Recently we have published an article about possible approaches to lease relationships during the quarantine. Among them, we have distinguished Force Majeure, significant change in circumstances in contracts (Article 652 of the Civil Code of Ukraine) and inability to use assets (Articles 762 (4) and (6) of the Civil Code of Ukraine).
The Parliament of Ukraine passed on 30 March 2020 Draft Law No. 3275 on Amendments to Certain Legislative Acts Aimed at Providing Additional Social and Economic Guarantees Due to Spreading of Coronavirus Disease (COVID-2019), which law has not been published yet. In general, it is a comprehensive law, which amends a number of legislative acts, i.e., Tax Code, all procedure codes, Labor Code, etc.
Our article addresses article 5 of Draft Law No. 3275, namely, the amendments to the Final and Transitional Provisions of the Civil Code of Ukraine: “with effect from the time the quarantine is declared under the Resolution of the Cabinet of Ministers of Ukraine (…) and until its termination under the procedure established by law, lessees shall be exempted from payment for the use of assets in accordance with Article 762 (6) of this Code.”
Article 762 (6) of the Civil Code of Ukraine states that “a lessee shall be exempt from payment for as long as such lessee cannot use its assets because of the circumstances beyond its control.”
First of all, we draw your attention that it is not any lessee who is exempt from payments for using any assets. Anyway the lessee will have to prove that 1) it could not use the assets, 2) the circumstances were beyond its control, and 3) it did not actually use the assets.
Let’s consider two cases:
Case 1. A lessee rents premises in a Shopping Mall to sell non-food goods.
Resolution No. 215 of the Cabinet of Ministers of Ukraine on Amendments to Resolution No. 211 of the Cabinet of Ministers of Ukraine of 11 March 2020 dated 16 March 2020 states that, starting from 12 March 2020, a quarantine has been announced throughout Ukraine and consequently, starting from 17 March 2020, business activities involving reception of consumers, including shopping malls and other facilities that provide shipping and household services to the public, must be prohibited.
If so, subject to the amendments introduced by Draft Law No. 3275, Article 762 (6) of the Civil Code of Ukraine may be considered as a ground for exemption from payment.
Case 2. A lessee rents a warehouse to store its goods. Undoubtedly, the declared quarantine has brought some difficulties for each business; however, it does not affect directly potential storage of goods in a warehouse. In this case, there are no grounds for exemption from payment under Article 762 (6) of the Civil code of Ukraine.
However, even Case 1 has some weaknesses. Namely, Article 762 (6) of the Civil Code of Ukraine has not been amended. It would be helpful to amend the clause by saying they the property may not be used for tits designated purpose. Otherwise, storage of the lessee’s goods and equipment in the premises and physical access available to the premise may be interpreted as such use or potential use.
Interestingly, Draft Law No. 3275 does not contain a reference to Article 762 (4), which, unlike Article 762 (6), provides that the rent may be reduced for the same reasons. This could be a compromise for the parties to lease relationships, as many premises are used at the same time for trade and storage of goods, and as a platforms for Internet sales.
Another issue may arise out of contracts, which parties do not separate maintenance and utility fees from the rent. Formally, a lessee may seek an exemption from payments. However, in our opinion, this does not necessarily mean the exemption from utility fees, as well as security, cleaning and other maintenance fees. Obviously, parties to the agreements under which such payments are not separated will have to negotiate a settlement procedure for the time of quarantine.
Thus, the amendments made to the Civil Code of Ukraine seem to be a benchmark for businesses dealing with lease relations. However, they must consult their lawyers to choose a key direction in each specific situation.
Furthermore, please keep in mind that, notwithstanding the amendments so passed, the parties are still able to choose the other approaches, for example, those first mentioned above.