National Government Measures Regarding Lease Agreements During COVID-19 Emergency

The current situation that Colombia and the world are going through because of the COVID-19 disease, has generated environmental, social and economic consequences. Therefore, the National Government has declared a state of emergency by Decree 417 of 17 March 2020. Within so many sectors of the economy that have been affected by the current situation, one of the most noteworthy is the real estate sector. The Government, through the Ministry of Housing, City and Territory, has decided to act within the framework of the emergency regarding lease agreements through Decree 579 of April 15, 2019.

This Decree has established the following measures that will govern during the crisis and up to two months after it., for housing leases and commercial leases signed by SMEs [1] Small and medium-sized enterprises. : (i) suspension of eviction to lessees, (ii) deferral of annual adjustment of rent, (iii) suspension of causation of default interest and other sanctions and (iv) extends contracts that had their scheduled termination during the crisis. 

These measures are an assistance to the lessee, but they cannot be understood as an automatic termination or modification of the obligations contained in the agreement. The obligations of the lessee can only be modified if in the contract there are previously provisions to do so, otherwise, the modifications, cancellations, reductions, or creation of deadlines must be made by mutual agreement between the lessor and the lessee. It is also important to understand that these announcements do not constitute a law source, and their application will only be feasible once the corresponding decree is issued, which will likely have some modification to what was announced.

Additionally, depending on how the conflict resolution have been established in the lease agreement, the parties may always resort to the intended mechanism and/or ordinary jurisdiction in the event of a breach of obligations. For example, the lessee would be fully entitled to file a force majeure exception in the face of any allegation of breach of agreement, if this situation is set up in the specific case. This situation is not ideal for either party, as long as this process can be troublesome as the standard of evidence of force majeure is supremely high, and it is not possible to claim that automatically applies to each of the existing lease agreements in Colombia. Besides, a dispute in ordinary jurisdiction or other intended mechanism, involves wasting time and financial resources for the parties.

At present, it is advisable to find negotiated solutions to disputes that may arise concerning the obligations breached as a result of the current situation. Negotiated solutions to modify obligations should take into account the immediate, medium-term and long-term interests of the parties, and cannot be taken as an opportunity to renegotiate conditions related to the original form of the contract under the normal conditions of its implementation, and must be stipulated quickly and temporarily to cover the needs of the parties concerned.

This has a direct relationship with insurance contracts on lease agreements since it is not possible for insurers to claim that there is a force majeure in non-compliance with the rental payments to exempt themselves in the payment of the insured amounts. The force majeure that excuses the non-payment of the rent is not one that prevents the use of the property, but one that truly makes it impossible to comply with the specific obligation to pay. Therefore, a general reaction from insurance companies remarking that policies cannot be implemented in the context of the health emergency would be wrong and the subject of possible future disputes. The financial regulator should be equally vigilant to avoid reusing the insurance companies from complying with these obligations where this is not appropriate.

It is relevant to clarify that Decree 579 contemplates the event in which the parties do not have a new agreement regarding the fulfillment of the obligations of the lease. When this occurs, it establishes that the lessor can enforce the payment of the obligations caused during the validity of that Decree, with the following conditions: (i) he will not be able to collect default interest or penalties that were caused by the non-payment of the rent and (ii) may require the payment of current interest at a rate equivalent to 50% of the Current Bank Interest Rate (Interes Bancario Corriente) in the consumption modality, on the unpaid rent. The foregoing highlights the fact that the lessee's obligations are not extinguished and if there is no mediation between the parties, its non-compliance implies the eventual payment of interest in favor of the lessor.

In any way, it is important to always consider the particularities of each contract and the relationship derived from them. Not all contracts have a non-compliance insurance policy, co-payers, payment percentages that depend on operating results (as is the case with some retail store lease agreements), among other factors. What is relevant is to be able to analyze the possibilities from the identification of the elements of each agreement so that the parties, autonomously, can adapt to the situation without having to enter into a lawsuit or terminate the legal relationship that links them. 

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