Impact of coronavirus on leases

The Council of Ministers has approved a new Royal Decree-Law adopting additional urgent social and economic measures to deal with COVID-19.

In the last three weeks, we have received many queries from law firms due to the uncertainty generated by the exceptional nature of the situation caused by the outbreak of the COVID-19 and its effect on our day-to-day relations.

One of the most important, because of the impact it has on the available resources of individuals and companies on a monthly basis, is the impact it can have on lease contracts.

Can I stop paying the rent for the premises, am I obliged as a landlord to condone rent or reduce it, what happens to the contract that expires during the time that the confinement lasts, how does the eviction that I had interposed affect me, can we hand over the keys during the state of alarm, must I continue to notify the will not to extend the contract, are the terms that the law of urban rentals provides altered by the current situation?

The above examples are some of the queries frequently raised by individuals and companies. Of all of them, those relating to the obligation to pay rent, due to their unquestionable impact on both the lessor and the lessee, are the most common.

I.- Measures approved by RD 11/2020 regarding housing leases

In view of the lack of a legal provision to provide a clear and secure answer to the above question and the uncertainty and insecurity involved in taking advantage of the remedies pointed out by case law because of the unpredictability they entail, the Government has enacted a new Royal Decree Law (Royal Decree Law 11/2020 of 31 March, adopting urgent complementary measures in the social and economic field to deal with COVID-19) which is aimed, according to its explanatory memorandum, at protecting employment, helping the most vulnerable and maintaining the productive fabric.

In order to achieve this goal, the Government, among many others, has established a series of rules aimed at protecting certain housing leases, trying to reconcile the protection of the most vulnerable tenant with the interest of the lessor in receiving the agreed rent.

The measures approved by the Government refer solely and exclusively to housing leases expressly provided for, excluding, therefore, leases other than housing leases.

(a) Suspension of launches
As a first measure, the suspension of evictions (the act through which the lessor recovers possession of the rented property) is established for vulnerable households without a housing alternative. This only applies to housing leases. To this end, the tenant must prove to the court that he or she is in a situation of supervening social or economic vulnerability as a result of the effects of the COVID-19 expansion, which makes it impossible for him or her to find alternative housing for himself or herself and for the people with whom he or she lives. In order for the suspension of the launch to take place, the tenant must prove that he/she is in one of the situations of economic vulnerability indicated in the Royal Decree-Law itself, in the terms that will be indicated later.

When the situation of vulnerability affects the lessor as a result of the suspension of the launch, the court is obliged to notify the corresponding social services and assess the social protection measures to be adopted.

As for the duration of the measure, the law provides for different time periods taking into account the procedural state in which the eviction procedure was, although, given the imprecise terms used by the law, it can give rise to very uncertain situations, since in some cases it states that the suspension will occur “until the measures that the competent social services deem appropriate are adopted, for a maximum period of six months from the entry into force of this Royal Decree-Law“, and in other cases it only speaks of suspension of the launch without greater precision.

b) Extension of housing leases
The second measure adopted by the Government is the establishment of an extension of the lease of a habitual residence for a maximum period of 6 months for those contracts whose extensions expire between 02/04/2020 and two months after the end of the state of alarm. In this case, it must be the tenant who makes the request for an extraordinary extension to the landlord. Once again, the decree can be clearly improved in its drafting, since it subsequently indicates that “this request for an extraordinary extension must be accepted by the lessor, unless other terms or conditions are fixed by agreement between the parties”. In this sense, the rule leaves much room for confusion, since it does not make clear whether the lessor is bound by the simple request of the lessee (hence the imperative expression “must be accepted”) or whether the expression “must be accepted” implies the need for the lessor’s subsequent agreement to the lessee’s initial request for extension. In other words, what interest is protected by the rule, that of the tenant who has no margin to look for an alternative dwelling because the expiration of the contract has occurred during the confinement and the rule protects him for a period of 6 months; is the landlord’s interest protected, and what the rule does is to guarantee that he must give his conformity and if this occurs he has the legal guarantee that the extension will not go beyond 6 months? In the latter case, it is not understood that the measure is really reconciled with the spirit of the rule.

