Many landlords believe that including a harsh "contractual penalty" clause for each day rent is late is enough to protect themselves from unreliable tenants. Meanwhile, in civil law, the rules for applying contractual penalties are based on the nature of the performance (monetary or non-monetary). So, can a contractual penalty effectively be stipulated in the event of non-payment of financial rent?
💡 Key takeaways
- A penalty clause may be validly stipulated in a contract Exclusively for non-cash benefitsA reservation of it for non-payment of rent in currency is legally ineffective.
- The landlord, in the absence of rent payment by the tenant, has the right to demand Late payment interest (statutory or higher – contractual, up to the level of maximum interest).
- To intelligently circumvent restrictions, lawyers create structures that allow them to reserve penalty clauses for "failure to provide a (non-monetary) bank guarantee, bond or surety."
A contractual penalty clause in the event of non-payment of rent paid in money is most often considered to be contrary to the law, and therefore invalid under Article 58 §3 of the Civil Code. This is because interest is payable for financial delays.
Liquidated damages for non-payment of rent in a tenancy agreement. Is this lawful?
Introduction and legal basis of the lease agreement
In accordance with Article 659 of the Civil Code (k.c.), by a lease agreement, the lessor grants the use of a thing (e.g. commercial premises), and in return, the lessee undertakes to pay rent. Rent may be specified in money (monetary performance) or exceptionally in performances of another kind, e.g. the delivery of agricultural produce (non-monetary performance).
W Real Estate Law Firm Every day we encounter contracts that raise the question – will a strict contractual penalty of, for example, tens of thousands of zlotys for "failure to pay a monthly invoice" be upheld in court?
Non-payment of rent: Delay versus lateness
In civil law, there is a vast difference between Delay and Delay:
- Delay This is a situation where payment is not received on time, for reasons often entirely independent and not the fault of the debtor (e.g., banking system failure).
- Delay (art. 476 of the Civil Code) means a failure to meet a deadline, for which the tenant is responsible due to their own fault or negligence (e.g. he decided not to pay out of unwillingness). The law always assumes an initial "presumption of default" against the debtor.
Penalty clause in a rental agreement
The institution of contractual penalty is rigorously described by Article 483 §1 of the Civil Code. It provides that such a penalty can be stipulated only as repair of damage from non-performance of a "NON-MONETARY obligation". It unequivocally follows from this that including a clause in a lease agreement (commercial or private) stating that "for failure to pay rent on time, a contractual penalty of PLN 200 shall be imposed for each day for the amount of PLN 1500" is ineffective.
What will a Polish court do if such an unfair clause comes before it? Depending on the interpretation:
- I will apply extreme rigor and fully invalidate the entry in this respect.
- Applying the theory of conversion or the Roman principle A false premise does not harm. recognises that the intention of the parties was in fact to charge "interest", and that only due to the lack of a lawyer was the term "penalty" mistakenly used – and will award the lower statutory interest.
Interest instead of a penalty clause
When the debtor defaults on a monetary obligation, the remedies available are Interest (art. 481 §1 of the Civil Code). Furthermore, these interest payments are due to the landlord automatically – "even if they have not suffered any damage as a result of the delay" and regardless of whether the tenant's fault was deliberate.
Parties may of course reserve interest rates higher than the statutory base rates (these are so-called capital or contractual interest rates), but they may never exceed the ceiling set by law – maximum interest rates.
When can a penalty clause be safely relied upon when recovering rent?
An experienced lawyer knows that while a penalty cannot be imposed for "non-transfer" itself, payments can be secured in the contract by stipulating additional non-monetary obligations on the tenant's side, for breach of which the penalty has already taken effect:
A) Penalty for failure to establish a Bank Guarantee: You are obliging the company (the tenant) in the agreement to non-monetarily deliver to you a written letter from the bank concerning the security of the premises' amount. For delay in "the act of delivering documents with a guarantee," you effectively trigger a multi-thousand penalty.
B) Penalty for Lack of Collateral: The tenant themselves may be contractually obliged to provide a guarantor and sign a so-called guarantee addendum. Failure to do so is again a breach of a non-monetary obligation, punishable by a significant penalty.
C) Transfer of ownership for security purposes: The tenant transfers ownership of valuable movable property to the landlord as security and is to repossess it at the end of the lease. The absence of a transfer deed increases the possibility of a penalty being imposed.
Commercial property leases are incredibly complicated, and one novice mistake with the terms can result in the loss of thousands of pounds in deposit. As a team with extensive experience in shopping centres and office buildings, we encourage you to entrust the drafting of secure contracts to professionals.