Commercial Leases: A Lot of Disputes Arising from the Health Crisis
By Pierre-Yves Rossignol, Herald
Since the beginning of the health crisis, the French government has taken a series of measures trying to stem the economic and financial consequences of the epidemic linked to the spread of the COVID-19 virus. For almost three months, all shops and businesses (except for food stores) were closed down.
Authorities have announced publicly – perhaps inappropriately – that rents “should be suspended”; although Emergency law No. 2020-290 of 23 March 2020, to deal with the COVID-19 epidemic, allowed the payment of rents to be postponed in full or spread out only for “microenterprises”, i.e., employing less than 10 people, and whose annual turnover or total balance sheet did not exceed EUR 2 million.
Therefore, it was highly likely that many commercial tenants – financially constrained and encouraged by the government’s declarations describing the recent events as “force majeure” – were tempted to take advantage of it and to escape paying their rents. However, these companies might also have seen their activity considerably reduced by the epidemic, and their cashflow permanently damaged. As a consequence, a lot of these companies took their chance to bring the case to Court.
On what grounds?
1. “Force majeure”
Tenants argue that their duty to pay the rent should be suspended as a consequence of “force majeure”. In the absence of a contractual stipulation modifying or excluding force majeure, reference should be made to Article 1218 of the Civil Code, which provides for the possibility of suspending the performance of contractual obligations when it can be demonstrated that an external event was beyond the debtor’s control, that this event was unforeseeable and could not reasonably have been foreseen at the time of the conclusion of the contract, and its effects are irresistible.
If he succeeds in doing so, the debtor may suspend the performance of his obligations if the event is temporary or request annulment of the contract in the event of a permanent impediment.
With regard to unpredictability, case law had considered in the past that the H1N1 flu epidemic did not constitute a case of force majeure, as it had been widely announced and foreseen, before the implementation1 of health regulations (CA Besançon of 08 January, 2014 (2nd Commercial Chamber, RG No. 12/02291). It seems that some Courts now considers that the occurrence of COVID-19 does constitute a case of force majeure (CA Colmar, 12 March 2020, No. 20/01098).
2. Plea of non-performance
The lessor’s obligation to deliver is an essential obligation, which the lessor cannot discharge on the lessee, since Article 1170 of the Civil Code provides that “any clause which deprives the essential obligation of the debtor of its substance is deemed not to be in writing”.
During judicial proceedings, the landlord may argue that he has fulfilled his obligation as the premises were available to the tenant, but the tenant could not use them due to a specific governmental order (fait du prince).
3. Unforeseen events
For all leases entered into or renewed on or after 01 October 2016, the lessees can avail themselves of Article 1195 of the French Civil Code, which enshrines the theory of contingency, and allows for renegotiation of the terms of the lease.
This article provides that in the event of a change in unforeseeable circumstances, making it excessively onerous for a party to perform its obligation, that party may request renegotiation of the contract, provided that it continues to perform its obligations during the renegotiation.
The payment of rent may have to be regarded as an obligation that has become excessively onerous for the lessee if, as a result of the ordered containment measures, he is deprived in whole or in part of the use of his business premises.
To compensate for the impossibility of making such a demonstration, the lessee can ask the judge that payment deadlines be extended or deferred under Article 1343-5 of the Civil Code, up to a limit of 24 months, in the course of urgency proceedings. A successful decision would have the effect of improving the tenant’s cashflow.
The public authorities clearly want the parties to negotiate amicable agreements that would enable them to overcome together the financial diffculties resulting from the health crisis. This is why Law No. 2020-473 of 25 April 2020, on finance, exempted from tax the debt waivers granted by the lessors to the benefit of their lessees.
However, the Court’s interpretation on these different legal concepts is highly anticipated, as it will probably help to settle most of the cases.
Pierre-Yves RossignolGGI member firm
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Herald (previously Granrut) is a well-established, independent law firm created in 1957. Herald’s lawyers always try to bring fresh ideas, innovation, and best practice in its core practice areas. Two Granrut partners have been elected Bâtonnier of the Paris Bar.
Admitted to the Paris Bar in 1990, Pierre-Yves Rossignol has been a Partner of Herald since 1997 and specialises in litigation and arbitration disputes in the field of business law, insurance, and defective products. He monitors litigation proceedings in the area of defective product liability on behalf of corporations and insurance companies.
Published: Litigation & Dispute Resolution Newsletter, No. 13, Autumn 2020 l Photo: JEROME LABOUYRIE - stock.adobe.com