With effect from 8 March 2021, the Hungarian government introduced strict coronavirus restrictions according to which all non-essential shops must remain closed and all services, with a few exceptions (e.g. private healthcare services), are suspended. The restrictions were supposed to be in effect until 22 March, but the government has extended them through 8 April.
The question is whether these regulations, which limit, and in some cases completely prevent, the operation of businesses in leased premises, qualify as force majeure events that tenants can use as grounds for an exemption from the obligation to pay rent.
When answering this question, first we have to make it clear that there is no general definition of “force majeure” under the Hungarian law. Nevertheless, it is a term that is frequently used in legal literature and judicial practice (sometimes as a collective definition) for different types of civil law concept under which a party can be exempted from the obligation to perform and/or from the consequences of a breach of contract. These kinds of “force majeure” legal concepts offer rare exceptions from a fundamental principle of civil law known as “pacta sunt servanda” (Latin for “agreements must be kept as concluded”), such as damage release forms, frustration of contract and “rebus sic stantibus” [Latin for “things standing thus”, a concept under which a judge can modify a contract if there has been a fundamental change of circumstances], etc. In addition to these general concepts that can be applied to all kinds of contracts, there are some special “force majeure rules” that are only applicable to certain specific types of contract, such as Section 6:336(2) of the Hungarian Civil Code, which applies to lease contracts.
On the basis of our understanding of these legal provisions and in the light of our recent experiences, we believe that Section 6:336(2) is the most likely to be invoked in connection with lease agreements and the current restrictions.
Section 6:336(2) of the Hungarian Civil Code states that “no lease payments shall be made for the period when the leased thing (e.g. premises) cannot be used for reasons that are not within a lessee’s scope of interest.” So, we have to answer two questions in order to make a conclusion as to whether tenants can expect to be exempted from paying rent for the period of the current coronavirus restrictions.
1. The first is whether the fact that a shop, restaurant or other service provider must remain closed to the public is outside its “scope of interest”.
2. The second is whether the mandatory closure actually means that tenants cannot use their premises. Tenants will only have a valid legal ground for refusing to pay rent if the answer is positive to both questions.
As for question one, we cannot give a clear answer due to the ambiguity of the term “tenant’s scope of interest”. If we analyse the position of the contractual parties, the following conclusions can be drawn. On the one hand, the main obligation of a landlord is to keep the rental property available for the tenant in such a condition that is in line with the relevant contractual and legal provisions. Accordingly, landlords have to warrant that the premises will be in a proper physical condition during the lease term. However, they do not, and cannot, warrant that the economic and regulatory environment will always be favourable for the profitable operation of business pursued in the premises. On the other hand, a tenant’s main obligation is to pay the rent regardless of whether its business is profitable or not. So, in nutshell, we can conclude that these kinds of risks are generally within a tenant’s scope of interest without any doubt. However, an assessment of the exact regulations of each lease agreement will be necessary on a case-by-case basis.
While this appears to be clear enough, we also have to take into account that the regulatory and economic consequences of the coronavirus were obviously less predictable when the lease contract was signed than general business risks; therefore, it is possible that judges may deviate from the main rule explained above.
As for question two, the answer will be negative with a higher certainty. Judges have consistently ruled that tenants cannot argue that they are unable to use their premises if they store their goods and/or perform other activities there (even though the premises are not open to the public). While it is possible that these rulings will be revised in connection with the coronavirus restrictions, this is less likely in this case, because a judgement [No. BH2020. 5.145] issued by the Supreme Court of Hungary last year has a relative binding force on lower courts.