On January 30, 2020, the World Health Organization (“WHO”) declared the “Public Health Emergency of International Concern”, as a result of the virus SARS-COV2 (which causes the disease known as COVID-19). At that moment, such virus had caused the death of 170 persons in China, with 9700 cases confirmed and 106 cases confirmed in other countries. Weeks later, on March 11, 2020, such organization issued a pandemic declaration as a result of such situation. Different from an outbreak or an epidemic, a pandemic exists with outbreaks that affect more than one continent around the same time, and in which the contagion quickly evolves from imported (carriers traveling in from abroad) to local transmission (locals infecting other locals). Weeks later, on March 11, 2020, such organization issued a pandemic declaration as a result of the virus SARS-COV2 (which causes the disease known as COVID-19). Different from an outbreak or an epidemic, a pandemic exists with outbreaks that affect more than one continent around the same time, and in which the contagion quickly evolves from imported (carriers traveling in from abroad) to local transmission (locals infecting other locals). Finally, the last report issued by WHO at 14:38 GMT-6 on March 21, 2020 states that at that moment there were 267,013 confirmed cases of COVID-19, 11,201 deaths and 185 countries with confirmed cases.
In Mexico, on February 28, 2020 the authorities confirmed the first COVID-19 case. A few days after, on March 17, 2020, the Ministry of Health issued a notice determining that, in the short term, the epidemiological surveillance model will function solely as a sentinel program. This kind of model observes the imported cases and identifies the local transmission within the community. Unfortunately, in the afternoon of Saturday March 21, 2020, the authorities reported that to that date there were 251 confirmed cases in Mexico (with 48 new cases compared to the day before), 697 suspicious cases y 2 confirmed deaths.
As a result of this COVID-19 pandemic an issue arises as to whether such event may be considered force majeure (“FM”) in the event of a breach of commercial and industrial lease agreements.
Force Majeure in Mexico.
FM is an unforeseen and inevitable event that prevents debtors from fulfilling their obligations. An event of force majeure is one that occurs absent of any fault by the debtor, and which makes it impossible for the debtor to fulfill the terms agreed upon in a contract. It is beyond the debtor´s conduct, beyond him or her to solve, and makes it impossible for the debtor to use any of the outside world elements to overcome it. In the case of lease agreements, article 2431 of the Federal Civil Code (and the equivalent articles of the State Civil Codes) determines that, in the event of FM, tenants shall have no obligation to pay their rent.
After considering the information stated above, we believe it is appropriate that our clients and friends take into account the following recommendations:
- First, these ideas apply conceptually to commercial and industrial agreements, since home isolation will still allow the use of the leased space, regardless of the pandemic. Also, please keep in mind that the rights of the parties may vary if applicable law is federal or local.
- Although it is not clear if COVID-19 already meets the criteria of FM in Mexico (perhaps in some municipalities it already does), projections show that it will probably meet them in the following weeks. With no doubt whatsoever, a pandemic of this magnitude is an unforeseeable event, both to landlords and to tenants, except for those who have recently signed a lease agreement. Likewise, it will make the breach of contract inevitable in the event the Ministry of Health issues a “Declaration of Public Health Emergency”.
- We recommend to our clients and friends to closely follow the determinations issued by the authorities, whether local or federal, and to monitor if the decrees make the tenant’s breach of its obligations inevitable. There is a possibility that in some cases the Municipal Declarations may give rise to a FM event within the city. There may be a FM incident if they order the shutdown of bars, entertainment centers, nightclubs, social clubs, among other public places (as is the case of the Municipality of San Pedro Garza García, NL).
- Regardless of what the administrative authorities declare, in the case of the Federal Judiciary, it is an evident fact that a work suspension has already been issued. We will see how this impacts the subject at hand when they rule over the existence or not of FM in the cases before them. However, it would be a contradiction if they do not accept the FM, when they resolved that it was necessary to mandate the work stoppage for themselves. We will also have to see how the social distancing policies implemented by some State Judiciaries will impact when they rule over the cases before its jurisdiction.
- We strongly recommend reviewing the FM clause of your lease agreements to be able to confirm if tenants gave up their right to invoke FM. Also, check if the parties defined or agreed upon the types of events that may give rise to a FM event.
- For landlords, it is important to assess how the relationship is with the corresponding tenant and the level of need that such tenant may have over to use the FM exemption. Keep in mind that if the FM lasts more than two months, the tenant has the right to seek termination of the agreement with no further legal consequences to the parties. For tenants, please assess how the events unfold, determine how relevant it is to continue the use of the premises, the relationship with the corresponding landlord and the possibility to implement palliative measures.
