Article by Juliana Assolari
Since the beginning of the covid-19 pandemic, due to the closure of commerce, mobility restrictions, mandatory isolation of risk groups, drop in demand, etc., relationships between landlords and tenants of commercial properties have been troubled due to the occurrence of moratoriums, requests for discounts, and renegotiation of the rent amount. For this reason, this article addresses the topic of the commercial lease agreement.
According to a survey by SEBRAE, 83.2% of small businesses in the State of São Paulo operate in commerce and services[1], generate 27% of the GDP and 49% of the formal jobs in the State of São Paulo[2]. Further, according to the SEBRAE survey[3], it was found that small enterprises (annual gross revenue of up to R$ 4.8 million) have a cash runway of only 21 days. Large and more capitalized companies, on the other hand, have a cash runway of 90 days[4].
In this scenario, it remains evident that the landlord and the tenant are forced to review their contractual position, since wanting to maintain the position that the contract must be performed (invocation of the principle of pacta sunt servanda by the landlord) or, in the extreme, demanding the cessation of rent payments (imposition of a moratorium by the tenant) will mean that the parties will take the matter to the judiciary to be resolved.
In taking the matter to be resolved judicially, the landlord and tenant must consider that (i) there is no settled case law on parameters for the percentage of discount or renegotiation of rent due to the pandemic, since the situation the Country is going through is entirely atypical; (ii) that there is a bill in progress (Bill No. 1179/2020) that prevents the granting of an eviction injunction until 10/30/2020 for eviction actions for non-payment filed after 03/20/2020; (iii) the time and costs incurred in a lawsuit; and (iv) the risk of the judicial understanding not being appropriate to the specific case, since each situation has its own peculiarities.
Therefore, under the legal argument that the Covid-19 pandemic is an unforeseeable fact that altered the basis of the transaction, it is possible for the tenant to follow two alternatives: (i) renegotiate the rent amount with the landlord (Article 317 of the Civil Code[5]) or (ii) request the termination of the lease agreement, without the application of a contractual penalty (Articles 478, 479, and 480 of the Civil Code[6]).
And why may the pandemic be considered an unforeseeable fact? Because at the time of negotiating the lease agreement the contractual bases were freely agreed between landlord and tenant and, during the performance of the contract, the pandemic, the declaration of public calamity by the Federal Government and the State Government, and the governmental restrictions on the exercise of business activities impacted the tenant’s business, leading to a drastic change in the economic-financial situation of one of the parties.
Therefore, it is possible for the tenant to request the revision of the lease agreement aiming at the rebalancing of the lease agreement due to the Covid-19 pandemic in order to readjust the rent to the new reality. And this new reality must consider not only the tenant’s condition, but also the landlord’s, under penalty of failing to achieve the economic rebalancing of the parties.
Regarding the revision of the lease agreement, it is recommended, based on the premise of the division of losses, that the following criteria be observed[7]:
- Analysis of the profit arising from the contract according to the activity carried out;
- Analysis arising from the economic-financial capacity of the contracting parties;
- Analysis of the line of activity and its potential for faster or slower recovery; and
- Avoiding, at all costs, a complete moratorium, since it generates the rupture of the price element, a sense of social chaos, and, more often than not, serious harm to the other party.
A factual difficulty regarding contractual renegotiation, at this time, is the fact that (i) there is an event that gives rise to the change in the negotiating basis (the pandemic), (ii) an initial date (03/20/2020, the date of publication of Legislative Decree No. 6, which declared the state of public calamity), but (iii) there is no final date for the cessation of the effects of the pandemic.
Therefore, in the current scenario, it proves impossible to tie the discount or the reduction of the rent, when negotiated and agreed between landlord and tenant, to the end of the Covid-19 pandemic, because what will be the date of the end of the pandemic?
Will the end of the quarantine imposed by the authorities imply the immediate resumption of business activities? Will it imply an immediate return to the situation that existed before the start of the pandemic, when landlord and tenant were in an equal situation, that is, in a position to discuss the terms of the contract on equal footing in light of the principle of freedom of will?
There are many questions whose answers do not depend on the will of the landlord or the tenant, since everyone is in the same boat called Brazil, whose control stick is in the hands of the governmental authorities. Thus, for now, it is recommended that the landlord and the tenant have a broad and open dialogue and that any negotiations be considered for 60, 90, or 120 days, depending on the case, leaving the doors open for renegotiation to review the leasing situation until the return of the new[8] normality.
[1] https://www.sebrae.com.br/Sebrae/Portal%20Sebrae/UFs/SP/Pesquisas/Relatorio-Coronavirus-V2.pdf
[2] https://www.sebrae.com.br/Sebrae/Portal%20Sebrae/UFs/SP/Pesquisas/Relatorio-FinancasMPE-corona-VF3.pdf
[3] https://www.sebrae.com.br/Sebrae/Portal%20Sebrae/UFs/SP/Pesquisas/Relatorio-FinancasMPE-corona-VF3.pdf
[4] https://exame.abril.com.br/negocios/metade-das-grandes-empresas-tem-caixa-para-suportar-3-meses-sem-receita/
[5] Art. 317. When, for unforeseeable reasons, a manifest disproportion arises between the value of the obligation owed and that at the moment of its performance, the judge may correct it, at the request of the party, in such a way as to ensure, as far as possible, the real value of the obligation.
[6] Art. 478. In contracts of continued or deferred performance, if the obligation of one of the parties becomes excessively onerous, with extreme advantage for the other, by virtue of extraordinary and unforeseeable events, the debtor may request the rescission of the contract. The effects of the judgment decreeing it shall be retroactive to the date of service of process.
Art. 479. The rescission may be avoided if the defendant offers to equitably modify the conditions of the contract.
Art. 480. If under the contract the obligations fall to only one of the parties, that party may plead that its obligation be reduced, or the manner of performing it altered, in order to avoid excessive onerousness.
[7] SIMÃO, José Fernando. The contract in the times of COVID-19”. Forget force majeure and think about the basis of the transaction, on 04/06/2020. https://www.migalhas.com.br/coluna/migalhas-contratuais/323599/o-contrato-nos-tempos-da-covid-19–esquecam-a-forca-maior-e-pensem-na-base-do-negocio
[8] It is called the new normality because anthropologists, historians, and economists have been writing about the possibilities of how the “new world reality” after Covid-19 will be.
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