THE CORONAVIRUS AND BUSINESS PREMISES LEASE CONTRACTS – IMPACTS ON THE RESTAURANT INDUSTRY
Borja García Rato | Lawyer. Managing Partner of the Commercial, Contractual, and Corporate Area at Summons
https://gabilex.castillalamancha.es/sites/gabilex.castillalamancha.es/files/pdfs/articulo_borja_garcia_rato.pdf
Summary: 1. Introduction. 2. Requirements imposed by Royal Decree 463/2020. 3. Analysis of force majeure. 4. Rebus sic stantibus and the possibility of exercising certain economic activities.
SUMMARY. The Covid-19 health crisis has necessitated the prohibition of opening establishments dedicated to the restaurant sector to the public. This represents a severe economic hardship that, in some cases, can hardly be borne by those who provide their services in leased premises. In this situation, the contracting parties face conflicts regarding contract terminations due to force majeure or, at the very least, the novation of the agreed terms under the rebus sic stantibus clause.
KEYWORDS: Covid-19, contract termination, force majeure, rebus sic stantibus.
- Introduction.
The publication of Royal Decree 463/2020, of March 14, which declares the state of alarm for the management of the health crisis situation caused by COVID-19, has not only significantly disrupted daily logistics but has also introduced new legal challenges that legal operators must address. Among them, the special situation of the tenant of a business premises dedicated to hospitality or restaurant services.
According to the Spanish Hospitality Business Confederation, our country ranks as the one with the most bars and restaurants per capita in the world. Businesses that often operate in leased premises and whose activities fall within one of the sectors most affected by the Covid-19 health crisis.
- Requirements imposed by Royal Decree 463/2020.
Article 10.4 of the aforementioned Royal Decree states: "Hospitality and restaurant activities are suspended, with only home delivery services allowed."
Spain closes bars and restaurants. Unprecedented. It seems that restaurateurs still have the opportunity to reinvent their business and focus efforts on home delivery services; notwithstanding the health distrust and exceptional nature of the situation, which could be another obstacle to the effectiveness of the proposed measure.
In any case, and in general terms, the halt in hospitality activities is evident, and economic problems have quickly emerged. In this context, what position are those tenants in who can no longer provide their services and see their income significantly reduced due to the coronavirus?
The legal possibilities are, a priori, two: (i) proving force majeure or (ii) applying the rebus sic stantibus clause.
- Analysis of force majeure.
The sector refers to force majeure as a legally regulated concept in Article 1105 of the Civil Code, which states:
"Except in cases expressly mentioned by law, and those declared by the obligation, no one shall be liable for events that could not have been foreseen."
The question is, is Covid-19 a reason for contract termination? Can the tenant-restaurateur terminate the lease contract by claiming the virus's spread as a case of force majeure?
Before analyzing what the legislator has provided, the first thing to check is what was agreed by the parties and the autonomy of will enabled by Article 1255 of the Civil Code.
If the contracting parties had foreseen the possibility of terminating the contract in case of a global pandemic, the affected party could simply denounce the contractual termination after the World Health Organization's communication on March 11 declaring Covid-19 a global pandemic.
However, it is very likely that neither the landlord nor the tenant considered the remote possibility of this happening, and therefore, this option would be ruled out.
Given a lack of foresight that cannot be attributed to either party - who would have thought this could happen - could the tenant request contract termination by law, citing force majeure?
The legislator will have to develop the urgent measures published, but so far, neither the aforementioned Royal Decree nor any official communications include the legal term "force majeure."
That the situation is exceptional is undisputed, but to be able to terminate the contract by claiming that there is force majeure when no authority has declared it so, presents a barrier that is difficult to overcome.
Likewise, our Civil Code does not legitimize contract termination due to force majeure but rather exempts the potential defaulter from any responsibility in this framework and exempts them from paying any proposed compensation.
In conclusion, pending new developments from the legislator, contract termination due to force majeure is not easily applicable at present.
- Rebus sic stantibus and the possibility of exercising certain economic activities.
With force majeure ruled out, only the much-discussed these days rebus sic stantibus or "things thus standing" clause remains. This jurisprudential creation (see, among others, STS 333/2014, June 30, STS 591/2014, October 15, and STS 64/2015, February 15 - Rapporteur in all of them: Hon. Francisco Javier Orduña Moreno) allows modifying the contractual conditions if the balance between the parties existing at the signing of the contract has disappeared.
Thus, it is proposed to modify what was agreed upon due to the exceptional situation created by Covid-19. It is not about opening the doors to a scenario of massive contract terminations but adapting what was agreed to the current reality.
This clause creates certain contractual flexibility by allowing the essential agreed conditions to be modified to adapt what was once considered balanced to today's instability.
One of the problems with its application may also be the novelty of what is happening.
Recall that the Second Additional Provision of Royal Decree 463/2020 has suspended procedural deadlines and that the General Council of the Judiciary only allows the filing of writs "whose object is solely and exclusively procedural actions declared urgent and unpostponable by the instructions and agreements of the governing body of the judges."
With judicial action paralyzed, all conflict resolution will have to be done extrajudicially, so the only option left is for the parties to lay the controversies on the table and reach the most satisfactory agreement for all.
In this negotiation framework - and in a future scenario of judicializing the matters - it is necessary to highlight what 463/2020 indicates about the possibility of providing hospitality services at home.
It has already been anticipated that the business of many of our bars and restaurants has decreased by an exaggerated percentage, but when modifying the contractual conditions, the possibility that some have to continue, albeit very partially, with the business they had been developing must be considered.
It is time to seek innovative solutions, so tenants obligated to pay the monthly fee in such an atmosphere must make maximum professional efforts to "move forward."
Likewise, landlords will have to adapt to the new situation, understand the precariousness of complete or very partial business closure, and adjust their economic interests to the existing possibilities.
It is well known that it is not easy to change the business model or become something you never were, but in exceptional times, it could be a possibility to consider.
Rebus sic stantibus is not only viable but presents itself as a recommended legal instrument in the current state of affairs. For its application, the landlord and tenant will have no choice but to renegotiate what was agreed to reach the most ingenious, balanced, and beneficial solution possible.
In short, both parties will have to make the greatest efforts to keep the existing contract alive, considering the special circumstances and the possibility of modifying what was agreed to achieve the much-desired survival.
