COVID-19 PANDEMIC AFFECTS LEASE RELATIONS

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COVID-19 PANDEMIC AFFECTS LEASE RELATIONS

COVID-19 outbreak (“Pandemic”) triggered a business slowdown across the world, particularly in the retail sector. Landlords and tenants are therefore looking for a middle ground to minimise the losses and keep their leases.

Ukraine introduced the nationwide quarantine from 12 March by Resolution No. 211 of the Cabinet of Ministers of Ukraine (“Quarantine”). Major Ukrainian cities applied some restrictive measures, including shutdown of business centres, shopping malls, and other places of mass gathering. This led to parties’ inability to perform their obligations under the leases.

As of now, there are at least two main options for tenants and landlords to minimise the negative effect of the Quarantine on their businesses.

First option is to negotiate temporary amendments to the leases. For example, the parties to a lease may agree to:

  • establish a rent-free period or reduce the rent rate for the term of the Quarantine
  • include the amount of the rent, unpaid or underpaid during the Quarantine, into the after-Quarantine rent payments
  • if the tenant’s online sales have increased, link the rent calculations to the delta of the tenant’s online sales turnover

To reduce their expenses property owners may decrease the scope of ancillary services provided by the contractors, keeping only the services:

  • necessary to properly maintain the premises
  • impossible to suspend even during the Quarantine

As the second option, Ukrainian law provides tenants with a right to stop paying rent for the whole period of their involuntary inability to use the leased premises.

In addition, we recommend to analyse force-majeure clauses of leases to determine whether the parties may be released from liability for their default due to the Pandemic or Quarantine. However, tenants should remember that Ukrainian law does not treat the lack of funds as a force-majeure event.

If the above options are not achievable, the parties may also seek either (i) amending, or (ii) terminating the leases through court due to the material change of circumstances.

Posted on March 26, 2020

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