On 11 March 2020, the World Health Organisation declared the novel coronavirus disease a global pandemic. In Vietnam, on 1 April 2020, Prime Minister Nguyen Xuan Phuc issued Decision No. 447/QD-TTg to officially announce Covid-19 a national epidemic. Since then, a variety of stringent measures (e.g. suspension of non-essential activities, social distancing, travel restrictions, etc.) have been imposed by national and local governmental agencies to contain the spread of Covid-19.
The Covid-19 pandemic itself and measures taken by the government to control it (collectively referred to as the “Covid-19 Pandemic”) have severely affected the performance of on-going contracts in general and commercial leases in particular. In the latter case, payment obligations are becoming more difficult or even impossible for tenants to perform while their business activities at the leased premises are suspended. In this context, this article will analyse the applicability of some contractual and regulatory reliefs such as force majeure event (“FME”) and hardship in the context of commercial leases. The article will end with some suggestions for commercial tenants during the time of the Covid-19 Pandemic.
1. FORCE MAJEURE EVENT AND HARDSHIP UNDER VIETNAMESE LAW
For the purpose of assessing the applicability of FME and hardship to lease contracts affected by the Covid-19 Pandemic, it would be appropriate to distinguish between these two concepts under Vietnamese law.
FME and hardship share some similarities in that they both require (i) an objectively unforeseen event/change of circumstances and (ii) necessary mitigating measures being taken by the affected party.
The difference between the two concepts is that FME caters to cases where the aggrieved party cannot perform its obligations properly, whereas hardship caters to cases where the performance of contractual obligations is still possible (albeit excessively onerous). Moreover, an FME is mostly used to discharge the relevant party from its obligations and therefore leads to suspension or termination of the contract. Hardship, on the contrary, aims to revise the contract so it survives the hardship.
2. COVID-19 AND PAYMENT OBLIGATION UNDER COMMERCIAL LEASES
a. Is the Covid-19 Pandemic an FME or a hardship in the context of commercial leases?
FME
In light of the above statutory elements of FME, the Covid-19 Pandemic, to the broadest extent, seems to be objective, unforeseeable and irremediable and therefore appears to be a qualifying event when it comes to commercial leases that were established prior to the time when the Covid-19 outbreak was officially declared in March 2020.
Nevertheless, whether the Covid-19 Pandemic constitutes an FME is also subject to specific contractual arrangements of the parties. In particular, similar to other commercial contracts, a lease contract may contain an FME clause of which the wording is usually boilerplate or sometimes tailored by the parties (e.g. laundry list of force majeure events, other consequences as mutually agreed by the parties, etc.) in line with their own wills. In the following example, a lease contract was executed in early 2019 in order to use a residential house in Ho Chi Minh City as a restaurant. It contains a typical FME clause as follows:
“a. “Force Majeure Event” means an event that objectively occurs, is beyond a party’s capacity to control and deal with such event, and directly prevents such party from performing its obligations under the contract (including, but not limited to, natural disaster, strike, riot, commercial dispute, etc.).
b. If a party is affected by a force majeure event, it must immediately notify the other party in writing of the nature and extent of such force majeure event.
c. Neither party shall be deemed to be in breach of this contract, or liable to the other party, for any delay in performance, or failure to perform any of its obligations under this contract as a result of the occurrence of any force majeure event that the party has notified the other party in writing; and the time limit for performance of such obligation shall be reasonably extended.”
Given the above definition, the qualification of the Covid-19 Pandemic as an FME may be analysed as below:
- Objectively occurs: The Covid-19 Pandemic has occurred independently of the will of the landlord and the tenant, thus this element is likely to be satisfied.
- Beyond a party’s capacity to control and deal with such event: Executive decisions taken by the government in relation to lockdown, suspension of non-essential activities, on-premises consumption prohibition, etc., especially Directive 15 and Directive 16 [8], are actually irresistible in terms of both its occurrence and effects, resulting in the closure and suspension of the tenant’s production and business activities at the leased premises. Hence, this element can also be satisfied.
- Directly prevents a party from performing its obligations: It can be seen that the most fundamental obligation of a tenant in a lease contract is to pay rent. However, whether the Covid-19 Pandemic "directly" prevents this obligation and whether the tenant will be discharged from rent payment obligation during the FME period is still a matter of controversy. Therefore, the satisfaction of this element depends a lot on the arrangements of the parties and eventually, the court’s judgment.
