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

Updated on 12.06.2020.

No, unless any of the following circumstances occur:

1. The parties have specifically agreed upon a provision setting forth that when such an event occurs, the rent could be readjusted;
2. The agreement states that the price of the lease contract is in any way contingent to the results of the operation.
3. In accordance with article 868 of the commercial code, the lessee can prove to a judge, in a lawsuit, that the performance of its obligations in accordance with the contract have become overly burdensome due to the new extraordinary circumstances (covid-19). This will result in the review of the contract to rebalance its economic equation to the new circumstances. If adjustment of the contract cannot be achieved, it will be terminated.
4. Pursuant to Decree 579 of 2020 recently released by the Colombian government due to Covid-19, tenants of residential leases, and tenant classified as MSMEs or non-profit organizations, both in the case of commercial leases, they could agree with their landlords upon a temporary rent reduction with a deferred payment of the outstanding balance. This law also banned landlord from charging interests or penalties over unpaid monies due to the corona crisis.

The lessee cannot opt for an obligatory rent reduction as a result of COVID 19, unless the circumstances stated above occur.

It is worth mentioning that, unless the parties have agreed upon a variable rent which depends on the opening of the business, the lessee is not legally obligated to have the leased spaced open. Therefore, as long as the lessee pays the agreed rent the lessee is free to decide whether it closes or not the premises. But, in certain cases - for example when the rent is calculated under the assumption of an open business- the close-off of the premises without a fair cause can be construed as an abandonment of the space and also as a breach of the agreement. Any mandate from the authorities ordering the closure of commercial spaces will be considered as fair cause for the closure.

If the parties have agreed upon a fixed rent, in principle this could be adjusted in accordance with options 1 or 4 as referred to in answer No 1 above,. If the parties have agreed upon a variable rent calculated under the assumption of an open business, the close-off of the premises with a fair cause -such an order by the government- should legally adjust the rent in favour of the lessee. In this case, the landlord cannot claim a breach of contract by the tenant for closing the business while the government order was in effect.

Generally, the landlord requests the tenant to sign the agreement with a co-debtor. It is also common to be requested to take an insurance policy to prevent the risks of default. Deposits are banned in residential leases.

As a result of Covid-19 the only legal options for the lessee to reduce, suspend or terminate the contract are: (i) options referred to in answer No 1 above, (ii) the tenant's claim of the occurrence of a force majeure, (iii) application of Decree 579 of 2020, and (iv) application of Decree 797 of 2020, as refferd below.

Obligations that cannot be complied with under force majeure cannot be claimed as a breach of the agreement. For lack of payment to be considered as a consequence of force majeure, if payment is due, the lessee will have to prove that because of COVID-19 he does not have the funds to make payment, and this situation cannot be a result of concurring causes. Therefore, it is very unlikely that this defense will be effective.

Pursuant to Decree 579 of 2020, the following measures were also enacted by the Colombian Government as a relief of the corona crisis:

1. Suspension of any eviction orders until June 30th, 2020.
2. Deferral of automatic annual rent adjustments until June 30th, 2020.
3. Prohibition for landlords to charge interests or penalties on overdue payments until June 30th, 2020. This is conditioned to an agreement by the parties on rescheduling such payments during the crisis. If an agreement is not reached by the parties and the tenant is unable to pay the rent, the landlord will only be able to charge 50% of the current bank interest certified by the Financial Superintendence of Colombia over the balance. This law does not allow tenants to default on the rent payments but encourages the parties to renegotiate the economic terms of the agreement while the crisis.
4. Automatic extension of lease agreements that expires during corona crisis until June 30th, 2020.

Finally, in accordance with Decree 797 of 2020, new measures allow certain types of lessees to terminate the commercial lease agreements which activities are not set for reopening by June 1^st, 2020. These activities are:

• Bars, dance clubs, casinos, bingos, and videogames hubs;
• Gymnasiums, pools, spa, bathing resorts, sauna, sports facilities, and amusement parks;
• Cinemas and theaters;
• churches
• Lodging and food services
• Public or private events that imply crowds

Under this new law, lessees may request the termination of the lease agreements up to August 31^st, 2020. For those purposes, lessees must be on due payment with the rent and other charges, and also will be obligued to pay 1/3 of the penalty clause if agreed, otherwise, they will be obligued to pay the value of one month of rent as compensation for the early termination of the contract.

The Colombian Supreme Court have ruled that force majeure events must be examined in each case, since an event does not constitute force majeure by the sole circumstance that the performance required in the contract becomes more difficult or burdensome to the debtor. The possibility of invoking COVID-19 as a force of majeure will depend upon the whole circumstances surrounding each lease contract. In order for the lessee to invoke COVID-19 as a force majeure event, the following criteria must be proven: (i) it was of an extraordinary and external nature; (ii) it occurred after the parties executed the contract; (iii) it was not possible for the parties to predict its occurrence before executing the contract; and most importantly that (iv), the obligations of the parties, or one of the parties to the contract, became impossible to be complied with due to the occurrence of COVID-19.

Consequently, COVID-19 could be construed as a force majeure event by the lessee, for instance, in the event of a financial crisis due to which withdrawal of money from bank accounts become restricted. In that case if the tenant cannot access his money, due to such an extraordinary and external circumstance, he cannot be obliged to fulfil the obligation to pay the rent in due time. To the contrary, the prohibition of opening business to the public cannot be always construed as the efficient cause for preventing payment of the rent because, in most cases, the lessee has other resources to meet this monetary obligation, for example by accessing public loans granted by the government to overcome the corona crisis.