The Prohibition has caused many considerations, including: Which shops are subject to the Prohibition? Is the tenant entitled to terminate the lease agreement and entitled to claim damages or pro rata reduction of the rent? Is it the tenant or landlord who carries the risk?
WHICH SHOPS ARE SUBJECT TO THE PROHIBITION?
According to the wording of the regulation, it is stated that: “shopping centres, department stores, arcades, etc.” must shut down. This give rise questions regarding limitations and interpretation of the wording.
Naturally, case law is incomplete regarding this specific matter. However, “shopping centres, etc.” shall probably be interpreted as covered arcades, etc., which entail a prohibition against gathering more than 10 people - neither indoor nor outdoor. Please note that the Prohibition does not include convenience stores or pharmacies, situated in shopping centres, etc. with directly access roads or with access to the public transport.
COVID-19 - FORCE MAJEURE?
Force majeure is defined as an external and unexpected event, such as e.g. war, catastrophes and prohibition against impositions and performances, which prevent the contracting party to fulfill its obligations.
The main effect is that the contracting party is exempted from liability, even though the contracting party breaches the contract. The burden of proof rests on the contacting party who claims force majeure.
A court ruling will probably be released about a year – at the earliest - and the outcome, which is difficult to predict, will probably depend on the subsequent developments of COVID-19.
IS IT THE TENANT OR THE LANDLORD WHO CARRIES THE RISK?
The question is whether the tenant is entitled to terminate the premises, as the premises cannot be used for the purpose due to the situation of COVID-19. A further question is whether the tenant is entitled to claim damages or pro rata reduction of the rent?
Article 23 of the Danish Business Lease Act states that: “Where the lease agreement is terminated prior to expiry, because a public authority has banned use of the premises by the lessee 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 above-mentioned provision concerns the situation, which is either due to (i) conditions of the landlord, or (ii) conditions where the landlord carries the risk that the government due to health-related or other reasons prohibits the use of the premises.
The crucial fact in this matter is whether the prohibition of the use of the premises is considered as a defect, and the defect is due to conditions caused by the landlord, and the landlord carries the risk for this.
However, according to the Danish case law, it is proved that it is the tenant who shall carry the risk for e.g. restrictions/prohibitions, as a result of the general developments in the society. This is also stated in previous cases from 1938 (JD. 1938.89) and 1942 (JD.1942.159).
The case from 1938 concerned an amendment in the shopping hours law (in Danish: “Lukkeloven”), which prohibited sale of tabaco outside opening hours. The courts of justice determined that it was the tenant and not the landlord who should carry the risk. Correspondingly, in the case from 1942, the court of justice determined that the tenant of a dairy outlet store should carry the risk that the tenant could not use the premises for the required purpose, as a result of the regulation, which required a permission to sell milk and cream. On this basis the courts of justice found that the tenant was not entitled to terminate the lease agreement, and the tenant was therefore obliged to pay the rent.
Please note that the above-mentioned decisions are of an earlier date. Naturally, case law is incomplete in this matter. However, it is our assessment that the decisions give a certain indication that it is the tenant who carries the risk, and consequently the tenant is not entitled to terminate the lease agreement. As a result, the courts of justice will probably reach the same decision, such as the tenant will carry the risk that the premises cannot be used for the purpose due to the Prohibition. However, this must be determined on this basis of a specific assessment of the individual circumstances, and the contract terms in the specific lease agreements.
RISK ASSESMENT – SHOPPING CENTRE
The risk assessment may probably be different regarding shopping centres. This is because, it is not only the operation of the premises which shall be closed, but also the shopping centres which must be shut down, except for convenience stores or pharmacies, situated in shopping centres.
The courts of justice might get to the conclusion that the premises have a defect (in title), which the landlord bears the risk of. In this case the tenant is not obliged to pay any rent within the period of prohibition. Nevertheless, it is still our opinion that shut down of the shopping centres do not legitimate the tenant to terminate the lease agreements.
The concrete answer to whether it is the landlord or the tenant who has the risk assessment must be found within the lease agreements and is determined by a specific assessment of the circumstances.
SUMMARY
The Prohibition against gathering has already caused devastating consequences for shopping centres and the retail industry.
It must be stressed that, the tenant bears the risk in relation to the use of the premises during the period of the prohibition against gathering. It is likely that the tenant will not be legitimate to claim a remedy for breach of the lease agreement. This is because the COVID-19- situation is not considered as a defect but as an external event such as force-majeure, which cannot be blamed on the landlord. However, the risk assessment may be different in relation to shopping centres, but generally this is determined by the specific assessment of the circumstances and the lease agreement.
COMMON COMMERCIELSOLUTION
We recommend that current lease agreements shall be reviewed in respect of an assessment of the actual situation and the specific contracts terms.
Furthermore, it is our recommendation that the landlords shall promote dialogue with the tenants in the preparation of obtaining a common commercial solution for the benefit of the tenant and the landlord. As for new lease agreements, it is important that the lease agreements take the legal position into account regarding the current situation due to COVID-19, but also the situation afterwards.
Lundgrens Real Estate Team has an extensive experience in providing competent legal advice. If you have any questions with respect to your commercial lease agreements and your obligations due to COVID-19, please do not hesitate to contact us.
Michala Ring Gale
Email: mrg@lundgrens.dk
Phone: + 45 9189 6464
Niels Gram-Hanssen
Email: ngh@lundgrens.dk
Phone: +45 2524 5119
