How to deal with your leases during the Covid-19 pandemic
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Publishing date:
27/12/2021
December 27, 2021

HOW TO DEAL WITH YOUR LEASES DURING THE COVID-19 PANDEMIC

On 11 March 2020, the World Health Organisation declared the novel coronavirus disease a global pandemic. In Vietnam, on 1 April 2020, Prime Minister Nguyen Xuan Phuc issued Decision No. 447/QD-TTg to officially announce Covid-19 a national epidemic. Since then, a variety of stringent measures (e.g. suspension of non-essential activities, social distancing, travel restrictions, etc.) have been imposed by national and local governmental agencies to contain the spread of Covid-19.  

The Covid-19 pandemic itself and measures taken by the government to control it (collectively referred to as the “Covid-19 Pandemic”) have severely affected the performance of on-going contracts in general and commercial leases in particular. In the latter case, payment obligations are becoming more difficult or even impossible for tenants to perform while their business activities at the leased premises are suspended. In this context, this article will analyse the applicability of some contractual and regulatory reliefs such as force majeure event (“FME”) and hardship in the context of commercial leases. The article will end with some suggestions for commercial tenants during the time of the Covid-19 Pandemic.

1. FORCE MAJEURE EVENT AND HARDSHIP UNDER VIETNAMESE LAW

For the purpose of assessing the applicability of FME and hardship to lease contracts affected by the Covid-19 Pandemic, it would be appropriate to distinguish between these two concepts under Vietnamese law.

FME and hardship share some similarities in that they both require (i) an objectively unforeseen event/change of circumstances and (ii) necessary mitigating measures being taken by the affected party.

The difference between the two concepts is that FME caters to cases where the aggrieved party cannot perform its obligations properly, whereas hardship caters to cases where the performance of contractual obligations is still possible (albeit excessively onerous). Moreover, an FME is mostly used to discharge the relevant party from its obligations and therefore leads to suspension or termination of the contract. Hardship, on the contrary, aims to revise the contract so it survives the hardship.

2. COVID-19 AND PAYMENT OBLIGATION UNDER COMMERCIAL LEASES

a. Is the Covid-19 Pandemic an FME or a hardship in the context of commercial leases?  

FME

In light of the above statutory elements of FME, the Covid-19 Pandemic, to the broadest extent, seems to be objective, unforeseeable and irremediable and therefore appears to be a qualifying event when it comes to commercial leases that were established prior to the time when the Covid-19 outbreak was officially declared in March 2020.

Nevertheless, whether the Covid-19 Pandemic constitutes an FME is also subject to specific contractual arrangements of the parties. In particular, similar to other commercial contracts, a lease contract may contain an FME clause of which the wording is usually boilerplate or sometimes tailored by the parties (e.g. laundry list of force majeure events, other consequences as mutually agreed by the parties, etc.) in line with their own wills. In the following example, a lease contract was executed in early 2019 in order to use a residential house in Ho Chi Minh City as a restaurant. It contains a typical FME clause as follows:

“a. “Force Majeure Event” means an event that objectively occurs, is beyond a party’s capacity to control and deal with such event, and directly prevents such party from performing its obligations under the contract (including, but not limited to, natural disaster, strike, riot, commercial dispute, etc.).

b. If a party is affected by a force majeure event, it must immediately notify the other party in writing of the nature and extent of such force majeure event.

c. Neither party shall be deemed to be in breach of this contract, or liable to the other party, for any delay in performance, or failure to perform any of its obligations under this contract as a result of the occurrence of any force majeure event that the party has notified the other party in writing; and the time limit for performance of such obligation shall be reasonably extended.”

Given the above definition, the qualification of the Covid-19 Pandemic as an FME may be analysed as below:

- Objectively occurs: The Covid-19 Pandemic has occurred independently of the will of the landlord and the tenant, thus this element is likely to be satisfied.

- Beyond a party’s capacity to control and deal with such event: Executive decisions taken by the government in relation to lockdown, suspension of non-essential activities, on-premises consumption prohibition, etc., especially Directive 15 and Directive 16 [8], are actually irresistible in terms of both its occurrence and effects, resulting in the closure and suspension of the tenant’s production and business activities at the leased premises. Hence, this element can also be satisfied.

- Directly prevents a party from performing its obligations: It can be seen that the most fundamental obligation of a tenant in a lease contract is to pay rent. However, whether the Covid-19 Pandemic "directly" prevents this obligation and whether the tenant will be discharged from rent payment obligation during the FME period is still a matter of controversy. Therefore, the satisfaction of this element depends a lot on the arrangements of the parties and eventually, the court’s judgment.