- We should mention that penalties (common provisions in lease agreements for lack of payment), will not be enforceable in the event of FM, as clearly stated in article 1847 of the Federal Civil Code (and the equivalent articles of the State Civil Codes).
To conclude, all landlords and tenants should consider the above said and start taking the measures appropriate to their businesses. Without any doubt, each case will be different. It is key to analyze it in the general context of things and the unique aspects related to the particular agreement and the parties involved.
RRQB Legal Solutions is currently operating via home-office. nonetheless, we will remain close to you to help you and advise you in any needs that may arise as a result of this very ill-fated pandemic.
On March 11, 2020, the World Health Organization (“WHO”) issued a pandemic declaration as a result of the virus SARS-COV2 (which causes the disease known as COVID-19). In Mexico, there are currently 251 confirmed cases, and counting.
According with estimates of the International Labour Organization, this pandemic will increase global unemployment by 5.3 million (under a “prudent” hypothesis) or by 24.7 million (under an “extreme” hypothesis). In comparison, the global financial crisis of 2008-2009 increased global unemployment by 22 million.
Up to this date, the competent health authorities in Mexico (i.e. the President, the General Health Council, the Ministry of Health and State/Mexico City governments) have not issued a formal declaration of health contingency in regards with COVID-19. However, a few of those authorities and the civil society in general have promoted and applied recommendations aligned with those issued by the WHO to prevent the propagation and contagion of the virus, specially “Social Distancing” measures.
Specifically, last Friday March 20 the Ministry of Labor and Social Welfare (“STPS”), in coordination with the Ministry of Health, issued an “Action Guide for the Workplace against COVID-19” (“Guide”), in which among other things the STPS considered the possibility for employers to implement several “temporary policies” (as further described below). We recommend reading the full Guide in the following link:
The COVID-19 pandemic has certainly affected the productive and economic activities in Mexico, situation which has been aggravated due to additional macroeconomic factors that converge simultaneously in the rest of the world.
As a consequence, concerns naturally arise regarding the labor implications for employers, and the available alternatives to mitigate its effects.
What can I do BEFORE a health contingency is formally issued?
The Federal Labor Law (“FLL”) sets forth certain cases and specific mechanisms to collectively suspend employment relationships before a health contingency is issued. The effect of such a measure would temporarily suspend the obligation of the workers to render their services, as well as the obligation of employers to pay salaries.
However, such measure requires for employers to inform and request the approval of the competent labor authority, which is unlikely to happen considering that, paradoxically, most Conciliation and Arbitration Boards in Mexico have suspended activities due to the pandemic.
Notwithstanding, there are additional alternatives to reduce labor costs for companies during the COVID-19 pandemic and avoid permanent closings and loss of jobs in the country.
Such alternatives include “work stoppages” (“paros técnicos”), work shift reduction, flexible work shifts, remote work or “Home Office”, anticipated use of vacation time, etc.
Please note that the applicability and effectiveness of each of the foregoing alternatives depend on the nature of the productive activities of the employer and the specific characteristics and duties of each position and, thus, it is advisable to conduct a proper evaluation before its implementation.
Likewise, considering that in Mexico employers cannot unilaterally modify work conditions of its workers, any preventive measure of this nature should be (i) expressly convened with the workers; and (ii) formalized in writing. In these cases, the practical and logistical aspects when preparing and delivering the message to the workers are of extreme importance and, hence, should be carefully and adequately planned.
Some of the foregoing alternatives have been confirmed by the STPS in the Guide, particularly in Section 5.5.
Once the suspension of work due to a health contingency has been formally declared…
Section VII of Article 427 of the FLL states that the declaration of a health contingency by the competent health authorities is a legal cause for temporary suspension of employment relationships in Mexico.
For such a purpose, employers are not required to obtain the approval or authorization of the authority. However, according with section IV of Article 429 of the FLL, employers are obliged to pay to their workers an indemnification equivalent to one daily minimum wage for each day of suspension, without exceeding of 1 month.
The daily minimum wage in force is equivalent to $185.16 Mexican Pesos in the Free Zone of the Northern Border, and to $123.22 Mexican Pesos in the rest of the country.
Please note that the FLL does not contemplate what would happen in case the suspension of work due to a health contingency lasts for more than one month.
However, in our view, the payment of the indemnification of 1 daily minimum wage for each day of suspension constitutes a temporary exception to the general rule applicable to suspensions of employment relationships, consisting of suspending the obligations to render services, and to pay the salaries. Thus, once the term of the exception is over (1 month), the foregoing general rule should prevail and, thus, employers should not be obliged to continue paying the indemnification, or the salaries of its workers.
If you wish to obtain additional information, we would be delighted to assist you.