COMMERCIAL LEASE IN TIME OF CORONAVIRUS PANDEMIC: HOW TO PROTECT SMALL ENTREPRENEURS?
UPDATE OF 07.04.2020 - After the posting of this article, the Italian Revenue Agency issued Circular 3 April 2020 no. 8/E, paragraph 3.1 of which explains that the tax credit, equal to 60% of the commercial rental fee for the month of March 2020, pursuant to art. 65 of the Decree Law 18/2020 s.c. "Cura Italia", "has the purpose of limiting the negative effects deriving from the containment measures of the epidemiological emergency towards subjects carrying out business activities in which a property in the cadastral category C/1 is leased. Although the provision generally refers to 60 per cent of the amount of the rent, the same has the purpose of restoring the subject by the cost incurred consisting of the aforementioned rent, so that in accordance with this purpose, the aforementioned credit will accrue following the payment of the fee itself ".
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UPDATE OF 23.03.2020 - The new D.P.C.M. of 22 March 2020 extended the obligation to remain closed until 3 April 2020 to all "non-essential" production activities. The range of measures to contain and manage the health emergency, to which this article refers, was therefore extended. The issue addressed remains equally current, considering that the need to protect tenants does not change with the new provisions.
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With the entry into force of the Italian Decree of the President of the Council of Ministers 11 March 2020, containing the implementing provisions of the Decree-Law 23 February 2020 no. 6 in terms of the containment and management of the epidemiological emergency by CoViD-19 (converted with amendments into Law 5 March 2020 no. 13), many businesses were forced to stop temporarily their activities, thus ceasing to produce income, at least for the duration of the contingent health situation.
In particular, art. 1 of the aforesaid D.P.C.M. provides for the suspension of:
1) retail commercial activities, with the exception of those selling food and basic necessities (identified in a specific annex to the Decree), as well as newsstands, tobacco shops, pharmacies and parapharmacies, provided that certain conditions of access are respected (interpersonal safety distance of at least one metre);
2) catering activities (including bars, pubs, restaurants, ice-cream parlours, pastry shops), with the exclusion of canteens, catering services already contracted out, home delivery catering, and road network, hospitals, stations and airports, always on condition that the hygiene and health regulations on personal distance are respected;
3) personal service activities (including hairdressers, barbers, beauticians) other than those identified in the specific annex to the Decree.
In this situation, the operators to whom the suspension order is addressed must in any case meet the fixed costs inherent in the business activity. One of these is the cost relating to the payment of rents for the buildings where the activity is carried out.
On this subject, the emergency measures issued by the Government have not been decisive, so the concern of many small entrepreneurs who, in these convulsive days of emergency, are looking for clear and reliable answers is quite understandable.
So let's try to clarify and give some suggestions to our readers, answering the main questions that many Customers are asking to our law and tax firm "Studio AMP".
Can commercial rental payments be legitimately suspended?
One of the main questions is aimed at knowing which instruments are offers by the law to the tenant who, in a non-residential rental relationship, sees his activity damaged by a situation of force majeure, which in fact zeroes cash flows, making difficult to pay the rent. Is it possible, in such a case, to suspend such payment for the entire duration of the restrictions imposed by the Government?
In order to answer this question, the first rule to be taken into consideration is surely the one set in art. 1256 of the Italian Civil Code, whose paragraph 2 reads: "If the impossibility [of paying the rent payment, for example] is only temporary, the debtor [tenant, in this case], as long as it lasts, is not responsible for the delay".
This provision regulates the effects of the temporary impossibility of the performance, allowing the tenant to suspend the payment of the fee without being in default.
Therefore, the payment of the fees is only suspended, without extinguishing the related obligation. The tenant himself shall therefore have to pay the entire amount of the suspended fees once the cause that made it impossible to perform the service ceases.
This, however, is only valid from a theoretical point of view, because the jurisprudence does not know suitable case law to support the interpretative thesis set out above, given the absolute novelty of the situation created because of the current pandemic. In fact, the applicability of article 1256 of the Italian Civil Code to commercial leases is not entirely undisputed.
The provisions of the D.P.C.M. 11 March 2020 certainly constitute a case of force majeure, which, unforeseeable and independently of the will of the parties, affects the concrete execution of the contractual regulations. In spite of this, it is not easy to consider the prohibitions imposed by this Decree as an objective impossibility of the typical services of the lessor or tenant within the commercial rental contract.
The main obligation of the lessor is, in fact, the provision of a property suitable for the use agreed in the contract. On the other hand, the prohibitions contained in the well-known Decree have effect only on the activity exercised by the tenant, but do not directly affect the manner of use of the property in which this activity is carried out. There is, therefore, no direct effect on the lessor’s performance, which, objectively, could not be considered impossible.
Turning to the tenant's point of view, in terms of causality, it is not in fact established that the temporary suspension of the activity necessarily makes it impossible to pay the rent and the incidental costs.
Nevertheless, in the case in point, the impossibility of the service could be established by relying on the so-called "concrete cause" of the contract, understood as the practical aim pursued by the parties in relation to their specific interests, as regulated in the contract itself.
Such conceptual reconstruction of the case makes it possible to have regard to the actual and mutually recognizable reasons, which led the parties to conclude the commercial lease agreement and to the aims actually pursued by them.
From this point of view, consequently, where an unforeseeable fact not attributable to the will of the parties makes it impossible to pursue the shared or recognisable purposes that led the parties to conclude the contract, a hypothesis of impossibility to provide the performance, with the consequent application of article 1256 of the Italian Civil Code, can reasonably be considered integrated.
