Last update: 6 April 2020
Do tenants still have to pay their rent?
This is the main question that our clients have been asking themselves and our team since the Government imposed the shutdown of “non-essential businesses” since 16 March 2020 and the confinement of the entire population since 17 March 2020 (obviously confinement has a main impact on the number of customers as well as the sales staff of businesses that are allowed to remain open).
After a period of astonishment and then confusion, a slightly clearer vision of the situation is now possible.
Following the announcement of Emmanuel Macron on 12 March 2020 that rent payments would be suspended, several Orders have been issued on 25 March 2020 in the context of the public health emergency, including Order No. 2020-316 relating to commercial rents.
What does this Order provide for?
Order no. 2020-316 allows the non-payment of the rent and rental charges for which payment is due between 12 March 2020 and the expiration of a period of 2 months after the date of termination of the public health emergency (the reference date is currently 24 May 2020, therefore the provisions will apply until 24 July 2020, but an extension may be possible); moreover, in the event of non-payment, no financial penalties or interests for late payment will be due, nor will it be possible to enforce the termination clause or a guarantee.
Who can benefit from it?
Order no. 2020-316 refers to Order no. 317, which itself refers to a decree that was only promulgated on 31 March 2020 (No. 2020-378), which refers to another decree promulgated the day before, 30 March 2020 (No. 2020-371), the latter having been amended by another decree of 2 April 2020 (No. 2020-394) …
The main criteria that need to be cumulatively met are:
- independent company with fewer than 11 employees;
- annual turnover in 2019 of less than 1 million Euros (or less than 83.333 Euros per month if the company has been created less than a year ago);
- annual taxable profit in 2019, plus any sums paid to the director for its activity carried out, of less than 60.000 Euros;
- the company is subject to administrative closure or has experienced a loss of turnover of at least 50% between 1 March and 31 March 2020 compared to the same period in 2019.
The combination of these criteria considerably limits the scope of application of Order no. 316, as only very few companies will be eligible.
In addition, even though this Order, as far as it applies, allows the tenant to temporarily suspend the payment of his rent and rental charges, it does not specify that these payments would no longer be due at all during the critical period; it seems as its provisions only provide with a means of postponing the payment until the expiration of a period of 2 months after the date of termination of the public health emergency.
If Order no. 2020-316 does not apply to his company, is the tenant automatically obliged to pay his rent?
Certain authors already stated in mid-March that this was a case of force majeure (Article 1218 of the French Civil Code), which makes it impossible for the tenant to perform the lease agreement. However, previous case law has not recognized other epidemics as cases of force majeure. It is therefore not foreseeable whether COVID-19, despite the extent of the pandemic, might be considered as a case of force majeure. Thus, there is a risk that the lease agreement will be terminated, if the tenant decides to stop paying his rent only because of COVID-19.
Other authors have invoked the legal concept of “unpredictability” referred to in article 1195 of the French Civil Code, since – because of the significant change in economic circumstances – the performance of the lease agreement becomes excessively onerous for the tenant. However, some commercial leases explicitly exclude the possibility to invoke “unpredictability”. Moreover, the unpredictable circumstances certainly allow the lease agreement to be renegotiated or even terminated, but probably not to unilaterally suspend the payment of rent during a crisis.
Recently, other authors have argued that a decision of the government (a so called “acte de prince”, which is generally speaking an act that is beyond the control of the parties, thus its consequences are extremely close to those of force majeure), which no longer allows the landlord to comply with his essential contractual obligation to provide the commercial premises, may justify the non-payment of the rent by the tenant during the affected period. This analysis is legally much more sophisticated and could even be confirmed by case law.
Courts will probably adopt their position on this issue long time after the end of the pandemic and there will always remain a certain risk of losing the case, especially when the dispute will last for several years. Tenants cannot be completely sure that this argument will finally be accepted by the Supreme Court to justify the omission of the tenant’s payment obligation during the shutdown-period imposed by the Government (because the consequence of the non-payment would not be the postponement of payment).
So, what to do?
It should be noted that, despite the extraordinary economic impacts of the decisions taken by the Government to fight against COVID-19, there still have not been issued any legal or regulatory provisions (although more and more voices are being raised to urge the Government to legislate), nor exists case law authorizing the tenant to suspend the payment of the rent. Subject to the clauses of the lease, the non-payment of the rent therefore authorizes the landlord to terminate the lease or to refuse its renewal, without having to pay an eviction compensation to the tenant which usually would be due in such situations. Therefore, it is very likely that some landlords, especially those who own commercial premises in privileged locations, will not hesitate to apply this rule.
For this reason, the tenant should always contact the landlord first in order to agree on the suspension of rent payments during the shutdown-period, or even the suspension of the rent itself. In practice, we have noted that landlords do not adopt a common approach as some have spontaneously suggested the “suspension” of payments or even of the rent, others have at least accepted it (generally specifying that the payment of the rent for the second quarter or even for the month of April alone is only postponed), others have completely refused it (and some have even refused that the rent for the second quarter which is usually totally due in advance could be paid monthly in advance …).
Furthermore, if the tenant should decide not to pay his rent during the shutdown-period because of his tight cash-flow situation, the tenant should at least inform his landlord in advance that he will suspend all payments as long as his points of sale are closed. The advantage of invoking only the “suspension” (and not the postponement – “report”) is that by using this term the tenant does not immediately comment on the consequences (contrary to a request for “postponement” which implies that the tenant acknowledges that his rent remains due during the shutdown-period). It is not necessary to justify the suspension in detail; a simple reference to the “impossibility to operate the business” should be enough to be able to invoke afterwards the non-provision of premises and finally refuse all rent payments with regards to the shutdown-period.
Of course, it cannot be excluded that a landlord may contest the suspension of rent payment and may send the tenant a formal notice invoking the termination clause; therefore, each tenant has to assess, with full knowledge of the facts, the risks that will incur depending on whether he decides to pay his rent despite the tight cash-flow situation or whether he decides to take the risk to be faced with the enforcement of the termination clause.
We remain at the full disposal of all tenants to assist them during this difficult period.