The first Italian decision on the suspension of the rent payment during the lock-down period
As it is well known, Courts are not able to keep up with the business and they necessarily express their judicial decisions on facts which occurred in the past.
Therefore, on the one hand, currently Italy is struggling in the middle of Phase 2 and in view of Phase 3 (to be intended as the return to full normality); on the other hand, Italian Courts are issuing the first precautionary judicial measures, concerning disputes between tenants and landlords on the payment of the rent and common charges related to Phase 1, during which there was the mandatory lock-down of most of the retail stores.
With this regard, the Decree of the Court of Rome of May 29, 2020 is one of the most interesting judicial decisions on the matter, because it contains a complete examination of the legislative provisions, which were often invoked in order to justify the non-payment of the rent by retailers and, on the landlord side, to justify the obligation to continue to pay the rent of retailer.
This judicial decision is characterised by certain circumstances, which make it peculiar.
Originally, there were two business unit lease agreements, executed between a retailer (owner of several commercial signs) and the owner of a Rome Shopping Centre. The two lease agreements concerned two business units located in the same Shopping Centre. At the beginning of 2019, the retailer complained about a drastic reduction in revenues of the stores. In light of this, the retailer and the landlord agreed to terminate one of the two abovementioned business unit lease agreements by mutual consent (obviously the least profitable) and to arrange a payment plan, with a duration of two years and providing the payment of the due amounts in 24 monthly instalments. Furthermore, with regards to the non-terminated agreement, the landlord granted monthly payment of the rent, instead of quarterly payment and, finally, the reduction of minimum guaranteed rent. No amendments were provided with respect to the two bank guarantees issued by the tenant’s bank to cover its obligations to pay the common charges and all other amounts provided for in the agreement.
With the outbreak of the Coronavirus emergency, the landlord also allowed the tenant to postpone the payments due for April 2020 until May 2020.
In April 2020, the tenant filed a petition pursuant to article 700 of the Italian Code of Civil Procedure requesting, and obtaining, a decree (the decree is issued by the Court without prior hearing the other party), by which the enforcement of the bank guarantees was prohibited to the landlord. Furthermore, the retailer asked for the suspension of payment for a period of 6 months (or for a different period set by the judge), or, in the alternative, the reinstatement of the terms of payment provided by the agreement.
The landlord requested to the Court the rejection of the retailer’s claims on the grounds that there was no “periculum in mora” circumstance (i.e. serious and irreparable damages caused by the default of one party), which is a necessary requirement for the issue of a precautionary measure by Italian Court, as well as claiming that the legal arguments put forward by the retailer were unfounded.
Given the above, it seems now appropriate to examine the legal reasons taken into account by the Court of Rome in the decision.
First, the Court of Rome states that, despite the existence of numerous rules in Covid-19 emergency legislation providing many benefits for economic operators (suspension of payment of certain taxes, extension of the time limits for payment of instalments of loans and mortgages, suspension of the time limits for proceedings), it is not possible to infer that there was a general rule providing for the suspension of the obligation of retailer to pay rent.
Moreover, articles 1175 and 1375 of the Italian Civil Code (which provide for a general obligation of acting in good faith during the negotiation and the fulfilment of any agreement) can not be the legal basis for a judicial decision to suspend payment of the rent or renegotiate it. Indeed, it is true that these provisions regulate the principle of objective good faith, which is the duty of each contracting party to cooperate in the realisation of the other party’s interest and therefore gives rise to an obligation of solidarity between the parties. However, such obligation exists only if it does not involve an appreciable sacrifice of the party against whom the duty to act in good faith is claimed. Therefore, the duty to act in good faith is not able to determine any amendment of the obligations concerning the rent payment and its timing.
With regards to the termination for excessive onerousness (i.e. a general hardship clause provided for any agreement under Italian law), provided for by Article 1467 of the Civil Code, which was invoked by the retailer by virtue of the extraordinary and unpredictable nature of the Coronavirus emergency which made the obligation to pay the rent excessively onerous vis-à-vis the suspension its sales activity, the Court acknowledged that such rules are incompatible with the preservation of the validity of the agreement, because they are meant to provoke the termination of the commercial relationship. In light of this, the Court considered such rules not applicable to the case at stake.
On the contrary, the reference to the partial impossibility of the fulfilment of the contractual obligations made by the retailer was considered more appropriate by the Court.
According to the Court, the agreement at stake concerns a business unit which consists both of the tenant right to occupy the premises, and the right to carry out the sale activity inside the premises.
According to the Decree, the case at stake is peculiar, because the impossibility of the fulfilment of the obligation is both partial and temporary.
It is partial because the obligation of the landlord was impossible only with respect to the obligation to allow the exercise of the sale activity and not also with respect to the obligation to occupy the premises. Furthermore, the impossibility to carry out the obligation is temporary, because the retail sale activity was precluded until 18 May 2020.
According to article 1464 of the Italian Civil Code, when performance is only partially impossible, the other party is entitled to a reduction of the consideration (in the case at stake, the rent).
Therefore, on the basis of the abovementioned Article 1464 of the Italian Civil Code, the Court of Rome orders a reduction of the rent due for two months of lock-down equal to 70% of the total rent due, acknowledging that the portion of the obligation not fulfilled is the most important of those constituting the balance of the contractual interests of retailer and landlord.
With regards to the other claims, the Court recognizes that the circumstances do not justify reductions or further extensions of payment of the instalments of the payment plan already agreed between the parties nor of the payment of the common charges, which are related to the material availability of the premises which was granted to the retailer, even during the lockdown.
Under judicial profile, the Court concluded its decree with the rejection of the claimant’s request, on the basis that, under Italian law, an irreparable prejudice is necessary for the issuance of a precautionary order. In the case at stake, the Court excludes such circumstance, because the retailer benefited from a suspension of payment of Euro 10,000.00, an amount equal to 70% of the two months’ rent due under the business unit lease agreement.
However, despite the formally unfavourable outcome for the retailer, the decision offers interesting food for thought on the use of the rules on the partial (and temporary) impossibility to fulfil obligations with regards to business unit lease agreements, whose activity has been affected by the lock-down during Phase 1 of the pandemic.