Commercial Law
May the tenant apply for a rent reduction in times of coronavirus?
The state authorities are ordering the suspension of most economic activities, with the hope to contain the spread of coronavirus. Nevertheless, even if companies see their revenues decline or disappear, they still have costs to cope with. Is it possible to apply for a rent reduction for commercial properties?
To discuss about this possibility, the following legal solutions are conceivable. However, it can be said in advance that most likely none of them will justify a reduction in rent in such temporary times of crisis.
- Withdrawal for serious reasons
According to article 27, Ital. Law no. 392/1978, the tenant may withdraw from the contract for serious reasons providing six months’ notice. Even with the assumption that the tenant’s impossibility to use the property constitutes such a “serious reason”, it may lead to the tenant’s withdrawal, which is probably not in the interest of the tenant since COVID-19 crisis is temporary situation, and not definitive. The “serious reasons” could therefore be over in a few weeks. Apart from that, in the event of such a cancellation, the rent shall be paid for six months from the date of notice.
- Subsequent impossibility of contractual performance
If the tenant declares bankruptcy because of lack of income due to the prohibition to carry out economic activities and therefore the impossibility to pay the rent in full, the contract is cancelled according to art. 1463 Italian Civil Code. Again, there is no automatic reduction of the rent. In the less serious case where the tenant, although not bankrupt, suffers liquidity problems due to a lack of income and is therefore unable to pay all or part of the rent for a certain period of time, Art. 1256 Italian Civil Code grants a deferment of payment, i.e. the tenant is not liable for the delay in the provision of services. However, this does not result in a reduction of the rent. However, for such case, it is not possible to argue of the impossibility of performance by the landlord under Art. 1463 Italian Civil Code as the landlord has already fulfilled his contractual obligations. For such a scenario, case law would consider another possibility for the tenant: namely the circumstance of impossibility for the tenant to use the prope1ty, i.e. to use the contractual service of the landlord. But also, in this case, the law only provides for the termination of the contract and only if the impossibility is final, which is not the case with the most likely temporary COVID- 19 crisis.
- Subsequent excessive burden for a service
This solution, which is based on art. 1467 of the Italian Civil Code, is applied by the highest Italian jurisdiction to the so-called “indirect burden” of the own contractual performance. In this case, the indirect burden is caused by the tenant’s lack of use of the property. However, the performance of the tenant is not permanently overburdened, which is why this solution cannot be applied. Moreover, this approach could merely lead to the tennination of the contract without having to comply with the six-month notice period. In this case, a reduction of the rent would have to be proposed alternatively by the landlord in order to prevent the termination.
In conclusion, it can be stated that an automatic and time-limited reduction of the rent during COVID-19 crisis is legally almost impossible. Such a reduction could only be achieved with the consent of the landlord. In case of a refusal by the landlord, the tenant should consider to start with a negotiation.
For any further questions or clarification on these issues please do not hesitate to contacting me.
Avv. RA Dr. Massimo Fontana Ros
M +39 331 7116211