Legal alerts / 20.05.2020

‘April Theses’ for leases

The rules of the law adopted in April [1] established that lessees from sectors of the Russian economy that have been most affected by the spread of coronavirus infection [2] (“Affected Industries”) are entitled to receive a delay of rental payments [3]. In addition to the delay, lessees are also entitled to demand a reduction of the rental payment owing to the inability to use the property. This last possibility, formally, is applicable to all lessees, even to those that are not included in the list of Affected Industries, but it is most likely to be used by lessees whose activities have been directly suspended by legal acts of state authorities [4].

Businesses whose activities have not directly been suspended by acts of state authorities but whose employees are under a self-isolation regime (“Lessees whose employees are self-isolated”) continue to raise questions about whether a legal reduction of rental payments is possible during the epidemic. It should be noted that many lessors are making advance payments and providing discounts to such lessees; however, the issue remains relevant in a situation in which it has not proved possible to agree [5].

In pursuance of the new legislative developments, on April 21, 2020 and April 30, 2020 the Supreme Court of the Russian Federation issued reviews explaining the questions that most often arise for lessees from Affected Industries and for Lessees whose employees are self-isolated [6] ( “Review No. 1 ” and ” Review No. 2 “, respectively). For the convenience of readers, we summarize the positions of the Supreme Court in the form of answers to relevant questions.

 

Can a pandemic qualify as a force majeure and entail an exemption from liability for a failure to discharge a lease agreement?

In Review No. 1, the Supreme Court clarifies as follows:

  • recognition of the coronavirus pandemic as a force majeure cannot be universal for entire industries and each case should be considered separately, taking into account: the type of activity of the debtor, the conditions on which it carries out such activity, the location (region), the nature of the undischarged obligation, and the reasonableness and good faith of the debtor’s actions.
  • In order to be released from liability for a failure to discharge one’s obligations, it is necessary to prove:
    •  the presence and duration of the force majeure (as a force majeure circumstance can be recognized as an extraordinary [7] and unavoidable [8] circumstance that is, in nature, external to the activities of the debtor [9]);
    • the presence of a cause-and-effect relationship between the force majeure that has arisen and the impossibility of (delay in) the discharge of obligations;
    • the debtor’s lack of involvement in the creation of the force majeure;
    • the use by the debtor in good faith of reasonably expected efforts to prevent (minimize) possible risks.
  • A lack of funds on the part of the debtor, as a general rule, is not a basis for an exemption from liability for a failure to discharge obligations. However, it may be recognized as the basis for an exemption from liability if such a lack of funds arose in connection with the restrictive measures that were taken. For example, this provision applies to catering organizations and beauty salons whose profit has decreased owing to the quarantine.
  • A party is exempted from liability for a reasonable period during which the force majeure impedes the discharge of obligations. Moreover, if the force majeure and/or the adoption of acts of state authorities led to a complete or partial objective impossibility of a permanent (irremovable) nature to discharge a lease agreement, such lease agreement may be terminated in full or in the corresponding part based on articles 416 [10] and 417 [11] of the Civil Code of the Russian Federation (the “Civil Code”).
  • The lessor has the right to withdraw from the agreement if it has lost interest in the discharge of the agreement as a result of the objectively arising delay in connection with the force majeure. In this case, the lessee is not liable to the lessor for losses caused by the delay in the discharge of obligations owing to the force majeure (clause 3 of article 401 and clause 2 of article 405 of the Civil Code).

 

Can a lease agreement be amended / terminated owing to a pandemic?

According to the general rule given in article 451 of the Civil Code, a basis for the amendment and termination of an agreement can be circumstances that the parties could not have foreseen (a significant change in circumstances).

At the same time, the question of whether the current pandemic situation could be considered a significant change in circumstances has not been clarified by the Supreme Court.

We remind you that if the parties to an agreement have not agreed to amend / terminate it, an interested party has the right to file a corresponding law suit with the court. The Supreme Court recalled that, as a general rule in judicial proceedings, the termination of an agreement takes priority over the amendment of an agreement.

The Supreme Court also recalled that the law provides for other possibilities to withdraw from an agreement: for example, guided by article 328 of the Civil Code in the case of a failure by one of the parties to discharge its obligations, when such  discharge is a condition for the discharge of obligations by the other party.

We also draw your attention to the fact that the State Duma, the lower house of Russia’s parliament, is currently engaged in the second reading of Draft Law No. 953580-7 “On amending certain legislative acts of the Russian Federation to take urgent measures to ensure the sustainable development of the economy and prevent the consequences of the spread of the new coronavirus infection”.

This draft law includes amendments to Federal Law No. 98-FZ dated April 1, 2020 “On amending certain legislative acts of the Russian Federation on the prevention of and response to emergencies”. It provides for the lessee to have a right to terminate a lease agreement without paying any penalties upon termination in the case of a reduction of the lessee’s income by more than 50%. At the same time, based on the current text of the draft law, this option is provided to all lessees, including lessees whose employees are self-isolated.

In addition to the above, the draft law establishes an obligation of lessors of public real estate, subject to certain conditions, to extend, without a bidding process being conducted, lease agreements for land plots by a period of not more than 3 years, and lease agreements for other property by 1 year.

 

What are the conditions for granting a delay of rental payments for lessees from Affected Industries? At what point does the delay apply?

