COVID-19: Impact on commercial lease agreements in Poland

The rapid spread of the coronavirus (COVID-19) is a major public health challenge, which is affecting businesses and individuals globally, as well as causing a disruption for both landlords and tenants of commercial buildings in Poland.

In order to contain the spread of the coronavirus, just before midnight on 13 March 2020, the Polish Minister of Health published a decree declaring the state of epidemic emergency nationwide (the “Decree”), which entered into force on the same day. Pursuant to the Decree, carrying out certain commercial activities is generally prohibited and some further restrictions apply to the activities carried out in retail buildings with a sales area exceeding 2,000 sq.m. (the “Shopping Centres”). The Decree’s provisions limiting these activities should be complied with from 14 March 2020 onward.

To assist businesses and their legal teams, this alert highlights some of the main legal issues, which companies carrying out economic activity in Poland should be thinking about, in light of the current events and the higher than usual uncertainty with regard to the outcome of a potential court dispute, especially given the lack of comparable case law, and the possibility of introducing further changes to the law.

Restricted commercial activities

Restricted commercial activities

1. Among the commercial activities restricted under the Decree, the following are most likely going to affect the owners of the Shopping Centres or office buildings:

  • the Decree restricts retail trade in the Shopping Centres by the tenants, whose predominant activity comprises the sale of fabric goods, clothing items, shoes and leatherware, furniture and lighting products, household appliances and audio-tv goods, books and stationery items, as well as any activity related to food service (e.g. restaurant and bars) and entertainment;
  • the following commercial activities are restricted nationwide: 

(a) serving food to customers (i.e. restaurants, food courts, pizzerias, ice cream parlours), except for the preparation of food to go and its delivery;

(b) bars, coffee shops, juice shops, etc;

(c) entertainment and leisure activities, such as gyms, fitness clubs, bowling alleys; 

(d) cinemas; and

(e) organising conferences and meetings.

2. While the entrepreneurs are banned from carrying out the restricted activities – for the time being – the owners of the buildings, including the Shopping Centres are not obliged to shut them down entirely.

Are the affected tenants entitled to claim a rent suspension or reduction for the time of the closure?

Are the affected tenants entitled to claim a rent suspension or reduction for the time of the closure?

1. No express statutory regulation. Polish law does not expressly grant tenants a statutory right to claim a rent reduction/suspension in the event of a temporary closure of the premises due to public health orders. 

2. Market standard and the individual lease agreements. The right to claim a rent reduction/suspension may result from the terms and conditions of the lease agreement, but the circumstances justifying a tenant’s claim for a rent reduction, are usually very limited on the Polish market. Most contractual rent suspension clauses require a trigger in the form of a “damage or destruction” to the premises. 

3. Impossibility of performance. Under the general principles of civil law and, in particular, Article 495 of the Polish Civil Code, if a party to a contract cannot perform its obligation due to circumstances that neither of the parties is liable for, it cannot demand reciprocal performance from the other party. If only a partial performance becomes impossible, a party loses the right to receive the corresponding part of the reciprocal performance. As such, the landlords may face arguments that the forced closure of shops, restaurant etc. amounts to an impediment for which neither of the parties is liable and, therefore, the parties’ mutual obligations “cancel each other out” for the time of the closure.

The merits of such an argumentation may be challenged, as the current case law requires the impossibility to be definite and permanent, and it is uncertain whether the concept of impossibility of a partial performance may apply to a situation of a temporary character, such as an epidemic. Additionally, the Decree prevents only certain business activities, but does not necessarily impede the access to and other use of the leased premises. 

Ultimately, in the case of the tenant’s refusal to pay rent for the closure period, the disputed claims would be assessed by the appropriate courts or arbitral tribunals on a case by case basis, taking into account, in particular, the terms and conditions of the lease agreement and the parties’ specific positions.

4. Hardship. A party to a contract may also consider applying to a court for equitable relief, based on a statutory hardship clause regulated in Article 3571 of the Polish Civil Code (the so-called “rebus sic stantibus” clause). 

