The effects of COVID-19 on lease agreements

The current pandemic has brought the economy to a near standstill. With many industries subjected to forced closures by virtue of Governmental orders, company liquidity has dried up and consequently, many companies are unable, or shall be imminently unable, to meet their debts. In this regard, tenants and landlords have been faced with high levels of uncertainty in respect of their ongoing obligations in terms of their respective lease agreements, specifically the payment of rent and the termination thereof, as well as any such possible actions or remedies available to them at law in light of the Covid-19 outbreak. There is no universal clear-cut answer to such questions as these issues are dependant on a number of factors and may only be assessed on a case by case basis.

The most prominent issue currently arising in relation to lease agreements – specifically in relation to commercial leases – is whether the obligation to pay rent remains due or conversely, whether such obligation may be suspended. In order to resolve the foregoing issue, an assessment of the relevant provisions of each lease agreement in question would be required. Firstly, one would need to determine whether the lease agreement contains a ‘force majeure’ clause. This clause is usually included in lease agreements and sets out the manner in which the obligations or liabilities of the parties thereto may be altered upon the occurrence of certain specified events which would prevent either or both of the parties from discharging its obligations. Secondly, the wording of any such clause would need to be analysed in order to determine whether the coronavirus pandemic falls within the ambit of the relevant clause. Furthermore, the party invoking relief under such clause would need to prove other factors such as the fact that the pandemic has prevented it from discharging its obligations; that the force majeure event was unforeseeable; and that the event was inevitable and extraneous and therefore could not have been prevented by the claiming party (as explained in further detail in the forthcoming paragraph).

Where the lease agreement in question does not contain any ‘force majeure’ provisions, an assessment of the relevant provisions of Maltese law and the application thereof by the Courts of Malta would be necessary. Article 1134 of the Civil Code (Chapter 16 of the Laws of Malta) provides that a “debtor shall not be liable for damages if he was prevented from giving or doing the thing he undertook to give or to do, or if he did the thing he was forbidden to do, in consequence of an irresistible force or a fortuitous event”. The laws of Malta, however, are silent as to what constitutes an “irresistible force” or a “fortuitous event”. Consequently, the Courts of Malta have, on numerous occasions, given their own interpretation of the foregoing provision of the Civil Code. The Courts have stated that in order for a party to successfully claim relief by virtue of the occurrence of a ‘force majeure’ or fortiutious event, the following conditions must be satisfied:
– The event or irresistible force must render the performance of the obligation or obligations in question impossible;
– The supervening event must be unpredictable or unforeseeable;
– The event in question must be external or extraneous to the relevant party or parties that are bound to perform the obligation or obligations in question; and
– The occurrence of the event must be inevitable and through no fault of the party or parties in question. The test of inevitability refers to whether the relevant party or parties could have avoided the supervening event by exercising the standard of diligence and conduct expected from a reasonable person (bonus paterfamilias).

It is evident from the foregoing that numerous factors need to be satisfied in order for a party to successfully claim relief under a ‘force majeure’ clause. Facts specific to the case at hand, such as the timing and purpose of the lease agreement are of particular relevance in determining whether such relief made be availed of. For example, would the pandemic satisfy the ‘unforeseeability’ test in respect of lease agreements entered into after the initial coronavirus outbreak in Wuhan? Could it be argued that a global outbreak was foreseeable at such time? Moreover, a lessee is more likely to be successful in claiming ‘force majeure’ and consequent suspension of rent where the lease agreement specifies the purpose of use of the leased premises and such use has been expressly prohibited by virtue of a Government order. In such a case, the lessor would be unable to perform its obligation to lease the premises for the specified purpose and therefore, the lessee could be deemed to be released from its obligation to pay rent. This would nonetheless need to be assessed on a case by case basis.

The resulting effects of claiming ‘force majeure’ in respect of the current pandemic may also vary. In general, should the supervening event render the performance of the obligation (such as the payment of rent) for a temporary period, such obligation would be suspended for such period. Should the event subsist for the entire duration of the contractual period agreed upon, or for a reasonable period of time, the lease agreement would be terminated and the parties would consequently be discharged from their obligations. Once again, this would depend on the existence and wording of a force majeure clause in the lease agreement, as some clauses provide for the automatic termination of the agreement in question upon the occurrence of any such event.

In light of the foregoing, it is evident that the outcomes of the aforementioned issues are dependant on a variety of factors, with many of the potential outcomes not being in the best interest of either of the parties. It is therefore surmised that, by virtue of these unprecedented and extraordinary times, it may be in the best interest of the parties to a lease agreement to engage in constructive discussion with the aim of resolving these matters in an amicable and more conducive manner. In this respect, it is of paramount importance that any such agreements reached between the parties regarding the aforementioned issues are evidenced in writing by means of an addendum to the original lease agreement, thereby amending the relevant provisions thereof.

For further information or assistance in this regard, please contact Dr. Ivan Vella on [email protected], Dr. Nicholas Bradshaw on [email protected] or Dr. Anndrea Moran on [email protected]

Disclaimer: The information contained in this article is solely for general information purposes and does not constitute legal advice.