The House of Representatives will be debating on a recently filed bill to amend Art. 52 of Emergency Law No. 6524/2020, whereby relations between civil and commercial landlords and tenants are regulated, in the framework of the COVID-19 pandemic.
The first three paragraphs of the new Art. 52 of the Emergency Law, according to the Bill, replicate and extend the general financial rule for rental fees and limitation of evictions until September of this year. The fourth – and last – paragraph presents, on the other hand, a novelty with respect to the law currently in force, since it refers exclusively to commercial rental or lease and also regulates termination of contracts due to force majeure.
Modifications refer to the financing term of the unpaid fees’ percentage, they must be completely cancelled within the following ten months after October 2020, thus increasing the repayment term of the prorated debt since the current Law 6524/2020 sets the same at 6 months. The legislator expressly establishes that during this period the landlord (creditor of the royalties) will not have the right to receive interest over the owed difference; a provision that does not exist in the current Emergency Law.
Indeed, it is the last paragraph of the Bill the most novel. There are no traces of said section in the Emergency Law. The same, which applies exclusively to commercial rentals, providing “commercial rentals related to activities suspended since March 10, 2020, and not authorized during the various phases of the smart quarantine, may choose to pay only the 40% or, where appropriate, to terminate the contract, when the purpose of the contract is not fulfilled, due to force majeure”.
This last paragraph should be approached with great caution, and brought to the legislators’ attention, since it concerns core issues regarding the obligations and contracts system outlined by the Civil Code.
On one hand, a partial and ex lege exemption from paying part of rents is established in favor of tenants who meet the requirements listed in the proposed legal document, namely: a) it must be a commercial rental; and, b) the concerned commercial activity must be included among those suspended and not reactivated by the health emergency laws. That is, commercial tenants would only be required (if the Bill is approved) 40% of the contractually agreed rental fee.
Additionally, tenants may choose not to pay said reduced fee and terminate the bond, thereby terminating the contract. It is understood that this right to terminate the rental contract would be reserved solely for the tenant, although it is not clear in the current text whether both parties would have such right, so it is expected that this issue is clarified at the congress debate prior to the enactment of the law.
The basis of the options made available to the tenant is the casus; that is to say, fortuitous event or force majeure. It is here, however, where legislators must proceed with caution so as not to generate an inconsistency in the private law system. In fact and in strict accordance with principles, force majeure as a means of extinction of obligations (provided by Art. 628 et seq. of the Civil Code) does not apply to gender obligations, as the obligation to give sums of money is, by the simple rule according to which “gender never perishes.”
However, and despite the difficulties that terminological inaccuracy could lead to, the last section of the Bill in terms of modifying the contractual economy by reducing rental payments could be framed within the figure of unforeseen due to supervening causes; typically contractual filiation remedy, provided for by Art. 672 of the Civil Code. Unlike the casus, it is not a question of the impossibility of fulfilling an obligation, but rather that it is disproportionately burdensome for one of the parties. It is here where the so-called “adequacy of the contract” comes into the scenario as a possibility, which the doctrine also often calls “shared effort”. In this case, the adequacy of the contract will no longer be the result of a fair negotiation on the distribution of obligations and rights, but it is the law itself that would provide the solution by establishing a discount of 60% of the rental price. Notwithstanding this, by application of the autonomy of will, the parties could agree other adjustments to the commercial rental contract (which could include renegotiation of prices, extension of terms, changes in scope, etc.) in an attempt to reestablish the performance balance (which includes the economic equation) that the parties took into account when originally entering into the contract
Unlike common regulations, where the party damaged by unforeseeable and extraordinary events that constitute force majeure can only demand the resolution of the contractual relationship, the Bill gives the tenant (presumed damaged party) the power to choose between the modification of the contract (substantially reducing the rental price) and the termination of the bond due to force majeure. Moreover, the article as written seems to deprive the landlord from the possibility of offering an equitable modification of the contract to prevent a resolution claim by the tenant -a faculty that, it is worth mentioning, is provided by the Civil Code.
Another issue of interest that the proposed legislative amendment raises is the classification of the event qualifying as force majeure, thereby exempting whoever invokes it from the burden of proof. In other words, any doubts about the application of the figure of force majeure to commercial rentals and under the conditions described are erased, without the need for prior interpretation by the intervening judge regarding facts and applicable law (and their caused relationship).
Besides the above stated, there are other aspects that the Bill leaves without solution, and that could bring practical problems of applicability. A striking omission, which directly concerns the exercise of the power provided for in the last section of said article, is related to the state of default. In fact, it is not established whether tenants in default before the entry into force of the law would be able to invoke the exception rule; an issue that should be clarified given that the regime outlined by the civil code prevents defaulters from invoking either the casus or unforeseen facts.
Also, the issue regarding past debts, assumed under the current Emergency Law, which is intended to be modified, is not resolved. It does not regulate, and it would be good if it does, if the proposed benefit (reducing the commercial rental fee to 40% of the value) is applied for the entire period of the health emergency (that is, from March until the quarantine ends), or just from the date in which the Bill entered into force onwards. Similarly, there is no mention of the destination given to the financing granted by the Emergency Law for the percentage of unpaid rents; would they continue to enjoy this financing, or debits should be fully cancelled to use the power established in the new fourth paragraph of Art. 52? All these under the principle of non-retroactivity of the law, so we consider prudent that those who took the benefit provided by the Emergency Law must return to the landlord the unpaid 60% within the deadlines established by law and, if after the enactment of the new Bill, they choose the reduction of the rental fee, this will apply in the future and not retroactively.
These aspects, which make the executive part of current lease contracts, must be clearly resolved by the legislator, in order to achieve legal certainty, avoid disputes, and facilitate the application of the law.
Briefness of the modifications proposed by the legislators would seem to suggest their irrelevance. However, and as indicated, appearance could not be more deceptive; since the reform would affect core elements of the contractual system. In view of this, legislators are advised to be prudent, and the reform will certainly be the subject of further studies and certain clarifications are expected to be mentioned prior to its approval.
For further clarifications, our specialists may be contacted at the following email addresses: Carla.Sosa@berke.com.py; Martin.Carlevaro@berke.com.py
BKM Berkemeyer
