COVID-19 - commercial leases

The French Government is currently mobilized on many fronts to help companies overcome the Covid-19 crisis. In order for the latter to maintain their cash flow, measures have been taken to suspend charges and to allow the granting of guaranteed loans. In addition, measures have been taken with regard to short-time working.

This note has been prepared by the Real Estate Law and Franchise and Distribution teams, with the purpose of informing you both of the measures taken by the French Government with regard to commercial leases aiming at reducing the pressure on very small businesses tenants, and, more generally, of the arguments that can be used, by tenants of commercial and professional premises in their relations with lessors.

Provisions resulting from the emergency Act of March 23, 2020

The emergency Act n° 2020-290 "aiming at facing the Covid 19 epidemic", dated March 23, 2020 and published in the French Official Journal on March 24, 2020, provides for a set of measures intending to deal with the economic consequences of the epidemic.

This Act can be consulted on the Legifrance website.

In particular, this Act allows the Government to take measures by executive order to enable the tenants:

• to postpone in full or to stagger the payment of professional and commercial rents for very small businesses whose activity is affected by the spread of the epidemic (art. 11, I-1°-g).
• and to postpone or to stagger the payment of water and energy bills relating to these premises, as well as to waive the contractual penalties and sanctions that may be applied in the event of non-payment of these bills (suspensions, interruptions, reductions in water or energy supplies; art. 11, I-1°-g).

The executive order n°2020-316 dated March 25, 2020 and published on March 26, 2020 in the Official Journal completes the above-mentioned mechanism "in order to prevent and limit the cessation of activity of very small businesses".

This order can be consulted on the Legifrance website.

It prohibits:

• the suspension, interruption and reduction of the supply of electricity, gas and water to such businesses, and provides, upon request from these businesses, for the staggering over time of the payment of the corresponding bills, without penalty;

• the application of financial penalties or interests for late payment, of damages, penalty payments, the enforcement of a termination clause, penalty clause or any clause providing for forfeiture, or the activation of guarantees or securities, due to the non-payment of rents or rental charges relating to their professional and commercial premises, notwithstanding any contractual stipulation provision and the provisions of Articles L. 622-14 and L. 641-12 of the French Commercial Code.

The above provisions apply to rents and rental charges of which payment is due between March 12, 2020 and the expiry of a period of two months following the end date of the state of health emergency declared by Article 4 of the aforementioned Act dated March 23, 2020.

Article 1 of the executive order specifies that the beneficiaries of these provisions are:

• On the one hand, “natural persons and legal entities governed by private law exercising an economic activity that are likely to be eligible for the solidarity fund mentioned in Article 1 of Order no. 2020-317 dated March 25, 2020";
• which provides that “The eligibility criteria for the above-mentioned provisions are specified by decree, which determines in particular the workforce and turnover thresholds of the persons concerned as well as the threshold of turnover loss observed as a result of the health crisis”;
• this article must itself be specified by decree (to be published)”;

The emergency Act provided that this mechanism would apply to micro-businesses (within the meaning of Article 3 of Decree 2008-1354 dated December 18, 2008) affected by the spread of the epidemic, including those that would not be closed. These consisted of businesses employing less than 10 people and having an annual turnover or balance sheet total not exceeding Euros 2 million.

However, according to the Decree n°2020-371 dated March 31, 2020, the solidarity fund applies only to very small businesses, micro-entrepreneurs, self-employed persons and liberal professions, having started their activity before February 1^st, 2020 and which are not in a situation of suspension of payments before March 1^st, 2020, which have an annual turnover of less than Euros 1 million and an annual taxable profit inferior to Euros 60,000, which are particularly affected by the economic consequences of covid-19 (i.e. companies that have been banned from welcoming public or have lost at least 70% of their turnover in March 2020 compared to March 2019).

This would, therefore, concern numerous franchisees/partners/dealers within the networks.

• On the other hand, “those who continue their activity within the framework of safeguard proceedings, receivership or liquidation proceedings, (...) in light of the communication of a certificate from one of the judicial representatives designated by the judgment which opened these proceedings".

