Termination of business premises rental agreement

Withdrawal of the lease of business´ premises by the tenant

There are as many reasons for a tenant to terminate his lease as there are possible causes for the disappearance of his business. The generalized drop in sales, for whatever cause, is the main reason that makes it impossible for the tenant to pay the rent.

The  Law on Urban Leasing does offer a solution for residential leases. It establishes that, after six months from the beginning of the lease, the lessee is allowed to cancel the lease contract. (Art. 11 Urban Leases Law; in Spanish Ley de Arrendamientos Urbanos; “LAU”). It must be communicated 30 days in advance. And it allows to agree a compensation of one month’s rent for each year that remains to be completed.

However, it does not regulate the cancellation of rentals for use other than housing. This is governed by the will of the parties and by the regulatory precepts of our Civil Code. (To which art. 4 LAU refers us).

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General notes regarding the term of a lease for use other than as a dwelling.

As we have said, the LAU does not establish anything regarding the duration of this type of lease. And, therefore, we must be aware of  what, with respect to the term of this type of contracts, the civil code (CC) establishes:

• Article 1255 CC: Establishes full freedom to set the term of the contract. It is only required, ex article 1543 CC, that the term must be determined.
• In the event that no term is fixed, Article 1581 provides: If the lease is fixed with a rent for years, it will be annual. In this way, if the rent is fixed by months or days, it will be of monthly or daily duration.
• Once the term has expired, the lease terminates without the need for special notice. If at the end of the term the lessee remains at least 15 days without protest of the lessor, the tacit reconduction is understood. (art. 1566 CC). Otherwise, an eviction action in favor of the lessor is possible.
• The lessee who has carried out commercial activity in the business premises is entitled to the compensation of art. 34 LAU. This indemnity is payable by the lessor. This commercial activity must be retail and must have been generated over the last five years. The tenant must express 4 months in advance his willingness to renew for another 5 years and for a market- according rent. The market rent is the one agreed between the parties or, failing that, the one determined by an arbitrator appointed for that purpose.

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

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

The amount of the indemnity is determined as follows:

1. Lessee who starts activity in the same municipality, within the following six months: The compensation will include the expenses of the transfer and the damages derived from the loss of clientele. It will be calculated with respect to the one existing during the first six months of the new activity.

2. Related activity developed in the following six months by the lessor/third party and the lessee does not start a different one: The compensation will be of one monthly payment per year of duration of the contract, with a maximum of eighteen monthly payments. It is considered related the activity suitable to benefit from the clientele captured by the activity exercised by the lessee. If there is no agreement on the indemnity, it shall be fixed by the arbitrator appointed by the parties.

In general, Art. 1569 CC allows the lessor to terminate the lease for the following reasons:

• Failure to pay the rent or other amounts due.
• Breach of any of the conditions stipulated in the contract.
• To use the premises for use other than the agreed one.
• Assignment-subletting of the premises not consented to in the contract or failure to comply with the obligation to increase the rent to the lessor of art 32 LAU. This right consists of: Rent increase of 10% in case of partial sublease or 20% in case of total sublease or assignment.

And we now move on to analyze the possibility for the lessee to terminate the business lease. This is not a legally regulated possibility, but as we will see below, it has been extensively dealt with in the Courts.

Jurisprudential interpretation on the unilateral withdrawal of the lessee from the lease of business premises.

In this regard, in our Case Law there are several reference judgments issued by the Supreme Court. For example, Supreme Court’s Sentence (STS) 183/2016 of March 18, 297/2017 of May 1 and 517/2017 of October 3. These judgments analyze this issue by differentiating three cases:

1.Case in which the contract includes the power to terminate by the lessee.

It includes the cases in which the lease provides for a clause that grants the lessee the power to terminate.

This ability to terminate will give rise to a penalty or not, depending on what has been agreed (penalty fine).  This in application of article 1255 CC.

These are the sentences of reference:

• Sentence of December 23, 2009 (rec. 1508 of 2005),
• Sentence of November 6, 2013 (rec. 1589 of 2011),
• Sentence of December 10, 2013 (rec. 2237 of 2011) and.
• Sentence of May 29, 2014 (rec. 449 of 2012).

2. Cases in which the contract does NOT include the tenant’s right to terminate the lease.

These are the cases in which such clause does not exist and the lessee manifests his will to terminate the lease. Resolution that the lessor does not accept and requests the fulfillment of the contract ex art. 1124CC. That is to say, he requests the payment of the rents according to the expirations agreed in the contract.

Here, the STS indicated at the beginning of this epigraph on unilateral termination of the tenant, contemplate the possibility of moderation of penalties. But they require a very strong burden of proof on the part of the lessee. Moderation does not apply automatically.

What judges do in this case is to assess whether or not the “Rebus sic stantibus” principle applies. This principle of law implies a substantial modification of the circumstances existing at the time of conclusion of the contract. And we say substantial because the modification must be evident and proven. The economic crisis of 2008, for example, was cause to appreciate the concurrence of the rebus sic stantibus principle.

The case of STS 517/2017 of October 3, ratified the moderation of compensation. Instead of compensating the lessor with the remaining year of performance, it moderated with an indemnity of 3 months.

3. The lease does NOT include a clause with the power of termination for the lessee, but the lessor accepts the termination.

It seems that this last case gives rise to little discussion. They are those in which, even without the clause, the lessee expresses the will to terminate the lease and the lessor accepts.

The lessor must be clear about the terms of the termination of the lease, because he will not be able to ask for more in the Courts. It will have to be to the terms accepted for the termination of the contract. For example, see STS of April 9, 2012; rec. 229 of 2007.

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