Termination of a lease agreement for a catering premises in connection with the COVID-19 epidemic – is it possible?
Krakow, May 4, 2020
AND. Entry
The COVID-19 epidemic seems to have caught everyone by surprise, reorganising people's lives around the globe and forcing us to adapt to a new social, economic, and - above all - legal situation. Governments of individual countries introduced a series of restrictions related, among others, to the possibility of free movement, the necessity of using personal protective equipment, or the availability of retail spaces and catering establishments. By virtue of the Regulation of the Minister of Health of 13 March 2020 on the declaration of an epidemic threat status throughout the Republic of Poland (Journal of Laws 2020, item 433), restrictions were imposed on conducting certain types of business activities, including those involving the preparation and serving of meals and drinks to guests seated at tables or guests making their own choice of dishes from an displayed menu, consumed on the premises (§ 5(1)(1)(a) of the Minister of Health Regulation). These restrictions were subsequently maintained in the Regulation of the Council of Ministers of 31 March 2020 on the establishment of certain restrictions, orders and prohibitions in connection with the occurrence of an epidemic (Journal of Laws 2020, item 566) and essentially amount to a complete ban on conducting business activities until further notice (§ 9(1)(1) of the Council of Ministers Regulation). They have also been repeated in subsequent lockdowns. Currently, in February 2021, the ban on providing catering services has been in place since October 2020, meaning for almost five months.
Alarmingly, no one can say with certainty when – or if – the situation will return to normal. Restaurateurs and other food service business owners are trying to find their footing in these new circumstances. This industry is inextricably linked with renting commercial premises in attractive locations, which often entails astronomical rents that eventually need to be earned. Therefore, in a situation where the business de facto and de jure cannot be run, are the tenants of catering premises doomed to the specter of bankruptcy? The purpose of this article is to highlight the opportunities for entrepreneurs in the catering industry that are successfully used by law firms to defend the interests of tenants who have decided to ask us for support.
II. Basic issues – admissibility of termination
First, we should briefly look at the regulations that the legislator has devoted to the lease agreement, and therefore the norms of Article 659 et seq. of the Civil Code. The lease provisions have been constructed according to the pandect methodology of a cascade of concepts, i.e. starting from general norms, down to detailed regulations relating stricto sensu to the premises lease agreement. Essentialia negotii lease agreements are defined in Art. 659 of the Civil Code, according to which: "By a lease agreement, the lessor undertakes to grant the lessee the use of a thing for a definite or indefinite period, and the lessee undertakes to pay the lessor the agreed rent", and according to Art. 680 of the Civil Code: "The provisions of the preceding chapter shall apply to the lease of premises, subject to the following provisions". It follows from this that lease agreements for catering premises can be structured by the parties as contractual relationships of a fixed-term or indefinite-term nature. Determining which type of relationship we are dealing with in a given situation is crucial from the perspective of answering the question posed in the title.
For contracts concluded for an indefinite period, Article 673(1) of the Civil Code applies, according to which: "If the duration of the lease is not specified, both the lessor and the lessee may terminate the lease while observing the contractual notice periods, and in the absence thereof, observing the statutory notice periods". In the case of a lease of premises, if the rent is payable monthly, the notice period referred to in the regulation cited is, as a general rule, 3 months in advance at the end of a calendar month (Article 688 of the Civil Code). A contentious issue remains whether the above provision is imperative in nature, or whether the notice period can be shortened by agreement of the parties to the lease agreement. Proponents of the view favouring the semi-imperative nature of this regulation believe that this provision is intended to protect the tenant from the premature termination of the lease by the lessor.[1]. However, the opposite view seems to dominate in the literature, and has also been approved in the case law of common courts and the Supreme Court.[2]. This means that the statutory notice period may be modified in the lease agreement itself, and therefore, this issue must always be analyzed in concrete.
The situation for tenants who have entered into fixed-term agreements is entirely different, as this relationship is – by design – intended to be durable, and therefore the possibility of terminating it has been subject to certain limitations by the legislator. According to Article 673 § 3 of the Civil Code: "If the lease term is fixed, both the landlord and the tenant may terminate the lease in cases specified in the agreement." Consequently, termination of a fixed-term lease agreement is possible – as a general rule – only if the parties provided for a termination clause in the contract. In the absence of such a clause, the tenant will not be able to terminate the lease relationship by unilateral legal action.[3]Does every termination clause therefore allow the tenant to end the rental agreement? The answer to the question posed in the title boils down to the phrase favoured by lawyers: "it depends". Various types of clauses are encountered in practice which, due to their content, are controversial. The disputed issue is whether a termination clause "for important reasons" is permissible due to the lack of specific circumstances, as required by Article 673 § 3 of the Civil Code. If it is accepted that this clause is permissible, and case law is moving in this direction[4], it seems that the situation caused by COVID-19 fits perfectly into the concept of "important reason". Even more doubts arise when defining the termination clause without specifying any circumstances justifying the termination (e.g. "each party has the right to terminate this agreement with one month's notice"). In all cases, the possibility of terminating the lease requires a thorough analysis of the individual provisions of the lease agreement so as not to expose the tenant to the ineffectiveness of the termination notice and possible contractual penalties, which are often stipulated by the parties in the agreements. The devil is often in the details, and properly interpreted lease agreements provide an independent and unambiguous basis for terminating them in the current situation.