These measures thus constitute a deferral of charges (the deferral of rents provided for in the emergency Act having not been taken over by the executive order) which apply only to the smallest and supposedly the most fragile companies.

The problem remains for larger companies and for very small businesses which such deferral will not be able to save.

Therefore, in addition to the mechanism established by the emergency Act, tenants of commercial and professional premises could rely on the provisions of the French Civil Code, under the conditions set out hereunder, in order to enter into discussions with their lessors.

Provisions of the Civil Code enforceable against the lessors

Subject to the implementation of more supportive future provisions to be taken by the Government as part of the economic emergency measures, tenants who have been forced to close their commercial premises (non-food retail and catering in shopping centres) could suspend the payment of rents as from the closing date of the business by the French Government and start a discussion with regard to the rent with the lessors, using various arguments of varying legal strength:

• The occurrence of a case of force majeure, which is probably not a very strong legal argument, but which allows characterising the exceptional period we are going through (1),
• Hardship, which can be activated when it is not possible to invoke force majeure (2), and
• Exception of non-performance by the lessor (3).

Force majeure and Covid 19

According to Article 1218 of the French Civil Code:

Thus, force majeure must meet the following three cumulative criteria:

• the event must be "beyond the control of the debtor": this is the criterion of exteriority from the will of the tenant. Obviously, Covid-19 fulfils this criterion since the measures imposed by the Government (prohibition of receiving the public in certain establishments, limitation of the number of persons in a closed and covered place and regulation of movements) are not within the control of the debtor;
• the event must be unforeseeable at the time of the conclusion of the contract: this requirement appears to be met for leases which are in force on the day of the emergence of the virus. More precisely, it will be necessary to determine the date on which the intervention of Covid-19 on the agreement could have been anticipated (and therefore the measures taken as a result). It would be possible, for any agreement entered into before the announcements of the various health and governmental authorities, to invoke the unforeseeable nature of the measures thus taken. Thus, in France, if the agreement has been signed after the outbreak of the epidemic, the unforeseeable nature could be ruled out. However, a contract signed at a time when the epidemic did not seem likely to reach our territory (reasonably, before mid or even the end of January 2020), undoubtedly fulfils this condition. There will probably be debates for the intermediate period, at least at the international level, since it was as early as 30 January 2020 that the WHO declared that the emergence of this virus constituted a public health emergency of international scope;
• the event must "be irresistible for the performance of the agreement", making it impossible for the debtor to perform his obligation.

With regard to Covid-19, the Minister for Economic Affairs and Finance has stated on 28 February 2020 that the Covid-19 epidemic would be considered a force majeure event for businesses.

However, the analysis must be conducted on a case-by-case basis.

With regard to the situation of commercial and professional leaseholders, the conditions of exteriority and unforseeability are certainly fulfilled.

This is not necessarily true for irresistibility.

Force majeure thus appears to be excluded for businesses and activities which are not directly banned from operating their activity, courts being reticent to accept the irresistible nature of force majeure in this case. The Paris Court of Appeal has indeed ruled that more difficult circumstances for the operation of a business are not sufficient for the tenant to be able to claim force majeure (Paris Court of Appeal, March 17, 2016, no. 15/04263).

The latter could be invoked by tenants operating businesses which are directly affected by the obligation of closing as a result of the decrees dated March 14 and 15, 2020, in particular if they are deprived of any income and can demonstrate that they no longer have the necessary cash flow (bearing in mind that the Government's measures concerning guaranteed loans could weaken this argument).

Doctrinal thinking indeed considers that force majeure, which is traditionally invoked by the debtor, should also be invokable by the creditor of the obligation when he is unable to exercise his right. A notable decision was in fact rendered by the Court of Cassation in this regard some twenty years ago (Cass. Civ. 1, February 10, 1998, No. 96-13316, Bull. Civ. I, No. 53).

However, this is not clearly established case law and the Court of Cassation has a rather strict general position on the obligation to pay:

Finally, some lease agreements may provide for contractual derogations in view of the suppletive nature of Article 1218 of the French Civil Code. It is therefore advisable to check the provisions of the lease (which, if they are too harsh, can be challenged on the basis of significant imbalance).

