Nearly Two and a Half Years After the Start of the Pandemic: What About Rent Arrears During Periods of Closure and Restrictions?

Nearly Two and a Half Years After the Start of the Pandemic: What About Rent Arrears During Periods of Closure and Restrictions?

What Are the Obligations of the Parties to a Commercial Lease Agreement?

As with any bilateral contract involving reciprocal obligations, each party to a commercial lease agreement is subject to essential obligations from which they cannot, in principle, be released:

  • The landlord is primarily required to provide the tenant with premises suitable for the purpose specified in the lease agreement;
  • The tenant is required to pay the rent on the agreed due dates.

A Contractual Balance Disrupted by the Health Crisis

Since March 2020, when the Covid-19 pandemic began, many businesses have experienced difficulties in meeting their rental payment obligations.

Businesses operating in sectors considered “non-essential” were particularly affected, having faced successive administrative closures and severe restrictions on public access. Examples include cafés, bars, restaurants, nightclubs, cinemas, museums and sports facilities.

Against this unprecedented backdrop, many tenants stopped paying their rent, arguing that the contractual balance had been disrupted by the restrictions imposed on their business activities.

Consequently, over the previous two years, the question of whether tenants remained obliged to pay rent during periods affected by restrictive measures was repeatedly brought before the courts.

The Approach Adopted by Luxembourg Courts

Given the relatively recent nature of the issue, it was not yet possible to conclude that Luxembourg had developed settled case law on the matter.

However, following several isolated and sometimes conflicting decisions by the Justices of the Peace, the Luxembourg District Court, acting as the appellate court in lease matters, appeared to favour maintaining tenants’ rental payment obligations.

In seeking to be released from these obligations, tenants mainly relied on four legal arguments.

Force Majeure

Many tenants facing enforcement proceedings for unpaid rent invoked the health crisis as an event of force majeure, namely an external, unforeseeable and irresistible event preventing them from fulfilling their contractual payment obligations.

Luxembourg courts consistently rejected this argument, relying on established case law according to which force majeure cannot release a debtor from an obligation to pay.

Since money is, by its very nature, fungible, the obligation to pay cannot be regarded as impossible to perform.

The Defence of Non-Performance

Under this argument, tenants claimed that, as a result of government-imposed restrictions, landlords had failed to fulfil their own contractual obligation to provide the leased premises.

Faced with this alleged non-performance by landlords, tenants considered themselves released from their corresponding obligation to pay rent.

However, this argument was consistently rejected by Luxembourg courts, which held either:

  • That there had been no breach of the landlord’s obligation to provide the premises, since tenants had never been deprived of access to them;
  • Or that, even assuming such a breach had occurred, the health crisis constituted an event of force majeure for landlords, exempting them from liability.

Loss of the Leased Premises

Tenants argued that government-imposed restrictions had resulted in a “legal loss” of the leased premises.

According to this reasoning, such a loss should have resulted in the suspension of their obligation to pay rent.

Several decisions of the Luxembourg Justice of the Peace upheld this argument and released tenants from their rental arrears, holding that:

“In the event of a temporary legal loss of the leased premises, the tenant is also temporarily released from their own obligations towards the landlord, including the payment of rent and other charges relating to the operation of the premises.”

However, the Luxembourg District Court did not adopt this interpretation.

The appellate court held that there had been no legal loss of the subject matter of the lease, since the government measures affected the business activity carried out on the premises rather than the premises themselves.

Consequently, this argument could not release tenants from their rental payment obligations either.

Furthermore, the theory of legal loss appeared to have been definitively rejected by Luxembourg courts, which dismissed it again in a decision dated 13 July 2022.

Equity and Contractual Good Faith

Ultimately, the Luxembourg District Court relied on the principle of good faith to take account of the difficulties genuinely experienced by tenants.

On several occasions, the District Court observed that, since neither landlords nor tenants were responsible for the pandemic, its adverse consequences should not be borne entirely by either party.

However, the Court went on to hold that the principle requiring contracts to be performed in good faith should encourage landlords to show understanding in circumstances involving a fundamental contractual imbalance and to agree to a rent reduction for the periods concerned.

