Mandatory discounts for commercial leases in Catalonia

Yesterday in Catalonia a new decree law was published and, immediately, came into force. This new regulation establishes the obligation for landlords to give discounts on rent to tenants of premises that are closed or restricted in use as a result of the pandemic. We are referring to Decree Law 34/2020 of 20 October on urgent measures to support economic activity in leased business premises ("DL 34/2020").

We summarise below some of the most important implications of this new regulation.

1. WHICH AGREEMENTS ARE ENCOMPASSED BY DL 34/2020?

For the new measures to be applied, three circumstances must cumulatively occur:

• The object of the agreement must be an immovable property intended for the performance of industrial or commercial activities. According to the exhibits of this DL 34/2020, cultural, educational, sporting and recreational activities are covered, as well as services such as beauty salons, hotels and restaurants.

• The agreements must have been signed on or after 1 January 1995.

• As a consequence of the COVID-19 pandemic, measures are set out by the competent authority to suspend the development of the activity or to restrict the material use of the property which is the object of the agreement.

DL 34/2020 applies even if the parties to the lease have reached agreements on the contingencies provided for before its entry into force and regardless of whether those agreements are more or less favourable than the discounts of DL 34/2020. However, since the procedure established by DL 34/2020 is initiated at the request of the lessee, it is foreseeable that only revisions of those agreements including measures less favourable than those imposed by this new rule will be requested.

2. ARE MEASURES DIFFERENT IF THE LANDLORD IS NOT A LARGE HOLDER?

No, the DL 34/2020 makes no difference. The subjective condition of the landlord or tenant is irrelevant. It is of general application provided that the three circumstances mentioned above are met.

3. WHAT IS THE PROCEDURE TO BE FOLLOWED?

These are the applicable steps:

• As of yesterday, any tenant whose lease agreements is under the circumstances mentioned in section ‎1 above may, through the official registered fax service (burofax) or notarial means, require its landlord to make a reasonable and equitable amendment to the terms of its lease agreement.

• As soon as this request is received, the landlord must stop issuing invoices for the amount of the rent or other charges.

• The parties have a period of one month to reach an agreement by negotiation or mediation. It is not clear from DL 34/2020 whether the start date of this period is the date of sending the request or the date of receipt by the landlord, although in our opinion the latter should be taken as a reference.

• If the parties reach an agreement within this one-month period, they shall be bound by it immediately (unless the agreement provides otherwise). At that time, the lessor may restart invoicing, but subject to the amendments agreed.

• If the parties do not reach an agreement, DL 34/2020 imposes a series of discounts that are compulsory for the landlord. The landlord may then begin invoicing again, but subject to the application of these discounts.

4. HOW MUCH ARE THE MANDATORY DISCOUNTS?

It depends on the extension of restrictions on activity imposed as a result of the pandemic and how they affect, in particular, the property to which the agreement refers:

• In the event of suspension of the activity, the rent and other amounts owed by the tenant will be reduced by 50% for the duration of the suspension measure.

• In the event of partial restriction of the material use of the property, the rent and other amounts due from the tenant shall be reduced by half of the loss of use of the property. The calculation of the percentage in these cases will depend on the reduction in capacity or opening hours, as well as on any other limitations imposed by the law. The wording of DL 34/2020 is rushed and does not clarify how to calculate the discount percentage in cases where several limitations overlap or apply at different times.

The fact that home delivery or in-store collection services are still provided does not affect the application of these discounts.

5. ARE THERE ANY OTHER MANDATORY MEASURES IMPOSED ON LANDLORDS?

Yes. The tenant may require the landlord to apply any additional guarantees it may have provided to any payments due under the lease agreement. He may not, however, request that the compulsory legal deposit (fianza) or other guarantees that have been deposited with a competent official body be applied to amounts due.

We understand that what the tenant may request to be applied to outstanding amounts are the cash deposits that are sometimes agreed as supplements the legal deposit. This regulation will probably not affect joint and several personal guarantees by third parties that will continue to be governed by what has been agreed in such guarantees or by the supplementary legal regulation applicable.

The lessee who benefits from the application of additional guarantees must return them within one year of the lifting of the suspension or restriction of use and, in any case, before the end of the agreement if its term is shorter.

In addition, and only in cases of suspension of the development of the activity (not in cases of partial restriction of use), if the measures last more than three months in the year following the entry into force of DL 34/2020, the lessee may choose to withdraw from the agreement without penalty.

DL 34/2020 does not clarify whether the three months have to be consecutive or are counted in total. In any case, the possibility of withdrawal will be in force until three months after the complete cessation of the measures. In order to exercise this right, the tenant must send the landlord a notification by burofax or notarial means one month in advance. Although the DL 34/2020 is quite strict about this period of one month, we understand that it should be construed as a minimum period.

6. CAN TENANTS (OR LANDLORDS) REQUEST ADDITIONAL MEASURES TO THOSE SET OUT IN DL 34/2020?

Yes. The exhibits of DL 34/2020 state that it seeks to establish a "criterion for the distribution of the negative consequences arising from the prohibitions, suspensions and restrictions imposed in order to prevent the spread of the pandemic". The rules, however, "concern exclusively the distribution of these negative consequences and are compatible with the right of the parties to seek judicial assistance to exercise any other claim relating to the agreement". We understand that this right applies to both parties.

7. WHEN WILL THESE DISCOUNTS START TO APPLY?

This DL 34/2020 is already in force. Tenants can request the renegotiation of affected contracts from 22 October 2020.

However, as it is a decree law, it must be validated within 30 working days by the Parliament of Catalonia and, if it does not obtain sufficient support, it will be repealed. The deadline for the validation vote in Parliament is 3 December this year.

Even if it is validated, it is foreseeable that an appeal of unconstitutionality will be filed against it. However, as a general rule and unless expressly requested, the submission of such appeals does not entail the automatic suspension of the appealed regulation.