In practice, there is a view that the Covid-19 Pandemic has affected the tenants’ rental of the premises in that the tenants cannot use the leased premises for their normal business activities, which means that the initial purpose of the lease is not achieved. For the sake of the contractual equilibrium and long-term relationship of the parties, payment exemption or reduction therefore can be considered as a reasonable solution to this problem. [9]

However, from an opposing point of view, whether the Covid-19 Pandemic is considered as an FME and the tenant can be exempted from payment obligation depends a lot on the wording of FME clause that the parties have agreed in the lease contract, and one may not arbitrarily use the Covid-19 Pandemic to circumvent its payment obligations, in other words, to impose its unilateral will on the other party. [10] Indeed, considering FME example clause above, the Covid-19 Pandemic has not been explicitly specified in the list of FME (although such list is non-exhaustive) and tends to cause disputes when the Covid-19 Pandemic itself does not absolutely meet the above conditions to be considered a FME under the contract for exemption of payment obligation.

Hardship

In line with the latter view, thinking out of the box, many opine that the tenant may seek to rely on hardship regulations in order to request the landlord to renegotiate the contract in order to conclude revision on respective regulations in such contract. [11] Indeed, when considering the statutory elements of hardship, especially the fact that it would be excessively onerous for the tenant to continue to perform the contract without a revision, we can see that the tenant in fact have certain grounds to do so. Where it is impossible to reach an agreement, the court's decision shall ultimately take its role. However, as mentioned above, please note that the tenant is still obliged to perform its contractual obligations during the time of renegotiation and the court handling the case.

b. Foreign countries’ experience

In the US, a common law system, the courts hold the view that mere financial difficulty or economic hardship will not excuse a party’s nonperformance of the contract. [12] Similarly, the courts in France, a civil law country, do not accept force majeure as a justification for nonpayment of a sum of money. [13]

However, there is a quite interesting and typical case regarding a commercial lease for restaurant business in the State of Illinois, US, where the court’s decision is in opposition to the above points of view, namely Hitz Restaurant Group, 616 B.R. 374 (Bankr. N.D. Ill. June 3, 2020). In this case, the court found that the Illinois Governor’s executive order (which required restaurants to suspend on-premises consumption but permitted delivery, take-out, and curbside pick-up) triggered the FME clause [14] in the lease between Hitz Restaurant Group (“Hitz”) and the landlord Kass Management Services, Inc. (“Kass”) and therefore could be applied to rent payments. The reasoning behind this decision is that the executive order (i) constitutes “governmental action” under the FME clause, (ii) “hindered” Hitz’s ability to perform under the lease by prohibiting on-premises consumption, and (iii) was the proximate cause of Hitz’s inability to pay rent because it prevented the tenant from operating normally and restricted its business to take-away activities only. Hence, interestingly, the court determined that Hitz’s obligation to pay rent was reduced pro-rata to its reduced ability to generate revenue due to the executive order and eventually concluded that Hitz only owed Kass 25% of the rent (equivalent to 25% of the premises occupied by the kitchen usable for delivery activities). [15]

3. SUGGESTIONS FOR BUSINESSES IN REPSECT OF COMMERCIAL LEASES

a. “To-do list”

Given that the applicability of FME and hardship to lease contracts are uncertain, tenants of on-going leases that were signed or took effect prior to the Covid-19 Pandemic should:  

(i) immediately notify the landlord about the Covid-19 Pandemic and its possible impacts on the tenant (purpose of the contract was not reached, revenue from production and business activities at the leased premises was decreased, etc.);

(ii) apply all necessary measures to limit losses due to the Covid-19 Pandemic (e.g. online sales, pickup service, online teaching, etc.); and    

(iii) negotiate with the landlord for rent exemption or reduction based on the laws as well as the signed contract.

b. Well-drafted Covid-19 Pandemic clause in the contract

With respect to lease contracts that are being or will be executed in the near future, the issue here is whether or not the Covid-19 Pandemic still qualifies as an FME or a hardship given that the parties to some extent can anticipate the potential risks of an outbreak of Covid-19 and executive decisions of state agencies on disease prevention and control measures. Having said that, the parties can consider to build a model clause specifically for the event of the Covid-19 Pandemic, which may include the following key points:

(i) a comprehensive and unambiguous definition of the Covid-19 Pandemic;

(ii) procedures for notification, discussion, limitation of damage; and

(iii) subject to the level of the impacts, the parties may agree in advance on the rate of rent exemption and/or reduction during and after the Covid-19 Pandemic period.

