Courts are increasingly willing to side with tenants of shopping malls - review of case law

rental in shopping malls
Piotr Kłodziński|
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The closure of shops and gyms resulted in huge financial losses for many entrepreneurs. Tenants of premises in shopping centers are feeling the effects of the current pandemic very severely. Empty facilities only generated expenses because they did not sell, and maintaining them while waiting for a return to business is a significant cost. Tenants of premises in shopping centers had to face a ban on their operations last spring, then the lockdown lasted from November 7 to November 28. From December 28, 2020, the government tightened the regulations on the operation of shopping malls. Until January 31, 2021, there was a ban on retail trade in commercial or service facilities, including retail parks, with a sales or service area exceeding 2,000 m2.2. The situation was supposed to be improved by the solutions of the Anti-Crisis Shield 2.0, which provided for the possibility of exempting mall tenants from the obligation to pay rent during the closure, but a very important condition had to be met, namely the extension of the contract. After closing the stores, the obligation for the tenant to submit an unconditional and binding offer to extend the lease agreement was updated.

Due to the restrictions introduced, the vast majority of tenants were deprived of income, which caused a problem with their financial liquidity. Moreover, this situation of tenants is influenced by public law burdens. The Act of July 6, 2016 on retail sales tax (consolidated text: Journal of Laws of 2020, item 1293) states that all entities that make retail sales are payers of retail sales tax. To put it very simply, this means that an entity that sells certain goods to consumers for a fee is a taxpayer of this tax. For some entrepreneurs, this will be another obstacle to regaining financial liquidity. Despite the lifting of the business ban, a decline in turnover and rental in shopping malls may be far-reaching. Disputes between tenants and landlords and the need to go to court are becoming more and more common. The same applies to fitness centers and gyms, as well as restaurants.

Is the rule pacta sunt servanda experience limitations?

Pacta sunt servanda, that is, the principle that a person who has entered into a valid contract must fulfill it. This institution is intended to ensure stability and certainty of trading. However, it may experience certain limitations as a result of the operation of the clause rebus sic stantibus. The purpose of this institution is to protect against events that the parties to the contract did not take into account when shaping its content. In order for this clause to apply, certain conditions must be met:

  • the source of the obligation must be a contract,
  • extraordinary nature of the change in relations,
  • the change causes excessive difficulty in performance or threatens one of the parties with a significant loss, which the parties did not anticipate when concluding the contract,
  • there must be a causal relationship between the change in extraordinary circumstances and the difficulties in performance.

As part of the application of this institution, you can expect security to be provided in the form of, for example, rent reduction. In this respect, it is worth considering the decisions of the courts.

Judicial practice

The authorized person running a business applied to a specific company for security for a non-pecuniary claim before initiating the proceedings, pursuant to Art. 3571 Civil Code, to change the content of the legal relationship between the parties based on the lease of premises located in a shopping center of January 22, 2020, in such a way as to specify that from May 2, 2020, the rent will constitute 10% of the monthly turnover of the entitled person or termination contract on the date the judgment becomes final and at the same time changes the rent as above from May 2, 2020 until the date the judgment becomes final, in connection with the occurrence of an extraordinary change in relations which causes the performance of the benefit under the contract by the entitled party to be associated with excessive difficulties and may threaten the entitled party by a significant loss (insolvency), which the parties did not and could not have foreseen when concluding the contract.

The District Court in Warsaw found that the application for security for a non-pecuniary claim was partially justified. The condition for granting security is that the claim must be substantiated and the legal interest must be demonstrated at the same time. According to the District Court, the entitled person properly substantiated the existence of an obligation relationship because he submitted a copy commercial premises lease agreements. Moreover, the entitled person also substantiated the occurrence of an extraordinary change in relations in the form of the introduction of a state of epidemic threat in the territory of Poland. The entitled person was obliged to cease running a business in connection with the introduced restrictions. Moreover, the Court emphasized that the parties could not have predicted the occurrence of an epidemic when concluding the contract.

