Contractual penalty for failure to pay rent under the lease agreement?

CONTRACTUAL PENALTY FOR NON-PAYMENT OF RENT?

That is, considerations include whether the landlord of the commercial premises could effectively demand payment of the contractual penalty stipulated in the lease agreement in the event of non-payment of rent by the tenant? 

As part of our practice Real Estate Law Firm Each year, we successfully run dozens of projects involving comprehensive support for clients in matters related to the lease of commercial real estate. We support clients from the legal side by advising, creating contracts and analyzing draft contracts sent by the other party. All this to ensure the highest possible degree of balancing the interests of both parties to this legal relationship, and therefore its security and stability. Of course, we also obtain opinions on tax law for our clients. And if necessary - when everything goes wrong - we also support clients in terminating lease contracts and court cases.

In addition to inviting you to take advantage of our support Chancellery in transactions involving the conclusion of a lease agreement regarding commercial real estate, we will share below some of the knowledge and extensive experience that our Team has gathered so far.

1. Introduction and legal basis 

To answer the question posed in the title of the article, you must first determine what the relationship between the landlord and the tenant is and what they are mutually obliged to do. At this point, please refer to Art. 659 of the Civil Code, which states that:

§1. Under the lease agreement, the lessor undertakes to provide the tenant with an item for use for a specified or indefinite period of time, and the tenant undertakes toacić to the landlordaboutcheap rent.

§2. Rent may be expressed in money or other types of benefits.

It must be stated that upon the conclusion of a lease agreement, the parties thereto (i.e. the tenant and the lessor) are bound by an obligational relationship which requires both the tenant and the lessor to fulfill certain obligations. The landlord undertakes to give the tenant the item for use. Most often, it will be real estate, residential or commercial premises, but of course it is possible and used to rent movable property. As an example, long-term car rental is becoming increasingly popular and has become more and more popular due to changes in tax regulations regarding leasing.

In turn, the tenant is obliged to pay the rent specified in the lease agreement. It should be noted that the rent does not have to be a fixed value, the parties may, for example, set it as a percentage of the income obtained by the tenant. This solution is common in the case of concluding lease agreements for commercial premises. As the provision of the Civil Code itself clearly indicates, the rent may be denominated in money (the parties may specify any currency, however, taking into account the provisions of Article 358 of the Civil Code) and will then be a monetary benefit, as well as other types of benefits, which will result in its classification as a non-monetary benefit[1]. The consequences of such a distinction will be very important, as we will point out shortly. An example of a non-monetary benefit constituting rent is the transfer of ownership of a thing or even putting another thing into use (then, as part of the payment of rent, the tenant will have the status of the lessor of the thing put into use).

The above comments allow us to present the situation in which the landlord and the tenant are in relation to each other after concluding a commercial premises lease agreement and what they can expect from each other. However, the reality sometimes turns out to be more complex and often makes it impossible or difficult for the tenant to pay the rent. So what can a landlord do in such a situation? And - if you want to protect your interests - can you stipulate a contractual penalty in the lease agreement in case the tenant fails to pay the agreed rent? What should a good lawyer include in a lease agreement?

2. Failure to pay rent.

As indicated above, the payment of rent constitutes the tenant's benefit. Therefore, it is necessary to analyze the situations in which non-payment of rent provided for in the lease agreement may occur. First, you should be aware that rent may be payable once or periodically. These situations also differ from the perspective of legal consequences. If the tenant is in default with the payment of rent payable once, it should be allowed to apply general provisions on breach of mutual obligations (which is what the lease relationship is), and thus the possibility of withdrawing from the contract and demanding compensation by the landlord.[2]. In turn, when the rent is payable periodically, the possibility of terminating the relationship arising from the lease agreement by the landlord is specified in Art. 672 of the Civil Code (and the above-mentioned application of general provisions is unacceptable)[3]. According to this provision:

If the tenant delays the payment of rent for at least two full payment periods, the landlord may terminate the lease without observing the deadline.aboutin notice.

As a side note, it is worth adding that this regulation is modified in specific regulations and, for example, for a tenant of a residential premises, only a delay in the payment of rent for three full periods and setting an additional month's deadline for payment allows the landlord to terminate the lease agreement (see Article 11 of the Act on protection of tenants' rights, municipal housing resources and amendments to the Civil Code). 

Another important distinction is related to the above-mentioned concept of delay. It is necessary to distinguish delay from delay, and this is particularly important in relation to the demands that the landlord could present to the non-paying tenant. It is worth taking a closer look at the content of Art. 476 of the Civil Code:

The debtor is in default when he fails to make the performance on time, and if the deadline is not specified, when he fails to make the performance immediately after being requested by the creditor. This does not apply to cases where the delay in performance is a consequence of circumstances referred to in artaboutdthe debtor is not liable.

