Swiss Landlords and Tenants Looking for Solutions as Covid-19 Impacts Commercial Leases
Under a commercial lease agreement, the rent is typically owed as far as the tenant can use the rental property for the agreed purpose.
Disrupted contractual relationship due to Covid-19 measures
Government-mandated corona measures have had far-reaching consequences on the contractual relationship around commercial leases. Covid-19 is a one-in-a-lifetime event and, therefore, the impact of the resulting government measures is not covered in most private sector contracts and lacks legislative precedence.
The Swiss parliament has touched on the issue of broken lease agreements as part of its broader package of Covid-legislation but has so far provided no clear guidance or legislative framework. That means it is necessary to find appropriate solutions on a case-by-case basis.
The question is whether article 259d of the Swiss Code of Obligations, which provides for a reduction in rent due to the defectiveness of the rental object, is applicable in these cases.
A defect occurs if the rental object lacks an agreed feature or cannot be used for the intended purpose. If a defect prevents or restricts the use for the intended purpose, the tenant may demand a corresponding reduction in rent. That said, the courts have yet to clarify to what extent government-mandated Covid-19 measures qualify as “leading to the defectiveness” of affected rental properties (e.g. restaurants).
The courts may rule that Covid-19 changed the situation related to a contractual relationship to such a degree that fulfilling the contract becomes unreasonable for one party and the terms of the contract need to be adjusted.
The requirements for such adjustment are that the change in circumstances was neither foreseeable nor avoidable and that such change led to a serious disturbance of equivalence. The decisive factor in this regard is whether the Covid-19 pandemic and the resulting government measures were unpredictable events. This is likely to be the case with leases concluded before the onset of the pandemic.
We would argue that the preconditions of inevitability and serious equivalence disturbance are likely met with regards to the unprecedented government measures taken in the wake of the pandemic. Whether and to what extent the courts will adjust the terms of commercial lease agreements based on this remains to be seen. However, as far as rent was paid without reservation during the closure of a business, an adjustment of the contract is unlikely to be admitted by the court.
Options for out-of-court settlements
In view of these legal uncertainties, many tenants and property owners will be eager to find an amicable settlement.
In addition to temporary rent reduction or partial debt relief, the deferring of rent claims could be a possible approach:
Temporary reduction of rent: The parties may attach conditions to the reduction, e.g., make it dependent on the payment of government compensation. To provide legal certainty about the future tenancy relationship, such agreement should explicitly state that the reduction is granted due to the current situation and is limited in duration.
Partial remission of rent due: Landlords should be aware that the remission of debt will cause the claim to be forfeited. This means that even if the tenant will be able to pay the forgiven debt sometime in the future, the landlord would no longer be entitled to claim such payment.
Deferral of rent claims: The parties may agree that due rent claims will be deferred. In a deferral agreement, the creditor waives the right to enforce a claim for e defined period. This prevents the creditor from initiating debt collection and enforcement proceedings and claiming default interest. In return, the debtor acknowledges the existence and amount of the claim.
Deferrals and debt remission agreements are not subject to specific formal requirements, i.e., a written agreement is generally not required. The parties are also free to attach certain conditions to the deferral or reduction of outstanding rent. This way, uncertainties about government’s compensation payments can be taken into account appropriately.