COVID-19 rent cuts in UK, Italy and Poland | Hogan Lovells
In the UK, various measures are underway to support and protect tenants against enforcement actions by landlords for non-payment of rent. These are roughly the following:
- there is a moratorium until March 25, 2022 on landlords evicting commercial tenants.
- the Commercial Rent Arrears Collection (CRAR) process (a legal procedure that allows owners of commercial premises to collect rent arrears by taking control of the tenant’s property and selling them) can only be used if tenants need to at least 544 days of principal rent.
- landlords are prohibited until March 31, 2022 from issuing statutory requests and closing petitions on the basis of a tenant’s inability to pay commercial rent (unless the landlord has reasonable grounds to believe that COVID-19 had no financial effect on the tenant or that the circumstances underlying the liquidation request would have occurred even if COVID-19 had not had a financial effect on the tenant. business).
Despite the above, there is no legal help for tenants to legally compel a landlord to reduce or write off COVID-19 arrears that have built up during the closure of the premises. However, the government is clearly concerned about the series of potential insolvencies (and subsequent job losses) that could occur if the restrictions mentioned above were simply to expire. It is therefore currently in consultation on the options available to deal with COVID-19 areas and one of the proposals under consideration is binding arbitration in circumstances where landlord and tenant cannot reach a settlement mutually. acceptable.
While consultation is ongoing, the government’s legislative plans on COVID-19-related arrears remain unclear and commercial landlords and tenants have a number of unanswered questions. For example, which arrears are “locked in” and submitted to arbitration if they are not agreed? What about tenants who have chosen, perhaps for commercial reasons, to remain closed? Will the law unwind concession agreements already made, including if the tenant insists they still cannot pay? Will tenants who have already paid in full be entitled to refunds? Will the legislation be limited to rent or will it include, for example, service charges? The government said the cantonment would only apply to tenants who have been “impacted” or “affected” by COVID-19 “business closures” for the period from March 2020 until the restrictions for their sector be removed. Business owners can be reassured that this at least suggests that rent will not be limited when it relates to times when tenants have chosen to close during the pandemic. Tensions between landlords and tenants over accumulated arrears are therefore expected to continue and parties will have to wait for further details as legislation is released before answering at least some of their questions.
With regard to leases of commercial buildings and leases of commercial premises, the emergency legislator in Italy has mainly introduced tax breaks without affecting the relations between the parties, with the exception of the planned eviction stop in article 103, paragraph 6, of the decree “Cura Italia” (legislative decree 18/2020, converted into law 27/2020).
Among the non-fiscal measures, article 91 of the “Cura Italia” decree provides that “[…] The compliance with the containment measures referred to in this decree is always assessed for the purposes of exclusion, by virtue and for the purposes of articles 1218 and 1223 of the Italian Civil Code, from the liability of the debtor, also with regard to the application of any confiscation or penalties related to delay or failure to perform. “Some judgments have ruled that the aforementioned Article 91 does not provide for the tenant’s right to unilaterally suspend the payment of rent and that the tenant must therefore provide objective data from which he can conclude that his financial situation has deteriorated.
On the other hand, some judgments are favorable to the demands of tenants affected by the socio-economic situation due to the health emergency. According to the court of La Spezia (December 15, 2020), the health emergency is one of the elements that can exclude that there is a “serious breach”, even if the tenant carries out an activity that is not directly affected by containment measures. In general, many courts have applied the provision of article 91 of the decree “Cura Italia” to exclude that the non-payment or late payment of the rent constitutes a “serious breach” (including the Court of Trani, 1st September 2020).
However, the latest court rulings focus on whether the landlord is forced to renegotiate the contract and if he can reduce the rent to be paid by the tenant for the months of ‘confinement’.
Several courts have confirmed that the solution to the contractual imbalance due to the emergency situation lies in the principles of fairness and good faith provided for by the Civil Code and applicable to the execution of contracts. In particular, as already recommended by the Court of Cassation in its Report n ° 56/2020 (on the application of the general principles of the Civil Code in the event of a pandemic), the courts affirm that the tenant must have the possibility of renegotiating the content. of the unbalanced contract (among others, Court of Treviso, December 21, 2020).
In particular, the Court of Rome (August 27, 2020) held that the emergency measures introduced by the legislator were not sufficient to rebalance the agreement and that the parties were obliged to start new negotiations in order to restore the contractual balance.
Other courts shared this approach and recognized the tenant’s right to reduce the rent, at least in relation to the months of closure. Some courts have informed the parties of the extent of the reduction to be applied to the rent, while others have limited themselves to asking the parties to renegotiate the rent (Court of Milan, October 21, 2020) or, more commonly, have deferred the determination of the extent of the reduction to later stages of the proceedings (Venice Tribunal, July 28, 2020). According to these judgments, renegotiating the rent in the sense of a temporary reduction would rebalance the agreement and force the landlord to make a much lower sacrifice than the tenant would have to make if they had to pay the rent in full (i.e. this meaning, see also Court of Venice, September 30, 2020).
However, there have also been contrary rulings which deprived the judge of the possibility of modifying the economic conditions of the leases by lowering the rent, even temporarily (Tribunal de Rome, February 19, 2021 and Tribunal de Biella, March 17, 2021).
The aforementioned judgments make it clear that legislative intervention would be appropriate, if not necessary, to establish clear criteria and parameters for the settlement of disputes between landlords and tenants in Italy. Indeed, to date, this scenario has been interpreted and applied differently by the courts.
In Poland, specific rent limitation regulations have only been put in place for leases of commercial premises in shopping centers with an area greater than 2,000 m². entered into force on March 31, 2020, the mutual obligations of a landlord and a tenant under a lease agreement should be suspended during the period when the activity of the tenant concerned is prohibited due to the Covid-19 restrictions until the date on which this ban is lifted.
Under the recent amendment to the Covid Law, all receivables, including rents and charges, payable by a tenant under a lease (or any other agreement to grant the right to use a commercial building , including lease contracts) the object of which is commercial premises in a shopping center with an area greater than 2,000 m²), must be reduced to 20% of its value for the period during which the tenant’s activity in question has been banned or to 50% of their value within three months from the date on which the ban was lifted.
Regarding other leases, including hotel leases, no specific regulations on rent limits have been introduced in Poland. Tenants often ask for rent reductions by referring to the so-called rebus sic stantibus clause of the Civil Code. According to this provision, a party can ask the court to change the terms of the contract if the performance of the contract has been significantly hampered by unforeseen and unforeseeable circumstances. There are already precedents of court rulings ordering rent cuts due to the Covid-19 pandemic on the basis of this clause. However, the courts are obliged to take into account the economic situation of both parties when rendering a judgment, so the outcome depends on the circumstances of the individual case.