A court of Barcelona applies the rebus sic stantibus clause for the first time on the occasion of Covid-19 and orders a rent reduction in an industrial lease
Published on 24th Mar 2021
Ruling number 1/2021 of 8 January passed by the Court of First Instance number 20 of Barcelona orders a landlord to apply a 50% reduction in the rent and other expenses borne by the tenant retroactively from April 2020 to 31 March 2021 (the "Ruling").
The measures implemented for the suspension and limitation of the development of industrial and commercial activities in order to contain the epidemic outbreak of Covid-19 have resulted, among other things, in tenants being unable to pay the rent from lease agreements of real estate properties.
Despite the central government and the governments of the autonomous communities have adopted specific measures so that tenants are able to negotiate a moratorium or reduction of the rent payment under a lease agreement, it seems that these measures have not always been sufficient. In those cases in which an agreement was not reached, the parties have ended up attending to court in order to request the application of the rebus sic stantibus clause, which literally means, "as long as things last". This clause has been restrictively applied by the judges as it enables the parties to moderate the pacta sunt servanda principle (this is, agreements are made to be fulfilled) set out in article 1,091 of the Spanish Civil Code. With such clause, tenants may request the modification of the terms of the lease agreement in order to compensate the imbalance of the reciprocal benefits.
The requirements for the application of the rebus sic stantibus clause are:
(i) occurrence of an extraordinary and unforeseeable alteration of the elements that were taken into account when signing the contract in such a way that the new situation has altered the basis of the business;
(ii) such alteration has produced the frustration of the purpose of the agreement or has made the obligation of one of the parties excessively onerous;
(iii) the parties have attempted to negotiate a modification of the terms of the contract without reaching an agreement; and
(iv) the solution which is being sought is either terminating the contract or modifying it in such a way that losses and benefits derived from the change are distributed between the parties in an equal and fair manner.
In the Ruling, the plaintiff brought a claim against a landlord (who considered to be a great property holder) with who had leased 26 dwellings and one business premise for tourist accommodation. The tenant's activity was suspended under Royal Decree 463/2020 and could not be initiated again until 9 May 2020 causing such suspension significant losses to the tenant's business.
The tenant requested to the court to apply the rebus sic stantibus clause as he was not able to achieve a rent reduction with the landlord, a declaration that there had been an unforeseen change of the circumstances of the lease agreement which had altered the contractual balance between the parties and the modification of the lease agreement in the terms proposed to the landlord, that is to say, a 50% reduction in the rent of all the real estate properties leased and other expenses borne by the tenant from April 2020 to March 2021, the date on which the lease expired. The tenant also required that, if the modification of the terms of the lease agreement were refused, all the lease agreements shall be terminated without any cost or penalty from the day following the date on which the state of emergency was declared (March 15th, 2020) in view of the impossibility of the tenant to continue with the business in the terms originally agreed with the landlord.
During the pre-trial hearing, the tenant based the need to modify the terms of the lease agreement and apply the rebus sic stantibus clause on the fact that the Covid-19 pandemic was an unpredictable risk that had caused an 86% fall in the turnover of the business from April to September 2020. As a consequence, the tenant requested a reduction of 50% of the rent of the lease agreement on the grounds of said clause even though the tenant's income had fallen more than the requested reduction. In addition, it was proved that the tenant had requested the modification of the terms of the lease agreement in good faith and on several occasions, which were not accepted the landlord.
It should be noted that according to the Ruling and despite the governments have already passed certain resolutions concerning the payment of the rent, such as Royal Decree 15/2020, this does not preclude the parties from taking action before the courts for the application of the rebus sic stantibus clause, since it is not the legislator's intention to eliminate the possibility of providing another solution to the situation created by the pandemic of Covid-19. Consequently, the aforementioned Royal Decree does not prevent the application of this clause; on the contrary, it offers another solution.
In view of the above, the Court of First Instance number 20 of Barcelona upheld the claim and declared that an unforeseen change in circumstances had occurred and that such change caused an imbalance in the obligations of the lease agreement that the tenant had to perform, ordering a 50% reduction in the rent and the rest of the monthly amounts payable by the tenant from April 2020 to 31 March 2021.