May the leases be terminated in the sectors most affected by the pandemic?
The Hungarian Government has ordered that the non-residential leases in the sectors most affected by the COVID-19 pandemic may not be terminated until 30 June 2020. Is this prohibition also applicable in the event of a breach of contract? Also, what happens if the definite lease term expires during the prohibition period?
1. Prohibition of termination
In order to mitigate the economic impact of the COVID-19 pandemic, the Hungarian Government has ordered as one of its first regulations on 18 March 2020 , that “(…) the lease agreements for non-residential premises shall not be terminated until 30 June 2020” in the most affected sectors .
- Is the prohibition of termination applicable to the landlords or to the tenants?
The prohibition of termination applies to the market players and their leases in the sectors listed in the Governmental Decree and considered as the sectors most affected by the impact of the pandemic. Although, these market players typically appear as tenants in the lease agreements, the Governmental Decree does not specify the position (landlord or tenant) of the market players under the lease agreements, to which the prohibition is applicable.
Accordingly, we believe that market players in the most affected sectors may be both tenants and landlords, and the prohibition of termination regarding their lease agreements is applicable for both scenarios. Thus, if a market player in the tourism sector (listed among the most affected sectors) leases premises to another market player operating in the retail sector (not listed among the most affected sectors), neither the market player in the tourism sector, as landlord, nor the market player in the retail sector as tenant may terminate the lease agreement.
- What kind of premises are concerned by the prohibition of termination?
The Governmental Decree clearly state that the prohibition of termination is applicable to non-residential premises. The „non-residential premises” is a legal term broadly defined in the Flat Lease Act, which includes all premises having economic purposes. Consequently, the prohibition of termination applies to the leases of office buildings, shopping malls, logistics parks, factories and other properties of commercial/industrial purposes.
Contrary to the above, in our view, the prohibition of termination is not applicable to properties with a description of „flat/apartment”, regardless of whether the tenant uses the property as an office or for other commercial purpose.
2. Ordinary and extraordinary termination
According to the above quoted wording, the Governmental Decree refers to the termination in general. Therefore, the question arises, whether the prohibition of termination is applicable only to the „ordinary” termination or is it also applicable to the „extraordinary” termination as distinguished both in legal and business terminology.
- Ordinary termination
In case of indefinite lease terms, the Hungarian Civil Code provides opportunity to the parties to terminate the lease agreements without reasoning (at any time). This regulation puts the parties to the lease agreement into a vulnerable position. The legislation is willing to protect the most affected sectors against this vulnerable position by excluding the parties’ ordinary termination right until 30 June 2020, which results in that the market players will be entitled to use their current premises during the state of emergency caused by the pandemic.
- Extraordinary termination
Considering that the extraordinary termination, unlike the ordinary termination, has a nature of sanction, which is applicable in the event of a breach of contract by a party, the question is, whether the prohibition of termination is also applicable in this case.
The legislator did not provide a justification for the Governmental Decree, thus we cannot give a definitive answer to the above question. Considering the short wording and that the Governmental Decree refers to the termination in general, we may conclude that the extraordinary termination is also prohibited. This is supported by the fact that the most common reason for extraordinary termination is the non-payment of rent and the Hungarian Government’s purpose is to protect the market players being in difficulty due to the pandemic, to maintain the „pre-emergency” conditions.
Although, payment default is the most common reason for extraordinary termination, extraordinary termination may also be caused by other conduct of both the tenant and the landlord. On the part of the landlord, it could be that the tenant causes damages to the property, or on the part of the tenant, it could be that the landlord does not ensure the ordinary use of the property. In these cases, where the breach of contract is unrelated to the declared state of emergency, the question is that the general prohibition of the Governmental Decree is applicable or not, whereas this would be such an intrusion on the parties’ autonomy, which could even lead to abuse for the other party.
3. Timing of the prohibition of termination
The Governmental Decree records that the “lease agreements (…) shall not be terminated until 30 June 2020.” Regarding the above, the question arises, whether the prohibition of termination means that no termination notice may be delivered to the other party before 30 June 2020, or the termination notice can be delivered but the termination, as a result of the termination notice, may only be effective from 1 July 2020?
This is an important question, because the indefinite lease agreements have a termination period usually around 1-3 months, i.e. the lease agreements will terminate months later if the termination notice could only be delivered on 1 July 2020, at the earliest. However, if the termination notice could be delivered before 30 June 2020 the notice period could expire meanwhile and the lease agreements may terminate on 1 July 2020; of course, it depens on the length of the notice period.
In our view, the legislator wanted to regulate with the phrase „terminate” that these lease agreements may not terminate before 30 June 2020 without the mutual consent of the parties. Thus, we believe that the correct interpretation is that the termination notices (both for ordinary and extraordinary terminations) may be delivered before 30 June 2020, but the termination may be effect only from 1 July 2020, at the earliest.
However, we would like to point out that the legislator may extend the deadline at its sole discretion as the legislator has referred to it in Article 3 of the Governmental Decree.
4. Expiry of a definite term lease agreement
If the definite term lease agreement expires prior to 30 June 2020, in our view, the services have been performed and the lease agreement will be terminated by law. Therefore, the above limitation does not apply to the termination of a definite term lease agreement.
Of course, it was a different case if the parties had not excluded the conversion of the definite lease term into an indefinite lease term and after the expiry of the agreement the tenant continues to use the premises with the landlord’s knowledge. In this case, the lease agreement would be turn into a lease agreement for indefinite term, which was subject to the prohibition of termination.
In conclusion, we expect that the market players will take into account both the effects of the pandemic and the other party’s interests. Thus, they aim to negotiate and act in a way, which supports the other market player to “stay on track”. As a result of the above, we believe that the mutual modifications of the lease agreements will be much more frequent than the terminations. Terminations will be rather used as an ultimate answer to a non-cooperative approach. Our current experiences support our understanding.