The COVID-19-Ordinance Rent and Lease – Grace Periods for Payment Arrears
Rental and leasing rates play an important role in the crisis-related liquidity management of companies and private individuals. To protect tenants and leaseholders, the Federal Council has temporarily extended the notice periods for so-called late payment notices by means of an emergency ordinance.
The following article explains the relevant provisions of the COVID-19-Ordinance Rent and Lease of 27 March 2020 and shows what landlords and tenants should consider in practice.
1. Initial Situation
As a support measure for tenants and leaseholders, the Federal Council passed the Ordinance on Cushioning the Effects of the Coronavirus in the Rental and Leasing Sector (COVID-10 Ordinance Rent and Lease, hereinafter referred to as "Ordinance") on 27 March 2020. This Regulation, which has been in force since 28 March 2020, shall apply until 31 May 2020. Among other things, it sets the grace period for tenants and lessees in the event of late payment from 30 to 90 days (rental interest) and from 60 to 120 days (lease interest). The Regulation applies to rental and leasing relationships of residential and business premises.
|Background information: procedure for late payment|
In principle, the termination of a rental agreement due to non-payment of rent or ancillary costs is carried out in two stages in accordance with art. 257d para. 1 CO: First, the landlord must set a payment period by means of a written notification which expressly and comprehensibly states the unpaid rent and/or ancillary costs and threatens to terminate the lease. This notice period must be at least 30 days for residential or commercial rental agreements and at least 60 days for lease agreements (art. 282 para. 1 CO). The notice period begins the day after the tenant receives the threat of termination. The landlord may terminate the lease agreement if the arrears mentioned in the notice of termination are not paid before the end of the notice period. Termination of the lease for residential and business premises is subject to a notice period of 30 days to the end of a month.
2. The Conditions for an Extended Period of Grace
The Ordinance covers rent and ancillary costs due between 13 March and 31 May 2020. In addition, the payment arrears must have been caused by measures taken by the Confederation to combat the coronavirus:
A. Rent Due between 13.03.2020 and 31.05.2020
The arrears must relate to rent and ancillary costs due between 13 March and 31 May 2020.
Usually, the due date of the rent is contractually regulated. It is often agreed that the rent and ancillary costs are to be paid monthly or quarterly in advance.
In the absence of a contractual provision, the rent is due at the end of each month in accordance with art. 257c CO, unless there is a different local custom. In Zurich, for example, it is ‒ in the absence of any other contractual agreement ‒ customary for rent to be paid monthly in advance on the first day of the month.
B. Payment Arrears Due to the Measures of the Federal Counsil to Combat the Coronavirus
The tenant must be in arrears "due to the measures of the Federal Council to combat the coronavirus".
This means in particular that the tenant's arrears must have arisen as a result of measures taken by the Federal Council to combat the coronavirus, such as total or partial closure of the business due to the Ordinance 2 on Measures to Combat the Coronavirus of 13 March 2002 (COVID-19-Ordinance 2). On the other hand, the infection of a tenant, his employees or his relatives with COVID-19 is likely to be irrelevant for the application of the Ordinance.
It may be difficult for a landlord to determine whether a tenant is in default of payment as a result of the Federal Council's corona measures: firstly, it is not always evident whether and how a tenant is affected at all (e.g. apartment tenants); and secondly, the landlord rarely has insight into the tenant's financial circumstances, i.e. he cannot assess whether the tenant has any reserves which he could draw on to pay the rent.
In a dispute, it is probably up to the tenant to demonstrate in a conciliation or court proceeding regarding the validity of the termination that a 90-day grace period should have been set. As a rule, however, landlords are unlikely to have any interest in a legal proceeding concerning the validity of the termination, and are therefore well advised to set the extended grace period in accordance with the Ordinance in case of doubt. Particularly with regard to a possible expulsion procedure, which is preferably carried out in summary proceedings (so-called legal protection in clear cases), any ambiguity with regard to the formalities of the default notice should be avoided.
3. Temporal Scope
As mentioned above, the Ordinance has been implemented for the period from 28 March to 31 May 2020. However, various transitional legal questions arise at the beginning and end of the Ordinance:
A. Beginning of Application of the Ordinance
The Ordinance covers rent and ancillary costs due from 13 March 2020. It is therefore clear that the landlord must set a 90-day grace period for rent and ancillary costs that became due after 13 March and for which the landlord sends a reminder after 28 March 2020.
