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Lease Relations during COVID-19

The new Federal law (No. 98-FZ) is amending a number of existing regulations, as well as setting the new rules in connection with COVID-19.

Three new basic rules of lease relations of businesses with their landlords during the coronavirus pandemic.

Due to the pandemic, in many regions of Russia, strict containment measures have been taken. Among other measures, various businesses (such as shopping malls, restaurants, hairdressers and even office buildings) have to stop operating for a long period (initially, for about a month, from March 28 to April 30). Effectively, the country is in a lockdown. As a result, a number of questions arise related to the lease relations of businesses with their landlords.

1. Should the lessee pay rent during the lockdown?

Russian law provides a rule protecting the lessee in cases where the conditions of use of the estate have worsened.

Art. 614(4) of the Russian Civil Code:

Except as otherwise provided by the law, the lessee may claim the proportionate decrease of the rent if the conditions of use of the estate have worsened due to the reasons for which the lessee is not responsible.

Thus, if the conditions of use have deteriorated due to any reasons (even accidentally), the lessor will bear the risk of such deterioration.

The courts practice applying the rule also shows that the lessee may be completely relieved from the rent in case of a complete inability to use the estate. This position has been approved by the Supreme Court of the Russian Federation in numerous cases related to lease contracts.

At the same time, in the case of the lockdown, although the lessee is prevented from entering the leased premises, it can still be used for storing the lessee's goods and other property. Therefore, since there is no complete inability to use the estate, the lessee will most likely not be completely relieved from the rent, but it will rather be entitled to a decrease in the rent amount (in accordance with Art. 614(4) of the Russian Civil Code).

In case of a dispute, the court will have to determine the extent to which the rent should be decreased. We expect that, after the pandemic, a huge amount of lease-related cases will reach the courts and, probably, some general guidelines will be formed as a result of such courts practice.

2. The new regulations enacted on April 1, 2020

On April 1, 2020, the new Federal law has been enacted (No. 98-FZ). The law is amending a number of existing regulations (including the law on insolvency, law on the state of emergency), as well as setting up the new rules in connection with COVID-19 pandemic.

Article 19 of the law deals with lease relations. Three basic rules are being introduced:

  • deferral of rental payments for 2020;
  • change of rent amount upon agreement of the parties during 2020;
  • the lessee's right to claim for reduce of the rent amount for 2020 due to the inability to use the estate.

2.1. The rule on the deferral of rental payments (Art. 19(1) of the Law 98-FZ) is a new regulation. According to the rule, the lessee is entitled to ask for a deferral agreement in case of the state of emergency or a high state of readiness enacted in the region. The lessor is obliged to sign such an agreement with the lessee in 30 days following the notice from the lessee.

The Government of the Russian Federation will determine the terms of such deferrals. Therefore, at present, the conditions of the deferrals are still uncertain (what rent periods will be count for the deferrals, will there be any interest on the deferred amounts, etc.).

2.2. The rule about the change of rent amount upon agreement of the parties is, of course, not new (Art. 19(2) of the Law 98-FZ). Effectively, it is covered by the general rule for the freedom of contract – parties are free to amend the contract upon their agreement at any moment.

2.3. The third rule (Art. 19(3) of the Law 98-FZ) is also within the existing regulation of lease contracts (as described above, Art. 614 of the Civil Code). The new law confirms that the lessee is entitled to a reduce in the rent amount in case of inability to use the estate due to the state of emergency or a high state of readiness enacted in the region.

3. Force Majeure in lease relations

Pandemic and the containment measures resulted from it are indeed a kind of the so-called force majeure events (in Russian law, regulated by Art. 401(3) of the Civil Code).

However, it is important that the force majeure does not relieve from the obligations themselves, but only exempts from the contractual liability, such as damages, penalties, etc. (not the main obligation). After the end of the force majeure circumstances, the parties will have to complete the performance of their obligations or terminate the obligations otherwise, if the performance is not feasible anymore.

In the lease relations, force majeure will most likely influence the lessor's obligation, not the lessee. Since the obligation of the lessee is to pay the rent, there are very few circumstances that may be considered as force majeure for the lessee. For example, even if the lessee's bank is not operating, that will not be deemed as the force majeure as it is. The rules of Art. 401 of the Civil Code expressly state that the non-performance of the debtor's counterparties should not be deemed the force majeure event.

The rules of Art. 401 of the Civil Code expressly state that the non-performance of the debtor's counterparties should not be deemed the force majeure event.

4. Amendment or termination of the lease contract due to the fundamental change of circumstances

A contract may be amended or terminated at the request either party in case of a fundamental change of circumstances (Art. 451 of the Russian Civil Code).

The rules on the reduction of the rent described above (Art. 614 of the Russian Civil Code, Art. 19(3) of the Law 98-FZ) are specific rules of the general rule for the fundamental change of circumstances.

There are three conditions that should be met for the application of these rules:

  • at the moment of entering the contract, the parties did not (and could not) expect such a change of circumstances (for example, if the contract is entered into before the pandemic, the parties obviously have not expected such a change of circumstances);
  • the change has resulted from an extraordinary event beyond the parties' control (indeed, neither party to a lease contract can influence the pandemic situation);
  • further performance of the contract on the same terms would harm the interested party to the extent that it could not predict when has entered the contract (that is obviously the case with short-term leases which should have been performed during the quarantine period);
  • neither contract nor the law place the risks of such an event on the interested party (as was mentioned above, the law places the risks of accidental inability to use the estate on the lessor).

Before this day, the rules on the fundamental change of circumstances have not been applied widely. For example, during the previous economic crises in Russia (in 1998, 2008, 2014), the courts stated that the parties bear the risks of dramatic changes of currency rates. However, in the current situation, the influence of the pandemic may be considered as the circumstances beyond the control of the parties. Therefore, the rules on the fundamental change of circumstances may be applied.

This article is prepared under the multi-disciplinary consulting practice – COVID-19 Helpdesk.

COVID-19, Real Estate, Real Estate Disputes

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