The closure of the tourist goods store had a significant impact on the financial situation of the entitled person, and the raised circumstances related to the reduction in the number of travelers related to restrictions introduced by other countries, as well as Poland, resulted in a decrease in customers of the tourist goods store, which resulted in reduced income of the entitled person. The court found that this was a condition for granting security for his claim. Moreover, moving on to the analysis of the issue of legal interest, it should be noted that under Art. 7301 § 2 of the Code of Civil Procedure states that a legal interest in securing non-pecuniary claims exists when the lack of security makes it impossible or seriously difficult to achieve the purpose of the proceedings in the case. The court emphasized that the entitled person found himself, as it were, forced into a difficult financial situation because he had to adapt to the restrictions introduced and thus to suspend his business.

The court also assumed that the parties had carried out an analysis of the impact of income on the rent, so it was reasonable to set the rent at 10% of the monthly turnover. However, the court pointed out that the entitled person should not be exempt from service charges because they are related to the use of the premises. (Resolution of the District Court in Warsaw of August 13, 2020, XXVI GCo 151/20, LEX no. 3090000).

The District Court in Warsaw also heard a case in which the entitled party concluded a lease agreement for premises in a shopping center on August 2, 2016. Premises lease agreement This agreement was concluded for a fixed period of 5 years. Due to the introduction of the state of epidemic and the subsequent ban on conducting business activities in commercial facilities with an area exceeding 2,000 m22, the authorized person did not conduct business from March 13 to May 4, 2020. After the abolition of these restrictions, customers returned to shopping in shopping centers, but negative emotions related to the epidemic resulted in a decrease in the attendance of potential customers and thus a decline in revenues. Due to the above, the entitled person declared that his income decreased by PLN 72 % in May 2020 compared to the same period last year and by PLN 60% in June 2020 compared to June 2019.

On this basis, the entitled person filed a lawsuit to establish a legal relationship pursuant to Art. 3571 Civil Code The argument of the entitled person was based on a change in relations by introducing limits on the number of customers, prescribed specific behavior, as well as the risk of infection in public places, which are undoubtedly shopping malls. Economic relations have also changed, as consumer spending has decreased significantly. In this case, the Court found that the entitled person had not fulfilled his obligations regarding substantiation of his claim.

In turn, the circumstances of an extraordinary change in relations were considered probable, because the occurrence of an epidemic and the announcement of a state of epidemic should be considered such a phenomenon. The court emphasized that the epidemic is an extraordinary, exceptional and unpredictable event. However, in the opinion of the Court, it was not probable how the alleged gross loss would affect the assets of the entitled person if he fulfilled the obligation. In the Court's opinion, the extraordinary situation resulted in a significant part of sales moving to the Internet, and the entitled person also conducts e-commerce sales. (Resolution of the District Court in Warsaw of August 28, 2020, XVI GCo 195/20, LEX No. 3063433).

Lease in shopping malls

The District Court in Warsaw also considered the case regarding an application for security for a non-pecuniary claim against a general partnership, to change the content of the legal relationship between the parties to the lease agreement for commercial space constituting a room in the Shopping Center of February 2, 2017, by specifying that from February 2, 2017 on May 2, 2020, the rent due to the obligee from the entitled person under the contract is 9% of the turnover obtained in the premises by the entitled person in a given calendar month (excluding VAT), calculated on the basis of monthly reports on the day the judgment becomes final and binding, while changing the rent as above from day 2 May 2020 until the date of the judgment becoming final, in connection with the occurrence of an extraordinary change in relations, which causes the entitled party to perform the performance under the contract with excessive difficulties and threatens the entitled party with a significant loss, which the parties did not foresee and could not have foreseen when concluding the contract, by reducing the amount monthly liabilities of the entitled person to the obligated person, possibly by reducing the amount of the entitled person's monetary benefit resulting from the contract in such a way that from May 2, 2020 until the date of the judgment in the case becoming final, the amount of benefits that the entitled person will be obliged to pay in terms of the basic rent referred to in the contract, the service fee and the promotion fee will amount to no more than PLN 48,855. The entitled person claimed that as a result of the pandemic, the validity and performance of the contract would result in a significant loss for her, and the lack of security would result in the bankruptcy of the premises. The turnover of the eligible entity decreased by approximately PLN 57% compared to the similar period last year. The court pointed out that the entitled person substantiated the existence of a legal relationship in the form of a lease agreement.

