In light of the recent extraordinary events connected with the COVID-19 (coronavirus) threat, we would like to summarise the possible legal consequences for contractual obligations, in particular in the real estate market in Poland. Undoubtedly, the recent events have caused much disturbance to business activities; many businesses have been closed for an unspecified period of time, workforces are being significantly reduced and supply chains have been seriously affected. The consequences for the proper performance of contractual obligations may be significant.
Recently adopted legislation
The regulation of March 20, 2020 issued by the Polish Minister of Health declaring a state of epidemic nationwide imposed certain restrictions on the operation of shopping centres. Shops other than those that sell food products, pharmacies, and laundries were ordered to be closed, but shopping centres may remain open provided that no other activity is conducted in them. Entertainment and leisure activities (restaurants, bars, cafes, cinemas, conferences, meetings) are also restricted nationwide.
The act of March 2, 2020, which covers some issues connected with the spread of the COVID-19 virus, does not refer to contractual obligations. It deals mainly with organisational, administrative and medical issues and for now, does not address the problem of impact of the current situation on contractual business relations. Any further regulations modifying contractual relations in some sectors (for example, suspension of mortgage payments) are still being considered. However, at this stage, only the relevant provisions of the Civil Code are applicable.
General rules of the Civil Code applicable in the current situation
According to Article 357(1) of the Civil Code if, following an extraordinary change of circumstances, the performance of an obligation would entail excessive difficulties or threaten one of the parties with substantial loss which the parties did not foresee when concluding the contract, the court may, after considering the interests of the parties, define the mode of performing the obligations and the degree of the performance required, and even decide upon termination of the contract. This regulation is considered as an exception to the general “pacta sunt servanda" rule according to which the parties should perform the contract regardless of subsequent circumstances. An amendment of contractual conditions requires the commencement of court proceedings, which may be difficult in the short term as the courts' activities have been suspended. Nevertheless, this provision may be used to mitigate the long-term negative consequences of the present situation. The court may in the first place amend the provisions of the contract taking into account the new circumstances. Termination of the contract is considered to be a measure of last resort. The possibility of using the above-mentioned regulation applies to contracts concluded after the extraordinary conditions have occurred.
It should be noted that the Polish Civil Code does not define a “force majeure” event. The concept is, however, known in the Polish legal system and is often included in contractual clauses. In common understanding, a force majeure event is regarded as an event classified as: 1) independent (from the parties), 2) unavoidable and 3) impossible to predict.
The result of such an extraordinary event may be the delayed performance of an obligation or a situation in which its performance becomes impossible.
Any delayed performance may have negative consequences (such as the creditor’s right to withdraw from the contract, receive substitutive performance from a third party or claim damages) but provided that the delay happened for reasons attributable to the debtor (however in case of late payment, interest becomes due regardless of the reason). In this particular scenario, assuming that late performance is caused by extraordinary circumstances, the creditor may not make use of the above-mentioned statutory sanctions.
If it becomes impossible to perform an obligation for reasons for which the debtor is not liable (including but not limited to force majeure events), the contract will expire and the debtor has no duty to pay any damages.
Significantly, the extraordinary (force majeure) event must be the reason for the delayed performance or non-performance. A timely coincidence with a force majeure event is not a sufficient cause for being released from the negative consequences of late performance or non-performance.
Specific provisions relevant for the real estate market
Besides the general rules governing obligations, the Civil Code includes also specific provisions that may be relevant to the real estate market.
According to Article 635 of the Civil Code (which refers to contracts for specific tasks and also to contracts for construction works), if the contractor is in delay with commencing or completing works to such an extent that it proves unlikely that the contractor would be able to finish them on time, the client may, without setting an additional time limit, withdraw from the contract even before the lapse of the time limit for the completion of works. The important difference is the fact that this article does not differentiate between the reasons for delay. Therefore, it may be applied also if the delay is caused by reasons for which the contractor is not liable.
According to Article 700 of the Civil Code (referring to tenancy agreements (umowa dzierżawy) if, as a result of circumstances for which the tenant is not liable and which do not pertain to the tenant personally, the usual revenue from the object of tenancy is considerably reduced, the tenant may claim a reduction of the rent for the given economic period. For some businesses affected by the current situation, it may provide the basis for rent reduction. However, this provision is not applicable to lease agreements (umowa najmu), (which is commonly used in most commercial leases – office, retail, warehouse) although parties to lease agreements may seek protection under Article 357(1) of the Civil Code.
No restrictions arising from the recently adopted laws dealing with the epidemic emergency should be considered as a “defect” in the object of lease and be used as the basis for rent reduction. Moreover, in most market standard lease contracts, such circumstances are not considered to be grounds for lease termination by the lessee. However, final conclusions about consequences of the current situation for the leases should always be based the exact wording of the agreement.