Commercial leases are among the contracts that are the subject of numerous disputes because of the economic situation generated by COVID-19.
At the beginning of the health crisis, a draft law was considered, to temporarily suspend the obligation to pay rents related to commercial leases. However, this bill was not successful.
Indeed, in the absence of sufficient cash flow, many commercial tenants have been unable to pay their rent during the periods of compulsory administrative closure mandated by the government.
In two recent court rulings, the District Court of Luxembourg (Tribunal de Paix), sitting in matters of rental disputes, ruled in favour of commercial tenants who had not paid their rents during these periods.
In these two first instance court rulings, rendered by different judges on 13 and 14 January 2021, the Court adopted the same reasoning, based on Article 1722 of the Civil Code, which provides that: “If during the term of the lease, the object being rented is destroyed in its entirety by a fortuitous event, the lease is terminated by operation of law; if it is only partially destroyed, the lessee may, depending on the circumstances, request either a reduction in the price or the termination of the lease itself. In either case, no compensation is payable”.
The Court points out that it is unanimously agreed that this provision, which applies to commercial leases and is merely an application of the risks’ theory, is not only aimed at the material destruction of the object being rented, but also at its loss for legal reasons. Therefore, the lessor must provide the lessee with peaceful enjoyment of the thing being rented, in accordance with the purpose intended by the parties. Consequently, when force majeure circumstances make it impossible or frustrate the purpose provided for in the lease agreement, the obligation to pay the rent ceases in whole or in part.
According to the Court, there is a legal loss if the leased property becomes unfit for the purpose for which the lease agreement was concluded, in particular as a result of an external event. In the event of temporary legal loss, the lessee is also temporarily released from its own obligations towards the lessor, including the payment of rent and charges.
The court notes that the governmental measures adopted in the context of the fight against COVID-19 prohibited the reception of the public in the premises of the lessors. In these two cases, the Court ruled that the period of closure during the lockdown constituted a temporary case of force majeure depriving the tenant of his right to peaceful enjoyment of the leased property in accordance with the purpose intended by the parties.
The Court thus concluded that pursuant to Article 1722 of the Civil Code, there was a temporary legal loss of the rented premises on the part of the tenant, who was therefore entitled to be released from its obligation to pay the rent and charges.
These two decisions, which are, however, still subject to appeal, are likely to have a significant impact in the coming months. For example, shopkeepers in the restaurant and catering sector (HORECA), who are still paying their rent despite the closure of their establishments, will be able to take advantage of the above-mentioned decisions to stop paying it. In addition, it is possible that some shopkeepers will try to use these rulings to claim back from their landlord the rents that have been paid when their shops were closed to the public.