Moreover, in the Court's opinion, the condition for an extraordinary change in relations has also been met, because there is no doubt that the epidemic caused by the virus should be classified as a normally unprecedented event. However, it was shown that at the beginning of August the turnover of the entitled person increased, and therefore there was a chance to improve her situation in the following months, and interference in the legal relationship between the parties may only result in a significant reduction in the income of the obligated person. The court also pointed out that, in particular, taking into account the fact that during the period when the entitled person could not conduct business activity in the premises covered by the application in question, she was not obliged to pay the obligated party and received support from the State, which was confirmed by the entitled person. omitted. In the Court's opinion, the entitled person did not substantiate her claim by failing to demonstrate what loss she would incur in the future and what connection it had with the pandemic situation. (Resolution of the District Court in Warsaw of October 1, 2020, XVI GCo 222/20, LEX No. 3108186).

When analyzing the issue discussed, it is also necessary to indicate the case in which on October 26, 2020, the entitled person submitted an application to secure her claim to establish a legal relationship between the entitled person and the obligated person pursuant to Art. 3571 Civil Code, i.e. determining the amount of the monthly rent and the costs of servicing the lease agreement of October 10, 2016 at PLN 0 for the period from October 17, 2020 until the date of lifting the ban on conducting a specific activity.

The entitled person rented a room from the obligated person in which she ran a fitness club. The entitled person explained that it occupies 1,278.73 m2area at levels 0, -1 and 21.32 m2 warehouse space, as well as 216 m2 terrace and parking spaces. In the Court's opinion, the entitled person, as of the date of submitting the application for security, substantiated the claim for the application of the clause rebus sic stantibus, because the closure of the fitness club for an unpredictable time and the introduced state of epidemic constitute an extraordinary change in relations. The entitled party demonstrated that performance of the contract would expose it to extraordinary loss and could even lead to its bankruptcy. Even though the Court found that both the legal interest and the existence of the claim were probable, the method of security does not deserve to be taken into account in its entirety, as it would burden the obligated party beyond the average level. The entitled person submitted a claim for complete exemption from the obligation to pay rent and service charges, while in the Court's opinion both parties should share the risk and bear the consequences jointly. The court found that exempting the entitled person from the obligation to incur costs under 50% would be adequate and sufficient. (Resolution of the District Court in Warsaw of November 5, 2020, XX GCo 246/20, LEX No. 3116082).

Premises lease agreement. Termination of the lease agreement

In the next case that should be considered, the applicant applied for security for the claim to establish a legal relationship by specifying the amount of the applicant's benefit under the premises lease agreement of July 22, 2013 in the Shopping Center in respect of the basic monthly rent and the rent additional claim against the obligated party by suspending, for the duration of the court proceedings, the obligation to pay rent resulting from the lease agreement for the premises of July 22, 2013 located in the Shopping Center, valid between the entitled parties and the obligated party for the period from June 6, 2020 to October 16, 2020. in an amount exceeding PLN 25% of rent resulting from the contract, prohibition of the obligation to submit a declaration of termination of the lease relationship of July 22, 2013 in the event of non-payment by the applicants of the basic rent and additional rent for the period from June 6, 2020 to October 16, 2020 in part more than 25% basic rent and additional rent.

