Leasing considerations for Landlords and Property Managers

On the 18th March 2020 the Danish government followed up by issuing formal restrictions regarding certain commercial leases used for inter alia the following purposes

• hairdressers,
• nightclubs,
• gyms,
• restaurants,
• pubs etc.

Said leaseholds are to shut down until 30th March 2020 and the tenants are thus prevented to cease operations for a period of at least 12 calendar days.

The suspension of the tenants’ operations will for most businesses result in reduced turnover and consequently suspension of payments and bankruptcies due to the tenants’ strained cash flow.

The object of this memo is to provide information to landlords about possible claims for remedies for breach of contract by the tenants based on COVID-19.

Commercial leases:
Article 23 of The Danish Business Lease Act states that:

“If the lease agreement is terminated prior to expiry, due to a public authority having banned the lessee’s use of the premises for health or other reasons, the lessee is only under an obligation to pay rent until the day on which such ban becomes effective. Where such ban merely restricts the use in a manner which is of minor importance, the lessee is, however, only entitled to demand a proportionate reduction of the rent.”

The key part of the article is the following sentence: “due to a public authority having banned the les-see’s use of the premises for health or other reasons”. 

Is it then possible for tenants to terminate their agreements based on a State implemented ban of the contractual use with reference COVID-19 related matters?

Our view is no.

It is our view that tenants are not entitled to terminate lease agreements due to COVID-19 conse-quences, even if the virus or matters related hereto influence the tenants’ use of the leases. The arti-cle in the Danish Business Lease Act governs the landlords’ breach of contract, COVID-19 is therefore not a part of the article’s purpose as the article targets matters that are within the landlords’ control, cf. the legislative material.

Article 23 seeks to relieve the tenant from its obligations to pay rent in part or in full, in the event that the lease is subject to a ban based on:

i. matters within the landlord’s control or negligence (i.e. structural hazards, fungus out-break due to construction of the property etc.) or
ii. situations where the landlord is nearest to bear the risk. The courts have in two circum-stances passed judgement in comparable situations where the courts found that the
tenant was nearest to bear the risk:

JD 1938.89: “The tenant himself had the risk that a change in the Danish Shops Act prohibit-ed the sale of tobacco outside normal business hours.”

JD 1942.159: “The tenant of an ice cream dairy could not use the lease for the intended pur-pose when the tenant was denied such a permit from the authorities. The tenant claimed that the lease could be terminated, and the rent paid should be repaid. In this decision, the con-clusion was also that the risk of new legislation rests with the tenant. The tenant was therefore unable to terminate the lease and the tenant had to pay the rent.”

Is it then possible for the tenants to claim a proportionate reduction of rent or compensation based on a ban of the contractual use with reference to COVID-19?

As a natural consequence of the conclusion, the tenants can neither demand compensation or pro-portionate reduction in the rent.

Our assessment is based on the assumption that the situation is temporary (up to 2 months) and therefore not relevant for article 7 of the Danish Business Lease Act under which grossly unreasona-ble or unfair agreements can be cancelled in full or in part.

If you have any questions with respect to your commercial lease or residential lease and your rights and obligations in the face of COVID-19, please do not hesitate to contact Jacob Skovgaard Kristensen or Alessandro Traina.

Jacob Skovgaard Kristensen
E-mail: jck@lundgrens.dk
Phone: +45 2757 7846

Alessandro Traina
E-mail: atr@lundgrens.dk
Phone: +45 2612 1922