In view of the recourse to the institution of temporary impossibility to suspend the performance, the burden of proving the actual and objective impossibility in question will in any case be borne by the tenant.
From this point of view, a consideration therefore must be given to the provision of article 65 of Decree-Law 17 March 2020 no. 18, the so-called "Cura Italia", by which a tax credit equal to 60 per cent of the amount of the rent, relating to the month of March 2020, of buildings falling under cadastral category C/1 (shops and stores) is granted to persons carrying out business activities for the year 2020.
While sharing and appreciating every government initiative aimed at favouring small businesses at such a critical time for the national economy, it is legitimate to ask how much a tax credit can facilitate, in practice, the commercial tenant who lacks the necessary liquidity to meet his rent.
Moreover, a different provision of the so-called "Cura Italia" Decree seems to confirm the Italian Legislator's willingness to recognize, in the particular state of emergency in which the Country is in, the general applicability of a principle already provided for in our legislation. In fact, in art. 91 of the aforesaid Decree, which contains "provisions on the subject of delays or breach of contract deriving from the implementation of the measures of containment and anticipation of the price in the matter of public contracts", a new paragraph 6/bis has been added to art. 3 of aforesaid Decree Law 6/2020, according to which "compliance with the measures of containment [...] is always assessed for the purposes of the exclusion, pursuant to articles 1218 and 1223 of the Italian Civil Code, of the debtor's liability, also with regard to the application of any forfeitures or penalties related to late payments or omitted fulfilment."
Therefore, the debtor's liability for damages caused to the creditor by the non-performance or delayed performance of the service is expressly excluded (art. 1218 of the Civil Code), both in terms of emerging damage and loss of profit (art. 1223 of the Civil Code), in perfect harmony with the provision of art. 1256 of the Civil Code herein extensively referred to.
Consequently, art. 91 of Decree-Law 18/2020 seems to corroborate the thesis herein supported.
In any case, it must be reiterated that the suspension of payment does not release the tenant from his debt, which will have to be honoured at the end of the crisis period, since the payment of the fees is only, temporarily, suspended.
Can the lease be terminated? Can the tenant withdraw?
Another interesting question posed by our Customers concerns the possibility that the current situation justifies the termination of the lease.
In theory, the current emergency situation could allow the recourse to the remedy of the contract termination for excessive onerousness of the performance, pursuant to art. 1467 of the Civil Code.
However, the use of this remedy is not easy at present, given the transitional nature of emergency measures. In addition, the lessor against whom the question of termination is done can avoid it by offering a fair modification of the terms of the contract.
Another remedy is the withdrawal of the contract. In this case, the breaking of the contract is effected by a unilateral declaration addressed to the lessor by the tenant who is in a state of difficulty.
The possibility of withdrawing from the contract is permitted only if certain conditions are met.
First, the tenant may be granted this right by a specific clause included in the rental contract. In this case, the tenant himself will have full freedom to withdraw, according to the rules laid down in the clause itself.
When, instead, the contractual title does not say anything in this regard, it will have to be applied the regulations contained in art. 27 of Law 27 July 1978 no. 392, which provides "Regulations for the rental of urban buildings", which allows the tenant to withdraw from the rental contract, with six months’ notice, if the request is justified by serious reasons.
So, the recourse to such a remedy must be carefully considered, since it would result in the definitive dissolution of the contractual obligation, while leaving intact the obligation to pay the rent in full for a further six months.
Moreover, the tenant's withdrawal is subject to the existence of serious reasons, which the jurisprudence identifies in those unforeseeable circumstances, beyond the tenant's control, which make the continuation of the lease no longer sustainable.
Certainly, the current pandemic integrates the extremes of serious reasons as qualified by jurisprudence. However, in order to make a valid withdrawal, the tenant should also demonstrate that the forced closure of the business is so serious that it is necessary to break over the lease, having caused irreversible effects on the possibility of continuing the business, once the emergency is over.
In the light of these considerations, termination and withdrawal seem not always advisable. In any case, before the adoption of such remedies, it is preferable to consult a lawyer expert in the matter, since the adoption of one or the other measure may or may not be appropriate, also depending on the assessment of issues specifically related to the specific case and, in any case, always in the light of the solution of legal problems that often turn out to be very complex.
So, what to do?
It can be concluded that the suspension of the payment of the rent, as proposed by answering the first question, seems in general the most suitable solution to meet the needs of small commercial entrepreneurs, subject to the temporary forced closure of their activities.
In fact, where the tenant is temporarily unable to pay the rent, as a result of the suspension of his activity imposed by the D.P.C.M. of 11 March 2020, the tenant has justified grounds to avail himself of the provision of Article 1256 of the Italian Civil Code.
It will therefore have to formalize communication in this sense to the lessor, to avoid the unfavourable effects of the delayed payment of the rent, such as the filing of a notice of default and termination for breach of contract, where applicable, with the consequent initiation of eviction proceedings.
The sending of such notice to the lessor can reasonably guarantee the tenant the right to enjoy the property without making the payment of the rent, for the period of suspension of activity and for the short additional period necessary to recover the related losses due to non-collection.
Furthermore, it is advisable that the communication of the tenant's wish to benefit from the suspension is formulated in a clear and technically correct manner, preferably with the help of a lawyer, who shall scrupulously examine whether the tenant's overall situation allows a reasonable recourse to such remedy.
This is also in view of the lessor's foreseeable resistance to granting the benefit in question.