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Real estate: Commercial lease termination due to the COVID-19 epidemic

Real estate: Commercial lease termination due to the COVID-19 epidemic

The state of the SARS-CoV 2 virus epidemic and the related legal restrictions negatively affected the legal situation of many tenants of commercial premises, in particular in shopping centers and office buildings. In the market realities, commercial premises lease agreements are concluded for a fixed period and usually do not provide for the possibility of their early termination due to circumstances such as a decline in the tenant's turnover, reduced traffic in a shopping center or a change in customer habits resulting from the current epidemic situation. The provisions of the Civil Code also do not give the tenant an easy exit from the lease agreement.

The tenant's only statutory right in such a situation is to demand a change or termination of the contract by the court

with reference to the clause of extraordinary change of circumstances (Art. 3571 of the Civil Code). For this to be possible, the tenant must prove in the course of the court process that an extraordinary change in relations has occurred, which means that the performance of the contract in accordance with its content threatens the tenant with a gross loss, and the parties did not anticipate such a situation when concluding the lease contract. On the basis of the mentioned provision, the court may, for example, reduce the rent, postpone its payment date, and in extreme cases even terminate the lease agreement. However, it should be remembered that the court must balance the interests of both parties to the lease agreement, and thus also the interest of the landlord, who usually invested considerable capital in the construction or purchase of real estate and has obligations to the bank and external investors on this account. In addition, a change or termination of the contract requires a judgment, which in the current reality may occur as a result of months or even several years of court dispute. Until the judgment is issued, the tenant is obliged to pay the rent and other fees in accordance with the applicable contract, unless during the course of the trial it is possible to obtain security in the form of a reduction or suspension of the rent payment for the duration of the trial pursuant to Art. 755 § 1 point 1 of the Code of Civil Procedure.

One way or another, the prospect of a lawsuit based on an extraordinary change of circumstances clause, in the absence of ordinary grounds for terminating the lease, puts the tenant in a worse negotiating position with the landlord. On the other hand, if the landlord does not agree to any concessions to the tenant in the form of a reduction in fees or spreading the arrears in installments, it must take into account the risk of the tenant's bankruptcy. The declaration of bankruptcy gives the possibility of early "exit from the contract" pursuant to the provisions of the bankruptcy law.

If, on the date of bankruptcy, the subject of the lease has not yet been released to the bankrupt tenant, either party may withdraw from the lease contract concluded by the bankrupt as a tenant. The declaration of withdrawal should be submitted within two months from the date of bankruptcy. Withdrawal from the contract does not entail any obligation to pay damages, including contractual penalties.

On the other hand, if the subject of the lease on the day of bankruptcy has already been handed over to the bankrupt, the trustee in bankruptcy may terminate the lease, even if the bankrupt's termination of this contract was not permitted under the provisions of the lease contract. If the contract concerns real estate in which the bankrupt's business was conducted, the notice is given with a three-month notice period, and in other cases - with the statutory period, unless the notice periods provided for in the contract are shorter. Regardless of the above rules, the termination of the contract may not take place before the expiry of the period for which the rent was paid in advance, unless the judge-commissioner agrees at the request of the trustee for early termination of the contract.

Early termination of the lease agreement by the trustee entitles the landlord to compensation for damages caused by the premature termination of the lease, but not longer than for a period of two years. Compensation should be reduced by the value of the bankrupt's outlays increasing the value of the leased property.

The prospect of tenant bankruptcy, early termination by the trustee and limited compensation in this respect prompts many landlords to negotiate with tenants and provide them with possible assistance by temporarily changing the terms of the lease.

Our law firm offers comprehensive support for tenants and owners of commercial real estate in negotiations regarding the conclusion or amendment of the terms of a lease agreement, as well as in court proceedings related to the lease of real estate.

Please feel free to contact us.



Marcin Kręglewski

Lawyer

Marcin Kręglewski

Barrister, Senior Counsel

Marcin Kręglewski

Contact:

Rondo ONZ 1
00-124 Warsaw