Corona pandemic, financial crisis and recession
The coronavirus pandemic is creating a financial crisis. According to trustworthy media outlets, the pandemic will cause a global recession in 2020 that could be worse than the one triggered by the global financial crisis of 2008-2009, albeit that we should have recovered by 2021 according to the IMF (International Monetary Fund).
Recently, a curfew was implemented during the evening and night hours in Aruba and, as of March 29th, 2020, a so-called ‘Shelter in Place’ will go into effect that ceases all non-essential (business) activities for at least two weeks. The Aruba government estimates that Aruba will lose 80% of its tourism income and that the GDP will drop by 44%. The adverse effects of the pandemic on the daily business activities are already visibly evident.
Businesses in Aruba may experience a drastic reduction in income. Payment of salaries would be granted the highest priority to the detriment of other operational expenses, among others payment of rent.
Dissolution (ontbinding) of the lease agreement by lessor
A financial crisis and recession due to a pandemic constitutes an force majeure / Act of God (‘overmacht’). Falling behind on lease payments due to force majeure would in principle not prevent lessor from dissolving the lease agreement, however.
A dissolution of the lease agreement is based on article 6:265 Aruba Civil Code (ACC), which stipulates that any shortcoming by a party in the fulfillment of one of its contractual obligations would give the other party the power to dissolve the agreement in whole or in part, unless the shortcoming, due to its special nature or minor significance, would not justify termination with its consequences.
However, attribution (‘toerekenbaarheid’) of the shortcoming to a party is not a requirement. Therefore, a shortcoming (non payment of rent by lessee) due to an external uncontrollable event would in principle not stand in the way of a dissolution.
If so, lessor may request the Court in First Instance to dissolve the lease agreement and vacate lessee in case of unpaid rent over a period of at least three months, which would be in accordance with the guidelines of the Court. Lessor may also dissolve the lease agreement out-of-court by means of a written notice to lessee. It is noted that said letter should be preceded by a notice of default in which lessee is granted a final chance to remit payment of the outstanding rent within a reasonable period of time (unless lessee has already indicated not to pay).
Reduction of rent on the basis of force majeure
Agreements, including lease agreements usually include a force majeure clause which excuses the performance of contractual obligations in an agreement due to an event beyond the control of the parties when this causes a party to be unable to meet its contractual obligations (e.g. government action, actions arising out of acts of god, fire, flood, storm, hurricane, war, riots, strikes, explosions, shortages or failure to supply materials or equipment, interruption or delay in transportation or any other similar event beyond the control of the parties). Force majeure is embedded in article 6:75 ACC.
The exceedingly extraordinary nature of the pandemic could -albeit with restraint- justify a temporary reduction of rent (to nil) on the basis of force majeure, even more so if Aruba would go into a lock down.
Unforeseen circumstances, article 6:258 ACC
A reduction of rent or a dissolution of the lease agreement by lessee to avoid paying rent could also be based on article 6:258 ACC which stipulates that the court may, at the request of a party, amend the consequences of an agreement or dissolve the agreement in whole or in part on the basis of unforeseen circumstances which are of such a nature that the other party cannot reasonably expect the agreement to remain the same.
An appeal on an unforeseen event is not readily accepted by the court. The court may decide that the decline in customers as a consequence of the pandemic could be regarded as a circumstance that is for the risk of lessee. However, the extraordinary nature of the pandemic event and its consequences may prompt the court to decide otherwise. Major retail stores in the Netherlands have already started demanding rent reduction due to the corona crisis (article).
Reasonability and fairness
Notwithstanding the above, contractual parties are always expected to act in a reasonable fashion toward each other (Article 6:2 ACC). Lessor may understand the extraordinary nature of the issue at hand and temporarily grant a rent reduction to lessee, voluntarily or if so requested.
The Rent Assessment Committee Ordinance is not applicable
On a final note, the Rent Assessment Committee Ordinance (Huurcommissieverordening) is not applicable when it comes to the dissolution of lease agreements nor for temporary reduction of rent due to force majeure / unforeseen circumstances.