COVID-19: How to manage the leasehold? Shall rent be paid? And is the tenant obligated to keep the premises open for business?

The shutdown of Danish businesses resulting from the COVID-19 outbreak is an extreme situation with enormous consequences for businesses in Denmark. It prompts a number of questions, including how to proceed in relation to leaseholds (both as tenant and as landlord). This situation is unprecedented and therefore unlikely to be regulated in the lease agreement.  

Most recently it has been decided that a number of businesses such as restaurants, cafés, hairdressers, tanning salons, department stores and shops in shopping centers (except from super markets, pharmacies and the like) must be closed from 18 March 2020 and (so far) until 30 March 2020. 

Contact your landlord/tenant

If you have not contacted your landlord or tenant already, we recommend that you do so immediately in order to find a joint solution to navigate through these difficult times. The parties often have a common interest in finding long-term solutions in order to be able to maintain the leasehold. The landlord is not interested in vacancy and at the same time the tenant is interested in maintaining some type of operation during this extraordinary situation. Several landlords have already granted their tenants an extension of the rent payments due 1 April 2020 and we have experience with landlords accepting requests for a (temporary) reduction of opening hours or complete closure. 

It is also a good idea to check the lease agreement whether there are terms which may regulate this situation directly or indirectly. This, however, will rarely be the case. 

Is there a force majeure situation? What are the implications?

As described in our previous newsletters, “force majeure” means events that are (i) unforeseeable and (ii) beyond the parties’ control, which make them (iii) an impediment to performance of an agreement. Thus, it must be extraordinary circumstances like e.g. war, import bans and natural disasters - in other words a circumstance of a very extraordinary nature. In general, case law has interpreted the force majeure concept very restrictively and it remains to be seen whether the Danish court finds an event of pandemic like the COVID-19 outbreak to be a force majeure event. This is, however, considered very likely with the destructive and extreme development we have seen. 

The main effect of force majeure is exemption from liability, which means that the party who breaches an agreement (in this case a lease agreement) due to a force majeure event does not have to pay damages to the other party. Thus, a party seeking to rely on force majeure will have to prove that it is impossible to perform the agreement (e.g. pay rent or keep the shop open), and that the impossibility of performance is due to the force majeure event. 

Having regard to the latest development in Denmark, it is considered likely that force majeure will be relied on in a number of situations - meaning that is in reality impossible to meet one’s obligations under the agreement. 

Is the tenant obligated to pay rent?

The significant slowdown has seriously affected many tenants' liquidity and it may therefore be difficult for many to meet rent payments in the foreseeable future. However, the clear legal stand is that the tenant must pay rent on time and that non-payment of rent may lead to termination of the leasehold without notice. 

The tenant's shortage of liquidity is generally not regarded as an "impossibility" and therefore the tenant cannot claim “force majeure” and evade paying rent. 

It is therefore important that tenants contact their landlords in this scenario in order to potentially agree on an extension of the rent payment or agree on a reduction of the rent. 

A reduction of rent may also be a possibility for restaurants, cafés, hairdressers, shops etc. which are affected by the recent executive order regarding mandatory closure for customers. However, in general, this also requires an agreement with the landlord, see further below. 

Must the tenant keep the premises open for business? 

It follows from the Danish business lease act that the tenant of a shop, a hotel, a restaurant or the like must keep the premises open for business and in good and sound operation. As a general rule, the landlord may terminate the lease without notice if the tenant fails to meet the obligation to stay open for business. As the COVID-19 situation has evolved, it is, however, far from given that non-operation from the leased premises will be characterized as "material breach" which enables the landlord to terminate the lease without notice.

"Voluntary closure"

Several tenants, including retail chains have already faced the consequences of the latest developments and have (temporarily) closed their outlets. Such “voluntary” closure of operation from the leased premises does not entail that the tenant may retain rent payment, and it does not give legal basis for the tenants to terminate the lease agreement on these grounds. In principle, the tenant’s “voluntary” closure of the premises may be considered a breach which may justify a termination without notice on behalf of the landlord. However, as stated above, it is not certain under Danish law that the landlord during this present situation is entitled to terminate - and most landlords also do not have any commercial interest in such actions. 

Order to shut down

What applies to the tenants who are comprised by the executive order to close their shops (temporarily) until 30 March 2020. May a tenant omit to pay rent in this situation? And may a tenant opt to terminate the lease agreement without notice? 

