Effects of State of Alarm measures on lease agreements for non-residential purposes in Spain

By Isidro del Moral, Jacobo Sanchez-Andrade, Patricia Perez, Gadea Perez de Guzman

04-2020

The declaration of the State of Alarm last Friday, 13 March, and the approval of Royal Decree 463/2020 dated 14 March, which declares the State of Alarm for the management of the health crisis caused by COVID-19, modified by Royal Decree 465/2020 of 17 March, and extended by Royal Decree Law 8/2020 of 17 March, on extraordinary urgent measures to deal with the economic and social impact of COVID-19, has led to the application of a series of extraordinary and unprecedented measures in Spain. Specifically, restrictions have been focused on the freedom of movement and containment measures for commercial activity, which may alter the normal fulfillment of obligations and contractual relations under private agreements.

This newsletter will try to clarify the effects that such exceptional measures may have on the lease agreements for non-residential purposes, specially focusing on those that have been forced to close temporarily (pursuant to Article 10 of RD 463/2020) and while the State of Alarm is maintained.

Application of the autonomy of will of the parties

Firstly, the principle of the autonomy of the parties' will would be the main rule for private contracts. In the Spanish legal system, Article 1,255 of the Spanish Civil Code (the "CC") establishes the freedom of agreements as long as they are not contrary to the law, morality or public order. Furthermore, Article 1,258 CC establishes that contracts are binding and mandatory. Therefore, it will be necessary to look at each affected agreement individually to determine whether they have provided for any exceptional circumstances that would imply the possibility of not complying with the contractual obligations, as well as what conditions have been established for the parties if such an event were to occur.

However, in most of the agreements, it is very likely that there is no specific clause regulating an event such as the COVID-19 pandemic or similar, and in some cases it is possible that only a generic reference is made to cases of force majeure. In this regard, force majeure application to monetary obligations, such as the payment of rent, will be now analysed.

Force majeure principle

Force majeure is regulated under the CC as those "events which could not have been foreseen, or which, if foreseen, were inevitable". The requirements for the application of force majeure, set out in the Spanish case-law are: unpredictability and unavoidability. Furthermore, the party claiming force majeure shall act in good faith.

There is Spanish Supreme Court case-law that establishes that the supervening impossibility to comply with the obligations (force majeure) would only affect those obligations to deliver a certain thing or to do something, but not to those of a pecuniary nature. The case-law distinguishes the pecuniary obligations from the rest of the obligations and: (i) it denies for such pecuniary obligations the impossibility of compliance, but admits the temporary non-compliance or delay, and it establishes that (ii) the lack of compliance involves the punishment to the payment of money.

Therefore, the resource of force majeure in those agreements that could be affected by the measures imposed as result of the State of Alarm, will be very restrictive, and even more so in the obligations affecting the payment of rent and similar amounts. In the absence of an express provision in the agreement, it will be necessary to take into account the above-mentioned case-law. In this regard, we would also like to refer to other cases that may have been foreseen in our legislation and that can be extrapolated. Thus, article 1575 of the CC provides that: "The tenant shall not be entitled to a reduction in the rent for sterility of the rented land or for loss of fruit resulting from ordinary fortuitous events; but in the event of loss of more than half of the fruit, the rent shall be reduced for extraordinary and unforeseen fortuitous events, unless otherwise agreed". In other words, the income would be adjusted, but it would continue to be paid even in the event of a fortuitous case. Pursuant to the foregoing, the intention of the tenant to suspend rent payment completely, considered as a pecuniary obligation, cannot be directly covered by force majeure.

Nevertheless, it shall be examined whether as a consequence of the supervening alteration of the concurrent circumstances, the "rebus sic stantibus" principle could be applied, which is analysed below.

Rebus sic stantibus principle

This principle focuses on the possibility of suspending, revising or terminating an agreement due to the supervening alteration of the concurrent circumstances or the break in the economic stability of the agreement when it is impossible or very difficult for one of the parties to perform. This figure ("Rebus Sic Stantibus") is not expressly foreseen in Spanish law and has its origin in case-law interpretation, and its application is usually very restrictive by Spanish Courts.

