TAKE II - Deferral of the Duty to Pay Rent

SERIES “LEASE AGREEMENTS IN THE CONTEXT OF COVID-19”

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

Criteria:

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 27^th 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.

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(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