In the case of an application for the reduction of rent by 50% filed by the lessee in a leasing of industry agreement (made up of 26 dwellings for tourist accommodation and one business premises property) with a lessor, who has the legal status of “big owner”, the Court of First Instance number 20 of Barcelona has issued the recent judgment of 8th January upholding the application filed by the lessor, based upon the rebus sic stantibus clause (RSSC), imposing costs upon the lessor.
In the legal grounds the court analyses three basic questions:
first, concept and requirements of said clause;
second, whether, as anticipated by the lawmaker in Royal Decree-Law 15/2020, the consequences attributable to a leasing of industry agreement affected by the pandemic, the doctrine of the CRSS is applicable; and
third, if the RSSC can be applied in the case being judged and under which terms.
As far as the first question is concerned, it is stated that the RSSC is a clause created by case law, which means a moderation of the “pacta sunt servanda” principle (Latin for “agreements must be kept”), which allows the modification or termination of a contract when certain supervening circumstances concur, which are exceptional and unforeseen at the time of establishing the conditions of the contract, which involve a substantial alteration to the business basis upon which the contractual will was formed. The rationale is found in the principle of good faith established in articles 7.1 and 1258 of the Civil Code. It is contemplated in compared law (German, Italian and Anglo Saxon law) and also in article 6.2.2. of the Unidroit Principles and 6.111 of the European Principles of Law of Contracts, it being possible for said principles to be used as interpretative criteria of our legal order, in accordance with reiterated case law of the Spanish Supreme Court.
The requirements according to the case law of the Spanish Supreme Court (judgments of 30th June 2014, 9thJanuary 2019 and 20th March 2020) are:
(i) extraordinary and unforeseen alteration of the elements taken into account upon signing the contract, in such a way that the new situation has altered the basis of the business;
(ii) such alteration produces, either the frustration of the purpose of the contract, or serious and excessively costly damage to one of the parties, going against the criteria of good faith and fair dealing;
(iii) the parties have attempted the negotiation of a modification to the contract without reaching an agreement;
(iv) the solution which is being sought is, either ending the contract, or modifying it in such a way that losses and gains derived from the change are distributed between the parties in an equal and fair manner.
With regard to the second question, the court understands that Royal Decree 15/20 establishes a legal consequence (moratorium) to the problem at hand, but this is not the only possible consequence and the claimant may turn to RSCC in order to attempt to find other measures intended for achieving contractual balance, if the claimant understands that the moratorium, in the specific contract, does not generate this contractual balance and neither does it re-establish the basis of the business. This is all in accordance with the principles of good faith and fair dealing, which must be the basis of contractual relations and on the understanding that the RSCC constitutes, a part from a creation of case law, the materialisation of a general principle of law in terms of obligations and contracts and that it is a source of law (article 1.4 of the Civil Code) and that, therefore, it is a guiding principle for the whole legal system. The court based its conclusion on three points:
(i) the case law of the Supreme Court regarding this clause and the legislation which regulates it does not establish a sole consequence where there is an extraordinary alteration of the circumstances;
(ii) the purpose of the Royal Decree Law 15/2020 is not to reach contractual balance;
(iii) other regulations exist which allow the application of RSCC, such as the Law of Navarra 498 or the Decree-Law 34/2020 of 20th October passed by the Government of Catalonia (Generalitat de Catalunya).
With regard to the third issue, the court considers that the four requirements established by the case law of the Supreme Court are met in this case. It should be noted that the court deems the second requirement to have been met (alteration of the business base as a result of serious and excessively costly damage to the lessee) after analysing the income obtained by the lessee in the 2019 financial year and comparing it to that obtained in 2020, resulting in a clear net profit in the 2019 financial year, while from January to September of 2020, losses have been generated which are greater than the profits made in 2019; turnover has been reduced by 70% from September 2019 to September 2020; the affordability rate (ratio between annual expenses on rent and annual turnover) has increased by 144,04% in 2020 compared with that of 2019. While an alteration in the contractual base arises for the lessee, due to a considerable reduction in profits which were rationally expected to be obtained, the lessor has not been disadvantaged in relation to what was aimed to be achieved with the rented properties, because they were already being rented. With regard to the fourth requirement (modification to the contract to the extent that losses and gains derived from the change are distributed between the parties in an equal and fair manner) the court considers that the demand made by the complainant is equal and fair because with the payment of 50% of the rent, the lessee is bearing losses in excess of 50%.
With regard to the lessor’s argument that the lessee had the option of terminating the contract in view of the losses, the court stresses that, as it is a lease of industry agreement, there are other costs that go beyond the lease agreement and that must continue to be paid even if the contract is terminated (employee salaries, social security, insurance, initial investments) thus, if the lessee decided to maintain the contract for profits that it may bring in some months, it is understood that this decision must prevail because it also implies maintaining the other related contracts.
This judgment is not yet final and the definitive criteria, which will finally be imposed regarding the application of RSSC to lessees of business premises which have suffered legal restrictions and limitations as a consequence of the pandemic, is unknown.
In this case, various aspects are notable:
(i) the speed with which the procedure has been processed (it has only taken seven months to obtain the judgment as from the date of filing the claim in the month of June 2020);
(ii) the retrospective application of the rent reduction measure (from 1st April 2020 and until the finalisation of the contract);
(iii) the detail and the grounds for the arguments in favour of the application of RSSC for the benefit of the lessee, both based upon its nature (as the main guiding principle of the legal order) as well as its purpose (to achieve the re-establishment of the contractual rebalancing based upon the principles of justice and fair dealing, which must prevail in contract law);
(iv) the reasoning on the compatibility between the Royal Decree Law 15/2020 with the request for the reduction of rent in application of the rebus clause;
(v) the maintenance of the principle of conserving the business.
Mireia Bosch
Vilá Abogados
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22nd January 2021
