Increases in electricity and gas fees have become a common and troublesome problem for entrepreneurs in recent months. Everyone experiences them, but they are particularly severe for people running businesses - especially those that require high consumption of electricity or gas. Additionally, if the business is conducted in a rented premises and the utility costs, as is usually the case, fall entirely on the tenant, the financial situation of the business owner becomes complicated because the utility costs have already increased several times. However, in this article we present some solutions that can help tenants renegotiate the contract or terminate it completely. One of them may be a clause rebus sic stantibus.
You don’t need to spend five years studying law and a further three on a legal traineeship to be familiar with the famous principle dating back to Roman law, which states ‘pacta sunt servanda’ – in other words, ‘agreements must be honoured’. It means, quite simply, that when you enter into a contract with another party, you must abide by its terms and fulfil your obligations. So, if a tenant has undertaken to pay the landlord a monthly rent of X and utility charges (including gas and electricity) of Y, and in return the landlord makes the premises available for the tenant’s use, well – “Sorry Winnetou, but business is business” – you’ve got to pay. In principle, this shouldn’t be a problem; after all, the tenant, knowing their financial circumstances, knew what they were getting into. The trouble begins when factors start to influence the amount of the charges, the scale of which (or the very existence of which) wasn’t taken into account when the contract was signed. We’re talking here about ever-rising inflation (after all, rent indexation is a common and well-known practice, but few people, particularly when entering into long-term tenancy agreements, expected inflation to rise so rapidly) and about increases in electricity and gas prices on a scale never seen before. Take, for example, Jagiellonian University, whose operations for the coming academic year have been thrown into doubt due to an increase in electricity charges from 27 million zlotys a year to… 182 million! And whilst households may experience some financial turbulence in this situation, businesses are often on the brink of disaster. When electricity and gas charges rise – charges which, under the terms of the lease, are usually borne by the tenant regardless of the rent amount – the entire business may prove unprofitable; after all, we will end up paying more for utilities than we earn from our business activities. In such cases, when the business is making a loss due to high costs, we may wish to wind up the business. However, if we are bound by a long-term tenancy agreement, the landlord may be reluctant to terminate it. And although increases in gas and electricity charges are entirely beyond the landlord’s control and it is difficult to blame them for them, it is worth considering whether the Polish Civil Code provides for any mechanism that would allow us to renegotiate the terms of the lease or terminate it altogether.
Clause rebus sic stantibus – opportunity for tenants?
The Polish legislator has provided for the possibility of extraordinary circumstances that may justify a change in the relationship between the parties. This means that if the conditions specified in the Civil Code are met, you can demand a different shape of the relationship between the parties (to put it simply - a change in the terms of the lease agreement) or even its termination (termination of the agreement). However, there is one catch - taking advantage of this benefit requires taking the case to court. This is potentially a big obstacle, because court cases can drag on for many months, which in the meantime may lead to the loss of justification for amending the contract due to the previous bankruptcy of the company. Without anticipating the facts, however, let us first focus on Article 357 itself1 § 1 of the Civil Code, which establishes this clause rebus sic stantibusand therefore the clause of extraordinary change of circumstances. Consequently, in accordance with the cited regulation: Art. 3571 § 1 CC: "If, due to an extraordinary change in relations, the fulfillment of the obligation would be associated with excessive difficulties or would threaten one of the parties with a significant loss, which the parties did not foresee when concluding the contract, the court may, after considering the interests of the parties, in accordance with the principles of social coexistence, determine the method of performance of the obligation and the amount of the benefit. or even decide to terminate the contract. When terminating the contract, the court may, if necessary, decide on the parties' settlements, guided by the principles set out in the preceding sentence. To clause rebus sic stantibus has been applied, it is necessary to demonstrate the fulfillment of several conditions described below and arising directly from the provision. These are: the occurrence of an extraordinary change in relations, excessive difficulty in fulfilling the benefit and/or the threat of a glaring loss, the causal relationship between the extraordinary change in relations and excessive difficulty in fulfilling the benefit and/or the threat of a glaring loss, and the unpredictability of the causative event at the contracting stage. Below we present brief considerations on each of these premises.
An extraordinary change in relations
Based on case law and the well-established position of legal doctrine, it should be noted that an extraordinary change in relations is understood as a change that relates to social relations, with particular emphasis on economic relations. This change must be universal, i.e. refer to a wide group of entities, and not only to individually designated parties to the contractual relationship. In accordance with the jurisprudence of the Supreme Court, Art. 3571 § 1 KC applies only to extraordinary events of a general nature, independent of the will of the party, which go beyond typical economic risk. The described change must also be of an extraordinary nature. This should be understood as an exceptional event, not encountered in the normal course of affairs. However, it is the change itself that must be extraordinary, not the event that caused the change. There is no doubt that such high price increases are extraordinary and – even if certain price fluctuations can be considered predictable and falling within ordinary contractual risk – we are dealing with unprecedented levels of increases. Therefore, there is no doubt that the events on which we wish to base the application of the clause are of the nature of an extraordinary change in circumstances.
