The rapid spread of the COVID-19 pandemic is causing a severe impact on everyone's daily life, and is putting considerable strain on the economy as a result of the new challenges stemming from the pandemic. The real estate sector is no exception from this.
On 13 March the Bulgarian Parliament declared a state of emergency for a period of one month. Under the Constitution of Bulgaria, the state of emergency is a special legal regime which allows the Parliament to temporarily suspend the application of certain rights. The State of Emergency Act, voted in by the Parliament and published on 24 March, regulates the majority of the measures to be applied by the Government through this emergency period.
Still on 13 March the Health Minister issued an order (the "Order") with certain measures aimed at stopping the rapid spread of the virus within the country. This Order actually contains some of the measures, e.g. closing of all shopping centres and restaurants among others, which at the moment have the biggest impact on the real estate sector in Bulgaria, and continues to result in much debate.
In this short article we give an overview on the changes that were introduced by the Order and the State of Emergency Act in respect of commercial lease agreements and construction agreements in light of the state of emergency.
Commercial leases: closure of premises
As stated above, since 13 March it is prohibited to visit shopping centres, except for grocery stores and pharmacies situated therein, and visiting restaurants, cafés, bars, cinemas, theatres, museums, discos, concerts, is prohibited. Market-standard commercial lease agreements for premises in shopping centres usually contain obligations for retail tenants to keep their shops open and to pay, in addition to the fixed monthly rent, an additional turnover-based rent. Due to the above Order the landlords will not be in a position to successfully enforce the clauses regarding staying open and the turnover rent clauses in commercial leases.
Commercial leases: rent payments and unilateral termination
The other and more pressing question, which already started a heated debate in the media, is whether the business owners of such closed establishments owe rent payments while unable to operate. The State of Emergency Act allows for the suspension of all payments, including rent, falling due during the emergency period. Under the newly enacted act, in case of a delay in payment, the legal remedies available to the creditor, such as statutory interest, penalties, termination of the contract or enforcement, will not apply during the state of emergency. This means that creditors, e.g. landlords, will not be able to charge default interest on delayed rent payments, nor will they be able to initiate execution procedures or other legal actions against tenants as long as the state of emergency is in place.
Once the state of emergency is revoked all such payments shall become immediately due and payable. Nevertheless, tenants have already started arguing that they don't owe such rent payments since the closing of their business is an event of force majeure and they should be released from their obligations to pay the agreed rent.
Since the Order and the State of Emergency Act are rather general and cannot cover each particular case nor replace terms agreed under each signed lease agreement, we would recommend that the parties should as a first step review their contracts to determine if the risk for such force majeure events has not already been allocated. Further, if the lease agreement is silent on that matter, the parties should still consider the statutory law regulations before entering into negotiations or court disputes.
Commercial leases: hardship as a consequence of the COVID-19 pandemic
As an introduction, it is interesting to remember the difference between force majeure and hardship, since it is often forgotten by both landlords and tenants as well as their legal advisors. Force majeure, under Bulgarian law and the majority of European laws, is an unforeseeable event which prevents a party from fulfilling its contractual obligations. Hardship, which is also explicitly regulated by Bulgarian law, refers to such a drastic change in economic circumstances which does not prevent a party from fulfilling its contractual obligations, but makes performance of the whole contract too burdensome for this party.
The preliminary evaluations of the impact of the COVID-19 pandemic on the world economy and the real estate sector in particular are as expected, not very positive. Therefore, it may be expected that the level of rent for both commercial and residential premises may drop. From a legal perspective it is too early to estimate whether the COVID-19 pandemic will have such a negative impact on commercial leases that the tenants will be in position to invoke hardship and try to amend the agreed rent.
Although a case-by-case analysation is necessary, generally we suggest that landlords and tenants closely monitor the development of the situation in the country and should amicably negotiate possible solutions that could be (i) quarterly, instead of monthly payment of rent; (ii) a moratorium on rental payments; (iii) rent reduction; (iv) conversion of the higher average turnover rent into a lower fixed rent.
Construction projects: force majeure as exclusion from contractual liability
The application of force majeure is market standard in construction agreements. As per the Bulgarian Commercial Act (article 306), three conjunctive conditions must be fulfilled in order for a non-performing party to be exempt from contractual liability: (i) the cause of the non-performance must be beyond the control of the given party; (ii) such cause was not foreseeable at the time of the conclusion of the agreement; and lastly (iii) it may not reasonably be expected from the given party to avoid or overcome the cause.
It is widely known that, for example, certain extreme weather conditions and war are usually regarded as force majeure. In our view, the COVID-19 pandemic and/or the measures related to the declared state of emergency in Bulgaria may also qualify as such cause for a delay under certain contracts. The COVID-19 pandemic is not the first one in human history and there is already substantial case law on similar matters.
Whether a contractor, in case of delay, may invoke force majeure and be exempt of contractual liability and respectively request an appropriate extension of the deadline, however, should be analysed on case by case manner. The performance of construction works have not been officially suspended in Bulgaria. Nevertheless, there are certain requirements that should be met in organising the performance of such works in order to protect the health of workers as well as to limit the spread of the disease.
If a contractor considers or expects to be in delay due to the current situation, he must notify the principal on such force majeure event without any delay and prove the existence of the above-mentioned conjunctive conditions. Even in case of success, the contractor is required to mitigate the damage and provide its services to the principal to the fullest extent possible. We suggest that parties to construction contracts should review the wording of the relevant force majeure clause or the respective insurance policies as they generally cover pandemics.
The current circumstances as well as potential legal outcome of the effect of the pandemic on the real estate sector is highly uncertain and relevant case law is yet to come.
As for commercial leases and construction agreements, it is recommended to closely analyse the wording of the contractual terms on a case-by-case basis and avoid taking any legal action without giving prior written notice to the contracting partners. The current circumstances that may lead to delay or impossibility to perform should be properly recorded.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.