SERIES “Lease Agreements in the Context of Covid-19″
Considering the measures approved by the Portuguese Government to control the economic pandemic caused by COVID-19, the sector of urban lease (residential and non-residential leases) was no exception. Bearing in mind the drop in companies and families’ income, the legislator was forced to adopt exceptional and temporary solutions in order to adjust the current contractual relations.
Heretofore the adopted measures (with specific requirements and scope of application) are the following:
1) Suspension of lease agreements termination’s effects
2) Deferral of the duty to pay rent
3) Financing at no cost to assist the payment of rents (by tenants) or to cover the decrease of the rental income (of landlords).
We will analyse (in three brief articles – Takes I, II e III) the above mentioned measures and the problems they will arise, for which we will search as much as possible for practical approaches.
TAKE I – Suspension of Lease Agreements' Termination Effects
The first measure adopted to aid tenants dealing with the economic and social consequences caused by the pandemic was the suspension of the effects arising from the termination of lease agreements, either with residential or non-residential purposes, when promoted by the landlord or as a result of the contract. This suspension shall take place until the end of the exception scenario of prevention, containment, mitigation and treatment of COVID-19 and during 60 days after the termination of such measures.
Thus, the effects resulting from a contract termination are suspended during this period, namely in case of ordinary termination, expiry or opposition to the automatic renewal of a lease agreement, as well as the deadline for tenants to return the property to landlords(1).
It should be noted that the suspension of such effects only applies to contractual terminations promoted by landlords or derive from a contractual clause term. In other words, one can say that nothing changes for the tenants, as they may terminate a lease agreement during the State of Emergency as before, in accordance with the mechanisms foreseen in the Civil Code and prior notice is given.
This situation may cause some uncertainty as to whether landlords and tenants can sign new lease agreements. Bearing this in mind, for example, what happens if a tenant who is a party to a residential lease agreement has planned to move out and has therefore rented another property? Or the landlord of a commercial establishment who expected to have the property leased until the 31st April 2020 only and thus entered into another lease agreement with a third party for that same property which should take effect on the 1st May?
The law only clarifies that the suspension of effects may not be applicable to fixed-term lease agreements if the tenant agrees with its termination. And what about the other scenarios? Although the law is silent, we believe that it aims to protect the tenants. As such, even in case of ordinary termination and opposition to the automatic renewal of lease agreements promoted by landlords, it seems that if a tenant does not want to benefit from the suspension of effects legally foreseen (for example, because the tenant has already signed another lease agreement), the parties are free to agree on the termination of the current lease contract with all its legal effects.
As regards to landlords that are unable to honour their commitments, such as the handover of a property on time under a new lease agreement (because the current tenant wants to benefit from the suspension of effects) – that is the second example above mentioned – considering that such inability stems from a statutory provision, it is important to find out whether or not the third party with whom the landlord entered into a new lease agreement is still interested in maintaining such an agreement perhaps postponing its starting date until the legal suspension ceases. If not, in principle the lease agreement will terminate and the landlord must return any funds received in advance, such as rents and deposit.
These are some of the issues that suspension of lease agreements termination’s effects may raise. However, these are general considerations and do not remove the need for a case-by-case analysis.
(1) In case of lease agreement’s termination, in accordance with article 1053.º of the Civil Code.
Joana Neto Mestre | Jéssica Ramos
TAKE II – Deferral of the Duty to Pay Rent
The second measure approved by the Portuguese Government to assist families and companies during the Covid-19 is the flexibilization of the deadlines to pay rents during the state of emergency (starting from the current month of April 2020) and in the month following its termination, that are due either under housing leases (for tenants’ permanent residence(1)) and non-housing leases (eg. leases for commerce or industry).
This right to defer or delay the payment of rents due during that period is not granted to all the tenants. Within the housing lease it will depend on the drop of tenant’s household income due to the economic contraction caused by Covid-19, and in the non-housing lease on the closure of the establishment or on the suspension of activities. In addition, a notification to the landlord is required.
A) Housing Lease
With regards to housing leases, tenants shall demonstrate (i) that their household’s income(2) has fallen by more than 20% in comparison to the previous month or to the same period in the previous year, and (ii) that household’s effort rate – calculated as the percentage of the overall household’s income allocated to the payment of the rent – is higher than 35%.
Thinking of a household composed by two adults and one child, in which both adults are dependent workers and due to the pandemic both adults are in layoff and therefore suffering salary reductions of nearly 33% each:
- Normal gross monthly income (in March 2020): 3.000,00 Euros
- Current monthly income (April 2020): 2.000,00 Euros
- Monthly rent (of family’s permanent home): 900,00 Euros
- Drop in household’s income higher than 20%:
(3.000,00€ x 20% = 600,00€)
In this case household’s income has fallen by approximately 34%, as they are receiving less 1.000,00 Euros compared to the income of the previous month (March). Since both adults are dependent workers, their pay slips will be enough to prove the drop of income.
