COVID-19 and Commercial Leases — Commentary on the Judgment of the Commercial Division of the Grenoble Court of Appeal dated 6 November 2020

Judgment of the Commercial Division of the GRENOBLE Court of Appeal dated 6 November 2020, on appeal from a decision rendered by the GRENOBLE Tribunal de Grande Instance on 21 March 2016.

By a judgment dated 6 November, the GRENOBLE Court of Appeal has just contributed to the intense debate between landlords and tenants under commercial leases that has arisen since the outbreak of the pandemic and its corollary — lockdown and the closure of businesses “not essential to the life of the Nation” — concerning the payment of commercial rents.

May a tenant whose business premises have been forced to close, and who is therefore unable to operate, be released from the obligation to pay rent during that period of closure?

That was the question put to the Court, which answered it in the negative, rejecting the arguments advanced by the tenant.

However, as we shall see, this solution is not necessarily transposable to all commercial lease tenants, as factual elements may alter the legal analysis of the question.

· The facts of the case:

Mr D had acquired two apartments under an off-plan sale (VEFA) within a serviced-residence complex.

It is well known that this type of acquisition gives rise to tax advantages and, as a result, imposes certain constraints, in particular the obligation to lease the apartments in question to an operator.

It was on this basis that Mr D granted to a company, Park And Suites — which would later become APPART CITY — a commercial lease over these two apartments in return for an annual rent of €4,869.20 excl. tax for the first and €4,229.10 excl. tax for the second.

It will be noted that it is not the amount in dispute that makes this case interesting…

This lease provided that the tenant would issue 4 quarterly invoices (on 31 March, 30 June, 30 September and 31 December) at the same time as it paid the corresponding amounts to the landlord.

In April 2014, the landlord brought proceedings against the tenant before the GRENOBLE Tribunal de Grande Instance, seeking:

Ø a finding that the company had systematically paid the rent late;

Ø a ruling that it had failed to comply with its invoicing obligation;

Ø an order requiring it to pay €1.15 in interest at the statutory rate on account of the late payment;

Ø an order requiring it to pay €2,509.52 in rent…;

Ø and an order requiring it to provide an itemised operating statement specifying the occupancy rates achieved, the significant events of the year, and the amount and trend of the residence’s main expense and revenue items over a given period, subject to a penalty payment.

It should be noted that the landlord did not seek termination of the lease, in which he had no interest, since in order to benefit from the tax advantages associated with the acquisition of a leisure residence, it is imperative not to be left without a tenant.

The landlord therefore asked the Court to compel the tenant to perform its obligations and to sanction it for having failed to do so.

In 2016, the Tribunal entered judgment against the tenant; the landlord, however, appealed against all the provisions of the judgment and argued that the tenant had persisted in its contractual breaches.

The proceedings lasted 4 years, as the closing order was issued on 17 September 2020.

And it was before the Court of Appeal that the question of unpaid rent during the lockdown period first arose — a period that led the tenant to cease all activity between 17 March and 2 June 2020, tourist residences being subject to a prohibition on opening under the decrees of 11 May and 20 May 2020.

In support of its contention that it was released from the obligation to pay rent, the tenant relied on:

– The defence of non-performance (exception d’inexécution),

arguing that the landlord had failed to fulfil its obligation to deliver the leased property and to allow the tenant to enjoy it within the meaning of Article 1719 of the Civil Code, since all activity had ceased as a result of the lockdown measures and the prohibition on opening.

– Force majeure:

the epidemic being unforeseeable at the time the lease was signed, external to the tenant and irresistible owing to the absence of any clientele and to the administrative measures, the tenant claiming that it was thereby released from its obligations during that period.

– that this situation also constituted the “act of the prince” (fait du prince),

the decisions taken having had the effect of undermining the financial balance of the contractual relationship.

– Article 1722 of the Civil Code, which provides that, in the event of partial destruction of the leased property, the tenant may seek a reduction in the rent or even termination of the lease.

– That this principle would be applicable here, destruction also being understood as the impossibility of using the property in accordance with its intended purpose resulting from the administrative measures taken during the lockdown period.

· The defence of non-performance

It is settled that, under the new Articles 1219 and 1220:

Article 1219:

“A party may refuse to perform its obligation, even though that obligation is enforceable, if the other party does not perform its own and if that non-performance is sufficiently serious.”

Article 1220:

“A party may suspend the performance of its obligation as soon as it becomes apparent that its counterparty will not perform when due and that the consequences of that non-performance are sufficiently serious for it. Such suspension must be notified as soon as possible.”

The defence of non-performance may only be invoked in the context of reciprocal and interdependent obligations.

In a lease, the obligations to deliver and to ensure peaceful enjoyment, on the one hand, and to pay the rent, on the other, are interdependent, since the rent is stipulated as consideration for the right to use the leased property.

But the non-performance must still emanate from the counterparty — here, the landlord. And it is not through any act of the landlord that the tenant is deprived of normal enjoyment of the premises.

In the health crisis, the lack of enjoyment is attributable neither to any act of the landlord nor to any fault on his part, but to a decision of the public authorities.

And it was probably to this that the tenant was alluding in its pleadings when it referred to the “act of the prince”.

