On 11 March 2020, the Cabinet of Ministers of Ukraine declared a nation-wide quarantine until 3 April 2020, which was supplemented on 16 March 2020 and 20 March 2020 by a number of temporary travel, transport, business and other restrictions to prevent the spread of coronavirus (COVID-19 Restrictions). Further, on 20 March 2020 Kyiv City Council declared emergency situation regime in Kyiv city.
This alert discusses force majeure and other statutory implications of the COVID-19 Restrictions from real estate leases perspective.
Do the COVID-19 Restrictions qualify as force majeure?
On 17 March 2020, the Law of Ukraine No. 530-IX "On amendments to certain legislative acts of Ukraine aimed at the prevention of occurrence and spread of coronavirus (COVID-19)" became effective (COVID-19 Law).
Among other things, the COVID-19 Law officially includes the "quarantines imposed by the government" (such as the COVID-19 Restrictions) in an open-ended illustrative list of force majeure events. This, however, does not entail the automatic enforcement of force majeure provisions in the relevant leases and does not allow the non-performance under such leases. It only grants any interested party an opportunity to obtain the certificate confirming that the COVID-19 Restrictions qualify as a force majeure event (Certificate).
In turn, the Chamber of Commerce and Industry in Ukraine will only issue the Certificate, if an interested party succeeds in providing sufficient documentary evidence that its inability to perform the obligations under a lease was directly caused by the COVID-19 Restrictions.
Note that the COVID-19 Restrictions as a force majeure event release from liability the failure to properly perform the affected obligation, such as late payment interests or other penalties (for tenants) and penalties for the failure to provide the premises suitable for the purpose of a lease (for landlords). Other statutory remedies should be considered for the purposes of release from the underlying obligation to pay rent.
Are there any grounds for rent concessions?
Ukrainian law entitles tenants to request rent concession or abatement in the following cases:
- Change of business conditions: Rent concession is possible if the business conditions specified in the relevant lease agreement have changed due to reasons beyond the tenant's control.
- Tenant's inability to use the premises: Full rent abatement is possible if the tenant cannot use the premises due to circumstances, for which the tenant is not responsible.
Case-by-case analyses will be needed to determine the extent of tenants' inability to use the premises or the degree of the change of business conditions, as well as their causal connection with the COVID-19 Restrictions.
Is it possible to terminate a lease due to the COVID-19 Restrictions?
Under Ukrainian law, the failure of a tenant or landlord to perform its respective obligations due to events beyond its reasonable control does not automatically lead to the termination of a lease agreement. It should be possible, however, to initiate the procedure of the lease termination due to material adverse change.
Actions to consider
- Analyze available legal mechanisms allowing to protect your interests under the lease from the consequences of the COVID-19 Restrictions (e.g. carefully review force majeure provisions to determine the applicable notification procedures and deadlines, initiate discussion on review of lease conditions, including possible rent concessions and so forth).
- Companies that are in the process of lease negotiations should seek broad and flexible clauses (not only force majeure) that deal with various eventual delays and other consequences of the COVID-19 pandemic.
With the full impact of the coronavirus and related restrictive measures likely to play out for some months yet, this is an issue seemingly becoming more important by the week.
If you would like to discuss in detail any of the issues raised in this alert please do not hesitate to contact us.
This LEGAL ALERT is issued to inform Baker McKenzie clients and other interested parties of legal developments that may affect or otherwise be of interest to them. The comments above do not constitute legal or other advice and should not be regarded as a substitute for specific advice in individual cases.