At the time, Luxembourg courts therefore appeared to favour maintaining the obligation to pay rent, subject to one important qualification: the principle of contractual good faith should lead landlords to agree to a reduction in rent.

This approach may be regarded as a partial application of the legal doctrine of hardship (imprévision), which was not recognised under Luxembourg law at the time.

The French Court of Cassation Has Ruled in Favour of Landlords

In three judgments delivered on 30 June 2022, the French Court of Cassation confirmed that tenants remained obliged to pay rent during periods affected by government-imposed restrictions.

Although the legal arguments raised before the French courts were substantially similar to those outlined above, the Court of Cassation held that:

  • Tenants could not validly rely on force majeure to justify non-payment;
  • The restrictive measures imposed did not constitute a breach of the landlord’s obligation to provide the premises, thereby excluding the defence of non-performance;
  • Government-imposed restrictions could not be equated with a legal loss of the leased premises;
  • Finally, a landlord who had offered to defer rental payments had sufficiently demonstrated good faith.

To our knowledge at the time of writing, the Luxembourg Court of Cassation had not ruled on these same issues.

What Impact on Ongoing Disputes?

The judgments recently delivered by the French Court of Cassation confirmed the approach adopted by Luxembourg courts, favouring the continued obligation to pay rent, subject to the principle of good faith.

However, an analysis of these decisions revealed a stricter application of this principle by Luxembourg courts, which had required landlords to reduce rents, whereas the French courts considered an offer to defer payment sufficient.

In any event, the principle of good faith in the performance of contractual obligations must be assessed on a case-by-case basis, taking into account the specific circumstances of each dispute and, in our view, particularly the nature of the business operated from the leased premises.

For the time being, negotiation and mutual concessions appear to be the preferred approach to resolving such disputes.

Elodie Rousseau, Counsel : elodie.rousseau@btplawyers.lu

[1] JPL, 14 janvier 2021, n° 124/21 ; TAL, 14, 8 décembre 2021, TAL-2021-03756 (citant : Cass. fr., 16 septembre 2014, n° 13-20.306 ; TAL, 8 décembre 2020, n° TAL-2020-03617). [2] JPL, 14 janvier 2021, n° 124/21 ; TAL, 14, 8 décembre 2021, TAL-2021-03756 [3] JPL 21 janvier 2021, n° 201/2021 ; JPL, 29 juillet 2020, n° 2051/20. [4] JPL, 13 janvier 2021, n° 94/21 ; JPL, 14 janvier 2021 n° 124/21 ; JPL, 4 février 2021, n° 376/21. [5] TAL, 14, 30 mars 2021, n° TAL-2020-09641 ; TAL, 11 mai 2021, n° TAL-2020-003621 ; TAL, 14, 28 juin 2021, rôles TAL-2021-02457 et TAL-2021-02480 ; TAL, 14, 12 juillet 2021, rôle TAL-2021-03029 ; TAL, 14, 8 décembre 2021, rôle TAL-2021-03756 ; TAL, 14, 22 décembre 2021, rôle TAL-2021-06238 ; TAL, 14, 13 juillet 2022, rôle TAL-2022-03402. [6] TAL, 14, 13 juillet 2022, rôle TAL-2022-03402. [7] TAL, 14, 28 juin 2021, rôles TAL-2021-02457 et TAL-2021-02480 ; TAL, 14, 8 décembre 2021, rôle TAL-2021-03756 [8] Il s’agit d’une théorie juridique permettant à une partie à un contrat, d’en renégocier les termes lorsque des circonstances, qui n’étaient pas prévisibles au moment de sa conclusion, en bouleversent l’équilibre et l’économie. Cette théorie n’est pas consacrée par le droit luxembourgeois (ni par le Code civil, ni par la jurisprudence). [9] Cour de cassation française, Chambre civile, 3, 30 juin 2022, 21.20-190 ; Cour de cassation française, Chambre civile, 3, 30 juin 2022, 21-20.127 ; Cour de cassation française, Chambre civile, 3, 30 juin 2022, 21-19.889