Moreover, the case here concerns a business whose opening to the public was prohibited by regulation, but whose premises were not inaccessible to the tenant, who could, where appropriate, carry on an activity there without receiving clientele or with a different clientele.

No failure to deliver can therefore be attributed to the landlord, since the tenant always had access to the premises it had leased: it had the keys, and could use them even if it could not operate the business.

The GRENOBLE Court of Appeal rejected the defence of non-performance, holding that the respondent was not entitled to raise such a defence under Articles 1219 and 1220 of the Civil Code, since the non-performance must be attributable to the counterparty and must be total — the tenant being able to invoke this defence only if enjoyment of the premises is rendered impossible and provided that such impossibility is attributable to the landlord.

The Court emphasised that, while tourist residences were compelled to close for a few weeks after having had to close certain common areas, the landlord’s inability to make the premises available did not result from any act of his own, but from administrative constraints.

It further noted that, for nearly two months, the operator had been able to run the residence, at least in part.

And that the respondent had not notified the landlord of the total or partial impossibility of operating the premises, whereas it had chosen not to reopen the residence over the summer even though there was no longer any prohibition on operating.

This reasoning can only be endorsed.

· On force majeure

It must be recalled that force majeure is an event beyond the debtor’s control — that is, one over which it has no power — that is unforeseeable at the time the contract is formed and that is irresistible.

But this mechanism applies only where performance of the obligation is materially impossible.

As Professor DANOS writes: “the performance of the obligation incumbent on the debtor must be strictly impossible in order for the latter to be able to invoke force majeure. The fact that performance is very difficult or becomes very onerous does not allow force majeure to be invoked (in such a case it is hardship (imprévision) that may, where applicable, apply).”

And force majeure is excluded for obligations to pay a sum of money: “a debtor under an unperformed contractual obligation to pay a sum of money cannot be released from that obligation by invoking a case of force majeure.”

This is the solution that has been laid down for several years by the Cour de cassation (French supreme judicial court).

Accordingly, the tenant’s financial difficulties — however real — resulting from the COVID-19 crisis and preventing it from paying its rent cannot constitute a case of force majeure justifying a suspension of the payment of that rent.

It was in this sense that the Court ruled, noting that the impossibility of operating during the health crisis was not irresistible, the respondent having failed to demonstrate the absolute impossibility of meeting its obligation in terms of cash flow, in that it did not produce any accounting records concerning the residence and its business.

And the Court recalled that hotels were not closed by a prohibition on carrying on their activity, since it was the tourist-residence activity that was targeted by the decree of 20 May 2020 and not the building itself — that decree allowing access where the building constitutes a regular domicile of persons within the meaning of Article D 321-1 of the Tourism Code; in other words, certain persons could take up residence in the serviced residence, which was not inaccessible.

It may be added that, even if the tenant had produced the accounting records demonstrating its cash-flow difficulties leading to a near-impossibility of paying its rent, force majeure would nonetheless not have been upheld, having regard to the doctrine and case law cited above, since the impossibility must be a material one.

This is why the doctrine of force majeure does not apply to obligations to pay.

· The doctrine of the “act of the prince”

The Court noted that it was not applicable, since it concerns only acts taken by a public body in its capacity as a party to the contract.

That is not the case with legislative or regulatory provisions, all the more so as the orders of 14 and 15 March 2020 authorised the continuation of hotel and tourist-accommodation activities, or short-stay accommodation, where these constitute a regular domicile for the persons living there.

The Court recalled that the operator’s decision to close the residence and not to reopen it stemmed solely from a management decision aimed at reducing operating costs…

· Article 1722 of the Civil Code

It will be noted that the Court of Appeal did not respond to this argument, which nonetheless features among the arguments identified as available to the tenant to obtain, at the very least, a reduction in the rent.

Indeed, the Cour de cassation has treated the impossibility of using the premises owing to an act of God (cas fortuit) as a loss of the property within the meaning of Article 1722 of the Civil Code.

And it has also accepted that this impossibility of using or enjoying the premises could amount to a partial loss of the property justifying a reduction in the rent.

A temporary impossibility of enjoyment resulting from an act of God could justify a reduction in the rent relating to the period during which the tenant suffered an impossibility of enjoyment.

However, the judgments that accept treating the impossibility of using the property owing to an act of God as a loss of the property concern only situations where that act of God affects the building itself or its physical amenities. This implies that, just as with the defence of non-performance, the provisions of Article 1722 of the Civil Code will be capable of applying only to buildings intended to receive the public that are targeted by a closure decision pursuant to Article 8 of the decree of 23 March 2020 — and it will still be necessary to determine whether the closure decision concerns the building itself or the tenant’s activity.

Consequently, in light of the Court of Appeal’s reasoning, it is clear that this argument, like the defence of non-performance, would not have been upheld.

In conclusion, this judgment applied the principles laid down by prior case law and the prevailing doctrine concerning the obligation to pay rent during periods of administrative closure.

But it must be remembered that every case is different and that, given the difficulties of accessing the courts during this period of health emergency, the parties should be encouraged to seek a negotiated solution rather than becoming bogged down in litigation whose outcome will, by nature, be uncertain and, above all, distant.