What are the measures currently in place?
Based on the measures adopted over the time by the Italian Government to tackle the COVID-19 emergency, non-essential retails have been generally closed from 9 March 2020 until 17 May 2020 throughout the country.
As a further step up to ease the lockdown emergency, new measures for the so-called “phase two” have been signed off by the Italian Government after consultation with regional governments, which remains entitled to tailor the measures taken at national level on the basis of the specific local conditions. In particular, the current governmental measures have been adopted by Prime Ministerial Decree of 18 May 2020, which provides, inter alia:
- the reopening of shops, bars, restaurants, hairdressers, barbers, beauty salons and beaches starting from 18 May 2020;
- the reopening of swimming pools, gyms and other sports facilities starting from 25 May 2020, while theatres and cinemas are set to return to work on 15 June 2020;
- the obligation to wear facemasks in closed public places and on public transports, where one-meter social distancing shall be respected;
- self-certification statement declaring reasons for being outside is no longer needed; and
- the movements between regions and within the European territory will be possible from 3 June 2020.
Lombardy remains the worst hit region; for this reason, more restrictive measures have been adopted at a regional level. However, as mentioned above, a gradual reopening of productive activities has been provided starting from 14 April 2020 and, as said, less rigorous measures have entered into force starting from the beginning of June.
On the other hand, certain regions (e.g., Veneto) have started to soften the restrictions previously adopted sooner with respect to other regions and more flexible measures have been adopted for some time now.
Can the tenant walk away from the lease agreement or suspend/reduce the payment of rents on the ground of the Covid-19 outbreak?
As a general remark, it is necessary to consider if the relevant lease agreement (i) was entered into before the beginning of the current Covid-19 outbreak (at least in Europe); (ii) provides for the lease of a real estate asset only for the purposes of the tenant’s activity which is comprised amongst those expressly named under the activities mandatorily suspended; and (iii) does or does not explicitly regulate the consequences of events like the current Covid-19 outbreak as force majeure events or alike.
Having said that, given that the measures adopted by the Italian Authorities to contrast the Covid-19 outbreak do not include any specific provision in this respect, in order to ground its request to terminate the lease agreement, or reduce rents or suspend the payment of rents, the tenant may (i) enforce the force majeure (or similar) clause provided for in the lease agreement (if any), or (ii) invoke certain rules provided for by Italian civil law.
If the lease agreement includes a force majeure (or similar) clause, depending on the scope of the same and the remedies provided for therein, the tenant may enforce this clause mainly in order to terminate the lease agreement, suspend the payment of the rents, or avoid any liability vis-à-vis the landlord deriving from the relevant force majeure (or similar) event (as the case may be). The inclusion of the Covid-19 outbreak into the scope of a force majeure clause may vary depending on, for example, whether (i) one or more epidemics are included in the wording of the clause; (ii) it provides for a “catch-all” wording relating to events caused by nature similar to the one at hand; and/or (iii) the situation actually meets the requirements defined in the clause to consider an event as force majeure. Based on our experience, lease agreements do not often contain such a clause.
If the lease agreement does not include any force majeure clause, the tenant might be entitled to invoke remedies deriving from: (a) the rules on “supervening impossibility”, (b) the rules on “supervening excessive burdensomeness”, (c) the right to withdraw from the contract pursuant to Article 27, paragraph 8, of the Law no. 392/78, and (d) the good faith principle.
The “supervening impossibility”
In general terms, when the performance due by a contractual party has become impossible for unpredictable and supervening reasons not attributable to such party, such impossibility may lead to:
- the termination of the agreement and the excuse of the debtor from its liability deriving from the failure to perform the agreement, if the performance has become totally and definitively impossible;
- the suspension of the performance and the excuse of the debtor from its liability deriving from the failure to timely perform the agreement, if the supervening impossibility is temporary;
- the reduction of the subject-matter of the performance, if the impossibility is only partial (unless the other party cannot be considered any longer interested in a partial performance).