As it has been previously mentioned, the general principle in the Spanish legal system is that the agreement is binding on the contracting parties and must be performed, without excuse or pretext. Therefore, the application of the rebus sic stantibus, according to the Supreme Court, would be applied in a very restrictive manner and on two assumptions: (i) the unpredictability of the risk; and (ii) excessive hardship in the performance of the contractual obligations i.e. that there is a break in the relationship of equivalence of the parties' considerations (principle of commutability of the agreement).

If the rebus sic stantibus principle is alleged, the consequences could be, depending on each case, the suspension, modification or termination of the agreement. The preferred solution applied by Spanish Courts, particularly in the case of successive agreements or agreements of long duration, is to amend the agreement, while maintaining, as far as possible, normal commercial traffic.

In this particular case, to apply this figure to the leases affected, either directly or indirectly by the declaration of the State of Alarm, two cases can be distinguished: (i) those leases affected by the suspension of activity derived from the obligation to close the establishment; and (ii) those leases in which the establishment is not obliged to close.

In the first scenario, it seems that the application of the rebus sic stantibus doctrine could be more direct. However, the solutions could be different in each case. In particular, the balance of the agreement must be taken into account, and at first sight, it does not seem fair that the lessor shall endure individually all of the losses caused by this particular situation. The good faith of both parties should in any case be invoked for the renegotiation of the conditions of the lease.

Regarding the second scenario, the application of the rebus sic stantibus doctrine would be less clear and would require a more intense evidentiary activity on the part of the lessee (i.e. think of an establishment - whether an office or any other - that is not affected by the closure order and that can continue to carry out its activity with relative normality).

With regard to the cases indicated above where the use of this doctrine is possible, it would be appropriate, within the framework of the autonomy of will that governs private agreements, to try to find a balance between the two parties in order to reduce losses and mitigate the damage arising from the current exceptional situation.

Conclusions

The COVID-19 crisis, and in particular the declaration of the State of Alarm, has imposed extraordinary measures restricting the freedom of movement of people and suspending the commercial activity of certain establishments.
Therefore, an uncertain scenario has arisen with respect to the possible implications that such a situation may have regarding the fulfillment of obligations under the leases agreements for non-residential purposes affected, either directly or indirectly, by such measures.

The lessee's intention to totally suspend or delay the payment of rent on the grounds of force majeure, as it has been set out above, would not be possible as this principle would not apply to obligations of a pecuniary nature such as the payment of rent.

However, in those cases where the competent authority has ordered the temporary closure of the establishment, the application of the figure "rebus sic stantibus" could be considered. This figure is understood as the possibility of modifying the contractual conditions due to the supervening alteration of the concurrent circumstances or the modification of the economic balance of the agreement when it is impossible or very burdensome for one of the parties to comply with them. Thus, on the basis of the good faith of the contracting parties and to try to find a balance between them, to reduce losses and mitigate damages, it would be possible to negotiate (while the application of the restrictive measures is extended) some new conditions. Some of them could be: granting a temporary partial reduction of the rent, a period of grace or bonus or a moratorium on payment of the same, trying to avoid more complex or drastic solutions such as the total suspension or termination of the agreement. Such drastic solutions would only benefit the tenant to the detriment of the owner-landlord, to whom all the economic loss would be transferred, creating a clear imbalance in the contractual relationship.

Regarding the expenses that pursuant to the lease agreement are charged or passed on to the lessee (i.e. community fees, property tax, etc.) it would seem fair to consider that these continue to be charged to the lessee since it still maintains possession, use and full enjoyment of the establishment.

In relation to those cases in which the closure of the establishment has not been ordered, without prejudice to a case-by-case analysis, it would be more complicated to reach to a mutual agreement on the solutions provided for above, since there would be greater difficulties in proving a substantial modification of the conditions under which the agreement was signed.

Last reviewed: 06 April 2020