A possible suspension of commercial and professional rents during the state of crisis
Luxembourg, 2020-06-01
Government measures taken in order to fight COVID-19 have forced many businesses to either reduce or entirely stop their activities. As these businesses now face serious cash flow problems, more and more voices are calling for a suspension of contractual obligations in commercial and professional leases.
Lessors remain free to terminate the lease on the ground of non-payment of rent (Art. 1762-11, Luxembourg Civil Code). However, evictions are suspended until the end of the state of crisis (Art. 5 (1), amended Grand-Ducal Regulation of 25 March 2020).
Thus, a Bill No. 7551 on rent suspension for commercial and professional leases during the state of crisis and amending the Law of 4 December 1967 on income tax has been submitted to the Chamber of Deputies on 6 April 2020.
The key points of this bill, which has not yet been adopted, are:
- The suspension of the obligation to pay rent and the suspension of the lessor’s right to terminate a lease for non-payment of rent during the state of crisis;
- The lessee’s obligation to pay rent arrears until 30 June 2021;
- An incentive fiscal mechanism allowing the lessor, who reduces or waives rent during the state of crisis, to fiscally deduct the financial concessions which are being assimilated to expenses (amount limited to EUR 10.000).
There is also a public petition N° 1581 launched on 8 May 2020, with already over 580 signatures, advocating for an adaption of commercial rents according to turnover in case of extraordinary events such as the COVID-19 crisis and the possibility for the lessor to claim compensation from the government for the lost rent.
In our opinion, the lessee’s obligation to pay rent is already suspended.
Art. 1719 3° of the Luxembourg Civil Code provides that the lessor has to ensure the lessee’s quiet possession of the leased premises during the term of the lease.
Whilst lockdown restrictions apply, a lessee could argue that the lessor cannot fulfil the aforementioned duty anymore because the activity agreed by contract at the beginning of the lease can no longer be executed.
The lessee could invoke the exception of non-execution on the basis of Article 1134-2 of the Luxembourg Civil Code which provides that each party can suspend the execution of his obligation if the other party has not executed his own obligation.
However, the lessor could justify his failure to assure the lessee’s peaceful enjoyment of the leased premises by invoking that government action during COVID-19 crisis constitutes a force majeure (an external cause which cannot be attributed to the parties of the lease contract) and that he is therefore exonerated of his contractual liability (Art. 1147 and 1148, Luxembourg Civil Code).
According to Luxembourg case law in case of temporary unforeseen events, the debtor’s obligation is only suspended until the end of the obstacle.
The government action during the state of crises could be considered a temporary unforeseen event.
Thus, the suspension of the lessee’s obligation to pay rent ends as soon as his business can resume the activity.
Author: Anne-Marie Schmit, attorney at law
ETUDE ANNE-MARIE SCHMIT