What to do with leases during COVID-19 measures?

Bosnia and Herzegovina

Governments at multiple levels in BiH have declared state of emergency. This situation has led to many restrictions adopted in order to prevent COVID-19 impacts. Consequently, many businesses are affected, and particularly in relation to the use of leased office space. Up to date, the government did not provide any guidelines on how this issue should be legally treated. 

Depending on the type of industry, many businesses will be affected in a way that they will not be in the position to fulfill their obligations under lease agreements. At this point there are two potential ways how this problem can be interpreted under applicable legislation, i.e., as a „force majeure“ event or as „changed circumstances“.

As for the “force majeure”, in theory,  an order of the government which prevent the parties to exercise their rights under lease agreement - primarily use of premises – would qualify as force majeure event. This order was adopted and it affects most of retail and hospitality businesses. If we assume that such order is of temporary nature then a tenant may claim that he is not obliged to pay the rent since he/she/it cannot access and use the premises. However, at this stage it is hard to claim that this provides a right to tenant or landlord to also terminate a lease agreement.

On the other hand, changed circumstances exist if they hinder the performance of obligations of one party or if the purposes of the agreement cannot be achieved. In any case such circumstances must be of such degree where it is evident that the agreement cannot meet the expectations of the parties and where it would clearly unjustified to stay in such agreement (also taking into consideration general opinion). In this case, a party which cannot achieve the purpose of the agreement may terminate the agreement. However, the law also provides that the agreement will not be terminated if the other party offers or accepts to amend the agreement in an equitable way. Consequently, given the present state of COVID-19 crisis, it is rather expected that the parties will try to find amicable solutions by amending the contract via rent reduction, rent free period and similar in a manner which will meet the interest of both parties.

In any case, it should be also noted that there is no viable court practice which can answer what would be the court stance on issues which will emerge after the crisis, and therefore it is interest of both parties to resolve these issues as prudent businessman.

Summary in bullet points

Lease agreements under COVID-19 crisis

  • Governments at multiple levels have adopted a state of emergency which may affect use of business space in various industries;
  • Still there are no official guidelines how this issue should be resolved;
  • Under local laws there are two potential institutes which could be used to interpret this situation, i.e., „force majeure“ event and „changed circumstances“
  • As the state of emergency is of temporary nature it would be hard to claim that the contract can be terminated due to this reason, however it may be said that at the moment the parties are not obliged to pay the rent if they cannot use their business premises;
  • As for changed circumstances, it would be also hard to claim that these entitle the parties to terminate their contracts, however it is expected from the parties to amend their contracts in an amicable way via rent reductions, rent free periods and similar.

CMS remains at your disposal in order to find a proper and amicable mitigation in the interest of your business.