In addition, the recent Italian Supreme Court case-law tends to treat a supervening impossibility to benefit from a performance as an impossibility of the performance itself.
As to lease agreements, in case the Covid-19 outbreak and the relevant measures (including the lockdown) adopted by the Italian Authorities affected the tenant’s business activity carried out therein, it might be potentially argued that a temporary supervening impossibility has occurred, consisting in (i) the impossibility for the landlord to fulfil its obligation of ensuring the quiet enjoyment of the leased asset to the tenant, and/or (ii) the impossibility for the tenant to benefit from the counter-performance of the landlord, all in relation to the agreed-upon use of the leased asset. In any case, a number of counter-arguments might be raised against the argument above.
In light of these principles, pursuant to Article 1256 of the Italian Civil Code, the tenant might be entitled to request the suspension of the payment of the rents, without incurring any liability deriving from the failure to timely pay, it being understood that the suspended rents shall be due when the temporary impossibility (i.e., the effect of the restrictive measures) ends. Please note that, in case such temporary supervening impossibility lasts for a period considered material in relation to the duration and the scope of the lease agreement, the tenant might claim to have definitively lost interest in the landlord’s obligation to ensure the quiet enjoyment of the leased asset, and thus request the termination of the lease agreement.
In such respect, it has to be noted that, according to most of Italian scholars, the temporary impossibility to perform the obligations under a lease agreement is deemed to be, from a substantial point of view, a partial impossibility. Consequently, pursuant to Articles 1258 and 1464 of the Italian Civil Code, the tenant might invoke such interpretation in order to definitively not pay (instead of just temporarily suspend) the rents during the supervening impossibility period (or, should it not be interested in a partial performance or enjoyment of the lease agreement, terminate it).
It is worth mentioning that the partial impossibility rules may also apply if the tenant can benefit from the leased property only in part (e.g., when the leased property consists of a part used as storage and of other part(s) used for production/commercial/office purposes, being just the latter affected by the shut-down measures).
While the tenant might invoke the “supervening impossibility” in relation to the non-benefit from the leased property, it may hardly invoke its financial distress due to the Covid-19 outbreak in order to be released from its payment obligations. Indeed, under Italian law the force majeure and, more in general, the supervening impossibility concepts tend not to definitively affect payment obligations, unless the relevant obligor proves that the force majeure (or similar) event caused an absolute – thus per se hardly imaginable – impediment to fulfil its payment obligation, and not a mere financial difficulty.
Notwithstanding the above, as a final remark it has to be pointed out that a tenant’s interest not to pay the rent relating to the period affected by the authorities’ restrictive measures might be said to have been favourably looked by the emergency legislator which, by Article 91, Paragraph 1, of Law Decree 17 March 2020, no. 18 (the so-called Cura Italia Decree), imposed that the compliance with the restrictive measures adopted by the authorities “shall always be taken into consideration” for the purposes of excusing a party’s default. This provision might thus be considered as a confirmation of tenants’ right to suspend and reduce their rent payment obligation as per the above.
The “supervening excessive burdensomeness”
The tenant might also try and claim that its contractual obligation has become excessively burdensome or difficult to perform, invoking the concept of “supervening excessive burdensomeness” of the performance under Articles 1467, 1468 and 1469 of the Italian Civil Code, provided that the following conditions are met:
- there must be a long-term agreement or an agreement providing for the postponed performance of at least some obligations;
- one of the obligations becomes excessively burdensome (mainly compared to the obligation(s) of the other party(ies));
- the obligation regarded as burdensome has not already been entirely performed; and
- such “excessive burdensomeness” results from an extraordinary and unpredictable event, in the sense that such event has not been foreseen by the parties or could not have been foreseen at the time the contract was concluded.