- Household’s effort rate to pay the rent is higher than 35%:
(2.000,00€ x 35% = 700€)
Bearing in mind the current household’s income (2.000,00 Euros), the amount allocated to the rent payment should not exceed 700,00 Euros. As the monthly rent is 900,00 Euros, the effort rate will be around 45% and thus the second criteria will be met.
The second requirement to enable a tenant of housing lease to apply for the deferral of the duty to pay the rents is to notify the landlord in due time and with complete information: in writing (preferably by e-mail) along with the necessary documentation to prove the drop of income(3).
The tenant must notify the landlord within five days prior to the deadline for the payment of the first rent which tenant intends to defer. However, if the tenant wishes to defer the payment of the rent due in April, he may notify the landlord until 27th of the current month without penalty.
B) Non-Housing Lease
In what concerns non-housing lease agreements, tenants may benefit of the deferral of the duty to pay rents provided that they have (i) establishments opened to the public and dedicated to retail sales or provision of services, (ii) which have been closed or have the activities suspended during the state of emergency, even if they still operating by means of e-commerce, remote provision of services or electronic platforms, and in the case of restaurants or similar establishments even if they still working for take-away or home deliveries.
Therefore, it is not required the proof of tenants’ drop of income in order to benefit from the deferral of the rents, as in these cases the drop is implicit to the closure of commercial establishments.
Regarding tenants’ obligation of notifying the landlords to inform their intention of benefiting from the right of deferral, although the law is silent and the closure of establishments is imposed by law it seems that such notification shall take place either in light of the duty to act in good faith within the execution of contracts or simply because parties may wish to negotiate the terms of the deferral beyond what is set forth in the law.
C) Impact of the deferral for the contractual relation
When the deferral of the duty to pay rents during the state of emergency and in the following month is applicable, the overall amount of the deferred rents is due by the tenant – if parties haven’t agreed to the contrary – in the twelve months following the termination of the period of deferral. Therefore, should the state of emergency last until May 2020, the deferral can take place until June 2020 and the rents which have not been paid during the months of April, May and June 2020 shall be regularized between July 2020 and June 2021 in twelve monthly instalments each of no less than 1/12 (one-twelfth) of the overall amount due, and they are payable along with the rent due in the respective month.
Taking back the example above, a family who deferred the rents of April, May and June 2020 in the amount of 900 Eur each shall pay the 2,700 Euros of deferred rents in twelve instalments of 225 Euros each between July 2020 and June 2021, thus the monthly amount due to the landlord during that period is 1,125 Euros should the rent remain unchanged.
Our understanding is that the duration of the deferral period, as well as the deadline, number and amount of the monthly instalments due to settle the deferred rents can be altered by parties’ agreement, as parties are free to increase or reduce those deadlines and to set forth different consequences for the deferral. If nothing is agreed differently, the standards above explained will apply.
In case of non-compliance of the duty to pay the deferred rents, for the housing lease the general provisions set forth on the Portuguese Civil Code for tenant’s default and termination of the lease agreement by the landlord with grounds on default or delayed rent payment shall apply. For the non-housing lease, the framework is the one set forth on the lease agreement by the parties and additionally the legal provisions of the non-housing and housing leases
This means that should one who has benefited from the right of deferral and once that right is no longer applicable only pays the rent due for the month at stake and not the accrual due to settle the deferred rental amount, faces the risk of termination of the lease agreement by the landlord if the payment of any of such accruals is delayed for three or more months.
The non-payment of rents during the deferral period within the housing lease agreement, and also the closure of establishments and premises within the non-housing lease agreement, cannot be used by landlords to cancel or in any way terminate lease agreements, neither to oblige tenants to vacate properties in which their establishments are located.
In addition, the compensation due by the tenant in case of delayed rent payment it is not deemed required while the deferral period is in place according to the law, just like any other contractual penalties that may be applicable under non-housing lease agreements.
A fortiori, while the right of deferral is in place the landlord cannot require guarantors to pay the rents due during that period as there is no delayed payment from the tenant yet.
It is known that in the month following the end of the state of emergency in Portugal the economy will not be functional as before and many economic difficulties will remain. In order to avoid conflicts between tenants and landlords it is advisable for parties to agree by mean of an amendment to the lease agreement the exact terms for the payment of the outstanding rents once the deferral period ends.
Furthermore, it is important to ponder those cases where the deferred rents have not been fully paid but the lease contracts will expire or terminate by mean of opposition to its renewal promoted by the landlord. The law states that in case of termination of the lease agreement by the tenant, the overall outstanding rental amount is due when termination takes effect. However, it seems that the expiry or termination of a contract by the landlord cannot determine a debt forgiveness for a tenant who has benefited from the right of deferral.
