Legal Implications of Government Restrictions on Lease Contracts Due to COVID-19
Contractual relationships are generally subject to a specified term, and they develop based on the adherence to that term. Failing to establish a term in a contract could lead to the unfortunate issue of allowing the judicial system to set the term in a private relationship, which depends solely on the parties’ initial agreement. It is said that contractual relationships are generally subject to a term because there are cases where the parties may choose not to establish one due to their interests or because of a mistake or circumstance that led to its omission.
In these types of contractual relationships, where the essential element lies in the existence of a term, we find the lease contract, as defined in the Civil Code, specifically in Article 1880.
A lease contract creates a relationship of reciprocal obligations, through which one party (the lessor) is obligated to give another party (the lessee) the use or enjoyment of a property for a specified period in exchange for a price, known as rent. These obligations of providing a property and paying rent are tied to a specified term, which governs these primary obligations and other related duties such as the return and maintenance of the property, appropriate use of the property, non-interference with the property’s use during the term, and others that ensure the efficiency of the contractual relationship. In this context, the term is essential because it governs the parties’ actions and behaviors in accordance with the contract.
The global pandemic and the government-issued decrees declaring a state of public calamity to contain COVID-19 in Guatemala have led to various legal implications. Among the first measures issued by the Executive Branch were the following:
-
“Work activities in state entities, the Executive Branch, and the private sector are suspended until Sunday, April 12, 2020, inclusive. This term may be reduced or extended by presidential decree.”
-
“Public transportation for collective passenger services, both urban and interurban, is prohibited, except for health-related transport and transport arranged by companies for their workers or personnel with prior authorization from the Ministry of Economy.”
-
“All shopping centers, and similar businesses, are closed.” (Among other provisions).
This situation has continued despite the expiration and repeal of some of the earlier provisions, as other presidential decrees issued on April 12, 2020, essentially maintained limitations affecting trade, industry, and other non-essential economic activities, continuing to impact many business owners and individuals with active lease contracts. The new measures included:
-
“Work activities are suspended in state entities, the Executive Branch, and the private sector until Sunday, April 19, 2020, inclusive. This term may be reduced or extended by presidential decree.”
-
“All shopping centers are closed 24/7 for public health reasons, with exceptions for businesses providing essential services.”
-
“Public events are prohibited, as are all sports, cultural, and social activities.” (Among other provisions).
Given the relevance of the term in lease contracts and the ongoing restrictions, the question arises: What happens legally for the lessee if they are unable to use the leased property for a certain period due to an external situation such as the COVID-19 pandemic and government measures?
To answer this, it is essential to review and analyze the grounds for termination of such contracts under Guatemalan legislation as a possible solution, which are:
-
Fulfillment of the contract’s term, or by law, or the satisfaction of the purpose for which the property was leased.
-
Express agreement.
-
Nullity or rescission of the contract.
-
Loss or total destruction of the leased property.
-
Expropriation or eviction of the leased property.
Upon reviewing these causes, it is evident that the current situation, as dictated by the Executive Branch, does not fit any of the legal grounds for terminating a lease contract. The fact that the lessee is unable to use and enjoy the property for commercial or profit purposes is a scenario not anticipated by the Civil Code, which prevents the lessee from using these grounds to terminate the contract. Consequently, the lessee would still be obligated to pay rent.
A first conclusion, therefore, must be that a lease contract cannot be terminated based on the current situation caused by the pandemic, as this contract is subject to a term that the parties voluntarily agreed upon.
Having dismissed the possibility of terminating the contract under the legal grounds, we should proceed with analyzing the fulfillment of the contract’s obligations. Since the contractual relationship cannot be annulled, it is necessary to determine whether the obligations must be strictly fulfilled or if non-fulfillment can be mitigated or minimized.
At this point, we must ask: Can force majeure or fortuitous event be grounds for terminating a lease contract? Alternatively, can the lease contract be reviewed based on the current situation as a case of unforeseen circumstances?
To address this, we must first analyze the concepts of force majeure, fortuitous event, and unforeseen circumstances, as these legal concepts apply to different scenarios that allow for their verification and application.
A fortuitous event refers to an unforeseeable event that arises from nature, such as earthquakes, tsunamis, or hurricanes, which occurs independently of human will and affects the performance of the contract. Force majeure, on the other hand, involves human actions that are foreseeable but unavoidable, such as theft, murder, or accidents. Both concepts involve the impossibility of fulfillment due to the event, but they differ in their origins: one arises from nature (fortuitous event) and the other from human actions (force majeure). Both can serve as remedies for non-performance due to the impossibility of fulfilling the contract.
Unforeseen circumstances, however, differ from these two concepts. They occur when the conditions under which an obligation was contracted change dramatically due to extraordinary and unforeseeable events, making the performance excessively burdensome for the debtor. This allows for the review of the contract through judicial declaration.
Recently, the Ministry of Labor and Social Welfare of Guatemala published Ministerial Agreement 140-2020 on March 23, 2020, which classified the current situation as force majeure. However, this classification pertains to labor contracts and differs from the legal definitions of force majeure and fortuitous events. It does not apply to lease contracts for several reasons:
-
Lease contracts fall under private law.
-
The primary regulation of lease contracts is based on the contracts themselves and the parties’ agreements, with the Civil Code applying subsidiarily.
-
The Civil Code does not include provisions for force majeure or fortuitous events in the context of lease contracts, meaning that these situations do not lead to termination.
The COVID-19 pandemic, while constituting an unforeseeable event, is not classified as a fortuitous event in the context of lease contracts. The lessor still maintains the obligation to fulfill their part of the contract. Despite the pandemic, one party (the lessor) continues to fulfill their obligation, which means there is no justification for terminating the contract under force majeure or fortuitous event.
Given this, the applicable legal concept for reviewing lease contracts in the current context is unforeseen circumstances, allowing for contractual review or suspension until the conditions for performance are restored.
Finally, it is important to note that the suspension or modification of a lease contract can only occur if the parties agree to it or if the contract is submitted for judicial review, where a judge may decide to suspend the contract due to the impossibility of fulfilling it.
Recommendations:
-
Review the lease contract to determine if it includes a force majeure, fortuitous event, or unforeseen circumstances clause.
-
The parties should negotiate and reach an agreement on how to proceed during the current situation, such as reducing rent or deferring payments. Any agreement should be documented in writing.
-
If an agreement cannot be reached, judicial intervention can be sought to review and modify the contract.
Each case must be evaluated individually, as specific circumstances may lead to different legal solutions.
