Lease agreements in large retail facilities during pandemic
On 31 March 2020, the Sejm adopted an amendment to the COVID-19 Act, which is part of the so-called anti-crisis shield, aimed, among others, at protecting entrepreneurs from the effects of the coronavirus epidemic. The act provides for special solutions for tenants of space in shopping centres, who are undoubtedly one of the groups of entities most affected by the epidemic. The above provisions arouse serious controversies and doubts, and will undoubtedly be the subject of a stormy legal discussion, and perhaps also of extensive court rulings. Therefore, in this paper we will discuss the basic provisions adopted in the amendment with regard to lease agreements in shopping centres, as well as some of the doubts raised by their analysis.
The amendment provides that during the period of the ban on operating in shopping centres with a sales area of more than 2000 m2, the mutual obligations of the parties to the lease, tenancy or other similar agreement by which the commercial space is used expire. At this point, the first doubt arises as to what the temporary “expiration of mutual obligations of the contracting parties” is. Such a construction has not yet been known to Polish civil law. It can only be assumed that the authors of the amendment could have meant a temporary suspension of the performance of contractual obligations, in particular releasing the tenant from the obligation to pay fees related to the subject of the lease, and not the expiry of the lease relationship itself. Unfortunately, the justification of the introduced draft amendment does not remove the doubts arose in this respect.
The concept of “expiration” the obligations under the lease agreements may cause many legal doubts as well as practical problems. For example, because of the expiry of mutual obligations for the duration of bans due to an epidemic, the landlord’s obligation to give the tenant an item for use expires (after all, this obligation is the essence of the lease agreement). Consequently, the tenant’s obligation would be to return the premises and remove all of the tenant’s movables from the premises. Nevertheless, this issue most probably slipped the legislator’s attention and was not regulated in any way in the Act. However, since the expiry of the contractual obligations is to be temporary, the tenant is unlikely to be interested in emptying the premises of their movables for the duration of the epidemic. In this situation, the premises closed in the shopping centres are in fact warehouses where goods and other tenants’ items are stored. If the tenant does not remove the property from the premises, we can imagine a situation in which the landlord will require the tenants to pay remuneration for storing the property, which is likely to happen in practice. At present, tenants do not have any legal title to use the premises, including storing their movables in them.
Another problem that should be noted in the context of temporary “expiration” of obligations under the lease agreement is the fact that the tenant will be exempt during this period not only from the obligation to pay rent, but also from service charges paid directly to the landlord or marketing fees related to the operation of the shopping centre. Such a solution is certainly not beneficial to landlords, who, while being deprived of any charges from tenants, have to pay the charges related to the current maintenance of the shopping centre and its common parts such as electricity, water, security and cleaning services. This is all the more important since most shopping centres have shops which are not subject to a restriction on activity, in particular grocery stores, and it is therefore impossible for those centres to be closed for four triggers. Nevertheless, a discussion may arise as to the principles of subsequent settlement of the actual operating costs incurred, which in most shopping centres will take place at the beginning of next year. While it is reasonable to say that tenants do not have to pay advances on operating costs during an epidemic, it is no longer so obvious whether this exemption refers to a later settlement of actual costs. The obligation to settle the actual costs will most likely arise once the ban on tenants’ activities is ended. Thus the concept of ‘expiration’ of the tenant’s obligations will no longer apply and the tenant will have to bear the operating costs for the entire year to be settled, including the duration of the ban.
By margin, it should be noted that the temporary exemption from the obligation to pay fees under lease agreements will undoubtedly not apply to fees which the tenant pays directly to utility or other service providers, on the basis of self-concluded agreements.
In addition to the above solutions, the amendment provides that the tenant, after the ban is ended, should submit to the landlord an unconditional and binding offer of intent to extend the agreement on the existing terms and conditions for a ban extended by six months. The offer should be submitted within three months from the date of removing the ban. If the tenant does not submit such an offer within this period, it will be obliged to pay the rent and other fees resulting from the lease agreement for the period in which the ban on the tenant’s activity was in force. Upon ineffective lapse of the deadline for submission of an offer by the tenant, the landlord shall cease to be bound by the provision concerning the expiry of obligations under the lease agreement.
Also the interpretation of the provisions concerning the tenant’s offer to extend the lease agreement after removing the ban raises many doubts. The justification of the Sejm’s self-amendment which introduces this regulation only shows that if the tenant’s offer is not submitted on time, it is considered that the agreement has not expired temporarily. This would mean that in such a situation the tenant would be obliged to pay the amounts due under the lease agreement in full for the entire duration of the prohibition, and in addition the lease agreement would continue to be in force on the existing terms and conditions, including those relating to the lease period. If the tenant makes an offer to extend the lease within three months from the date of cessation of the prohibition, the lease period will be extended by the duration of the prohibition increased by six months, and the tenant will be fully relieved of charges under the lease agreement for the entire duration of the prohibition. The possibility of taking advantage of the exemption from charges for the duration of the ban is therefore connected with the obligation to extend the lease agreement on the existing terms.
