Can your business claim the decrease of rent?

16/04/2020
Can your business claim the decrease of rent?

In current circumstances related to the spread of COVID-19, many companies are unable to use the premises they are leasing, while not being released from their obligation to pay rent under their respective lease agreements.

If the tenant belongs to the most affected industries (restaurants, hotels, tourism, air transportation, etc), then they are entitled to request the deferral of rent payments (described in detail here). Similar measures have been adopted with respect to immovable property leased by businesses from state or municipal authorities.

But are there any protective measures for other types of tenants in their leases?

We suggest that the tenant takes the following steps to assess their chances to reduce rent or postpone its payment:

1. The first and most obvious step would be to review the lease agreement itself. Does it provide for the possibility for the tenant to demand a decrease of rent in certain circumstances? Can certain provisions be applied in the current situation?

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a. YES: The next step would be to follow the procedure set forth in the agreement. However, if the landlord does not agree to apply these provisions voluntary, the tenant might need to enforce them through a court.

b. NO: in this case you need to look at the options offered to the tenants by the applicable law and the court practice. See the subsequent steps.

SCHNEIDER GROUP will be happy to assist tenants with review of the lease agreements to determine whether they actually provideany options to decrease or postpone rent payments.

2. Was the lease agreement concluded before the state of high alert or emergency situation was introduced in the respective region? Is the tenant unable to use the leased property or have the conditions of the leased property significantly deteriorated as a result of such state of high alert or emergency situation?

a. YES to both questions: in this case the tenant may demand a decrease of rent from the landlord based on several strategies:

  • if the tenant unable to use the leased property, it may demand decrease of rent from the landlord based on the provisions ofnew Federal Law No. 98-FZ of April 01, 2020. In case the landlord does not voluntarily agree to the decrease of rent, the tenant might need to refer to a court.The chances of success in the respective court dispute will increase if the landlord themselves prohibit the tenant’s access to the premises (for example, the landlord closed the business center). However, if the landlord does not prevent the tenant’s access to the premises, but the tenant’s employees cannot come to the premises because of the legislative prohibitions – the tenant’s chances seem to be significantly lower.The court might also consider the following:
    • whether the tenant’s employees can work remotely;
    • whether the tenant suffered any turnover / profits losses as a direct result of inability to use the premises (and not just as an economic result of the spread of coronavirus infection);
    • whether any of the tenant’s employees actually work at the premises.
  • by reference to paragraph 4 of Article 614 of the RF Civil Code. The tenant will have to prove that the conditions of use of the premises, provided by the lease agreement, have significantly deteriorated for reasons, for which the tenant is not responsible. The tenant will need to justify and prove the possibility and proportionality of the requested rent reduction to the deterioration of conditions to use the premises;
  • Another option would be to refer to Article 451 of the RF Civil Code (material change of circumstances). All of the following conditions must be met in order to apply for a decrease of the rent pursuant to the said article 451 of the RF Civil Code:
    • when entering into the lease agreement, neither of the parties had foreseen such a change in circumstances (e.g., the agreement was made before the coronavirus pandemic restrictions were imposed);
    • it was not possible to overcome the restrictions after they arose;
    • the performance of the lease agreement without changing its terms would have so undermined the balance of property interests of the parties and caused such damage to the interested party that it would have largely lost what it was entitled to expect when concluding the agreement;
    • It does not follow from the customs or the substance of the lease agreement that the risk of changing circumstances is borne by the tenant.

    According to paragraph 4 of Article 451 of the RF Civil Code, modification of the lease agreement due to the material change of circumstances is allowed by the court only in the exceptional cases (when the termination of the agreement is contrary to public interests or will cause the parties damage that significantly exceeds the costs necessary to perform the agreement on terms and conditions changed by the court). However, in the given situation, there are good arguments for a modification as the current crisis is temporary and a termination of the lease agreement would cause substantial damage to both, the landlord and the tenant.

  • In addition, the tenant may try to terminate the lease agreement early by reference to Article 451 of the RF Civil Code (material change of circumstances) or Article 620 of the RF Civil Code (the property is in condition unsuitable for use due to circumstances for which the tenant is not responsible). The success of termination of lease by the court will also largely depend on how long the changes in circumstances will last and how significantly they will affect the parties.

NO, the lease agreement was concluded after the state of high alert or emergency situation had been introduced in the respective region: in this case you need to look at other options offered to the tenants by the applicable law and the court practice, however, the chance of success seems quite low, as the tenant entered into the lease agreement already being aware of the limitations related to the introduction of the state of high alert or emergency situation.

3. Did the landlord close the building and prohibit the tenant’s access thereto?

YES: in this case the chances to reduce the rent seem pretty good based on paragraph 4 of Article 614 (see Section 2 above) and Article 328 of the RF Civil Code (failure of the landlord to fulfill its counter-obligations under the lease agreement).

b. NO: in this case you need to look at other options offered to the tenants by the applicable law and the courts’ practice.

Please note that the above review is of general nature and may not, and is not intended to replace legal advice on a specific lease agreement and a specific situation of a tenant of premises.

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