Lessee vs Lessor: which side is the new virus on?

Under the current conditions, various lessee organizations face the following problem: they have to pay rent for vacant premises (offices, shops, pavilions). What is more, this problem has affected everyone – someone has all their employees working remotely, someone has suspended their activities due to restrictive measures, someone is unable to use the leased premises due to the closure of the shopping (office) center. There are also those that were not affected by the prohibitions above, but due to the introduction of the lockdown, the flow of buyers decreased, which resulted in a significant revenue decrease, and consequently – inability to pay rent.

In order to reduce costs, it is reasonable to either negotiate with a lessor on a deferral, reduction of rent, rent free periods, or on termination of the agreement by mutual consent on mutually beneficial terms.

We decided to review some questions that lessees tend to have in this situation.

Is it possible to stop paying rent?

It is definitely not worth letting this issue “take its own course” by simply not paying rent. This will lead to debt accumulation and subsequent filing of a claim by the lessor, including penalties. What is more, claims of the lessor will definitely be satisfied by the court.

Certainly, court proceedings may drag on, and the execution of the court decision may become complicated for the lessor, but there is always a possibility of bringing controlling persons of the lessee to subsidiary liability.

Does force majeure exempt the lessee from paying rent?

It should be understood that in most cases epidemics, pandemics, and other similar phenomena in and of themselves do not constitute force majeure, but so do restrictive measures that are subsequently introduced. Thus, the introduction of restrictive measures to prevent the spread of the new virus has already been recognized as extraordinary, unforeseen, unavoidable, beyond the control of the parties and having a significant impact on the performance of obligations under economic agreements (see Letter of the Chamber of Commerce and Industry of the Russian Federation ref. ПР-0315 dated 26.03.2020, as well as explanations of other state authorities: Letter of the Federal Anti-Monopoly Service of Russia No. ИА/21684/20 dated March 18, 2020, Letter of the Ministry of Finance of Russia No. 24-06-06/21324 dated March 19, 2020).

However, pursuant to the general rule (Clause 3 of Article 401 of the Civil Code of the Russian Federation) the lessee may be exempt from liability for the violation of obligations (to pay rent) in case he/she fails to perform them due to force majeure. Here it is important to realize that a person is exempt from liability for non-performance of obligations (forfeits, fines, penalties), but not from the obligation to pay rent itself. The lessee’s inability to pay rent is obviously not directly related to the new virus, since it may be related to a decrease in the lessee’s income (revenue), exchange rate growth, decrease in the purchasing power of consumers, etc., i.e. with those events that resulted from the spread of the new virus, consequent introduction of restrictive measures, as well as signs of a crisis.

The Moscow Chamber of Commerce and Industry has also repeatedly provided explanations stating that force majeure does not and cannot affect an ability of the lessee to perform its rent payment obligations, and therefore, most of requests of lessees for the issuance of force majeure certificates remain unsatisfied1.

For more information about force majeure and most frequently asked questions thereon, see my article “Searching for force majeure…”.

What supporting measures are provided for lessees?

The supporting measures announced for lessees are set out in the following regulatory enactments:

  • Order of the Government of the Russian Federation No. 670-р dated 19.03.2020 “On measures to support small and medium-sized enterprises”
  • Article 19 of Federal Law No. 98-ФЗ “On amendments to certain legislative acts of the Russian Federation on the prevention and liquidation of emergency situations” dated 01.04.2020
  • Decree of the Government of the Russian Federation No. 439 dated 03.04.2020
  • “On setting requirements for terms and conditions for deferral of rent payments under real estate lease agreements”.

A summary of the supporting measures provided is given in the table below:

The summary of the above information is as follows:

  • Supporting measures are mainly provided to small and medium-sized enterprises, as well as economic entities operating in the most affected business areas;
  • Supporting measures (including deferrals and rent-free periods) are not applied automatically, but only after entering into relevant additional agreements to lease contracts. Moreover, the lessor may refuse to grant a deferral to the lessee and refuse to sign such an agreement, and there is no liability on the lessor’s part. The lessee may force the lessor to enter into an additional agreement (if there are grounds for granting a deferral) in a court of law, but proceedings may lead to time expenditure and financial costs.

Therefore, the said supporting measures are unlikely to be widely used, both due to a limited number of persons to whom they apply, and due to a lack of efficient mechanisms for their implementation.

What are the ways to persuade the lessor to make concessions to the lessee?

