COVID-19 Newsroom

Covid-19 and its impact on the obligation to pay rent in commercial leases

The Covid-19 pandemic has heavily impacted the day-to-day business across numerous sectors and demands for rent reductions for commercial leases are currently not uncommon. The demand for adjusting rent payment clauses under commercial lease agreements will most likely become even more common after the entering into force of the proposal of the Finnish Government to temporarily close restaurants, bars, coffee shops and nightclubs until end May 2020. The proposal is expected to enter into force in the upcoming days. However, many of these places have already last week voluntarily closed their doors.

At the outset, neither the Act on Commercial Leases nor any exemption legislation enacted as a result of the Covid-19 pandemic contain any provision which would per se release a tenant from paying its rent partly or in whole due to hardship caused by the Covid-19 situation. Should the tenant fail to pay its rent on time, the landlord has, as a rule, a statutory right to cancel the lease. The lease agreement itself, may of course contain a force majeure clause or similar although this is rare in commercial lease agreements in Finland. The assessment of whether the clause can be successfully invoked due to the impact of the Covid-19 must be made on a case by case basis.

Even though hardship to pay the agreed rent at the outset does not release a tenant from its obligation to do so, it cannot be ruled out that a Finnish court would rule in favor of a rent adjustment or a suspension of the payment obligations on, for example, some of the following grounds:

• Finnish Act on Commercial Leases – application of lease term leads to unfairness: Under the Act on Commercial Leases, a party to a lease agreement has the right to invoke unfairness of a contract term and to have such term adjusted or set aside if the application of the term leads to unfairness. The Finnish Supreme Court has, however, been rather reluctant to allow adjustments under this provision, especially if the legal entities concerned are of equal bargaining strength. The situation caused by the Covid-19 pandemic and the Government’s decisions to close restaurants and coffee shops is, however, unprecedented. A governmental decision that would prevent a tenant from using the rented premises would probably, if assessed by a Court be a fairly strong factor speaking for adjusting the rent terms.

• Finnish Contracts Act – contract term may be adjusted or set aside if its application would lead to an unfair result: Finnish contract law includes a general provision applicable to all kinds of contracts under which a party may claim that enforcement of a specific term of an agreement shall be adjusted or set aside if the application thereof would lead to an unreasonable result. There are several factors that the Court would need to take into consideration when determining what is unfair, such as the balance between the parties, the circumstances at the time of entering into the agreement and thereafter – to name a few. With regard to commercial lease agreements, the adjustment assessment would primarily be done on the basis of the adjustment provision in the Act on Commercial Leases, but the general provision of the Contracts Act could also be of some relevance in the overall assessment.

• General principles of force majeure and hardship under Finnish contract law: Generally, force majeure can be successfully invoked for the postponement or suspension of the performance of an obligation under a contract if an unforeseeable circumstance beyond the control of the invoking party prevents its performance. Accordingly, for a tenant to have the rent adjusted or suspended due to force majeure, the force majeure situation would need to affect the tenant’s ability to pay the agreed rent. Although it could be difficult to argue that the Covid-19 crisis, with still functioning banking systems, would impede the tenant from paying the rent (vs. a situation where a party cannot deliver a product due to strike for example), it could potentially be argued that this should not preclude the tenant from invoking general hardship if e.g. the use of the leased premises is prohibited or otherwise made impossible. Also here, the situation is to be assessed as a whole.

As mentioned above, the threshold for adjusting an agreement between businesses has generally been quite high. Whether or not an unprecedented event like Covid-19 will constitute grounds for rent adjustment/suspension on the discussed grounds remains to be seen.

Conclusion:

We recommend both tenants and landlords that are affected by the crisis to as a first step be in contact with their contracting parties and to on a voluntary basis achieve an agreement on the payment of the rent during the Covid-19 pandemic. This serves the interests of both the landlord and the tenant, especially considering the very uncertain outcome of a possible Court ruling in this rather unprecedented situation.

Some Finnish commercial landlords have already taken a proactive approach towards their tenants and offered options such as rent adjustments and deferrals in order to keep their premises occupied.

For further information please contact:

Bernt Juthström

Partner

Charlotta Sittnikow

Counsel