Hardship and Covid-19

According to article 1195 of the French Civil Code:

"If a change in circumstances, unforeseeable at the time of the conclusion of the agreement, makes its execution excessively onerous for a party who had not agreed to assume the associated risk, that party may ask for a renegotiation of the agreement from the other party. This party shall continue to perform its obligations during the renegotiation.

In case of refusal by the other party or if the renegotiation fails, the parties may agree on termination of the agreement, on the date and on the terms they determine, or request the court to adapt it by mutual agreement. If no agreement is reached within a reasonable time, the court may, at the request of one of the parties, revise or terminate the agreement, on the date and under the conditions it shall determine”.

However, this provision shall only apply:

• To leases entered into as from or after October 1, 2016 (entry into force of the reform of Contract law), and
• in the absence of a derogation clause in the lease agreement.

The tenant may argue that the Covid-19 outbreak characterizes an unforeseeable change of circumstances allowing the renegotiation of the commercial lease, provided that:

• on the one hand, the Covid-19 outbreak was unforeseeable at the time the agreement was entered into (if the lease was entered into prior to the official announcements in mid/late January 2020); and
• on the other hand, this situation generates excessively high costs due to a turnover which is either reduced to nothing as a result of the shutdown ordered by the Government or extremely reduced as a consequence of the containment measures, so that it would render the execution of the lease agreement excessively onerous.

The tenant will nevertheless remain obliged to pay the rent during the renegotiation of the agreement, which must be carried out in good faith.

Moreover, such renegotiation appears to be possible only if the shutdown and containment measures last for a certain period of time and genuinely upset the economic balance of the agreement. Therefore, it is still early to know with certainty whether this argument can be successfully raised.

If the lessor refuses to negotiate or if no agreement can be reached, the parties may jointly decide to terminate the agreement "on the date and on the terms they determine" or to resort to judicial adaptation of the agreement by means of a joint application. Failing this, the tenant may refer the matter to the court for adaptation of the agreement.

Exception of non-performance and Covid-19

Pursuant to articles 1219 and 1220 of the French Civil Code, the exception of non-performance (exceptio non adimpleti contractus) allows a party to suspend performance of its obligation if the other party does not or will manifestly not perform its obligation when due and when the consequences of such non-performance are sufficiently serious.

Provided, again, that the lease agreement does not contain any derogatory provisions, the tenant concerned by the decrees dated March 14 and 15, 2020 could argue that the shutdown of the commercial premises due to the Covid-19 epidemic deprives it of the right to use the premises in accordance with the purpose of the lease and allows for the exception of non-performance to be raised, since the lessor, who is no longer able to meet its obligation to provide business premises in accordance with their purpose, is not performing its obligation.

Indeed, even if, for the lessor, the shutdown can be considered as force majeure event (it was unforeseeable and is, for the lessor, external and irresistible), the fact that they are not at fault does not prevent the tenant from invoking non-performance.

The tenant could therefore be tempted to suspend the payment of its rents on this basis.

Naturally, caution is called for, as the lessor may challenge its failure to comply with its obligation to deliver (after all, the premises are still made available to the tenant and are not intrinsically unsuitable for the activity: it is the tenant’s activity, wherever it is located, that is prevented by the Decrees dated  March 14 and 15, 2020) and trigger the termination clause.

Conclusion

As can be seen, a negotiation can be entered into between the tenant and the lessor regarding the payment of rents for the months during which the business premises are made unavailable due to shutdown measures or during which the activity is significantly reduced due to containment, so that the cost of such measures is equitably shared.

Although general principles can be identified, a case-by-case study is in any case recommended.

In particular, it will be necessary to examine the specific clauses included in each lease, in particular those defining force majeure, hardship and the purpose of the lease with regard to the decrees dated March 14 and 15, 2020, which defined the business areas authorized to continue their activity.

The Real Estate and Franchise and Distribution teams are available to further discuss these matters.