As mentioned above, the most efficient way to resolve the problem is to set proper channels of communication with the lessor. At the same time, one should not expect the lessor to provide a full exemption from paying rent, as the parties should find some middle ground, i.e. a mutually beneficial compromise that will allow the parties to share the burden of costs incurred in connection with the “corona crisis”, while maintaining a balance of interests of both parties.

The lessee’s interest here is clear and obvious. But what might be of interest to the lessor? What are the possible ways to persuade him/her to reach out to the lessee? Below are the reasons that may serve as motivators for the lessor:

  • A rough approach to the dialogue with the lessee may lead the lessor to court. Undoubtedly, he/she will collect both rental arrears and the amount of accrued penalties from the lessee. However, court proceedings may drag on, and the court decision still needs to be executed (the lessee may simply have no funds and assets to meet the requirements of the lessor).
  • In case of a dispute, the lessee may have a plan B and refer to force majeure (that is if it is possible to prove a connection between force majeure and non-performance of the payment obligation). This will give the lessee a chance for an exemption from liability (from accrued penalties).
  • One may refer to Article 19 of Federal Law No. 98-ФЗ dated 01.04.2020, in accordance wherewith all lessors shall provide a deferral and reduce the rental for the period of inability to use the leased object. Undoubtedly, this rule is by and large exclusively declarative and optional for application, but it may be used as an additional argument with the lessor.
  • Economic supporting measures taken in each specific region for owners that reduce rates for lessees affected by the pandemic may serve as an additional argument for the lessor. For example, for Moscow, such measures are set by Decree of the Government of Moscow No. 212-ПП dated 24.03.2020.
  • A flexible approach to the dialogue with the lessee may be much more profitable by making temporary concessions and gaining a stable partner for the future, than later in the crisis trying to find new lessees and lease out empty premises.

What are the ways to terminate a lease agreement?

First of all, it is necessary to review the agreement for any provisions on the possibility of unilateral termination of the lease agreement and the procedure for such termination.

The Civil Code of the Russian Federation provides for the only possibility for unilateral out-of-court termination of lease agreements at the initiative of the lessee. Such termination is allowed only for agreements concluded for an indefinite period. The lessee is entitled to withdraw from such an agreement by notifying the lessor one month in advance.

For other lease agreements, the lessee has no such right. However, in case of force majeure, the lessee may apply Article 451 of the Civil Code of the Russian Federation and file a claim for termination of the agreement in a court of law.

Thus, in accordance with Clause 1 of Article 451 of the Civil Code of the Russian Federation, if the circumstances on which the parties based the conclusion of the agreement have undergone significant changes, each of the parties is entitled to apply to court for termination of the agreement. Changes in circumstances are recognized as significant, in case they have changed so much that, if the parties could have reasonably foreseen them, the agreement would have never been concluded or would have been concluded on substantially different terms.

It is more likely that the lease agreement will be terminated by the lessee in a court of law. However, such measure is not so much a panacea as a last resort, since court proceedings may drag on (especially given the temporary paralysis of courts and their subsequent predictable overload with work), and the agreement shall be considered terminated only from the moment of entry into force of the court decision. All the while, the rent arrears will keep accumulating for payment by the lessee.

Summing up all the above, it is worth noting that the current circumstances do not play into the hands of either of the parties to the lease agreement – neither the lessee nor the lessor, and both parties bear equal loss. Absence of a temporary compromise on the lessor’s part will inevitably have a detrimental effect on him/her later. The same goes for the lessee. Therefore, we strongly believe that the only proper solution is a mutually beneficial compromise to be reached by the parties.

  1. Letter of the Chamber of Commerce and Industry of the Russian Federation No. Пр/0349 dated 07.04.2020 “On issuance of force majeure certificates regarding rent payment obligations for the use of premises in commercial real estate in connection with the spread of the new virus”.
  2. Sub-clause “а” of Clause 1 of Order of the Government of the Russian Federation No. 670-р dated 19.03.2020.
  3. Clause 2 of Order of the Government of the Russian Federation No. 670-р dated 19.03.2020.
  4. Sub-clause “б” of Clause 1 of Order of the Government of the Russian Federation No. 670-р dated 19.03.2020.
  5. High alert or emergency regime.
  6. Clause 3 of the Requirements for terms and conditions for deferral of rental payments under real estate lease agreements (approved by Decree of the Government of the Russian Federation No. 439 dated 03.04.2020).
Alexey Oskin

Deputy Director

Tax and Legal Practice

Korpus Prava (Russia)

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