Leases management in COVID-19 times: is the rent (fully) due?
On 30 October 2020, the Judge of Peace of Etterbeek rendered a judgment on commercial leases in the first lockdown period in view of the COVID-19 measures. The issue raised was whether the rents were due by the tenant (operating a cosmetics business within the leased premises) during this first lockdown period (i.e. from March to May 2020).
According to the judge, the landlord failed to fulfil his obligation to provide the tenant with the peaceful enjoyment of the leased premises. The court noted that – in the case of a commercial lease – the direct contact between the tenant and its clients is essential and, if it is made impossible by external circumstances such as a mandatory lockdown, the landlord no longer fulfils his obligations to provide the tenant with the peaceful enjoyment of the leased premises. The tenant is therefore released (in whole or in part) from his payment obligations for this period.
This decision has been largely commented in the press – but is however contradicted by other judgements recently published. So, is this a one-off decision or a precedent for future cases?
“Act of God” or “act of Government” as a ground of force majeure?
The Belgian Court of Cassation states that a circumstance which simply makes the performance of the obligation more onerous does not constitute an event of force majeure. The “act of God” or “act of Government” is defined as any impediment resulting from an order or prohibition emanating from a public authority and which constitutes a foreign cause justifying non-performance of the obligations as provided for in the contract. In this regard, most of the legal doctrine believe that the performance itself of the obligation to pay (e.g. the rent) is in fact not affected by the act of Government (e.g. the governmental restrictions). Even if the lockdown imposed by the Governmental orders has reduced the tenants’ revenues, payment remains in theory possible during the obligatory closure, for instance with the tenant’s available cash or through obtaining new external financing.
This position is followed in most of the judgments published until now (at least when this argument has been raised). Certain judges have also pointed out that the different governments have implemented support measures for the sectors forced to close – a judge insisting on the fact that no such measure has been taken in favour of the landlords.
Failure by the landlord to guarantee the peaceful enjoyment of the premises (art. 1722 of the Civil Code)?
In case of (temporary) judicial or material loss of the leased premises, the landlord cannot fulfil anymore its guarantee obligation, and the tenant can request a reduction of the rent or the termination, without indemnity, of the lease.
This is the main argument of the tenants, and the one used by the Judge of Etterbeek to grant a full waiver of rent during the lockdown.
It remains however heavily debated and rejected in most of the judgments published, based on the following grounds:
- Confinement and closure measures may result in the temporary loss of the tenant's use of the leased premises. However, Article 1722 of the Civil Code presupposes that the impossibility of guaranteeing this peaceful enjoyment exists on the part of the landlord, who is bound by this obligation. In the present case this impossibility is due to a measure taken by a third party, the public authority, for which the lessor is not answerable under Article 1725 of the Civil Code.
- The Tenant’s inability to carry on business in the leased premises is not the consequence of a failure by the landlord to fulfil his guarantee obligation to ensure peaceful enjoyment, but of a decision by the authorities which is binding on the tenant.
- The closure measure decided upon does not affect the leased premises but the business, i.e. the tenant's business.
- The closure measure does not eliminate all possibilities of enjoyment: the storage function is maintained, the tenant can carry out an inventory or make improvements, and the tenant retains exclusive access to the premises.
- Online services and delivery services were still possible for certain shops.
Hardship theory, which would recommend the renegotiation of commercial terms when an unforeseen circumstance creating an imbalance between the parties occurs, is not recognised in Belgian law. This is acknowledged by several judgments published, although certain judges would – indirectly – apply this theory via the principle of prohibition of the abuse of right and the principle of execution of good faith of contracts.
Abuse of right and execution in good faith of contracts
In all judgments published, this is, depending on the circumstances, the argument that supports a reduction – but not a full waiver – of the rent due for the months of lockdown. We however insist on the fact that it depends on the specific circumstances of the case, whether the tenant is a SME, a big local player with several shops or a multinational, whether the tenant has always fulfilled its own obligation, whether the tenant has answered to the landlord’s call for a negotiation. In this respect, note that in the judgments recently published, only a minority has granted a rent reduction on this basis.
Note that judges can grant payment terms considering all circumstances. In a minority of the judgments, such payment terms have been granted.
One-off decision or precedent for future cases?
It should first be said that many landlords and tenants have chosen the road to negotiation instead of legal proceedings. As a result, only a few judgments have been rendered and published to date, and it is premature to conclude to a certain trend. It seems however that a full waiver of rent during the lockdown period can hardly be justified and that the underlying legal grounds can be disputed.