In practice, there is a view that the Covid-19 Pandemic has affected the tenants’ rental of the premises in that the tenants cannot use the leased premises for their normal business activities, which means that the initial purpose of the lease is not achieved. For the sake of the contractual equilibrium and long-term relationship of the parties, payment exemption or reduction therefore can be considered as a reasonable solution to this problem. [9]
However, from an opposing point of view, whether the Covid-19 Pandemic is considered as an FME and the tenant can be exempted from payment obligation depends a lot on the wording of FME clause that the parties have agreed in the lease contract, and one may not arbitrarily use the Covid-19 Pandemic to circumvent its payment obligations, in other words, to impose its unilateral will on the other party. [10] Indeed, considering FME example clause above, the Covid-19 Pandemic has not been explicitly specified in the list of FME (although such list is non-exhaustive) and tends to cause disputes when the Covid-19 Pandemic itself does not absolutely meet the above conditions to be considered a FME under the contract for exemption of payment obligation.
Hardship
In line with the latter view, thinking out of the box, many opine that the tenant may seek to rely on hardship regulations in order to request the landlord to renegotiate the contract in order to conclude revision on respective regulations in such contract. [11] Indeed, when considering the statutory elements of hardship, especially the fact that it would be excessively onerous for the tenant to continue to perform the contract without a revision, we can see that the tenant in fact have certain grounds to do so. Where it is impossible to reach an agreement, the court's decision shall ultimately take its role. However, as mentioned above, please note that the tenant is still obliged to perform its contractual obligations during the time of renegotiation and the court handling the case.
b. Foreign countries’ experience
In the US, a common law system, the courts hold the view that mere financial difficulty or economic hardship will not excuse a party’s nonperformance of the contract. [12] Similarly, the courts in France, a civil law country, do not accept force majeure as a justification for nonpayment of a sum of money. [13]
However, there is a quite interesting and typical case regarding a commercial lease for restaurant business in the State of Illinois, US, where the court’s decision is in opposition to the above points of view, namely Hitz Restaurant Group, 616 B.R. 374 (Bankr. N.D. Ill. June 3, 2020). In this case, the court found that the Illinois Governor’s executive order (which required restaurants to suspend on-premises consumption but permitted delivery, take-out, and curbside pick-up) triggered the FME clause [14] in the lease between Hitz Restaurant Group (“Hitz”) and the landlord Kass Management Services, Inc. (“Kass”) and therefore could be applied to rent payments. The reasoning behind this decision is that the executive order (i) constitutes “governmental action” under the FME clause, (ii) “hindered” Hitz’s ability to perform under the lease by prohibiting on-premises consumption, and (iii) was the proximate cause of Hitz’s inability to pay rent because it prevented the tenant from operating normally and restricted its business to take-away activities only. Hence, interestingly, the court determined that Hitz’s obligation to pay rent was reduced pro-rata to its reduced ability to generate revenue due to the executive order and eventually concluded that Hitz only owed Kass 25% of the rent (equivalent to 25% of the premises occupied by the kitchen usable for delivery activities). [15]
3. SUGGESTIONS FOR BUSINESSES IN REPSECT OF COMMERCIAL LEASES
a. “To-do list”
Given that the applicability of FME and hardship to lease contracts are uncertain, tenants of on-going leases that were signed or took effect prior to the Covid-19 Pandemic should:
(i) immediately notify the landlord about the Covid-19 Pandemic and its possible impacts on the tenant (purpose of the contract was not reached, revenue from production and business activities at the leased premises was decreased, etc.);
(ii) apply all necessary measures to limit losses due to the Covid-19 Pandemic (e.g. online sales, pickup service, online teaching, etc.); and
(iii) negotiate with the landlord for rent exemption or reduction based on the laws as well as the signed contract.
b. Well-drafted Covid-19 Pandemic clause in the contract
With respect to lease contracts that are being or will be executed in the near future, the issue here is whether or not the Covid-19 Pandemic still qualifies as an FME or a hardship given that the parties to some extent can anticipate the potential risks of an outbreak of Covid-19 and executive decisions of state agencies on disease prevention and control measures. Having said that, the parties can consider to build a model clause specifically for the event of the Covid-19 Pandemic, which may include the following key points:
(i) a comprehensive and unambiguous definition of the Covid-19 Pandemic;
(ii) procedures for notification, discussion, limitation of damage; and
(iii) subject to the level of the impacts, the parties may agree in advance on the rate of rent exemption and/or reduction during and after the Covid-19 Pandemic period.
Several critical legal instruments have come into force in November and early December 2021:
This briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.
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