National Government Measures against Commercial Lease Agreements During COVID-19 Emergency

In the context of the economic and health crisis caused by the COVID-19 pandemic, the National Government has issued dozens of decrees seeking to address this crisis in different areas, including the real estate sector, especially in terms of lease contracts. In addition to Decree 579 of April 15, 2020, which established temporary regulations for leases in general, the Ministry of Housing, City and Territory has issued the Decree 797 of June 4, 2020, introducing specific regulations for certain contracts regarding commercial assets.

This new Decree has established a regulation for tenants to be allowed to unilaterally terminate the lease of commercial premises that cannot be used for their economic activity as a consequence of the restrictions that the national government has imposed since the beginning of the crisis and which are still fully or partially in effect. In this sense, the decree applies to real estate in which the following activities were carried out: (i) bars clubs, billiards, casinos, bingos and video game terminals, (ii) gyms, swimming pools, spa, sauna, spas, sports courts, mechanical amusement parks and playgrounds, (iii) cinemas and theatres, (iv) religious services involving crowds, (v) accommodation and food services and, (vi) public or private events involving crowds.

The measure of unilateral termination of leases where the property has the destinations is a relief for lessees who have not been able to exercise their economic activity within this period. Lessees may use this new prerogative from the date of issuance of the Decree until 31 August 2020. It is important to note that they will only be able to do so if they are up to date regarding the payment of their obligations with the lessor. It is important to clarify that the Decree presupposes an exception for the application of the provisions described above for financial leasing contracts.

While this decision of the National Government seeks to provide relief to some lessees who have not been able to normally exercise their economic and commercial activity, it also seeks to protect the interests of lessors. In that sense, if the lessee decides to terminate the contract unilaterally, he must pay one third of the penalty clause provided for in the contract. If that penalty has not been agreed, the lessee shall pay the equivalent of a lease fee to the lessor.

Any other sanctioning right that has been agreed in the lease may not be applied or required by the lessors during the term of the Decree in question. In this sense, lessors may not require additional compensation from the lessee.

For more information about how  leases are being regulated in other jurisdictions in which CMS operates, visit CMS Expert Guide to COVID-19 Impact on Lease Agreements