Protecting tenants of commercial property against the backlash from the covid-19 pandemic in russia and abroad
Economies across the globe have experienced the grave consequences of the COVID-19 outbreak. A long-lasting decline in business activity, remote work and in some cases even a full suspension of operations are looming for tenants and landlords in many countries. In response to the threats of the pandemic, state authorities are stepping up measures to protect tenants who have suffered from the pandemic and who are traditionally viewed as more the vulnerable party to a lease agreement.
The Law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal proceedings (Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht) was enacted on 27 March 2020 to protect tenants facing financial difficulties caused by the pandemic and restrictions introduced to combat it against the early termination of their leases.
The Law, in particular, provides that a landlord cannot terminate a lease before its term has expired if the only ground for such early termination is a failure by the tenant to make rental payments throughout the period from 1 April 2020 to 30 June 2020, provided that such non-payment was caused by the COVID-19 pandemic. If a tenant that has been protected by the above law does not repay the outstanding amount by 30 June 2022, the landlord will still have the opportunity to terminate the lease relationship.
Ordinance No. 2020-306 of the Council of Ministers of France (Ordonnance № 2020-306 du 25 mars 2020) stipulates that during the state of health emergency that has been declared no sanctions and other penalties introduced by a lease should be applied, while nor should the termination provisions of the lease. The effect of such contractual provisions will be reinstated only a month after the state of emergency has been cancelled; as at today's date, it has been extended until 24 May 2020. Consequently, the obligation to pay rent remains, although it has been suspended without any penalties.
The current regulation, however, allows a landlord to seize monetary funds on the tenant’s bank account or receive payment under a bank guarantee the tenant has provided to secure its obligations under the lease agreement.
The UK authorities have also taken measures to protect the interests of the tenants under business tenancies by including relevant provisions in the Coronavirus Act 2020, which came into force on 26 March 2020. It provides for a moratorium on terminating a business tenancy for the non-payment of rent. “Rent” includes any sum due under the relevant business tenancy. Consequently, a ban on terminating a tenancy covers, among other things, non-payment of insurance contributions, utilities, etc.
The moratorium applies from 26 March until 30 June 2020, or until such later date as may be set additionally.
The objective of the Code is to balance the financial risks between landlords and tenants by granting the tenants the right to have rent reduced in proportion to the loss of a tenant’s turnover during the COVID-19 pandemic, plus a reasonable subsequent recovery period. The overall reduction of rent can be achieved through a combination of reduced rent and a deferral of rent if the following requirements are met:
According to article 19(1) of the Law, tenants will be entitled to have rental payments deferred. The Russian Government has established the requirements for the conditions and duration of such a deferral. These stipulate that a deferral is granted until 1 October 2020, while the debt accrued can be repaid from 1 January 2021 until 1 January 2023. Further, until a high-alert regime or a state of emergency is in place, 100% of the rent will be deferred; while 50% of the rent will be deferred from the date the above regimes are lifted and until 1 October 2020.
The above resolution applies only to organisations and individual entrepreneurs engaged in those sectors of Russian economy that have been affected most in the deteriorating environment as a result of the spread of the new coronavirus infection.
The Law also enables a tenant to demand that rent be reduced for 2020 in connection with it being unable to use the property because of the decision made to introduce a high-alert regime or a state of emergency.
As distinct from the Australian Code, the Law has not regulated the question of to what extent the rent should be reduced further to the relevant demand of a tenant. In this regard, we cannot rule out any disputes arising in practice.
It is obvious that the above measures are aimed at finding the optimal solution to the problem of the large-scale closure of commercial premises for tenants during the COVID-19 outbreak and the non-payment of rent by the tenants.
The Russian legislature appears to adhere to the approach whereby the deferral of rent rather than its reduction or suspension (for which tenants can count for in certain cases in accordance with article 328 of the Russian Civil Code) is the most appropriate solution for all parties.
The approach the legislature has embraced allows landlords to count on the late receipt of rental income which they could have received for the period when the market was undermined by the COVID-19 pandemic. Moreover, these measures prompt the parties to negotiate the future conditions of leases, which some market players refused to do previously.
Such measures are already applied or are being implemented in many foreign states rocked by the new coronavirus infection, which proves their efficiency.
Germany
As at 22 April 2020, the number of persons infected with the new coronavirus in Germany hit 145,000 people. Given the threat the COVID-19 pandemic poses to public health, the economy and the well-being of citizens, the German authorities decided to close hotels, restaurants and cafés, as well as sports and entertainment facilities, beauty parlours, hair-dressers and shops (except for drug stores, food stores and stores selling essential consumer goods).The Law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal proceedings (Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht) was enacted on 27 March 2020 to protect tenants facing financial difficulties caused by the pandemic and restrictions introduced to combat it against the early termination of their leases.
The Law, in particular, provides that a landlord cannot terminate a lease before its term has expired if the only ground for such early termination is a failure by the tenant to make rental payments throughout the period from 1 April 2020 to 30 June 2020, provided that such non-payment was caused by the COVID-19 pandemic. If a tenant that has been protected by the above law does not repay the outstanding amount by 30 June 2022, the landlord will still have the opportunity to terminate the lease relationship.
France
In light of the rapid spread of the disease, a state of health emergency has been introduced for the period from 24 March until 24 May 2020 in France, where the number of positive cases exceeded 116,000 people as at 22 April.Ordinance No. 2020-306 of the Council of Ministers of France (Ordonnance № 2020-306 du 25 mars 2020) stipulates that during the state of health emergency that has been declared no sanctions and other penalties introduced by a lease should be applied, while nor should the termination provisions of the lease. The effect of such contractual provisions will be reinstated only a month after the state of emergency has been cancelled; as at today's date, it has been extended until 24 May 2020. Consequently, the obligation to pay rent remains, although it has been suspended without any penalties.