Any grace periods that were set before the regulation came into force on 28 March 2020 in accordance with the previous regulations (i.e. 30 days) remain valid and do not need to be amended or repeated. In our opinion, this also applies if the rent in question became due after 13 March 2020.
However, there are also constellations that need to be considered in a differentiated way: For example, different consequences may arise if the tenant was already in arrears before 13 March 2020 and now another rent remains unpaid.
The tenant was already in arrears with the rent for March 2020, which was payable by the end of February 2020. Now the tenant is in arrears with another monthly rent after 13 March 2020.
First of all, it is clear that the March rent can still be reminded with a grace period of 30 days, while for the April rent a grace period of 90 days must already be set.
If the tenant pays only the rent for one month even if all payments are due, the further consequences are determined by the arrears against which the payment is to be credited. If the tenant does not provide any information in this regard when making the payment, it is, in case of doubt, to be assumed that the tenant has paid the earlier debt in accordance with art. 87 para. 1 CO, so that the 90-day grace period continues to apply to the outstanding April rent.
Rent and ancillary costs due before 31 May 2020 must be reminded with the 90-day grace period if the delay in payment is due to measures of the Federal Council to combat the coronavirus, even if the reminder is sent (long) after the expiry date of the Ordinance.
Rent and ancillary costs due from 1 June 2020 can be reminded with the 30-day grace period pursuant to art. 257d CO.
If a landlord is unsure whether the 30-day or the 90-day notice period applies, we recommend, as a precaution, to send a reminder with the longer notice period of 90 days in case of doubt.
4. Practical Questions
How do I know as a landlord whether the requirements of the Ordinance are met?
Unless the tenant has already informed the landlord on his own initiative, it is not immediately apparent to the landlord whether a tenant is in arrears with payments due to the measures taken by the Federal Council to combat the coronavirus. One possibility would be to ask the tenant. In our opinion, a landlord may rely on corresponding information from the tenant; in our opinion, however, silence on the part of the tenant should not be interpreted as a waiver by the tenant of the protective effect of the Ordinance, namely the extension of time. Another possibility ‒ which is probably easier to handle in practice ‒ is to generally apply the extended grace periods for outstanding payments in the period from 13 March to 31 May 2020.
How do I set a grace period correctly as a landlord?
The grace period must be formulated clearly and unambiguously. The tenant must be able to see what he has to do by when and what consequences he might otherwise face. Furthermore, the letter must list the outstanding claims against the tenant in detail.
A landlord who is unsure whether the conditions of the Ordinance are met should not be tempted to set alternative grace periods, such as "[...] I will set you a grace period of 30 days. If the requirements of the COVID-19-Ordinance Rent and Lease are met, this notice period is automatically extended to 90 days".
Setting a grace period that complies with the above-mentioned conditions could, for example, be done in the following way:
"Your tenant account currently has outstanding rent receivables, which you can see in the following list:
We hereby grant you a grace period of 90 days from receipt of this letter to pay the outstanding debts.
If the outstanding amounts are not paid within the specified notice period, we will terminate the rental agreement due to default of payment in accordance with art. 257d CO."
For better traceability and period of time control, it is advisable to send the setting of a grace period by registered mail and to keep the postal proof of delivery (Track & Trace) carefully.
If the rented property is a family apartment, the tenant's spouse must be notified of the setting of a notice period by separate registered letter.
What should I do as a tenant if the wording in the reminder is unclear?
If the wording is unclear, the setting of a grace period is null and void and a termination based on it is invalid. In any case, it is recommended that the tenant react to an unclear reminder and request clarification from the landlord making reference to the applicable provisions of the CO and the COVID-19-Ordinance Rent and Lease. It may be worthwhile to consult a legal advisor.
How should I proceed as a landlord if I notice that I have set a too short grace period?
A notice period that is too short is invalid. In such a case, we therefore recommend sending a new reminder with a new, correctly specified notice period. In our opinion, a mere extension of the already set, too short notice period is not permissible, as this would be contrary to the purpose of setting a grace period.
Do's and Don'ts
- Check whether a tenancy or lease exists (different notice periods!)
- Formulate threats of termination clearly and unambiguously, do not set alternative deadlines!
- In case of doubt: choose the longer period according to COVID-19-Ordinance Rent and Lease.
- Be careful if there are several outstanding payments: under certain circumstances, different grace periods may apply!
1 For the sake of better legibility, the following section primarily deals with tenancies; the comments apply analogously to leases.