[COVID-19] Commercial rent suspensions
Information current as of the date of publication of this article
Given the exceptional confinement measures and the announcements made by the government, you legitimately enquire on the possibility of suspending the payment of commercial rents. The purpose of this article is to provide a general overview of the law, to date, on this subject, it being recalled that each situation is specific and must therefore be analyzed precisely.
No measures have been formally adopted at this time authorizing the suspension or postponement of rents. Much information is circulating on the content of a possible decree, the broad outlines of which are however mentioned in LAW No. 2020-290 of March 23, 2020 as an emergency measure to deal with the Covid-19 epidemic, published in the OJ of March 24, 2020.
This law authorizes the government to take measures, whose content is still awaited, by an ordinance with retroactive effect to March 12, 2020 “(g) Allowing the full deferral or staggering of the payment of rents, water, gas and electricity bills relating to professional and commercial premises and to waive the financial penalties and the suspensions, interruptions or reductions in supplies that may be applied in the event of non-payment of these bills, for the benefit of micro-companies (…) whose activity is affected by the spread of the epidemic”.
Micro-companies within the meaning of Decree No. 2008-1354 of December 18, 2008 are defined as enterprises that: on the one hand employ fewer than 10 people and, on the other hand, have an annual turnover or balance sheet total not exceeding 2 million euros.
Certain institutional lessors have informed their tenants that they are temporarily “suspending” rents, with monthly payments for the second quarter and postponement of rent payments for the period from March 15 to April 15 and only for shops closed pursuant to the decree of March 15, 2020.
These are spontaneous, isolated initiatives and not at all obligatory.
Other spontaneous initiatives have also been noted: some lessors have already indicated that they consider that the COVID-19 epidemic does not constitute a case of force majeure exempting the lessee from complying and therefore from paying rent.
From a legal point of view, the applicable mechanisms are described below:
- Force majeure and the exception of non-performance
Force majeure is an unforeseeable and insurmountable event preventing the performance of an obligation. It is defined by Article 1218 of the French Civil Code:
Force majeure is a rule that applies even if it is not mentioned in the contract; however, the contract may adjust its terms of application (notification by registered letter with acknowledgement of receipt for example).
The conditions for the application of force majeure are as follows:
- – The event must be unforeseeable, i.e. it must not pre-exist on the day the contract is executed. In this case, the first cases of coronavirus were reported by China to the WHO on December 31, 2019. It can therefore reasonably be considered that the event was unforeseeable on the day of signature of any contract signed before 01/01/2020.
- – The event must also be irresistible, i.e. it must prevent the execution of the contract, not just make it more complicated or expensive. In this case, only businesses closed pursuant to the above-mentioned order can invoke this irresistible criterion.
In the event that the opening of commercial premises has been prohibited pursuant to the Order of March 15, 2020, the lessee could also claim the lessor’s failure to deliver and invoke the exception of non-performance (Article 1220 of the French Civil Code).
- – Force majeure and the exception of non-performance only apply if the business has been closed in accordance with the decree of March 15, 2020.
- – In this case, the lessee may validly notify the lessor “as soon as possible” and by registered letter with acknowledgement of receipt that he/she intends to claim force majeure and make use of this exception by suspending the payment of rent for the time the establishment is closed, but also by suspending the entire performance of the contract (i.e. also maintenance, payment of charges, etc.).
- – The lessor who wishes to contest the application of force majeure may refer the matter directly to the court of law or serve a summons to pay to which the lessee may object: the court will decide whether or not force majeure is applied and whether or not the formalism provided for in the contract is respected.
- Unforeseeable change of circumstances
For businesses that have not been closed by the decree of March 15, 2020, it is necessary to refer to the stipulation of Article 1195 of the French Civil Code provided however that :
- – The contract was signed after October 1, 2016, the date of entry into force of the Ordinance on the Reform of the Law of Obligations;
- – The contract has not conventionally excluded the application of the unforeseeable change of circumstances;
- – The event could not have been anticipated by the parties at the time they exchanged their consents. The criterion is the same as that of unforeseeability in matters of force majeure and therefore appears to be well met in the present case;
- – The event makes the performance of the contract excessively onerous. It is not a question of showing that the performance of the contract has simply become difficult; the disruption of the contract must be excessive. This criterion is assessed on a case-by-case basis.
The consequences of unforeseen circumstances are less brutal than those of force majeure since it does not suspend the obligations of the parties and therefore does not allow a suspension of rent payments. It simply allows a party to ask its co-contracting party to renegotiate the contract and, if this amicable discussion fails, to have the judge intervene to modify the contract. The text expressly provides that, during this phase, each of the parties “shall continue to perform its obligations”.
- – The parties are entitled to request a renegotiation of the contract on the basis of unforeseen circumstances if all the conditions are met, but this does not authorize the suspension of rent payments.
- – For shops not concerned by the closure order, any suspension of the rent without the agreement of the lessor is likely to characterize a contractual fault.