Can shopping centres’ tenants withdraw from their lease agreements?
Once the Regulation of the Council of Ministers dated 2 May 2020 on establishing certain restrictions, orders and prohibitions in connection with the occurrence of the state of epidemic has entered into force, tenants of premises in commercial facilities of a sales area exceeding 2,000 m2 (“Shopping Mall“) who have so far been banned, are obliged to resume operations in accordance with concluded and binding lease agreements.
Currently, there is a noticeable practice on the market for tenants to withdraw from lease contracts located in a shopping mall. Actions taken to “exit” from binding lease agreements may result in a change in the current level of commercialization of the Shopping Mall, and thus engage both managers and owners of Shopping Malls in negotiations or litigation with tenants in order to demonstrate the unfounded statements of withdrawal.
Statements of withdrawal are usually based on arguments related to the so-called partial consequent inability to provide (Article 495 § 2 of the Civil Code) or to an extraordinary change in the contractual relations of the parties (Article 3571 of the Civil Code). Tenants claim, e.g., that they were not able to operate in the premises from 14 March till 2 May 2020. Due to restrictions in the operation of Shopping Malls, landlords are unable to provide tenants with a certain number of customers after the lifting of the ban and thus cannot guarantee revenues at the current level.
In the opinion of SSW, statements made both during the ban on conducting a specific type of activity, as well as after its abolition are ineffective, and thus do not cause the expiry of the lease agreement.
During the ban, mutual obligations of landlords and tenants were extinguished under the COVID-19 Act. Therefore, the parties were not obliged to each other for any benefits resulting from the lease agreement that was covered by the ban.
By default, lease agreements for premises located in Shopping Malls do not contain provisions obliging landlords to ensure a certain level of visibility in the Shopping Mall or guarantees regarding the income generated by tenants from the business conducted in the premises. It is therefore impossible to claim the impossibility of providing landlords, even if the turnover of tenants has decreased. Statements of withdrawal from lease agreements currently made by tenants on this basis should be considered as unjustified and constitute an attempt to “exit” from already unprofitable lease agreements.
If it was assumed that one of the parties to the lease agreement is entitled to unilaterally “exit” from the agreement due to the deterioration of visibility at Shopping Malls, there would be a breach of certainty and durability of the parties’ contractual obligations. In such a case, either party could unilaterally lead to the expiry of the contract if the commitments made would become economically disadvantageous for them.
In the opinion of SSW, the arguments raised by tenants ignore the fact that an extraordinary change in relations resulting in excessive difficulties or threatening one of the parties with a gross loss may justify a change in the content of the contract or its termination. However, according to the Civil Code, the only authorized entity is the court after considering the interests of the parties. In order to terminate or modify the lease agreement for space located in a shopping mall, it is necessary to conduct court proceedings, including citing evidence from expert opinions. Tenants are therefore not entitled to unilaterally “exit” from the lease. Unilateral withdrawal attempts by tenants are in fact aimed at charging the landlords with the economic consequences of their business activity, bypassing the content of concluded and binding lease agreements.
Each time, of course, you should analyse the provisions of the contract and the legal and factual grounds invoked by tenants, as this may affect the selection of arguments favourable to the landlord.
It seems that if the parties do not reach a satisfactory agreement, it will be inevitable that disputes will arise because of the ineffectiveness of the withdrawal made and the payment of the outstanding rent. These disputes will probably find their finale in the courts. SSW will help you prepare a comprehensive strategy, consisting firstly in strengthening the position of the Shopping Mall already at the stage of pre-trial negotiations and secondly in designing process tactics in advance.
Our goal is to effectively enable Shopping Malls to prepare for the process in advance, so that it is possible to increase the range of collaterals held by Shopping Malls. Our advisory will enable not only the effective implementation of existing collaterals such as a bank guarantee or statutory pledge, but also the implementation of innovative tactics to obtain the title of collateral. The application of the solution proposed by SSW will allow for increasing the level of security of the Shopping Mall, using various procedural instruments resulting from the Act on preventing excessive delays in commercial transactions. As a result, it will be possible to seize the whole of the tenant’s assets quickly and to a great extent (not only those left at the Shopping Mall), reduce court costs, as well as obtain the title of collateral, enabling to seize, e.g., the tenant’s receivables and bank accounts, as well as to obtain a compulsory mortgage.