However, pursuant to Italian law, the only available remedy for the party invoking the “supervening excessive burdensomeness” in relation to a bilateral contract (i.e., one providing for obligations not only on one of the parties) is the termination of the relevant agreement, unless the other party offers to amend the affected contractual provisions to restore the balance between the obligations of the parties.
In such respect, it can be argued that lease agreements might be affected by such an excessive burdensomeness if the relevant imbalance affected the agreement as a whole and was material in relation to the entire duration of the lease (and not merely to a brief period of the same).
Therefore, in light of the Covid-19 outbreak and the relevant measures adopted by the Italian Authorities, in case the above conditions were met, the tenant might seek to obtain the termination of the agreement on the basis of the “supervening excessive burdensomeness” principle, save for the landlord’s possibility to offer the tenant to reduce the rent, restoring a balance between the parties’ mutual obligations.
The withdrawal pursuant to Article 27, paragraph 8 of Law no. 392/78
Another remedy which might be invoked by tenants under non-residential lease agreements is the withdrawal pursuant to Article 27, paragraph 8 of the Law no. 392/78.
This provision allows the tenant to withdraw from a non-residential lease agreement with a 6-month notice by proving the existence of serious grounds (gravi motivi).
According to the majority case law, serious grounds (gravi motivi) include unpredictable events which have not been foreseen by the parties or could not have been foreseen at the time the contract was concluded, and which make the continuation of the relationship extremely burdensome for the claiming party.
Depending on both the type/destination of the leased asset and the relevant actual use, it cannot be excluded that the Covid-19 outbreak and the relevant measures adopted by the Italian Authorities fall into the definition of “serious grounds” above, entitling the tenant to withdraw from the lease agreement, with a 6-month notice.
The good faith principle and other facilitating measures introduced by the emergency legislation
Finally, it is worth mentioning that, when invoking one the remedies described above and particularly when requesting or negotiating an amendment to the lease agreement, the tenant may refer to the good faith principle, which according to Articles 1175 and 1375 of the Italian Civil Code, shall drive the behaviour of the parties and the performance of the agreement. In fact, this mandatory principle of Italian contractual law incorporates a general duty of solidarity which, according to the Italian Supreme Court’s case-law, imposes each of the parties to act in a way as to preserve the other contractual party’s interest, subject only to the cases where conducts to be carried out in order to safeguard the other party’s interest entail a significant sacrifice for the burdened party’s own interests.
All the above being said, please in any case consider that another factor to keep in mind when assessing the topics referred above is the uncertainty of the outcome of a potential judicial or arbitration dispute, especially given the lack of comparable case law, as well as the possible adoption of extraordinary measures by the Italian Authorities. In such respect, please note that, for instance, a tenant’s interest not to fully pay the rent corresponding to the forced closure period might be argued to have been favourably looked by the emergency legislator which, by Article 91, Paragraph 1, of Cura Italia Decree imposed that the compliance with the restrictive measures adopted by the authorities “shall always be taken into consideration” for the purposes of excusing a party’s default.
In addition, it is worth noting that by Article 216, Paragraph 3, of Law Decree no. 19/2020 (the so-called “Rilancio” Decree), the emergency legislator has provided that the suspension of sports activities, imposed by the restrictive measures adopted by the Italian authorities, shall always be taken into account, under the provisions of the Italian Civil Code regulating temporary and partial supervening impossibility (i.e. Articles 1256 and 1464) and supervening excessive burdensomeness of the performance (i.e. Articles 1467 and 1468), starting from the date of entry into force of the above-mentioned measures, as a factor of supervening imbalance affecting the agreement on which lease contracts relating to private gyms, swimming pools and sports facilities are based on. Accordingly, the relevant tenant shall be entitled to a reduction in the rent for the 5 months going form March 2020 to July 2020, which it is presumed to equal to fifty percent of the amounts due for such period under the contract (subject to proof of a different amount by the interested party).
Do the same considerations apply also to business lease agreements?
