The Swiss authorities have introduced restrictive measures in connection with the COVID-19 crisis, resulting in numerous businesses no longer being allowed to open to the public. Consequently, the question arises what influence these restrictions have on rental contracts for commercial premises.
Generally, we are of the view that the obligation of the tenant to pay the rent subsists in the current situation and that there is no entitlement to a reduction of the rent. Each individual case should still be examined; in particular, rental agreements have to be reviewed with regard to specific provisions which may be applicable. However, it cannot be excluded that a court will come to a different assessment or will apply the general rules of contract adjustment in the event of a gross discrepancy between performance and consideration (“clausula rebus sic stantibus”) and will on that basis adapt the rental agreement.
If the current restrictions are extended for a longer period or in the case of tenancies for a limited time or only for a specific date, the tenant may have the right to terminate the lease prematurely for cause.
A dialogue between the parties must be sought in any case and an assessment should be made whether insurance coverage or support from the state is available.
First, it must be examined whether the applicable lease agreement contains regulations regarding the payment of the rent in the event of force majeure or when the tenant’s business is closed. Contractual regulations take precedence over general statutory provisions.
Should the lease agreement not contain such individual regulations, the statutory provisions and prevailing doctrine and case law have to be considered.
First, it should be noted that the lease agreement remains valid even in the event of force majeure and does not terminate, i.e. all parties are still generally obligated to perform under the contract. The lessor must continue to make the premises available and the tenant must continue to pay the rent.
It is irrelevant that the tenant cannot operate its business due to external circumstances (including cases of force majeure). The obligation to pay the rent as a general rule subsists.
Reduction of rent
It is questionable whether a tenant can claim a reduction of the rent. According to the law, such reduction may be requested if the rented premises have a defect (“Mangel”).
The lessor has to provide the premises in a condition suitable for the intended use. If this is not the case (initially or during the rental period), the premises are defective, and the tenant may request a proportional reduction of the rent. The rent reduction takes into consideration the decreased use value of the rented premises; the rent reduction is intended to rebalance the contractually owed obligations.
In the current situation, Swiss tenant organizations argue that if a business is closed by governmental order, the requirement of suitability of the premises is no longer satisfied, because the premises are rented to run a business but cannot be used for that purpose anymore; for this reason, the rent should be reduced by 100% until this (legal) defect is remedied.
However, the counterargument can be made as follows: The premises can as a general matter still be used, they are as such not defective. In our view the lessor bears only the risk of usability of the premises, while the tenant has to bear the risk of their use. The fact that the Swiss authorities order a business to be closed affects the risk area of the tenant and does not render the rental premises defective. The premises are still suitable for their contractually intended use, only the tenant is prohibited from using them in the intended way. The Swiss Home Owners Association (HEV) takes the view that such operating restrictions are part of the tenant’s entrepreneurial risk, but they do not constitute a defect in the legal sense and therefore do not grant the right to a reduction of rent.
In summary: If the closure is caused due to the fact that the particular premises can no longer be operated (e.g. security risks in a commercial property due to construction defects), a reduction of rent can be considered. If, however, the restriction relates to specific ways of operating the property, the tenant bears the risk. The business closures ordered in the wake of the Corona crisis are intended to decrease the number of customers in retail stores and the associated infection risks. There is always a differentiation made based on the types of businesses: stores considered necessary for local supply (grocery stores, banks, pharmacies, post offices, etc.) may remain open. The measures are therefore purely operational interventions and not directly related to the rental premises. The affected tenants can continue to use their rental property, for example for internal purposes, in particular the storage of equipment and inventory. The permission to reopen to the public is comparable to a business license.
Finally, it has to be taken into account that the wording of the relevant legal provisions regarding defects of rental premises assumes that the lessor has the power to remedy the defect. In the case at hand, however, the lessor has no influence on the measures imposed by the Swiss authorities and can thus not remove the circumstances restricting the operation.
On this basis, we are of the view that in to the current legal situation, the obligation to pay the full rent should generally subsist.
However, the fundamental legal principle of “clausula rebus sic stantibus” which provides for a contract adjustment in the event of a gross discrepancy between performance and consideration also has to be taken into account. This principle is also applicable to rental agreements, and it is conceivable that courts will order rent adjustments on that basis.
It also has to be reviewed whether insurance coverage or support from the government is available to the tenant. If and to the extent the loss of revenue is compensated by a third party, in our view a defect of the rental premises in the legal sense can in any case no longer be assumed.
The Swiss federal government has so far not explicitly addressed this issue in its COVID-19 emergency legislation. However, on March 27, 2020, the Federal Council has enacted an ordinance which extends the maximum admissible delay within which a tenant may pay the rent before the lessor has the right to terminate the lease agreement for default, provided the tenant’s payment delay is due to the restrictions imposed by the governmental COVID-19 measures. This seems to imply that the Federal Council is of the view that at least a 100% reduction of rent cannot be requested by tenants. However, it must be kept in mind that the Federal Council has no power to amend or interpret federal laws, and this point of view will therefore not be binding for the Swiss courts.
Apart from a reduction of rent, also an extraordinary termination right for the tenant is conceivable. Also here the contractual rules take precedence over general statutory provisions and consequently must be examined first.
The statutory principle states: In order for the tenant to terminate the lease prematurely, a valid reason is required which renders the tenant’s continued contractual performance undue. This reason must be substantial, it must not have been foreseeable and must have arisen through no fault of the terminating party. In principle, the temporary closure of a business is not considered substantial enough to justify termination for cause. It is different, however, if the lease has explicitly been concluded only for a short time or even only for a specific event. In such case, also a temporary closure may constitute a valid reason. As a rule, it can be stated that the longer the closure lasts, the more likely the obligation to pay the rent becomes undue. In any case, this should only be the case after an extended period of time during which the restrictive measures subsist.