Negotiation of Commercial Leases During the COVID-19 Crisis

Negotiation of Commercial Leases During the COVID-19 Crisis

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Many commercial businesses are suffering under the current circumstances and are looking to re-negotiate the terms of their lease. Below is a short overview of the opportunities provided by Latvian law to assist tenants with this kind of negotiations.

1. Legal framework

Except for very specific cases (e.g., lease of a point of sale in the customs territory or lease of state or municipality owned land) commercial leases are governed by the provisions of Latvian Civil Law.

The Civil Law contains certain mandatory provisions with respect to commercial leases such as:

  • provisions stipulating that the lease price must be fair market price for use of the property;
  • requirement of a reasonable notice period prior to termination by the landlord;
  • change of ownership provisions.

Except for these mandatory provisions, parties enjoy the freedom of contract.

Consequently, Latvian law commercial lease contracts are very flexible.

2. COVID-19 ad-hoc regulations for commercial premises

A. Payment of rent

The only special COVID-19 measures for commercial leases in Latvia concern lease of property owned by state and municipalities.

The law On Measures for the Prevention and Suppression of Threat to the State and Its Consequences Due to the Spread of COVID-19 that entered into force on the 22nd of March this year provides that state and local government institutions, as well as derived public persons and companies controlled by public persons, freeports and special economic zones shall, for the period of validity of this law, release commercial tenants affected by the spread of COVID‑19 from payment of rent or reduce the amount of rent as well as refrain from applying late payment interest and contractual penalties for late payments (not applicable to payments for electricity, heat, water supply and other property maintenance services).

B. Limitations on the opening of commercial premises

As of the 12th of May there are no longer limitations on opening commercial premises in Latvia. However, the social distancing measures and gathering restrictions are still applicable.

According to the 7th of May amendments to the Order of the Cabinet of Ministers dated 12 March 2020 by which the emergency situation in Latvia was declared, merchants are still obliged to organize visitor flow control, ensuring that no more than 1 visitor per 4 m2 of retail space is present at the point of sale at any one time.

Traders must ensure social distance measures at the entrance to the point of sale (both public and outdoor), preventing crowding and providing a distance of 2 m between visitors. In addition, merchants are recommended to inform customers about the need to observe a distance of 2 meters in the areas adjacent to the point of sale, such as parking lots. In public catering establishments, a distance of two meters between tables must be ensured; the maximum number of visitors at a table is two (unless the visitors are members of the same family). In the cash register and service area, distance of two meters from the visitor standing in front in the queue must be ensure by the use of delimiting signs. In general, there should be one visitor per at least 4 m2 of the total area of ​​the dining hall.

Gathering up to 25 persons is permitted, both indoors and outdoors. The length of the event must not exceed 3 hours; the 2-meter distancing rule must be observed and appropriate hygiene, health and safety measures must be put in place. As far as sports activities are concerned, trainings are permitted subject to compliance with the aforementioned requirements whereas sports competitions are not.

3. General negotiations.

Latvian Civil Law provides that a tenant shall be exempt from paying the rent or shall be ensured reasonable reduction of rent when the possibility to use the leased property is limited due to reasons that are beyond the control of the tenant (Arts 2136, 2147-2149 of the Civil Law). The possibility to apply this principle, however, depends on the possibility to argue that the COVID-19 situation qualifies as limitation to use the leased property within the meaning of the Latvian Civil Law. So far, we are not aware of any developed practice.

As regards force majeure, Latvian lawyers have come to a conclusion that the possibility to rely on force majeure in the circumstances of COVID-19 depends on the wording of the specific lease agreement.

Additionally, it may be possible to negotiate the conditions of commercial lease agreements, as well as their termination on the basis of unfair enrichment doctrine.

It follows from the above that the tenants willing to renegotiate their commercial leases (as well as lawyers assisting those tenants) may rely on both, special COVID-19 ad hoc regulations, as well as ever existing provisions of Latvian law and general legal principles, and it is a great opportunity to develop practices that can be applied also post-pandemically and permanently.

By Inese Rendeniece, Senior Associate, and Linda Lielbriede, Legal Assistant, BDO Law