The above described rules of “supervening impossibility”, of “supervening excessive burdensomeness”, and good faith principle are also applicable to cases involving assets leased by means of business lease agreements (which are very common in shopping centres). Conversely, the withdrawal pursuant to Article 27, paragraph 8 of the Law no. 392/78 is not applicable to such leases.
It is worth mentioning that, in case of shopping centres, due to the restrictive measures imposed by the decrees adopted by the Italian Authorities, on the one hand, the relevant landlord might potentially be considered in the factual impossibility to provide to the tenant the asset and other services constituting the relevant business unit and contemplated under the business lease agreement, thus preventing its entitlement to claim for the payment of the corresponding rent and other ancillary expenses. On the other hand, the reduction of the productivity of the leased business unit, due to the mandatory closure of shopping centres, might potentially determine an excessive burdensomeness of the tenant’s obligation.
How the landlord and the tenant can agree on a rent reduction?
In light of the above, it seems that the most reasonable path for tenants to obtain a rent reduction would be to reach an agreement in this respect with their respective landlord(s). Should the landlord(s) be willing to accommodate the request of the tenant, a formal written agreement has to be executed between the parties so to amend the lease agreement provision regulating the amount of the rent. In such a case, it would be advisable to clearly specify under the amendment agreement what are the reasons underlying the rent change, the percentage of rent reduction, as well as the duration of the rent reduction. Depending on the nature and/or the form of the amendment, the registration of the amendment agreement with the Italian Tax Authority might be required by law or simply advisable.
What is the impact on turnover rents?
As turnover rent provisions are usually included under commercial lease agreements, the shutdown imposed by governmental measures will most likely affect landlords in terms of decreased rental income. Indeed, the decrease of public life and footfall generated by the shutdown will probably have a negative impact on the turnover of tenants and consequentially on the rental income of landlords as the tenants may only need to pay a low turnover rent or, if applicable, a minimum base rent.
Are landlords covered by their insurance?
If, based on specific contractual provisions or specific circumstances, tenants are entitled not to continue to pay the rent, landlords will generally not be able to claim under their insurance policy as in Italy natural events and pandemics are usually not covered under business interruption insurance policies. However, in this respect it is always recommend carrying out a detailed analysis of the relevant lease agreement and insurance policy.
What are the actions a landlord can currently implement to recover unpaid rents? Can evictions be enforced in court during the emergency period?
As a general remark, it shall be considered that, except for certain urgent and delicate subject matters (e.g., fundamental human rights, or cases where a postponement could cause serious prejudice to the parties), the hearings relating to civil proceedings and the time-limits for the filing of briefs in the context of such proceedings were ex lege suspended until 11 May 2020 by application of Article 83 of the Cura Italia Decree (as amended by Law Decree no. 23/2020, the so-called Liquidità Decree).
In addition, Article 103, paragraph 6, of the Cura Italia Decree provides that the enforcement of decisions for the eviction from properties is suspended until 1 September 2020.
Having said that, in addition to any specific remedy provided for by the relevant lease agreement, the Italian civil procedure code (Articles 657-669) sets forth the general rules of the summary procedure by which the landlord may obtain a judicial title to vacate the (previously leased) property (the “Eviction Title Proceedings”):
- upon the expiration, or future expiration, of the lease agreement; or
- upon a payment delay of the rent (or of the ancillary expenses (oneri accessori) arising from the lease agreement), provided that such delay is of at least 20 days.
Upon the occurrence of one of the above events of default, the landlord is entitled to send to the tenant an eviction notice (intimazione di licenza o di sfratto), in the form of a writ of summons, including, among other things: (i) a proposed date of the hearing, and (ii) only if the Eviction Title Proceeding is based on a payment delay, a possible request to the court to issue a payment order (decreto ingiuntivo) concerning the rents due until the eviction notice and the rents accruing until the definition of the Eviction Title Proceeding.