Due to the COVID-19 pandemic, which was officially recognised in Poland in the second half of March, many restrictions on business activity have been introduced. In particular, the government has temporarily banned retail business activity in shopping centres with a sales area of more than 2,000 m2 (excluding pharmacies, food shops, chemists, DIY stores). As of 4 May 2020, the ban on retail sales in shopping centres was lifted (with the introduction of certain restrictions and special security measures).
The effect of the bans has seen a decrease in revenues and difficulties with meeting financial obligations on time, including those arising from lease agreements. What actions can parties to lease agreements take in this situation?
On 31 March 2020, the Polish Parliament adopted a new act which covers various economic and commercial aspects of the COVID-19 pandemic (the “Anti-Crisis Act”). Under the Anti-Crisis Act, lease agreements in shopping centres for those premises which are subject to restrictions have been suspended – the tenant will be released from the obligation to make payments under the lease, if they provide the landlord with an offer to extend the lease agreement by an additional: (i) six months increased by (ii) the period in which the lease was suspended.
The suspension applies only to tenants whose business activity has been prohibited. However, the suspension does not apply to tenants operating in shopping centres with a sales area below 2,000 m2 (even if such tenants’ business activity has been banned), or in buildings other than shopping centres (e.g., office buildings, warehouses).
Unfortunately, the new provisions are unclear and raise many doubts. Therefore, parties to lease agreements should conclude agreements in which they will specify their rights and obligations during the COVID-19 pandemic. Such agreements will clarify the unclear provisions of the Anti-Crisis Act by introducing solutions that will not violate the tenant’s fundamental right to be exempted from paying rent during the period of the prohibitions.
In the context of suspension of lease agreements, it is important that shopping centres have been open since 4 May 2020. Therefore, most tenants can reopen their premises. However, lifting the ban does not apply to fitness clubs, hair and beauty salons, and restaurants, which can only offer takeaway meals.
The opening of shopping centres means that from 4 May 2020 the parties to lease agreements are obliged to meet their obligations, including paying rent. If the tenant wants to exercise its right to be exempted from paying rent (for the duration of the ban), they will have to provide the landlord with an offer to extend the lease agreement by 4 August 2020.
Further, under the Anti-crisis Act, any lease agreement for premises that has been concluded before 31 March 2020, and expires prior to 30 June 2020, is automatically extended until 30 June 2020, if the tenant requests such extension (subject to certain exceptions). Additionally, until 30 June 2o2o, no landlord can terminate a lease agreement (subject to certain exceptions).
Rebus sic stantibus clause
The Polish Civil Code (the “Civil Code”) contains various provisions which might be applied during the COVID-19 pandemic in relation to lease agreements. It should be stressed that the parties to a lease agreement can decide to structure their agreement differently. Therefore, the rights and obligations of the parties under each lease agreement always have to be considered on a case-by-case basis.
The “rebus sic stantibus” clause can be regarded as a statutory material adverse change (MAC) clause – Article 3571 of the Civil Code deals with an extraordinary change of circumstances.
Under the “rebus sic stantibus” clause, no party can terminate the agreement or change it on their own – only the court may change or suspend certain obligations, or even terminate the agreement. However, the party which is affected by the extraordinary change of circumstances usually refers to this clause when approaching the other party.
To apply the “rebus sic stantibus” clause, the affected party has to prove that: (A) an extraordinary change of circumstances has occurred, and (B) such change causes: (i) excessive difficulties in carrying out such party’s obligations, or (ii) threatens such party with significant loss. The change of circumstances should be permanent.
As the outbreak of the COVID-19 pandemic was officially recognised in Poland only in mid-March, in some cases it might be claimed that the lockdown’s impact on business is not clear and, therefore, the extraordinary change of circumstances (of a permanent nature) has not yet occurred.
However, when considering the risk of significant loss, the commercial purpose of the agreement should be taken into account. If the tenant leases the premises to carry out business and make a profit, it should be clear that the prohibition against carrying out business in the premises results in significant loss for the tenant.
There is no definition of force majeure under the Civil Code. Generally, both natural disasters (including outbreak of a pandemic) and binding provisions of law (e.g., restrictions on conducting certain types of business activities) are seen as force majeure events.
A force majeure event might exclude the liability of a given party to the agreement for the non-performance of such party’s obligations under the agreement. The affected party has to prove that the occurrence of the force majeure event had a direct influence on the possibility to perform the obligations under the agreement by such party (e.g. to pay rent).
Although it is obvious that the prohibition against carrying out commercial activity results in decreasing the tenant’s turnover, such prohibition does not make it (directly) impossible to pay the rent. In our view, it might be difficult for a tenant to claim that due to the occurrence of the force majeure event the tenant is released from their obligation to pay the rent.
Impact of the pandemic on the relationship between tenants and landlords in various sectors
Warehouse, logistics and production buildings
Tenants are currently approaching their landlords and asking for cancellation of rent, rent rebates or other concessions. They usually justify their requests with the occurrence of force majeure events and/or the extraordinary change of circumstances which threatens them with significant loss. In some cases such threats are real and might evolve into discontinuation of tenants’ businesses and abandoning premises.
However, we believe that certain sectors (in particular, e-commerce and logistics) might expand their businesses in future as consumers are switching to home shopping. Also, some production companies might be interested in securing themselves against suspensions and breakdowns of supply chains by securing additional warehouse space for materials and stocks.
Despite shopping centres opening from 4 May 2020, the difficult financial situation forces tenants to approach their landlords and ask to change the terms of agreements, in particular to reduce rent. It cannot be expected perhaps that reopening shopping centres will mean that the number of customers will be the same as before the pandemic, especially considering that restrictions have been introduced, such as limits on customers. In addition, not all tenants can reopen their premises as the ban still applies to some of them.
Therefore, negotiations are ongoing, during which the different interests of tenants and landlords clash. Some tenants have already announced, that in the event of disagreement, they will be forced to close their shops. It can be assumed that some of these cases will end in court disputes.
Premises outside shopping centres
Due to the COVID-19 pandemic, it is prohibited to operate, i.a., restaurants and pubs, cinemas, theatres, fitness clubs, as well as hair and beauty salons, regardless of the location of such business.
It seems that tenants whose business activity has been banned and who do not operate business in shopping centres are in the most difficult situation. They cannot obtain income from their core business, and at the same time new legislation has not provided any special solutions for them regarding the obligation to pay rent.
Therefore, such tenants can only apply the above mentioned provisions of the Civil Code. Although it may not be easy to apply them, it seems that tenants whose business activities have been banned are the most likely to benefit from applying them.
Generally, the current situation does not directly affect the possibility to use office space for normal business activities (there are only minor restrictions relating to distancing and/or wearing masks at work). Unless a tenant has special provisions in their lease agreement, obtaining a rent reduction from the landlord might be rather difficult (however, some tenants might still try to raise arguments relating to extraordinary change of circumstances).
Nonetheless, the tenants and their employees have switched to working from home and are testing various tools and procedures extensively. Home office might become more popular and frequent (to some extent this might also be cost driven). In the long term tenants will probably be thinking of new solutions to secure flexibility (in terms of changes to space arrangement (e.g., hot desks) and commercial terms – including more detailed regulations in the leases on the effects of occurrence of force majeure events in future).
Last reviewed: 11 May 2020