Both concepts therefore refer to a situation in which the tenant has not paid the rent on time. However, the reasons for this basis are different. In the event of delay, the tenant is liable for failure to pay (this is due to his fault, i.e., under contract law, failure to exercise due diligence). A delay is a situation in which the failure to pay on time is due to circumstances for which the tenant cannot be held responsible. It should also be mentioned that this provision introduces a presumption of the debtor's liability for failure to meet the deadline, and therefore a presumption of delay on the part of the tenant when he is late in paying the rent.[4].

Taking these issues into account, it is necessary to proceed to the answer to the main question posed in the title of this article, i.e. whether in the event of a delay or delay in the payment of rent by the tenant, the landlord could demand payment of a (reserved) contractual penalty? And if the answer was negative, what remedies could the landlord seek?

3. Contractual penalty in rental agreement

To put it simply, a contractual penalty is a form of lump-sum compensation agreed by the parties in the event of breach of obligation. A specific definition of this concept is introduced by Art. 483 §1 of the Civil Code:

It may be stipulated in the contract that compensation for damage resulting from non-performance or improper performance of a non-monetary obligation will be made by paying a specific sum (contractual penalty).

Therefore, the question arises how to apply the institution of a contractual penalty to a situation in which the tenant does not pay the agreed rent. As mentioned above, the payment of rent is an obligation that arises on the part of the tenant in connection with the conclusion of the lease agreement. Default in payment of rent is therefore a breach of this obligation. In this context, assessing whether there is non-performance or improper performance of an obligation is of no great practical importance[5].

The first assessment that needs to be made is to determine whether a contractual penalty may be reserved only in the event of delay in rent payment (breach of an obligation for which the tenant is liable) or also delay (when such liability cannot be assigned). This question must be answered taking into account the so-called modification of liability provided for in Art. 473 of the Civil Code It is therefore possible to provide for a contractual penalty in the event of a breach for which the debtor is not responsible, but in the absence of such an indication in the contract, the stipulated contractual penalty will only cover cases in which liability must be attributed to the debtor, and therefore delay.

However, the next issue raises more problems. The provision of Art. 483 §1 of the Civil Code talks about a non-monetary obligation. Therefore, it is necessary to consider whether a contractual penalty can be stipulated in the most popular situation, i.e. when the rent is paid in cash. The answer must be unambiguous: a contractual penalty cannot be stipulated in the event of non-payment of rent paid in cash. But what if such a provision is included in the contract? Of course, such a contractual penalty cannot be enforced directly, but there are various interpretations of such a situation:

and)      the first position is very rigorous, but it seems to dominate among lawyers. According to it, the stipulation of a contractual penalty in the event of failure to pay rent paid in cash would be considered contrary to the Act and therefore invalid under Art. 58 §3 of the Civil Code[6].

b)      the second position is based on the structure of the so-called conversion and assumes that the contractual penalty reserved for a monetary obligation, giving primacy to the will of the parties to the contract as to sanctioning non-payment, should be treated as interest for delay (Article 481 of the Civil Code). This view was also expressed by the Supreme Court in one of its judgments[7].

c)      the third position could, with some simplification, be considered an intermediate position. It is based on a principle derived from Roman law, therefore falsa demonstratio non nocet. It means situations in which the parties intended to reserve interest, but wrongly called it a contractual penalty[8]. In such a situation, this provision is valid, but of course it gives the lessor the right to demand interest, not a contractual penalty.

However, we mentioned above that the rent does not have to be paid in cash, and then the tenant's benefit will be a non-monetary benefit. This qualification allows for stipulating a contractual penalty in lease agreements in which the rent is paid, for example, by providing the lessor with a specific batch of products in exchange for the premises. This would mean that if the tenant fails to deliver the products on time, he or she is in breach of a non-monetary obligation and will therefore be obliged to pay the contractual penalty specified in the contract.

4. Interest.

In the above considerations, the concept of interest appears several times as an institution that the landlord could invoke when the tenant is late in paying the rent. This forces us to take a closer look at the topic of interest. It is necessary to quote Art. 481 §1 of the Civil Code:

If the debtor delays in fulfilling the monetary obligation, the creditor may demand interest for the period of delay, even if not belowaboutsł no harm and at leastby opthe delay was a consequence of circumstances for whichaboutdthe debtor is not liable.