(c) Temporary reduction/moratorium on income
The third measure adopted is the possibility of modifying the payment of the rent through the possibility of making use of two alternatives:

1. A 50% reduction in rent for the duration of the alarm state and the following monthly payments if that period is insufficient in relation to the situation of vulnerability caused by the COVID-19, with a maximum of four months in any case.
2. A moratorium on the payment of rental income which will be applied automatically and which will affect the period of time that the state of alarm lasts and the following monthly payments, which may be extended one by one if that period is insufficient in relation to the situation of vulnerability caused by the COVID-19, without it being possible to exceed four months in any case. This rent will be deferred, as from the next monthly rental payment, by means of instalments over at least three years, which will be counted from the moment the situation mentioned above is overcome, or from the end of the four-month period mentioned above, and always within the period during which the rental contract or any of its extensions continues to be in force. The lessee will not be penalized in any way and the deferred amounts will be returned to the lessor without interest.

The application of this regime is subject to the following requirements:

1. It must be a lease of habitual residence.
2. The tenant must be in a situation of economic vulnerability as a result of the health emergency caused by the COVID-19. It is understood that only those tenants who meet the following requirements are in this situation:
   1. That the person who is obliged to pay the rent becomes unemployed, Temporary Employment Regulation File (ERTE), or has reduced his working hours due to care, in the case of an employer, or other similar circumstances that imply a substantial loss of income, not reaching the total income of the members of the family unit, in the month prior to the application of the moratorium:
      1. In general, the limit of three times the monthly Public Multiple Effect Income Indicator (hereinafter IPREM).
      2. This limit will be increased by 0.1 times the IPREM for each dependent child in the family unit. The applicable increase per dependent child shall be 0.15 times the IPREM for each child in the case of a single parent household.
      3. This limit will be increased by 0.1 times the IPREM for each person over 65 years of age who is a member of the family unit.
      4. In the event that any of the members of the family unit has a declared disability of more than 33 percent, a situation of dependency or illness that permanently incapacitates him/her to carry out a work activity, the limit foreseen in sub-section i) will be four times the IPREM, without prejudice to the accumulated increases per dependent child.
      5. In the event that the person obliged to pay rent is a person with cerebral palsy, with mental illness, or with an intellectual disability, with a recognised degree of disability equal to or greater than 33 per cent, or a person with a physical or sensory disability, with a recognised degree of disability equal to or greater than 65 per cent, as well as in cases of serious illness that makes the person or his/her carer demonstrably unable to carry out a work activity, the limit provided for in sub-section i) shall be five times the IPREM.
   2. That the rental income, plus expenses and basic supplies, is greater than or equal to 35 percent of the net income received by all members of the family unit. For these purposes, “basic expenses and supplies” shall mean the amount of the cost of the supplies of electricity, gas, heating oil, running water, fixed and mobile telecommunications services, and any contributions to the owners’ association, all of which are payable by the tenant.
   3. The condition of vulnerability must be accredited by the tenant through the provision of a series of documents justifying the economic situation as a consequence of the health emergency caused by the COVID-19, as well as documents relating to the members of the family unit, justification of the non-existence of property through registry information and a responsible declaration by the tenant himself regarding compliance with the requirements demanded to be considered without sufficient economic resources according to the Royal Decree-Law. However, if it is not possible to provide the documentation, except for the responsible declaration, the tenant may access the protection regime, with the obligation to provide it within 1 month after the cessation of the state of alarm.
3. The lessor must necessarily be a public housing company or entity or a large holder (a natural or legal person that owns more than ten urban properties, excluding garages and storage rooms, or a built area of more than 1,500 m2). Here, too, the rule is ambiguous, since it refers to “holder” without specifying whether such ownership is to be a domain or also includes holders in usufruct or fiduciary holders, which can give rise to numerous disputes as a result of the impossibility of interpreting an exceptional legal rule, such as the one in this case, extensively or analogically (Article 4.2 of the Civil Code).
4. The tenant must apply until 02/05/2020 (one month from the entry into force of the Royal Decree-Law, which took place on 02/04/2020). Once the request has been made to the landlord, he has a period of 7 working days to choose the measure from the two options provided: reduction of the rent by 50% or postponement of the initial rent payment.
5. The tenant or any of the persons who comprise the family unit that inhabits that unit may not be the owner or usufructuary of any dwelling in Spain, unless they only have an undivided participation in the property (community of property) and it has been obtained through hereditary succession, although an exception is made for those who, being owners of a dwelling, certify the unavailability of the same due to separation or divorce, for any other cause beyond their control, or when the dwelling is inaccessible due to the disability of the owner or of any of the persons who comprise the cohabitation unit.
6. The rule itself provides for the responsibility of those who have unduly benefited from the system of aid exposed, being responsible for damages that may have occurred, as well as all expenses generated by the application of the exceptional measures, without prejudice to the responsibilities of another order to which the conduct of the same could give rise, extending that responsibility to those who voluntarily and deliberately seek to place or maintain themselves in the cases of economic vulnerability in order to obtain the application of the measures regulated by the Royal Decree-Law.

