27 March, 2020
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Effects of COVID-19 on business owners – are they entitled to rent reduction?

With the state of emergency measures hitting businesses throughout Serbia, business owners are scrambling for ways to cut expenses as much as possible. Seeing that many businesses, especially SMEs, lease their commercial premises, the obvious question is whether business owners must pay full rent while closed or operating at severely reduced capacity?

The answer is by no means an easy or straightforward one.

 

What does the law say?

The Contracts and Torts Act (“CTA”) regulates the landlord-tenant relationship by and large. Under the CTA, tenants must use the leased premises with the care of a prudent businessperson and only for those (business) purposes stipulated in the lease agreement.

What happens if a tenant is temporarily unable to use the leased business premises because the Government ordered its closure during the state of emergency? As the closure is neither attributable to the tenant nor to the landlord, the CTA entitles the tenant to request a proportionate rent reduction.

While this relief measure is certainly applicable to businesses subject to Government closure orders (e.g. shopping malls, restaurants, coffee shops, etc.), does it also apply to businesses that are still open?

The answer is – it depends.

 

What seems to be the problem?

Businesses that stayed open during the state of emergency suffered another unintentional setback on March 21, 2020 when the Ministry of Health issued the Decree banning all public gatherings comprising more than 5 individuals, gathered at the same time, in a single closed venue in a public space.

While the obvious intention of the Decree was to restrict citizens’ freedom of assembly, it had an indirect economic impact on certain business owners as well. For instance, businesses such as grocery stores had to severely limit customer numbers and implement crowd control measures, which ultimately lead to a reduction in revenue. As grocery store owners were not able to use the leased premises fully in line with the contracted commercial purpose, they are now asking if these circumstances – which are not attributable to them – entitle them to a proportionate rent reduction.

To answer this question, we must first identify businesses affected by the Decree, which was not designed to apply to all public gatherings and, consequently, does not affect all businesses.

 

“Public space” requirement – the breaking point

As noted above, the Decree banned all public gatherings comprising more than 5 individuals, gathered at the same time in a single closed venue in a public space.

While it is certain that “public gathering” means any assembly of people outside their homes, and that “closed venue” clearly refers to a room or a similar walled off area, the Decree’s “public space” requirement is where all the answers lie.

Although the Decree does not itself define this key term, its meaning is found elsewhere in Serbian legislation – namely, the Public Order Act defines a “public space” as a space accessible to an indefinite number of unspecified people under equal conditions or without special requirements.

When this definition is put into context, it becomes clear that the Decree only prohibits gatherings of people in venues that are up for anyone’s grabs – shops, banks, pharmacies, retails, post offices, etc. By contrast, the Decree does not prohibit gatherings in spaces which are not accessible to the general public without special requirements, i.e. spaces accessible only to a limited number of specified individuals, such as law offices or company headquarters or any other “closed venues” inaccessible to an indefinite number of unspecified people.

 

Where does this leave tenants?

Seeing that the Decree does not apply to all gatherings in all closed venues, only businesses carried on in venues that meet the “public space” requirement will find themselves subject to restrictions imposed by the Decree. As a result, only owners of these affected businesses would be unable to fully use the leased premises in line with the contracted commercial purposes. Only these business owners (if they are tenants), therefore, would be entitled to request a proportionate rent reduction from their landlords.

 

For more information, please contact us via covid19@geciclaw.com