The tenant and the landlord will of course be obligated to follow the executive order to keep the premises closed. A closure will thus not imply any breach of the lease agreement on the part of the tenant, and the landlord will not be able to terminate the lease without notice due the lack of operations from the premises. 

The question is whether the tenant may terminate the lease due to the fact that the leasehold  no longer can be used for the agreed purpose (as no operations may be carried out from the leased premises) and whether the tenant is obligated to pay rent during the period where the tenant must keep the premises closed?

The decisive factor in this assessment probably is whether it can be regarded as a defect (in title) in the lease. It is an assessment of whether the leased premises may be regarded to be in the "condition" as the tenant may legally require under the lease agreement and the provisions of the business lease act. This assessment is objective. It is thus not a requirement that there must be something “to blame” the landlord for. However, the general rule is that the “defect” is due to circumstances for which the landlord bears the risk. If, on the other hand, it is due to circumstances for which the tenant bears the risk, there is no legal defect in the lease. 

Basically, it is the tenant who bears the risk of the general development of society, changes in surroundings and changes of the legislation of a general nature. Such circumstances will affect all operators of shops irrespective of whether the shop is operated from leased premises or owned premises. Such external circumstances - as e.g. an executive order to keep shops closed - will therefore (probably) not be regarded as a legal defect in terms of lease law. 

If no default is considered to persist, the tenant has no remedies for breach against the landlord as e.g. termination without notice or claim for a proportionate reduction of the rent. However, if the prohibition affected by the executive order continues for a (very) long period of time, it cannot be ruled out that a tenant may (successfully) demand to be released from the lease agreement. 

With respect to leaseholds in shopping centers, the (risk) assessment may possibly be different as it is not only the operation from the premises which is closed but also the shopping center itself except from supermarkets, pharmacies etc. The wording of the executive order reads as follows “shopping centers, department stores, covered arcades and bazaars” and at the same time it is repeated that “convenience stores, pharmacies,...” may remain open. The executive order could then be interpreted to the effect that the leasehold suffers from a defect (in title) for which the landlord is responsible and that the tenant therefore does not have to pay rent for the period where there is an order to stay closed. Considering the temporary nature of the executive order, it is, however, also in this case the assessment that the tenant will not be entitled to terminate the lease without notice. Furthermore, the executive order gives rise to a number of other questions, including e.g. understanding/limitation of “shopping centers, department stores, covered arcades and bazaars”. 

It is indeed a very extraordinary and unusual situation we are facing. Relevant case law is therefore very sparse and without precedents which are comparable to the given situation of today. There are, however, some historic rulings from 1938 and 1942 which may give an indication of where we stand on this very uncertain and unknown area: 

In a case from 1938 a change of the legislation governing retail opening hours resulted in a kiosk owner being unable to sell tobacco after the closing hours of ordinary shops. This implied a substantial loss to the owner who claimed compensation from the landlord and further claimed that the lease be terminated without notice. The ruling was that the tenant bore the risk of the subsequent change of legislation and thus that the tenant was not entitled to terminate the lease without notice. The tenant also had to pay full rent.

In another case from 1942 a "milk scheme" was introduced which required a permit to sell milk and cream and a tenant of a dairy plant was not able to use the premises for the desired purpose since the tenant was denied such permit. The tenant claimed that the lease agreement could be terminated without notice and that the rent paid should be repaid. This ruling also concluded that the tenant carried the risk of any new legislation. Thus, the tenant was not able to terminate the lease without notice and the tenant had to pay rent. 

The above rulings show that in general the tenant bears the risk of external circumstances of a general nature as amended by legislation etc.

It should be emphasized that it is a specific assessment of the individual situations and also where the provisions of lease agreement play a part. Furthermore, it still remains to be seen how the courts will assess the present very extraordinary situation in Denmark and consider the parties’ risk. 

We therefore recommend again that the parties talk to each other and jointly find solutions.  

We are ready to help

Kromann Reumert has set up a special COVID-19 task force which constantly keeps an eye on tendencies, measures and proposed bills in order to be ready to assist Danish and foreign businesses the best way possible in relation to the challenges which COVID-19 presents. We have already handled a number of inquiries relating to COVID-19 and we are familiar with all the challenges which business are now facing in these difficult times.