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Rental Agreements – How are they impacted by the Coronavirus and the Government Decrees on the Suspension of Business Activities?
The Greek version of this article was published in Politis Newspaper in Greek
Given the devastating effects of the coronavirus outbreak (and the measures adopted for the prevention of its spread through the government decrees) a question which arises is whether a tenant can legally stop paying rent.
The effects of the coronavirus have touched every corner of our society. Outbreaks worldwide are already in the hundreds of thousands and it is now clear that the direct and indirect financial implications will be enormous. The pandemic has also led to the adoption of a series of Cabinet decisions adopted by the Government, with the result that several measures have been adopted by the Minister of Health to protect Public Health and manage the impact of the coronavirus pandemic. Two such measures are the Quarantine (Implementation of Measures to Prevent the Spread of COVID-19 Coronavirus) Decree (No. 3) of 2020 (R.A.A. 101/2020) and Quarantine (Implementation of Measures to Prevent the Spread of COVID-19 Coronavirus) Decree (No. 9) of 2020 which suspend the operation of various retail businesses including shopping malls, department stores, entertainment centers, cafes, bars, cinemas etc until the 13th of April 2020.
Given the devastating effects of the coronavirus outbreak (and the measures adopted for the prevention of its spread through the government decrees) the tenant will generally wish to know whether the coronavirus affects the rental agreement and whether it gives the right to the Tenant to avoid its terms and stop paying rent.
If that is not the case, then the Tenant’s only option is to renegotiate the terms of the rental agreement, something which will of course ultimately rest on the Landlord. That is because the general rule is that both parties to any agreement must comply with their obligations – the main obligations in a rental agreement are that the rent is payable by the tenant and that the landlord provides the tenant with possession of the property.
Frequently, rental agreements include terms that refer to changes in the parties’ rights and obligations as different events unfold during the course of the rental agreement – for example an increase in rent over time or the tenant’s right to repairs of the plumbing and ceiling etc. When these events are rare, unforeseen, and are generally not controlled by the parties to the agreement, then, the parties may have included in their agreement a clause which determines the way in which rights and obligations are affected in case these events unfold. Below we analyse the cases where (1) the parties have agreed on the consequences of such unforeseen events and (2) the cases where the parties have not provided for such events contractually.
When these events are rare, unforeseen, and are generally not controlled by the parties to the agreement, then, the parties may have included in their contact a clause which determines the way that rights and obligations will be affected in case these events unfold
Force Majeure
Clauses drafted in the contract between the landlord and the tenant by which the parties agree on the ways to deal with the consequences of unforeseen events are called “Force Majeure” clauses. Where such clauses exist, in most cases they specify what the unforeseen events are and they may state, for example, which of these constitute force majeure events. Such events could be war, natural disasters, fire, a pandemic, government decrees or any other event that the parties agree on.
Where there is a Force Majeure clause and the event envisaged occurs (i.e. the outbreak of a pandemic such as the coronavirus or the issuance of government decrees) the clause will describe the consequences to the parties on their rights or obligations e.g. that there will be no liability imposed for failure to comply with the obligations under the contract by one or the other party. Thus, where there is for example, a Force Majeure clause in a rental agreement, it may provide that the obligations under the agreement will be suspended for the duration of the force majeure event.
Therefore, it is important for the parties to carefully check the rental agreement in order to decide what their next actions will be given that the event may have already been foreseen by the two parties at the conclusion of their rental agreement.
Thus, where there is, for example, a Force Majeure clause in a rental agreement, it may provide that the obligations under the agreement will be suspended for the duration of the force majeure event.
Frustration of the Rental Agreement
Where there is no Force Majeure clause then it is important to look at whether the rental agreement may have become frustrated – that is, terminated because it can no longer be carried out by the parties. Relevant to this situation is article 56(2) of the CAP 149 (Contract Law) which states that:
“A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.”
