Rebus sic stantibus clause in business premises leases after covid-19.

Summary on the criteria for the application of the “rebus sic stantibus” clause by the supreme court. Will it continue to be applied so restrictively?

In other similar articles, we have already talked about the criteria used by the High Court. And more specifically, after the economic crisis of 2008 with its famous STS 333/2014 of 30 June. This, opened the door to a more flexible application, detailing the requirements to be met for its application. On one side, the need for the existence of extraordinary and unforeseeable circumstances. Furthermore, these circumstances must imply a disappearance of the basis of the contract. And finally, that they imply an imbalance of the contractual benefits resulting in an excessive onerousness of the contract.

Nevertheless, makes it  manifestly clear that not every economic crisis implies an automatic application of the rebus. Therefore, it will always be necessary to contrast the real incidence within the framework of each contractual relationship. From which it can be concluded that even if there is a somewhat more flexible application, it is still highly restrictive.

Covid-19 as an unforeseeable event; Is article 1105 of the cc applicable?

Indeed, the crisis generated by Covid-19 involves a situation of force majeure provided for in article 1105 CC. According to this article, no one can be held liable for events that could not have been foreseen. Or which, if foreseen, could not have been avoided.

We would therefore be dealing with a cause justifying breach of contract due to an unforeseeable event. And that in addition, it has arisen subsequent to the conclusion of the contract without the intervention of any fault of the parties.

Well, in lease contracts, it is true that the lessee cannot freely and unilaterally dispose of the contract. Neither can the lessee withdraw from the lease without any consequence, unless it has been so provided. However, it is unlikely that these contracts provide for the occurrence of a pandemic. And much less, the consequences of this for the contracting parties.

The above could lead us to the application of article 1289.1 CC. It states that, if the contract is onerous, the doubt will be resolved in favor of the greater reciprocity of interests. From this, we can extract the possibility of resorting to the Rebus, which we will discuss below.

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Application of “rebus sic stantibus” by our courts after the crisis caused by the pandemic, for or against?

Although we have already seen that the SC continues to be restrictive with its application, it seems that changes are coming. As a consequence of the pandemic, thousands of tenants have gone to court invoking this unwritten clause. With it, it is intended that not only the tenants will bear the consequences of this unexpected crisis.

In the first place, it is true that so far there have been no rulings from higher courts. However, the few that do exist lead to the conclusion that the Courts are going to opt for its application. That is to say, to reduce the rents of the leases of business premises.

As an example, a recent Judgment of the Court of First Instance nº 20 of Barcelona dated 08/01/2021. In it the Judge equates the world pandemic to a war situation. He argues that there has clearly been an imbalance and rupture of the expectations of the contract. This makes it necessary to adapt it to the new normality, calculating that the economic effects will be dragged on for at least two years. In summary, it rules the application of the clause under the following considerations:

• Existence of alteration of the basis of the business due to a reduction of the benefits that were rationally intended to be obtained. This leads to the contract being excessively onerous for the lessee.
• The modification proposed by the lessee is fair and equitable. If he pays 50% of the rent, he assumes a loss in his business in excess of 50%.
• The lesser in the negotiations has not offered any other alternative beyond a moratorium on payment. This is considered insufficient and unfeasible to maintain the viability of the lessee.

Other measures to regulate the “rebus sic stantibus” clause.

In addition to this relaxation by our Courts, other measures are being sought. Thus, last year a proposal to reform the rebus clause was sent to the Ministry of Justice. This proposal, defended by a Magistrate of the SC, aims to minimize the legal uncertainty that exists on this matter. And thus to be able to establish key requirements for its application in order to avoid contradictory jurisprudence.

Although this reform is expected to be included in the Civil Code, it is certain that it will also take some time. Therefore, the Spanish Courts are adopting Unification Agreements on the application of the “rebus sic stantibus” clause. And not only in residential leases to individuals, but also in business premises affected by opening restrictions.

As an example, the Agreements of the Courts of First Instance of Barcelona dated November 12, 2020. With them, it is allowed to enervate the procedure, consigning 50% of the rents due to unforeseen circumstances after the state of alarm. And also, the suspension of the eviction trials. In this case, taking into account all the concurrent circumstances and especially if the claim for rents is also accumulated. Also, to the manifestations made by the plaintiff and the monthly payments that appear as unpaid.

Conclusions

The application of the rebus clause was made more flexible by the SC after the economic crisis of 2008. However, so far, the High Court considers that its application is not automatic and must be analyzed on a case-by-case basis.

The COVID-19 is considered a case of force majeure. And therefore a justifiable cause for breach of contract due to an event that was neither foreseeable nor avoidable by the contracting parties.

There are still no rulings from higher courts on the application of “rebus” in leases of business premises. However, it is clear from those that do exist that the Courts are going to opt for its application.

In Barcelona, a Court equates the pandemic to a war situation. It appreciates the alteration of the business base due to the reduction of the benefits that were rationally intended to be obtained. And it considers that it is equitable to reduce the rent to 50%, even more so when the lessor has not provided alternatives.

The adoption of other measures and Agreements are important. They may serve to strengthen your position as a lessee. And, in addition, it is more than likely that they will influence the criteria of judges in other judicial districts.

If this article has been of interest, we also suggest you to read the following article published on our website:

Rebus sic Stantibus or Pacta sunt Servanda