Therefore, in the absence of a termination clause in a fixed-term lease agreement, does the tenant have no chance of ending it early? Not necessarily. The legislator has foreseen several situations in which the contractual relationship either expires ex lege, or expires as a result of withdrawal from or termination of the contract.
III. Warranty for defects in the premises – Art. 664 CC
In accordance with Article 664 § 2 of the Civil Code: "If, at the time of handing over the leased property to the tenant, it had defects which prevent the use of the property as provided for in the lease agreement, or if such defects arose later and the landlord, despite being notified, did not remedy them within a reasonable time, or if the defects cannot be remedied, the tenant may terminate the lease without observing the notice periods." The term "defects" within the meaning of the provision cited should be understood to include both physical and legal defects of the leased property.[5]. The legal defect has not been regulated by the legislator in the provisions on lease, therefore it is necessary to use the definition of a legal defect established in the provisions on the warranty on sale. Pursuant to Art. 5563 Under Article 6, subsection 1, point 2 of the Act, a legal defect of a thing is understood to include, inter alia, the situation where a restriction on using or disposing of the thing arises from a decision or ruling of a competent authority. It should be noted here that doubts have arisen in academic literature regarding the position that, in addition to rulings or decisions, i.e. individual and specific acts, the hypothesis of this provision should also include restrictions arising from regulations, i.e. general and abstract acts, although such a qualification is not excluded. It is correctly pointed out that "(...) encumbrances on real estate which, due to legal restrictions, make it difficult to use the thing, contrary to the contract, i.e. contrary to the justified expectations of the buyer, should be regarded as legal defects".[6], and therefore they are relativized in relation to the purpose of the concluded contract. There is no doubt that the primary purpose of renting premises for catering activities is to serve meals and drinks to guests, which is impossible in the current normative situation. With this in mind, it cannot be ruled out that the tenant of the catering premises will be able to effectively exercise the rights arising from the norm of Art. 664 § 2 of the Civil Code
IV. Consequential impossibility to provide – Art. 495 CC
Another regulation that could potentially be helpful in resolving disputes with landlords is Article 495 § 2 of the Civil Code, which establishes innocent partial impossibility of performance. The impossibility of performance has not been explicitly defined in the act, and two concepts compete in this regard – the objective concept and the subjective concept. According to the objective theory, performance is impossible if no one, not just the debtor in a specific obligation, would be able to fulfil it. According to the subjective approach, impossibility occurs when, although performance is objectively possible, it remains beyond the sphere of possibilities of a specific person.[7].
However, this raises the question of whether the ban on operating a catering business can be considered a – even partial – impossibility of performance on the part of the landlord. After all Prima facie he continues to provide the space of the premises to the tenant, and - in principle - this is his basic obligation under Art. 659 in connection with joke. 680 of the Civil Code, however, an interpretation of the contract is not excluded, according to which the lessor is obliged to provide not just any space, but space suitable for the tenant to conduct a specific type of business. Therefore, if it were assumed that the lessor's performance has become partially impossible, and the provision of the service in part is not important for the tenant due to the purpose known to the other party (the purpose is to run a catering business), the tenant would be entitled to withdraw from the contract with reference to Art. 495 § 2 of the Civil Code, however, this is the most questionable - although possible - way of terminating the lease relationship.
UPDATE FEBRUARY 2021: And yet it turns out that this method has also found its acceptance in the eyes of the courts, not only as applied to gastronomy, but also to gyms and fitness centers.
V Clause Rebus sic stantibus – art. 3571 CC
In conclusion, reference should still be made to Article 357.1 CC, in which the clause was placed rebus sic stantibus, i.e. the clause of extraordinary change of relations. There is no doubt that since Roman times the fundamental principle of contract law has been the principle pacta sunt servanda. However, the legislator has provided an instrument that is intended to protect the parties to contractual relationships in the event of extraordinary circumstances that the parties could not have predicted when concluding the contract and which radically affect their legal or factual situation, which may lead to a situation in which the performance of the benefit for one of the parties parties will be associated with excessive difficulties or will pose a risk of significant loss.
