How to get a reduction in the rent of a restaurant due to the coronavirus pandemic?
Outline of the problem
Recently, in connection with the authorities' consent to the reopening of catering premises, the issue of terminating premises lease agreements gave way to questions about whether in the current situation it is also possible - after all, completely justified - to demand a reduction in the rent for the catering premises. This question is very important because from the perspective of the catering industry, the unfreezing of this branch of the economy should only be partial. This is due to the restrictions introduced both regarding the rules for arranging tables (which translates into the number of customers) and due to additional costs incurred in providing disposable cutlery, disinfectant liquid and protective walls. The ban on eating meals together with people we do not live with also has a significant impact. There has been a permanent change in relations - now, due to the ongoing epidemic, customers are simply afraid to use stationary catering establishments. In addition, a significant group of former regular customers of the catering industry have moved online and use meals ordered for delivery. All this means that the profits of restaurant owners are far from those before the pandemic, and it should be remembered that they were the reference point when concluding the lease agreement. Moreover, many entrepreneurs have to make up for the losses incurred in recent months, when they could not run their business at all, and the rent was - in our opinion - unfairly charged by some less reasonable and amicable property owners. From a logical point of view, it therefore seems justified to strive to reduce the rent of premises so that its amount corresponds to both the complete closure of stationary premises and when the restrictions are only partially relaxed. Otherwise, unfreezing the economy may not protect catering enterprises from bankruptcy.
Renegotiation of the rent amount
First and foremost, it is worth attempting to negotiate the rent amount with the landlord. Many of them understand the situation the catering industry is in, so they will want to find a way out of the current situation, taking into account further cooperation, as the current epidemic will certainly end someday. For the owner of a premises rented for catering purposes, it will also be more profitable to maintain a steady, albeit lower, income from the rented premises than the prospect of no income due to the entrepreneur's bankruptcy. In the current circumstances, finding a new tenant will not be easy. Furthermore, if we have been running our business in the same place for a long time and our relationship with the landlord is good, it is certainly in their interest to maintain the contract, as a new tenant might simply prove to be less reliable, leading to conflicts or late payments. Many property owners have a long history of disputes with previous tenants. Some of them have learned from it, others unfortunately have not.
The arguments presented unequivocally prove that the negotiating position of restaurant tenants is sufficiently strong, that assuming a rational approach from both sides, a mutually satisfactory solution can be reached through discussions with the landlord. In such a situation, an appropriate addendum to the agreement should be prepared, the provisions of which may be permanent or temporary. Time-limited addenda with the possibility of renewal are also concluded. For example, the most equitable solution seems to be one where the rent reduction applies to the past and the next few months. After this period, depending on the situation – if restrictions are maintained and the premises' turnover remains low, the landlord shall undertake to extend this period, and if they are lifted and turnover increases to the original level, the rent shall revert to the original amount. Of course, an intermediate option can also be developed in case only some restrictions are lifted and turnover increases slowly. In such a situation, it is worth jointly approaching a law firm with the landlord to prepare such an agreement, where an experienced representative will help to document the mutual arrangements of the parties and specify in detail all necessary issues between the parties, maintaining reasonable neutrality.
In case of no agreement – clause rebus sic stantibus
The construction of this provision is based on the assumption that failure to consider the occurrence of specific, extraordinary circumstances after the conclusion of the contract, which have a significant impact on the performance of the obligation, would lead to an unjustified breach of contractual fairness, i.e., to injustice. W. Popiołek in: Commemorative book dedicated to Professor Bogusław Gawlik (edited by J. Pisuliński, P. Tereszkiewicz, F. Zolla), Warszawa 2012, pp. 167–168.
Pursuant to the regulation of Art. 3571 KC "If, due to an extraordinary change in relations, the performance 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 anticipate when concluding the contract, the court may, after considering the interests of the parties, in accordance with the principles of social coexistence, determine the manner of performance of the obligation, the amount benefits or even order 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.
