In light of the state of emergency declared in Bulgaria and the measures undertaken by the government for the containment of the spread of COVID-19 at this stage, the commercial real estate sector appears to be one of the most significantly affected. As such, we have prepared this brief outline of the major questions raised in the sector. This summary addresses only the measures already in force and may be subject to update, in case additional rules or restrictions are adopted.
- Public access restrictions to certain premises
Subject to Order No RD-01-124 of 13 March 2020 of the Minister of Health (“the Order”), visits to leisure and playground halls, discotheques, bars, restaurants, fast food restaurants, coffee shops and large commercial centres (except for food stores, pharmacies, bank and insurance offices) are to be discontinued until 29 March 2020.
As the Order imposes measures in relation to the outbreak of an infectious disease (COVID-19), all individuals and legal entities are obliged to comply therewith. More specifically, in the case of commercial centres, landlords and tenants are required to suspend visitor access to the premises specifically listed under the Order. This, however, does mean that the affected leased premises must be shut down, as only customer access to such leased premises is disallowed and tenants are not generally prohibited to use the premises. Further, certain operations with customers from these premises that do not involve direct contact, such as home deliveries, are explicitly allowed upon strict compliance with the sanitary and hygiene requirements.
- Suspension of rent payments
Generally speaking, to the extent that the lease agreement is effective and the tenant is in possession of the leased premises, the landlord is entitled to demand rental payments irrespective of whether or not the leased premises are actively used by the tenant. However, some lease agreements may contain different arrangements to allow tenants to suspend rental payment if tenants cannot use the premises for the contractually agreed use. Therefore, a careful review of the specific clauses of each lease agreement is required to assess what each party is entitled to under the agreement in the current situation.
In certain cases, tenants could potentially claim suspension of rental payments due to a failure of the landlord to ensure undisturbed possession of the leased premises (retention rights). Whether such claims of tenants are likely to succeed or not would depend on the specific facts and circumstances of each particular case, such as access of tenants to the leased premises, any impediments for tenants to use the leased premises, etc., which should be assessed in view of the terms of the specific lease agreement.
- Force majeure
Force majeure under Bulgarian law constitutes an unforeseeable or unavoidable event of extraordinary nature that
i. has arisen after the conclusion of a commercial agreement, and
ii. prevents the performance of the obligations of any of the parties under the agreement.
Such an event absolves the defaulting party from liability arising from its default, as long as the party had not been in default prior to the occurrence of the event. In this case, however, it might be difficult for tenants to claim that they have been prevented to make due rental payments by a force majeure event. While the anti-epidemic measures will most likely qualify as an unforeseeable or unavoidable event of extraordinary nature, the causal link between this event and the impossibility of tenants to make the due payments is unlikely to be established, in particular given that Bulgarian law explicitly disregards the lack of sufficient funds as grounds for exemption from liability.
If, however, a landlord (i) denies tenant access to its premises or impedes the use of the premises by a tenant based on the anti-epidemic measures imposed by the Order, and (ii) claims a force majeure event, the tenant may be entitled to suspend payments under the lease agreement.
- Termination of a lease agreement
The termination options under lease agreements should be carefully reviewed, as some lease agreements might contain explicit provisions that entitle the tenant to terminate the agreement if prevented from using its premises for a certain period of time, including in case of a force majeure event.
Further, under Bulgarian law, any of the parties can request a court to modify or terminate а lease agreement if circumstances that the parties have not foreseen and have not been obliged to foresee have occurred and the preservation of the agreement will violate fairness and good faith. To the extent that tenants are not able to use their premises to serve customers due to the restrictions imposed by the Order but are bound to make rental payments as if they were serving customers, this could potentially be considered as a violation of fairness and good faith and as such trigger the modification/termination of a lease agreement (of course subject to the interpretation of the court under the specific situation).
For more information on the topic, please contact Antonia Mavrova, Partner and Head of the Sofia Real Estate and Construction practice, at [email protected], or Atanas Mihaylov, Managing Associate, at [email protected]