Commercial rent payments in Ukraine

Due to COVID-19 outbreak, since mid-March 2020 the Ukrainian Government has adopted various measures to try to control the virus spread as much as possible. The Governmental decrees temporary imposed, amongst other, the mandatory closure of the premises, which are used for the reception of visitors, including catering establishments (restaurants, cafes, etc.), shopping and entertainment centres, other entertainment facilities, fitness centres, cultural institutions, etc. While such bans were not continuous during all period of the quarantine (i.e., from mid-March 2020 till the present moment), it significantly interfered with the business operations. 

Considering the adverse effect of the restrictions on tenants, the Ukrainian Parliament adopted several amendments to the Civil Code of Ukraine enabling tenants to apply rent payments reductions or exemptions, once they were unable to use the leased premises in full. 

On the basis of the current case law, the grounds as (i) reduction of rent rights, (ii) force majeure, (iii) exemption from rent possibilities are mostly used by tenants before the courts to excuse their breaches of contractual payment provisions. While reviewing the relevant cases, the Supreme Court tends to apply the law provisions that entitle the tenants to reduce the rent and the force majeure clauses to release them of liability for overdue payments. Concerning the total exemption from the rent payment, the courts require evidence of a tenant’s complete restriction in accessing the leased premises, which is often not the case in such disputes. 

Some of the tenants, most affected by the restrictions, won the respective disputes. 

The Ukrainian Parliament allowed tenants affected by the restrictions to request reduction of the rent payments. According to clause 14 of the Transitional and Final Provisions of the Civil Code of Ukraine, the rent payment for the use of real estate (its part) is subject to reduction at the request of the tenant, which carries out business activities using the property, for the period, when the property could not be used in full due to governmental restrictions and (or) prohibitions (the “Payment Reduction Provision”). In such a case, the amount of payment for the use of property may not exceed the total costs incurred by the landlord for the relevant period for payment of land, real estate taxes (other than land taxes), and utility bills, in proportion to the leased area.

The Payment Reduction Provision does not apply to business entities that actually carried out business activities with the use of the leased property in full during the quarantine, as well as to lease agreements of municipal property.

Several tenants managed to successfully rely on the Payment Reduction Provision before the court to counter the landlords’ claims for overdue payments. Usually these were the tenants affected the most by the quarantine (e.g., restaurants, hotels, industrial shops, etc.). However, some courts have chosen more formalistic approach stating that once a tenant is not restricted from access to the leased premises, the tenant cannot claim inability to properly use them. 

The courts have stated that a prerequisite for the application of the Payment Reduction Provision is the existence of a causal relationship between the restrictive measures imposed during the quarantine and the inability to use the leased premises, and the scope of such restrictions.

The courts mostly consider possibility of using the premises in accordance with the purpose provided in the relevant lease agreement, thus in case the premises could not be used for any other purpose, the courts tend to disregard such claims.
In resolving this issue, the following factors are usually assessed by the court:

• the connection of business activity of the tenant with the activities that were fully or partially limited due to the quarantine;
• use of the premises in business activities that were fully or partially restricted due to the quarantine;
• the possibility of using the premises for other business purposes that were not limited during the quarantine period;
• actual use of the premises by the tenant during the quarantine period.

Previously (in April-July 2020) the tenants had the right to apply for the reduction of rent payments due to the quarantine based on Article 762(4) of the Civil Code of Ukraine. However, it was difficult to define the amount of rent discount based on the statutory provisions, which were not really clear and which required the respective court decision to enter into force prior to application of the reduced rent. Therefore, it was not widely used.

The quarantine established by the Cabinet of Ministers of Ukraine is recognized as a potential force majeure circumstance.

However, in practice it may be difficult to prove the link between a force majeure event and inability to perform contractual obligations. To prove existence of a force majeure event, a certificate of the respective chamber of commerce issued for a particular case is required. In addition to obtaining such a certificate, the tenant must follow a force majeure notification procedure prescribed under a lease agreement. The courts are quite critical to those tenants, who have failed to properly communicate a force majeure event to their landlords, especially when the procedure for communication is provided by relevant lease agreements. 

Moreover, the existence of a force majeure event may only release from liability for late performance of the obligation (i.e. for rent payments delays), but not from the performance of the obligation as such. Therefore, tenants prefer to use the force majeure ground in conjunction with the mandatory reduction of the rent payment argument.

Under Article 762 (6) of the Civil Code of Ukraine, if it is not possible to use the rented premises at all due to circumstances outside of the tenant’s control, the tenants may be fully exemption from rent payments during the respective period.

For a brief period (April-July 2020) there was a clarification in the Ukrainian legislation that a tenant may apply for exemption from the rent payment due to the introduced quarantined based on Article 762(6) of the Civil Code of Ukraine, if the property could not be used to any extent. However, the respective clarification was soon replaced with the Payment Reduction Provision, described above.

The complete exemption from the rent payment can be applied only in case of total inability to use the premises, such as lack of access to them, inability of the tenant to stay and store things. Consequently, the presence of tenant’s staff or belongings in the leased premises and/or the consumption of utilities could be considered by a court as grounds to deny the exemption from the rent payment. 

This ground is less effective for the tenants than Payment Reduction Provision and thus tenants usually use these two grounds in conjunction.