Further to our briefing on civil law qualifications and consequences for contractual relations under Russian law, we have analysed below how COVID-19, in conjunction with the measures taken by Russia’s public authorities to combat it, might affect the respective positions of contract counterparties under commercial property lease agreements.
Operations in the premises / building have been suspended pursuant to the acts on high alert regime
In order to combat COVID-19 in all regions across Russia, during March 2020 a number of restrictive measures, including the introduction of a “high alert regime”, were implemented against individuals and legal entities. In accordance with the decree of the Mayor (The Decree of the Mayor of Moscow No. 12-UM dated 5 March 2020, as amended), operations in Moscow have been temporarily suspended at the following sites:
- catering facilities (restaurants, cafes, public dining areas), except for take-away and other food delivery services;
- retail facilities, except for some specialty stores, food stores and basic supplies stores;
- beauty salons, spas, baths, fitness centres; and
- cinemas, entertainment centers.
Due to these restrictions, the tenants of the abovementioned commercial premises cannot use them for their intended purpose in whole or in part, respectively, and so have been deprived of their contractual right of use. At the same time, the obligation of the landlord to provide the premises for use and the obligation of the tenant to pay the rent are corresponding obligations of the parties under the relevant lease agreement to which Article 328 of the Civil Code of the Russian Federation (the “Russian Civil Code”) applies1. In their analysis of Article 328 of the Russian Civil Code, the Russian courts have repeatedly confirmed that the tenant may be exempted from paying rent (in full or in part) for the duration of the period in which restrictions persist on the use of the relevant property under the lease2
As such, tenants of the properties mentioned above can justify non-accrual of the rent for the corresponding period by reference to Article 328 of the Russian Civil Code on the grounds of impossibility of use of the commercial premises.
In our view, as a general rule, landlords of commercial properties should equally not be liable for failure to provide the premises for use due to the restrictions imposed in connection with COVID-19, on the grounds referred to in Articles 416 and 417 of the Russian Civil Code and the application of the legal principle of force majeure.
In addition, both landlord and tenant may claim for application of Article 451 of the Russian Civil Code concerning the occurrence of a material change of circumstances to their contractual relations (see below for further detail).
Other commercial Properties under lease
If the commercial premises in question have not been affected by the restrictions imposed by public authorities in light of COVID-19, as is the case with commercial office space, it is deemed that the tenant's obligation to pay rent remains unchanged and so continues in accordance with the terms and conditions stipulated by the relevant lease agreement. At the same time, the tenant whose business has been affected by COVID-19 may discuss with its landlord a reduction in the amount of rent payable in respect of the affected period and/or changes to other terms of the lease agreement by reference to Article 451 of the Russian Civil Code (a “material change of circumstances”).
COVID-19 and the measures taken in conjunction with the pandemic fall under the general criteria provided by Article 451 of the Russian Civil Code and may be regarded as a material change of circumstances from the parties’ agreed position at the execution of the lease agreement. Either party whose business has been affected by COVID-19 may refer to Article 451 of the Russian Civil Code in order to either change the material terms of the lease agreement or to terminate the agreement. The parties should be aware that if they fail to reach a consensus on the modification of the relevant lease agreement, the court will be involved in the process of termination (or amendment, as the case may be) of the agreement, subject to the conditions stipulated in paragraph 2 of Article 451 of the Russian Civil Code. The court will also determine the specific consequences of the termination (or amendment, as the case may be) of the lease agreement for the parties.
COVID-19 and the implementation of associated restrictive measures by Russia’s public authorities may be considered to be a force majeure event under the relevant commercial arrangements connected to the tenant’s business. However, in relation to the tenant's obligation to pay rent to its landlord, it seems unlikely that a court would find that the tenant has been prevented from fulfilling that obligation in light of such restrictions.
This view has been affirmed by the recent position of the Chamber of Commerce and Industry of the Russian Federation and the Moscow Chamber of Commerce and Industry, which, in the case of closed facilities, pointed out that "the impossibility to fulfil the obligation to pay rent is not directly related to closure, since there may be other sources of funds from the entity, other than the proceeds of sale (eg bank credit, loan from the founder etc.). The tenant’s lack of necessary funds, based on the current court practice, is not a force majeure circumstance (clause 8 of the Resolution of the Plenum of the Supreme Court of the Russian Federation No. 7 dated 24.03.2016)"3.
Although, it is possible that when considering specific cases in which the tenant’s business has been severely affected by force majeure circumstances, the courts may determine that COVID-19 and the associated restrictive measures do, in fact, constitute a force majeure event under the relevant lease agreement, thereby releasing the tenant from liability for non-payment of rent. A useful analogy can be drawn to the application of force majeure to the introduction of European/U.S. sanctions, which were initially not recognised as force majeure by the Russian courts; however, later there were some decisions in which the sanctions were recognised as such.