Certain doubts from the perspective of clause application rebus sic stantibus This raises the question of whether a change in legal provisions can be considered an extraordinary change in circumstances, but one must agree with P. Machnikowski, who points out: "The introduction of new, unforeseeable legal prohibitions, not applied in well-functioning societies, related to some specific situation (e.g. natural disaster, epidemic, armed conflict, serious economic crisis), should be considered, in my opinion, an extraordinary change in circumstances."[8]. The COVID-19 pandemic, as already mentioned in the introduction, surprised the whole world, including, of course, the parties to contractual relations. There is no doubt, therefore, that the situation resulting from its outbreak falls within the concept of an "extraordinary change in relations." The parties concluding the contract could not have foreseen it, and one of the parties - in this case, the tenant - experienced excessive difficulties or a significant loss. This instrument was introduced by the legislator to help the parties to contracts that cannot be performed in emergency situations, and such a situation is undoubtedly the state of epidemic.
At this point, it should be noted that the application of the clause rebus sic stantibus is only possible through court proceedings, which requires filing a lawsuit to establish a legal relationship[9]. In such a situation, the court has the power to determine the manner of fulfilling the obligation, the amount of the benefit, and even a decision to terminate the contract.
VI. Summary
To sum up these considerations, it should be noted that the situation of tenants of catering premises is difficult, although it is far from hopeless. There are many legal instruments that allow the termination of the lease relationship to the tenant's satisfaction. Although a full guarantee of the effectiveness of the above-described legal measures and actions taken cannot be given - in our opinion - the proper application of the provisions discussed should result in achieving the intended effect of terminating the lease relationship.
We often receive heartening news that landlords understand the tenants' situation, agreeing to renegotiate lease terms, for example, by significantly reducing rent or even waiving it for a certain period, or even terminating contracts by mutual agreement. Such cooperation is undoubtedly the most desirable situation. However, sometimes it is necessary to remember that both parties have very strong legal arguments in this dispute.
UPDATE FEBRUARY 2021: It turns out that the aforementioned legal norms, such as Article 495 or Article 357[1], are justified and applied not only to the termination of lease agreements, but also, and perhaps even primarily, to rent reductions and the complete suspension of rent payments during total lockdowns. Such actions are protected by court rulings – see the Decision of the District Court in Warsaw of 28 September 2020, ref. no. XXVI GCo 189/20.
Author: Antoni Skoczek*
OUR FIRM ASSISTS TENANTS IN CONFLICT SITUATIONS, COURT DISPUTES, PREPARING NOTICE DOCUMENTS, AND IN NEGOTIATIONS WITH LANDLORDS TO ACHIEVE RENT REDUCTIONS OR A MUTUALLY SATISFACTORY TERMINATION OF THE TENANCY AGREEMENT. DO YOU HAVE ADDITIONAL QUESTIONS? DO YOU NEED LEGAL ASSISTANCE IN TERMINATING A RENTAL AGREEMENT?
WELCOME TO ADD COMMENTS BELOW OR CONTACT THE AUTHOR VIA BIURO@KLODZINSKIKANCELARIA.PL
*The author is a repeatedly appreciated expert in the field of civil and bankruptcy law, a permanent member of the Law Firm's Team, a graduate of the Faculty of Law and Administration of the Jagiellonian University, completing legal counsel training at the District Chamber of Legal Advisors in Krakow, co-editor and co-author of the book Civil law. Comments on the judgments of the Supreme Court, Krakow 2019.
[1] K. Pietrzykowski, [In:] K. Pietrzykowski (red.), Komentarz KC, t. 2, 2018, art. 688, Nb 3
[2] judgment of the Supreme Court of April 6, 2000, II CKN 264/00, OSNC 2000, No. 10, item 186; ed. SA in Katowice of February 23, 2005, I ACa 1951/04, OSAK 2005, No. 2
[3] J.Gaboutrecki, G. Matusik, [In:] K. Settlement (ed.), Volume III B. Civil Code. Comment. Commitments. Detailed part. Act on payment terms, Legalis 2020, reference to art. 673, Nb. 13.
[4] resolution Supreme Court of November 21, 2006, III CZP 92/06, OSNC 2007, No. 7–8, item 102)
[5] J. Panowicz-Lipska [In:] M. Gutowski (ed.), Civil Code. Volume III. Commentary on art. 627–1088, Warszawa 2019, comm. to art. 664, Nb. 2; judgment of the Supreme Court of November 27, 1973, II CR 335/73, Bull. SN 1974, No. 5, item 84.
[6] so right F. Zoll, Warranty. Seller's liability, Warsaw 2018, chapter II, § 1, XII.
[7] Z. Radwański, [in:] Obligations - general part, Warsaw 2010, p. 323.
[8] P. Machnikowski [In:] Anger (ed.), Civil Code. Comment, Warsaw 2019, comm. to art. 3571 Nb. 7.
[9] P. Machnikowski [In:] Anger (ed.), Civil Code. Comment, Warsaw 2019, comm. to art. 3571 Nb. 12.