The effects of the COVID-19 crisis
The hospitality industry is facing tremendous challenges as a result of the COVID-19 pandemic. Whereas cafés, bars and restaurants are forced either to scale back their operations or to offer mainly delivery-based services, hotels – severely affected by statutory travel bans and the cancellations of trips and events – have no choice but to partially or wholly close down their operations for the foreseeable future. Such closures are likely to result in a substantial decrease or even the complete evaporation of their revenue.
Due to the serious financial losses, various hotel lessees are currently approaching their lessors with a request for the deferral or abatement of rent payments.
Primary obligation of the lessee – paying the rent
Generally, the lessee’s primary obligation under the lease agreement is to pay the rent. In return, the lessor is required to ensure that the leased premises are fit for the intended use. The lessee is not released from its obligation to pay the rent solely because it is not in the position to use the leased premises for reasons arising from its own sphere of risks, so long as the leased premises are not defective. Therefore, the lessee of a hotel remains obliged – generally speaking – to pay the rent in accordance with the lease agreement even in cases of seriously decreased bookings or if the lessee suspends its operation voluntarily, without any statutory restrictions obliging it to do so.
Although hotels are not statutorily obliged to shut down their operations in Hungary, many voluntarily decided to close or restrict the services they offer due to the drastic decline in tourism. This means that – in spite of being obliged under the terms of the respective lease agreement – many hotel operators are financially unable to pay the rent, and therefore are turning to the lessors asking for a complete rent waiver or some kind or rent relief. The complete waiver of the rent certainly does not meet the approval of the majority of lessors. However, most of them are ready to grant some kind of relief, such as a pro-rata reduction in the rent (e.g. 25% or 50%) or – most commonly – rent deferral.
If the lessor agrees to the deferral of the rent at its free will, it is also important to determine how the deferred rent will be compensated. The most common approach is to agree that the lessee pays the deferred amount at a later date during the term of the lease. Alternatively, it may also be practical to establish a turnover rent component in addition to the current fixed rental rate, enabling the lessee to pay back the deferred rent in parallel with the improvement of its financial situation. Another possible option for the compensation of the deferred rent is the application of an extraordinary indexation of the agreed rent besides the regular indexation already agreed under the lease agreement.
Agreeing on rent relief may be beneficial for both the lessor and the lessee as it provides for legal certainty between the parties. The lessee does not accumulate rent arrears that accrue interest, and the lessor has a clear payment scheme (indicating when and in what instalments the lessee will pay back the deferred rent).
Business interruption and all-risk insurances
Hotel operators tend to take out business interruption insurance that typically covers exactly the risks they currently have to cope with: the loss of revenue due to business interruption. It should be noted though that insurers only pay out if the damage or loss of profit is caused by a risk indicated in the insurance policy (such as fire, explosions, etc.), but pandemic and statutory restrictions introduced subsequently do not belong to the scope of generally insured risks under business interruption insurance. Therefore, it is unlikely that a business interruption insurance would cover the losses incurred in relation to, or as a result of, the COVID-19 pandemic.
All-risk insurance policies are not likely to be applicable to the aforementioned situation either. Although it would be possible to include pandemics and consequential measures as special risks in the terms of such policies, all-risk insurance usually covers actual property damage (i.e. damage to the property of the lessee) only, not loss of profit.