In its decision (No. 24/2nd commercial department) of 12 September 2013, the Supreme Cassation Court of Bulgaria comprehensively expressed its opinion on the substantive legal aspects of the economic adverse change clause1 and ruled on the termination of a lease agreement on this ground. According to the decision, a fundamental change of the circumstances could lead to early termination of an agreement if such change was not caused by any of the parties and neither of them was able to predict it at signing, as well as if further force and effect of the agreement are contrary to the principles of justice and the bona fide rules. The decision is of major importance, since it marks the first time that a long-term lease agreement has been terminated by court ruling due to an economic adverse change.
The Bulgarian Supreme Cassation Court (the "Supreme Court") dealt with a case in which the plaintiff (the lessee) and the respondent (the lessor) had in April 2007 signed a lease agreement for a 34 square meter-sized shop located in a shopping mall in Varna (the second-largest city in Bulgaria, situated at the Black Sea). The term of the lease agreement was set for 10 years. Until the summer of 2008, the leased shop had sufficient turnover. However, due to the global financial crisis, the turnover of the shop decreased rapidly. Thus, the shop's turnover for the entire year 2008 was EUR 13,000, compared to a total EUR 6,000 for just the two months November and December 2007. Given that the agreed monthly rent of the leased shop was EUR 2,100, the lessee requested a decrease in the rent. The negotiations with the lessor failed and the lessee was forced to close the shop (with the rent agreement still being valid and effective).
Subsequently, the lessee brought an action against the lessor and sought the court to terminate the lease agreement on the grounds of an economic adverse change.
The court of first instance and the appellate court rejected the claim, ruling that the agreement could be terminated on account of economic adverse change only if the fundamental change in the circumstances has led to a significant decrease in the rents charged for similar types of shops. However, there was no evidence that the rents in other commercial premises/shops have decreased. Thus, the courts of first and second instance found that the lessee is facing only temporarily difficulties, which it has to endure.
Supreme Court ruling
On this factual basis, the Supreme Court regarded the following issues as essential:
- whether there is a fundamental change in the circumstances (i.e. in the economic situation) that was not caused by any of the parties and which neither one of them could possibly have predicted at signing; and
- whether there is a substantial disparity between the parties' obligations that is against the bona fide (good faith) rules.
The Supreme Court pointed out that the global financial crisis led to a significant change in the economic relations, also in Bulgaria. Further, this change was not caused by any of the parties and also could not have been predicted by either of them at the time of the signing of the lease agreement.
Further, the Supreme Court found that if the lease agreement remains in force and effect, this would be contrary to the principles of justice and the bona fide rules, as the contractual performance by the lessee has become a burden for it, which could eventually lead to the lessee's bankruptcy.
For the above reasons, the Supreme Court adjudicated that all requirements of the economic adverse change clause are present and ruled for a termination of the lease agreement.
The importance of this Supreme Court ruling lies in the fact that it is the first (published) Bulgarian decision that rules for the termination of an agreement due to an economic adverse change. It is also one of the few court decisions dealing with the global financial crisis and its contractual effects in Bulgaria.
The legal doctrine of economic adverse change (also known as clausula rebus sic stantibus), which was introduced in Bulgaria with the new Commercial Act in 1996, has so far hardly been implemented in practice. Nevertheless, this concept still requires careful usage and reliance. Otherwise, it is capable of being used with the mere intention to excuse a breach of obligations that a party finds inconvenient or uneconomical to fulfill. Bulgarian case law contains a significant number of unsuccessful attempts to pursue claims on the basis of an economic adverse change. This decision will most likely encourage further such attempts.
1 Article 307 of the Bulgarian Commercial Act.
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