Businesses that rent premises in the Malls and can not operate there during the period of prohibition have a logical question: do they have to pay rent for the quarantine period? The same question arises for those businesses the activities of which are not prohibited for the quarantine period but they switch over to remote work so that do not actually use the premises they rent (primarily for offices) in buildings that do not close for the quarantine period.
In particular, shopping and entertainment centers, other establishments of entertaining activity, commercial and household services of the population (hereinafter referred to as the “Malls”) stopped their work. Only some areas of business that were not covered by the prohibition of work continue operating in such premises. For example, retail of food, hygiene products, medicines, medical devices, etc.
Businesses that rent premises in the Malls and can not operate there during the period of prohibition have a very logical question: do they have to pay rent for the quarantine period?
The same question arises for those businesses the activities of which are not prohibited for the quarantine period but they switch over to remote work so that do not actually use the premises they rent (primarily for offices) in buildings that do not close for the quarantine period.
Let’s consider this issue in more details.
Lease in Malls (for shops, restaurants, cafes)
First of all, it is advisable for a lessee to refer to the text of the lease agreement concluded. Quite often, lease agreements contain provisions relieving a lessee of lease payments for those periods when a lessee can not use the premises leased due to the circumstances beyond lessee’s control (or other specific provisions for such circumstances). If there are no such clauses in the lease agreement, the lessee may refer to the provisions of law.
In accordance with Article 286 of the Commercial Code of Ukraine, lease payment is a flat-rate payment that a lessee pays to a lessor regardless of the consequences of lessee’s business activities. The amount of rent may be changed by agreement of the parties, as well as in other cases established by law.
As follows from Article 762 of the Civil Code of Ukraine, a lessee is relieved of lease payments for all time during which the lessee could not use leased property due to the circumstances beyond lessee’s control. However, there is no comprehensive list of such circumstances in civil law.
In our opinion, it is possible to consider the quarantine as a circumstance beyond lessee’s control and, therefore, a ground for lessees to be relieved of lease payments for the quarantine period.
This approach appears to be in agreement with the following legal position of the Grand Chamber of the Supreme Court on practical application of the mentioned above provision of Article 762 of the Civil Code of Ukraine:
“6.7. In accordance with Paragraph 6 of Article 762 of the Civil Code of Ukraine, the lessee is relieved of lease payments for all time during which the leased property could not be used by the lessee due to the circumstances beyond lessee’s control.
6.8. Therefore, this rule of law defines as a ground for relief from obligation to perform lease payment an objective direct inability to use the leased property (to be admitted to the premises, to stay there, to store in the premises etc.) due to the circumstances out of lessee’s control.
6.9. In addition, the circumstances specified in Paragraph 6 of Article 762 of the Civil Code of Ukraine are not fully covered by the concept of force majeure because unlike the latter, the characteristic of which is its objective and absolute effect, as well as unpredictability, the former can be caused, in particular, directly by the lessor’s acts of will, therefore, the circumstances under Paragraph 6 of Article 762 of the Civil Code of Ukraine may include circumstances of force majeure and the case, but are not limited to them…
6.10. In view of the foregoing, the Grand Chamber of the Supreme Court notes that the absence in Paragraph 6 of Article 762 of the Civil Code of Ukraine of a comprehensive list of circumstances which make impossible usage by the lessee of the property, grounds of origination of such circumstances, means of confirming them indicates that the basis for the application of this rule is finding out of the fact that it is impossible for lessee to use the leased property for reasons out of lessee’s control on the general grounds determined by the procedural law”.
Similar position was highlighted even earlier by the Supreme economic court of Ukraine:
“…In accordance with Paragraph 6 of Article 762 of the Civil Code of Ukraine, the lessee is relieved of lease payments for all time during which the leased property could not be used by the lessee due to the circumstances beyond lessee’s control.
