RENT SUSPENSION CLAUSE AS SOLUTION TO LEASE ISSUES RESULTING FROM COVID-19

LEGAL UPDATE

Confronting the COVID-19 outbreak and its serious progress and consequences, governments of many countries have imposed mandatory measures for preventing the spread and managing the impact of this pandemic.

In Vietnam, the Prime Minister also issued instructions on implementation of epidemic prevention measures, among others, social distancing measures. Many offices, factories, entertainment and service places operated by enterprises and other business entities had to close and cease their operation during the period such measure was imposed. Accordingly, such enterprises and business entities could not carry out their business activities or gain turnover. However, they still incurred many operational expenses such as rental fee, service charge and other kinds of fees for leased premises, employee costs, marketing costs, and other necessary costs for maintaining the operation and necessary for the survival of their business locations and the enterprises and business entities themselves.

In practice, many enterprises and business entities have fallen into serious difficulties, have become insolvent and may have to file for bankruptcy. It could be said that the COVID-19 crises brought an expensive experience for many businesses, especially for those which had not been well prepared for an incident of this proportion.

1. Non-transparent Rental Abatement Provisions

In this update, we will discuss one of the most interesting problems business entities might have encountered during the COVID-19 outbreak and subsequent implementation of the social distancing measure, being rental abatement for leased premises affected by the same. Business entities, especially those which are running business locations with premises leased from third-party landlords, should pay attention to this for the purposes of minimising negative impacts such as damages and potential risks arising from COVID-19.

As mentioned before, while many business entities were unable to earn revenue during the epidemic period, they were required to pay rental and other fees and charges for the premises leased as usual. However, other than the generic provisions on force majeure events, the law does not specially stipulate any provision on the right of tenants to rental abatement or exemption due to or in the period of occurrence of an epidemic.

Also, many lease agreements entered into between business entities and their landlords do not include such clause for dealing with such situations. As a result, it can lead to very difficult and heated discussions between landlords and tenants with reference to unclear legal provisions as to how to handle rent and charges during such period.

Where parties have reached a deadlock, a tenant’s business can have a dilemma in the situation where they could not afford to pay rental fee but find it extremely difficult to deal with landlords for rent abatement or exemption due to lack of legal basis.

2. Solution

Taking into consideration the difficulties that business entities have been facing during the pandemic and still might be facing as a result of it, we would like to introduce a clause on rent suspension in the epidemic period. This will allow business entities, as tenants, to negotiate with landlords and put the clause into their current or future lease agreements. Especially, because competent authorities have warned that there might be new waves of COVID-19 in the future, pre-emption of a mutually agreed contractual position with landlords is strongly advised.

Under the said clause, tenants can propose rent exemption and payment delay during the period that such tenants cannot use their leased premises for the permitted use as agreed under the tenancy agreement due to the occurrence of any epidemic or the implementation of any epidemic prevention measures imposed by governmental authorities.

The clause also provides for the right of either party to a lease agreement to terminate the same in case the rent suspension period exceeds the maximum period of time agreed by the parties (e.g. 3 months). In case of such termination, we suggest that the consequences of termination shall be the same as termination upon expiry of the leased term. Accordingly, no party shall be responsible for any compensation of penalty due to early termination, and the tenant shall be returned the deposit upon completion of its obligations under the tenancy agreement.

3. Rent Suspension Clause Sample

Coronavirus: the disease known as coronavirus disease 2019 (COVID-19) and the virus known as severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2).

Epidemic Disease: any disease that affects many people at the same time, and spreads from person to person in a locality where the disease is not permanently prevalent and has been announced as an epidemic disease by the relevant Governmental Authority in such locality.

Governmental Authority: local, regional or central government, ministry or similar authority, administrative authority, financial authority, fiscal authority, any-level people’s committee, other competent authority, court, agent or division.

Pandemic Disease: any Epidemic Disease that spreads over a large area, is prevalent throughout an entire country, continent or the whole world and has been announced as a pandemic disease by the World Health Organization.

Use Prevention Period: the period from the date on which a Use Prevention Measure takes effect until the date which is [NUMBER] days from the date on which the Use Prevention Measure ceases to take effect.

Use Prevention Measure: any mandatory measure imposed by the Governmental Authority for the prevention or delay of the spread of Coronavirus or any other Epidemic Disease or Pandemic Disease which requires:

a. the Tenant not to use the Leased Premises (or any part of it) for the Permitted Use; or

b. the Landlord to prevent or restrict access to the Building or the Leased Premises for the Tenant (including its employees and customers) so that the Tenant is not able to use the Leased Premises (or any part of it) for the Permitted Use.

1. Rent Suspension during Use Prevention Period

1.1 Subject to clause 1.2, if a Use Prevention Measure takes effect, payment of the Rent [and Service Charge] shall be suspended during the Use Prevention Period. Accordingly, (i) the Tenant shall be exempted from payment of the Rent [and Service Charge] for the Use Prevention Period[; and (ii) any payment obligation accrued to the Tenant within [NUMBER] days prior to the commencement of the Use Prevention Period shall be delayed until the expiry of the Use Prevention Period].

1.2 If the Rent is suspended under clause 1.1 and the Use Prevention Period has exceeded [MAXIMUM PERIOD OF TIME] from the commencement of the Use Prevention Period, then either party may at any time terminate this Tenancy Agreement by giving written notice to the other within 30 days from the end of such [MAXIMUM PERIOD OF TIME]-day period.

1.3 If either party gives a notice to terminate this Tenancy Agreement in accordance with clause 1.2:

a. the Tenancy Agreement shall terminate with immediate effect from the date of the notice; and

b. consequences of such termination shall be the same as termination upon expiry of the Term; and neither party shall be responsible for any compensation or penalty due to such termination.

4. Further Steps

It is worth noting that the Rent Suspension Clause should be reviewed and revised together with other clauses of the tenancy agreement on a case-by-case basis.

Furthermore, in case the tenancy agreement template already includes a force majeure clause, the latter could be integrated with the Rent Suspension Clause as appropriate.

Contact Information

Should you have any questions, please feel free to contact our lawyers at the below email addresses.

Hieu Pham / Special Counsel

hieu.pham@acsvlegal.com

Phuong Huynh / Senior Associate

phuong.huynh@acsvlegal.com

© 2020 ACS Legal Vietnam Company Limited – All rights reserved

This legal update is not an advice and should not be treated as such.

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