Romania: To pay or not to pay? Rent in the light of the Covid-19 pandemic under Romanian law
The Covid-19 pandemic has created an unprecedented economic climate. As a result, we face an emerging crisis impacting business relationships between tenants and landlords. Considering that most of the tenants are not able to fully use their leased premises during the Covid-19 pandemic due to recent governmental measures, are landlords still entitled to require tenants to comply with all their contractual obligations? Particularly to pay their rent?
On 16 March 2020, the president of Romania issued a decree proclaiming a state of emergency for an (initial) period of 30 days as a result of the Covid-19 pandemic. Consequently, the Romanian government adopted a series of exceptional measures in order to prevent coronavirus from spreading, among which the following are relevant to our topic:
- suspension of retail activities for goods and services in commercial centres with multiple business operators (except for the sale of pharmaceutical products, food/groceries, veterinary products and cleaning services);
- restrictions in the movement of private individuals (except for emergencies), thus leading to a dramatic decrease in the number of potential clients for the businesses still open to the public.
This article intends to debate a series of legal arguments by means of which interested parties may approach this unique situation, with a focus on the obligation to pay rent; our thoughts on the matter are discussed below.
Force majeure – a viable argument in relation to the rent payment obligation?
A force majeure event represents an external, unpredictable, absolutely insurmountable and unavoidable circumstance that prevents a party from complying with its obligations. At a first glance, it could be argued that the coronavirus epidemic is a force majeure event and that it could be the adequate solution for the vast majority of cases connected to the impossibility to fulfil legal obligations in these unpredictable circumstances.
However, it should be noted that under Romanian legislation and legal doctrine, the debtor of an obligation involving replaceable goods (Romanian: bunuri de gen) may not rely on the force majeure doctrine to defend a lack of compliance with its obligation. Generally, the tenant is obliged to pay an amount of money (a replaceable good) to the landlord under the provisions of a lease agreement concluded between the two parties. Therefore, in accordance with Romanian legislation and legal doctrine, it is highly unlikely that tenants could successfully invoke the force majeure principle when seeking a release from their obligation to pay rent.
Moreover, it should be considered on a case-by-case basis whether the relevant party assumed the risk of a force majeure event through the agreement. If any party chose to deliberately assume the force majeure risk, they have effectively waived their legal right to invoke this remedy in connection with the obligations arising from the agreement.
Up to the current date the Romanian government has not expressly declared the Covid-19 pandemic to be a force majeure event. Hence only the competent courts may decide on this matter on a case-by-case basis. The Romanian government declared the unpredictable, absolutely insurmountable and unavoidable circumstances deriving out of the actions of public authorities when implementing the measures imposed by the prevention and fighting of the Covid-19 pandemic to presumably represent a force majeure event, yet only with regard to the obligations of small- and medium-sized enterprises (SMEs).
We may thus provisionally conclude that the tenant (apart from the fact that it owes money/replaceable goods) is not automatically entitled to stop complying with its obligation to pay rent as a result of the measures taken by public authorities in the context of the Covid-19 pandemic.
Hardship (lat.: rebus sic stantibus): Does it apply to the current scenario?
Under Romanian law, if an exceptional change of circumstances occurs during the execution of a contract and unreasonably tilts the balance of the contractual obligations, leading to further execution of the contract being unreasonably favourable to one party and/or excessively unfavourable to the other, the court may readjust the contractual terms or may decide to terminate the agreement under the terms and conditions requested and negotiated by the parties and approved by the court.
Nevertheless, the principle of hardship only applies if the following conditions are cumulatively met: (i) the change of circumstances occurred after the conclusion of the agreement; (ii) the change of circumstances was not and could not have been reasonably foreseen by the affected party at the time of conclusion of the agreement; (iii) the affected party did not assume and cannot be reasonably considered to have assumed the risk of the change in circumstances; (iv) the affected party proves that it has attempted to renegotiate the terms of the agreement in good faith.
Rebus sic stantibus, or the hardship principle, may be used by the tenant as an argument for suspending the payment of rent for the period covered by the state of emergency decree, yet there are two potential challenges that we envisage in relation to this solution: (1) under Romanian law, it is at the court’s discretion whether to adjust the terms of the agreement or to terminate the agreement based on the doctrine of hardship (based on requests of the parties negotiated within the trial) (2) it is mandatory that the affected party did not previously assume the change of circumstances through a specific contractual clause.
