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The coronavirus has seriously impacted daily life worldwide and given rise to considerable economic challenges. The real estate sector is no exception.
On 11 March, the Government of Hungary passed Government Decree No. 40/2020 in which it declared a national state of emergency. Under the Fundamental Law (Alaptörvény) of Hungary, under this special legal regime the Government of Hungary may temporarily suspend the application of certain Acts of Parliament by adopting Government decrees.
In this short information notice we provide an overview of the changes introduced by the Government in respect of commercial lease agreements and construction agreements in light of the state of emergency.
Commercial leases: closure of premises
Market-standard commercial lease agreements usually contain obligations for retail tenants to keep their shops open and to pay, in addition to the fixed monthly rent, an additional rent based on the turnover achieved in the given shops. The Government of Hungary passed Decree No. 46/2020 under which, from 3 p.m. to 6 a.m. daily, only members of the staff may stay within shops, restaurants, cafés and bars. This basically means that shops must be closed at 3 p.m. every day. Only grocery stores, pharmacies, drug stores, petrol stations and tobacco stores are exempt from this. In restaurants only takeaway food may be purchased outside this timeframe. Furthermore, it is forbidden to visit cinemas, theatres, museums, night clubs, concerts or other shows, i.e. these premises must be closed.
Due to the above decree, it is likely that landlords will not be in a position to successfully enforce the keep open and turnover rent clauses in commercial leases. For the same reasons it will likely not be possible for landlords to enforce the payment of the average daily turnover for days closed.
Commercial leases: ban on unilateral termination and rent increase
Following the above prohibition to visit cinemas, theatres, museums, night clubs, concerts and other shows, the Government of Hungary passed Decree No. 47/2020 in which it introduced a further twofold ban. First, it is prohibited for landlords to terminate lease agreements concerning premises engaging in tourism, catering, leisure services, gambling, film, performing arts, event planning and sports. Moreover, under the decree it is prohibited to increase the rent for such leases. The measures are effective until 30 June 2020 and may be extended by the Government of Hungary.
Landlords are therefore unlikely to be in a position to successfully claim that the inability to pay rent falls outside the lease and is the tenant's business risk. The above may prevent landlords from initiating a lawsuit, administrative execution or insolvency liquidation against a non-paying tenant. If a tenant makes no rental payments, the landlord could potentially argue towards the financing bank for impossibility to perform the relevant facility agreement.
Although a case-by-case analysis is necessary, we generally suggest that landlords and tenants should amicably negotiate possible solutions. These could be (i) quarterly instead of monthly payment of rent, (ii) moratorium on rental payments, (iii) rent reduction, or (iv) conversion of the higher average turnover rent into a lower fixed rent.
Construction projects: force majeure as exclusion from contractual liability
The application of force majeure is market standard in construction agreements. Under Section 6 (142) of the Civil Code, three conjunctive conditions must be fulfilled in order for a non-performing party to be exempt from contractual liability: (i) the cause of the non-performance must be beyond the given party's control; (ii) the cause was not foreseeable at the time the agreement was concluded; and (iii) the given party cannot be reasonably expected to avoid or overcome the cause.
Certain extreme weather conditions and war are usually regarded as force majeure. In our view, the coronavirus pandemic may also qualify as such a cause for a delay, i.e. the contractor may not be subject to contractual liability, is freed from the payment of contractual penalty and may request an appropriate extension of the deadline.
In practice, the contractor must notify the principal of a force majeure event without delay and prove the existence of the above-mentioned conjunctive conditions. Even in case of success, the contractor is required to mitigate the damage and provide its services to the principal to the fullest extent possible. We recommend that the parties to construction contracts review the language in the relevant force majeure clause or the respective insurance policies, as they generally cover pandemics.
Construction projects: frustration of the construction agreement
The frustration of a construction agreement may lead to its termination. In the case of frustration, the role of the parties in connection with the frustration must be closely assessed. If the reason for the frustration lies beyond the scope of interest of both parties, the construction agreement terminates and the contractor is entitled to pro rata remuneration and compensation for its works and costs.
The current circumstances and potential legal outcome of the effect of the pandemic on the real estate sector are highly uncertain and the relevant case law is yet to come.
As for commercial leases and construction agreements, it is recommended to carefully analyse the contractual terms on a case-by-case basis and avoid taking any legal action without giving prior written notice to the contracting partners. The current circumstances that may lead to a delay or impossibility to perform should be properly recorded.
Attorney at Law