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Covid-19’s impact on relationships between landlords and tenants – today and tomorrow

The outbreak of the Covid-19 pandemic, which was officially recognised in Poland in the second half of March, resulted in the lockdown of business activity, in particular in the retail, hotel, restaurants and entertainment sectors.

This has caused tensions in relationships between landlords and tenants, especially where the tenant’s business activity has been prohibited or limited.

Source: British Polish Chamber of Commerce.

What was always on the table?

The Polish Civil Code contains provisions which might be used during the SARS-Cov-2 pandemic in relation to lease agreements. The two most important legal regulations are set out below. Because parties to a given lease agreement might decide to structure their agreement differently, the rights and obligations of the parties under each lease agreement always have to be considered on a case-by-case basis.

Rebus sic stantibus (‘things thus standing’) clause

The rebus sic stantibus clause allows for nullification or change of contract in the event that fundamental circumstances change. It can be regarded as a ‘statutory material adverse change’ (MAC) clause. Article 3571 of the Civil Code deals with an extraordinary change of circumstances.

Under the rebus sic stantibus clause, no party can terminate the agreement or change it on their own – only the court may change or suspend certain obligations or even terminate the agreement. However, the party which is affected by the extraordinary change of circumstances usually refers to this clause when approaching the other party.

To make use of the rebus sic stantibus clause, the affected party has to prove that an extraordinary change of circumstances has occurred and that this change causes excessive difficulties in carrying out such party’s obligations or else threatens such party with significant loss. The change of circumstances should be permanent.

As the outbreak of the Covid-19 pandemic was recognised in Poland only in mid-March, in some cases it might be claimed that the impact of the lockdown on the given business is not clear and, therefore, the extraordinary change of circumstances (of a permanent nature) has not yet occurred.

On the other hand, it should be noted that when considering the risk of significant loss, the commercial purpose of the agreement should be taken into account. If the tenant leases the premises to carry out business and make a profit, it should be clear that the prohibition against carrying out business in the premises results in significant loss for the tenant.

Force majeure

There is no definition of force majeure under the Civil Code. Generally, both natural disasters (including outbreak of a pandemic) and binding provisions of law (such as restrictions on conducting certain types of business activities) are seen as force majeure events.

force majeure event might exclude the liability of one party to the agreement for the non-performance of its obligations. The affected party has to prove that the occurrence of the force majeure event had a direct influence on its ability to carry out the obligations under the agreement by such party (for example, to pay rent).

Although it is obvious that the prohibition against carrying out commercial activity decreases the tenant’s turnover, such a prohibition does not make it (directly) impossible to pay the rent. In our view, it might be difficult for a tenant to claim that due to the occurrence of the force majeure event the tenant is released from their obligation to pay the rent.

What new regulations have been adopted so far?

In connection with the Covid-19 pandemic the government has banned business performed by, restaurants and pubs (only take-away service is allowed), cinemas and theatres, conferences and exhibitions, hairdressers and beauty salons, sports, entertainment and recreation services, and shops in large shopping centres (with the exception of pharmacies, food shops and DIY stores). It should be noted that (in general) no production or office activity has been restricted.

On 31 March 2020, the Polish Parliament adopted a new act which deals with various economic and commercial aspects of the Covid-19 pandemic. Under the new Act:

  • Any lease agreement for premises concluded before 31 March 2020 and expires prior to 30 June 2020 is automatically extended until 30 June 2020, if the tenant requests such extension (subject to some exceptions)
  • Until 30 June 2o2o, no landlord can terminate a lease agreement (subject to certain exceptions)
  • Lease agreements in shopping centres for those premises which are subject to restrictions have been suspended – the tenant will be released from the obligation to make payments under the lease, if they provide the landlord with an offer to extend the lease agreement by an additional six months increased by  the period in which the lease was suspended.

What is the impact on the lease relations?

Warehouse, logistics and production buildings

Various tenants are approaching their landlords and asking for cancellation of rent, rent rebates or other concessions. Tenants usually justify their requests with the occurrence of force majeure events and/or the extraordinary change of circumstances which threatens them with significant loss. In some cases, such threats are real and might lead to their tenants going out of business and abandoning the premises.

However, we believe that certain sectors (in particular e-commerce and logistics) might expand their businesses in future as consumers switch to home shopping. Also, some manufacturers might be interested in securing themselves against suspensions and breakdowns of supply chains by securing additional warehouse space for materials and stocks.

Shopping centres

The new regulations are not clear and there are doubts as to how to interpret them. Do they mean that tenants are not allowed to keep their goods and stocks in the premises? Are landlords obliged to provide energy and water (and other services) to the premises? Can tenants be charged with additional payments (e.g. for common costs or utilities)?

We believe that in the current situation the best solution is to reach additional understanding between landlords and tenants in which they agree upon mutual rights and obligations during the pandemic. The tenant should not be deprived of their right to refrain from rent payment (and – in return – offering a lease extension to the landlord), however, the parties should supplement the unclear statutory provisions with some practical and compromise regulations.

Offices

Generally, the current situation does not (directly) affect the possibility to use office space for normal business activities (there are only minor restrictions relating to keeping distance and/or wearing masks at work). Unless a given tenant has special provisions in their lease agreement, obtaining a rent reduction from the landlord might be rather difficult (however, some tenants might still try to raise arguments relating to extraordinary change of circumstances).

Nonetheless, tenants and their employees have switched to work from homes and are extensively testing various tools and procedures. Home office might become more popular and frequent (to some extent this might also be cost-driven). In the long term, tenants will probably be thinking of new solutions to secure flexibility (in terms of changes to space arrangement (such as hot desks, home office) and commercial terms – including more detailed regulations in the leases on the effects of occurrence of force majeure events in future).

By Marcin Świerżewski, counsel, head of the Real Estate team and Michał Prochwicz, senior associate, Real Estate practice, Bird & Bird
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