SPECIAL PROVISIONS in relation to Commerical LEASE Agreements
Special provisions of the Russian Civil Code in relation to commercial lease agreements (Articles 614 and 620 of the Russian Civil Code) also give the tenant the right to demand reduction of the rent or termination of the lease agreement in the case of significant deterioration of either the leased property itself or the conditions of its use. Nevertheless, such deterioration is usually understood to mean physical deterioration of conditions of use, for example, when the premises’ utilities are cut off.
Taking into account the unprecedented situation with COVID-19, the courts may change their approach to the application of Article 614 of the Russian Civil Code such that landlords may become obliged to reduce the tenant’s rent in these circumstances.
It is important to note that Articles 451 (“material change in circumstances”) and 614 (“significant deterioration in leased property”) of the Russian Civil Code provide grounds for revising the rent only. They do not operate to release the tenant from the obligation to make payments for the period of negotiations between landlord and tenant in relation to rent reduction nor do they release the tenant from liability for such non-payment.
RECENT LEGISLATIVE DEVELOPMENTS
In the light of recent events, it has been interesting to see how legislators have been actively seeking to regulate the relationship between landlords and tenants in situations where the parties have been affected by COVID-19 and the implementation of associated restrictive measures.
In one recent example, on April 1, 2020, Federal Law No. 98-FZ "On Amendments to Certain Legislative Acts of the Russian Federation on the Prevention and Response of Emergencies" (the "Law") entered into force. Article 19 of the Law contains special rules regarding lease agreements entered into before the introduction of the “high alert regime”, which appears to apply to both public and private leases.
According to paragraph 1 of Article 19 of the Law, tenants will receive the right to defer payment of rent to their landlords. Requirements for the conditions and terms of such deferral are to be established in due course by the Russian government. At the time of publication of this briefing, the Prime Minister recently made a statement on this point to the effect that the amount of rent payable by the tenant for a period of 6 months would be tied to the quantifiable income of the tenant, and the accrued debt could be repaid in instalments during the year4.
Paragraph 3 of Article 19 of the Law gives the tenant a right to demand a reduction in the amount of the rent due to the "inability to use the property" associated with the introduction of the “high alert regime”.
However, it is not yet clear from the legislation at what point the rent can be reviewed for the purposes of assessing the rent reduction: from the date of entry into force of the Law or from the date of introduction of the “high alert regime”. The law does not contain special provisions on retroactivity, but the specific wording of the Article references the revision of the rent for the period of 2020 and the decision to introduce a “high alert regime”. In our view, it can be interpreted so that the rent can be revised from the date of the introduction of the “high alert regime”.
It is also not clear how the provisions of Article 19 of the Law will interact with various provisions of the articles of the Russian Civil Code which relate to the reciprocity of obligations of parties under a lease agreement, force majeure and a material change of circumstances to the contract counterparties’ commercial positions (ie Articles 401, 416, 417, 451 and 614 of the Russian Civil Code).
The reference in paragraph 3 of Article 19 of the Law to the “impossibility of use” will also require clarification. Construed narrowly, “impossibility of use” might only arise where the commercial premises are closed as a result of a decision of the public authorities; construed broadly, it might even be engaged where citizens are merely undergoing the mandatory self-isolation regime but the commercial premises remain technically open, despite the fact that the tenant’s employees are unable to access the premises due to related quarantine restrictions.
Clearly, the aim of recent legislative initiatives is to find an optimal solution to the problem of mass closure of commercial premises for tenants during the period affected by the COVID-19 disruption and the non-payment of rent on their part under relevant commercial lease agreements. As indicated by paragraph 3 of Article 19 of the Law, Russian legislators seem to have taken the approach that a reduction in rent, rather than its indefinite suspension (which some tenants could otherwise seek under Article 328 of the Russian Civil Code), is the most appropriate solution for all parties.
In our view, legislators have taken this approach to provide some comfort to commercial landlords that they can expect to receive a proportion of the rental income owed to them during the period affected by COVID-19 market disruption. In addition, we note that Article 19 of the Law forces the parties to negotiate on the terms of the lease agreement in the first instance, which some market participants had previously refused to do.
According to public statements from the Russian government, it is also likely that landlords will be able to rely on a property tax discount and exemption from liability for non-payment of utility bills5.
- Paragraph 10 of Information letter of Presidium of the Supreme Arbitrazh Court of the Russian Federation dated 11.01.2002 No. 66.
- The Decree of the Central District Arbitrazh court dated 03.03.2020 No. F10-560/20 in case No. А68-3169/2019; the Decree of Presidium of the Supreme Arbitrazh Court of the Russian Federation dated 09.04.2013 No.VAS-13689/12.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2020