Firstly, there is a factual distinction between the pandemic, as a generalized and continuous fact, against the specific situations that occur as a consequence of it –governmental orders, facts of nature or third parties- that prevent from the performance of contractual obligations. In particular, this newsletter analyzes the implications of the pandemic context that is taking place in Colombia against the essential obligations agreed in commercial lease contracts that link lessors and lessees of warehouses or other types of property, that are necessary for the companies production process.
In general, there are two possible legal remedies applicable to this situation:
Force majeure or fortuitous event:
According to Colombian law, force majeure corresponds to an unforeseen event that cannot be resisted, in this sense, it is an event that must generally fulfill three characteristics: (i) be irresistible, (ii) be unpredictable, (iii) be external or oblivious to the debtor. Also, it is possible that the contracts include force majeure clauses that address situations related with the sanitary emergency generated by the COVID-19 and establish the consequences of a force majeure event.
The proof of a force majeure event can release the parties of liability for the non-performance of their obligations or, according to the case, motivate the suspension of the contract.
The contractual review due to an unforeseen event:
Another option the parties can rely on is article 868, Commercial Code, the above to request the review of the contract, when the occurrence of these extraordinary circumstances does not turn the performance of the obligations impossible, but do exacerbate its compliance in an excessively onerous way. For the review to be appropriate, the first thing to be proven is that the contract is adjusted to those that according to article 868 may be reviewed: commutative contracts with successive execution. Once analyzed the nature of the contract, the party seeking the review must prove: (i) that the obligation has become excessively onerous, (ii) that the circumstances related to the review are unpredictable and extraordinary. For both the onerousness and unpredictability analysis, it is essential to observe the risks allocation agreed between the parties and to demonstrate how the situation generated by COVID-19 exceeds the limits of any previously planned allocation of risks.
This second alternative in principle creates a right to review the terms and conditions of the contract in the head of the party affected by the supervening modification of the contractual bases.
Relevant questions regarding the commercial leases:
To identify which remedy may be the most appropriate in each contract, we recommend you review the following questions:
- Which role do you play in the lease? (Lessor, lessee, sub-lessee, co-debtor, guarantor, guaranteed creditor, among others)
- In general, which economic and practical effects have been the ones caused by the emergency or government measures on the performance of the contract? (Is it possible to open the commercial premises? The operation can continue but in a reduced way? Is it possible but more onerous?)
- From the role that you have in the contract, which are the emergency or government measures effects on your specific obligations?
- If you are the lessor: can you guarantee the use and enjoyment of the property for the agreed destination in favor of the lessee?
- If you are the lessee: Can you use and enjoy the property for the agreed destination? Can you pay the price? Is possible, but more onerous, use/enjoy the property and pay the price?
- If the commercial premises opening is restricted by the governmental measures:
- Review whether the contract provides for this assumption as a force majeure event in favor of one or both parties or as a basis for the suspension of the contract.
- Review whether risks arising from the performance impossibility of all the obligations or some of it was assigned in the contract.
- The lessor must evaluate whether his obligation to guarantee the use and enjoyment of the property has become impossible. In such case, you may be facing a force majeure event that prevents the execution of the contract.
- The lessee must evaluate whether, in the contract, the payment of the rent fee is associated with the property´s use for the agreed destination. In such case, you may be facing a force majeure event.
- In the case of a force majeure event, the consequence as a general rule is to excuse for the non-performance of obligations. As a general rule, for the contract to be suspended, there must be a contractual clause that provides for this effect or, in a few cases, it may arise from the essential nature of the obligation that becomes impossible.
- If the commercial premises opening is not restricted or some of the obligations have not become impossible:
- Review which one was the risk allocation agreed in the contract as this one, in principle, should prevail.
- Establish whether the situation generated by COVID-19 has made the performance of any contractual obligation excessively onerous. The excessive onerousness should be reviewed based on the original distribution of assignments between the parties.
- Determine if the circumstances that led to the excessive onerousness are unpredictable and extraordinary. While the pandemic itself may be, the analysis should consider the risks originally assigned in the contract – for example, whether the currency risk was assigned, or the volatility risk, among others.
- Even under a contractual risk allocation, it may be established (and it should be demonstrated) that the new extraordinary circumstances have altered the contractual balance in an (i) unforeseen and (ii) disproportionate way in relation to the initial forecasts.
- We recommend you, in any case, to inform the other party about the circumstances that have affected the performance of the contract, either making it impossible or excessively onerous.
- In the force majeure event, it should be specified which one is the irresistible, unpredictable and foreign event to the debtor that prevents the execution of the obligations. If the suspension proceeds, it should be announced.
- In the case of contractual review, the procedure established in the contract should be followed. If it does not exist, and if the parties do not reach an agreement regarding the contractual review, the party seeking the disproportion would have to request the review before a judge or arbitral tribunal, in a case-by-case analysis the option of not complying with the contract may be considered, adducing the lack of foresight as justification.
The Dispute Resolution & Investment Protection Practice is constantly following the issues related to COVID-19, if have any doubts or concerns, please do not hesitate to contact us.