Spanish courts uphold reduction of commercial leases due to pandemic.

by Vanessa Guzek

The retail sector, along with tourism and the hotel industry, has been one of the biggest victims of the pandemic, since the proclamation of the national state of alarm in Spain on March 15, 2020, when all commercial activities were banned and hundreds of rented premises were closed. With the reopening of shopping centers and the entry into the so-called “new normality”, it remained to be seen how the problem of commercial leases between landlords and tenants would be resolved.

During the lockdown, most landlords decided to temporarily defer commercial leases. In the case of large landlords with SMEs (small and mid-size enterprises) and self-employed as tenants, the postponement was covered by the Royal Decree approved by the government on April 21,2020, which provided for a maximum period of four months. The preamble of RD 15/2020 stated that it opted for a regulation in accordance with the rebus sic stantibus clause, which allows a temporary modification of contractual conditions in order to avoid excessive burdens on tenants as a result of the pandemic, provided that new circumstances arise, which alter the conditions that were in place when the obligations in question came into force.

In the last year, several lawsuits were filed in Spanish courts for non-payment of commercial leases due to the Covid-19 crisis.

In a lawsuit filed by “Implantaciones Comerciales del Mediterraneo S.L.” (hereinafter “Implantaciones Comerciales”)  against “RPFI Vitoria, S.L.U.”(owner of the El Boulevard shopping center in Vitoria), the Provincial Court of Álava has ruled for the first time in its judgment dated June 30, 2021, confirming the right of the stores to fixed lease reductions due to substantial alterations derived from the pandemic.

The lease agreement signed between the parties in 2017, was agreed for a period of five years and the lease was set based on a percentage of 6% applicable on annual sales, with a minimum guaranteed rent of € 2,530.32 per month, plus € 284.89 for common expenses.

The first instance judgment partially upheld the claim filed by Implantaciones Comerciales, considering that the rebus sic stantibus clause was applicable as a consequence of the substantial alteration in the balance of the services provided under the contract caused by the pandemic situation, which led to the declaration of a state of alarm, with closure and limitations of commercial activity.

Implantaciones Comerciales filed an appeal against this judgment, reiterating its claim that the minimum guaranteed lease be annulled from the first declaration of the state of alarm until the end of the contractual relationship, and that the lease be fixed based on the percentage agreed for the variable rent. Alternatively, the reduction of the lease by 100% during the period of obligatory closure, and 50% during the establishment of the state of alarm, until the end of the contractual relationship.

As grounds for the appeal, it mentioned the equitable distribution of the imbalance, which in its opinion is not complied with in the resolution, taking into account the percentages of the drop in sales. Therefore, it understands that the reference only to the agreed variable percentage is the equitable system.

The question at issue in this case was reduced to the determination of the measures to modify the contract to allow an equitable and fair redistribution of the obligations and rights affected, in order to rebalance the essential bases of the contract.

Given the unpredictability that the unbalancing cause also unfolds for the future, the Provincial Court considered reasonable and effective the regulation of the moderation of the rent depending on the restrictions imposed at any given time for the exercise of the business, whether it is the closing or the restrictions of capacity or limitations of opening hours to the public.

Therefore, the Provincial Court confirmed in its entirety the judgment of the court of first instance, which reduced the minimum guaranteed lease by 50% during periods of closure and by 25% in other periods affected by other restrictions, without prejudice to the moratoriums that may also be agreed upon by the parties.

The Provincial Court emphasizes that it is necessary to establish a mechanism that distributes between the parties the prejudice derived from the exceptional situation, as it unbalances the basic obligation affected, which is the payment of the lease, while the assignment of the use of the premises is not altered in any way.

“The burden of the lease becomes excessively burdensome for the tenant in those periods, but the total elimination of the obligation would mean transferring the entire loss to the landlord, which is not equitable. However, the variability of the amount of lease that the tenant must pay depending on the volume of its sales is a contractual uncertainty, not derived from the exceptional situation caused by the pandemic”, Provincial Court of Álava.

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