It does not follow from the introduced regulations whether the landlord can refuse to accept the tenant’s offer and thus continue the lease agreement on the existing conditions. The term ‘offer’ of a tenant’s statement may suggest that, like any offer, it may be rejected by the other party. Following this example, it can be assumed that the offer procedure provided for in the Civil Code will apply and thus the landlord would be entitled to reject the offer or submit a counter-offer. The wording of the provision suggests that if a tenant’s offer is rejected or a counter-offer is made, the landlord is still bound by the provisions relating to the expiry of the tenant’s obligation to pay rent and other charges under the agreement (the only case where these provisions cease to bind the landlord is if the period for the tenant to make an offer expires without effect). However, the amendment to the lease agreement does not answer such questions, but only multiplies further doubts.
The solutions introduced concerning the tenant’s offer do not prejudge what happens with the lease agreement in the period after the ban expires, but before the tenant makes an offer to extend the agreement. The wording of the provision indicates that mutual obligations under the lease agreement expire only for the duration of the ban, hence we may presume that the intention of the legislator was to “resurrect” them once the ban ceased. The adoption of this concept results in the fact that from the date of the cessation of the ban, the tenant is obliged to perform the obligations under the lease agreement within the scope of the existing one, including the payment of rent and other receivables in the amount resulting from the agreement. However, the landlord will have the right to demand payment for the ban period only after the three-month deadline for submitting a tenant’s offer to extend the lease agreement has expired ineffectively.
As assumed by the legislator, the introduced solutions do not violate the provisions of the Civil Code governing the states in which legal restrictions on the freedom of economic activity are introduced. The intention of the legislator behind this provision is not clear. Perhaps, as a consequence of this provision, it may be considered that in the event of the tenant’s non-performance of his financial obligations during the epidemic, it will be possible for the tenant to invoke force majeure and an extraordinary change in relations in order to claim a rent reduction on this basis or even to terminate the contract before the court. However, this will only apply to situations where the tenant has not submitted an offer to extend the lease within three months from the date of cessation of the ban and thus has not obtained an exemption from charges for that period. Nevertheless, such an interpretation of the provisions raises serious doubts, and it would seem that the introduced rules of expiry of the tenant’s obligations should be the only means of protecting its interests.
The amendment provides that all lease agreements concluded before 1 April 2020, the lease period of which expires between 1 April and 30 June 2020, will be extended on the terms and conditions existing until 30 June 2020. This rule applies to all lease agreements, not only those concluded with respect to premises in shopping centres. The only requirement to extend the lease term is to submit a declaration of the tenant’s will in this respect. The extension of the lease agreement shall not apply to those tenants who, during at least 6 months of the lease agreement’s term before the amendment comes into force, were in arrears with payment of fees related to the premises for at least one settlement period, if the total value of arrears exceeds the amount of rent for one month. The automatic extension of the agreement cannot be expected by the tenants who have been in arrears during the term of the lease agreement: (i) used the premises in a manner contrary to the agreement or contrary to the intended use of the premises, (ii) neglected obligations related to the premises, causing damage to the premises, (iii) leased, subleased or gave the premises (or a part thereof) for free use without the required written consent of the landlord. Under the Act, it will be impossible to terminate the tenant’s lease agreement or the amount of rent until June 30th 2020.
The above solutions concerning automatic extension of lease agreements certainly put in a difficult situation those landlords who have already signed another lease agreement for a given premises or space, which was to come into force before 30 June 2020. In such a situation, it would seem reasonable to try to renegotiate such an agreement with a new tenant as to the terms and conditions and the date of delivery of the premises or space with reference to the force majeure, i.e. to introduce provisions preventing the landlord from fulfilling its obligation to deliver the premises on time under the lease agreement. The amendment does not provide for releasing the landlords from the obligation to pay damages and contractual penalties in connection with the difficulties resulting from the introduced state of epidemics. Nevertheless, since the landlord’s inability to fulfil its obligation to deliver the premises to a new tenant within a specified period of time is a consequence of circumstances for which the landlord is not responsible, it shall not be obliged to pay compensation (including contractual penalties) to such tenant.
Autor: Ewelina Cieślak
In case of any questions and doubts regarding presented issues, including their relation to provisions of Polish special act related to counteracting coronavirus, we encourage you to contact the authors of the analysis.