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AEMCarnelutti: The Relationship between tenant and landlord under COVID-19 Emergency – Strategies for tenants to exit commercial leases

May 2020 |

This article illustrates key considerations on whether a tenant may successfully argue for a reduction or deferral in the rent payable under a lease agreement.

A commercial lease agreement may contain specific force majeure clause which would entitle either party to suspend the performance of the contract and, in the event of prolonged impossibility beyond a certain term, terminate the agreement. Alike, the parties may have included a “hardship clause” providing that, in the event of defined hardship, the parties must attempt to renegotiate the lease terms, and, if the parties cannot reach an agreement, an independent expert will decide on the substituted terms.

In the absence of such contractual provisions, it is necessary to take a look to the Italian Civil Code (“ICC”) for guidance on the rights and responsibilities of both tenant an landlord. The ICC does not provide a general force majeure excuse for contractual performances. However, guidance can be drawn from the general rules on temporary or permanent contractual impossibility as to relevant obligation under a certain contract (articles, 1218, 1256, 1463 and 1464 of the ICC) and on termination of contract where performance becomes excessively onerous (article 1467 of the ICC). Commercial leases generally include provisions on temporary impossibility which provide that while the agreement remains in full force and effect, the defaulting party will not be liable for the delay in performing its contractual duties. In the light of this clause or the ICC’s principles above mentioned, a tenant may consider to ask for a deferral in the payment of rent (without interest or penalties) or a payment plan for unpaid rents.

The temporary impossibility doctrine argument may be opposed by landlords focusing on the fact that premises continue to physically exist and remain at the tenant’s disposal. Tenants are likely to success in arguing that the contract became excessively onerous and seek termination by a Court. More specifically, a tenant may argue that the Covid-19 emergency irreversibly alters the balance between the landlord and tenant.

Additionally, tenants could attempt to withdraw from a lease for “material reasons” as provided for under Article 27, para 8 of Law 392/1978. Consolidated case laws held that “Material reasons” are events which are both unforeseeable and beyond a tenant’s control, or such as would make it extremely burdensome for the tenant should the lease continue. While the burden of proof remains on tenants, such argument is likely to success, especially with respect to long-term leases and onerous in terms of rent to be paid (e.g in excess of €250,000).

Compliments of AEM Carnelutti – a member of the EACCNY.