OTHER LEGAL UPDATES

Several critical legal instruments have come into force in November and early December 2021:

  1. Decree No. 86/2021/NĐ-CP regulates on travelling abroad of Vietnamese Nationals for studying, teaching, conducting scientific research, and performing academic exchange; rights and responsibilities of relevant agencies, organizations, and individuals dated 25 September 2021. This Decree comes into effect on 01 December, 2021 and annuls Decision No. 05/2013/QD-TTg dated 15 January, 2013 of Prime Minister. Noted that certificate for study abroad consultancy service provision issued before the effective date hereof remain valid for use.
  2. Decision No. 34/2021/QD-TTg provides for e-identification and e-authentication based on the National Population Database, Citizen Identification Database and National Immigration Database; Rights, obligations and responsibilities of organizations and individual concerned dated 8 November 2021. This Decision comes into effect on 09 November 2021.
  3. Circular No. 08/2021/TT-BTTTT promulgates regulation on undergraduate education dated 18 March 2021 by the Minister of Education and Training. This Circular comes into effect on 03 May 2021, is applicable to cohorts admitted after the entry into force of this Circular and supersedes Decision No. 25/2006/QD-BGDDT on promulgation of regulation on formal undergraduate education; Decision No. 43/2007/QD-BGDDT on promulgation of regulation on formal undergraduate education using academic credit system; Circular No. 57/2012/TT-BGDDT amending some articles of regulation on formal undergraduate education using academic credit system promulgated together with Decision No. 43/2007/QD-BGDDT; Circular No. 06/2017/TT-BGDDT promulgating regulation on part-time undergraduate study; Decision No. 22/QD-BGDDT providing for the training to award second university graduation diploma; Circular No. 10/2018/TT-BGDDT promulgating regulations on training for second bachelor degrees and college degrees in teacher education; and Circular No. 07/2017/TT-BGDDT promulgating regulations on joint undergraduate programs.
  4. Circular No. 17/2021/TT-BTNMT provides for supervision of extraction and use of water resources by organizations and individuals dated on 14 October 2021. This Circular comes into effect on 30 November 2021 and supersedes the Circular No. 47/2017/TT-BTNMT dated 07 November 2017 of the Minister of Natural Resources and Environment.
  5. Circular No. 87/2021/TT-BTC regulates on e-transactions in the major activities of State Treasury dated 8 October 2021. This Circular comes into effect as of 01 November 2021 and supersedes the Circular No. 133/2017/TT-BTC dated 15 November 2017.
  6. Circular No. 98/2021/TT-BCA provides regulations on citizen reception work of polices on complaints, denunciations, petitions, reports dated 20 October 2021. This Circular shall come into effect on 3 December 2021.
  7. Circular No. 28/2021/TT-BGDĐT promulgates the program of frequency education in practice English dated 20 October 2021. This Circular shall come into effect as of 5 December 2021 and supersedes Decision No. 66/2018/QD-BGDDT dated 02 December 2018. According to this Circular, the program of frequency education in practice English which promulgated with Decision No. 66/2018/QD-BGDDT shall be applied till the implementation of Article 2 of this Circular.
  8. Circular No. 71/2021/TT-BTC guides on corporate income tax arrears not yet retrospectively collected from socialized entities under the Government’s Resolution No.63/NQ-CP dated 25 May 2014. Specifically, socialized entities established before 22 July 2016 that earning income from socialization activities and being held liable to fulfill corporate income tax obligation as follows (i) being entitled to corporate income tax incentives if satisfying the conditions set out in the Prime Minister’s decisions over periods of time in the following specific circumstances including Decision No. 1466/QD-TTg, Decision No. 693/QD-TTg and Decision No. 1470/QD-TTg; (ii) making additional declarations of the amount of corporate income tax underpayment (if any), self-assess corporate income tax amount that must be paid or corporate income tax arrears that tax authorities will retrospectively collect if fails to satisfy the conditions specified in these above-mentioned decisions. In addition, this Circular also regulates the fine for violations against laws on taxes and late payment interest on the corporate income tax arrears that are not retrospectively collected under the Circular No. 151/2014/TT-BTC. This Circular comes into effect on 01 November 2021.
  9. Circular No. 77/2021/TT-BTC provides amendments to Circular No. 200/2015/TT-BTC dated 15 December 2015 of Ministry of Finance providing guidelines for supervision of investment of state capital in enterprises, financial supervision, performance assessment and financial information disclosure in state-owned and state invested enterprises. One of the alert points under this Circular is that the replacement on 02 legal phrases as (i) the phrase “state-owned enterprise” by the phrase “wholly state-owned enterprise”) and (ii) the phrase “public utility products and services” by “public products and services funded by state budget for covering recurrent expenditures”. This Circular comes into effect on 3 November 2021 and applies for the fiscal year 2021.
  10. Circular No. 20/2021/TT-BGTVT promulgates regulations on cooperation between enterprise assigned to manage aviation infrastructure assets and authority performing state management of aviation activities. This Circular comes into effect on 10 November 2021.
  11. Circular No. 15/2021/TT-BYT provides amendments to certain articles of Circular No. 15/2019/TT-BYT of Minister of Health prescribing bidding for supply of drugs for public health facilities. Of note, this Circular sets out the supervising and regulating the supply and  use of antiretroviral drugs in health facilities under the signed framework agreements. This Circular comes into effect on 15 November 2021.
  12. Circular No. 15/2021/TT-NHNN provides amendment to Circular No. 16/2012/TT-NHNN of the Governor of the State Bank of Vietnam (SBV) providing guidelines for some articles of the Government’s Decree No. 24/2012/ND-CP on gold business. There is an outstanding point that having replacement of  some phrases and appendices hereof as (i) the phrase “phiếu trừ lùi có xác nhận của Hải quan” is replaced with “Phiếu trừ lùi in từ hệ thống thông tin nghiệp vụ Hải quan có xác nhận của doanh nghiệp về tính chính xác của tài liệu này”, (ii) the phrase “nộp trực tiếp hoặc gửi qua đường bưu điện” is replace with the phrase “nộp trực tiếp tại bộ phận một cửa hoặc qua dịch vụ bưu chính” and (iii) Appendix 10b of Circular No. 16/2012/TT-NHNN, which is amended by Circular No. 29/2019/TT-NHNN, is replaced with Appendix 10b enclosed with this Circular. This Circular comes into effect on 20 November 2021.
  13. Circular No.09/2021/TT-BLDTBXH provides amendments to Circular No. 08/2020/TT-BLDTBXH on guidelines for protection of employment status of whistleblowers working under employment contracts. This Circular comes into effect on 01 November 2021.
  14. Circular No. 04/2021/TT-TTCP provides procedures for reception of citizens. One of the alert points under this Circular is that the persons receiving citizens may refuse to receive citizens in some cases and must give citizens reasons for such refusal as well as report to persons in charge of receiving citizens. In case of refusing to receive citizens, heads of regulatory institutions in charge of receiving citizens should issue the Notice of refusal. The Notice must be made by using the Sample No. 01 annexed of this Circular. This Circular shall enter into force as from 15 November 2021 and replaces Circular No. 06/2014/TT-TTCP.

