Articles

Effects of the Corona Virus (Covid-19) Outbreak on Lease Agreements

2020, Erdemir&Özmen Attorney Partnership

Effects of the Corona Virus (Covid-19) Outbreak on Lease Agreements

Due to the corona virus (Covid-19) which causes a worldwide epidemic, certain measures are also taken and many sectors are negatively affected by the outbreak in our Country. Pursuant to the notice [1] sent by the Ministry of Interior, the workplaces in various sectors have been ordered to be closed temporarily. Due to the negative effects created by Covid-19 across the world, the businesses are temporarily closed under the notice and the businesses and factories suspend their activities in order to prevent the outbreak and this fact causes the economy to be damaged and consequently, difficulties in paying workplace rents. Accordingly, in order to mitigate the negative effects of the payment difficulties in workplace rents and to ensure resumption of the economic activities, a legal arrangement has been issued in respect of the matter that workplaces shall not be evicted due to nonpayment of rent [2].

Before evaluating the effects of Covid-19 outbreak on lease agreements, it is useful to explain briefly the certain legal concepts that we may encounter.

Impossibility of performance

Of these concepts, “impossibility of performance” constitutes the first legal concept. Impossibility of performance is regulated by the articles 136 and 137 of the Turkish Obligations Code dated 11/01/2011 numbered 6098 (the “TOC”).  Accordingly, the obligation shall terminate if it becomes impossible to perform the obligation due to the reasons for which the obligor cannot be held responsible.

If performance of the obligation becomes impossible partly due to the reasons for which the obligor cannot be held responsible, the obligor will be relieved of only the part that becomes impossible. However, the obligation shall terminate entirely in case it is clearly understood that such an agreement would not have been concluded by the parties if this partial impossibility of performance had been foreseen in advance by the parties. The matter of whether or not impossibility of performance takes place due to the corona virus outbreak should additionally be analyzed depending on the circumstances of each concrete case.

When an assessment is carried out on whether or not the obligor has a fault in the occurrence of the impossibility; in the current situation, even though the corona virus outbreak does not originate from the obligors’ fault, if the obligor fails to perform his own obligations through his fault although he has the ability to perform his obligations in spite of the outbreak, this may create on the part of the obligor the obligation to compensate the losses suffered by the obligee.

Extreme difficulty of performance

It is possible to apply the “extreme difficulty of performance” provisions regulated by the article 138 of the TOC, if the performance of the obligation becomes extremely difficult due to the reasons for which the obligor is not responsible, although the fulfillment of the obligation does not become impossible. Accordingly; in the case that an extraordinary circumstance, which has not been foreseen and is not expected to be foreseen by the parties at the time of conclusion of the agreement, emerges for a reason not originating from the obligor and that such extraordinary circumstance changes the facts, existing at the time of conclusion of the agreement, to the detriment of the obligor in such a degree that the request for the performance from the obligor would run counter to the rules of objective good faith and further, in the case that the obligor has not performed his obligation yet or that the obligor has performed his obligation by reserving his rights arising from the extreme difficulty of performance, the obligor has the right to request the judge to adapt the agreement to the new conditions, or if this is not possible, the obligor has the right to rescission of the agreement. In the agreements containing continuing obligations, in principle, the obligor exercises his right to termination instead of his right to rescission.

As can be understood, for the applicability of the provisions regarding extreme difficulty of performance, there should be an extraordinary circumstance which cannot be foreseen and does not originate from the obligor. In this respect, the corona virus outbreak can be indicated as an example for such an extraordinary circumstance, if the circumstances of the concrete case are convenient. In case it becomes extremely difficult for the obligor to fulfill his obligation, the obligor has the right to apply to a court and request for adaptation of the agreement to the new conditions. If such adaptation is not possible, the agreement may be terminated.

Force majeure

The concept of force majeure emerges in the situations to which impossibility of performance applies generally. In a binding decision of the Supreme Court of Appeals, force majeure is defined as: “An extraordinary event that leads to absolutely and unavoidably violation of the incumbent’s or the obligor’s activity or breach of the obligation, which cannot be foreseen and resisted”, and epidemic/pandemic diseases are considered as force majeure [3]. After this binding decision, it is observed that many Supreme Court decisions also consider epidemic/pandemic disease as force majeure.

Finally, we are of the opinion that there is a virus outbreak with a very high spreading speed against which widespread measures are taken all around the world, including our Country and that it is therefore possible to consider this epidemic disease i.e. the Covid-19 outbreak as force majeure. However, we would like to state importantly that the matter of whether the corona virus outbreak constitutes force majeure can be interpreted as per the terms of the agreement between the parties and that the circumstances of each concrete case should therefore be analyzed additionally.

