30.07.2020 Real estate law

Lease: When and how to terminate or amend the lease contract?

The tenant and the landlord share the legal relationship and obligations specified in the lease contract. Many of us wonder how the coronavirus pandemic has affected the rules governing the lease of apartments and business premises. When can the tenant terminate the contract and on what regulatory basis?

Lease contract regulated by the provisions of the Civil Code lays down the obligations of landlord and tenant and may be concluded for a fixed or indefinite term. Admittedly, on 14 March 2020, a state of pandemic was announced by Regulation of the Minister of Health, which may be considered a force majeure event, however, if the contract does not provide for the possibility to terminate it due to force majeure, then the currently in force regulations on lease apply. This means that landlord and tenant are obliged to enforce the performance of the lease contract unless they are able to demonstrate the impact of the epidemic on their inability to meet or properly meet their obligations.

In the case of a fixed term contract, the legal relationship between the parties usually expires on the lapse of term for which the contract was concluded. Termination of such contract is possible but basically only on the basis of appropriate clauses or contractual provisions.

The situation of the tenant is slightly different in the case of lease contract for an indefinite term. The termination of such a contract takes place in accordance with the contractual deadlines or, in the absence of relevant provisions, in accordance with the statutory notice periods specified in Article 673§2 Civil Code (“CC”). However, these notice periods depend on the rent payment deadlines. This means that if rent is payable on a monthly basis – with one month’s notice at the end of a calendar month. If rent is payable at intervals longer than one month, the lease may be terminated with a three months’ notice at the end of a calendar quarter. If rent is payable at shorter intervals – with a three days’ notice and if rent is daily – with one day’s notice. 

However, in accordance with the provisions of the Anti-Crisis Shield which significantly interfered in lease contracts, landlords could not terminate the lease or the lease rent until 30 June 2020. 

An important exception to the abovementioned ban was the possibility of terminating the lease, both for a fixed term and for an indefinite term, with immediate effect in a situation where:

  • leased premises or the property has defects that prevent its use,
  • the use of the premises endangers the health of the tenant and the occupants of the premises, including those employed by the tenant

There are also other code-based options for terminating the lease (both for a fixed term and an indefinite term), according to which the tenant has the right to terminate the lease contract with immediate effect in the event that:

  • leased premises has defects that prevent its use,
  • the use of the premises endangers the health of the tenant and his household members, including persons employed by the tenant.

Moreover, it should be kept in mind that a party to lease contract will not be liable for non-performance or improper performance of the lease contract if the non-performance or improper performance is due to circumstances for which the debtor is not liable (Article 471 CC), and if a performance becomes impossible due to circumstances for which the debtor is not liable, the obligation expires (Article 495 CC). However, if due to circumstances for which the debtor is not liable the performance of one of the parties becomes only partially impossible, the other party may rescind the lease contract if partial performance were meaningless to it due to the nature of the obligation or due to the purpose of the contract intended by that party and known to the party whose performance has become partially impossible (Article 495 CC). An example of such circumstances excluding the debtor’s liability for non-performance or improper performance of an obligation may be force majeure in the form of the coronavirus epidemic. In order to apply the above-mentioned legal concepts, it is necessary to examine whether there is a causal relationship between the force majeure and the failure to perform the contract or its improper performance. This means that, in principle, the occurrence of an epidemic or epidemic emergency alone does not constitute a stand-alone basis for termination of the lease under the abovementioned regulations.

Termination/change to the contract:  rebus sic stantibus clause?

In the period between the creation of an obligation and its performance, various changes in social and economic relations may occur. The vast majority of them are typical. Because it is within the normal conditions of civil law transactions and is covered by the so-called normal contractual risk, it has no effect on the performance of obligations. Modification of the method of performance of the obligation may take place only with the consent of both parties.

A situation is different when there is an extraordinary, objectively unpredictable change in social and economic relations, which uniquely affects the reality and causes excessive difficulties in rendering the performance or threatens one of the parties with a gross loss. In such a situation, a rebus sic stantibus clause, regulated in Article 358 [1] Civil Code, may be applicable. It is a legal concept that allows a court to amend  the provisions of the contract, or even dissolve it.

This clause applies to all contractual obligations, irrespective of whether they provide for changes in the event of an extraordinary change in circumstances or whether such change affects the performance or proper performance of the obligation. Importantly, this article is of a dispositive nature. It is permissible to exclude its application or replace it with a regulation on the consequences of changing relations agreed by the parties (the so-called adaptation clause).  

The conditions for its application are:

  • extraordinary change of relations;
  • excessive difficulty in rendering the performance or threat of a gross loss by one of the parties;
  • a causal relationship between the change of relations and difficulties in rendering the performance or a threat of loss;
  • failure by the parties to foresee the impact of changing relations on the performance of the obligation when concluding the contract;

If the above conditions are fulfilled it is possible to enforce the changes in court, or terminate the lease contract even if the parties failed to foresee the change or impact of such change on circumstances (absence of relevant provisions in the contract). However, this does not mean that the application of the said clause is limited only to court proceedings – it may well constitute a negotiating basis between the parties to an obligation relationship.

The party to the contract, the tenant in the discussed case, wishing to invoke the rebus sic stantibus clause, for example in connection with the coronavirus pandemic, should apply to the landlord with a request to change the provisions of the contract and only after potentially fruitless negotiations of both parties, the tenant may decide to go to court or, if the parties to the contract have applied an arbitration clause, opt for arbitration. Therefore, the court decide on the legitimacy of rebus sic stantibus and the possible changes to the contract in that respect, provided the parties do not agree in the first place.

Invoking the rebus sic stantibus clause is therefore a long and bumping road which may or may not lead to a change or termination of the contract. Until recently, tenants struggling with the pandemic had other options leading to a change in their contractual relationship or the termination of their contract  

Shopping malls and the pandemic – special regulations on lease contracts

When discussing the impact of the coronavirus on lease contracts, it is impossible not to briefly mention the situation of tenants of shopping centres and shopping malls. Special regulations regarding the ban on leasing activities in shopping centres and malls were in force from 31 March 2020 to 4 May 2020, and in the case of tenants operating fitness clubs, hairdressing or beauty salons and restaurants – until 18 May 2020. They significantly affected the situation of tenants of such facilities, therefore the legislative body decided to introduce the Act of 2 March 2020 on special solutions related to the prevention, counteracting and combating of COVID-19, other infectious diseases and the emergencies caused by them, in order to reduce the negative effects of the pandemic on the trade sector – Article 15ze.

This regulation assumed the expiry of mutual obligations of the parties to the lease contracts in large-area shopping centres (with a sales area of ​​more than 2,000 sqm.) for the duration of the ban to conduct business (as specified above). This applied to (due and payable) obligations which arose during the period of the ban to conduct business, in particular with respect to lease rent, fees for additional services, or charging contractual penalties and interest.

This regulation introduced an important condition for taking advantage of the exemption in question, namely, to this end, the tenant is obliged to submit an offer to extend the lease within three months from the end of the ban to conduct business (i.e. until 4 August 2020 or 18 August 2020 respectively) by the duration of the prohibition plus additional six months. If the tenant does not submit such an offer, the landlord ceases to be bound by the expiry of the obligations, which means that it may require the tenant to pay the rent and other fees for the period of the ban.

The introduced regulations, however, hide some inaccuracies, which in turn raised and still raises a number of doubts regarding the possibility, during the period of ban to conduct activity, for the tenant to store its goods in the premises, supply of utilities to the premises and provide other services, e.g. security services and sharing (between the tenant and the landlord) costs related to the use of the leased premises.

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