For further information,
please contact:
Legal Alerts
29/09/2021 https://www.esin.av.tr/wp-content/themes/esin/images/esin.jpg

The COVID-19 Pandemic’s Effect on Lease Agreements

Legal Alerts
Covid-19
Real Estate
General

Recent Development

The outbreak of COVID-19 in Turkey poses not only a threat to public and individual health, but also to the economy. The Turkish government and companies are taking various precautions to combat the pandemic.

On 16 March 2020, the Ministry of Internal Affairs delivered the Additional Circular on Precautions against Coronavirus dated 16 March 2020 to the city governorates. The circular temporarily suspends the activities of a number of businesses operating as Public Resting and Amusement Locations (e.g., performance centers, concert venues, cinemas, cafés, playgrounds, and sport centers) as of 24:00 on 16 March 2020. Simultaneously, a large number of businesses announced that they have decided, at their own discretion, to either suspend their activities or implement remote-working; and a large number of retailers announced that they have decided to close their stores. In parallel with these developments, the Association of Shopping Malls (Alışveriş Merkezleri ve Yatırımcıları Derneği) considered society and retailers’ requests and advised shutting down shopping malls and making things easier for the retailers (tenants). Some shopping malls are already closed pursuant to the recommendation of Association of Shopping Malls. Similarly, the Turkish Federation of Shopping Centers and Retailers (Türkiye Alışveriş Merkezleri ve Perakendeciler Federasyonu (TAMPF)) declared that within the scope of combating the pandemic, TAMPF member shopping malls will not issue any rent invoices to retailers while shopping malls and stores are closed.

Furthermore, the Revenue Administration announced on its official website that they were working on postponing the April, May and June withholding and VAT payments for six months for taxpayers affected by the COVID-19 pandemic. The Revenue Administration considers shopping malls and retailers in shopping malls to be affected taxpayers.

This alert addresses the manner in which these interruptions to business activities in leased workplaces will impact the lease relationship between businesses (tenants) and landlords, and provides legal and practical advice on how to mitigate the impact to a bare minimum for both parties.

1. Will the tenants’ obligation to pay rent continue if the government shuts down their businesses as precautionary measures?

The complete shut-down of tenants’ businesses, as a governmental precautionary measures against the COVID-19 pandemic, will constitute an extraordinary event for the tenants. Accordingly, tenants may request from the landlords the suspension of their obligation to pay rent until the extraordinary event and force majeure ends. Additionally, the COVID-19 pandemic may also affect future rent assessments. With the assumption that the pandemic and the precautionary measures are prolonged, the opportunity to raise legal requests also by the landlords, relying on that the leased property cannot be legally -and maybe physically- used in accordance with its designated purpose insofar this case is unbearable for the landlord as no rent is collected.

2. Will the tenants’ obligation to pay common expenses continue if shopping malls and business centers are completely shut down or certain businesses within the shopping malls are shut down due to the government’s precautionary measures?

Even during periods where buildings similar to shopping malls or business centers are shut down, certain services, such as providing security to the shops inside shopping malls or businesses in business centers and other cleaning and technical support services, must be continued in order to ensure the continuity of shopping malls and to ensure the buildings are ready to use.

As these services are provided as a part of the obligations of the landlords (or managers of the shopping malls/business centres), the landlords may request the common expenses from the tenants who are shut down due to governmental precautionary measures.

However, in order to prevent any disputes that may arise, the managers of shopping malls and business centers, with consideration of the governmental precautionary measures, the number of open shops and offices, the working hours, and density of customers, should keep the pricing of the services provided under common expenses at a reasonable level, and if possible, manage its employees’ shifts in accordance with the new necessities.

3. Can tenants request rent reductions if the operating hours of businesses, shopping malls or business centers are restricted due to the government’s precautionary measures?

The restriction of the operating hours of businesses due to the government’s precautionary measures also constitute an extraordinary event for the relevant businesses. Although the businesses will be operational, the restriction of operating hours may significantly reduce the number of customers. Therefore, tenants may request a rent revision from the landlords.

4. What are tenants’ rights if landlords, at their sole discretion, shut down the leased property or restrict the working hours within the scope of precautions taken to protect public health?

In a similar fashion to the abovementioned questions, the tenants may request their obligations to pay the rent be suspended or deducted if their businesses are restricted due to precautions that landlords take at their sole discretion.

5. Can tenants request rent reductions due to reasons arising from the tenant, like supply chain interruptions and employee reductions?

Although one may assume that factors affecting tenants like supply chain interruptions and employee reductions would not warrant a request for rent reduction, these circumstances may be considered the results of the COVID-19 pandemic. Therefore, these or similar circumstances can be interpreted to warrant the tenants to request the revision of their lease agreements.

6. Can tenants request rent reductions due to the decreasing number of customers?

Tenants may request the revision of their lease agreement if the number of customers decrease due to the COVID-19 pandemic and this decrease is continuous.

7. How will lease agreements be subject to revision?

Although the revision can be done through the consentaneous amendment of the rent amount, it can also be done in various other ways, such as amending the payment dates, the lease term, and the form of performance. If the parties consentaneously revise their agreements, the parties can freely decide the duration of the amended rent amount’s application and the date or event on which the tenant will resume paying rent.

Lease agreements may or may not contain provisions on how they will be subject to revision due to an extraordinary event. If an agreement contains a revision provision, the provision will be primarily applied. However, if the party requesting the revision considers that the revision provision does not produce just results, the party may apply to the courts, despite the existence of a revision provision.

Conclusion

The COVID-19 pandemic will undoubtedly affect existing lease agreements and result in certain reciprocal claims.

Accordingly, it is necessary to review the existing lease agreements’ provisions and identify how extraordinary event provisions may be applied to the lease relationship. If the lease agreement does not have these provisions, it will be beneficial to execute revision protocols between the parties regulating the rent payment obligations, which should be in effect until the precautions against the COVID-19 pandemic end. Moreover, in locations such as shopping malls, the lease relationships constitute a part of the supply chain. To this extent, it will be more beneficial for the tenant and the landlord to evaluate any related issues not limited to the lease in an integrated manner to include restructuring the supply chain and sale strategies.

If the tenant files a revision request at the courts or the landlord seeks legal remedies due to the tenants’ non-payment of rent due to the COVID-19 pandemic, the procedure would be very time consuming and would harm the business relationship between the parties. Additionally, it is uncertain whether the courts will issue a decision fitting to the parties’ requests and needs, and for which period the revision concerning the rent reduction would be applied.

Therefore, the successful and amicable management of this process will not only preserve the parties’ business relationships, but also enable them to more easily perform their social responsibilities.