Jane Tsai and Julian Lai
The global economy has entered a significant trough since the start of the 2020 COVID-19 pandemic. As a result, many domestic businesses have suffered a sharp decline in income, but they are still obliged to pay a high fixed rental expense, which has led to the question: Whether businesses could make rent adjustments claims using the Principle of Change in Circumstances under Article 227-2 of the Civil Code? The Taipei District Court has at least four judgments regarding this issue, which should be of considerable referencing value on the applicability of the Principle of Change in Circumstances and the appropriate distribution of risks and benefits in a lease. Their contents are as follow:
1. The lessee of a fixed term lease is not under the restraints the proviso of Article 442 of the Civil Code and may claim for rent adjustments using the pandemic’s effect as a Principle of Change in Circumstances under Article 227-2- of the Civil Code
There have been judgments pointing out that Article 442 of the Civil Code expressly stipulate that “if the thing leased a real estate, a lessee may apply to the Court for an increase or reduction of its rental in proportion to the change of its value. However, it does not apply to a fixed term lease.” Since Article 442 of the Civil Code is a special rule of Article 227-2 of the Civil Code, it has superior applicability, regardless of the changes in the leased property’s value, the lessee of a fixed term lease shall not claim rent adjustments using Article 227-2 of the Civil Code (Tainan High Court’s 96 Chong-Shang-Zi No.49 Judicial Opinion). Accordingly, when a lessee claims for rent adjustments on the grounds of the COVID-19 pandemic, the primary legal issue to deal with is whether Article 442 of the Civil Code can be interpreted as prohibiting all lessees of a fixed term lease from rent adjustment claims that appeals to the Principle of Change in Circumstances.
On this question, instead of using Article 442 of the Civil Code as the basis for rejecting rent adjustment claims, the four recent judgments from Taipei District Court consider whether these claims satisfy the conditions set forth in Article 227-2 of the Civil Code. This implies that the Court interprets Article 442 of the Civil Code as not prohibiting a lessee of a fixed term lease from claiming rent adjustments using the Principle of Change in Circumstances.
In its 109 Chong-Su-Zi No.603 judicial decision, Taipei District Court has expressly stated that a shift in leased property’s value stipulated under Article 442 of the Civil Code is just a form of Change in Circumstances; it does not prohibit the lessee from making claims when another type of Change in Circumstances occurs. Namely, the lessee of a fixed term lease claiming for rent adjustments on the grounds of COVID-19’s effect constitutes a Change in Circumstances. Therefore, restrictions under Article 442 of the Civil Code do not apply.
2. There has been no example of a lessee winning rent adjustment claim on the grounds of the pandemic’s effect:
However, none of the four judgments mentioned above has resulted in a lessee winning its claim on the grounds of the pandemic’s effect. The Courts reasoned that although the COVID-19 pandemic was unpredictable when the Parties entered into the contract, the lessee should not make rent adjustment claims solely on the basis of a decreased revenue; rather, factors such as whether the lessor benefits from the event and whether its risks exceeded the reasonable range that assumed by a lessee of a long-term lease should also be taken into consideration.
(1) A party suffers damages while the other benefits
In our judicial practice, Courts shall fairly balance the relationship between the damage suffered from a party due to the change and the unexpected benefit gained by the other party when applying to the Principle of Change in Circumstances.
The Taipei District Court’s 109 Bei-Jian-Zi No.16450 decision hereby held that the Court shall not merely focus on whether the lessee’s revenue has decreased due to the change; it should also consider whether there is a shift in the reasonable market price of the leased property. The contractual obligation of the lessor is to provide the leased property for the lessee to use; whether or not the lessee makes a profit is out of the scope of the lessor’s obligations. Therefore, provided that the lessee cannot prove that, due to a sharp fall in the related market, the rent is unreasonably higher than other rent prices of the same market, it is difficult to find that the lessor has benefited unreasonably, which shall not entitle the lessee to claim for rent adjustment in accordance with the Principle of Change in Circumstances stipulated in Article 227-2 of the Civil Code
(2) Long-term lease assumes short-term risks
The Taipei District Court held in its 109 Bei-Jian-Zi No.12561 that the lessee of a property uses for its hotel business has agreed on a lease period of up to 12 years, and thus, the lessee should presumably have calculated the appropriateness of the rent with regards to the economic effect of a 12 year period; made predictions on the long-term development in the domestic consumer markets; and take into consideration factors like risks, profit, and costs. Moreover, although the COVID-19 pandemic was a drastic change, its effect lasted less than 6 months, which is quite short. Therefore, the change shall be considered within the range of risks assumed by the lessee.
The Taipei District Court’s 109 Chong-Su-Zi No.603 held that the effects of the COVID-19 pandemic on a hotel business’ long-term income are complex and unclear. Although parts of their income surely decreased due to the restricted entry of foreign tourists, since there is also an increase in other parts of their income due to a rise in domestic tourism and the demand for quarantine hotels, the Court finds it difficult to infer, solely from the lessee’s short-term income drop, an effect on its long-term revenue.
The Taipei District Court’s 109 Bei-Jian-Zi No.10275 held that since many factors could result in a short-term drop in revenue, which nonetheless shifts according to consumer behaviors and market conditions, a short-term revenue drop, by itself, does not exceed the range of risks assumed by the lessee in signing a long-term lease.
3. Conclusion
The main reason there were not any Court in favor of the lessees in the four Taipei District Court’s judgments is the Court’s opinion that claims for rent adjustments shall not be made solely based on decreased revenue; rather, it should also take into account the reasonableness of the distribution of risks and benefits to both parties. Notably, however, the lessees of all 4 cases are in the hotel and KTV industry, and 3 of the 4 cases are claims for rent adjustment regarding the 2020 period, while the claim in the other case stems beyond May 19, 2021, when the level-three alert was enacted. Thus, it is worthy of attention whether Courts will change their attitude toward rent adjustment claims in other industries or after a more severe development of the pandemic.