COVID-19 and Romanian lease agreements

Romanian measures in response to the COVID-19 pandemic temporarily suspended activity in all shopping centres (not only malls) except for the sale of groceries, cleaning supplies and services, pharmaceutical products, medical equipment and veterinary medicines.

This suspension came on top of restrictions imposed on restaurants, bars, coffee shops and cosmetic salons, both located inside and outside of malls. With these sites temporarily closed, Romanian law does offer a way forward for those businesses struggling to pay rent. According to art. 1557 of the Romanian Civil Code, if the impossibility to perform an important obligation by one party is temporary, the counterparty can suspend performance of its own correlative obligation or apply for termination of the contract.

Most lease agreements in shopping centres do not only provide for the renting of certain premises, but also qualify as a rented space can only be used for a permitted activity.

If a shopping centre leases out a space for the retail sale of clothing, the tenant must use it for this activity only: selling clothes. But since clothing retail activities are "suspended by law in shopping galleries", the landlord cannot temporarily allow a tenant to sell other relevant merchandise. Hence, under closure by the state and with no other commercial recourse, the tenant must consider the lease agreement frozen. The landlord’s and tenant’s obligations towards one another have become temporarily illegal. Since the landlord is by law unable to grant the retailer an appropriate commercial space, even though this inability is not its fault, the tenant may have grounds to discontinue paying rent until there is further regulation and clarification from authorities.

Furthermore, if the tenant tries to sue the landlord for any loss of business, the landlord could cite the unpredictability of the damage as a defense and be exempted from owing this damage according to art. 1533 of the Civil Code.

Lastly, any party can at any time during the suspension ask for the termination of a lease. Termination, however, is unlikely to occur during the state of emergency period since, according to the measures, court activities have also been restricted.

Given how new this situation is, we recommend that landlords and tenants communicate and maintain as much clarity as possible about each party’s position and the continuation of their contractual relationship.

What happens to any other commercial lease agreements?

All other commercial lease agreements are largely subject to case-by-case assessments.

According to the Civil Code, any party can defend its interest by invoking either the exception of non-performance; fortuitous impossibility of performance; or hardship.

The exception of non-performance

According to the Civil Code, this defence can be raised when the counterparty did not perform its obligations under the relevant agreement. Using this defence implies a court showdown and can be used on a case-by-case basis in various situations. For example, landlords can use this exception to justify the suspension of some of their services in buildings during the state of emergency.

The fortuitous impossibility to perform

This can be invoked in cases of force majeure, a fortuitous event or other events with the same effects (i.e. other specific situations in which the special legislation grants the same effects).

The procedure for ascertaining a force majeure event generally involves the Romanian Chamber of Commerce and Industry (CCIR) being called upon to issue a certificate of force majeure for each specific contractual relationship. Such certificates could be requested only if the respective lease agreement includes a force majeure clause. To have an analysis of an agreement made, parties would have to pay a EUR 500 fee. For a tenant that leased spaces in various buildings that are not legally defined as shopping centres (e.g. street retailers), obtaining a force majeure certificate for each location could become quite burdensome and expensive.

In addition, the CCIR may not consider every situation force majeure, and may not grant the certificate. Even if granted, the certificate's effects are not automatic. Instead, the party with a force majeure certificate would have to go to court to justify its non-compliance in a lease agreement, and the court could ultimately overrule the CCIR's decision. Similarly, a fortuitous event is also subject to a possible reassessment by a court.

Hence, assessing COVID-19 as force majeure or a fortuitous event in relation to a lease agreement must be done on a case-by-case basis, taking into account the particular circumstances, such as the extent to which the obligation to work from home is applicable to a certain tenant and the extent to which the measures prevent a landlord from keeping leased premises operational and staffed due to mandatory quarantine measures.

Hardship

Hardship is defined as an exceptional change of circumstances during the contractual performance that makes one’s obligations more onerous than the counterparty’s. Hardship, however, is not automatic. It is merely a defence to be raised in court against a claim by the other party. At its face, hardship appears to be a more acceptable solution in court than force majeure, but with the potential downside that the future of the entire contract is left in court’s hands (as opposed to a certain set of obligations).

Hardship must be unpredictable, which COVID-19 qualifies as, and must occur after conclusion of the lease. If a court acknowledges hardship, it could decide to recalibrate the contract towards a more balanced set or terminate it under certain conditions. Institutional and triple net lease agreements usually exclude hardship as a cause for exoneration. As a result, one should first check a lease agreement to determine if this exclusion would apply.

Lastly, hardship cannot apply if the party invoking it did not take steps towards renegotiating the lease outside the courts.

Small and medium enterprises (SMEs)

Government Emergency Ordinance no. 29/2020 (GEO 29) states that SMEs recognised as such by Law 346/2004 (i.e. according to the number of employees, and turnover or asset value),which obtained a certificate from the Ministry of Economy evidencing the state of emergency and the interruption of their activities by its declaration, do not have to pay utilities and rent for their main and secondary registered offices during the emergency period.

This measure allows for a postponement of these costs, but not for service charges. Moreover, it is unclear what will happen after the state of emergency with the postponed payments. When do the payments become due? Can they be paid in instalments over a period of time? Due to the absence of clarity over these matters, SMEs may be reluctant to take advantage of this measure to avoid potential issues once the state of emergency ends.

Although GEO 29 is not fully clear, in our view SMEs can also benefit from Civil Code provisions that allow for a claim of force majeure to improve their position in their lease agreements.

To conclude, if you are a SME or a party to commercial lease, we recommend that you do the following:

• check the contract for any limitations in force majeure, fortuitous case and hardship;
• also check if this pandemic could be seen as insured risk entitling the tenant to a rent suspension according to the relevant clauses from the lease agreement;
• observe the contractual procedure under each case;
• actively approach the counterparty and begin renegotiations of the lease, and
• make the most out of any measure enacted by the state to rebalance the economy of the contract (e.g. apply for SME emergency certificates from the Ministry of Economy).

For more information on how to manage your Romanian lease agreement during the current crisis, contact your regular CMS advisor or local CMS expert Roxana Fratila.