Is it possible to cancel, suspend or modify the Lease Agreements conditions due to the COVID-19 crisis?
In order to answer this question, two phases must be considered.
The first phase, in which the economic activity of the Tenant was prohibited by the State in order to contain the epidemic. The second phase, in which the State bans ceased and the Tenant returned to business.
In the first phase, the Tenant had to pay the rent for a property that was in fact useless (safe as a warehouse and in view of business restart).
In this situation, interpreters and the first rulings tend to admit that, pursuant to articles 1256 and 1464 of Italian Civil Code, the Tenant may apply to the Court to ask for a reduction in the rent, given the impossibility of the Landlord’s performance, that is both temporary (because limited to the duration of the State prohibition) and partial(because the Tenant enjoyed the property anyway, although for few purposes). In application of these principles, on May 29, 2020, the Court of Rome ruled that the Tenant was entitled to a 70% reduction in the rent.
A similar solution is provided by Article 216 of Decree-Law No 34/2020, according to which the suspension of sporting activities, due to the Covid – 19 emergency, is always considered, in accordance with Articles 1256, 1464, 1467 and 1468 of the Civil Code, as a factor determining an imbalance in the interest of the parties in the lease of gyms, swimming pools and sports facilities owned by private individuals. As a result of this imbalance, the Tenant is entitled, solely from March 2020 to July 2020, to a corresponding 50 per cent reduction in the rent, unless proof of a different amount is provided by the party involved.
In the second phase, the Tenant has restarted his business, but he is struggling to pay the rent, because of the drop in revenues caused by the general economic crisis started by the Covid – 19 and compliance with the containment measures.
In this case, the prevailing opinion is that there is no general rule which entitles the Tenant to obtain a reduction in the rent.
As a matter of fact, the Tenant’s financial difficulties do not give him the right either to reduce the rent or to terminate the contract, but there are exceptions.
One exception is given, in the case of a business rental, by article 1623 of Italian Civil Code, according to which the Tenant has the right to a reduction in the rent, or to the termination of the contract, provided that, as a result of a statutory provision or a measure of the authority concerning production management, the relationship is significantly altered so that the parties of the contract suffer a loss and an advantage, respectively.
Another exception is offered by art. 27, paragraph 8, law no. 392 of 1978, which, in the presence of serious reasons, allows the Tenant to withdraw from the contract with 6 months’ notice. The Italian case law defines “serious reason“: “facts beyond the control of the Tenant, unavoidable and occurred subsequently to the execution of the contract, such as to make the continuation of the contractual relationship burdensome, and may consist, for commercial leases, also in the (negative) trend of the economic conjuncture occurred and objectively unpredictable “(Italian Supreme Court, decisions n. 8706/2015, No. 1206/2015, No. 26892/2014). According to this interpretation, it will be reasonably easy for the Tenant to invoke the negative economic situation caused by Covid -19 in order to terminate the contract.
However, the solution leading to the termination of the contract is considered unsatisfactory, as the parties should aim to maintain the contract, albeit under different economic conditions.
For this reason, in Italy the discussion has focused on whether or not there is an obligation for the parties to renew in good faith the terms of the contract, and, in the event the negotiation fails, a right to apply to the Court in order to reconduct the contract to fairness conditions.
Some argue that the State should adopt a general measure in order to avoid case-by-case interpretations.