Ordinance 2020-427 specifies when default clauses will resume, depending on whether the contractual obligation to be performed during the protected period was due prior to or after 12 March, as follows:
- for contractual obligations due prior to 12 March: default clauses will resume after the expiry of the protected period plus the notice period set out in the agreement, as reduced by the time between the day when the obligation became due and 12 March;
- for contractual obligations due after 12 March: default clauses will resume after the expiry of the protected period plus the notice period set out in the agreement.
Some practical examples of how these could apply to real estate businesses are:
- for a development agreement entered into before 12 March with an obligation for the developer to complete the works by 20 March, no late delivery penalty will be due if the works are completed by 1 July 2020 (i.e. expiry of the protected period plus eight days);
- for a commercial lease under which a tenant, unable to benefit from the neutralisation of certain sanctions for non-payment of rent further explained below, must pay quarterly rent by 15 April and 15 July, no late penalty will be due if the tenant pays its rent by 8 July (i.e. expiry of the protected period plus 15 days).
Postponement of sanctions for contractual non-performance of obligations due after protected period
Ordinance no. 2020-427 also covers obligations other than payment obligations that are to be performed after the expiry of the protected period.
Default clauses triggered by the non-performance of a contractual obligation due to be performed after the protected period will be postponed:
- for obligations entered into prior to the protected period - by the duration of the protected period, i.e. three months and 13 days;
- for obligations entered into during the protected period – by the length of time between the date on which the obligation is entered into and the expiry of the protected period.
As a practical example, for a development contract providing for practical completion to occur on 25 August 2020:
- if the development contract was entered into before 12 March, no late delivery penalty will be due if the works are completed by 7 December 2020 (i.e. 25 August plus three months and 13 days);
- if the development contract was entered into on 24 April, two months before expiry of the protected period - no late delivery penalty will be due if the works are completed by 24 October 2020 (i.e. 25 August plus two months).
Extension of time periods for terminating or not renewing contracts
Longstop dates or time windows within which contracts must be terminated, or automatic renewal opposed, which fall between 12 March and 23 June 2020 are extended until two months after the end of this period, 23 August 2020.
As a practical example, in a commercial lease which started on 21 October 2017 which provides the tenant with a termination right for 20 October 2020 subject to six months' notice – that is, by 20 April – the termination right is extended until 23 August.
Given that this extension may result in reducing the duration of the notice period from six months up to 20 days for leases providing break options between 13 September 2020 and 24 December 2020, there is some uncertainty as to whether the termination notice will remain effective only four months after its service. For now, this issue has not been addressed by the relevant laws and ordinances.
Suspension of statutory time limits
All statutory time limits for carrying out formalities, declarations, notifications or publications under penalty of being declared null and void which are due to expire during the protected period will start running from the end of the protected period, subject to a two-month 'long stop' date after the expiry of the protected period.
As a practical example, where a landlord contemplates the sale of a single tenant building subject to a commercial lease, and notifies the tenant of its statutory pre-emption right on 20 March, the time period of one month during which the tenant must provide an answer is suspended. This one-month period will now start after the expiry of the protected period (24 June), and will therefore expire on 23 July 2020.
Suspension of time periods during which an administration must issue a decision on pre-emption rights
Time periods during which an administration must issue a decision regarding the exercise of its pre-emption rights were initially suspended during the state of emergency, under ordinance no. 2020-306. This applied to municipality pre-emption rights and pre-emption rights held by SAFER, the French agricultural commission.
On 7 May, the French government published a specific decree maintaining the suspension until 23 May, the end of the initial state of emergency period, irrespective of future extension. This was designed to allow for a rebound of activity.
Therefore, the time periods left within which an administration must take a decision whether to exercise pre-emption rights that have not expired before 12 March are suspended until 23 May, and will resume on 24 May. If these time periods should have started after 12 March, their starting point has been postponed to 24 May.
In practical terms:
- the two-month time period during which a municipality must issue its decision of pre-emption which started on 3 March 2020 is suspended until 23 May, and will expire on 15 July (i.e. one month and 22 days);
- the two-month time period during which a municipality must issue its decision of pre-emption which should have started between 12 March and 23 May will start on 24 May and expire on 23 July.