In cases involving an extraordinary change of circumstances, rendering the performance of the lease agreement excessively onerous or exposing a party to a serious loss, which was not foreseen by the parties at the time of conclusion of the contract, the court could: 

  • designate the manner in which the obligation must be performed, 
  • set the value of the performance of such an obligation, or even
  • terminate the lease agreement

However, the operation of the statutory hardship clause requires a party to take formal steps before a court or arbitral tribunal, and the circumstances underlying the party’s request would be generally assessed as at the closing of the hearing. This would take months or even years, especially if no arbitration clause was provided for in the lease agreement and the parties were forced to litigate the dispute before Polish courts. The tenants should be cautious when invoking the statutory hardship clause also because the case law set certain additional requirements, such us the exposed party should not be in delay at the time it commences legal action. 

Further information on the concept of hardship may be found in our cross-border guide on hardship, which also includes a Poland chapter.

5. Exoneration of liability due to force majeure. Eventually, the party may also try to invoke the “force majeure” doctrine, alleging that the COVID-19 pandemic is an external event that was unforeseeable and impossible to prevent, in order to be released from the liability for damages in the case of a breach of the lease agreement.

 

Are the affected tenants entitled to claim a suspension or reduction of the service charges for the time of the closure?

Are the affected tenants entitled to claim a suspension or reduction of the service charges for the time of the closure?

1. No express statutory regulation. Polish law does not expressly grant tenants a statutory right to claim a service charge reduction/suspension in the event of a temporary closure of the premises due to public health orders. 

2. Tenants’ possible claims. Since the tenant’s obligation to pay the service charges and the landlord’s obligation to provide the relevant services are inextricably linked with the lease agreement and its main purpose (i.e. the tenant would not agree to settle these amounts if it were not for the ability to operate on the premises), the landlord may face a tenant claiming a release from the obligation to pay the service charges for the period of the forced closure.

Such claim might be supported by the jurisprudence related to the statutory claim for rent reduction due to a defect in the premises, based on the provisions of Article 664 of the Polish Civil Code. While the foregoing provision is not directly applicable to the forced closure of the premises, the courts have held that, in principle, the reduction may also be extended to the costs of utilities provided by landlords.

3. Landlord’s defences. The costs of provision of services to the building (such as public taxes, utilities or security) have to be incurred in any case, to keep the building ready for operation in favour of the remaining tenants and to cover the ordinary wear and tear, including during the period of time when a tenant cannot operate on the premises due to the Decree. Moreover, the obligation to pay the service charges is distinguishable from the obligation to pay the rent. 

4.  Other considerations in the response to question 2 above apply accordingly.

Can tenants terminate their leases in light of the Decree?

Can tenants terminate their leases in light of the Decree?

1. No express statutory regulation. Polish law does not grant tenants a statutory right to terminate leases if there is a temporary closure of the premises due to public health orders. 

2. No defect of the subject of the lease. The issuance of the Decree and the COVID-19 pandemic as such, should not be understood as a defect in the leased premises. Such defect would be required in order for the tenant to be able to terminate the lease pursuant to Articles 664 or 682 of the Polish Civil Code. 

3. Market standard and the individual lease agreements. Under the lease agreements on the Polish market, the circumstances pursuant to which tenants are entitled to terminate lease agreements are usually very limited and hardly ever encompass “force majeure” events.

4. Hardship. A party to a contract may also consider applying to a court for equitable relief, based on a statutory hardship clause regulated in Article 3571 of the Polish Civil Code (the so-called “rebus sic stantibus” clause). 
In cases involving an extraordinary change of circumstances, rendering the performance of the lease agreement excessively onerous or exposing a party to a serious loss, which was not foreseen by the parties at the time of conclusion of the contract, the court could: 

  • designate the manner in which the obligation must be performed, 
  • set the value of the performance of such an obligation, or even
  • terminate the lease agreement. 

Polish courts usually take a restrictive approach, and the termination of a contractual arrangement is the last resort. At present, it seems unlikely that a short term closure caused by the COVID-19 situation could result in a termination of the lease agreement.

Can food operators in the Shopping Centres serve food to go?

Can food operators in the Shopping Centres serve food to go? 

The provision of the Decree regarding the restriction in the operation of food service activity in the Shopping Centres is unconditional. Therefore, the possibility to prepare and deliver food to go can only apply to other kinds of buildings and premises (i.e. buildings and premises where the sales area does not exceed 2,000 sq.m.).