Impact of the Covid-19 outbreak on the Polish leasing market
Partner, WKB Lawyers, Warsaw
The Covid-19 outbreak forced the Polish Government to conduct some fast and complex interventions in many market areas, including the real estate sector. On 13 March 2020, the Minister of Health issued a regulation introducing an epidemic emergency in Poland. A week later, this regulation was repealed and a state of epidemic was declared. Together, these regulations introduced the first restrictions on movement and running businesses. In terms of the real estate market, the most severe restrictions lasted until the beginning of May 2020 and mainly concerned large commercial facilities. Other real estate sectors, particularly the warehouse and office sectors, did not experience such strict legal restrictions, though obviously, this does not mean they have remained intact.
Temporary expiration of lease obligations in retail
Between 14 March 2020 and 2 May 2020 (inclusive), the operation of any large shopping facility was limited to those shops which sell or provide some essential services. According to the restrictions introduced, the following business activities were prohibited from being run in commercial facilities with a sales area exceeding 2,000 square metres:
- retail trade, except for the sale of foods, cosmetic products (except perfumes or beauty treatments), toiletries, cleaning products, medicinal products, including in pharmacies or dispensaries, medical devices, food with nutrient intakes, newspapers, builders or DIY supplies, excluding on weekends between 1 April and 11 April 2020, pet supplies and fuels;
- provision of services, except for medical, banking, insurance, postal, laundry and food and beverages (only involving the preparation and delivery of food) services; and
- retail trade or provision of services in retail merchandising units/retail kiosks.
With the aim of clarifying the situation of entities in such circumstances, the Polish parliament adopted the so-called Anti-Crisis Shield Act on 31 March 2020, which provides for, among others, the ‘temporary expiration’ of the obligations of parties to agreements in commercial facilities with a sales area exceeding 2,000 square metres. Accordingly, for the duration of the prohibition, the mutual obligations of parties regarding lease or other similar agreements, expired. After that, and within three months of the date of the ban being lifted (ie, in the majority of cases, until 3 August 2020), a tenant or other person entitled to use the premises should have submitted an unconditional and binding offer of intent to extend the duration of the agreement on existing terms by the length of the prohibition period and six additional months. Otherwise, after the expiry of such a period, the landlords will not be bound by a decision on the expiration of the parties' obligations, meaning that they may claim payment of outstanding amounts from the tenants. In practice, this means that tenants were free to choose whether to extend the lease term on the same conditions without having to pay any outstanding amounts, or to pay the landlord any such amounts with the same lease term as previously; the latter option may prove to be more attractive for those tenants heavily affected by the Covid-19 outbreak.
The special law adopted in connection with the Covid-19 outbreak also introduced many restrictions on business activities in commercial facilities with a sales area of up to 2,000 squares metres. Restrictions applied to, for example, the sale of food and beverages (except for takeaway and delivery services), activities related to the organisation and promotion of events (including but not limited to fairs, exhibitions and conferences), hairdressing and cosmetic services, activities related to the improvement of physical fitness, activities related to the operation of hotel services and healthcare services relating to rehabilitation and dental care, among a variety of other activities. Note that the expiry of lease obligations was not applied to such situations. Therefore, if the lease agreement does not provide for the possibility of a rent reduction or a grace period, any such action requires the parties’ mutual agreement; otherwise, it must be resolved before the courts. The ability to terminate agreements in such cases were also very limited and, with regards to leases executed with a definite term without the option for their early termination, they are mostly restricted to claiming that the agreement has expired due to their performance being impossible. Considering the nature of such claims, however, in most cases they were likely to only have been successfully made during the prohibition on conducting activities in commercial facilities, that is, until 3 May 2020.
Selected interpretational issues
Based on the provisions of the Anti-Crisis Shield Act, many practical doubts can be raised. First, which mutual obligations expire by law? In many cases, landlords claimed that only the main obligations, such as the payment of rent, expire, while tenants claimed that all obligations expire, including the obligation to pay service charges, for example. If all obligations were to be deemed as expired, then the obligation to, for example, release the property and remove all the tenant’s belongings stored in the subject of the lease, or carry out renovation works would also not apply and thus, on the other hand, the landlord could theoretically charge tenants for the storage of their belongings. A strict interpretation of the regulation could have also led to the conclusion that tenants were prohibited from entering the subject of the lease at all, even if only in order to secure their aforementioned belongings from wear or theft, for instance.
