What you should know about lease contracts during the state of calamity in Guatemala
Alejandro Solares Solares
Due to the presence of COVID-19 in Guatemala, there are cases of commercial entities and companies where the economic alteration implies difficulties to continue operations and possible requests for pardon in the payment of their obligations will be made by the lessees, specifically with the rents and maintenance fees in the Lease Agreements, based on contractual aspects such as Unforeseen Events in Contracts, force majeure and acts of providence.
The termination of Lease Agreements does NOT have a specific legal norm for the fortuitous event or force majeure; this means that the contracts cannot be terminated. Furthermore, there is the jurisprudence of some courts that indicates that a fortuitous case and termination cannot be requested because in these cases there is no cause under the provisions of the Commercial Code.
Under the provisions of article 1426 of the Civil Code, it is established that "The debtor is not responsible for the failure to comply with the obligation due to fortuitous event or force majeure unless at the time it occurred it would have been in default".
The State of Public Calamity declared in the Government Decrees previously related, does not mean that all entities and commercial companies must close their operations. Nor are obliged to close operations those companies that have the authorization issued by the Ministry of Economy. Per a request made by a form has been made available on the website of the Ministry mentioned above. (https://forms.gle/VDH9HEcWPoEnDB8v5).
Also, they must comply with the application of all the measures on occupational hygiene, health and safety established by the Labor Code and the Regulations on Occupational Health and Safety. Likewise, they must adapt all the norms and provisions issued by the President of the Republic on the State of Public Calamity decreed and the regulations issued by the authorities of the Ministry of Public Health and Social Assistance, the Ministry of Labor and Social Welfare and the Institute Guatemalan Social Security.
Consequently, from those mentioned above and given the current situation predominating in the country, this bulletin is issued on the specific case of Lease Agreements in force, considering the following scenarios:
a. When the lessee provides essential services with the authorization of the Ministry of Economy;
b. When the lessee does not provide essential services, and they have permission from the Ministry of Economy; y
c. When the lessee does not provide essential services, and they lack approval from the Ministry of Economy.
Other aspects considered in this bulletin are the civil responsibilities that may have derived from contagions that can be traced and that have occurred in the shopping center also if the owner of the establishment is solely responsible for sanitary measures and whether or not there are criminal consequences for its non-application.
What happens in the case of COVID-19?
Several entities and companies in the Public and Private Sector have suspended the ordinary course of their operations, and some of them continue to provide them irregularly. In this case, the tenants cannot allege unforeseen events or force majeure because the law does not contemplate termination due to unforeseen circumstances or force majeure. Still, they can terminate their contracts in advance because the contractual term is in the interest of the lessee. The only case in which this is not the case is if the contracts have a compulsory term.
Different is the case for a change of essential circumstances of the contract for fundamental change in conditions that led to the hiring. The above is known as unforeseen events. The Change of Essential Circumstances in term contracts or the execution of periodical or deferred income benefits allows a judge to review the agreement and modify the benefits. This applies to the lease because it is for contracts with periodic benefits, but the law establishes that the consequence is the revision of the contract, but that it must also be given in court.
However, the economic alteration and the financial needs of both parties will lead to the search for income reductions and deferrals. The discount or waiting of the rent payment is different for those who have been producing than for those who have not. Commercial tenants are separate from home tenants.
The economic emergency law did not put into effect any measure beyond, in a specific interpretation, the non-increase in income (Article 2). DIACO must check that there is no price increase. The reduction granted in rents can be interpreted as once the prices have been lowered, they cannot be raised if the reduction is not recorded correctly in writing.
The reduction or deferral will be entirely voluntary and negotiated between the parties. The negotiating power of the lessee will lie in the possibility of terminating the contracts. The lessor must consider the accreditation that the lessee has in place and the duration of the total contractual term. The lessor must also consider the possibility that the lessee closes the business or moving to another property, and that he will have to reoccupy the property. In some cases, termination of the contract is an option for the owner because the financially troubled tenant may leave service debts. Any renegotiation must start from the obligation of the renter of paying for the services used by the property and maintenance fees.
In the case of housing, it will be necessary to review the source of payment of the rent of its occupant, to take the required measures.
What’s the lessor liability if there’s an infection in the leased property?
For the lessor to be legally liable he has to authorize the opening of a property that has to remain closed and has control over it and is performing an activity not permitted by the presidential dispositions. If the property is open for business, either by authorization of MINECO or because it’s within the exemptions, then there can be a liability if an infection of COVID-19 is acquired in the leased property. The law indicates that the lessor shall be liable in case infectious substances or smoke or damaging gas are deposited in the leased property. This liability can be typically determined not by a random contact, but due to constant contact, which usually occurs with employees; hence, the compliance with the sanitary measures with employees is of vital importance to avoid any legal liability. In the case of housing, we do not see civil liabilities unless the property does not previously have essential sanitary aspects.
We do not foresee any legal liability for not complying with sanitary measures, given that the Criminal Code does regulate criminal liability for not complying with such measures. If the lessor can impede for a not permitted activity to be executed but he opts not to act, he could be held criminal liable in accordance with article 305, even if the primary criminal liable for not complying with a legal disposition will be the lessee.
The suggestion is to comply and with no exemption, the sanitary measures and to verify the compliance of such measures by the lessee.
Given the above, it is important that in case the lessee continues to have open to the public an establishment, then the lessee shall also be compromised to comply with all the sanitary measures decreed by the Government and that the lessee signs a declaration of liability to the lessor.
Criminal liability may eventually arise for two reasons for the owner of a shopping center. Given the express prohibitive nature of the prohibition of activities in Shopping Centers, the opening of premises in a shopping center without proof of express authorization may imply a criminal figure of disobedience for its owner. Same for the lessee who does it without express permission.
Responsibility can also be given by Article 305 of the Penal Code for non-compliance with sanitary measures. This covers the previous case but also includes the tenant who does not follow the health protocols ordered by the President of the Republic. Or whoever allows them to have no longer the obligation to verify them. This could cover the owner in the case of businesses or entities authorized to operate that do not follow ordered sanitary measures. For this reason, a letter of responsibility has been designed for local owners.
1. Depending on each particular case, it must be determined whether the Lease Agreement can be subject to review (theory of the unforeseen).
2. Is important to take into consideration that the text of the Lease Agreement does include an Act of God or Force Majeure or of the Theory of the Unforeseen clause, and the local laws can only be enforced when the agreements do not include these clauses; therefore, a study of each agreement should be made to determine which is the more advisable way to proceed.
3. It is also advisable that if as a result of negotiation, a waiver or a reduction is granted, this is written agreed to avoid any tax consequences.