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

Updated on 21.04.2020.

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?

Loss of profit due to decreased turnover caused by COVID-19 is not a ground for rent reduction under the law. However, if a lease agreement expressly provides for this, a lessee may be in a position to claim for such reduction. 

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 decides to suspend activities at its premises as a result of the COVID-19 pandemic, this does not in itself qualify as a ground for not paying rent under the contract. Even if the activities were stopped as a result of the official lockdown regime having been implemented in Moscow and some other regions, this does not automatically give a tenant the right to benefit from rent reduction, unless such tenant’s business is listed among the “most affected industries” by the government (see below for more detail). 

Unless a lease expressly states that a lessee is relieved from having to perform obligations upon the occurrence of a force majeure event (which relief can be enjoyed only if the tenant proves the direct impact of force majeure in court), it will be obliged to continue to pay rent even for the period when it does not use the premises.

In addition, some leases provide that, if the lessee does not use the premises or conducts no activity there, it will be contractually liable and will have to pay a penalty.

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?

In theory, the lessee has the right to demand a reduction in rent if it proves that the conditions provided for by the lease regarding the use of the premises have deteriorated significantly due to suspension of its activities in the leased space following an order by the Government. 

Also, the specific regulations adopted by the government due to COVID-19 envisage that the rent for the period of suspension can be reduced upon mutual agreement of the parties (see below for more detail).

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

A security deposit is predominantly used on the Russian commercial and retail leases market. 

Bank or parent company guarantees are more common for retail leases with anchor tenants and large-scale office leases with corporate occupiers.

Russian law, including specific regulations adopted in connection with the COVID-19 pandemic, does not expressly provide that a contract may be terminated in connection with COVID-19 as a force majeure event. That said, the parties may decide themselves, when negotiating a lease, to provide for a mechanism of unilateral termination due to force majeure.

In practice, lease agreements very often give parties the right to unilaterally terminate in the event of force majeure if such circumstances impede the performance of the agreement and last, for example, more than one or three months – the time limits usually specified in lease agreements.
In addition, the Russian government has adopted several supporting measures in connection with the COVID-19 outbreak that can be viewed as helpful tools for lessees:

  1. mandatory rent deferral is granted under leases for state-owned properties;
  2. in relation to leases for privately owned properties, mandatory rent deferral is granted to the lessees from the industries which are recognised by the authorities as most affected by COVID-19 (i.e. fashion retail, leisure, entertainment, sports, catering, domestic services sectors), i.e.
    1. deferral is granted starting from the date of the adoption of a decision on the introduction of a high-alert regime or emergency situation in the respective Russian region until 1 October 2020;
    2. the rent due for the deferral period in 2020 (rent arrears) shall be paid in equal instalments in the amount not exceeding a half of the monthly rent within the period from 1 January 2021 to 1 January 2023;
    3. no penalties are imposed on lessees due to such deferral;
    4. the deferral is not applicable to utilities payments under the lease;
  3. lessors and lessees are encouraged (but not obliged) to negotiate a rent reduction for the deferral period.

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

Most of the Russian regions declared COVID-19 as force majeure. However, the mere fact that COVID-19 is recognised as a force majeure event does not exempt the tenant from paying rent.

Force majeure may only generally serve as a basis for postponing the execution of obligations under a lease agreement allowing the parties to avoid liability for breach of the contract. Still, in order to achieve this, a party would need to prove that its inability to perform under the contract directly resulted from the particular force-majeure event, i.e. COVID-19 outbreak.

Portrait of Artashes Oganov
Artashes Oganov
Partner
Moscow