Leased premises deemed unusable: is the rent still due?
Under Romanian law, the tenant is entitled to request a reduction in rent as a consequence of being restricted from fully using the leased premises in accordance with their agreed purpose/destination.
It is worth mentioning that even in such exceptional circumstances (impossibility to use the leased premises by virtue of official decrees issued by authorities), the tenant is still in effect benefiting, to some extent, from the use of the leased premises. In most cases, tenants still enjoy advantages that are not directly related to the primary purpose of the lease. For example, even if retail activities are suspended, tenants can still store and protect their assets within the rented premises.
When assessing the current situation in a holistic manner, should the tenant not be able to argue for the force majeure as being applicable to its particular situation, it can still invoke the impossibility to use the leased premises as a basis for a rent reduction.
In Emergency Ordinance no. 29/2020, the Romanian Government decided that SMEs which totally or partially interrupted their business activities due to the emergency measures taken by the competent authorities in accordance with applicable law and which are in possession of an emergency state certificate issued by the Ministry of Economy, Energy and Business Environment will benefit for the entire duration of the state of emergency from the postponement of (i) the payment of rent for the immovable properties that constitute headquarters and/or secondary offices, as well as (ii) the payment of utilities’ costs (e.g. electricity, gas, water, sewage, telecommunications and internet) for the same premises.
Nonetheless, for contracts that do not fall within the categories mentioned above, SMEs may invoke the force majeure principle, as EO no. 29/2020 institutes a general presumption for a force majeure event. Considering that the unpredictability of the event is a prerequisite for applying the force majeure principle, the legislator clarifies that such unpredictability should only be assessed based on the position of the parties at the time of conclusion of their contractual relationship. Hence, for contracts agreed or entered into after the publication of state of emergency decree, the unpredictable character of force majeure events connected to the coronavirus outbreak will generally not apply (although this remains to be assessed on a case-by-case basis).
Draft law on the exemption from rent payments during the state of emergency
The Romanian parliament is currently in the process of debating and potentially adopting a new piece of legislation relating to exemptions from rent payments during the state of emergency and one additional month following the end this period. At the moment, the draft law includes the following main legal measures: (i) tenants, business operators, professionals, public authorities and private law entities whose economic activities have been interrupted or restrained by means of governmental measures during the state of emergency are exempted from or granted a moratorium (this aspect in still unclear and under debate) with regard to their rent payment obligation for premises used as headquarters or working units; (ii) landlords who will not benefit from collecting rent as a result of the above exemptions will also be exempted from paying taxes in connection with such uncollected rent; (iii) these measures will be applicable as of 1 March 2020 and will be enforceable for an additional month following the declared end date of the state of emergency timeframe; (iv) lease agreements impacted by the provisions of this draft law will be proportionately extended in alignment with the period covered by the exemption of rent payments.
In our view, considering the generic language used to regulate these drastic and unbalanced measures, the lack of detail could eventually lead to conflicts, as the applicability of the law can be debatable and open to subjective views. Moreover, it is expected that this draft will undergo additional amendments, as a substantial part of the business environment is already raising credible concerns in relation to it, such as an obvious imbalance of risk allocation between tenants and landlords to the gross disadvantage of the latter.
When assessing current commercial and economic factors, we believe that the parties should be encouraged to negotiate the further execution of their obligations on a case-by-case basis. Economic actors face varying circumstances and levels of complexity when leases are discussed and performed. Therefore, we believe a generic solution/answer cannot fully address every aspect of the tenant-to-landlord relationship in this volatile environment, and a more “laissez faire” or at least more balanced approach taking into account all parties’ interests would have been beneficial in these circumstances.
Taking into account the above arguments, negotiations conducted in good faith between landlords and tenants are probably the least disruptive options to address potential disputes resulting from the Covid-19 crisis. Finding the right balance between the rights and obligations of the parties will be beneficial not only in the short term, but also a long-term incentive for continuing the business relationship in the post-pandemic environment.