Does Covid-19 constitute force majeure in Danish commercial lease contracts?
Claudia S Mathiasen
Winsløw Law Firm, Copenhagen
Like governments and authorities across the globe, the Danish government has imposed unprecedented restrictions in Denmark since mid-March 2020 in order to limit the spread of the Covid-19 pandemic. These restrictions have had, and continue to have, a severe impact on many companies and commercial contracts, including commercial leases.
Among others, the restrictions in Denmark have included closed schools for grades 0–5 from 16 March to 17 April 2020 and for grades 6–10 until 18 May 2020; public servants have worked from home from 16 March until 8 June 2020; hairdressers and dentists were closed from 17 March to 20 April 2020; shops in shopping centres, except pharmacies and supermarkets, were closed for customers from 18 March to 11 May 2020; restaurants, churches, theatres and concert halls were closed from 13 March to 18 May 2020; fitness centres were closed from 18 March to 8 June 2020 and nightclubs were closed from 18 March 2020 and continue to be so until the government decides to change or lift the restrictions.
Denmark has not had a complete lockdown during the pandemic, as it has been possible to leave private homes at all times, and no restrictions to close offices or stores outside shopping centres have been imposed. Despite this, it may be relevant to consider whether the outbreak of Covid-19 and the restrictions in Denmark constitute a force majeure event granting contractual relief in commercial leases, in particular because this gives the right starting point for potential negotiations between the lessor and lessee to reach commercially viable solutions that are not strictly focused on the legal positions of the parties.
Furthermore, it is relevant to consider how comparable pandemic or global disasters should be taken into account when drafting commercial lease contracts in the future.
Force majeure as a concept
The key parameters applicable when assessing whether Covid-19 constitute a force majeure event under the Danish legal principles are:
- extraordinary events;
- preventing a contractual party from fulfilling its obligations under a contract; and
- events which the relevant party could not foresee, prevent or overcome.
Typical examples of force majeure events include war, riots, import bans, blockade, public seizure, fire and natural disasters. The burden of proof rests with the party seeking to rely on the force majeure event.
The main legal implication of a force majeure event is temporary relief for the party being prevented from fulfilling its obligations. This applies even if this has not been explicitly agreed upon in the relevant contract, which it rarely has in Danish commercial lease contracts. Hence, the party subject to a force majeure event cannot be met by remedies for breach of contract from its counterparty. If performance of the contract is impeded by the force majeure event for an indefinite duration, a party’s obligations to fulfil the contract may even cease altogether.
A Danish law perspective on commercial leases
The outbreak of Covid-19 and the consequences thereof must be deemed as unforeseeable to the party seeking to rely on force majeure. Therefore, the date of entering into the lease contract will be an important factor, since it can be assumed that the outbreak, at its present stage, is sufficiently known by the public to render businesses capable of anticipating the potential consequences of the outbreak. However, for commercial lease contracts entered into prior to the outbreak, for example, before the World Health Organization officially classified the outbreak as a public health emergency, it is more likely that the condition of unforeseeability can be met.
Furthermore an assessment of whether the outbreak of Covid-19 and the restrictions imposed in Denmark due to the outbreak constitute a force majeure event will be based on an assessment of whether the timely and accurate performance of the lease contract is impossible as a result of the outbreak. Therefore, it is necessary to define the obligations of the lessor and the lessee according to the lease contract and the Danish Business Lease Act. Although the outbreak of Covid-19 may have rendered it considerably more burdensome, more expensive or even unprofitable for the party to meet its contractual obligations in the lease contract, this will not in itself imply that force majeure can be relied upon.
The obligations of the lessor are to deliver the leased premises on the agreed date of takeover, in the state of repair which the lessee is entitled to demand in accordance with the lease contract. Unless otherwise agreed, this includes that the premises can be used legally by the lessee for the agreed purpose.
The obligations of the lessee are to exercise due care in the use of the leased premisesfrom the agreed date of takeover; to use the premises for the agreed purpose and to pay the agreed rent and additional costs timely to the lessor. Furthermore, lessees renting a shop, a hotel, a restaurant or similar must keep the business open and in good operation to the extent customary. This includes keeping the shop/hotel/restaurant in the leased premises open for customers at regular opening hours on a continued basis.
The Covid-19 outbreak in Denmark and the imposed restrictions on the right to gather more than (at first 1,000, then 100, 50 and then) ten persons have meant that the lessees of commercial premises have been unable to utilise the premises as assumed when entering the lease contract. However, the lessors have delivered the leased premises on the agreed date of takeover, in the state of repair which the lessee is entitled to demand in accordance with the lease contract, and the premises can still be used legally for the agreed purpose by the lessee. The two cornerstones of this conclusion are: (1) that it is not the premises that have caused the restrictions, but general risk that the activities of the lessees in the premises might cause a spread of Covid-19; and (2) that the lessor does not carry the risk related to the business of the lessee or the risk of general changes in laws relevant for the lessees’ business after the lease contract has been entered.
The same applies for retail leases in shopping centres. The Covid-19 restrictions in Denmark do not change that position, as the lessees still have access to the leased premises. Thus, there are no circumstances leading to impossibility for the timely and accurate performance of the lessor’s obligation according to the lease contract. Therefore, there is no relevant force majeure circumstances for the lessor due to Covid-19.
