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To Pay or Not to Pay?

When shops close but the lease goes on...

Local firms – as much as international corporations – find themselves pondering these days more and more frequently, whether they can or cannot suspend lease payments for their shops, restaurants now temporarily closed due to the menace of the coronavirus epidemic.

Lessees expect the courts — in light of the present situation – to be reluctant to resolve any dispute in favor of lessors. Yet, the situation is not that clear cut. Certain legal issues shall be considered before making any assumptions.

Based on written lease agreements, lessee is to pay the amount of lease specified in the contract, on the one hand and the lessor is obliged to enable the use of the leased premises, on the other.

It goes without doubt, however, that an unexpected pandemic is an external circumstance that turns the payment of due lease fees illogical. Yet, stores can presently stay open even under certain statutory limitations and offices can still be operational despite the statutory changes of the past weeks. So, it actually is a question whether the courts would in the future recognize the present situation —uniformly, for all cases — as a force majeure that exempts lessees from their respective lease payment obligations (unless the parties expressly agreed otherwise, which seems rather unlikely) and eventually resort to the highly rarely invoked provisions of the Civil Code that relieve lessees from lease payment as long as the premises cannot be used due to circumstances beyond lessee’s sphere of control. However, if courts acknowledge a ’pandemic grace period’, it would mean a one sided total shift of obligations to lessors (maintenance costs, debt service, etc), while depriving them from the only source of income from real estate: the lease payment.

Accordingly, the question is rather whether any lessee’s expectation would be realistic to place all financial burdens stemming from the present situation on the lessors, despite valid lease agreements that are still in place. Not to forget, lessors generally tend to exclude any liability for their lessees’ turnover and profit and when the parties signed their lease agreements, lessee accepted and agreed to such exclusion of liability.

Therefore, the problem leads us to consider where exactly should be set the fine lines for a force majeure/contract frustration; whether a statutory quarantine has the same legal consequences as a partial closedown of a store (e.g. from 3 pm in the afternoon). Who bears the risk of a sudden drop of customers — if the loss is triggered by a statutory order, or by the individual decision of the management to instruct remote working and this is what caused substantial decrease in profit. As of today, it is hard to predict anything with full legal certainty, but for sure there will be court decisions which grant the lessee full exemption from lease payment, whereas there will be others, which grant partial relief and some others that do not exempt lessees, at all. For this reason, the present situation calls for a thought after and considerate approach, as well as a suitable way of communication/negotiation between the parties.

All in all, we recommend lessees to consider if
(i) their contract includes a force majeure clause, which can be applied favorably
to support them,
(ii) their lessor is currently in default of any of its contractual obligations,
meaning that lessees should better understand whether or not based on their specific contract they can indeed claim contract frustration and invoke a statutory force major clause, i.e. unexpected circumstances beyond the parties control.

Dr. Péter Garancsi is Managing Partner at Jádi Németh Attorneys at Law

Dr. Péter Garancsi

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