Italy: The effects of the pandemic on the leasing agreements in Italy: the (possible) legal solutions and the first judicial decisions
Italy has been one of the first Countries in the world to be affected by Coronavirus at the end of February 2020, when the Covid-19 suddenly spread among the Country, especially in the Northern Regions.
The dramatic increase of infected people and deaths forced the Government to order an extended lock-down from March 9 to May 18, prohibiting the population to leave their houses apart for emergencies and, at the same time, allowing only the industries and retailers active in the most essential sectors (food, health and transport and few others) to remain opened.
Therefore, the majority of the retailers have been obliged to close their shops. The Government provided the retailers with (poor and insufficient) subsidies aimed to mitigate the losses suffered by them.
Indeed, the emergency regulation provided a tax credit in favour of certain retailers based on a percentage of the lease rent in relation to the months from March to June 2020 which has been later extended also to October November and December. No right to reduction of the rent has been provided by the law. As a consequence, most of the tenants have and are still negotiating with the landlords a discounted rent The approach of retailers (and landlords) to this respect has been different.
In some case landlords and tenants found an agreement and renegotiated the terms of payment of the rent or agreed to reduce the rent due during the lock-down period.
In other cases they have not found any agreement and the landlords sued the tenants in Court claiming for the full rent or also claiming for the breach of the lease contract and the termination of the lease contract.
The judicial proceedings started by landlords are still pending, however the Italian Courts have already issued some precautionary decisions.
The Italian Civil Code and the Italian Leasing Act (Italian law 392/1978) do not expressly regulate a force majeure event such as the pandemic generated by Covid and also the case law on the matter is not developed yet, since the last time that a virus spread in the world like Covid 19 dates back to 1918 and 1919 when the Spanish flu affected the globe.
Indeed, the obligations of the landlord are two: the first is to make the leased real estate unit available to the tenant, and this was respected also during the lock-down period, and the second is to ensure that the real estate is eligible for the use agreed in the lease contract (retail activity, i.e. sale to the public of the products of the retailer) and this was not possible during the lockdown.
Therefore, sometimes judges applied article 1464 of the Italian Civil Code - under which when the obligation of one contractual party becomes partially impossible, the other party has the right to request a reduction of the amount due – and article 1256 par. 2 of the Italian Civil Code – pursuant to which in case the obligation of one party becomes impossible for a limited period of time, the debtor is not liable for the delay until the end of such period of time.
In the light of the above, some Courts ruled that the tenant is not due to pay the whole rent in relation to the months when the lock-down was in force, because the lessee did not have the possibility to execute the retail activity pursuant to the use clause agreed in the contract. For this reason, the Courts requested the landlords to apply a discount on the rent. The amount of such discount varies from Court to Court and depends by the current circumstances: it ranges from 30 to 70% of the original amount due.
However, the above solution is not valid for all the agreements: indeed, it mainly depends by the peculiarities of each lease relationship, the content of the leasing agreement and by the description of the “use clause” of the lease. In addition, the decisions on the matter are limited and, as of now, they have precautionary nature: it means that the final decision will be published the next one or two years and it is possible that the definitive judgment shall have a different content from the precautionary decree.
However, it is presently growing an interpretation of the authors, that seems being accepted also by the case law which is putting as a central element the “good faith” in the performance of the agreement. More precisely, a provision sets forth by our Civil Code and applicable to contracts in general states that the parties must execute and interpret the agreement in good faith.
The scholars and the case law decisions - and, last but not least, a position paper of the Supreme Court issued on July 2020 with respect to the consequences of the Covid-19 in the execution of the agreements and namely of the lease agreements - stated that the “good faith principle” implies a duty of the parties to renegotiate the terms of the contracts in order to recover the balance between the reciprocal performances that has failed due to the containment measures due to COVID 19. This does not mean that the landlord should necessarily accept all the requests of rent reduction proposed by the tenant but that he should consider in good faith the reasonable proposals of the tenant and should accept them insofar they restore the lost balance between each party’s performance.
Therefore the best way to mitigate the effects of the pandemic for the parties of leasing contracts related to activities which have been severely affected by the containment measures due to the pandemic, is to find an agreement for the reduction of the rent, for the mutual satisfaction of both parties: the landlords receives at least part of the rent, even if the real estate has not been used for the contractual use and the tenant enjoys a discount, which shall be of help to restart the activities after this difficult period of the pandemic, which, unfortunately, has not been ended yet.
In the light of the above, it is clear that the case law is providing to lawyers and, landlords and tenants an oriented interpretation of the pandemic period, however, it is not still clear which could be the final decision of the Courts.