Legal situation of the lease agreements pertaining to the businesses closed by the State

On 16.03.2020, the Ministry of Interior has published a notice ordering temporarily closure of certain workplaces; and both the lessors and the lessees have been affected mutually by this circumstance. For the workplaces included in this scope, it is possible for the lessors not to perform their obligation to make the leased real estate available for the lessee’s use, and it is possible for the lessees not to perform their obligation to pay the rent, due to the loss suffered by the lessee in economic terms. In the emergence of this compulsory situation, the lessor and the lessee do not have a fault or a mistake.

In the circumstance that the businesses are closed by the State, if the businesses do not continue serving in takeaway capacity or if it is not possible for them to continue performing their activities within the scope of an exception, this means that there is a compulsory reason beyond the persons’ power. This situation, which causes them not to open the business even if they wish, may constitute force majeure.  In this case, it should firstly be checked whether or not there is a force majeure-related article in the lease agreement. In the lease agreement, if force majeure events are listed one by one, however, epidemic diseases are not among these events listed, it will not be possible to apply the relevant provision. The force majeure provision contained in the lease agreement can apply if epidemic diseases are referred to as force majeure or if force majeure events are not listed on a numerus clausus basis i.e. if force majeure events are listed on an exemplary basis. Pursuant to the relevant provision in the agreement, it may also come into question to postpone the performance, instead of termination. In this case, it is possible to suspend the obligations under the agreement, on the basis of the provisions of the postponement of performance.

If the lease agreement does not contain any provision or contains an insufficient provision in this regard, it will be necessary to assess the concrete case in terms of the legal concepts, and particularly the concepts of impossibility of performance and extreme difficulty of performance explained above.

In the existence of a reason which does not originate from the obligor’s fault and makes the performance impossible, it is possible to adopt that there is impossibility of performance. However, at this point, the matter necessary to be taken into consideration is whether or not the impossibility of performance is temporary and whether not the duration of this impossibility exceeds a reasonable period of time. With regard to the current situation, it is of quite importance to carry out this assessment for the workplaces closed temporarily under the notice.

Pursuant to the provisions contained in the article 136 of the TOC, impossibility of performance is expressed exactly as follows: “The obligation shall terminate if it becomes impossible to perform the obligation due to the reasons for which the obligor cannot be held responsible. In the agreements which impose mutual obligations, the obligor who is relieved of the obligation due to impossibility is obliged to give back, in accordance with the unjust enrichment provisions, the consideration that the obligor has received from the other party, and the obligor shall lose the right to claim the consideration which has not been yet performed for the obligor. The circumstances, where the damage that has arisen prior to the performance of the obligation is attributed to the obligee by the laws or the agreement, are excluded from this provision. If the obligor does not notify, without delay, the obligee that the performance has become impossible and does not take the measures necessary for the loss not to increase, the obligor shall be obliged to compensate the losses arising therefrom.”

Besides, pursuant to the provisions contained in the article 137 of the TOC, partial impossibility of performance is expressed exactly as follows: “If performance of the obligation becomes impossible partly due to the reasons for which the obligor cannot be held responsible, the obligor will be relieved of only the part that becomes impossible. However, the obligation shall terminate entirely in case it is clearly understood that such an agreement would not have been concluded by the parties if this partial impossibility of performance had been foreseen in advance by the parties.

In the agreements which impose mutual obligations, if one party’s obligation becomes partly impossible and the obligee consents to the partial performance, the counter obligation will be performed to that extent. In the case that the obligee does not consent to such a performance or that the counter obligation is of indivisible nature, the full impossibility provisions shall apply.”

In case the performance becomes impossible for a temporary period of time, the agreement almost freezes during the impossibility period, however the obligee-obligor relationship continues. In case the impossibility ceases to exist, the agreement comes into force again. In the established decisions of the Supreme Court of Appeals, this waiting period is called as agreement tolerance or endurance period and it is prescribed that the parties should wait for the end of this period.

However; given all the contractual factors, if the temporary impossibility has lasted for a long period of time and the survival of the agreement becomes intolerable, in other words, if the resumption of the agreement constitutes a violation of the rules of objective good faith, it is possible to apply the provisions regarding impossibility of performance. The termination of the lease agreement on the basis of these provisions may come into question in cases where it will be unfair to expect the resumption of the agreement from at least one of the parties i.e. the lessor or the lessee. Thus, as explained above, the parties are expected to tolerate to be bound by the agreement under these conditions for a certain period of time, by reason of the impossibility of performance that occur due to this temporary outbreak. Given also the period that the Covid-19 outbreak will continue, if both parties are henceforth expected to be bound by the agreement, this may constitute a violation of the principles of equity. In such case, both parties may request to terminate the agreement. Thus, the matter of whether or not the current situation grants the parties the right to termination should be analyzed and assessed as per the terms of the applicable lease agreement within the framework of the concrete case.