In one of our recent reviews on measures to support lessees [12], we indicated that a lessor must conclude an additional agreement with a lessee from Affected Industries to delay the rental payment for 30 days from the day on which the lessee applies for this (this pertains to a lease agreement concluded before the decisions to introduce a state of readiness were taken in 2020).

The Supreme Court, in its Review No. 2, clarifies that lessees from Affected Industries have the right to be granted a delay of rental payments under lease agreements concluded before the decision to introduce a state of readiness was taken in 2020.

No other grounds and conditions are required, including proving the impossibility of using the leased property for its intended purpose, for a delay of rental payments to be granted.

According to the position of the Supreme Court, a delay of rental payments is applied from the date when the state of readiness was introduced (in a particular constituent entity of the Russian Federation) regardless of the date of conclusion of the additional agreement.

In addition, if the lessor did not inform the lessee about the possibility for  a delay to be granted or if the lessor evaded entry into an appropriate additional agreement, then even in this case the lessor is considered to have granted a delay on the conditions specified in Government Decree No. 439 dated April 3, 2020 “On establishing requirements for the conditions and terms for a delay of rental payments under real estate lease agreements”

 

When do changes to the lease come into effect in terms of lower rental payment?

As indicated above, as a measure of support for lessees, it is possible for lessees to demand a reduction of rental payments for 2020 owing to the inability to use the property due to the introduction of a state of readiness. [13]

In accordance with the explanations of the Supreme Court in its Review No. 2, the rental payment is subject to reduction from the moment when the specified impossibility to use the property for the purpose originally agreed in the lease agreement has occurred, regardless of the date when the additional agreement to reduce the rental payment was concluded or the date when the court decision came into legal effect to force the lessor to amend the lease agreement in terms of reducing rental payments.

 

Is it possible to apply the provisions for a delay / reduction of rental payments when only part of the property is leased?

Clarifying this issue, the Supreme Court refers to the general provisions of the Civil Code on leases [14] and explains that the parties are entitled to conclude a lease agreement according to which not a whole property but a distinct part of it is provided for use by the lessee.

In this regard, the Supreme Court concludes that the provisions for a delay / reduction of rental payments also apply to lease agreements for part of a real estate item.

 

[1] Federal Law No. 98-FZ dated April 1, 2020 “On amending certain legislative acts of the Russian Federation on the prevention of and response to Emergencies”, Government Decree No. 439 dated April 3, 2020 “On establishing requirements for the conditions and terms for a delay of rental payments under real estate lease agreements”, Decree No. 434 of the Government of the Russian Federation dated April 3, 2020 “On approving the list of sectors of the Russian economy that have been most affected by the deterioration of the situation as a result of the spread of the new coronavirus infection”.

[2] Such industries include sports and fitness activities, the activities of travel agencies, the hotel business, catering, the organization of conferences and exhibitions, the provision of domestic services to the population, and retail trade in non-food products.

[3] Read more about the terms for a delay in our review 

[4] Decree No. 206 of the President of the Russian Federation dated March 25, 2020 “On the announcement of non-working days in the Russian Federation”, Decree No. 239 of the President of the Russian Federation dated April 4, 2020 “On measures to ensure the sanitary and epidemiological welfare of the population in the Russian Federation in connection with the spread of the new coronavirus infection (COVID-19)”, Decree No. 294 of the President of the Russian Federation dated April 28, 2020 “ On the extension of measures to ensure the sanitary and epidemiological welfare of the population in the Russian Federation in connection with the spread of the new coronavirus infection (COVID-19)”, Resolution No. 121 of the Government of St. Petersburg dated March 3, 2020 “On measures to counteract the spread in St. Petersburg of the new coronavirus infection (COVID-19)” (as amended and supplemented to come into legal force on May 5, 2020), and Decree No. 12-UM of the Mayor of Moscow dated May 3, 2020 “On the introduction a state of readiness” (as amended on May 5, 2020).

[5] We draw your attention to the fact that, from a legal point of view, Lessees whose employees are self-isolated can be helped by the provisions of the lease agreement, and we recommend that these should be carefully analyzed, as should the general concepts of the Civil Code of the Russian Federation to which the lessee may refer under the circumstances. In one of our past reviews, we surveyed the relevant concepts (see our review)

[6] Review No. 1 on selected issues of judicial practice related to the application of legislation and measures to counteract the spread of the new coronavirus infection (Covid-19) in the Russian Federation, approved by the Presidium of the Supreme Court of the Russian Federation on April 21, 2020, and Review No. 2 on selected issues of judicial practice related to the application of legislation and measures to prevent the spread of the new coronavirus infection (Covid-19) in the Russian Federation, approved by the Presidium of the Supreme Court of the Russian Federation on April 30, 2020

[7] This means exceptional circumstances, the occurrence of which is not usual in the specific conditions.

[8] This means a circumstance in which any person involved in civil commerce carrying out activities similar to those of the debtor could not have avoided the occurrence of this circumstance or its consequences

[9] Force majeure cannot depend on the will or actions of the parties of the obligation.

[10] Article 416 of the Civil Code of the Russian Federation: The termination of an obligation through the impossibility of its discharge

[11] Article 417 the Civil Code of the Russian Federation: The termination of an obligation based on an act of a public authority or local government.

[12] The Review in question can be viewed here 

[13] Clause 3 of Federal Law No. 98-FZ dated April 1, 2020 “On amending certain legislative acts of the Russian Federation on the prevention of and response to emergencies”

[14] Clause 1 of article 606 and clause 1 of article of 607 of the Civil Code of the Russian Federation

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