Neutralisation of certain sanctions for non-payment of rent
This concession applies to small business tenants who are subject to bankruptcy proceedings or which are eligible for the solidarity fund (fonds de solidarité), and which meet certain criteria. These are tenants with fewer than 10 employees and a turnover excluding taxes lower than €1 million during the last financial year, which suffered a loss of turnover of at least 50% between 1 and 31 March 2020.
These small business tenants may not incur financial penalties or interest for late payment, damages, periodic penalty payments (astreinte), performance of a termination clause (clause résolutoire), penalty clause or any clause providing for forfeiture or activation of guarantees as a result of the non-payment of rent or rental charges relating to their business or commercial premises due between 12 March 2020 until two months after the end of the state of emergency.
Following the enactment of the law extending the state of emergency, this period will now expire on 10 September 2020 (i.e. 10 July plus two months).
In this case, rent and charges are still due but landlords will not be able to rely on the default to exercise the abovementioned clauses. They will be able to request the payment due in line with general law in front of a judge.
In practical terms, these measures are more likely to impact on landlords of ground floor retail premises than landlords of office premises, which are generally rented by stronger tenants that do not meet the criteria.
The extension of the state of emergency has a direct impact on this measure, which now covers rent and charges for the third quarter of 2020, in addition to the amounts due for the second quarter of 2020. Landlords will have to reinvoice the amounts unpaid during the neutralisation period so as to reactivate their rights, as they will not be able to rely on a payment default which occurred between 12 March and 10 September.
Covid-19 and force majeure
Article 1218 of the French civil code provides for a lawful excuse to non-performance of a contract in case of force majeure without the need for a specific clause to be provided in the agreement, provided certain conditions are met.
The French courts have been reluctant to recognise epidemics such as Chikungunya and Ebola as cases of force majeure, adopting a subjective test by which if the debtor himself did not contract the disease then the force majeure test was not satisfied. It remains to be seen whether the courts will retain this test in cases connected to the Covid-19 pandemic.
However, the measures taken by the French government to limit the spread of the virus may be considered a force majeure situation depending on the circumstances – for example, forced closure of premises open to the public, employees being required to work remotely unless their work cannot be performed in these conditions. The French government confirmed several weeks ago that works on construction sites had to continue during the lockdown.
In practical terms:
- tenants will not be able to rely on force majeure to justify payment defaults unless they operate a commercial activity opened to the public and affected by the lockdown to the extent that this measure prevents them from carrying out their activities;
- contractors and developers may not be able to rely on force majeure before the French courts in order to justify late contractual performance of a construction contract, unless a significant proportion of the workforce is unable to work because they have contracted Covid-19;
- parties to a contract due to be signed in the coming weeks should bear in mind that Covid-19 and some of its consequences are now foreseeable, and therefore may not be considered as a force majeure scenario in the future. Consider instead specific Covid-19 provisions to address issues related to contractual performance impacted by Covid-19.
The existence of a force majeure situation in the context of a private law contract will remain subject to the discretion of the French courts on a case by case basis.
Covid-19 and hardship (imprévision)
Article 1195 of the French civil code, which applies to contracts entered into from 1 October 2016, provides for a right of renegotiation of the contractual terms in case of an unforeseen hardship rendering the execution of the contractual obligations excessively onerous to a party which did not choose to bear the risk.
By triggering this provision, a party activates the renegotiation mechanism. If the parties reach an agreement, the contract is deemed renegotiated and its contractual performance will continue under the new negotiated terms. Should the parties fail to reach agreement, a second phase opens during which they may agree to terminate the contract on a date and conditions they agree on, or ask the courts together to adapt the contractual terms. If parties still fail to reach agreement within a reasonable time period, a third phase opens allowing any party to request the courts to either adapt the contractual terms or terminate the contract altogether.
Note that application of article 1195 of the French civil code is not mandatory, and is often waived by the parties in their contracts.
In practical terms:
- tenants which can no longer pay their rent due to a loss of business caused by the lockdown may seek the application of article 1195 of the French civil code;
- institutional landlords should review any leases entered into as of 1 October 2016 to check whether they contain an express waiver of article 1195 of the French civil code.