90% Rent Reduction for Tenants in Shopping Centers? - Poland

The Polish government has submitted an amendment to the Law on Special Measures for COVID-19 and Crisis Prevention which, among other things, stipulates a temporary 90% rent reduction for most tenants in shopping centers.

Under article 15 ze of the proposed amendment (the draft dated 21 March 2020, hereinafter the Draft Amendment), in the situation when a tenant’s activity in a shopping center (with an area in excess of 2,000 sq.m.) has been banned or limited because of an epidemic and the tenant has, as a result of this, ceased its activity, the rent would be reduced by 90% as compared to the rent that would otherwise be due under the lease agreement. The tenant is also exempt from any contractual penalties or other liability that could arise under the terms of a particular lease agreement due to the lack of its business activities in the shopping center. The court can order a different amount of rent if this is justified under the principle of fairness.

The Draft Amendment does not yet constitute binding law, but is merely proposed legislation. However, the Draft Amendment is under intense legislative works and could possibly be enacted during the Parliament session planned for Friday, 27 March 2020. If enacted, it would be binding immediately after its publication. The Draft Amendment is questioned to the extent it places substantial burden on the only one group of market players, i.e. the landlords.

The Ordinance of the Minister of Health

In accordance with the Ordinance of the Minister of Health of 13 March 2020 on the SARS-CoV-2 Epidemic Danger (hereinafter referred to as the Ordinance), a shutdown has been ordered to most tenants’ holding stores in shopping centers. The shutdown was applied as of 14 March 2020 to those tenants whose main activity consisted of the sale of: textile products, clothing products, footwear, leather products, furniture, lighting equipment, consumer electronics, household appliances, books, gastronomy, and entertainment activities. For the sake of clarity, the above rules only apply to shopping centers with an area of over 2,000 sq.m., and do not apply to other buildings, e.g. to office buildings or logistical centers.

Rebus sic stantibus

In accordance to Article 357(1) of the Civil Code (also known as the rebus sic stantibus clause) if, due to an extraordinary change of circumstances, the performance of a contractual obligation would entail excessive difficulties, or a gross loss which the parties had not predicted, the court can (i) determine an alternative method for performing the obligation, (ii) limit the obligation amount, or (iii) rule on the termination of the agreement.

The application of the rebus sic stantibus clause is not automatic. In order to obtain a rent reduction or rent suspension, a tenant would have to go to court and obtain a court judgment. The landlord remains legally entitled to charge rent in the full amount until the final judgment is in place. Given the length of court proceedings in Poland, a final judgment might require proceedings that could last months, or, most likely, years.

Non-performance of a landlord’s obligation

Under the Polish Civil Code, the non-performance of a landlord’s obligation might give rise to a claim for rent reduction. In the case of a shutdown related to epidemic, several issues need to first be considered.

In general, should a landlord shut a building down, and therefore make it impossible for the tenant to use the premises, the argument could be made that this would result in the non-performance of the landlord’s obligation.

However, should a shutdown be imposed as a result of the Ordinance on the tenants of a shopping centre, it is not obvious that the landlord has failed to perform its obligation under the lease agreement.

Firstly, the landlord could argue that the restriction introduced in the Ordinance did not apply to the landlord and did not affect its ability to perform. Instead, the restriction applied to the tenants and affected the tenants’ ability to perform their own activity.

Secondly, the argument could be made that the landlord’s performance consisted in making the premises available for the tenants’ use. Therefore, as far as a shutdown imposed by the Ordinance was concerned, the tenants still had access to the premises.

To summarize, if enacted, the Draft Amendment resulting in rent reductions of 90% would significantly change the position those tenants in shopping centers who would be entitled to 90% of the rent reduction in the case of a shutdown.

The situation concerning the new legislation is very dynamic and it is difficult to evaluate an act that has not, as yet, come into force. We are closely monitoring the development of this current situation. Should you have any further questions, please do not hesitate to contact our Real Estate department.

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