Features of Lease in time of Covid-19 pandemic

Features of Lease in time of Covid-19 pandemic

     Due to COVID-19 pandemic and implying restrictive measures from governmental bodies, the point of commercial activity of small and middle-class entities gets extremely urgent. As a rule, such enterprises do not have over-income so their financial situation leaves much to be desired according to various factors: tax duties, lack of assets, delay of cashflow and what not. Small organizations are often binded with lease obligations, especially if their activity is vitally connected with necessity of client`s presence in their rented premises (shops, cafes, restaraunts etc).

     Decree of Moscow Mayor from 16th of March 2020 № 21-УМ stated that the spread of infection is considered as extraordinary and unavoidable circumstance, which started the regime of higher availability. all persons aged >65 years are obliged to stay at home by this Decree.

     According to Order of Russian Federal Government of 16.03.2020 №635-р, enter to Russian Federation is restricted for all foreign citizens from 18.03.2020 to 01.05.2020.

     President of Russian Federation stated that days from 30.03.2020 till 01.05.2020 are days-off for the most part of entities.

     Individuals and commercial organizations can minimize the losses of rent payments with taking following actions:

     Change of a contract.

     As a general rule, the rental amount is changed by agreement of the parties. However, it is difficult to predict the reaction of the lessor to such an offer in current conditions.
In case of a lessor’s refusal to adjust the rent, the law provides special grounds for amending the contract due to a significant change in circumstances.     

     According to the position of Supreme Court of Russian Federation, the court should determine the following legally significant circumstances for the application of Art. 451 of Civil Code of the Russian Federation:

• significant change of circumstances;

• time of its occurrence

• the ability to reasonably predict this change

     It should be noted that the filing a claim to amend the contract in connection with a significant change of circumstances is possible only after the other party refuses to offer to amend or terminate the contract or does not respond a response within the specified time. 

     It should also be noted that a change in the contract due to a significant change of circumstances is an exceptional measure that was not actually applied by the courts even during the Default of Russian Federation in 1998. According to the provisions of paragraph 4 of Art. 451 of Civil Code of Russian Federation, a change of contract due to a significant change of circumstances is allowed by court decision in exceptional cases when the termination of the contract is contrary to the public interest or will entail damage to the parties that significantly exceeds the costs required to execute the contract on the terms changed by the court.

     So, the provisions of Articles 450-451 of Civil Code of Russian Federation allow not only to change the terms of the contract, but also to terminate it. This can also be an option to solve the problem (albeit radical) in conditions of impossibility to continue commercial activity if there are no contractual grounds of limiting liability or the grounds of Part 2 of Civil Code of Russian Federation.

 

     Force Majeure

     It goes without saying that individual entrepreneurs and commercial organizations bear civil liability not on the basis of guilt, but on the basis of the risk of commercial activity.
The only exception to liability is the presence of force majeure circumstances.

     The key points are:

• mandatory notification to the lessor of the occurrence of such circumstances;

• presence of reasons why these circumstances make it impossible to continue the commercial activities of this enterprise;

• notification of the occurrence of circumstances does not exempt from fulfillment of obligations in future.

     It is worth noting that the absence of a mayor’s decree in itself is not an obstacle to the recognition of a coronavirus infection pandemic as force majeure.
With regard to the procedural nuances of evidence in the absence of orders of the heads of subjects of federation or other competent authorities, the institution of recognition of circumstances as a well-known fact can be used.

     Also, the responsibility within the meaning of the Civil Code of the Russian Federation includes precisely sanctions for non-performance of the contract (interest rate, penalty).
Payment of rental payments represents the performance of an obligation, and not liability for breach of contract.

     The position of the Moscow Chamber of Commerce and Industry is as follows: «…
On the basis of Decree of the Mayor of Moscow and / or the Order of the Federal Service for Supervision of Consumer Rights Protection and Human Welfare dated 03/20/2020 and others. in connection with the coronavirus pandemic, circumstances of force majeure arise for you, therefore, exemption from the penalty due to non-fulfillment of the obligation , just in front of your customers. The inability to fulfill obligations to pay rent is not directly related to closure, as other sources of generating cash from the enterprise are possible, except for sales proceeds (credit, loan from the shareholder). In turn, the lack of necessary funds on debtor`s side is not a force majeure circumstance, according to current judicial practice, (Clause 8 of the Resolution of Plenum of Supreme Court of Russian Federation of March 24, 2016 No. 7).    Prior to the adoption of new legal norms, clarifications of Plenum of Supreme Court of Russian Federation, Federal Government of Russian Federation - there are no grounds for issuing an opinion on force majeure in order to force the lessor to reduce the lease, but there are reasons to apply Articles. 451, 416-417 of Civil Code of Russian Federation. It is worthwhile to make a reservation that, in addition to issuing acts of state authorities, other factors can be attributed to force majeure circumstances, of which you can find a lot in a pandemic situation and try to apply any of them to a particular case.

     These legal grounds relate primarily to those commercial activities which were directly or indirectly prohibited in connection with the issuance of a legal act by Russian or international authorities or in connection with other objective circumstances that make it impossible to fulfill obligations. First of all, they are related to companies whose activities are related to cross-border interaction with other counterparties. The range of recognition of such circumstances is very wide, the only universal criterion is that the occurrence of such a circumstance does not depend on the will of the parties of contract.

     Thus, now it is impossible to accurately predict the possible outcome of cases related to the possibility of non-payment of rent in connection with the coronavirus infection pandemic.
The situation changes every day, new restrictions and prohibitions are introduced, changes are made in current legislation. For many years world did not face such a significant factor as an epidemic affecting almost all countries
However, do not consider the situation hopeless. In addition to the above provisions of legislation, it is necessary to analyze each lease contract individually for conditions that are determined by will of the parties, including the conditions for the elimination or reduction of liability.

     Lawyers of L1 Law Firm possess the necessary knowledge and experience and will provide the necessary assistance even in the most difficult situation.