Uncharted Territories in Tenancy Law

New COVID-19 Ordinance on Rent and Usufructuary Lease

On March 27, 2020, the Federal Council issued the new COVID-19 Ordinance on Rent and Usufructuary Lease (available in German, French and Italian).

Below is a brief summary of the most important points:

• The time limits to be set in case of payment arrears by tenants and lessees have been extended.
• The main question – whether rent is still owed if the rental premises can no longer be used due to the closure of publicly accessible facilities by the Federal Council – has not been answered.
• Moving is still possible as long as hygiene and social distancing measures are observed.

Extension of time limits in case of payment arrears by tenants and lessees

The time limits have been extended as follows:

1. In tenancy law, the landlord must now set a new payment deadline of at least 90 days (previous regulations according to Art. 257d para. 1 CO: at least 30 days for residential and business premises and at least 10 days for all other rented property) for tenants in arrears with the payment of rent or ancillary costs due between March 13, 2020 and May 31, 2020 and threaten them with the termination of the rental agreement if the time limit expires unused. The extension of the deadline only applies if the payment arrears were caused by the Federal Council's measures to combat the COVID-19 pandemic. After expiry of this period, the landlord may (as before) give notice of termination to the tenant of residential and business premises with a minimum of 30 days' notice at the end of a calendar month, and to tenants of all other rented property without notice. The latter period was not extended by the regulation.
2. The statutory notice period for furnished rooms and separately rented parking spaces was increased from two weeks at the end of a one-month rental period to 30 days (Art. 266e CO).
3. In usufructuary lease law, the payment deadline to be set has been extended from 60 to 120 days in accordance with Art. 282 para. 1 CO. The procedure is analogous to that described above for rental agreements.

Commentary

The COVID-19 Ordinance on Rent and Usufructuary Lease gives rise to the following comments:

1. When adapting the periods in Art. 257d para. 1 CO, no distinction was made between residential and business premises on the one hand and other rental objects on the other hand, and the time limit for the threat of termination has also been extended for all other rental objects. It is questionable whether this extension was intentional.
2. Default interest of 5 % is still owed from the first day the rent is overdue. This means that non-payment of rent is considerably worse than taking out a COVID-19 emergency loan, on which 0 % interest is due. Non-payment of rent should therefore only be a last resort, and only if there is real promise of an improvement in the course of business and no other options are available.
3. The new regulations lead to the situation that rent deferred by the landlord until the beginning of June, if not paid in June, will lead to bankruptcy faster than rent that has not been deferred. Since rent deferred in this way is not due until June, the landlord can then apply the 30-day period with a threat of termination in accordance with Art. 257d para. 1 CO because the 90-day period in accordance with the COVID-19 Ordinance on Rent and Usufructuary Lease will no longer apply to rent due from June on. This, of course, presupposes that the minimum time limits are not extended again by a new ordinance.

Is the rent still owed?

However, the new regulations do not answer the most important question – whether the rent is still owed if rental premises can no longer be used due to the closure of publicly accessible facilities and the tenant thus suffers a sharp decrease in income.

On the basis of the COVID-19 Ordinance 2, many public establishments, such as shops, restaurants, bars, museums or parks, are now closed to the public. This means that the affected tenants cannot generate any more income through their businesses. Accordingly, the question arises as to whether the rent for the rented business premises is still owed. This question has not yet been decided by the Swiss courts, especially since the measures taken by the Federal Council have never been enacted before.

In Switzerland, there are two main opinions in this regard:

The rent is no longer owed

This opinion is voiced primarily by tenants' organizations (as well as by lawyers who mainly represent tenants) and is justified by the fact that the rented property is no longer suitable for the contractually agreed use due to the ordered closure. According to this opinion, a property rented out as a restaurant, for example, would no longer be suitable for the contractually agreed use because the tenant would no longer be able to receive guests and maintain a restaurant business. Correspondingly, draft letters have been put up on the Internet that can be downloaded by tenants and sent to their landlords in order to request a reduction of the rent.

The rent is still owed

On the other hand, landlords' organizations (and lawyers who mainly represent landlords) are of the opinion that rent is still owed. The justification for this position is that the closure of a business by official decree falls within the tenant's sphere of risk and does not constitute a defect in the rented property. The property is therefore still suitable for the contractually agreed use. According to this opinion, closure to the public only affects certain sectors and not specific rental properties or buildings. If a shop was used, for example, to sell clothes or jewelry, the shop had to be closed due to the enacted measures, while a grocery store or optician's shop, for example, was able to remain open. It follows that the closure does not affect the rental property, but rather the business.

What is a sensible approach?

How the courts will decide one day is up in the air. In any case, it cannot be ruled out that they will approve at least a partial reduction in rent for affected tenants.

Landlords cannot simply turn a blind eye to the situation and insist on rental payments that a tenant may no longer be able to make. Sooner or later, this could result in the tenant's bankruptcy, which would invalidate the obligation to pay the rent and prevent the premises from being rented out for several months due to the ongoing bankruptcy proceedings. In the current situation, it would also be difficult to find a new tenant. Moreover, once the rental deposit is used up, it is unlikely that the landlord would be able to claim and receive payment of the entire outstanding rent in the bankruptcy proceedings, as rental payments are non-privileged third-class claims (Art. 219 Debt Enforcement and Bankruptcy Act).

Accordingly, it makes sense for tenant and landlord to agree on a temporary reduction or at least a deferment of the rent, so that both parties bear part of the damages. Such agreements must clearly state that they regulate the legal situation between the parties and retain their validity even if the legal issues are later clarified in a different manner. Therefore, if a tenant enters into an agreement with its landlord on a partial reduction of the rent, the tenant should not be able to later claim a full reduction of the rent to zero should the courts decide that rent is not due at all in such situations. However, the fact that the issue is clarified by agreement at an early stage and the ensuing legal certainty and peace of mind for both parties should more than compensate for any such disadvantages.

Tenants with liquidity problems can also apply for bridging loans (which, as explained above, can be a better course of action due to the interest rate issue) and take various other measures (see our newsletter of March 26, 2020).