It should be stated importantly that, in principle, if the lessee wishes to make use of this provision, the lessee should notify as soon as possible the lessor of this circumstance, without seeking the condition that the obligation becomes due.

On the other hand, in case the matters explained above apply to the businesses which are able to use the leased property by serving in takeaway capacity or within the context of a different exception, though they are included in the types of the business closed under the notice, this would be contrary to the principles of equity. In this case, it would be possible to resort to extreme difficulty of performance explained above, if the relevant conditions take place.

Legal situation of the lease agreements pertaining to the businesses which are closed voluntarily or whose revenues substantially decrease

As is known, some of the businesses have closed their workplaces as a precaution to reduce the contacts with the Covid-19 outbreak, although they are not included in the scope of the notice. The current situation of a lessee who has closed the workplace of his own free will, though it is not mandatory for him to do so in legal terms, shall be interpreted differently than the workplaces which are closed by virtue of the notice.

Furthermore, although some of the businesses have not suspended their activities, they have substantially suffered loss of revenue since they are unable to find customers. The legal situation should also be evaluated with regard to these businesses.

In both cases mentioned above, it should firstly be looked into whether or not the lease agreement regulates the current situation. If the agreement contains a provision regarding the cases where the lease relationship between the parties suffers difficulty in economic terms, it will be possible to apply such provision. Otherwise, the legal concept that will be resorted to may be extreme difficulty of performance. As a matter of fact, an extraordinary circumstance, which has not been foreseen and is not expected to be foreseen by the parties at the time of conclusion of the agreement, may have emerged for a reason not originating from the obligor, and such extraordinary circumstance may have changed the facts, existing at the time of conclusion of the agreement, to the detriment of the obligor in such a degree that the request for the performance from the obligor would run counter to the rules of objective good faith.

In other words, the lessee may have closed the workplace voluntarily in order to protect the public health, or although the lessee has not closed the workplace, his revenues may have reduced extremely due to the outbreak. In such a circumstance, it is possible that the financial situation of the lessee does not allow the lessee to pay the rent in whole or in part. Accordingly, it is possible to adapt the matters that have changed to the detriment of the obligor in the agreement. However, at this point, the matter necessary to be taken into consideration is whether or not the lessee has made the effects of the corona virus outbreak more difficult through his own fault, in spite of the fact that the lessee has not caused the outbreak. An analysis should absolutely be carried out on whether or not the lessee has a fault about the fact that the lessee’s current situation has become difficult. Furthermore, the effects of the measures taken by the lessee on the extreme difficulty of performance as well as the effects of the lessee’s acts on the extreme difficulty of performance should also be analyzed. Within this context, there is no impediment against the lessee to request, through litigation, the court to adapt the lease agreement on the basis of the new circumstances that have emerged due to the Covid-19 outbreak. In such case, the lessee may either request that his obligation to pay the rent be suspended for a period of time or request for a reduction in the rent within the framework of the circumstances. Then, the judge will carry out an assessment depending on the concrete case and render his decision about the request.

It is not possible to reach a precise opinion about the possibility, on the part of the lessee who becomes insolvent due to the Covid-19 outbreak, to request for termination of the lease agreement. However, the provision contained in the article 138 of the TOC regulates that the termination may be requested, if the lease agreement cannot be modified within the framework of the request for adaptation. In such case, it should be adopted that the termination will come into question in exceptional circumstances only. The authority to adapt the lease agreement and to assess the termination lies with the courts. The court will determine the terms and conditions of the adaptation, if the court decides to adapt the lease agreement; or if such adaptation is not possible, the court will carry out an assessment in respect of termination of the agreement, in which case the court shall carry out the assessment within the framework of the concrete case.

Eviction barrier in workplace leases

In principle, the termination of the agreement and the eviction of the leased property, whose lessee does not pay the rent, can be possible by exercising all these legal remedies. Besides, the TOC grants the lessor the right to request for eviction of the leased property in case the lessee does not fulfill its obligation to pay the rent. That being the case, it is possible for the businesses, whose activities discontinue/reduce due to the current outbreak, not to be able to pay the rents and consequently, to be faced with the risk of termination and eviction. To the end that this situation is prevented, a legal arrangement has been made in order for the businesses to continue operating and thus, continue contributing to the economy and in order to mitigate the negative effects of the outbreak. Thus, the termination of the lease agreements and the eviction of the leased properties, due to nonpayment of the rents by the lessees, have been postponed for a period of four months. 

Pursuant to the temporary article 2 of the Law numbered 7226 on “Making Amendments to Certain Laws” as adopted on 25.03.2020 [4]:

“Failure to pay a workplace rent, which will accrue as from 1/3/2020 until 30/6/2020, shall not constitute a ground for termination of the lease agreement and for eviction.”

