courts have not recognized a deterioration of the economic situation and a decrease in demand for goods [6], as well as a reduction of staff [7] as a ground for the early rescission of a lease agreement; a decrease in the market value of leased premises and changes in market conditions [8], as well as inflationary fluctuations [9] have not been recognized as grounds for a reduction of rental payments.

The concept of a material change in circumstances provides an opportunity for both the amendment and cancellation of the agreement. Taking into account the above practice, the possibility of a reduction through the court of the rental payment on the ground of art. 451 of the Civil Code in relation to companies whose activities are not officially suspended is contentious, in the event that the leaseholder refuses to amend the lease agreement voluntarily.

 

Substantial deterioration of the conditions for the use property

According to the art. 614 of the Civil Code, unless the law provides otherwise, the leaseholder will have the right to demand a corresponding reduction of the rental payment if, in view of circumstances for which the leaseholder is not answerable, the conditions of use specified by the lease agreement have deteriorated substantially.

It should be noted that the court practice under this rule mainly relates to the possibility of a reduction of the rental payment when it is objectively impossible to use the rented premises due to circumstances beyond the control of the lessee [10]. Such circumstances could be, for example, when premises flood due to precipitation [11] or when certain rented properties cease to exist [12] or the leaseholder terminates access to the rented premises [13].

Based on an analysis of the aggregate of the court practice, article 614 of the Civil Code  is at present interpreted by the courts mainly as allowing rental payments to be reduced in a case when the lessee is deprived of the opportunity to use the premises due to events that deteriorate such use or make it impossible.

Summing up the above, first of all, it seems that the choice of a lessee’s method of action depends on its goals:

  • If the lessee wants to get a rental vacation for the period of suspension, it seems possible to use articles 416, 417 and 451 of the Civil Code (if the application of article 451 is not excluded by the lease agreement);
  • If for reasons related to the coronavirus the leaseholder restricts lessees’ access to premises at the leaseholder’s own initiative (for example, it closes a retail/office center), lessees are entitled to have recourse to a reduction of the rental payments under art. 614 of the Civil Code.

Besides, we additionally recommend analyzing the lease agreement carefully whether there are conditions that allow you to reduce the rental payment or delay payment in the current situation.

 

[1] For example, Resolution No. 5598/00 of the Presidium of the Supreme Commercial Court of the Russian Federation of December 19, 2000
[2] par. 8 of Order No. 7 of the Plenum of the Supreme Court of the Russian Federation dated March 24, 2016
[3] The decision of the Commercial Court of the North-Western District dated January 18, 2016 under case No. A56-85550/2014].
[4] Appeal decision of the Supreme Court of the Republic of Mordovia of January 18, 2018 under case No. 33-96 / 2018
[5] Para. 5 of Information letter No. 104 of the Presidium of the Supreme Commercial Court of the Russian Federation of December 21, 2005
[6] The Decision of the Commercial Court of the West Siberian District dated August 26, 2014 under case No. A27-18034/2013
[7] Resolution No. 9600/10 of the Presidium of the Supreme Commercial Court of the Russian Federation dated November 30, 2010 under the case NA17-1960/2009
[8] The Decision of the Commercial Court of the Moscow District dated August 22, 2018 under case No. A41-75942 / 2017
[9] Resolution No. 1074/10 of the Presidium of the Supreme Commercial Court of the Russian Federation dated April 13, 2010 under case No. A40-90259/08-28-767
[10] Para. 5 of Review No. 3 of court practice of the Supreme Court of the Russian Federation (2017) (approved by the Presidium of the Supreme Court of the Russian Federation on December 7, 2017), and para. 4 of the Review No. 2 of court practice of the Supreme Court of the Russian Federation (2015) (approved by the Presidium of the Supreme Court of the Russian Federation on June 26, 2015)
[11] Decision No. F05-336/2020 of the Commercial Court of the Moscow District dated February 12, 2020 under case No. A40-298756/2018
[12] Decision No. F01-1419/2019 of the Commercial Court of the Volga-Vyatka District dated April 19, 2019 under case No. A43-26742/2018
[13] Resolution No. 13689/12 of the Presidium of the Supreme Arbitration Court of the Russian Federation dated April 9, 2013 under case No. A67-3141/2011

Share on LinkedInTweet about this on TwitterShare on Facebook