Businesses that lease premises in malls and can not operate there because of the quarantine have a very logical question: do they have to pay for lease?
The same question arises for those businesses that switched over to remote work and do not actually use the premises they lease, as far as work of offices is not suspended by law.
Let’s consider this issue in more details.
Lease in malls (for shops, restaurants, cafes)
First of all, it is advisable for any lessee to refer to the text of the lease agreement concluded. Quite often, they contain provisions relieving the lessee of lease payments for those periods when the lessee can not use the premises leased due to the circumstances beyond lessee’s control. If there are no such clauses in the lease agreement, the lessee may refer to the provisions of law:
- as follows from the Civil Code of Ukraine (p. art. 762), a lessee is relieved of lease payments for all time during which the leased property could not be in use due to the circumstances beyond lessee’s control. However, there is no comprehensive list of such circumstances in civil law.
- in accordance with the Commercial Code of Ukraine (art. 286), lease payment is a flat-rate payment that a lessee pays to a lessor regardless of the consequences of lessee’s business activities. The amount of lease payment may be changed by agreement of the parties, as well as in other cases established by law.
In our opinion, it is possible to consider the quarantine as a circumstance beyond lessee’s control and, therefore, a ground for a lessee to be relieved of lease payments. This was confirmed even earlier by certain conclusions of the Grand Chamber of the Supreme Court and the Supreme economic court of Ukraine.
Lease of premises (in particular, offices) in buildings the work of which is not prohibited
As to the lease of offices, it is also advisable for any lessee to review, first of all, the text of lease agreement as to whether it contains provisions on the possibility of changing the amount of lease payment or relieving the lessee of the obligation to pay it in case of factual non-use of the premises by such lessee.
In absence of such provisions in the lease agreement, the reference to the abovementioned provision of art. 762 of the Civil Code of Ukraine appears to be quite problematic in terms of proving the existence of “circumstances beyond lessee’s control”. In fact, there is no direct legislative prohibition of work for offices, and, therefore, from a legal point of view, the lessee has the right and possibility to use premises for business.
At any rate, lessees are not deprived of their right to initiate negotiations with their lessors regarding change of the amount of lease payments for the period of quarantine in order to reach a mutually acceptable compromise in this behalf. In this context it may be useful for the lessee a right to demand reduction of lease payment if the possibility to use leased premises decreased significantly (p. 4 art. 762 of the Civil Code of Ukraine).
N.B.! On March 30, Ukrainian legislative body adopted the Law No. 3275, which introduced additional benefits for businesses for the period of quarantine. There is no official text yet, but from the provisions that have already been published it appears that the legislator tried to regulate the lease issues as follows.
The Civil Code is amended with the following provision:
Since the establishment of the quarantine, introduced by the Decree of the Cabinet of Ministers of Ukraine “On Prevention of the acute respiratory illnesses COVID-19, caused by SARS-CoV-2 Coronavirus, in Ukraine” dated of March 11, 2020 (as amended) and till its end in accordance with the law, the lessee shall be relieved of payment for the use of premises in accordance with p. 6 of art. 762 of this Code
From such wording it may seem that all lessees are relieved of lease payments. But it is not so. In fact, there are no changes for the lessees of malls: they cannot use the leased premises because of the legal prohibition, and, therefore, do not pay rent.
Lessees of offices will not be able to refer to the provision of the Law No. 3275 as far as there is no legislative prohibition for them to use the premises.
So, in fact, the situation has become somewhat simpler for those lessees of malls that could not agree with their lessors on payment of lease during the quarantine.
Is force majeure worth to be referenced?
Lessees also inquire whether they can be completely relieved of lease payments for the quarantine period on the grounds that the quarantine is a force majeure.
From our point of view, lessees may be relieved from payment for lease because of impossibility to use leased premises and not because of force majeure as such.
As follows from the Law “On Chambers of Commerce and Industry of Ukraine” (art. 141), force majeure circumstances are extraordinary and inevitable circumstances that objectively make it impossible to fulfill the obligations stipulated by the terms of the contract (contract, agreement, etc.), obligations under legislative and other regulations.
The impossibility of fulfillment of obligations under a specific contract due to and during the force majeure circumstances must be certified by a certificate of the Ukrainian Chamber of Commerce and Industry (regional chambers of commerce and industry). Such certificate is what confirms the existence of force majeure in the particular case (although it should be noted that there have been cases in a court practice where the courts did not accept such certificates as evidence of force majeure). Such certificate can only be obtained when there is a cause and effect relationship between force majeure and impossibility to perform. In other words, in absence of a force majeure the obligation may be fulfilled.
However, confirmed force majeure circumstances will not relieve a business entity of fulfillment of its contractual obligation for the period of their effect (in this case, from lease payment for the period of quarantine), they will only allow to postpone the fulfillment until the time when the force majeure major circumstances will cease.
In addition, if the effect of confirmed force majeure results in a breach of a certain obligation, then liability for such breach (such as fines, penalties) will not take place.
This follows from art. 617 of the Civil Code of Ukraine, whereby a person that breaches an obligation is released from liability for breach of the obligation if such person proves that the breach occurred in the result of an accident or a force majeure.
Thus, you should not refer to force majeure in order to confirm your right not to pay for lease, as it does not relieve you of the obligation to pay it. In this case, it is better to refer to the provisions of the Civil Code and the new Law No. 3275.
Will it be real not to pay?
In our opinion, the chances of lessees of offices to obtain a certificate confirming the impossibility to effect lease payments due to quarantine as a force majeure, do not seem to be very high: in order to obtain a certificate from the relevant chamber of commerce, the lessee will have to prove that quarantine measures have such a significant impact on its (his, her) business that fulfillment of the obligation to pay for lease is impossible. This appears to be quite problematic as far as there are no technical obstacles to make payments at this time – banking institutions work, the possibility to effect payments exists.
What should lessors do?
However, reference to the quarantine, as a force majeure that makes impossible to fulfill the obligations under the lease agreements, may take place on the part of the malls-lessors. At first instance, the point is that lease agreements often provide rules regarding the time during which lessors provide lessees with access to leased premises, as well as responsibility for non-fulfilment of such rules. Therefore, in the event of certification of lessor’s impossibility to fulfill obligations under lease agreement due to the quarantine (in particular, the abovementioned rules regarding access to leased premises), the liability for their non-fulfilment will not take place.
Partner, Head of Tax practice, Restructuring, Claims and Recoveries practice, Attorney at law
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