« The real antidote to the epidemic is not isolation, but cooperation. »

Yuval Noah Harari, le Monde, April 5, 2020

Commercial Rents in Spain in the Face of the Covid-19 Crisis: Towards a Regulated Renegotiation of Commercial Leases

Following up on our article published on April 13th, we are informing you of the measures taken by the Spanish government, as outlined in the Royal Decree of April 21st, published in the Official Gazette on April 22nd, 2020.

This law stems from the observation that many businesses and self-employed individuals have had to cease their operations, either completely or partially, for nearly six weeks now.

This entirely exceptional situation, worthy of the most outlandish science fiction scenarios, has resulted, depending on the circumstances, in either a complete absence of invoicing or a drastic reduction in revenue.

Entrepreneurs, facing numerous obligations, are experiencing significant cash flow difficulties and must nevertheless continue to pay their commercial rent.

A Previously Inadequate Legal Framework

The Spanish Tenancy Law (29/1994, of November 24) provides for almost no exemptions, except for Article 26 in cases where the premises become uninhabitable due to work carried out by the landlord.

This new regulation clarifies that recourse to the general rule of force majeure in the Civil Code is not appropriate.

The government is therefore finally addressing the application of the legal principle "rebus sic stantibus," that is, the recognition of unforeseen circumstances.

This regulation governs the possibility of renegotiating and modifying contractual obligations. It establishes the conditions for overriding the principle "pacta sunt servanda," according to which the contract is binding on the parties.

It is necessary that the risk be unforeseeable, imperative, and that the obligation has become excessively onerous.

Why the Health Crisis Changes the Game

With regard to the global COVID-19 health crisis, the first two conditions are clearly met.

It is therefore the excessively onerous nature of the obligation that the law has clarified.

We have summarized these provisions:

1. Leases with a large landlord or a public landlord

The text distinguishes between premises belonging to large landlords or public landlords and other landlords.

A large landlord is defined as a landlord, whether an individual or a legal entity, owning more than 10 buildings (garages and cellars are not included in this count) or with a constructed area exceeding 1,500 m².

  • When should the application be submitted?: By May 22, 2020.
  • What can be expected?: A payment deferral of up to 4 months, payable over a period of two years.
  • Can the landlord refuse?: If the conditions are met, the landlord is obligated to accept, unless they had already reached an agreement with the tenant (payment deferral or reduction) before the law came into effect.

2. Leases with other landlords

In other cases, the tenant must submit a request to their landlord.

  • When should the application be submitted?: By May 22, 2020.
  • What can be expected?: A payment extension, the details of which must be agreed upon with the landlord, a rent reduction, or other concessions. The possibility of using the funds stipulated as a security deposit (subject to replenishing it within one year).
  • Can the landlord refuse?: Even if conditions (iii) are met, the landlord has the right to refuse.

3. Conditions to be met to benefit from the scheme

3.1 Regarding natural persons:

  • Be affiliated with social security,
  • Have had their activity suspended due to the COVID crisis,
  • A minimum decrease of 75% in turnover for the month preceding the date of application (compared to the average monthly billing for the quarter of the previous year),

3.2 Regarding legal entities

  • The thresholds (2) established by Article 257.1 of the Law on Capital Companies must not exceed:
    • Assets must not exceed €4,000,000.
    • Annual turnover must not exceed €8,000,000.
    • The number of employees must not exceed 50.
  • The business must have had its activity suspended due to the COVID crisis.
  • There must have been a minimum decrease of 75% in turnover for the month preceding the date of application (compared to the average monthly invoicing for the quarter of the previous year).

Please note that benefiting from the provisions of this text when the tenant did not meet the criteria may give rise to the payment of penalties (damages, but it will be necessary to demonstrate harm, or even late payment interest).

4.Supporting Documents to Provide

  • A sworn statement regarding the loss of revenue, bearing in mind that the landlord may request to verify the tenant's accounting documents.
  • A certificate of total suspension of activity issued by the tax authorities.

This is a logical continuation of the government's decision concerning residential leases. We are constantly monitoring new measures taken by the authorities to support businesses and will keep you regularly informed. One thing is certain: the parties to the contract are encouraged to communicate and find ways to cooperate.

We hear everywhere that this period of crisis will bring about changes; everything suggests that we haven't seen the last of what's to come.

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