The coronavirus crisis and the application of the rebus sic stantibus clause in leases for use other than housing

Written on 22 Jun 2020

The problems arising from commercial and industrial lease agreements directly affected by the Covid-19 health crisis have tried to be addressed in two stages. First, and because no regulations existed, by applying force majeure provisions and the rebus sic stantibus principle, and then with the approval of Royal Decree-Law 15/2020, of 21 April, on additional urgent measures to support the economy and employment.

During the Covid-19 health crisis, many businesses have still had to pay rent for property and premises they were not able to use, either because the state of alarm forced them to interrupt their economic activity or because their turnover had seen a significant drop.

Before approving Royal Decree-Law 15/2020, of 21 April, on additional urgent measures to support the economy and employment, published in the BOE on 22 April 2020 (the "RDL 15/2020"), and given the lack of regulations, the doctrine had tried to provide a solution to this issue with the application of force majeure and the rebus sic stantibus principle. However, this led to two opposing legal doctrinal trends.

One legal doctrine has defended that closing the premises where business takes place is a force majeure situation because the obligation of closing the premises means that the landlord cannot provide the tenant with the peaceful enjoyment of the leased property during the term of the agreement, as set out in article 1554 of the Civil Code. This circumstance would allow the tenant to cancel the payment of the rent while the situation remained unchanged, and in some instances, to terminate the agreement due to the landlord's inability to fulfil its obligations. If the premises had not closed down because of the state of alarm, but the business had seen a significant drop in turnover, the doctrine states that there would be no force majeure case, but that the application of the rebus sic stantibus clause could be applied, as long as the following four circumstances developed by case law are met. These are: (i) a change in the circumstances in which the parties signed the agreement, (ii) an unexpected or exorbitant disproportion between the benefits of the contracting parties, which breaks the balance between these benefits; (iii) that the changes in circumstances are entirely unforeseen and (iv) that the contractual relationship lacks other mechanisms to re-establish the balance.

The other primary legal doctrine sets out that the landlord does not assume any risks derived from the tenant being unable to obtain, or can no longer have, the expected utility of the premises, for reasons beyond the landlord or the property. Therefore, none of the mentioned examples (suspension of the activity carried out in the premises or a severe decrease in turnover as a result of the state of alarm) would mean the breach of the lease agreement by the landlord or the tenant, on the contrary, it would be considered a force majeure event. Thus, it would be possible to think about applying the rebus sic stantibus clause, as long as the previously mentioned legal requirements are met on a case-by-case basis.

Because of these issues, the Spanish Government approved RDL 15/2020 to provide a specific legal solution for leased business premises affected by the sanitary crisis, pointing out in the exposition of motives that it would specifically regulate the application of the rebus sic stantibus clause for this kind of contractual relationship. To access the measures introduced by RDL 15/2020, click here.

It is important to stress that the measures adopted by RDL 15/2020 only apply to tenants that are self-employed workers or small and medium businesses, whose activity was interrupted by the state of alarm, or that have seen at least a 75% decrease in their turnover during the calendar month since requesting the suspension of activities.

Additionally, RDL 15/2020 considers a different treatment for tenants based on whether their landlord is a public entity or a large holder. Thus, if the landlord is a public entity or large holder, the tenant may request suspending the payment of the rent during the state of alarm and its extensions and with a maximum of 4 months term. The landlord has to accept this request. With other types of landlords, the renter may request a suspension of the rent, but the lessor is not required to accept such request.

In conclusion, it can be seen that the measures introduced by the Government with the approval of RDL 15/2020 have a more limited scope than those set out by the rebus sic stantibus principle, as it only sets out the moratorium on rent payments, and under no circumstances foresees its reduction or suspension. Also, said measures only provide a solution to tenants that are eligible for these measures, that is self-employed workers or small and medium businesses, and whose landlords are public entities or large holders of property.

Finally, regarding those leases that do not meet the requirements set out to apply for such measures, the RDL 15/2020 does not provide an alternative solution. In this event, the parties would have to reach an agreement to enable the payment of the rent, or they would have to go to court. A judge would then evaluate and, if appropriate, re-establish the balance of the obligations pursuant the lease agreement. Bearing in mind that RDL 15/2020 only foresees a moratorium of the rent as a form of adjustment, this arises the question as to whether the courts will go further and will accept, in some cases, a reduction or suspension of the rent when the law does not provide for it.