It should be noted that, unfortunately, there are still doubts among some as to whether the state of epidemic and the associated rapid and unexpected changes in legal regulations can be considered an extraordinary change of circumstances. Changes in the law itself are something completely natural, and entrepreneurs sometimes decide to bear the risk of such changes – in the area of business rules, labour law or tax law – however, these changes have also been repeatedly recognised as fulfilling the conditions of Article 357[1] of the Civil Code. The current change in the law is caused by an extraordinary situation, which can also be observed outside the borders of our country, and even continent. The restrictions introduced are therefore exceptional, very severe and introduced suddenly. However, following P. Machnikowski, it should be pointed out that "The introduction of new, unforeseeable prohibitions that are not applied in properly functioning societies, related to some special situation (e.g. a natural disaster), epidemic, armed conflict, serious economic crisis) should be considered, in my opinion, an extraordinary change in relations.[AND] A similar position was taken by the Court of Appeal in Kraków, upholding the position of the District Court in one of its key judgments, according to which "an extraordinary change in relations is generally understood to mean a state of affairs that happens rarely, is unprecedented, unusual, although it does not necessarily have to be a catastrophe. For example, there are various types of natural disasters, epidemics, war operations, general strike and even essential and surprising changes in legal regulationsSo it's about circumstances that are not covered by typical contractual risk, and furthermore, are objective and independent of the parties.[II]
It is worth noting here another circumstance, overlooked by commentators on the above provision in the context of the current situation. Considerations as to whether a change in regulations can be assessed as an extraordinary change in circumstances are, of course, valid, although this is not the only circumstance that should be analysed. If no restrictions on the operation of establishments were introduced by law, we would still be dealing with an extraordinary change in the situation. Many customers of catering establishments do not decide to use their services not because they do not like the greater distance between tables, but because of fear of the virus. The drop in turnover is therefore caused by a smaller number of customers, resulting from a change in their behaviour, not from a change in regulations. Furthermore, the consumers' decision is not caused by a drop in the quality of services provided in a given establishment, but by an extraordinary, unprecedented pandemic situation. The high risk of contracting the virus exists not only in the establishment itself, but also on the way to it – on the street, in public transport or in a taxi. Moreover, prohibitions on tables being occupied by people not living together effectively deter customers. If obligations related to disinfecting the premises or using disposable cutlery were not introduced, the proprietors would have to incur these costs anyway to meet the requirements of customers fearing infection with the virus. Failure to introduce such measures, despite their voluntary nature, would expose the establishment to a drop in the number of customers, as they would choose places fully equipped with safety measures. Following case law: "examples of events causing an extraordinary change in circumstances may include crop failure," epidemics, war operations, general strikes, various types of natural disasters, an extraordinary, particularly profound change in the economic situation, a sharp change in price levels in a specific market, long-term paralysis of means of transport or communication, change of the political and socio-economic system of the country e.t.c."[III] Courts of Appeal throughout Poland have made similar statements many times.[IV] The Supreme Court also points out that "an extraordinary change in relations is understood as an event that rarely occurs, is extraordinary, exceptional, and normally unheard of. The causes of this condition include natural events (harvest failure), social events (epidemic, natural disasters, economic crisis) commonly occurring.[V]
The tenant's situation is therefore a consequence of regulatory changes, but even without them, the situation in the catering industry would not be much different. All these circumstances justify the firm assertion that the commented provision should apply. This is, moreover, the purpose of this regulation – it is intended to create an exception to the principle that has its roots in Roman times. pacta sunt servanda (Agreements must be kept). This is justified by the fact that man is unable to predict future events, and current scientific and technological achievements are not always – as the current situation proves – able to eliminate unforeseen risks quickly enough. Consequently, the parties to an agreement, both the creditor and the debtor, need an appropriate legal tool. At the time of concluding an agreement, we determine its content and individual performances based on external factors, the changes of which, including negative ones, we accept and consequently agree to the accompanying risk. However, if these changes take the form of extraordinary and unforeseeable events, then it is justified to grant the party to the legal relationship protection.
Given that the above regulation is exceptional in nature, the method of determining the level of protection granted also requires the application of exceptional measures – using this regulation always requires a court ruling. Only the court, and therefore an independent body equipped with the appropriate powers, is capable of reshaping the legal relationship between the parties, and even bringing it to an end. This solution should be assessed as appropriate, although it should be recalled that court proceedings are not usually matters that happen overnight. Nevertheless, all the above circumstances can be taken into account during mediation or arbitration proceedings, which will significantly speed up the consideration of the case and enable the parties to agree on new, satisfactory conditions. Eliminating the risk of dissatisfaction of one of the parties, and thus their use of appeal procedures, significantly shortens the entire process.
The current situation justifies using the described solution. Using professional help will help you avoid failure and loss of trial costs due to ignorance of procedural regulations.
Defect of hired goods
Pursuant to Art. Art. 664 § 1 "If the leased item has defects that limit its suitability for the agreed use, the tenant may demand an appropriate reduction in rent for the duration of the defects." You can read more about the types of defects on our website blogIt is sufficient here to point out that the restrictions on the use of the premises result from enacted legal provisions, and therefore constitute a legal defect. While the application of this provision to residential premises is not obvious, the situation is different in the case of a catering establishment. Firstly, the terms of the lease agreement must be thoroughly analysed, particularly with regard to whether it specifies the purpose of the concluded agreement. A catering establishment is intended to be used for conducting business activities of a specific nature. In our opinion, the rental itself, in a situation where catering services cannot be provided or their provision is severely restricted, does not fulfil the purpose for which the agreement was concluded. This is because there is no realistic possibility of providing catering services to the same extent as agreed by the parties, or as any reasonable tenant would expect. This is a defect beyond the landlord's control, and yet it does not change the fact that the use of the premises is significantly restricted. Consequently, availing oneself of this regulation may prove to be an adequate solution for the prevailing situation, but the content of the lease agreement will be crucial here, and each case must be analysed individually.