In summary, it is very subtle the combination of tenants and landlords’ interests set forth by the exceptional regime approved for the urban lease sector to fight the economic difficulties that Covid-19 is generating. As much as possible, today the parties shall prevent the conflicts that will certainly arise tomorrow.
These are a few general considerations that seem relevant to us concerning the right of deferral of rent payments, and do not prevent the need for a case-by-case analysis.
(1) The law assumes that tenant’s permanent residence corresponds to the fiscal residence address.
(2) To demonstrate the drop of income it is required: a) for income from dependent work, the respective gross value; b) for income from independent work (category B of the Portuguese IRS), the amounts excluded of VAT; c) for pension income, the respective monthly gross value; d) for rental income, the amount of the rents received; e) for social benefits and habitation supports, the respective monthly amount received; f) for other regularly or periodically types of income, the respective amount.
The income shall be proved by pay slips (dependent work), invoices or receipts (independent work), and documents issued by the paying entities or others that demonstrate the current income. In this last case only and considering the types of the income (pensions, rents, habitation supports or other regular or periodic income), should not be possible to present any documents the tenant must present an honour statement
(3) Only the honour statement whenever accepted may be delivery to the landlord up to 30 days after the communication. If by the time the tenant is notifying the landlord the proof of the incomes’ drop (ex. Pay slip) is not yet available and tenant awaits its issuance by the competent authority, the tenant must inform the landlord and indicate an expected date to receive such documentation.
Joana Neto Mestre | Jéssica Ramos
TAKE III – Financial Support from IHRU
The third measure approved by the Portuguese Government to support tenants and landlords in the context of Covid-19 consists of the possibility of obtaining an interest-free financing granted by the Institute for Housing and Urban Rehabilitation, I.P. (hereinafter, IHRU, I.P.), which aims to ensure the payment of rents by tenants or to compensate landlords for the loss of income during the of the state of emergency and until the month following its lifting.
Like the right to defer the payment of rents (see Take II of this series of articles), the granting of financial support by the IHRU is not within the reach of all tenants and landlords. As this measure aims order to protect the fundamental right to housing, access is limited to tenants and landlords on lease agreements for housing purposes.
Therefore, to lease agreements for non-housing purposes it is only applicable the suspension of termination effects (see Take I) and the deferral of the duty to pay rent (see Take II).
A) Tenants in lease agreements for housing purposes
The IHRU financing is as an alternative measure to the right of deferral of the rent payment. Therefore, a tenant may choose between deferring the payment of the rents that are due to the landlord until the month following the lifting of the state of emergency, or to maintain the regular payment of those rents and obtain a loan from the IHRU to cover part of the rent. In principle, this is a decision of the tenant.
In order to access the IHRU loan, tenant must demonstrate that the following criteria are met:
- A drop of more than 20% in the overall tenant household’s income in comparison with the previous month or the same period of the previous year(1),
- That tenant household’s effort rate(2) is higher than 35%, and
- Tenant does not benefit from any reduced rental scheme, namely social rents.
In addition to tenants of lease agreements for housing purposes whose permanent residence is at the leased property, financial support from IHRU is also available to those who are guarantors to lease agreements for housing purposes entered into by students with no labour income, and to students that are tenants to lease agreements for housing purposes to attend a college or school located over 50 km away from their households’ permanent residencies.
The financing from IHRU is interest-free (i.e. no compensatory interest is due), and the application is made by the tenant at Portal da Habitação website, by filling in an electronic form along with documentation evidencing the above-mentioned criteria.
IHRU has 8 days to approve or refuse the financing request.
When approved, the financing will be made available on a monthly basis (during the state of emergency and until the month following its lifting), but shall cover only the difference between the monthly rent due by the tenant and the amount resulting from the application of the maximum effort rate of 35% to the tenant’s household income. However, the remainder household’s income can not be less than EUR 438,81 (amount of the IAS)(3) after the rent has been paid.
Taking back the example presented in Take II, by which we’ve rehearsed the reality of a family with a regular monthly income of 3,000.00 Euros reduced to 2,000.00 Euros due to the crisis, and whose monthly rent is of 900.00 Euros:
(Monthly rent of 900 Euros – Effort Rate of 35% of 700 Euros = 200 Euros)
Considering that the maximum effort rate of 35% applicable to the monthly income of this household is 700 Euros, this family will pay 700 Euros. The difference of 200 Euros to make up the total rent amount of 900 Euros will be covered by by IHRU’s loan. Therefore, the loaned amount will be of 200 Euros.
