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

Updated on 27.03.2020

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?

In Mexico, lease regulations are subject to local state civil codes. The questions in this study are answered following applicable provisions to Mexico City for assets located within Mexico City. Specific answers to a different state would have to be reviewed in a case by case analysis. In Mexico City, the lessee may only claim rent reduction or rent-free periods if, in case of a force majeure event, the lessee is unable to use the leased area. In some cases and depends on where the real estate assets are located, the parties might be able to renegotiate or terminate in terms of "unforseeability principle" (regus sic stantibus). Case by case analysis of the lease agreements is required for advising on application of such principle.

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?

As long as: (i) the landlord fulfils with its obligation to conduct the actions or omissions, reasonably necessary for the lessee to carry out the peaceful use and enjoyment of the leased premises, and (ii) regardless of lessee’s own decision, the leased premises are available for lessee's use, the rent payment obligation shall endure pursuant to the corresponding lease agreement provisions.  
If the lessee chooses to close its leased space on its own initiative, without any outside imposed restrictions that would prevent their use of the leased space, the lessee shall continue to be liable to pay the rent according to the provisions of its lease agreement.

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?

Mexico City legislation establishes that, lessee may be released of paying rent if, in case of an act of god or force majeure event, the lessee is unable to use the leased area.
Additionally, if due to such event, the lessee is unable to use the leased space for more than two months, they will have the right to terminate the relevant lease agreement.
While commercial lease forms differ substantially, acts of god and force majeure clauses typically offer protection from a litany of events like acts of God (i.e., tornadoes, floods and hurricanes), unavailability of utility service, action by governmental bodies, riots, war, labor strikes and embargos or any circumstance caused by nature or by a third party that is not subject to the control or administration of the party that calls upon the force majeure event. Moreover, last week the COVID-19 spread was defined by the Mexican Supreme Court of Justice as a force majeure event for its own activities. While this is not a general ruling for civil contracts, it sets an important precedent in the context of the current circumstances.

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

The more common securities for commercial lease agreements are: security deposits (usually equivalent to 2 months of rent), security bonds, letters of credit and corporate guarantees.

As mentioned above and considering COVID -19 as a force majeure event, according to Mexico City civil code, lessee may be released of paying rent if, in case of such force majeure event, the lessee is unable to use the leased area. Additionally, if due to a force majeure event, the lessee is unable to use the leased space for more than two months, they will have the right to terminate the relevant lease agreement. We consider it important to take into account that for a completely correct advice, we will find ourselves in the need to review case by case in specific due to the fact that: (i) wording of leases vary; (ii) the lessees may use different arguments when claiming a force majeure event; and (iii) new legal measures may be carried out by the different levels of the Mexican Government, as the health contingency related to COVID-19 develops.

Portrait of Cesar Armando Lechuga Perezanta
Cesar Armando Lechuga Perezanta
Partner
Mexico City