The COVID-19 measures of the Hungarian Government and their effects on non-residential lease agreements

With regard to the COVID19 epidemic the Hungarian Government has prog­ressively implemented certain restrictive measures that may have an impact on the use of commercial stores. Let us provide you a brief summary below on the implemented measures and the affects thereof on non-residential lease agreements.

The measures of the Government

On March 17, 2020, as a first step, the Government implemented strict, stringency measures for hindering the spread of the COVID19 epidemic [Governmental Decree no. 46/2020. (III. 16.)].

It is prohibited to stay at premises offering catering services between 3 p.m. and 6 a.m. [non-applicable to (i) employees working therein and (ii) people staying therein for shift-change, take-away, or payment purposes].

Between 3 p.m. and 6 a.m. no person (excluding the employees and the business operators) shall stay in stores that do not sell foodstuff, perfume, drugstore products, household cleaning materials, chemical products or hygienic paper products, or in stores that do not qualify as pharmacies, tobacco shops, petrol stations or stores selling medical equipment.

Due to the decree it is prohibited to visit cultural institutions (theatre, cinema, museums, etc.) and a general prohibition shall be applicable to events as well (excluding religious rites, civil wedding ceremonies, funerals).

On March 18, 2020 the Government introduced special provisions for certain leases most affected by the epidemic [47/2020. no. Government Decree (III. 18.)].

Leases for non-residential premises in the tourism, catering, entertainment, gambling, film, performance, event and sports sectors may not be terminated until June 30, 2020. The rent under these leases may not be increased during the emergency, even if the lease contract allows.

On March 27, 2020 the curfew restrictions became more stringent by the Government Decree no. 71/2020 (III.27.). According to the decree everyone shall restrict social contact with other people – excluding with people from the same household – to the lowest possible level and maintain at least a 1.5 metre distance from others. The decree prohibited staying at businesses offering catering services (which prohibition is not applicable to employees working therein), however take-away and home delivery services are still possible. People may only leave their permanent, temporary or private residence for valid reasons determined in this decree.

The following shall qualify as such valid reasons:

  1. working, other professional duties, or conducting other economic, agricultural or forestry activities and purchasing in stores selling assets, equipment (especially technical goods, building materials and equipment) essential for performing such tasks and duties connected to such activities
  2. escorting infants when taking care of groups of children
  3. seeking healthcare supplies and medical services, including – beyond the treatment activities – healthcare services aimed at the protection of physical and mental health (especially psychotherapies, physiotherapy treatments, corrective-gymnastic therapy)
  4. individual leisure sport activities, recreational walking activities as specified in Article 5
  5. family gatherings for the purpose of attending weddings and funerals
  6. purchasing in grocery stores selling daily consumer products (hereinafter: Grocery Store)
  7. purchasing in stores selling other daily consumer products (perfume, drugstore products, household cleaning materials, chemical products or hygienic paper products) (hereinafter: Drugstore)
  8. purchasing in stores selling pet food and animal fodder;
  9. purchasing in agricultural stores including stores selling fertiliser, and slaughterhouses;
  10. purchasing in markets and local produce markets (hereinafter: Market)
  11. purchasing in stores selling medicine, medical equipment (hereinafter: Pharmacy)
  12. purchasing at petrol stations;
  13. purchasing in tobacco shops;
  14. using hairdressing and manicure services
  15. using transport, cleaning and hygienic services
  16. using repair services of cars, bicycles, agricultural and forestry machines and equipment,
  17. using services related to waste management;
  18. if necessary, managing administrational duties requiring personal appearance, namely using the services of authorities, banks, financial, insurance companies and the post office;
  19. taking care of animals, walking pets in public areas, using services of a veterinarian surgery
  20. fulfilling parents’ rights and obligations
  21. religious activities

Legal consequences

The listed restrictions make a significant impact on the real-estate sector (especially on the retail branch). The operation of commercial units (which has been profitable recently) has collapsed from one day to the next due to the loss of clients. According to our experiences both the lessors and lessees are seeking survival solutions on the market, including legal arguments serving to protect their interests.

