The impact of the pandemic can be direct and immediate, as in the case of premises affected by the mandatory shutdown (e.g. clothing shops in shopping centres, cinemas, hotels) or restrictions on business activity (e.g. restaurants which are allowed only to serve deliveries and takeaway). There are also many cases where the impact on the lease is indirect and tenants are suffering severe financial difficulty and lack of cash flow due to the restrictions on their business (e.g. tourist operators or event producers) or generally due to limited commercial activities during the pandemic. All in all, a significant part of the market is faced with difficulties that are hard to overcome without extraordinary, immediate actions. Making matters worse, it is hard to predict when the situation will get back to normal.
The Polish governmental aid programme, known as the "Anti-crisis Shield" includes mitigating measures concerning mostly retail premises in shopping centres (for details, please refer to Poland: COVID-19 vs. lease agreements). Other lease agreements are not covered by the programme. How can the impact of the pandemic be mitigated for such leases?
Contractual provisions – no one expected the pandemic
One of the first things parties do in a crisis is carefully read their lease agreements.
However, a typical, long-term commercial lease agreement would not include provisions directly applicable to a pandemic. Force majeure clauses usually concern the physical condition of the premises. Although some lease agreements include provisions applicable when a tenant is unable to use the premises due to circumstances beyond the parties' control, these would not apply to premises not directly affected by the pandemic-related restrictions (e.g. office or warehouse premises in principle). Furthermore, contractual means, even if included in the lease agreement, might not be adequate to the situation of a pandemic. For instance, a tenant affected by the mandatory shutdown might not be willing to terminate the lease immediately, even if the agreement allows for such a solution. What to do then?
General rules – usually not the first choice
Institutions of Polish civil law such as general principles of liability or rebus sic stantibus clause (for details, please refer to Poland: COVID-19 as force majeure) seem not to provide suitable, immediate solutions that would allow landlords and tenants to manage the current crisis with minimal losses. Obviously, the parties' positions will vary depending on the specific circumstances and the content of each lease agreement. Furthermore, in a specific situation, the best strategy for the parties could be to follow the lease agreement strictly and/or to rely on the generally binding laws. However, in many situations where a tenant is affected by the pandemic, the best solution for both parties would be to amend their contractual relationship in the mutually agreed manner to address the immediate issues and thus to allow a return to normal operations over the longer term.
Mutually agreed relief measures: What is the golden mean?
For most tenants trying to survive the current crisis, the crucial issue is reducing ongoing expenditures while they have no or only limited income. In the long term, it is apparently also in the landlords' interest if tenants overcome their problems and get back to normal business.
On the other hand, landlords, especially institutional ones such as investment funds, have to follow strict financial rules, all while incurring the costs of operating and maintaining the property, public duties or mortgage payments, etc.
The best solutions should therefore include both temporary relief for the tenant and sufficient compensation for the landlord.
This goal may be achieved by:
- earlier utilisation of rent-free periods ("acceleration of incentives"), which includes exemption for rent during the current months and proportional reduction of rent rebates envisaged for future periods;
- reduction of the current rent and increase of the rent in future, e.g. 50 % rent reduction in April, May and June 2020 in return for a proportional increase in rent for 12 months in 2021;
- reduction of the current rent and extension of the lease period or renunciation of a tenant's break option, where temporarily lower rent is compensated by a longer lease term;
- prolongation of payment deadlines; or
- combinations of the above methods.
Implementing these measures will require modification of the existing lease agreement by executing an annex thereto or by entering into a separate agreement covering the parties' arrangements.
The presented measures are to some extent economically neutral and, therefore, in principle could be applied by all landlords. But each situation is different and, in some cases, the measures might not be possible, sufficient or justified.
In some situations, other means could appear to be necessary, such as postponement of the lease commencement date and thus payment obligations (in the case of new leases) or a temporary rent abatement without an economic equivalent for the landlord. The latter might not be possible for certain landlords due to their internal regulations or contractual obligations or simply due to their economic situation.
Also, in specific situations the parties might find different methods of mitigating the negative effects of the pandemic. In any case finding a suitable solution requires in-depth analysis from the legal, financial and commercial perspectives.
Many commercial leases are now directly or indirectly affected by the negative consequences of the COVID-19 pandemic.
The government relief measures are applicable to selected entities only. Others need to seek their own ways to overcome the crisis based on their lease agreements, general rules and mutual arrangements.
Our experience to-date has shown that in many cases the best solution is to amend the lease relationship and introduce mutually agreed measures allowing: (i) the tenant's immediate needs resulting from the COVID-19 pandemic to be addressed; and (ii) the landlord's interest in the longer-term perspective to be secured.