Commercial Lease - Responding to the COVID-19 pandemic


French Court of Cassation rules in favour of landlords – Legal uncertainty in Luxembourg


In three judgments of 30 June 2022, the Third Civil Chamber of the French Court of Cassation put an end to the procrastination of the lower courts by ruling on the question of whether the rent for the Covid period is payable in favour of the landlords (1).


This brief is an opportunity to analyse the issue and to review the situation in Luxembourg, where uncertainty remains in the absence, for the time being, of a decision by the Supreme Court on this point.



I. Differences between the French courts before the French Court of Cassation's rulings

Essentially three legal means have been invoked in France by tenants in support of their request for suspension or exemption from their obligation to pay rent: “force majeure”, loss of the property and exception of non-performance/breach-based defence.

Firstly, “force majeure” was quickly ruled out, on the grounds that an obligation to pay a sum of money never constitutes “force majeure”, according to established case law (2) and reaffirmed in the context of the Covid period rent (3). Secondly, the loss of the object, invoked on the basis of Article 1722 of the Civil Code on the grounds that the administrative decision to close the premises was an obstacle to the permanent or temporary enjoyment of the premises, analysed not as a material loss (e.g. a fire which destroys a building) but as a legal loss of the premises, has had some success (4).

Thirdly, the exception of non-performance has been invoked on the grounds of a breach of the landlord’s obligation to deliver and a corresponding failure to enjoy the leased premises peacefully, but without much success (5).

A great disparity in the assessment of French courts has sometimes made the exemption ordered depend on the type of establishment concerned, the number of days of administrative closure and its position on the national territory. There was a certain tendency to grant relief to tenants deprived of the possibility of operating their business during the periods of administrative closure due to the pandemic. The Court of Cassation has put an end to this.



II. The French Court of Cassation puts an end to the debate and removes any ambiguity

In its aforementioned judgments of 30 June 2022, the highest Court put an end to these debates by ruling in favour of the landlords, on the grounds that "the effect of this general and temporary measure, with no direct link to the contractual destination of the rented premises, cannot therefore be assimilated to the loss of the property, within the meaning of Article 1722 of the Civil Code (...)[nor] constitute a breach by the landlord of his obligation to deliver" (6), that "the effect of this general and temporary measure, with no direct link to the contractual destination of the rented premises, cannot be attributable to the landlords, so that they cannot be accused for failing to fulfill their obligation to deliver, nor can it be assimilated to the loss of the rented property, within the meaning of Article 1722 of the Civil Code, so that the obligation to pay the rent could not be seriously challenged" (7) and that "the effect of this general and temporary measure, without any direct link with the contractual destination of the rented premises, cannot therefore be assimilated to the loss of the property, within the meaning of Article 1722 of the Civil Code, (...) that the general administrative police measure prohibiting the reception of the public did not constitute a breach of the obligation to deliver (...) [and] that a creditor who has not been able to benefit from the consideration to which he was entitled cannot obtain the termination of the contract or the suspension of his obligation by invoking force majeure [and] [that] [by] proposing to defer the payment of the rent until April 2020, (...) the landlord had taken account of the exceptional circumstances and thus demonstrated her good faith" (8).


The press release relating to these decisions specifies that " The general and temporary measure of prohibition to receive the public does not lead to the loss of the rented property and does not constitute a non-performance by the landlord of his obligation to deliver. A tenant is not entitled to rely on it as force majeure to escape payment of his rent”.


All of the arguments put forward by the tenants are thus swept aside, with the clarification that the landlord’s proposal to defer the payment of a single rent is sufficient to characterize his good faith.


These rulings are therefore favourable to landlords, also due to the fact that some tenants have been able to benefit from public aid, including the solidarity fund, rental aid and aid for fixed costs.



