Commercial rent payments in Spain

Since the outbreak of the Covid-19 pandemic, the Spanish Government has adopted some measures to try to control the virus spread as much as possible. In particular, the Royal Decree 35/2020 opened the door for the lessee’s of commercial assets to request rent moratoriums or reductions from their landlords (albeit such relief measures expired on 31 January 2021).

Since neither the Civil Code nor the Spanish Lease Act contemplate any specific consequences for the outbreak of truly exceptional situations such as the Covid-19 pandemic, in the absence of any explicit or implicit contractual provisions relating to risk allocation, the main argument has been put forward by the lessees to seek for a rent reduction has been the rebus sic stantibus doctrine (“Rebus”). Rebus is a Spanish case law doctrine that implicates the amendment or termination of an agreement as a result of a significant change of circumstances that existed at the time of the execution of the agreement, that has caused a disruption in contractual balance between the parties’ rights and obligations.

There are still very few court rulings properly addressing this topic, and most of them have been rendered by lower courts of first instance, which are potentially subject to an appeal to the Provincial Courts and, where applicable, the Supreme Court. In any case, in the absence of a clear-cut Supreme Court case law on this issue —which will not be available for several years—, for the time being there is already a trend in the lower courts ordering (i) rent reductions ranging from 25 to 50% of the applicable rent, and (ii) interim injunctions (“medidas cautelares”) based on the application of the Rebus.

According to the Supreme Court, the application of the Rebus requires the satisfaction of several cumulative requirements that must be analysed on a case-by-case-basis, including, inter alia; (i) the creation of an extraordinary and unforeseeable change of the circumstances with respect to those existing when the contract was executed , not attributable to one of the parties; (ii) a deferral between the time of execution of the contract and the time of performance; (iii) a significant alteration of the contractual balance; and (iv)the absence of contractual allocation of risk mechanism (i.e. an explicit or implicit rule for allocation of the specific risk arising from the new unforeseeable circumstances).

As a general rule the standard effect of the application of the Rebus by the Supreme Court consists of the amendment of the agreement in order to re-establish the balance of the parties’ rights and obligations—in the case at hand, a rent reduction. 

On the contrary, according to the general principle of preservation of the agreements (“pacta sunt servanda”), it is more difficult to successfully claim the termination of the agreement as a result of the application of the Rebus, without prejudice to the potential doctrine of contract frustration of force majeure if the change of circumstances is of such intensity as to make the performance of the agreement impossible. However, the Supreme Court has considered that this legal doctrine is not applicable to monetary obligations, because their performance is always possible (at least, in theory).

The economic crisis of 2008 was considered in several Supreme Court rulings as an unpredictable and extraordinary event capable of creating a significant change of the circumstances pursuant to which the parties’ agreed to shape their will to enter into a binding agreement. However, the Supreme Court has adamantly stressed that the Rubus should not be applied generally or automatically in the event of an economic crisis. The Courts must assess the real impact of the crisis on each specific contractual relationship and the “causal” link to the significant change of the contractual balance on a case-by-case basis.

In 2014 the Supreme Court issued two rulings that relaxed —to some extent— the requirements of the Rebus, in an effort to cause a more normalized application of this doctrine, as opposed to the traditional case-law that applied it only on a very extraordinary and exceptional basis. However, despite the relative relaxation of the requirements as a result of the 2014 judgements, the application of the Rebus continues to be very limited and exceptional in practice.

• By way of example, the ruling dated 15 October 2014 admitted a 29% rent reduction in the annual lease rent claimed by a hotel operator which had experienced substantial losses due to the fall in the touristic demand because of the economic crisis of 2008. Despite the lessee not being an important and experienced player in the sector, it was understood that the risk of the economic crisis (due to its particular intense impact) should not be deemed to have been allocated exclusively to the lessee. In the case at hand the Court understood that the economic crisis had caused a significant alteration of the contractual balance due to the accumulated losses the lessee had endured during the period of 2005-209 by contrast with the lessor’s substantial profits during the same period.
• On the contrary, the ruling dated 15 January 2019 dismissed the application of the Rebus in respect of a lease of a hotel based, inter alia, on the arguments of other previous rulings: (i) the financial crisis and market variations were considered a risk allocated implicitly to the professional hotel operator; (ii) the Rebus provision should not be applied automatically in an economic crisis scenario; (iii) courts should be cautions in the application of the Rebus to avoid incentivising an opportunistic use as tool to breach contracts; and (iv) the evidence of a contractual minimum guaranteed rent (plus a variable rent) and a break option of the lessee evidenced that the risk of reduction of the income was implicitly allocated to the lessee. 

The Covid-19 pandemic has triggered a completely new scenario and is yet to be seen how the Spanish Courts will apply the Rebus provisions in the different scenarios that will arise since it is to early yet to draw-up any conclusions and there have been very few court rulings addressing this matter. 

Since the crisis caused by the Covid-19 pandemic is, undoubtedly, an event that may cause an unforeseeable and extraordinary change of circumstances, the underlying question the Courts will have to assess is whether in light of the particular circumstances of each scenario: (i) such change has caused a material alteration of the contractual balance; and (ii) whether this is a risk that has been explicitly or implicitly allocated in the agreement.

So far, we are aware of, at least, 5 judgements issued by lower courts that decree a rent reduction in favor of the lessee. Such rent reductions range from 25 to 50% of the applicable rent. However, it is worth mentioning most of these decisions came from first instance courts and, are therefore, not yet final decisions. They are judgements which are still subject to an appeal by the lessors to the Provincial Courts (and, ultimately, to the Supreme Court). Only a judgement by the Supreme Court regarding the application of the Rebus in context of the Covid-19 pandemic will establish a binding case-law for the rest of Spanish courts to follow.

In addition, there is also a growing trend in lower courts to grant interim injunctions. In this regard we are aware of 3 court rulings that have granted interim injunctions that allow the lessee to reduce the rent provided that certain requirements are fulfilled, such as, inter alia, a delivery of a bank guarantee to cover any damages, and evidencing the risk of factual ineffectiveness (“periculum in mora”).

This legal concept has been invoked in some few proceedings. However, its application by the courts has been dismissed in most cases, since according to a judgement rendered by the Supreme Court dated 19 May 2015, force majeure is not applicable in those cases relating to pecuniary debts involving the payment of money, as the main performance obligation is still feasible.