The COVID-19 crisis: answers to key questions related to lease of premises
Covid-19 crisis in Lithuania
UPDATED: MAY 4, 2020
From May 4, small and medium-sized businesses that have been suspended during quarantine can apply for state support to reimburse 50 percent of the business rental price.
This state offered aid will be available to those companies whose lessor will provide at least percent discount, and the tenant will have to pay the remaining 20 percent. If the company does not receive a 30% discount from the landlord, no compensation will be given.
All small and medium-sized enterprises will be eligible for this compensation. Also those with more than 250 employees, as the number of employees will not be assessed under this subsidy.
Companies seeking this 50 percent rent compensation will also have to meet the following administrative conditions:
- At the end of 2019, companies should not have been classified as companies in difficulty;
- The property lease agreement will have to be registered in the "Register Center" at the time of submission of the application.
The rental subsidy will be available from the start of quarantine (March 16) and for 2 months after the end of quarantine.
The Government has extended the quarantine period in Lithuania until 11th of May, 2020. As prognosed, the quarantine may be extended for an even longer period. Throughout this time, various commercial activities are prohibited, including catering, restaurants, bars, sports, beauty, entertainment and other activities. In almost all cases, such companies lease premises for their activity.
According to this, and the fact that companies engaged in such activities currently have almost no or no income at all, lawyers of Professional Partnership of Advocates “Deloitte Legal” provide answers to the lessee’s most frequently asked questions regarding execution of the lease agreement and the lease payment.
Is it possible to not pay the lease payment during the COVID-19 quarantine period due to force majeure circumstances?
Quarantine situation in the view of contractual relationship is oftenly called a force majeure circumstance, so let‘s clarify if such conclusion is made reasonably. Force majeure is regulated by the Article 6.212 of the Civil Code of Lithuania, the first part of which provides that a party shall be deemed not liable for non-performance of the agreement if such party proves that its obligations cannot be performed due to the following circumstances:
- the party could not control and reasonably foresee occurrence of such circumstances at the time of the agreement’s conclusion;
- the party could not prevent the occurrence of these circumstances or its consequences.
These conditions are additionally clarified by the Supreme Court, which ruled that in order the circumstances to be recognised as force majeure, all of the following conditions are mandatory:
- these circumstances did not exist at the time of the conclusion of the agreement and its occurrence could not have been reasonably foreseen;
- due to such circumstances, the agreement cannot be objectively performed; • the party failing to perform the agreement could not control or prevent those circumstances;
- the party has not assumed the risk of the occurrence of these circumstances or their consequences.
Assessing the compliance of the COVID-19 quarantine with these above-mentioned conditions of force majeure, it is clear that the quarantine does not meet at least one of the necessary conditions - the quarantine does not objectively take away the ability to perform the agreement, i.e. the ability to pay the lease payment. In addition, the first part of the Article 6.212 expressly provides that in case the other party does not have the necessary financial resources to fulfil the obligation, it is not considered as force majeure circumstances.
Thus, in the perspective of the lease agreements, the quarantine of COVID-19 cannot be assessed as force majeure circumstance, so that the lessee is not entitled to suspend or otherwise change the payment of the lease on that basis. However, each force majeure situation must be assessed individually, so, although unlikely, there may be exceptions.
Furthermore, although courts sometimes applies force majeure more broadly, in fact force majeure circumstances relieves the party from the contractual liability (e.g. fine) rather than from the obligation itself (in this case, from the lease payment).
Is it possible to pay a lower lease payment during the quarantine period?
First of all, neither the prohibition or restriction of activities carried out in the leased premises nor the quarantine of COVID-19 itself is a ground for the lessee to unilaterally reduce, suspend or otherwise change the amount and the terms of the lease payment. However, this provides a legal basis to apply to the lessor for a change of the agreement.
Article 6.204 of the Civil Code provides that in case the performance of the agreement becomes more difficult for one of the parties, that party shall have the right to apply to the lessor. Restrictions on the performance of the agreement are those circumstances which substantially change the balance of contractual obligations, i.e. it may be either a substantial increase of the price of the performance, or a substantial decrease of the received performance. Only the following circumstances may be assessed as a restriction: (1) arose or became known only after the conclusion of the agreement, (2) could not have been foreseen at the time of the conclusion, (3) cannot be controlled by the party and (4) the party has not assumed the risk of its occurrence.
The fact that during the quarantine period the activity of certain entities (including the one carried out in the leased premises) are prohibited or substantially restricted, which also means that the lessees generate significantly less or no income, forms the basis to conclude that it is more difficult to perform the agreement for the lessees. According to this, a contractual restriction arises, which substantially changes the balance of contractual obligations. In this case, in accordance with the Article 6.204, the lessee has the right to apply to the lessor for the amendment of the lease agreement, including the reduction of the lease payment.
Moreover, before applying the above basis, please analyse your lease agreement - it may already contain the answer to your question, i.e. the agreement may contain the grounds for the reduction of the lease payment, the possibility to change the lease payment order or the grounds proving that such situation is to be considered as changing the balance between the parties. Furthermore, please check whether the agreement does not provide a condition stating that the agreement may not be changed due to substantially changed circumstances – if the agreement contain such condition, it may be more difficult to apply Article 6.204 and the agreement may require an individual legal assessment.
What steps need to be taken in order to start negotiations regarding the change of the agreement in case the contractual balance between the parties has changed?
First of all, the party shall immediately send a request, containing information on the requested conditions (price reduction, suspension, etc.) and evidence confirming why the circumstances have substantially changed the balance of the parties' contractual relationship. Be sure to include request for administration fees, payment of parking places and other payments. The current situation has shown that lessors are well aware of the quarantine’s impact on their partners’ businesses and are ready to negotiate or even offer possible options on their own initiative. Please have in mind that neither the sending of the request nor the fact of the negotiation process constitutes grounds for the lessee to cease to perform the contract.
However, if no agreement is reached within a reasonable
period of time, the lessee has the right to take a suit asking for amendment or
termination of the agreement. The sue may be taken along with request for
interim measures. If the court decides that the balance of the parties has
changed, it will change or terminate the lease agreement (including a date and
conditions for termination). However, this process should be used as a last measure,
because, although it is not possible to determine exactly how long the
quarantine will last, the trial is likely to take even longer.
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