Tenants in the hospitality and the retail sectors may not always refer to the Covid-19 pandemic as force majeure

author: dr. Mátyás RADA

Restrictive measures enacted to combat the coronavirus pandemic have proven to be exceptionally sensitive for tenants in the hospitality and retail sectors. Many are unable to pay their rent through no fault of their own. However, landlords are under no obligation to accept a tenant’s claim for a reduction in rent due to a loss of income. According to Kapolyi Law Firm, enterprises in the tourism sector are somewhat protected by a government decree adopted during the state of danger. However, in the retail sector, the only solution seems to be a mutual agreement between the landlords and the tenants. Claiming force majeure in either sector would not be easily defensible in court.

The coronavirus pandemic put many businesses operating in leased properties in a difficult position. This warrants the question of what legal options tenants have to reduce rents or delay payment. One of the most severely affected sectors is the tourism industry. The curfew measures implemented on the 28th of March implicitly prohibit the use of hotels for hospitality services. Prior to this, foreign private persons have been prohibited from entering Hungary from the 16th of March. As a result, several hotels temporarily suspended their operation. Several retailers have been severely affected by the pandemic too. While governmental measures do not prohibit the opening of stores which do not sell essential products (i.e. bookstores and clothing retailers), as a result of curfew measures, said retailers will have less customers, which may result in their closure.

Hotels enjoy some protection due to the Government Decree, while retailers do not

According to Kapolyi Law Firm, for hotel operator tenants a temporary source of help could be the Government Decree[1] which stipulates that leases for non-residential purposes may not be terminated until the 30th of June 2020, and the rent may not be increased until the state of danger is over. It may strengthen the tenant’s bargaining position. Therefore, the landlord may not terminate the lease by extraordinary notice until said date if the tenant is unable to pay its rent due to a lack of revenue. However, this does not preclude the landlord from continuing to claim the due rent, interest for late payment or penalty for late payment. Concurrently, tenants of stores in malls, shopping centres and other buildings do not enjoy any legal protections despite restrictions on opening hours and shopping.

Claiming force majeure is difficult to defend before courts, therefore the appropriate solution is the mutual agreement of the parties

The question arises for tenants engaged in commercial activities and accommodation provision services if they can claim relief for a force majeure event due to the coronavirus pandemic, which would relieve them of their obligation to pay rent and from their liability for a breach of contract resulting from the late payment of rent. According to Kapolyi Law Firm, since force majeure clauses in lease contracts usually cover such events, which are beyond the control of the parties, and may result in the damaging or destroying of the property stipulated in the lease contract, which events makes the property unusable (i.e.: fire, flood, or even events of war). As such, a new interpretation of “unusable” may arise as a result of the pandemic situation. However, it is Kapolyi Law Firm’s view, that in the present absence of a supportive legal interpretation, it cannot be said with absolute certainty that a tenant can successfully claim in court that he/she could not utilise the rental property for the purpose stipulated in the lease contract as a result of the pandemic, and therefore he/she should be exempt from their obligation to pay rent. Furthermore, it is questionable whether this claim will stand in court, as based on case law, if – for any reason – the tenant is unable to meet his/her obligation to pay the rent for a reason beyond his/her control, that is a commercial risk assumed by the tenant. Pursuant to legal provisions currently in force, landlords are not expected to assume the risks of running a hotel or business at a loss. As the current pandemic and its effects are unprecedented, there are usually no detailed provisions stipulated in the leases that permit tenants to claim situation-specific discounts and reductions.

From a business perspective, landlords may in the long run have a greater interest in retaining otherwise reliable tenants, than in forcibly collecting rents and applying penalties for late payment. In affected sectors, there are already several cases where the landlord and the tenant are negotiating changes to the leases and the landlords provide various facilitations to the tenants. However, it is important to note that the provision of facilitations are dictated by the landlord’s commercial interests, instead of specific contractual or legal obligations. In the absence of supporting legislation, cooperation and negotiation between landlords and tenants could be a temporary solution in the current crisis.

[1] 47/2020. (III. 18.)