For the lessee, the same applies to the extent that Covid-19 has not made it impossible for the lessee to take over or use the leased premises for the agreed purpose. It is solely the restricted access for the public/customers to the leased premises due to the imposed restrictions in shopping centres, fitness centres, restaurants, hairdressers and other specifically defined sectors that differ from the legal framework that applied when the lease contract was entered. These restrictions do not differ from any other public restrictions related to the business of the lessees, which are at the risk of the lessee. Furthermore, Covid-19 has not made it impossible to execute the payment of rent. In short, it is not impossible for the lessee to pay rent due to Covid-19, and therefore there is no force majeure relief in this obligation for the lessee.
The imposed Covid-19 requirements to keep shops in shopping centres, restaurants, bars and nightclubs closed for public access from 18 March 2020 until 18 May 2020 (and for nightclubs until the government decides to change or lift the restrictions) do make it impossible for the lessee to comply with the obligation in the Danish Business Lease Act, section 39(2) to keep the business open and in good operation. Therefore, this specific obligation due to a temporary lex specialis constitutes a force majeure event that justifies a temporary relief for the lessee from fulfilling this specific obligation.
It has been discussed among Danish lawyers representing lessees and lessors whether the lessee is entitled to a rent reduction/relief due to the Covid-19 restrictions. The lessees do not refer to force majeure, but argue that this right appears from the Danish Business Lease Act, section 23(2) which states:
‘Where the lease agreement is terminated prior to expiry, because a public authority has banned use of the premises by the lessee for health or other reasons, the lessee is only under an obligation to pay rent until the day on which such ban becomes effective. Where such ban merely restricts the use in a manner which is of minor importance, the lessee is, however, only entitled to demand a proportionate reduction of the rent.’
The correct interpretation of the Danish Business Lease Act, section 23(2) must consider the original purpose of the Danish Lease Law from 1937 which states that the public ban for health reasons must be solely on the specific property due to the state of this particular property with regard to health consequences when using the property, and not a general public ban, to justify a rent reduction. Based on this, the general Covid-19 restrictions in Denmark do not entitle the lessee to a rent reduction.
Some lessees have taken voluntary precautions and closed their stores outside shopping centres to cut costs during a period where there were no, or only a limited number of, customers. These commercial decisions are made solely at the discretion and risk of the lessee, and do not constitute a force majeure situation with a relief from paying rent as a legal consequence.
The legal positions of the lessor and the lessee described above are supported by the fact that the Danish Government has decided to grant a business relief package of €8,724,000,000 to cover fixed costs of businesses, including rent. The business relief package enables the lessees to apply for public funding of the rent in order to meet its obligations in the lease contract.
Conclusion and focal points to help navigate in force majeure events in new commercial leases
The current public restrictions, and the previous restrictions imposed due to Covid-19 in Denmark from mid-March 2020 do not constitute a force majeure event which gives a temporary relief for any of the parties in commercial leases, as neither the lessor nor the lessee are being prevented from fulfilling contractual obligations. The only exception to this is the obligation of the lessee to keep the business in shops, restaurants, hotels and bars open, as this is made impossible due to the restrictions.
The stressful situation for many lessees makes it relevant to consider alternatives to a strict, legal solution, and to negotiate commercial solutions for existing leases to the extent that the lessor is in a financial position to do so.
When drafting new commercial lease contracts in the future, it is important to take into account the experiences from Covid-19. It can be assumed that pandemics and the risk of potential public restrictions to fully utilise commercially leased premises will draw more attention than prior to Covid-19. Therefore, it is relevant to consider a ‘pandemic-clause’ that balances the risks of the parties and describes under which circumstances a party can be relieved from its contractual obligations. Such a clause could include the following focal points:
- That the lessor carries the risk that the leased premises comply with all public requirements at the commencement of the lease contract.
- That the lessee carries the risk that the specific use of the premises, including public requirements to the business of the lessee, are complied with.
- If a public authority imposes restrictions due to a general health risk, including pandemics, requiring that the premises are closed for the public/customers, the lessee is granted rent relief for a limited period, if the lessee does not obtain a turnover solution in an alternative way.
- If the restrictions are upheld beyond the agreed period, the parties are entitled to terminate the business lease contract without a notice/with a short notice.
The ‘pandemic-clause’ must be adjusted to the specific circumstances for the contracting parties, and consider the bargaining power of the lessor and lessee.
Act on Measures against Infectious and Other Communicable Diseases, No 1026 of 1 October 2019 (Act on Epidemic Deceases) and Executive Order No 224 of 17/03/2020 on the prohibition of major assemblies and the prohibition of access to and restrictions on certain premises in connection with management of Coronavirus disease 2019 (Covid-19), changed by BEK No 251 of 22/03/2020, changed by BEK No 305 of 27/03/2020, changed by BEK No 370 of 04/04/2020, changed by BEK No 442 of 17/04/2020, changed by BEK No 445 of 19/04/2020, changed by BEK No 586 of 08/05/2020, changed by BEK No 593 of 10/05/2020, changed by BEK No 630 of 17/05/2020, changed by BEK No 658 of 21/05/2020, changed by BEK No 687 of 27/05/2020 changed, by BEK No 791 of 07/06/2020, changed by BEK No 795 of 08/06/2020, changed by BEK No 865 of 13/06/2020, changed by BEK No 1126 of 02/07/2020, changed by BEK No 1129 of 04/07/2020.
On 27 June 2020 only €426,000,000 had been paid out, see https://erhvervsstyrelsen.dk/statistik-kompensationsordningeraccessed 30 August 2020.