As can be seen, in case of a delay in the payment of the rent for an office/workplace lease, termination of the agreement and eviction are prohibited until 30.06.2020. However, this legal arrangement does not constitute an obstacle against collection of such rent receivable through enforcement proceedings.

As regards the collection through enforcement proceedings, by virtue of the temporary article 1 contained in the same Law, the terms prescribed by the Enforcement and Bankruptcy Code and by the other laws pertaining to the law of enforcement and the terms set by the judges or the enforcement and bankruptcy offices within this context as well as all enforcement and bankruptcy proceedings with the exclusion of the enforcement proceedings for alimony receivables, the party and enforcement transactions, the receipt of requests for new enforcement and bankruptcy proceedings, and the proceedings for enforcement and execution of provisional attachment decisions were suspended as from 22.03.2020 (including that date) until 30.04.2020 (including that date).

Pursuant to “The Presidential Decree on the Extension of the Suspension Period Introduced for the Prevention of Loss of Rights in Legal Proceedings” (Decree No.: 2480) [5] published in the Official Gazette dated 30.04.2020 and numbered 31114, this suspension period has been extended as from 01.05.2020 (including that date) until 15.06.2020 (including that date).

Accordingly, in the light of all above-mentioned, in spite of the fact that no eviction shall take place due to nonpayment of office/workplace rents in the interval of 01.03.2020 – 30.06.2020, it is obvious that it is possible to initiate and carry out enforcement proceedings for rent receivables as from 15.06.2020 unless a decree to the contrary enters into force.

It should be stated importantly that the legal arrangement only covers the lease agreements concluded for offices/workplaces and does not have an effect on the lease agreements concluded for houses. Hence, the legal arrangement does not have any effects on the eviction, with regard to the lease agreements concluded for houses. 

Conclusion

As is known, office/workplace activities are suspended or substantially reduced due to the Covid-19 outbreak. As an effect of the outbreak, the risk of the failure to pay the rents comes into question unavoidably for office/workplace leases.

As explained in this newsletter, provided that the circumstances of the concrete case are analyzed, the force majeure provisions (if any) in the lease agreements may apply to or the impossibility of performance provisions may be rested on for the workplaces whose activities are suspended mandatorily pursuant to the notice. At this point, the lessee may assert that it becomes impossible for him to perform his obligation to pay the rent, as part of the measures taken due to the epidemic disease. However, on the part of the lessee, in principle, the possibility to rest on this provision is conditional upon the notification to the lessor that the performance has become impossible, which notification should be made by the lessee as soon as possible. However, this principle may be interpreted broadly, since there is a situation known by everyone.

For the lease agreements pertaining to the businesses whose revenues substantially decrease due to the outbreak or which are closed voluntarily within the scope of the Covid-19 measures, though they are not closed by the State; the lessee may request, through litigation, the court to adapt the lease agreement on the basis of the new conditions emerged due to the Covid-19 outbreak. At this point, the lessee may either request that his obligation to pay the rent be suspended for a period of time or request for a reduction in the rent within the framework of the circumstances. Then, the judge will carry out an assessment depending on the concrete case and render his decision about the request and may order the termination of the agreement in cases where the adaptation is not possible.

Besides, a legal arrangement has been made in order to prevent all these circumstances developed to the detriment of the lessees and in order for the businesses to continue contributing to the economy. Pursuant to the temporary statutory article that has entered into force in this direction, the termination of the lease agreement and the eviction of the leased property, due to nonpayment of the rent for an office/workplace lease, shall not become possible until 30.06.2020. However, in spite of the fact that the termination and eviction are not allowed during that period, the legal arrangement does not constitute an impediment against collection of the rent receivables through enforcement proceedings. Within this context, for the rent receivables accrued in that period, it is possible to resort to enforcement proceedings as from 15.06.2020 pursuant to “The Presidential Decree on the Extension of the Suspension Period Introduced for the Prevention of Loss of Rights in Legal Proceedings”.  However, the circumstances of the concrete case should be analyzed comprehensively within the context of the legal concepts explained in detail by this newsletter, and the amount claimed should represent a justifiable request on the part of the lessor.


References

[1] https://www.icisleri.gov.tr/81-il-valiligine-koronavirus-tedbirleri-konulu-ek-genelge-gonderildi

[2] https://www.resmigazete.gov.tr/eskiler/2020/03/20200326M1-1.htm

[3] The Assembly of Civil Chambers of the Supreme Court of Appeals, the decision numbered 2017/11-90 E. 2018/1259 K. and dated 27.06.2018

[4] https://www.resmigazete.gov.tr/eskiler/2020/03/20200326M1-1.htm

[5] https://www.resmigazete.gov.tr/eskiler/2020/04/20200430-1.pdf

 

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