(d) Income support
The standard also provides for a series of aid measures in the form of financing for tenants who meet the above requirements but whose lessor is not a large holder and therefore does not have to choose between the two measures provided for in the standard (rent reduction or deferment). In these cases, if the individual lessor does not accept any agreement on deferment, the lessee may have access to the transitional financing aid program regulated by the Royal Decree-Law itself.

This aid consists of a line of guarantees guaranteed by the State, through the Instituto del Crédito Oficial (ICO), so that banks can offer transitional financing aid to persons in the aforementioned situation of vulnerability, with a repayment period of up to six years, exceptionally extendable for a further four years and in no case accruing any kind of expense or interest to the applicant.

Such guarantees may only cover a maximum of six monthly rental payments.

If the tenant avails himself of the system of aid by means of guarantees, the moratorium on the payment of the rental income to which he has availed himself and the consequent pre-established instalment payment on the first monthly rental payment in which the said financing is available to the person obliged to pay it, is no longer in effect. The rule is also confusing on this point, since it only speaks of the cessation of the moratorium (deferment), but not of the return of 50% of the rent if the landlord had opted for this measure, instead of the deferment.

The rule itself, as we have seen, probably due to the haste in its preparation, leaves many aspects open that may lead to confusion, while choosing to limit the aid and protection regime to the area of habitual residence rental, leaving the multiple disputes that are arising between landlords and business premises tenants unregulated, whether they are businesses that have had to close down due to legal requirements or premises that have not closed down but have seen their activity greatly reduced as a result of the limitations established by the declaration of the state of alarm and the subsequent rules that limit and restrict activities.

It would have been very convenient to have thrown out some solution or general principle of action or intervention on these relations to avoid the atomism of solutions that will surely be provided by the different courts once the effects of the state of alarm have ceased.

II. – Situation of the leases not affected by RD 11/2020

As we indicated at the beginning, the fundamental question that arises for tenants who are not included in the Royal Decree-Law, for example, business premises tenants, is whether they can suspend payment of rent as a result of having to close their businesses due to the existing health emergency, an event of force majeure, i.e. unforeseeable and unavoidable.

In view of the silence of the new emergency regulations, article 1105 of the Civil Code establishes “except for the cases expressly mentioned in the law, and those in which the obligation is so declared, no one shall be liable for those events that could not have been foreseen or, if foreseen, were unavoidable.”

Therefore, the first step will be to go to the contract to see if there is a possibility of suspending the payment of rent due to force majeure, a highly unlikely situation. If this is not the case, it is usually, if not unanimously, discussed whether the aforementioned article may be applicable to the cases under discussion here. Firstly, the law refers to the fact that “no one will be liable”, which still leaves open the question of whether the effects of the current emergency situation should be borne by the lessor (loss of rent) or by the lessee (payment of rent), since the provision does not discriminate against one or the other.

It should be noted here that the main, although not the only, obligations arising from the lease contract are for the lessor to make the rented property available to the lessee, and to ensure the peaceful (undisputed) use of the property, it being necessary for the rented property to be suitable for the intended purpose. The lessee’s fundamental obligation is to pay the rent.

Therefore, the event of force majeure must directly prevent the performance of the obligations for the party seeking to be released from them, and it must be taken into account that a restrictive interpretation must be made of the means that allow the parties to disengage themselves from the obligations assumed under the contract, given the obligatory and binding nature of the contract. Moreover, as stated in the case law, if the obligation can be partially fulfilled, it must in any case be verified in that part.

