Law and regulation of rental agreements in Bulgaria during Covid-19

Updated on 10.04.2020

1. Is a lessee eligible for rent reduction due to a significant decline in footfall and consequently its turnover as a result of COVID-19?

No, in principle not (except when this has been specifically agreed in the lease agreement)

2. Is a lessee eligible to temporarily close its leased space - on its own initiative – and opt for rent reduction as a result of COVID-19?

No, in principle not. Unless an obligation to operate is included in the lease, the lessee may close its lease space, but will not be entitled to rent reduction.

3. Is a lessee eligible for rent reduction in the event its leased space is closed following an order by the Government as a result of COVID-19?

This would likely be considered as entrepreneurial risk of the lessee, especially if the Government intervention involves suspension of the lessee’s specific activities. According to the existing precedents, a lessee will be eligible for rent reduction only when it is prevented from using the premises for reasons for which the lessor is liable. Final determination would be based on the specific circumstances – mainly: terms of the lease agreement and scope/specifics of the Government intervention. In certain instances, it may be argued that restrictions, which may be interpreted to address the specifics of the building where the leased premises are located, might entitle the lessee to claim non-payment of the rent for the duration of the restrictions. However, it is uncertain if such an argument would be successful. 

Meanwhile, most shopping centres and lessees found an amicable solution to this situation.  With a few exceptions, most of the malls in Sofia (Bulgaria’s capital) and elsewhere in the country provided rent holidays to the lessees for the period of the state of emergency announced by Bulgarian Parliament on 13 March 2020.  In most cases, service charge continues to be due.  

In the office leases segment, some lessors have also made rent concessions to their lessees. 

4. What kind of security is generally provided by a tenant in connection with a lease, a bank guarantee, a deposit or otherwise?

Bank guarantees and deposits. Foreign law governed parent company guarantees might be agreed as well (usually when the lessee is part of an international group of companies). 

The availability of such options would depend on the scope and duration of the Government intervention. On certain instances (for example: if the access to premises is legally impossible and must not be permitted by the lessor), it may be argued that the lessor is in default to perform its obligation to ensure the undisturbed use of the premises by the lessee as a result of a force majeure event (the enacted legal restriction to the premises’ use). This would relieve the lessee from its counter obligation to pay rent for the period of the legal restriction; also, the lessee would be entitled to terminate the lease if, because of the duration of the force majeure event, it is no longer interested in the lease. However, since the matter is unprecedented it cannot yet be assessed whether rent-reduction/termination claims in such instances will be successful or not. 

As an alternative option, the lessee may request the court to amend or terminate the lease based on business frustration. Under Bulgarian law business frustration occurs when (i) circumstances, which the parties could not have foreseen have occurred and (ii) it is possible but would be unfair and contradictory to good faith to perform the lease as agreed. These options, however, may be exercised exclusively by a court claim (i.e. if the judiciary are operating as usual) and the lease would be amended/terminated effective from the date of the court decision (i.e. it may take the lessee more than a year to achieve the reduction/termination). Business frustration claims are decided by the courts on a case-by-case basis based on good faith and fairness principles; there are court precedents suggesting that if there are economic changes, which have a huge negative impact on the lessee (in this case: resulting from the outbreak and/or the associated Government restrictions), such claims would likely be successful.

6. Does the outbreak of COVID-19 justifies invoking force majeure by lessee?

Under Bulgarian law, both the outbreak of COVID-19 and acts of the competent authorities, which provide for anti-epidemic measures and restrictions, would qualify as force majeure events; however, parties having payment obligations may not be released from liability for failure to perform them because of force majeure events.  Lessees may, for example, invoke force majeure in respect of certain obligations under leases (such as the obligation not to close their premises without a prior notice to or approval by the  lessor); but may not do so in respect of their obligations to pay rent or to make other payments due under the lease.  

Portrait of Jenia Dimitrova
Jenia Dimitrova
Counsel
Sofia
Portrait of Antonia Kehayova
Antonia Kehayova
Senior Associate
Sofia