The provision clearly states that interest is due in the event of a delay in the payment of the monetary benefit. This formulation therefore covers the overwhelming majority of lease agreements used in practice, in which the rent is specified in money and, for various reasons, the tenant does not fulfill his obligation and does not pay the rent on time.

The first point worth emphasizing is that if the tenant fails to pay the agreed rent, the landlord may demand payment of interest, even if the lease agreement did not provide for the obligation to pay interest and did not specify its amount. Statutory interest is then due.

However, the parties may agree on higher interest rates and the lessor, invoking the contractual provision, could demand this amount, although they cannot exceed the so-called maximum interest rates.[9]. What if this amount is higher than the maximum interest? The Act does not provide for such a far-reaching sanction as invalidity of the provision, but it grants the lessor the right to demand the maximum interest.

What is equally important is the fact that in order for the landlord to be able to demand payment of interest, even if the tenant is not responsible for the lack of payment, there is no need to include appropriate provisions in the lease agreement. A claim for interest payment also arises in the event of a simple delay in payment.

It is therefore worth remembering about the structure of interest, as it can be claimed in the vast majority of cases. The landlord may demand payment of interest for the tenant's delay in payment of rent specified in money, regardless of the reason for non-payment.

5. When is it permissible to stipulate a contractual penalty?

After analyzing the above comments, the question arises whether there are situations in which when the tenant stops paying rent, the landlord can sanction this with a contractual penalty? This penalty, however, would usually be higher than the mentioned maximum interest. As we explained above, for a contractual penalty to secure the breach of an obligation, it must be a non-monetary obligation. What non-monetary obligations may be linked to the payment of rent paid in cash and partially secure the interest of the lessor?

A) A bank guarantee securing the payment of rent in the lease agreement.

The institution of a bank guarantee is provided for in Art. 81 banking law. Briefly, presenting its essence and relating it to the issue of payment of rent under a lease agreement, it should be pointed out that it is (according to the dominant view)[10] it is a unilaterally binding agreement concluded between the bank (guarantor) and the lessor, in which the bank, at the request of the tenant, undertakes to secure the receivable for payment of rent. If there is such an agreement, which is expressed in a letter of guarantee sent to the landlord, if the tenant fails to pay the agreed rent, the landlord may apply to the bank for payment under the conditions specified in the letter of guarantee. Due to the nature of the bank as a civil law entity, this structure is characterized by high certainty and effectively protects the tenant's interest.

However, you must be aware that in this way you can secure the payment of, for example, several subsequent installments, but what if the landlord effectively draws a bank guarantee (i.e. demands payment of funds and it will be made) and would like to further ensure the enforcement of the rent payment. The lease agreement should include a provision that would oblige the tenant to order another bank guarantee to be established or to supplement it. According to some, such an obligation arising from the contract constitutes a non-monetary obligation of the tenant. It may seem that the parties can effectively stipulate a contractual penalty against him. And although, unfortunately, in such a situation the tenant will most likely no longer pay rent and the bank will not provide another guarantee, the landlord may then effectively demand payment of a specific amount of money as a contractual penalty. The opposing view points out that a bank guarantee is payment security - most easily exchangeable for money, and therefore demanding a contractual penalty for failure to provide it constitutes a kind of circumvention of the law. Which does not necessarily have to obtain legal protection during a court case.

Often, the contract also obliges the tenant to establish another new bank guarantee because each guarantee has its own validity period (some banks issue only one- or two-year guarantees, others issue guarantees that allow the entire duration of the contract to be secured in advance. The purpose of such a provision is to ensure certainty of duration security held by the owner of the property - for example, the manager of a shopping mall or an office building. The assessment of whether such a contractual provision is consistent with Article 484 § 2 of the Civil Code is again based on the considerations presented in the previous paragraph.

The problem often arises when this provision concerns both the obligation to supplement the deposit and, alternatively, the provision of a supplementary bank guarantee. Such a provision will very likely be questioned during court proceedings, because the combination of both models (i.e. supplementing the deposit and supplementing the bank guarantee) will most likely result in the entire obligation described in the lease agreement being recognized by the court as an obligation to pay a sum of money. . Therefore, we should avoid the apparent facilitation of preparing a uniform contract template for various types of contractual security, unless, of course, we really want to stipulate such a provision as effectively as possible.