Excessive difficulty in performance and/or threat of significant loss
The extraordinary change in circumstances described above must create a situation where the performance of the obligation would be excessively difficult or would threaten a significant loss for one or both parties to the civil law relationship. The above means that a change in circumstances " (…) should therefore lead to a significant disruption of the contractual balance, the questioning of the economic sense of the performances, and the frustration of the objectives that the parties assumed when concluding the contract". In accordance with the case law of the Supreme Court, "a significant loss is decided not by a mere comparison of the current value of the performances, but by the overall consequences of the performance of the obligation for the party's assets, taking into account the purpose of the obligation and the benefits the party could have expected from its performance. In legal literature and case law, it has been demonstrated that a significant loss occurs when the rate of return on the subject of the performance has radically decreased, i.e. when, for example, a tenant – making a certain investment through renting a property – derives much lower benefits (due to an extraordinary change in circumstances) than those assumed at the time of concluding the contract. In a situation where our business loses its economic justification due to maintenance costs exceeding profits, it can certainly be spoken of as an excessive difficulty in fulfilling the obligation or a threat of significant loss in the sense described above. However, it should be remembered that in a situation where the increases are significantly high, but at the same time the revenue obtained by the tenant is even higher, demonstrating that this condition has been met may be significantly difficult. If, however, a situation arises where, due to the level of electricity and gas charges, the activity loses its economic justification, it is always possible to seek the application of the clause rebus sic stantibus and fulfillment of this condition.
Rebus sic stantibus – causal relationship
If this clause is applied, there must also be a causal link between the extraordinary change in relations and the excessive difficulty in performance and/or the threat of a significant loss. This causal relationship should not be equated with that existing in the civil law system under the provisions on liability for damages. It is simply an objective causal relationship, so the significant loss results from an unforeseen event. If the rebus sic stantibus clause is applied as a result of an increase in electricity and gas fees, the event in the form of an increase is undoubtedly the direct causative factor of the gross loss and/or excessive difficulty in fulfilling the benefit. It is these increases, caused by various factors which, however, remain outside the subject of considerations, which directly result in the obligation to pay a much larger amount than at the stage of initial contracting. Therefore, if in a given factual situation the first two conditions (extraordinary change in relations, excessive difficulty in fulfilling the benefit and/or threat of significant loss) are met, there is almost certainly a causal relationship between them.
Rebus sic stantibus – unpredictability
Due to the content of art. 3571 The parties to a contractual relationship could not, at the stage of concluding the contract, foresee the impact that an extraordinary change of circumstances would have on their legal relationship. It is emphasised in legal doctrine that, in order to demonstrate unforeseeability, the party invoking the extraordinary change of circumstances must demonstrate that, by exercising due diligence (Art. 355 of the Civil Code), they could not have foreseen the significance of the change in circumstances for the given obligation. Therefore, two situations must be distinguished: signing a lease agreement under "normal" conditions, when no one could have expected such significant increases in electricity and gas prices, and signing an agreement recently, i.e., at a time when the aforementioned increases were foreseeable or already underway. In the first case, this condition will be met, in the second – it will not. In the latter situation, if the tenant signed the agreement at a time when the war was ongoing or when experts were arguing that gas and electricity prices were bound to rise, it would be difficult to speak of unforeseeability. This is particularly true in the case of a tenant who is an entrepreneur, and therefore an entity from whom a certain degree of diligence and market knowledge is required.
See also: Is the lease agreement for commercial space in a shopping mall de facto a lease agreement for premises?
How to assert your rights?
Once it has been established that all of the above premises have been met, one can attempt to change the rental agreement or terminate it. And here we distinguish two paths: amicable and judicial. It is always worthwhile to start with the amicable path, i.e., to enter into discussions with the landlord, on the basis of which one should demand a suitable reduction in rent (which N.B. also in current conditions due to inflation it is usually increased) or termination of the contract - depending on our needs. If he is not willing, you can also send him a formalized pre-court request to reduce the rent/terminate the contract, in which, demonstrating the validity of the claim due to the fulfillment of the conditions under Art. 3571 § 1 KC, "threaten" to refer the case to court in the absence of a willingness to engage in discussions aimed at reaching a compromise appropriate to the tenant's economic situation. If the above were ineffective (after all, the landlord's willingness to cooperate is required), the lawsuit can not only be filed, but should be filed. Such a lawsuit requests the shaping of the legal relationship based on Art. 3571 § 1 KC. If the claim's validity is effectively demonstrated, the Court shall appropriately shape the relationship between the parties or terminate the contract – depending on the plaintiff's wishes. However, there is one "catch" mentioned in the introduction – time. Usually, tenants need rent reduction or termination of the contract "here and now" to avoid incurring costs and falling into debt. Taking a case to court typically involves several months of proceedings, which can drag on even after a satisfactory decision in the first instance. Such a development of the situation partially distorts the purpose of seeking justice in court, as losses and debts will continue to grow for the tenant during this entire time. However, there is a way to overcome this problem. A well-constructed request for interim relief in the lawsuit – if the court agrees to it – can appropriately reduce the rent or even (although this should be considered in the realm of procedural abstraction) lead to a temporary suspension of the obligation to pay it. However, both the lawsuit and the request for interim relief (which is crucial in this case), as well as well-constructed documents at the pre-litigation stage, require the assistance of an experienced lawyer. Within the practice of our Law Firm, we have successfully conducted many cases based on the clause rebus sic stantibus (mainly in terms of reducing the rent of commercial premises during the COVID-19 pandemic). Our experience shows that selecting the right strategy at the pre-trial and court stages may result in a positive outcome. Sometimes, it is only after filing a lawsuit that the landlord, fearing losing the case, decides to enter into settlement negotiations - this is how many of our cases conducted under this provision ended.
Therefore, please contact our office – after an initial assessment of the situation, we will advise you whether we see any prospects for reducing the rent/terminating the contract, select pre-court tactics, conduct negotiations, and - if necessary - file an appropriate lawsuit to court.