Covid-19 and Force majeure in Commercial Lease Agreements

The corona virus, Covid-19, has been classified as a public health hazard and everyone has a responsibility to prevent the spread of infection. This responsibility lies primarily with the Public Health Agency in Sweden and anyone who is, or suspects to be, infected. In order to limit the spread of the corona virus, the Public Health Agency in Sweden has the right to, among other things, block off a building and it cannot be ruled out that new legislation will be adopted which may affect a landlord’s ability to provide premises to tenants. Should such a shutdown occur, or other government measures be taken as a result of new legislation, questions arise on how this would affect commercial lease agreements within the affected buildings. In addition, questions may also arise as to whether landlords may close a building, or tenants demand changed lease conditions, due to the consequences of Covid-19.

According to the Swedish Communicable Diseases Act, the Public Health Agency in Sweden has the right to block off certain areas, such as buildings, to prevent the spread of a disease that has, or is suspected to have, spread in that area. Such a block off is an extraordinary disease prevention measure that has not yet been taken by the Public Health Agency. In addition, it cannot be ruled out that the Swedish Parliament and Government may decide on measures leading to, for example, that certain activities may not be conducted within premises of a certain type, in order to prevent the spread of Covid-19. How would such decisions affect the parties’ obligations under a lease agreement, e.g. if a tenant is denied access to its premises as a result thereof? What are the consequences for the landlord? And would a tenant still be obliged to pay rent even though the tenant is unable to use the premises?

The legal consequence of force majeure is, unless the parties have agreed otherwise, that the party relying on force majeure for non-fulfillment of a contractual obligation can avoid the consequences normally borne by the breaching party, i.e. primarily the obligation to compensate the counterparty for costs, expenses and losses suffered as a result of the breach. Prior to entering into a discussion of the consequences of force majeure for either party, the following must be established: (i) whether a particular event is of such nature as to qualify as a force majeure event and (ii) which contractual obligation that is affected by the extraordinary event. Subsequently, an assessment needs to be made as to whether there are grounds for release from performance of that specific obligation (read more about force majeure clauses in general and the importance of how force majeure clauses are drafted here).

A majority of lease agreements in Sweden are based on the standard lease form drafted by the Swedish Property Owners’ organization. The standard lease form contains a force majeure clause that releases the landlord from its obligation to fulfill its part of the lease agreement, and from the obligation to pay damages, in the event that the landlord’s obligations cannot be fulfilled at all, or only at an abnormally high cost, due to war or riots, strike or lockout, blockade, fire, explosion or an intervention by public authorities over which the landlord has no control and could not foresee. The force majeure clause is thus one-sided in favor of the landlord. However, this does not necessarily prevent a tenant from referring to force majeure with respect to non-performance of its part of the lease agreement relying on general legal principles.

A landlord’s main obligation under the lease agreement is to provide the premises in an acceptable condition. A landlord is also obliged to adhere to a decision made by the Public Health Agency of Sweden to block off a building. One might assume that such a directed decision would constitute “an intervention by public authorities over which the landlord has no control and could not foresee” which would release the landlord from its main obligation under the lease – to provide the premises – and from the obligation to pay damages. If a recommendation from the government or parliament, imposing certain restrictions on the access or use of buildings or premises, would constitute such force majeure circumstance is not given. An assessment of all circumstances in each individual case must be made. In this regard, it is advisable to bear in mind that general statements from authorities in some cases have been considered to constitute (appealable) administrative decisions directed at an individual.

If the landlord can rely on force majeure, in the light of the above, the question arises whether a tenant is obliged to pay rent despite the fact that the tenant is denied access to the premises. The lack of precedents in the area makes the legal situation unclear, but it can be noted that the Swedish Rental Act (chapter 12 of the Swedish Land Code) contains provisions to the effect that a tenant may invoke sanctions, e.g. rent reductions, if a tenant is unable to use its premises as intended. Thus, it may be conceivable that a tenant, even though the landlord is (temporarily) released from the obligation to provide the premises, may assert the right to rent reductions. However, it is not clear how the Swedish provisions on right to rent reductions correlate with the landlord’s grounds for exemption due to force majeure circumstances.

The tenant’s main obligation under the lease agreement is to pay rent. A break down in the general payment system could possibly constitute a force majeure event that could release a tenant from its obligation to pay overdue rent, provided that the break down is not foreseeable and provided the payment cannot be carried out in any other way. However, the actual situation that may arise, and have already occurred, for tenants as a result of Covid-19 is primarily a decrease in customer base and, as a result thereof, reduced sales. Although the outbreak of Covid-19 in some cases could constitute force majeure as regards the provision of goods or services, it does not affect a tenant’s practical ability to effectuate rent payments – at least not yet.

To our knowledge, the Public Health Agency in Sweden has not yet issued any decisions to block off certain areas. The above notwithstanding, both landlords and tenants experience negative effects of Covid-19, and it has been discussed if this in itself would constitute a ground for non-performance with reference to force majeure. However, it cannot be generally applied for all landlords and tenants that Covid-19 would constitute a hindrance on performance. As mentioned, whether a party successfully can rely on force majeure in a given situation depends on how the force majeure clause, if any, is drafted, which contractual obligation a party wishes to be released from, and which concrete obstacle exists preventing performance of that specific contractual obligation.

Lastly, stand-alone from a discussion regarding force majeure, the Swedish Government has proposed a support package entailing that the Swedish Government will bear part of the landlord’s costs for agreed rent reductions.