Therefore, according to the content of the said substantive law, if the lessee is temporarily deprived of the opportunity to use the leased property due to the circumstances out of its (his, her) control, the lessee is relieved of lease payment for all the time of such impossibility of use. The circumstances that make use of leased property by the lessee impossible may be related both to the activity of the lessor and to certain objective circumstances (circumstances of force majeure, case, etc.)…”.
Lease of premises (in particular, offices) in buildings the work of which is not prohibited
In this case, it is also advisable for a lessee to review, first of all, the text of lease agreement as to whether it contains provisions on the possibility of changing the amount of rent or relieving the lessee of the obligation to perform the lease payment in case of actual non-use of the premises by the lessee.
In absence of such provisions in the lease agreement, the reference to the abovementioned provision of Article 762 of the Civil Code of Ukraine appears to be quite problematic in terms of proving the existence of “circumstances beyond lessee’s control”. In fact, there is no direct legislative prohibition of office work, and therefore, from a legal point of view, the lessee has the right and ability to use the premises for his business.
At any rate, lessees are not deprived of their right to initiate negotiations with their lessors regarding change of the amount of rental payments for the period of quarantine in order to reach a mutually acceptable compromise in this behalf.
Is force majeure worth to be referenced?
Lessees also inquire whether they can be completely relieved of lease payments for the quarantine period on the grounds that quarantine is a force majeure.
As follows from Article 141 of the Law “On Chambers of Commerce and Industry of Ukraine”, force majeure circumstances are extraordinary and inevitable circumstances that objectively make it impossible to fulfill the obligations stipulated by the terms of the contract (contract, agreement, etc.), obligations under legislative and other regulations.
The impossibility of fulfilling obligations under a specific contract due to and during the force majeure circumstances must be certified by a certificate of the Ukrainian Chamber of Commerce and Industry (regional chambers of commerce and industry). Such certificate is what confirms the existence of force majeure in the particular case (although it should be noted that there have been cases in a court practice where the courts did not accept such certificates as evidence of force majeure). Such certificate can only be obtained when there is a cause and effect relationship between force majeure and inability to perform. In other words, in absence of a force majeure the obligation may be fulfilled.
However, confirmed force majeure circumstances will not relieve a business entity of fulfillment of its contractual obligation for the period of their effect (in this case, from lease payment for the period of quarantine), they will only allow to postpone the fulfillment until the time when the force majeure major circumstances will cease.
In addition, if the effect of confirmed force majeure results in a breach of an obligation, then liability for such breach (such as fines, penalties) will not take place.
This follows from Article 617 of the Civil Code of Ukraine, whereby a person that breaches an obligation is released from liability for breach of the obligation if such person proves that the breach occurred in the result of an accident or a force majeure.
In our opinion, the lessee’s chances to obtain a certificate confirming the inability to effect lease payment due to quarantine as a force majeure, do not seem to be high: in order to obtain a certificate from the relevant chamber of commerce, a lessee will have to prove that quarantine measures have such a significant impact on its (his, her) business that fulfillment of the obligation to pay for the lease is impossible. This appears to be quite problematic as far as there are no technical obstacles to making payments at this time – banking institutions work, the possibility to effect payments exists.
However, the reference to quarantine, as a force majeure that makes impossible to fulfill the obligations under the lease agreements, may take place on the part of the Malls-lessors. At first instance, the point is that lease agreements often provide rules regarding the time during which lessors provide lessees with access to leased premises, as well as responsibility for non-fulfilment of such rules. Therefore, in the event of certification of lessor’s impossibility to fulfill obligations under lease agreement due to the quarantine (in particular, the abovementioned rules regarding access to leased premises), the liability for their non-fulfilment will not take place. We wrote more in details about quarantine as a force majeure and its impact on business here.
In conclusion we would like to mention that it would be reasonable to regulate the issue of rent in conditions of quarantine at the national level – in order to maximize the balance of interests, first of all, financial, for both lessors and lessees.
If you have any additional questions, please contact:
Partner, Attorney at law