FIRST COURT DECISION IN SPAIN TO APPLY THE REBUS SIC STANTIBUS CLAUSE WITH REGARD TO THE COVID-19 PANDEMIC

On 25 September 2020 the First Instance Court No. 81 of Madrid passed a judgment adopting precautionary measures in application of the rebus sic stantibus clause.

The doctrine of the rebus sic stantibus clause is a reasonable theoretical construction from an equity point of view but devoid of regulation. It is, above all, a clause of exceptional and extraordinary application.

The fact is that rebus sic stantibus is a Latin expression that can be translated as “things being as they are” and refers to a principle of Law by virtue of which it is understood that the stipulations established in contracts take into account the concurrent circumstances at the time of their conclusion, that is to say, any substantial alteration of these circumstances could modify those stipulations.

However, this clause vigorously clashes with the principle of contractual security, better known as pacta sunt servanda or “the pacts [agreements] are made to be fulfilled”, hence the exceptionality of the clause under consideration.

Consequently, only atypical and extraordinary situations caused by “absolutely unforeseeable circumstances” and resulting in an “exorbitant disproportion between the services provided by the parties” will lead to a loss of contractual security for the purpose of applying the rebus sic stantibus clause, according to the Spanish Supreme Court.

The first judgment passed in Spain in application of this exceptional clause, motivated by the critical economic scenario (as a consequence of the current health emergency situation) settles in a precautionary basis ––before the trial takes place, and in order to preserve the effectiveness of a possible definitive estimation of the claim–– the controversy between: (i) the lessee of a night club whose opening is not permitted from the time of the declaration of the state of alert and until further notice; and (ii) the lessor owner of the night club who did not accept to the lessee’s request to suspend the payment of the rent.

The lease is for a dance club, which is not allowed to open by the Spanish health authorities as long as the pandemic caused by COVID-19 continues. It was therefore closed on 14 March ––the day on which the Spanish Government declared the state of emergency throughout the country––.

The lessor argued in his favour that “agreements are made to be fulfilled”, so that the lessee should pay the agreed rent on time in accordance with the terms of the leasing agreement regardless of the current situation.

At most, he was willing to apply a discount on rent of up to 30%.

But the lessee considered that, “as things stand”, payment of the agreed rent should be suspended.

The Judge concluded that the prohibition of the opening of establishments such as the one in question “as a result of the declaration of the state of alarm due to the situation caused by the COVID-19 cannot be considered by the lessor as a failure of the lessee”.

Thus, the Judge stated that the economic situation “following the outbreak of the coronavirus constitutes an exceptional event that can have serious economic consequences, especially taking into account the particularly rigorous treatment given to this type of business because, due to its usual dynamics, it entails a greater risk of contagion”.

For this reason, and “while things are in this way, I order the suspension of the payment of the agreed rent until the club is allowed to reopen”. Therefore, the lessee will have to pay only the common expenses of the building until he can restart the activity.

Finally, the judicial decision does not stop here, but goes further and adds that, in the opinion of the Judge, once the activity can be restarted ––once things are no longer like this–– “the rent to be paid will be half of what was agreed in the leasing agreement until the trial takes place”.

This is, so far, the first judicial decision in this regard, but we will have to be cautious because these are precautionary measures. We will therefore have to wait for the final judgment.

In any case, even the final judgment can be appealed to the Provincial Court of Madrid.

Besides, it turns out that the Spanish Government is preparing a report which should be ready before the end of this year 2020 in which it will analyse the legal implications of the rebus sic stantibus clause in order to avoid the other party being left in total defencelessness because it only protects one party.

In view of the above, this judicial decision is certainly novel; but caution should prevail as it is not firm and Spanish law does not offer, so far, an unanimous solution to the specific disruption suffered in legal transactions as a result of the COVID-19.