Under the loan agreement with the IHRU borrowers (tenants) are not allowed to use the funds for any purposes other than paying the rents, and they shall send to IHRU the rental receipts within 10 consecutive days after the funds are made available. They must also inform the IHRU if meanwhile they managed to obtain alternative state support for the same purpose (payment of rent), as well as the occurrence of any event that may jeopardize or prevent compliance with their obligations set forth in the loan agreements.
As for the loan repayment conditions, under the Regulation approved by the IHRU(4) a grace period until 31 December 2020(5) is granted. Therefore:
- reimbursement will be due from January 2021 as a rule;
- it shall be paid in monthly, equal and successive capital instalments of 1/12 (one-twelfth) of the monthly rent, except for the last instalment which shall be in the total remainder amount due;
- the first instalment is due on the first working day of the month following the termination of the grace period, and the following instalments on the first working day of each subsequent month;
- early repayments (total or partial) are allowed, without penalties;
B) Landlords in lease agreements for housing purposes
Although in very limited terms landlords of housing leases may also request financing to IHRU to cover the decrease of rental income due to deferral of the duty to pay rent requested by tenants.
In order to benefit from IHRU’s financial support, the landlord shall demonstrate that:
- landlord household’s income has fallen by more than 20% in comparison to the previous month or to the same period in the previous year, resulting on a household’s disposable income lower than 438,81 Euros (IAS);
- the abrupt drop in income results from non-payment of rents due and unpaid by tenants,
- tenants have requested the deferral of their duty to pay rents and communicated their intention to the landlord.
The landlords of housing leases who intend to obtain this financing shall submit their application through Portal da Habitação website. The maximum amount loaned by IHRU corresponds to the monthly amount of rents due and unpaid by the tenants.
Concerning the repayment, it is due in equal and successive instalments, of one-twelfth (1/12) of the overall loaned amount, being the first instalment due on the first day of the month following the last payment by IHRU and the following instalments on the first day of each subsequent month, although each instalment may be repaid without penalty until the eighth day of the same month.
It shall be noted that no grace period has been granted for landlords and therefore the repayment of the borrowed amount is due from the month subsequent to the last payment from IHRY (i.e. from the month following the termination of the tenants’ right to defer the duty to pay rents).
C) Restrained application of the measure: Deferral vs. Financing?
In general, the tenant has two alternative solutions that are quite distinct in what concerns bureaucracy, liquidity and risk distribution.
Regarding the bureaucracy, while the approval of financial support requires the submission of an application, acceptance by IHRU and the signing of a loan agreement, the deferral of the duty to pay rent requires only a communication addressed to the landlord, who can neither oppose nor require the tenant to ask for the financing if the legal requirements of tenant’s right to defer are met.
As for the liquidity, the right of deferral allows the tenant to delay the full payment of rents but there is no grace period – repayment will start shortly after the termination of the state of emergency. Under the loan granted by IHRU the tenant must pay part of the rent up to the limit of the effort rate of 35% during the state of emergency and until the month following its termination – IHRU’s support covers the remaining value of the rent but its repayment is only due, as a rule, from January 2021.
Therefore, on the deferral of the duty to pay the rent, the risks of non-compliance and lack of liquidity fall entirely on the landlord who, unlike the tenants, will only be able to request financing support to IHRU if his household’s income drop to extremely low levels (438,81 Euros). If the tenant asks for the IHRU’s financial support, the rents will continue to be paid in full and the risk of default of repayment of the borrowed amounts falls on the Institute – and ultimately on the State.
In summary, the disparity between the solutions available for tenants and landlords is evident and therefore it seems that many tenants will choose to defer the rents’ payment instead of asking for IHRU’s financial support. With this in view, we believe that this support will surely have a limited or restrained application.
This is not an exhaustive analysis and the advantages of one or another measure are necessarily connected to the reality of each household, thus a case-by-case review is indispensable.
(1) To demonstrate the drop of income it is required: a) for income from dependent work, the respective gross value; b) for income from independent work (category B of the Portuguese IRS), the amounts excluded of VAT; c) for pension income, the respective monthly gross value; d) for rental income, the amount of the rents received; e) for social benefits and habitation supports, the respective monthly amount received; f) for other regularly or periodically types of income, the respective amount.
The income shall be proved by pay slips (dependent work), invoices or receipts (independent work), and documents issued by the paying entities or others that demonstrate the current income.
When it is not possible to present any documents, considering the types of the income (pensions, rents, habitation supports or other regular or periodic income), the tenant must present an honour statement.
(2) Calculated as the percentage of the overall household’s income allocated to the payment of the rent.
(3) For each tranche, a stamp duty of 0.04% on the loaned amount is due. This amount is withhold by IHRU and deducted from the funds made available to the borrower.
(4) Available for consultation here.
(5) Which, in any case, cannot be of less than 6 months.
Joana Neto Mestre | Jéssica Ramos