Rebus sic stantibus: rent modification due to COVID-19

The Court of First Instance and Preliminary Investigation No. 7 of Palencia, in Order (Auto) 26/2021 of February 9, 2021, has followed many others that, since mid-2020, have been ordering the provisional suspension of rent payments for businesses closed due to COVID-19 (in this case, a gym). In addition, once the business reopens, the owner of the premises will have to reduce the rent by 40% until the proceedings are resolved (following the approach set out in Order 447/2020 of September 25, 2020, issued by Court of First Instance No. 81 of Madrid, which, on the one hand, ordered the suspension of the rent payable for a nightclub for as long as reopening is not permitted and, on the other, once reopening takes place, reduced the rent by 50%. In this regard, the order stated that “while, on the one hand, it does not seem balanced to make the landlord bear all the losses arising from the critical health situation, in the sense of making payment of the rent—or part of it—conditional on the maximum permitted capacity, neither is it equitable to require the tenant to continue fulfilling its payment obligation when the operation of its business is prohibited by the Community of Madrid, since in this case the failure to open does not stem from a business decision, but from a legal impossibility.”)

It is essential to mention the judgment handed down on March 6, 2020 (Supreme Court judgment (STS) 153/2020, Appeal No. 2400/2017), in which our Supreme Court, unaware of the relevance that this institution derived from Roman law would acquire in the wake of the commercial uncertainty generated by COVID-19, delivered a ruling that will serve to clarify court practice when settling contractual disputes.

“And, of course, such supervening circumstances must have been entirely unforeseeable for the contracting parties. Unforeseeability of the change of circumstances is a necessary condition for applying the ‘rebus’ rule. If the parties have expressly or implicitly assumed the risk that a circumstance might occur, or should have assumed it because, by virtue of the circumstances and/or the nature of the contract, such risk was reasonably foreseeable, it is not possible to find a supervening alteration, which, by definition, implies the non-assumption of the risk (recently, judgment 5/2019, of January 9). An alteration cannot be described as unforeseeable when it falls within the normal risks of the contract (judgments 333/2014, of June 30; 64/2015, of February 24; and 477/2017, of July 20, among others).”

Countless queries are now being raised by small business owners and self-employed workers regarding the consequences of being unable to meet their contractual commitments, especially those relating to lease agreements, mortgage-secured loans encumbering small factories and workshops, and the real estate leasing contracts through which banks have financed the acquisition of the premises and industrial buildings housing the production units that are the backbone and foundation of the Spanish economy.

Rebus sic stantibus 

Following the 2008 economic crisis, the Supreme Court developed new case law on the requirements for applying this rebus sic stantibus clause to contracts, establishing it as an unwritten clause that allows the terms of a signed contract to be altered when extraordinary events occur that alter the parties’ expectations. It is important to note that, according to both legal scholarship and case law, this clause does not have rescissory, termination, or extinguishing effects, but only effects that modify contracts, and all of this is aimed solely at seeking and attempting to offset the imbalance between the obligations of the contracting parties, one weaker than the other, caused by a circumstance that was extraordinarily unforeseeable at the time the contract was entered into and at the time those bound to perform it gave their consent to its formation.

Therefore, under this clause, contracts and/or treaties may be revised whenever new circumstances arise that alter the conditions that existed when the obligations in question became applicable.

In this way, the economic imbalance between the obligations of the parties to a contract is corrected when unforeseeable circumstances arise, such as a forced closure, which means that possession of the premises no longer has the same economic value for the tenant.

In this regard, returning to the order of the Palencia court, the judge states therein that “the extraordinary and unforeseeable situation, which is being prolonged over time and which produces an imbalance in the parties’ obligations to the benefit of the landlords, is a well-known fact, since rents continue to accrue monthly while the tenant is unable to enjoy full use of the premises, with the consequent decrease in income.”

Another relevant aspect of the order is that it considers that, even if the landlord were a large property holder (gran tenedor) and could request that payment of the rent be deferred under Royal Decree-Law 35/2020 rather than suspended, the judge nonetheless points out that “the rules laid down in the Royal Decree are no obstacle to adopting interim measures that ensure the potential effectiveness of a judgment upholding the claims brought by the tenant.”

In addition to the rent reduction, the judge also prohibits the inclusion of the tenant and the guarantor in any debtor register, and orders the suspension of the enforceability of the contractual clauses relating to the guarantor’s joint and several liability and to non-payment.

In our view, this case law is not only applicable to businesses that have been forced to close; being able to demonstrate a considerable decline in turnover likewise makes it possible to demand a contractual modification, specifically regarding the rent, that allows the business to survive. If you need any kind of advice on this matter, do not hesitate to contact our legal team.