As a side note, it is worth adding two comments:

1/ More and more often in Poland to secure claims arising from lease agreements for commercial premises, corporate guarantees are also used - large related entities (usually much larger domestic or foreign owners than the tenant company) issue documents guaranteeing the payment of specific amounts in the event that the daughter company does not have the funds to settle its liabilities. These documents constitute a specific combination of a bank guarantee and a surety. And although the consolidation of case law in this matter is still ahead of us, it should be recognized that this trend in securing contractual obligations is likely to become more widespread. Personally, I wouldn't be afraid of it - as long as the entity issuing the guarantee is a really large and reliable entity, and the content of the guarantee itself is clear, precise and well protects the creditor's interests.

2/ It is much simpler, instead of provisions regulating the obligation to supplement subsequent bank guarantees or entire clauses regarding their increase, to establish in the commercial premises lease agreement with the lessor a guarantee in the amount of 110% or 120% of the originally agreed value, and in return waive the indexation of the bank guarantee every year or two years - as too many contractual standards provide for it. This solution results in significant savings in terms of the amount of work necessary to properly handle the lease agreement, and is therefore simply cheaper and better than the commonly used indexation clauses for contractual security. This way, you can save your company a lot. After all, our employees' working time can be spent on more creative tasks that bring real benefits to the company than calculating the amount of the guarantee after another several percent indexation.

B) Surety.

An institution similar to a bank guarantee, which can be seen even in the reference to Art. 84 of the banking law, there is a surety. Without delving deeply into the discrepancies, it is worth emphasizing that through a surety agreement, the landlord's claim can be secured by any entity, not just the bank. The essence of the surety is expressed in Art. 876 §1 of the Civil Code:

By means of a surety agreement, the guarantor undertakes to fulfill the obligation towards the creditor in the event that the debtor fails to fulfill the obligation.

This should be referred to the lease agreement. In a situation where the debtor does not pay the rent, the landlord may demand payment from the guarantor, who must fulfill this obligation. How can a landlord ensure such a situation? The answer can be found in art. 391 of the Civil Code. The tenant should ensure in the lease agreement that a specific entity will conclude the above-mentioned surety agreement with the landlord. If such an agreement is not concluded, the tenant will be in breach of his obligation. And this is a non-monetary obligation. Therefore, such a provision may be subject to a contractual penalty (thus modifying the liability limited to the so-called negative contractual interest). The situation of the lessor would then be as follows: either a surety agreement would be concluded and in the event of non-payment of rent by the tenant, the lessor could demand payment from the guarantor, or if no surety agreement was concluded, the lessor could demand payment of a contractual penalty.

C) Transfer of ownership as security

It is worth giving another example of an institution that could improve the landlord's situation. This is a structure of the so-called transfer of ownership as security. In short, it means that the tenant undertakes to transfer ownership of a specific item to the lessor in the lease agreement. If the tenant fulfills the contract (payment of rent), the ownership of the item would be returned to him. However, if the tenant did not pay the rent, the landlord could satisfy himself with this property.

Once again, it is worth emphasizing that the provision of the lease agreement imposing on the tenant the obligation to transfer ownership of the goods will be a non-monetary obligation for the tenant. Therefore, you can reserve a contractual penalty for him. Therefore, if the property is transferred as security and the tenant fails to pay the rent, the landlord may be satisfied with the property. However, if the transfer of ownership did not take place, he could demand payment of the amount of the contractual penalty.

6. Summary.

The basic purpose for which the lessor decides to put the thing into use is to obtain payment of the agreed rent. It is worth remembering about the possibilities of regulating payment issues in such a way that will increase the likelihood of receiving payment without complications; for this purpose, it is best to consult an experienced lawyer. One that will be able to take into account, in particular, the setting of payment deadlines or, for example, the dependence of the rent amount on certain economic factors.

However, it is known that in practice there are situations in which the tenant simply does not pay the rent on time. Here too, the solutions for the lessor may be different, including even unilateral termination of the relationship arising from the lease agreement. However, it is worth emphasizing what follows from the presented comments. Firstly, the landlord cannot, in principle, establish and demand payment of a contractual penalty in the event of failure to pay the rent. Secondly, the landlord is almost always entitled to claim interest to compensate for the delay in payment of the agreed rent. Finally, it is worth emphasizing the existence of more complex structures that can secure the creditor's position.

Therefore, it is clear how important it is to properly structure the lease agreement, both in terms of establishing the rules for rent payment and sanctioning non-payment of rent by the tenant and, finally, institutions securing the proper performance of the agreement. Therefore, we recommend using the help of professionals when concluding a lease agreement - for example, an experienced legal advisor. 

In our law firm, specializing in matters relating to commercial real estate, we prepare and review contracts for clients almost every day rental of commercial premises and residential. We cordially invite you to visit contact.