Law and regulation of rental agreements in Romania 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?

As long as the space remains available and fit to use, the lessee would not be considered under the law eligible for a rent reduction. In the vast majority of commercial leases (retail and office) the economic decline of the lessee (even if due to the pandemic) could not be per se grounds entitling the lessee to a rent reduction. Also, it is unlikely that this pandemic could be seen as an insured risk entitling lessees to a rent suspension, but it is worth checking the relevant clauses in the leases.

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?

If the lessee chooses to close its leased space on its own initiative, without any outside imposed restrictions on the continuation of its activity in the leased space, the lessee shall continue to be liable to pay the rent according to the provisions of the lease. Before taking the decision to close the leased space, the lessee should check whether, under the lease agreement or the law, itis bound to keep it open.

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?

The lessee could not invoke the COVID-19 pandemic as a force majeure case that releases it from the rent payment. However, through the Military Ordinance no. 2/2020 (applicable as of 22 March 2020 hours 22:00), activity in all shopping centres (not only shopping malls) has been temporarily suspended, except for sale of food, pharmacy, veterinary and cleaning services. This is in addition to the suspension of the activity of restaurants, bars, coffee shops, cosmetic salons in force since 16 March 2020 (irrespective of whether they are located in shopping centres). As such, since lessors cannot comply any longer with their obligations to ensure the quiet enjoyment of the spaces in the shopping centres, the lessees would have grounds under the Civil Code to ask for the suspension of the rent payment starting from 22 March 2020, the date when the lessors were not able any more to provide the use of the leased spaces. In principle, lessors could challenge in court the lessees' decision to suspend the rent payments on the above-mentioned grounds (and given the courts' very limited activity at present, such a challenge would not have an immediate result). In addition, a Government Emergency Ordinance no. 29/2020 has also been enacted which provides that small and medium enterprises (governed by Law 346/2004) which obtain a certificate evidencing the state of emergency (issued by the Ministry of Economy) following interruption of their activity due to the state of emergency are entitled to the postponement of their duty to pay utilities and rent for their main and secondary registered offices.

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

The most common form of security provided under a lease agreement is a letter of bank guarantee. A cash deposit is also used by lessees. Rather rarely, in the case of large multinational lessees, lessors may accept parent company letters (corporate guarantees).

Most of the commercial lease agreements for shopping centres in Romania are institutional/ triple net leases, which means in general very little room for lessees’ exit by simple notice. We would expect however that such leases have a termination right (sometimes by simple notice subject to cure period) if the lessors do not fulfil their obligation to ensure access to the leased space and its quiet enjoyment. In such a case, lessors would likely be interested to have recognized the legal ) impossibility of them being able to provide access and use  of the shopping centres to its lessees, so that they benefit in turn under the Civil Code of the suspension of such obligation and prevent such lessees' attempt to terminate. Such termination would most likely end up by being ruled upon in most of the retail leases by final court decision; hence, a termination notice may not actually  immediately support the lessees' decision to simply stop paying the rent (whereas suspension of rent payment seems more feasible as per our answer 3 above), but it may incentivise the lessors to accept/ not to challenge the rent suspension claim (especially for an anchor or big lessee). As such, both parties seem to be incentivised by the recent enactments and the Civil Code to send notifications and work together to renegotiate the terms of their agreements.

Moreover, lessees could also consider declaring insolvency; in turn, a lessor could also file for the lessee’s insolvency in the conditions set out in the law (i.e. due to non-payment of rent).

Portrait of Roxana Fratila
Roxana Fratila
Partner
Bucharest