Contractual consequences derived from the declaration of the State of Alarm and the Leasing Contracts for use other than housing
The declaration of the state of alarm may generate a massive breach in relation to the lease contracts of commercial, leisure and restaurant premises whose activity, in accordance with the provisions of the Royal Decree, has been suspended for a minimum period of fifteen days and in In particular, regarding the payment of the agreed rent given the lack of income to support the payment of said rent. By means of this note, it is intended to clarify the protection mechanisms against foreseeable contractual breaches derived from the state of alarm in which the entire national territory is found, in particular, in relation to leasing contracts for use other than housing.
I. INTRODUCTION
On March 14, through Royal Decree 463/2020 (LAW 3343/2020) (hereinafter, the “Royal Decree”), a state of alarm was declared for the management of the health crisis situation caused by COVID-19.
As a consequence of this, containment measures were adopted in the field of commercial activity, cultural facilities, establishments and recreational activities, hotel and restaurant activities, and other additional measures, consisting of the suspension of the opening to the public of the premises and retail establishments except for those that supply goods considered of first necessity (1).
This situation may generate a massive breach in relation to the lease contracts of commercial, leisure and restaurant premises whose activity, in accordance with the provisions of the Royal Decree, has been suspended for a minimum period of fifteen days and in particular, as pertaining to the payment of the agreed rent given the lack of income to support the payment of said rent.
By means of this note, it is intended to clarify the protection mechanisms against foreseeable contractual breaches derived from the state of alarm in which the entire national territory is found, in particular, in relation to leasing contracts for use other than housing.
II. COVID-19 AS A FORCE MAJEURE SITUATION
The contractual relationships oblige the parties to comply with the obligations derived from the contracts and in the event of a possible breach of the same, the Contracts and, failing that, the Law, establish protection mechanisms against the defaulting party.
In effect, and without prejudice to the agreed contractual mechanisms, the Civil Code, in its article 1124 (LAW 1/1889) provides that, in the event of contractual breach, the party performing the contract may demand compliance or, in its case, the resolution thereof, as well as the corresponding compensation for damages caused by the merited breach.
However, when the breach of contract is due to a cause beyond the control of the non-compliant party, unpredictable and unavoidable, mechanisms exonerating the responsibility of the non-compliant party have been provided.
- What is force majeure?
The Supreme Court has defined force majeure as an extraordinary, unforeseeable, unavoidable event, not even applying the greatest possible diligence that is due to external circumstances and / or beyond the will and control of the employer.
Our Civil Code, in its article 1105 (LAW 1/1889), defines the effects and consequences of force majeure by indicating:
“Outside of the cases expressly mentioned in the law, and those in which the obligation so declares, no one will be responsible for those events that could not have been foreseen or, that, foreseen, were unavoidable.”
Likewise, in this line, article 1184 of the Civil Code (LAW 1/1889) provides that:
“The debtor will also be released from the obligations to do when the provision is legally or physically impossible.”
2. How does force majeure affect compliance with contractual obligations? The existence of an event of force majeure (pandemic caused by the COVID-19 virus and closure of commercial and restaurant establishments due to the declaration of the state of alarm) as an obstacle to compliance with the contract and liberating full compliance with the obligations of the contract is only applicable to obligations to give or do, but not in exchange, to pecuniary debts.
In any case, and for the purpose of applying force majeure as a phenomenon of exemption from contractual liability in the event of a breach of its obligations, the debtor must prove the causal relationship between the phenomenon (closure of establishments with the approval of the Royal Decree) and the impossible fulfillment of its obligations.
By virtue of the aforementioned, in the lease contracts, in principle and except for specific regulation in the contract stipulated between the parties, the closure of the leased establishment does not exonerate the lessee from his payment obligations with the lessor, since the contract of lease can be executed. The only impact of these measures on the execution of the contract is the difficult financial situation that the tenant may go through, who will see his income diminished due to the closure of his establishment.