[1] Article 156.1, the Civil Code 2015
[2] Article 420.1, the Civil Code 2015
[3] Article 351.2, the Civil Code 2015; Article 294.1(b), the Commercial Law 2005
[4] Article 296.1,2, the Commercial Law 2005
[5] Articles 295.1, 305, the Commercial Law 2005
[6] Article 420.2,3, the Civil Code 2015
[7] Article 420.4, the Civil Code 2015
[8] Directive No. 15/CT-TTg dated 27 March 2020 and Directive No. 16/CT-TTg dated 31 March 2020 implementing the Covid-19 pandemic prevention and control measures
[9]https://tuoitre.vn/tranh-chap-cho-thue-mat-bang-dich-covid-19-la-su-kien-bat-kha-khang-20211016220200273.htm
[10] Id.
[11] Please see recent disputes in relation to hardship clause at https://tuoitre.vn/lai-them-chu-nha-bi-cgv-kien-ra-toa-doi-don-phuong-cham-dut-hop-dong-ma-khong-boi-thuong-20210507174451205.htm
[12] See, e.g. Lantino v. Clay LLC, No. 1:18-cv-12247(S.D.N.Y. May 8, 2020)
[13] See Cass. Com., 16 Sept. 2014, n° 13-20.306
[14] “Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Lease, in the event, but only so long as the performance of any of its obligations are prevented or delayed, retarded or hindered by . . . laws, governmental action or inaction, [or] orders of government. . . . Lack of money shall not be grounds for Force Majeure.”
[15] LINK

This briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.
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