Concern is rising within the retail sector regarding the payment of rent. On the one hand, landlords fear defaults on payment or even insolvency from their tenants, impacting their own finances, especially if the rent of a lease in place partially depends on the tenant's shop turnover.
On the other hand, tenants may be tempted to withhold payment of rent to allocate cash towards expenses deemed more urgent, such as deliveries of supplies or paying employees.
Facing this issue, how could each party react and what are the trends in the market currently?
Check the lease agreement
A first essential step is to look into the lease agreement itself. The agreement is likely to anticipate situations such as force majeure events or similar, and the applicable rules between tenant and landlord will take one or more of the following forms :
- Force majeure clause.
- Hardship clauses ("Imprévision"/"Imprevisie"), providing that the agreement can be renegotiated in the event of external circumstances creating an economic imbalance between the parties.
- Termination for cause/suspension of obligation clauses, which describe specific events during which a party is temporarily or indefinitely relieved of its contractual obligations.
- Specific representations and warranties given by each party, such as the representation that the tenant will be able at any time to operate the leased premises in accordance with their intended purpose or that the landlord is guaranteed payment of rent through the revenues of the tenant's operational activities in the premises.
- Bank guarantees and other securities: check the conditions in which they could be enforced or lifted should one of the parties not comply with their obligations.
Solutions under Belgian law?
In the absence of specific contractual clauses, the parties could consider legal remedies available under the general law, but doubt remains as to their effectiveness during situations such as the lockdown:
- Is the lockdown force majeure? The lockdown, triggering a legal prohibition to operate one's business because the risk caused by the pandemic, can reasonably be considered as an "act of Government" ("Fait du Prince"; "overheidsbevel") constituting a specific case of force majeure. A force majeure typically exists under Belgian law if there is an event that, cumulatively (i) could not have been foreseen when parties entered into the lease agreement, (ii) makes it impossible for a normally prudent and diligent person placed in the same circumstances to perform the obligation at stake, and (iii) is not caused by any of the parties' contractual breach.
- Effect of force majeure – the effect of force majeure is that a party is temporarily or definitely relieved from the performance of its obligations. This is assessed on a case-by-case basis. However, parties need to consider that force majeure only offers relief regarding the performance of the obligation impacted by it, and not of all obligations under the contract. For example, the obligation to operate a business in the premises, which would be impacted by the lockdown, remains different to the obligation to pay rent; on the other hand, the obligation to put premises at a tenant's disposal is different to the obligation to guarantee their accessibility.
- Mutual suspension of the parties' obligations? A party can claim to be relieved from performance of its obligations by invoking an "exception of non-performance" (exception non adimpleti contractus) from the other party. Parties should, however, approach this argument carefully as the suspended obligation of one party must be have an immediate relation with the non-performed obligation from the other party. With the current lockdown impacting performance of lease obligations on both sides, this solution doesn't offer the right for a party to suspend all obligations because the other party only cannot perform one.
- Partial loss of the premises? A specific remedy offered under sect. 1722 of the Belgian Civil Code could provide grounds for suspension of obligations or termination if the situation creates a partial or total loss of the leased premises. Such loss can also be a "legal" loss consisting in the impossibility to provide or enjoy the premises according to the terms and conditions agreed. Again, it can be argued that it is the business and not the premises (or building) that is impacted as such, so caution is required when approaching this argument.
- Consequences of non-performance – In any case, parties must consider the risk attached to unilaterally withholding any of their obligations. An abrupt and unilateral cessation of payment from the tenant, or threats from the landlord to terminate the agreement could be seen as a breach of contract or a non bona fide performance of it. Such issues are also likely to give room for discussion during a later trial (taking place once the courts can function normally again): a judge could take the view that a party abused the situation, be it for withholding obligations or terminating the agreement for alleged breach. While there is uncertainty on how the judges are going to react, it is reasonable to assume that they will take the lockdown into account in order to issue equitable judgments.
While awaiting further declarations from the government, which has indicated there will be financial support provided to certain businesses, all actors from the sectors should bear in mind the following tips:
- Stay tuned: the situation is evolving every day and it is not impossible that we will see some collective efforts in the sector by the implementation of specific voluntary measures on both sides of the table;
- Check your current agreements, and what they provide regarding suspension of obligations, the definition of force majeure and hardship, including the conditions of their enforcement and the timing of the agreement.
- Collaboration is key: communication and negotiation between a tenant and a landlord will always be the preferable solution, showing that both parties want to perform their obligations in good faith and that they have each made some effort in resolving the situation. We have seen cases where parties agreed on rent payment referrals or reductions in order to accommodate and mitigate financial losses on both sides.
- Avoid later court disputes: given the uncertainties around the duration of the lockdown and the validity of the legal remedies offered, parties may want to avoid adopting an overly contentious approach. This could lead to court cases handled months past the lockdown and unnecessarily maintain a negative climate in the contractual relationship.
We are happy to keep you updated on these issues, assist you with all your questions and to do our best to help you meeting your goals.