III. APPLICATION TO THE “REBUS SIC STANTIBUS” DOCTRINE CONTRACTS
Faced with an exceptional and unpredictable circumstance such as the declaration of a state of national alarm and the coercive closure of commercial establishments, the tenant may urge the modification of the contractual clauses, in particular, those relating to rent and payment thereof, to through the “rebus sic stantibus” clause, which seeks to restore the balance of benefits between the parties when they have been altered by exceptional circumstances.
The “rebus sic stantibus” clause allows one of the parties to the contract to exonerate or reduce the negative impact of a contractual risk not examined at the time of entering into the contract
The “rebus sic stantibus” clause has been defined jurisprudentially as that rule that allows, in the contractual relationships of successive tract, one of the parties to the contract to exonerate or reduce the negative impact of a contractual risk not examined at the time of formalizing the contract (In this case, a pandemic caused by the COVID-19 virus and the effects derived from it).
The jurisprudence has defined as essential assumptions for the application of the “rebus sic stantibus”, the following:
a. An alteration completely disconnected from the will of the parties.
The closure of the premises and commercial establishments derived from the entry into force of the Royal Decree that regulates the situation of the state of alarm is a fact totally beyond the control of the parties and inevitable.
b. An unpredictable risk and extraordinary nature of circumstances.
The situation derived from the health crisis suffered due to the expansion of the COVID-19 virus, the declaration of a state of alarm throughout the national territory and, consequently, the closure of commercial premises, restaurants and leisure establishments, is about an unprecedented circumstance, entirely unpredictable and extremely extraordinary.
c. An excessively onerous obligation / consideration for one of the parties or that supposes the frustration of the end of the contract.
As a consequence of the aforementioned, the termination of the lessee’s activity implies the lack of income, the complete disappearance of any profit margin and, therefore, the economic unviability of the business, so that the maintenance of the conditions stipulated in the lease contracts of the premises, in particular, the payment of the rent, may imply an excessively onerous obligation for the tenant which, in some cases, may even frustrate the end of the lease.
The main difference between force majeure and the “rebus sic stantibus” clause is that force majeure makes the fulfillment and execution of contractual obligations absolutely impossible, while the “rebus sic stantibus” allows the alteration and modification of the content for adapt it to the new circumstances, assuming at all times that the contract, as it was signed by the parties at the time of its completion, can be fulfilled and executed.
In this sense, on the basis of the “rebus sic stantibus”, the lessor and the lessee could (i) alter the content of what was initially agreed in the lease and make the appropriate changes in order to re-establish the balance between their benefits, which has been affected by the declaration of the state of alarm and, in particular, with regard to the determination of the rent and the payment conditions, or even (ii) to terminate the stipulated contract.
The preferential application of the “rebus sic stantibus” includes the modifying effects of the contractual relationship, precisely because it is the solution that is more suited to the principle of preservation of legal acts and businesses, so that only the content is modified which has been altered as a result of the unforeseeable and extraordinary circumstances that motivate the application of the “rebus sic stantibus”.
Some proposals for alternative modifications could be the following:
-Articulate a suspension of the payment of the rent during the period of state of alarm.
-Make a reduction in the monthly amount of the rent.
As a counterpart to the previous modifications, the lessor could demand:
-Extend the mandatory period for the duration of the contract.
-Extend the initial duration of the agreed Contract.
-Increase the amount of the monthly rent after a certain period of time.
-Update the income by referencing it to a CPI increased by several percentage points.
Furthermore, the provisions of article 1,575 of the Civil Code (LAW 1/1889) regarding leases of rustic properties can be brought up, which establishes that the tenant will have the right to a rent reduction “in case of loss of more of half the fruits for extraordinary and unforeseen fortuitous cases, always except for the special agreement to the contrary.
It is understood by extraordinary fortuitous cases: the fire, war, plague, unusual flood, locust, earthquake or other equally unusual, and that the contracting parties could not rationally foresee.
On the basis of this precept, which should be applied by analogy in the case of urban leases, the tenant who has had to close the leased commercial premises, reducing his income to zero during the period of state of alarm, could urge the lessor to that lowers the rent in response to the exceptional circumstances suffered.