Rebus sic stantibus and COVID-19
First ruling by the Barcelona Courts applying the rebus sic stantibus doctrine.
The rebus sic stantibus clause “as long as things continue as they are” is used in law to state that a rule will be applicable as long as the circumstances for the situation in which it was dictated are maintained. The aim is to re-establish the balance of the contractual benefits, so that one party does not benefit more than the other by maintaining the conditions of a contract that was agreed before the unforeseeable and unavoidable event. Faced with an unforeseeable and unavoidable event, the parties to a contract must modify the contract so that the party that was in an advantageous position is on an equal footing with the injured party, in order to avoid excessive onerousness and that one party benefits with respect to the other from the unforeseeable circumstances.
As my colleague Pablo Garrido has already indicated in previous circulars, this doctrine is one of the most relevant issues that we legal operators are currently facing due to the COVID-19 health crisis.
From the beginning of the pandemic until the present day, much has been written and debated about the possibility of one of the parties to the contract failing to perform, partially or in full, its obligations stipulated in a contract, sometimes monetary and other times of services, under the pretext of the occurrence of a case of force majeure linked to the unpredictability and effects of the pandemic; and all this on the basis of the doctrine of rebus sic stantibus. It should be noted that the aforementioned doctrine is not yet regulated in the current codes of Spanish law, but has been applied by jurisprudence according to the casuistry involved.
Thus, it has been on the basis of this maxim that the aggrieved party to a contract forces the other party to renegotiate the terms of a contract. However, renegotiation does not imply, logically, imposing the terms unilaterally, but rather, as a principle, only the common will of the parties can make flexible, modify or extinguish the bond generated by the contract. In the event of failure to reach an agreement between the parties, it is then that the party alleging the aforementioned doctrine can go to the courts and have them apply the aforementioned premise.
In this respect, the question is whether it can be said, in the current context, that the effects of the COVID-19 pandemic on certain contracts (leases for use other than as a dwelling, provision of continuous services, operating licences, supply, distribution in all its variants) are of such a magnitude that they objectively require a rebalancing of services.
Well, the Barcelona Court of First Instance no. 20, in the Judgment dated 8 January 2021, has ruled in this regard, applying the rebus sic stantibus clause, ordering a 50% reduction in the rent paid by a tenant to the owner of the property as a result of the loss of income of the tenant due to the COVID.
In the case in question, the plaintiff had the leased buildings and premises used for tourist activities and accommodation. The lessee requested the lessor to reduce the rental price and the rest of the rental-like expenses it paid for the properties by 50%, since its income had fallen drastically due to the restrictions imposed by the COVID-19. The judgment upholds the plaintiff on the following grounds:
- When the parties entered into the lease contract, they could not foresee the existence of this extraordinary situation (the COVID-19 pandemic) with a great impact on the world economy, given that it had not happened before, comparing the current situation with the Spanish flu. In this sense, the requirement of unforeseeability and inevitability required by the aforementioned clause is met.
- Serious and excessively onerous damage has been caused to the lessee, as its business has greatly reduced the profits that were rationally intended to be obtained.
- The parties have tried to negotiate the amendment of the lease and no agreement has been reached on the matter.
- The plaintiff’s request is fair and equitable because if she pays 50% of the rent, she is assuming losses in her business that are greater than this 50%.
Finally, the Judge highlights the good faith of the tenant during the negotiations, who continued to pay 50% of the rent at all times, which is what he could assume in view of the circumstances, as well as the importance of the expert report submitted by the plaintiff in which the damage suffered by the suspension of the activity was accredited.
The ruling is not final and is subject to appeal, but it is undoubtedly a precedent that demonstrates that, when analysing each specific case, a reduction is possible. It will undoubtedly help many negotiations to prosper and not end up in court. Moreover, if you add to this ruling the Catalan Government’s intention to introduce therebus sic stantibus clause in the Catalan Civil Code, it can be said that the impact of this doctrine will be enormous, not only in cases caused by the COVID-19, but also in other cases in which the injured party proves the unforeseeable and unavoidable event.
At AddVANTE, we not only offer our assistance from the legal point of view to settle, both in and out of court, conflicting situations similar to those of the Judgment of 8 January 2021, but also from the technical and expert point of view, which, as indicated by the Judge of Barcelona Court of First Instance No. 20, is essential to accredit the damage caused.