The current regulation, however, allows a landlord to seize monetary funds on the tenant’s bank account or receive payment under a bank guarantee the tenant has provided to secure its obligations under the lease agreement.
UK
Most business tenancies in the UK stipulate that a landlord may terminate a tenancy and force the tenant out of the leased facility if the latter breaches the tenancy agreement and, specifically, if rent is delayed for 14 days or 21 days.The UK authorities have also taken measures to protect the interests of the tenants under business tenancies by including relevant provisions in the Coronavirus Act 2020, which came into force on 26 March 2020. It provides for a moratorium on terminating a business tenancy for the non-payment of rent. “Rent” includes any sum due under the relevant business tenancy. Consequently, a ban on terminating a tenancy covers, among other things, non-payment of insurance contributions, utilities, etc.
The new regulation does not suspend the accrual of a rent (and other sums), nor does it in any way confine the landlord in his ability to enforce the debt against the tenant, including in court. Further, the above measures do not apply to short-term tenancies (less than six months). The relevant landlords are still entitled to terminate such tenancies with their tenants.
The moratorium applies from 26 March until 30 June 2020, or until such later date as may be set additionally.
Australia
On 7 April 2020, the Cabinet of Australia adopted the National Cabinet Mandatory Code of Conduct - SME Commercial Leasing Principles During COVID-19 (the “Code”). The Code provides a regulatory framework for resolving the issue of sharing the financial burden of the COVID-19 pandemic between landlords and their tenants who are SMEs. To this end, the Code establishes an obligation for landlords to approve with tenants amendments to existing tenancies, by including a reduction in rent in accordance with the set of good faith leasing principles.The objective of the Code is to balance the financial risks between landlords and tenants by granting the tenants the right to have rent reduced in proportion to the loss of a tenant’s turnover during the COVID-19 pandemic, plus a reasonable subsequent recovery period. The overall reduction of rent can be achieved through a combination of reduced rent and a deferral of rent if the following requirements are met:
- the amount by which rent should be decreased should be at least 50% of the total reduction in rent payable for which a tenant may be eligible;
- payment of rental deferrals must be made within the whole lease term or for a period of no less than 24 months, whichever is the greater (unless otherwise agreed by the parties).
The Code has been developed so that landlords and tenants could bring their leases into sync with specific circumstances. At the same time, the Code contains a number of provisions for such leases aimed at striking an appropriate balance between the interests of both parties, such as:
- payment of rental deferrals must preclude placing an undue financial burden on tenants and should commence only after the ending of the coronavirus pandemic or the existing lease expiring, and taking into account a reasonable subsequent recovery period;
- tenants should be provided with an opportunity to extend their leases to have additional time to trade during the recovery period after the COVID-19 pandemic concludes;
- rental waivers must be provided predominantly by reducing the amount of the rent (rather than through granting to a tenant a deferral of a portion of the rent) in cases where failure to do so would compromise the tenant’s capacity to fulfil its ongoing obligations under the lease agreement (provided that landlords are able to provide such waivers);
- no penalties should be applied with respect to rent waived or rent deferred.
- having a lease terminated for the non-payment of rent and being forced out of the premises;
- having the rent increased;
- penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic;
- drawing on a bank guarantee, cash bond or other security for the non-payment of rent.
Russia
On 1 April 2020, Federal Law No. 98-FZ “On amending certain instruments of the legislation of the Russian Federation in relation to the forestalling and elimination of emergencies” (the “Law”) came into force. Article 19 of the Law contains special rules regarding lease agreements concluded before the high alert regime was introduced. These rules apply to both state-owned and private property.According to article 19(1) of the Law, tenants will be entitled to have rental payments deferred. The Russian Government has established the requirements for the conditions and duration of such a deferral. These stipulate that a deferral is granted until 1 October 2020, while the debt accrued can be repaid from 1 January 2021 until 1 January 2023. Further, until a high-alert regime or a state of emergency is in place, 100% of the rent will be deferred; while 50% of the rent will be deferred from the date the above regimes are lifted and until 1 October 2020.
The above resolution applies only to organisations and individual entrepreneurs engaged in those sectors of Russian economy that have been affected most in the deteriorating environment as a result of the spread of the new coronavirus infection.
The Law also enables a tenant to demand that rent be reduced for 2020 in connection with it being unable to use the property because of the decision made to introduce a high-alert regime or a state of emergency.
As distinct from the Australian Code, the Law has not regulated the question of to what extent the rent should be reduced further to the relevant demand of a tenant. In this regard, we cannot rule out any disputes arising in practice.
It is obvious that the above measures are aimed at finding the optimal solution to the problem of the large-scale closure of commercial premises for tenants during the COVID-19 outbreak and the non-payment of rent by the tenants.
The Russian legislature appears to adhere to the approach whereby the deferral of rent rather than its reduction or suspension (for which tenants can count for in certain cases in accordance with article 328 of the Russian Civil Code) is the most appropriate solution for all parties.
The approach the legislature has embraced allows landlords to count on the late receipt of rental income which they could have received for the period when the market was undermined by the COVID-19 pandemic. Moreover, these measures prompt the parties to negotiate the future conditions of leases, which some market players refused to do previously.
Such measures are already applied or are being implemented in many foreign states rocked by the new coronavirus infection, which proves their efficiency.
The source: Lexology