Does the pandemic cause the property to cease to be temporarily suitable for the intended use? Is this an essential obligation of the lessor?

Is the obligation to pay rent impossible to fulfil due to a pandemic?

In this case, it is obvious that the impossibility is not due to the pandemic itself, but to the legal ban on opening most public establishments and the prohibition on people walking around, which has led to the closure of the premises where the business is conducted. Consequently, in these cases (in the case of premises that must remain closed to the public), instead of force majeure in generic terms, it should also be possible to assess as an option the non-payment of rent as a consequence of a supervening illicit provision. The speciality is that in the present case the unlawfulness is transitory or temporary, a fundamental aspect, given that otherwise the remedy could be worse than the illness, given that the lessor could claim the termination of the contract and the return of possession of the premises.

In these cases it will be essential to examine the terms in which the contract was formulated, since if the lease was subordinated to the development of a specific activity and this has become prohibited, it would be possible to formulate a claim for possible suspension of payment of rent based on the above arguments.

Apart from the above, there are also other legal mechanisms to defend a possible suspension or reduction of the rent.

As I have indicated above, the main effect of a contract is that it is binding, which means that the parties cannot unilaterally terminate it. However, scientific doctrine and case law have developed a series of cases in which the parties could modify the initial terms of a contract by altering the initial circumstances. We will summarize the main ones:

a) Rebus sic stantibus
It is a theory that allows one to disassociate oneself from an existing contract as a result of the supervening appearance of certain circumstances. For the application of its effects it is essential that the following requirements are met:

1. An extraordinary alteration in the circumstances at the present time in relation to those concurrent at the time of signing the contract.
2. That the application of the initial contractual conditions implies for one of the parties an exorbitant provision (lack of equivalence between the claims of both parties arising from the lease contract in this case).
3. That the appearance of said circumstances takes place due to radically unforeseeable circumstances.

The effect of the application of this solution would be the readjustment or revision of the contract adapting it to the new circumstances, trying to compensate the imbalance between the benefits of the landlord and the tenant.

It should be pointed out that the Supreme Court, while admitting the applicability of such a solution, interprets it in an extremely restrictive manner.

b) Theory of the business base
Such a solution is based on the premise that the contract has been concluded by the parties concerned on the basis of the existence of certain circumstances on which the contract is based, so that if they subsequently disappear without the parties having foreseen or assumed the risk of their disappearance, the party aggrieved by this may terminate the contract.

As can be seen, these alternatives start from the same premise, which is the supervening of circumstances, a situation which means that one of the parties is excessively prejudiced in continuing to fulfil the contract in the terms initially formulated.

Although civil law does not generally provide for these alternative methods (although the principle of equivalence of performance between the parties can be found, for example, in articles 1274 and 1289 of the Civil Code), it does provide for very specific cases in certain contracts.

Precisely, one of them is in the field of rural leases, article 1575 Civil Code, which provides
“The tenant shall not be entitled to a reduction in the rent for sterility of the rented land or for loss of fruit from ordinary fortuitous cases; but he shall be entitled to a reduction in the rent for loss of more than half of the fruit due to extraordinary and unforeseen fortuitous cases, unless otherwise specially agreed.

Extraordinary circumstances are understood to mean: fire, war, plague, unusual flooding, locust, earthquake or other equally unusual circumstances which the parties to the contract could not reasonably have foreseen”

Therefore, this provision foresees the reduction of the rent due to the loss of more than half of the yield of the leased property in the event of an event of force majeure, although the provision speaks of extraordinary fortuitous case.

In any case and by way of conclusion, as indicated above, the response to the specific case will depend on multiple factors, such as the wording of the contract, the type of activity carried out on the premises and whether it is limited or restricted by the decree-laws issued by the government to prevent the spread of COVID-19, although we understand that in the spirit and solution offered by the aforementioned article 1575 CCiv, may be the judicial response that may be imposed in the future in the event of disputes between owners and tenants, given that it distributes the consequences of force majeure between both contractual parties, without either of them having to bear the full consequences of the appearance of totally unforeseeable circumstances, except in any case, the terms in which the contract has been expressly formulated.