A dramatic increase in energy and gas prices can, from one day to the next, turn a previously profitable business in rented premises into one that incurs drastic losses. What can be done when a long-term contract binds you to the landlord and utility costs exceed the limits of profitability? We explain how the doctrine of unforeseen circumstances (rebus sic stantibus) allows for a reduction in rent or the complete termination of a toxic lease agreement.
💡 Key takeaways
- Rising utility costs, which are ruining the profitability of a business, can in certain cases be grounds for judicial modification of the terms of an entered contract (e.g., rent reduction).
- Clause rebus sic stantibus (Article 3571 The Civil Code) can be applied when phenomena of a general nature occur, which the tenant could not have foreseen at the time of signing the contract.
- Court proceedings can last for years, which is why it is crucial to seek in the lawsuit security for an actionwhich allows for a temporary reduction (or suspension) of rent payments for the duration of the case.
The extraordinary change in economic relations and dramatic increases in fees give the tenant a powerful weapon for renegotiating the contract. Very often, a professional pre-litigation demand for a rent reduction based on Article 357(1) of the Civil Code alone prompts the landlord to make real concessions.
Killer bills. How the rebus sic stantibus clause will save the tenant?
Dear media and the "sanctity" of rental agreements
Principle pacta sunt servanda (Agreements must be kept) is the absolute foundation of contract law. By signing a contract, you waive the possibility of breaking it without good reason, because markets can sometimes be capricious. However, what to do when, due to a global energy crisis, electricity bills increase severalfold, as was the case, for example, with large public institutions and universities, which saw increases of hundreds of percent? Often, rent is only the beginning of the problems – it is the astronomical costs of heating and electricity passed on to the tenant that sink businesses.
When tenants don't have a hard "break option" in such circumstances, landlords often block contract terminations. Fortunately, the Civil Code offers an emergency exit.
Rebus sic stantibus clause (Art. 3571 KC)
In accordance with the Civil Code, if further adherence to the contract leads to a glaring loss due to an extraordinary change in economic circumstances, the court may intervene – and indeed to change the rent amount or terminate the contract definitivelyTo take advantage of this solution, you must prove that the cumulative conditions have been met.
What is an extraordinary change of circumstances?
This cannot be a normal, incidental business risk (e.g. lower customer traffic). It must be a systemic market shock – such as a global pandemic, a collapse of fuel markets due to war, or rapid, unprecedented hyperinflation affecting a wide range of entrepreneurs.
Threat of substantial loss and loss of profitability
The case-law of the Supreme Court (including in the context of pandemic-related cases) clarifies that a "gross loss" occurs when the economic objective of a concluded contract is completely thwarted. If drastic gas or electricity prices consume profit and cause an investment in a particular property to permanently start generating enormous liabilities exceeding the revenue from the conducted business, the premise is met.
The premise of unpredictability at the contracting stage
You will not be able to take advantage of the clause if you signed the lease agreement a month ago, being aware of nationwide, historical jumps in commodity prices. However, in the case of multi-year market agreements, concluded in stable economic circumstances several years before the onset of the crisis wave, no one exercising due diligence could have estimated the risk of global tensions and an inflationary peak. This means the condition of unpredictability has been met.
How to effectively assert your rights?
Step 1: Amicable settlement attempt and pre-action letter
It is in the interest of all parties to reach a swift agreement. The basis for this is a strong, substantive pre-litigation demand for rent reduction or consent to terminate the lease. Arguments carefully formulated by a professional lawyer, citing case law, can open the landlord's eyes to the fact that they could lose much more in court than by agreeing to a suitable, compromise annex.
Step 2: Lawsuit and application for rent security
A lack of willingness to reach an agreement is a direct route to court with a request to rule on the termination of the contract or to impose rent margin cuts. The fundamental problem with court proceedings is time. If the case lasts for 2 years, the tenant's debt alone will ruin the company.
The solution is application for interim reliefA well-written and positively considered by the Court application can – for the duration of the court proceedings – suspend the collection of part of the rent or protect against eviction, saving the tenant from increasing debt due to media charges.