Consequential partial impossibility of performance
Pursuant to Article 495 § 2 of the Civil Code, "If the performance of one of the parties has become impossible only in part, that party loses the right to the corresponding part of the reciprocal performance." Therefore, since the tenant cannot use the premises in a certain scope, their performance towards the landlord, i.e. the rent paid, should be proportionally reduced. It is worth noting that the aforementioned article, in § 1, indicates that this impossibility must arise from independent circumstances, and the COVID-19 pandemic can be considered as such. You can read more about the understanding of the concept of impossibility of performance on our blog. At this point, it is enough to point out that in the current situation the impossibility of providing services is both objective and subjective. In the current situation, neither this particular landlord nor any other landlord would be able to ensure full use of the catering premises, because the restrictions introduced are uniform for everyone. Using the premises with restrictions imposed on the tenant may make sense, but the restrictions introduced justify a claim for a rent reduction if the landlord, although through no fault of his own, is unable to provide the premises with the properties agreed upon by the parties. In this respect, it is also crucial to analyze the provisions in order to correctly identify the purpose of the concluded catering premises lease agreement. It does not matter that the landlord is in no way responsible for the situation. In our opinion, this provision also applies to reasons beyond the control of the parties, such as changes in legal provisions.
Summary
In the current situation, reducing rental prices for commercial properties is the only sensible action that can allow many catering businesses to survive, and at the same time ensure the sustainability of property rental relationships, which will ultimately also benefit all landlords. Therefore, it is worth starting by negotiating with the other party to the agreement, presenting your arguments. This can lead to the conclusion of an appropriate addendum to the agreement and a reduction in rent, at least for a certain period. However, if discussions do not yield results, it is worth taking advantage of the legal solutions presented. Subsequent partial impossibility of performance gives us grounds to demand a rent reduction, and it is worth consulting the content of your agreement with a lawyer in this regard to assess whether this institution can be used. The situation is similar regarding a defect in the premises, although qualifying the current situation as a defect is controversial. The most effective legal basis for reducing the rent and other fees arising from the lease agreement in the absence of agreement with the owner is to use the code's extraordinary change of relations clause. In our opinion, it gives by far the greatest chance of achieving the desired result, but in order to properly apply it, it is necessary to go to court. However, even with this solution, the parties to the dispute are not forced to wait for a long-term court judgment, because the case can be resolved in the course of previous negotiations, mediation or arbitration. It is also worth remembering that in many cases the use of other contractual security measures by the landlord may be temporarily suspended (until a final judgment is issued) by the court by way of security provisions requested together with the lawsuit.
FAQ: 1. Should owners of catering establishments reduce rents for the period of closure and now when business is significantly reduced despite re-opening? Yes. However, they can only be forced to do so in court, which costs both parties money and takes up time that could be spent on rebuilding the business. That's why sensible landlords give tenants discounts as a result of negotiations.
2. Do tenants of catering establishments have a chance to win in court? In our opinion, such tenant claims are fully justified in the current situation. Although everything depends on the specific contract and the specific case, each situation is different. However, we certainly had and currently have a situation that the legislator described as an extraordinary change in relations. The fact that the premises are open today does not mean that they are as profitable as before. The courts will have to take this into account.
3. Can I claim a refund of already paid rent? It depends very much on the specific case, but in our opinion such claims are justified. Although the line of court jurisprudence in this respect is still to be clarified.
Piotr Kłodziński
Legal Counsel
together with the Law Firm Team
DO YOU HAVE ADDITIONAL QUESTIONS? DO YOU NEED LEGAL ASSISTANCE IN REDUCING THE RENT RESULTING FROM THE RENTAL AGREEMENT?
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[AND] P. Machnikowski [in:] Gniewek (ed.), Civil Code. Commentary, Warsaw 2019, comm. to art. 3571 Nb. 7.
[II] Judgment of the Court of Appeal in Krakow of 6 December 2016, I ACa 644/16
[III] Judgment of the Court of Appeal in Gdańsk of 27 January 2020, V AGa 110/19
[IV] Judgment of the District Court of Appeal in Krakow of 10 July 2018, I ACa 1459/17; Judgment of the District Court of Appeal in Warsaw of 10 October 2017, VI ACa 1556/16; Judgment of the District Court of Appeal in Rzeszow of 7 February 2018, I AGa 34/18
[V] Supreme Court Judgment of 8 March 2018, II CSK 303/17