III. Situation in Luxembourg

We will not discuss all the measures taken by the Government to deal with the pandemic, except to recall that these measures, which affected all so-called "non-essential" businesses, were first introduced by Grand-Ducal regulation of 18 March 2020 and then lifted for the most part as of 26 May 2020, in accordance with Grand-Ducal regulation of 25 May 2020. The HORECA sector faced specific constraints, with longer periods of closure, followed by a period of controlled opening hours, before the restrictions were completely lifted on 28 February 2022. The question of whether the rents of the businesses concerned are payable during the periods of administrative closure has become, as in France, a major issue to the courts. It would be desirable in this respect, given the divergent views of the judges of the court of first instance, for the Luxembourg Court of Cassation to take up the subject in order to clarify the situation. A. First divergent case law in Luxembourg The Luxembourg judges were not unanimous on the question of the obligation to pay rent during the administrative closure. On 8 December 2020, “the Tribunal d'arrondissement de Luxembourg”, ruling as an appeal court on judgments handed down in this matter by the Justice of the Peace, held that the tenants were not released from their obligation to pay the rent for the period of confinement. Following this appeal decision, the judges held that the conditions of "force majeure" (external, irresistible and unforeseeable characteristic) (9) were not fulfilled, mainly because the administrative measures, which provided for the closure of the business, were only temporary and not definitive (10). On 30 March 2021, in the case of a restaurant/drinking establishment, the appeal judges also refused to grant rent relief on the basis of "partial loss", as the closure order did not relate to the building as such, but only to the operation of a business within it, and "the tenants were able to continue to sublet the rooms, to use the building for storage purposes and they could, unless proven otherwise, have set up a take-away service", so that "there is therefore no legal loss of the rented property as such and the tenants cannot rely on Article 1722 of the Civil Code to suspend the payment of rent (...)(11). On 11 May 2021, the appeal judges again refused to grant the tenant an exemption from his rent (12). As of the plea of “force majeure”, they argued that "the impossibility of performance means a real impossibility, i.e. an insurmountable obstacle and not more difficulties, even if they are very great. As soon as the debtor is able to perform the contract, the debtor is bound to do so, even if this performance must be very costly for him: it is said that there is no such thing as financial “force majeure”, so that financial difficulties can never constitute “force majeure”. As for the loss of the property within the meaning of Article 1722 of the Civil Code, the judges recalled that it must refer to the object itself, the object of the lease contract, and not to the commercial activity. In this case, the appeal judges therefore once again refused to grant an exemption from rent, given that the closure ordered did not concern the building as such, but only “the on-site restaurant and beverage outlet activity” and that “the tenants were able to continue to use the building, in particular for the purpose of storing their goods, and they would have been able to set up a take-away service unless proven otherwise.” B. Current trend in Luxembourg courts: Reduction of rents on the basis of "good faith performance" and "abuse of rights” In more recent decisions from 28 June (13) and 12 July 2021 (14), the pleas relating to the exception of non-performance, “force majeure” on the part of the tenant, legal loss within the meaning of Article 1722 of the Civil Code, deviation from the intended purpose and loss of enjoyment, disturbance of rights and the theory of unforeseeability, have all been rejected. On the other hand, the grounds of "good faith performance" and "abuse of rights" have, in certain circumstances, been used to grant the tenant a reduction in rent (15). Thus, now, at least on appeal, Luxembourg judges tend to grant a reduction of the rent according to the constraints faced by the tenants and taking into account the respective behaviour of the parties in the performance of their leases (16). Following this case law, judges have always recalled first of all the principle that the landlord does not commit an abuse of rights by demanding payment of the full rent, but that the performance of the contract in good faith may nevertheless go so far as to require the creditor to show restraint in demanding respect for his rights (17). Thus, the judges have granted a reduction in rent by assessing the behaviour of both parties, in order to determine "whether there is a failure to perform in good faith or an abuse of rights on the part of the landlord or the tenant" (18). According to the judges, it should be avoided that the landlord may seek an advantage out of proportion to the correlative burden on the other party; thus, "the principle of good faith performance of agreements should lead the landlord to grant a reduction in rent, so that the harmful consequences of the exceptional situation are not borne solely by one of the contracting parties" (19). The judges therefore considered that "the principle of good faith performance of agreements must lead the landlord to grant a rent reduction, so that the harmful consequences of the exceptional situation created during the periods of total closure for the fitness centres are not borne solely by one of the co-contractors, while applying the theory of abuse of right on the part of the landlord" (20). This same reasoning of good faith performance and abuse of rights seems to be continued after these decisions and until 2022. Thus, in a decision of 16 March 2022, the Court of Appeal held that "it is appropriate to analyse the respective conduct of each of the parties to determine whether there is, where applicable, a failure to perform in good faith or an abuse of rights on the part of the landlord or the tenant" (21). In this case, the plea based on an alleged breach of the landlords' duty of good faith was rejected on the main ground that the tenant had completely stopped paying his rent from May 2020 until July 2020. However, it is difficult, on the basis of these recent appeal decisions, to evaluate a potential reduction of the rent, in the absence of a precise method of calculation on this question which is left to the sovereign appreciation of the judges, thus creating a certain legal insecurity for the parties involved. As in France, it is therefore desirable, in order to guarantee better legal certainty, that the Luxembourg Court of Cassation be seized of this question to clarify it definitively. Our team of specialists in real estate law is at your disposal in case of questions.



 

1 Civ. 3ème , 30 June 2022, n° 21-19.889, 21-20.127 and 21-20.190

2 Com., 16 September 2014, n° 13-20.306

3 CA Paris, 7 May 2021, n°20/15102 ; 12 May 2021, n° 20/17489 ; 2 June 2021, n° 20/17808 | CA Nîmes, 4 March 2022, n° 21/01389 | CA Lyon, 13 April 2022, n° 21/01573 4 CA Douai, 16 December 2021, n° 21/03259 | CA Paris, 30 March 2022, n° 21/16710

5 CA Paris, 7 May 2021, no. 20/15102; 30 March 2022, no. 21/16714 and 21/16710 | CA Lyon, 13 April 2022, no. 21/01573

6 Appeal No. 21-19.889 7 Appeal No. 21-20.127 8 Appeal No. 21-20.190

9 Externality means that the defendant cannot exonerate himself from his own act and that the measures taken by the Luxembourg government were external to the parties. Irresistibility takes the form of an absolute impossibility of performance of the contract. It must be total and definitive, as a temporary or partial impossibility does not constitute force majeure. It has therefore been accepted that the debtor is obliged to perform the contract even if contractual performance is more onerous. As for unforeseeability, it is based on the fact that the person could not foresee an irresistible event and cannot be blamed for having taken precautions to prevent it.

10 TAL, 8 December 2020, no. TAL-2020-03617

11TAL, 30 March 2021, no. TAL-2020-09641

12 TAL, 11 May 2021 No. TAL-2020-00361

13 TAL, 28 June 2021 No. TAL-2021-02457 and TAL-2021-02480; TAL, 28 June 2021 No. TAL-2021-00994

14 TAL, 12 July 2021 No. TAL-2021-02935 and TAL-2021-03029; TAL, 12 July 2021 No. TAL-2021-04656 15 Ibid

16 Ibid

17 Ibid; TAL, 16 March 2022 No. TAL-2021-07717

18 TAL, 28 June 2021 No. TAL-2021-02457 and TAL-2021-02480, cited above

19 TAL, 28 June 2021 No. TAL-2021-00994, cited above

20 TAL, 12 July 2021 No. TAL-2021-02935 and TAL-2021-03029, cited above

21 TAL, 16 March 2022 No. TAL-2021-07717, cited above