We need to take into account the fact that the Hungarian civil code (hereinafter: “Civil Code“) does not contain a generally applicable provision for epidemic or for another unavoidable circumstance that qualifies as a force majeure. However, (force majeure-type) circumstances non-foreseeable at the conclusion of an agreement can be legally significant:

  1. In cases of claims for damages due to breach of contract: the party breaching the contract shall be relieved of its liability if it proves that the damage occurred in consequence of an unforeseen circumstance beyond its control, and that there had been no reasonable cause to take action for preventing or mitigating the damage;
  2. In cases where the performance of services becomes impossible: if none of the parties is liable for the impossibility of the performance, then the parties shall settle the account with each other regarding the performed services but beyond such no claim for damages shall be requested. However, we draw your attention to the fact that the judgement of economic unfeasibility is quite controversial in Hungary;
  3. In the case of requesting to have the agreement amended by the court: the court is entitled to amend the agreement upon the request of any of the contracting parties if in the long-term contractual relationship of the parties (such as a lease agreement concluded for a term of years) performing the contract under the same terms is likely to harm his relevant lawful interests in consequence of a circumstance that has occurred after the conclusion of the contract, and (i) the possibility of that change of circumstances could not have been foreseen at the time of conclusion of the contract; (ii) the change of circumstances has not been caused by the contracting party requesting the amendment; and (iii) such change in circumstances cannot be regarded as normal business risks. The court shall have powers to amend the contract at the earliest time from the date of enforcement of the right to amend the contract before the court (the actual date of filing the statement of claim), in a manner to ensure that neither of the parties should suffer any harm to their relevant lawful interests in consequence of any change in the circumstances.

Obviously, the parties can stipulate force majeure clauses in their agreement, the judgement of such cases depends on the applicability of these provisions and the content thereof.

According to the trending of the market, in the current situation the lessees of (commercial) lease agreements reject the payment of rent with reference to paragraph (2) of Section 6.336 of the Civil Code. The referred provision is as follows: “No lease payments shall be made for the period when the thing cannot be used for reasons beyond the lessee’s control.” The argument is that they can (and shall) conduct solely commercial activities in the store, therefore the usage of the store guaranteed by the lessor incorporates the usage for commercial purposes as well.

The application of the provision referred to above to the current situation generates many interpretational questions to which even the absenting judicial practice cannot answer. According to the argument representing the interest of the lessee, it is a provision that imposes liability to the lessor, regarding the usage of the premises intended to be leased by the lessor for commercial premises, in all cases and for the entire term, in cases where the reason of the absenting usage is within the sphere of interest of the lessee. However, the lessor could argue that since the commercial usage (i.e. the profitability of the lessee) is not subject to the agreement, the lessee shall bear the risk of their own activities (such as in the case of leasing agreements), furthermore the government measures do not aim to close stores, rather “solely” prohibits staying in the stores (excluding the employees working therein). The future court awards to be made regarding these disputes will be available only in several years. In our opinion the final decision may depend on the extent of the commercial-specific clauses the parties stipulated in the lease agreement and that on what extent the lessee can prove that the lessor accepted certain characteristics of the leased premises at the conclusion of the agreement (for example: extent of visiting clients).

If the rejection of the payment of the rent proves to be justified in accordance with paragraph (2) of Section 6:336 of the Civil Code, then the extent of the rent reduction is questionable as well, as the provision concerned does not help in calculating the extent of the justified rent reduction. Do we need to calculate the extent of the rent reduction by collating the original opening hours with the opening hours resulted by the restrictions or shall we take a 24-hour base value? Is the extent of the decrease in turnover relevant? In our opinion, the calculation may be made with regard to the rent and the opening hours of the agreement.

We should not forget the fact that the implemented prohibitional measures shall not be applied to the employees of the stores. As a consequence, the store shall not be closed (as the current situation stands) and the operation cost will presumably be borne by the lessee.

We believe that the current circumstances do not entitle the lessee to terminate the lease agreement.

The lessees have another option to manage the situation by having the agreement amended by the court. In this case special attention must be paid to initiate the civil procedure as early as possible since the rent can be amended with retroactive effect only from the date of filing the statement of claim to the court. Although it must be emphasized that the outcome of these statement of claims cannot be clearly foreseen either.

It is also questionable how long the epidemic restriction (state of emergency) will be applicable. Do we need to prepare for a long-term economic crisis or do the restrictive measures create only temporary difficulties? These circumstances will affect the success of the parties’ legal tools. It is certain that the restrictions and the commercial consequences thereof burden the entire industry (lessors and lessees as well), therefore we will need risk-sharing techniques aimed at long-term cooperation rather than legal battles in which the consequences are exclusively imposed solely to one of the parties.