It is also unclear if any new lease agreements for commercial premises in shopping centres could be concluded after 31 March 2020 and before the epidemic state is revoked. Assuming that the provisions on the expiry of lease obligations constitutes, so-called, ius cogens (ie, a provision of law which cannot be derogated by the parties’ mutual intent), no new lease agreements could have been concluded for premises in shopping centres before the revocation of the state of epidemic in Poland (as all provisions of such new lease agreements would be made ineffective by virtue of law upon their conclusion).
Despite the literal wording of the provision being discussed, it seems rather that the legislature intended to temporarily exempt the parties from the performance of obligations under lease agreements which could arise during the state of epidemic, and which the parties would be incapable of performing during the pandemic. A lease, tenancy or other similar agreement under which one party is obliged to allow for the use of commercial space should, in such circumstances, be recognised as still binding, yet the parties are entitled to refrain from performing those obligations which, due to the circumstances of the Covid-19 outbreak, are impossible to perform. Nevertheless, in practice these problems often remain unresolved and continue to generate many disputes, which may soon arrive in courtrooms.
The introduction of the prohibition on most business activities in large shopping centres with a sales area exceeding 2,000 square metres has also led to a decrease in revenues for other tenants in the same shopping centres whose activities have not been formally prohibited. As a result, those tenants have also demanded modifications to their contract terms and for rent exemptions to be granted. Although the literal wording of the provision does not limit the rule on the expiry of lease obligations only to those tenants whose activity was prohibited, it seems that, in such cases, such a literal interpretation would be obviously contradictory to the purpose of the regulation and so the provision should be interpreted on the basis of its purpose. Accordingly, the legal actions available to tenants in these circumstances may be similar to those available to tenants of commercial facilities with a sales area of up to 2,000 square metres as mentioned above.
Impact of restrictions and its consequences on the real estate market
All these restrictions and limitations have significantly impacted the condition of the Polish retail market. All of the aforementioned prohibitions were implemented directly by virtue of law, therefore, they were valid regardless of the intentions of the parties to the agreement. The parties could only verify their mutual relations and take all the restrictions introduced by the Act into consideration.
Also, owners of commercial facilities of up to 2,000 square metres, which were not covered by most of the provisions of the Anti-Crisis Shield Act, but which were affected by the restrictions imposed by the prohibition of certain business activities, had to consider the possibility of granting tenants a rent rebate or exemption for several months. Many tenants failed to generate any profits because, even if their business was not prohibited, they remained unable to keep up with paying rent and other charges. The difficult market situation thus required all traders to make certain concessions for the greater good of financial stability.
Although the warehouse and office markets did not suffer any significant legal restrictions related to the Covid-19 outbreak, its impact remains visible. First and foremost, the world’s general situation and the global lockdown resulted in a significant decrease in interest in office rental. According to recently published research for Q2 2020, the vacancy rate for Polish office premises has increased slightly, which is obviously not surprising given the general trend of transferring to remote work solutions. Also, considering all the procedures aimed at securing the health of employees and the need to comply with the restrictions and obligations of applicable sanitary regimes, an increase in the rates of services charges may be expected. On the other hand, the largest office lease agreement ever on the Polish office market was concluded during the Covid-19 outbreak, which appears to foretell a rather optimistic outlook.
The warehouse sector has remained in good shape despite a large number of suspended construction processes of new projects during the lockdown. Interest in warehouse rental has increased, which appears to be closely related to the transfer of many sales to e-commerce platforms due to the forced temporary shut-down of physical stores. E-commerce and build-to-suit projects remain the key drivers of the entire warehouse market in Poland for the first half of 2020. However, even here, the market has been affected, for example, the automotive and machinery industries, which were negatively impacted by the suspension of many investment decisions. Currently, the further development of warehouse projects is largely dependent on the financing of new projects by the banks which are rather cautious in granting loans in this respect.
Getting back to normal
The process of lifting the restrictions imposed with regards to conducting business activities in commercial facilities with a sales area of up to 2,000 square metres began on 4 May 2020. This stage of the lockdown easing covered the reopening of commercial spaces where the sale of clothes, food and print media and newspapers dominate. On 18 May 2020, food courts and restaurants were reopened, while remaining subject to a special sanitary regime. Furthermore, activities related to the screening of films, operation of fitness clubs, gyms and gaming zones is now permitted again, with fountains and children’s play areas also being permitted to open to the public.
The continuing return to a new normal has lifted most of the prohibitions and restrictions, while the market effects of the pandemic will most likely continue to cause disputes, as well as doubts about the regulations introduced, particularly in the retail sector. Despite the lack of the special legal solutions for office and warehouse leases, the consequences of the pandemic will also be visible for a long time to come. While the warehouse market clearly benefits from the immediate switch of consumers to e-commerce, time will tell how remote working will affect the development of the office sector.