Conditions of paying rent during quarantine restrictive measures: to amend or not to amend that is a question
Нanna Marunych, Leading Lawyer at TOTUM LF
Apparently, the problem of paying rent during the quarantine is one of the vital ones and Verkhovna Rada does not put aside its attempts to get these social relations organized. Before the discussions on the latest amendments on this issue, prescribed by the Law № 540-IX that entered into force on 02.04.2020 stopped, the lawmaker adopted the Law “On amending the Law of Ukraine “On the State Budget of Ukraine for 2020” (hereinafter – the Law № 553-IX), which changed the order of paying the rent during quarantine once again.
The legislative amendments
The Law № 553-IX which came into force on 18.04.2020, revised p. 14 of Closing and Transitional Provisions of the Civil Code of Ukraine to read as follows: during respective restrictive quarantine measures, imposed by the Cabinet of Ministers of Ukraine, the reasons beyond the lessee control which may lead to the changing of the commercial conditions or to the significant reduction of property use or to the total impossibility of property to be in use also include:
- measures, imposed by subject of competences to forbid some kinds of commercial activity, conducting with the use of the lease property or
- measures to forbid access to such property by the third parties.
Regarding on the level of restrictions in use of the lease property the lessee:
- shall have the right to request reduction of lease payment (in the case of change of commercial terms and conditions or significant reduction of the possibility to use the lease property);
- shall be exempt from lease payment during any period of time when the lease property could not be in use.
First of all, it should be noted that the lawmaker did not actually alter the existing order of paying rent because even before the Law № 553-IX was adopted, the lessee was entitled to request reduction of rent or to be exempt from its payment depending on what extent (totally or partially but significantly) the possibility of use of property had reduced due to the reasons which were beyond his control.
Lawyers had no doubt that quarantine measures belonged to aforementioned reasons; however, the Law № 553-IX did not give the direct answers to several important questions.
Who is entitled to be exempt from paying rent or to request its reduction?
As we can see the Law № 553-IX does not prescribe the precise list of such persons. Actually, it can be the subject of commerce, that were restricted in use of the lease property because of impose of quarantine measures.
To our mind, the persons who have the right to request the reduction of payment for property use include the lessees:
- which lease the property for several kinds of commercial activity, including those which are forbidden/restricted because of introducing quarantine (for example, for conducting activity on receiving visitors, that is forbidden under the Resolution № 211, and for storage of goods);
- which lease the property for one kind of commercial activity, which can be conducted during quarantine, but with some restrictions (for example, the restaurant which functions to take away only; stores that changes its way of trade into the distance one and use the property for delivering goods only).
- whose lease agreement does not envisage the specific aim of use of property, but it was primarily used for commercial activity which is restricted/forbidden under the quarantine measures.
Persons who are exempted from paying rent include the lessees:
- who rent the property exceptionally for one kind of commercial activity which is forbidden by the Resolution № 211 (for example, cinemas, cafes), and whose lease agreement does not prescribe any other kind of use the lease property and who
- don’t use the lease property in any other way.
The rule on reducing the payment for property use or exemption from its payment does not expand on the lessees who use the property for their own needs, that don’t concern commercial activity (for example, the lease of apartment).
What about the possibility of reducing payment (exemption from it) for the use of property that was leased as offices, because of introducing the distance working for employees due to quarantine measures, the Law № 553-IX also does not propose any answer to this important question. But as the significant reduction of the property use is crucially important for reduction of payment this issue rests ambiguous and could be solved under the agreement of the parties.
In what order could the payment for property use be reduced or the lessee be exempted from it?
In order to reduce the payment for property use the lessee shall send a respective request to the lessor. As the lease payment is one of the essential terms of the agreement, its alteration shall be fixed in the additional agreement. Should not the parties come to the consent on the reduced payment the dispute between the lessee and the lessor may be regarded in court.
At the same time, the exemption from payment for the property use due to total impossibility of its use because of imposing quarantine restrictions occurs automatically and no consent of lessor is needed. But in order to clarify the real intentions of other party we recommend prior requesting the lessor for exemption from lease payment.
What amount of reduced rental payment can the lessee count on?
The amount of reduced payment for property use is defined under the parties’ agreement regarding on what extent the possibility of use the property lessened. For this purpose, the party may take into consideration:
- the reduction of area of the lease property that is used by the lessee;
- the reduction of the period of time when the property is used by the lessee due to introduction of quarantine measures;
- other crucial circumstances, for example the restriction of the quantity of people, who can stay in the building at the same time).
In any way such reduction of the possibility of use must be significant.
What does the payment for use of property consist of?
If the lease agreement does not stipulate any other payments apart from the rent, so it can be reduced if all the legislative requirements are met, and in this case, there are no discussions.
Some problematic issues may arise if the lessee is obliged to compensate the owner’s expenditures for property maintenance (paying real property or land taxes, public services) or other lessor’s expenses.
The resolution of this situation depends on whether such expenses are included to the payment for property use under the contract or not.
In the first case it is possible to discuss the reduction of these expenses. But the lessee has to keep in mind that compensation of these expenses actually is not closely connected with the possibility of use of the property that is why it’s quite difficult to prove the appropriateness of their reduction. Of course, if the lessor is actually exempted from paying real property tax or land tax under the legislation (as it happened during the period from 01.03.2020 to 30.03.2020 under the amendments to the Tax Code), such alterations will reflect at the amount of the rental payment.
But if the tenant agreement foresees that the compensations of lessor’s expenses are not the part of the payment for the use of property, then reducing of such compensations depends on the parties’ consent.
The same goes for the exemption from lease payment if the lessee can’t use the property at all. If the payment for use of the property includes the compensational fees, to our mind the lessee can be exempted from them (even if the lessor pays them during the respective period). If such fees don’t form a part of the payment for the use of property, there are no grounds for the lessee to be exempted from them.
When is the lessee entitled to request the reduction of the lease payment or to be exempted from it?
The reduction of the rental payment is possible from the moment the parties gained consent on this issue (signing the additional agreement to the lease contract), but the parties may prescribe that the rental payment shall be reduced from the moment the quarantine restrictions were imposed. In such a way the rental fee that had been already paid could be transmitted to the next periods.
The lessee is exempted from the payment for the use of property from the moment the quarantine restrictions that make it totally impossible to use the property were introduced. There is no need to sign any additional agreements in this case.
At the same time considering constant legislative amendments the conflicts between the parties to the tenant agreement are inevitable. That is why the final dot in the issue of paying the lease payment during quarantine will be put by the judicial practice.
In conclusion we would like to admit that Verkhovna Rada’s attempts to simplify «the rules of the game» in the tenant relations could not be named as totally successful. Moreover, the bill № 553-IX, which was adopted by Verkhovna Rada on 13.04.2020, stipulated such an order of reducing of lease payment that is completely different from that is prescribed in the text of the Law № 553-IX. It also may be an additional reason for the court disputes.
That is why in order to achieve the result in the negotiations with your counteragent on the issue of reduction of the rental payment or exemption from it, you should be prepared, and involving lawyers at the earliest stages of this process will increase your chances for success and allow to protect your interests in the case the dispute occurs with the highest efficiency.