The business activity conducted by the applicant concerns a fitness center, which was subject to a total operating ban in the period from March 13, 2020 to June 5, 2020. Although the club resumed operations on June 6, 2020, there was a visible decrease in customers. As of October 17, 2020, the club remained closed again. The entitled person indicated that the request to set the rent amount at 25% results from the difficult financial situation and therefore the inability to obtain funds that would ensure the repayment of liabilities. The court found that the conditions for granting security had been met, but dismissed the application to submit a declaration of will termination of the lease agreement, in the event of failure by the applicants to pay the basic rent and additional rent for the period from June 6, 2020 to October 16, 2020, in part over 25% of the basic rent and additional rent. In the Court's opinion, this request is not related to a substantiated claim or legal interest. (Resolution of the District Court in Warsaw of January 7, 2021, XX GCo 303/20, LEX No. 3118469)

The analysis of these cases indicates that the clause rebus sic stantibus was used in practice by tenants of premises as a special solution. However, tenants who have been affected by restrictions in the form of a ban on running their business often use Art. 495 of the Civil Code, i.e. subsequent impossibility of performance for which neither party to the contract is responsible. This provision applies to a situation in which one of the mutual performances has become impossible as a result of circumstances for which neither party is responsible. Then the legislator resolves this issue in such a way that the party that was supposed to provide this performance cannot demand reciprocal performance, and if it has already received it, it is obliged to return it in accordance with the provisions on unjust enrichment. It should be emphasized in this case that the situation must be assessed objectively. The provision will not apply if the tenant does not have the financial resources necessary to pay the rent. If the tenant finds himself in a difficult financial situation as a result of the epidemic, he cannot effectively avoid the obligation to pay rent pursuant to Art. 495 of the Civil Code. However, it should be remembered that the reference to Art. 495 of the Civil Code leads to the expiry of the entire obligation, i.e. in this case - the lease agreement.

To use the clause rebus sic stantibus the date of concluding the premises lease agreement is crucial. By its nature, the clause refers to events that could not be predicted. Therefore for example - if an entity concluded an agreement, e.g. in June 2020, then in a situation where the tenant expected a limitation in rent payments, the landlord could indicate at that moment that the risk caused by epidemic restrictions was foreseeable at the time of concluding the agreement. Although even then it seemed that the epidemic would end soon, and certainly no one expected a second and third lockdown. For gym owners, this state of closure has lasted as long as 4 months as of the date of writing this article.

Summary

Based on the above-mentioned cases, it can be clearly stated that courts are increasingly acceding to tenants' requests for relief, suspension of payments or partial payments. Tenants are only now slowly trying to rebuild financial liquidity, but there is a high probability that it will take a long time to return to the turnover results from previous years, and only if there are no further lockdowns and the epidemic itself ends quickly. Suffice it to say that there is no certainty in this matter. It should be noted that the restrictions also affect landlords, as they also bear the costs of the crisis as their rental income is reduced, although the obligation to cover common fees for the maintenance of the property is usually not questioned.

The best solution for both parties is most often to reduce the rent or set it in the form of rent per turnover both for the duration of the lockdown and generally for the entire duration of the epidemic, because then the tenant maintains financial liquidity and the landlord maintains a proven source of income. However, against this background, disputes are becoming more frequent and reaching an agreement is not always possible. For both parties, the best solution in this situation is to seek professional help from a law firm that specializes in conducting disputes between landlords and tenants. Moreover, demonstrating an extraordinary change in relations and thus invoking the clause rebus sic stantibus, despite its apparent obviousness, requires specialized knowledge, because the institution in question requires justification for the existence of a state of affairs that happens rarely, is unprecedented, unusual. The epidemic is undoubtedly such a situation and is an obvious example of a change in relations, and the application of Art. 3571 the Civil Code in court practice begins to increase. Even though before the pandemic, this provision was not very eagerly applied.

Working out an agreement is a more advantageous solution, because the application of the indicated clause requires the defense of one's interests only in court and is associated with the passage of time, which in this case is important for both parties. On the other hand, protective orders are increasingly issued even within a few weeks, which makes society regain faith in the courts. Application of the clause by courts rebus sic stantibus is a kind of lifeline for tenants who have lost financial liquidity and concluded a contract in completely different economic conditions. It is worth emphasizing that submitting an application to the court does not end the negotiations, and it is best if they take place in parallel - focusing on both usually leads to a satisfactory solution.

Piotr Kłodziński with appl. Agata Michalska
Legal Advisor Warsaw
Law Firm Warsaw


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