Shopping center lease agreements and anti-crisis shield

On 31 March 2020, an amendment to the special law re. COVID-19, which is a part of Polish “anti-crisis shield”, entered into force. The amendment introduced many provisions aimed at countering the adverse effects of the coronavirus pandemic, including a provision on the temporary expiry of mutual obligations of the parties to lease, tenancy or other similar agreements under which retail space is put into use.

Who is affected by the temporary expiry of mutual obligations?

It seems that the provision on the temporary expiry of mutual obligations, i.e. Article 15ze of the said amendment, applies to the situations where the user of the retail space (tenant/lessee) is banned from conducting business activity according to the resolution of the Minister of Health dated 13 March 2020. Such an interpretation of the said provision would allow to assume that it applies only to premises and stands in commercial facilities with a retail area exceeding 2,000 sqm (with some exceptions regarding, i.e., grocery stores, pharmacies, dry cleaners, and restaurants for delivery purposes).

However, based on the wording of Article 15ze and the content of the explanatory memorandum explaining the reasons behind the proposed solution, one cannot be certain as to whether such an interpretation is correct. On the contrary, the way in which the provision in question has been edited and explained by the legislature leads to the conclusion that it applies to all agreements for the use of retail space, not only those regarding activities conducted in the shopping centers over 2,000 sqm that have been directly affected by restrictions introduced by the Minister of Health.

What is the purpose of the temporary expiry of mutual obligations and how long would it last?

An amendment to the special law re. COVID-19 provides for the temporary expiry of mutual obligations from the day the state introduced the ban, i.e. from 14 March 2020, until the day the ban is lifted. In practice, this means that lease, tenancy or other similar agreements are in force, but they are temporarily suspended (frozen) as both the provider of the premise (landlord/lessor) and the user (tenant/lessee) are free from performing their contractual obligations during the above-mentioned period.

What will happen after the ban will be lifted?

Within three months from the date of lifting the ban, the tenant/lessee may submit to the landlord/lessor an offer to extend the term of the “suspended” agreement on the existing terms for a period of the ban increased by an additional six months. The content of this provision does not provide clarity as to how to interpret a situation where such an offer is not made. The explanatory memorandum reads that in such case the agreement should be considered as “not suspended” and the obligations that arise from should be considered binding the parties also for the duration of the ban, which for the tenant/lessee would mean that it needs to retroactively regulate the rent and any other due fees.

What other doubts does the proposed solution raise?

The presented amendment does not answer many important questions that arise in connection with the proposed solution. Here we present only some of them. Firstly, what about the rent that had been paid in advance, e.g. per the whole of March, before the ban came into force? Can the landlord/lessor demands its return, or should it be settled with the subsequent rents charged for the period after lifting the ban? Who should decide about this – the landlord/lessor or maybe the tenant/lessee? Secondly, what about the operating costs (consumption of utilities in common areas, cleaning, security or managerial costs) incurred by the tenant/lessee in a situation when a shopping center is open because it houses premises that are not affected by the ban? Thirdly, what about the goods belonging to the tenants/lessees and the costs related to their storage during the period of “suspension” of the agreement? And last but not least, what about agreements that are not “suspended”? Is the landlord/lessor entitled to demand changes to their existing content and with it an increase of rent, referring to the extraordinary change in relations?

What can be done in the present situation?

In the absence of relevant statutory regulations, the above-mentioned issues remain open and their resolution is fully dependent on the content of particular agreements and the will of the parties. Therefore, at this stage, it is in the interest of the parties to all the “suspended” agreements is to engage in negotiations with the aim of concluding relevant arrangements or annexes that would regulate all the questionable issues. Another possible solution is to wait for the end of the ban and request the tenants/lessees to cover the resulted difference under the annual settlement or reimbursement agreement. However, this option seems to be quite risky.

It also cannot be excluded that some parties will not be able to reach an agreement, which may mean the necessity of pursuing claims in court, although this – in the light of the disorganization of the courts caused by the epidemic – may prove to be very difficult. In such a situation, it might be reasonable to apply to the court for an interim relief in the form of a provisional settlement of the relations between the parties for the duration of the dispute.

What does the “suspension” of the agreements mean for shopping centers’ owners?

Undoubtedly, the owners of shopping centers are in the worst position, as they are substantially responsible for all the costs. One should also not forget that the construction of the vast majority of the shopping centers has been financed by bank loans, which – like the fixed costs of maintaining the facility – should be paid on regular basis.
Although the amendment to the special law re. COVID-19 introduces certain facilitation measures concerning the payment of the property tax and the annual perpetual usufruct fee, it is lacking any indication regarding compensation for the lost rents or so-called “loan holidays” that would be beneficial for the landlords/lessors. Although all the entrepreneurs are entitled to apply for a loan repayment guarantee granted by Bank Gospodarstwa Krajowego, the decision in this regard is left entirely to its own discretion.

The above means that the solution adopted by the Polish government provides no real protection of shopping centers’ owners, as a result of which even a temporary loss of some rents may result in some of them losing their liquidity and consequently going bankrupt. What is important, however, is that this is not only about the deprivation of profits, but also about the disproportion in distribution of the burden between the parties to the “suspended” agreements, and, thus, the discriminatory nature of the solution adopted. This, in turn, may lead to the compensatory liability on the part of the Polish state for the damage suffered by the shopping centers’ owners, based not only on the national regulations but also on bilateral investment treaties (BIT’s) signed by Poland, allowing foreign investors to sue the Polish state for unjustified expropriation, discriminatory measures, and adverse changes in legislation.

For more detailed information or legal assistance, contact DT’s lawyer.

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2020-04-08 11:08

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