The Impact of CORONAVIRUS on Lease Agreements.

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.

Recommendations.

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.