Impact of the Coronavirus emergency on lease agreements

The measures that the Italian Government has taken since 1 March 2020 (and a number of regional government orders before then) to contain the spread of COVID-19, have resulted in the gradual shutdown (until 3 May as of now) of non-essential productive and commercial activities throughout the national territory (with the exception of the activities recently listed in the Italian Prime Minister Decree of 25 March 2020, identified by the relevant ATECO code, or in more restrictive regional government orders). One of the most frequently asked questions concerns the legal implications of the emergency on the performance of non-residential lease agreements (regulated by Law no 392/1978). In particular, tenants are wondering whether they are entitled to suspend lease payments, ask for a reduction or even terminate the agreement. Let us consider the available options.

1) IS IT POSSIBLE TO SUSPEND PAYMENT OF THE LEASE DURING THE PERIOD OF MANDATORY SHUTDOWN?

The orders to shut down manufacturing and commercial businesses prevent tenants from using the leased property for their business: this constitutes an event of force majeure (factum principis) which, in the circumstances, would excuse landlords from satisfying their obligation to ensure the continued availability of the leased premises due to an unexpected occurrence beyond their reasonable control. However, tenants may claim improper performance of the lease agreement and ask for a reduction pursuant to articles 1460 and 1464 of the Civil Code or for the return of any amounts already paid for the period of non-use of the property. The same may apply to the lease of a business by retail stores within shopping malls. We would suggest checking for clauses in the agreement providing for a limitation of lessors’ liability in a case of force majeure (factum principis).

2) DOES THIS APPLY TO ALL MANUFACTURING AND COMMERCIAL BUSINESSES?

In principle, the above suggestions may apply to all businesses which have been temporarily shut down as a result of the Government’s measures. However, pursuant to article 65, comma 1 of Decree-Law no. 18 of 17 March 2020, business owners who have leased property under land registry classification C1 (stores and shops) have been granted a tax credit of 60% of their March 2020 lease; this measure de facto cancels out the lease cost for the month and therefore a request for suspension of the lease payment would not be justifiable. However, if the suspension of business activities were to be extended but no tax relief concurrently granted, the tenant may ask for suspension of payment.
The tax credit is available for offset with effect from 25 March 2020, in the manner specified by Italian Revenue Agency Resolution no 13/E of 20 March 2020.

3) WHAT ABOUT THOSE ACTIVITIES WHICH HAVE NOT BEEN SUSPENDED BUT ARE BEING CARRIED OUT IN REMOTE MODE, I.E., WITHOUT USING THE LEASED PREMISES?
AND WHAT ABOUT THE POST-EMERGENCY PERIOD?

The challenging economic scenario and the length of the suspension measures could make it difficult for tenants to comply with the original terms and conditions of their lease agreements; this applies also to businesses which have not been shut down, but which may suffer from significant losses. Pursuant to article 1467 of the Italian Civil Code, tenants have the right to claim judicial termination of agreements (such as lease agreements) which require “continued or periodical performance”, in the event that continued performance by one party (i.e., payment of the lease) has become excessively burdensome because of an exceptional or unpredictable event (such as the spread of COVID-19 and the implementation of the restrictive measures to mitigate it).If, however, a tenant is not interested in terminating the arrangement (especially if the property leased is strategically located), we would suggest negotiating the amount of the lease payment, or the relevant terms of payment, on the grounds that the payment obligation may not be satisfied due to the impact of the government measures on the company’s turnover.

4) CAN THE CONTRACTUAL RELATIONSHIP BE TERMINATED?

In addition to the case of excessively burdensome performance of non-residential lease agreements described above (which may also apply to the lease of a business by retail stores within shopping malls), financial hardships resulting from the government measures to shut down manufacturing or commercial businesses (or from significant losses suffered by businesses which – albeit not shut down – are unable to meet their full potential due to the circumstances) may constitute “serious grounds” for termination of the agreement by the tenant pursuant to article 27 of Law 392/1978, subject to the required notice.  Needless to say, this will depend on the incidence of the government measures, in connection with their length and their impact on the businesses concerned.

5) WHAT TO DO NEXT?

We suggest that tenants make timely contact with their landlords to inform them of their intention to suspend payment of the lease (to meet their immediate cash requirements) due to the above reasons, making sure that there is no express termination clause for non-payment (since it cannot be ruled out that the landlords may dispute the tenants’ decisions); subsequently, tenants should attempt to renegotiate the terms of payment, at least throughout the state of emergency (even if business activities are resumed). Moreover, we recommend checking whether the insurance taken out expressly covers the risk of non-use of the property (unless limitations apply for force majeure).

Nicola Lattanzi & Anne-Manuelle Gaillet
Pirola Pennuto Zei & Associati
Milan, Italy

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This memorandum provides general information and does not constitute a professional opinion