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COVID-19 chance to renegotiate commercial space lease agreements?

18 May 2020
Małgorzata Lesiak-Ćwikowska and Patrick Koźliczak, in the latest real estate alert, discuss new opening in landlord-tenant relations after the reopening of shopping centres in Poland.

NEW OPENING IN LANDLORD-TENANT RELATIONS

After the reopening of shopping centres in Poland and lifting of the ban on certain types of trade and business activity in them, we are observing intensive efforts of tenants aimed at either effective termination of lease agreements allowing them to withdraw from unprofitable locations without incurring excessive financial consequences, such as, for example, payment of a contractual penalty, or an attempt to renegotiate the terms of such agreement mainly in order to reduce the rent.

The method of rescission of lease agreements used by some tenants is based on the concept of impossibility of performance on the part of the landlord, understood as inability to achieve the purpose of the agreement, which was intended for both parties when it was concluded. This is related to the fact that as a result of the epidemic, shopping centres will operate in a new reality, probably depriving tenants of the possibility to make profits in the current amount. 

DOOMED TO INTERPRETATION

In the coming months we will have a chance to observe how the implementation of other tenants' rights will look like in practice, among other things on the basis of the Act of 31 March 2020 amending the Act on special solutions related to the prevention, mitigation and combating of COVID-19, other infectious diseases and crisis situations caused by them and certain other acts ("the Act").

It should be borne in mind that pursuant to Article 15ze of the Act, during the period of the ban to conduct business activity in shopping malls with a sales area of more than 2,000 sq. m., the mutual obligations of the parties to the lease agreement expire. Moreover, within three months from the date of lifting the ban, the tenant should submit to the landlord an unconditional and binding offer of intent to extend the term of the agreement under the existing terms and conditions for a ban period extended by six months.

The discussed provision has been perceived as controversial since the beginning of its validity and was quoted as a shameful example of the quality of legislation within the so-called Anti-Crisis Shield.

The result of the interpretational chaos included attempts of some landlords to charge the tenants of service premises for the duration of the ban on activity, due to the use of the term of 'commercial space' and not also 'service space' in the provision. Due to the unclear drafting, it was also not obvious what was the legal situation of tenants whose activity had not been restored on 4 May 2020. The Ministry of Development has recently dispelled these doubts by confirming (i) the right of tenants to be exempted from rent also in respect of service areas and (ii) the expiry of the obligations under the lease agreements for the whole period of the ban which applies to the tenant in question on account of the object of its activity. Therefore, for example, for tenants who operate beauty salons or multiplex cinemas, the deadline for making an unconditional and binding offer to the landlord to extend the lease on existing terms for a ban period extended by six months has not yet begun.

THE INDUSTRIES THAT HAVE BEEN LEAST AFFECTED HAVE A CHANCE TO BENEFIT MOST?

Despite a series of remarks on the quality of the legal language used in the drafting of the discussed legislation, so far it has been interpreted quite consistently as applying only to those tenants whose activities have been subject to government restrictions.

Nevertheless, according to analyses of the Federation of Polish Entrepreneurs ("FPP") and the Centre for Legislative Analysis and Economic Policy ("CALPE"), the provision in question applies to all commercial areas regardless of the fact that they are subject to the obligation to close, while the reference to shopping malls with a sales area of more than 2,000 sq. m. only applies to the period in which the ban on operating in these facilities remains in force and, consequently, allows for defining the expiry period of mutual obligations of landlords and tenants.

In practice, this would mean that the rights under Article 15ze of the Act could be invoked not only by tenants who were deprived of the possibility to operate in shopping centres with a sales area of more than 2,000 sq. m. under the restrictions, but also by all other tenants of retail space, including those who normally operated in shopping centres as an exception to the restrictions (e.g. grocery stores or drugstores), as well as those whose leased area was outside shopping centres.

CORRECT OR WISHFUL THINKING INTERPRETATION?

However, the above interpretation raises a number of doubts, both on the grounds of the very reading of the scope of tenants' rights and the rules of interpretation applied, from which the above conclusions were drawn.

The aforementioned analysis of FPP and CALPE bases its conclusions on a strict, linguistic interpretation of the provision of Article 15ze of the Act and at the same time indicates that its wording is so unambiguous that it justifies retaining at a grammatical interpretation. This is quite surprising, because while pointing to the possibility of renegotiating the terms and conditions of lease agreements, the authors of the analysis forget that the obligation under the provision for tenants to submit an unconditional and binding offer of intent to extend lease agreements for the ban period extended by six months excludes - by interpreting the provision literally - the possibility to modify the terms and conditions of such agreement. However, the extension of the lease period is to be made on the terms and conditions that were previously applicable. While the possibility to modify the agreement may be based on the freedom of contract rule, it is certainly not possible to find its source in the provision in question.

Given the high probability that disputes between landlords and tenants, which will arise under this provision, will to a certain extent be resolved by the common courts, it is the courts that will be able to make a binding interpretation of Article 15 of the Act.

Nevertheless, it can already be stated that while there is no doubt that a correct interpretation of the provisions of the law is always based on linguistic interpretation, if its application does not lead to clarification of interpretational doubts, it should only constitute a starting point preceding the application of systemic and functional interpretation. In view of the exceptional circumstances surrounding the adoption of the provision in question, this seems all the more necessary.

Should you have any doubts concerning the current legal situation of any of the parties to a lease agreement in a shopping centre or the scope of their rights, please feel free to contact us.

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