The effect of frustration to the rights of the parties are far reaching. No matter what has been agreed between them (except where the parties have predicted for such an event and its consequences through a Force Majeure clause) if a contract is frustrated then both parties are released from their future obligations i.e. the payment of rent or the right to possession of the property. It is precisely because of this drastic effect that the Courts will rarely allow a plea for the frustration of a rental agreement. Indicative of this reluctance, is the case of Cyprus Cinema & Theater Co Ltd v. Christodoulols Karmiotis (1967) 1 C.L.R. 42 where it was stated that:
“…In formulating a test with particular reference to contracts of lease we would rule that on rare occasions a contract of lease may become impossible of performance, as, for instance, if some vast convulsion of nature swallowed up the property altogether, or buried it in the depths of the sea”
The above extract illustrates the difficulty of invoking frustration in the case of rental agreements. What is required is more than the outbreak of a pandemic or the imposition of restrictive conditions on the business activities of the tenant/lessee through a government decree.
Brexit?
The reluctance of the courts to accept the frustration of a rental agreement is also evident by the English courts where tenants have sought to avoid rental agreements on the ground that the United Kingdom’s exit from the European Union (Brexit) frustrates such agreements. In the case of Canary Wharf (BP4) T1 Limited v European Medicines Agency [2019] EWHC 335 (Ch) the European Medicines Agency (EMA) – which is a European Union agency renting premises in London until 2039 for £13m a year – had informed the owners of the premises that if the Brexit eventuates, it will consider their rental agreement frustrated because, as an agency of the European Union, it will no longer be permissible to keep its head office in London. The owner sought a declaration from the court that Brexit would not nullify the agreement between them. In an illuminating decision on how Brexit affects rental agreements, the Court ruled that Brexit could not frustrate the specific rental agreement.
We note that the outbreak of fire in the premises which makes it impossible to use the premises may result in the frustration of the contract as has been indicated in the recent decision of the Supreme Court of Cyprus in P.P. Body Art Gym Ltd v. Shiptrans Estate Ltd (Appeal No. 300/2012). The criterion is whether “the changing circumstances would entail a significant change from the original obligation“.
Can the Coronavirus Pandemic Frustrate a Rental Agreement?
As we have already seen, pursuant to section 56(2) of CAP 149, for an event to frustrate a rental agreement, it should cause it to be impossible of performance. In our view, the outbreak of a pandemic cannot allow for the frustration of a contract as it does not affect the operation of the property, nor its rental – that is, both the tenant and its customers can continue to use the property. Adversely affecting the tenant’s financial interests (e.g. because it will be difficult to attract customers due to the pandemic) does not make the rental agreement impossible to perform.
What remains to be considered is whether a government decree suspending the operation of a tenant’s business can terminate a rental agreement. On 15/03/2020 and 23/03/2020 the Minister of Health has issued two decrees no.3 and no.9 which essentially prohibit the operation of several businesses for a period of approximately one month (from the 16th of March and from the 24th of March 2020 to the 13th of April 2020).
Adversely affecting the tenant’s financial interests (e.g. because it will be difficult to attract customers due to the pandemic) does not make the rental agreement impossible to perform.
Can the Government Decrees which suspend Business Activities Frustrate a Rental Agreement?
In order to examine whether a rental contract can be frustrated due to the mandatory suspension of the business activities, an important factor to consider is the total duration of the suspension measures compared to the remainder of the rental period. In the English case of National Carriers Ltd n Panalpina (Northern) Ltd [1981] AC 675 it was decided that the closure of a road by the District Council of Hull for a period of one year, which had the effect of blocking access to the rental premises (a warehouse) was not an event frustrating the contract because the original agreement was to remain effective for another three years after the road was reopened.
Therefore, as with the case of a pandemic outbreak, a government decree suspending the operation of premises would not frustrate a rental agreement, unless perhaps the rental agreement expires at the same time as the decree or immediately thereafter.
An important factor to consider as to whether the government decrees cause the frustration of a rental agreement, is the total duration of the government measures compared to the remainder of the rental period.
Renegotiation of the Terms of the Rental Agreement?
Given the facts mentioned above, it is our view that unless there is a Force Majeure clause in the contract, it is difficult to change the initial obligations or cause the frustration of the rental agreement for reasons related to the coronavirus outbreak or the temporary imposition of government restrictions.
Therefore, where there is no Force Majeure clause, the most logical step for the interests of the tenant is to try and renegotiate the amount and/or the time of payment of the rent instalments for the duration of the pandemic or the measures taken by the government. Such a renegotiation, if accepted by the Landlord, should preferably be evident in writing for reasons of commercial certainty.
This article is given for information purposes only and it does not constitute legal advice. For further information and advice please contact Mr. Evripides Hadjinestoros at eh@dhadjinestoros.com.