Categoria: Corona

Coronavirus epidemic and its impact on performance of obligations arising from construction works agreements

Posted on by Lisa Fortmüller

The SARS-CoV2 (“Coronavirus”) epidemic might lead to numerous problems in performance of construction works agreements.

Our clients point to conflicting signals coming from the market:

– in some investment projects (e.g. large construction projects), investors insist that works should be continued, while construction companies would like to modify schedules, realizing that certain limitations will arise from distorted supply chains and lower availability of subcontractors/employees, e.g. as a result of: (i) a large number of medical leaves (estimates indicate that this might concern 10-20% of employees); and (ii) closing of the Ukrainian border;

– in other projects (e.g. renovation or office fit-out projects at levels that are partially occupied by tenants), construction companies might be willing to perform works but entities occupying the areas intended for renovation ask for the suspension of works due to guidelines issued by the Chief Sanitary Inspectorate, so that they don’t need to share space with the contractors’ employees.

In view of the Regulation of the Minister of Health of March 13, 2020, announcing the state of epidemic threat in Poland (the “Regulation”), and the fact that it does not specify any restrictions related to construction works, it might be difficult or even (in some cases) impossible to invoke a force majeure event.

Under specific (individually assessed) circumstances, however, it may be justified to claim that we are experiencing: (i) a force majeure event; and (ii) extraordinary circumstances that make it possible to amend the agreements that have already been executed (rebus sic stantibus). This situation gives rise to a number of questions and doubts related to further implementation of construction projects.

It is important now to analyze construction agreements in order to examine the possibility to suspend works and change schedules, as well as to assess the impact of the adopted solutions on costs, with a strong focus on arguments related to potential emergence of force majeure.

Force majeure

Construction works agreements often include “force majeure clauses” with specific definitions. We need to keep in mind that anyone seeking to invoke force majeure will be obliged to prove: (i) that the current situation is categorized as force majeure in light of a given agreement; and (ii) that the current situation made it impossible to perform an obligation in accordance with the agreement for objective reasons. Not every single non-performance or improper performance of an obligation will be justified.
Only non-performance or improper performance resulting from factors that none of the parties could predict or influence can be excused.

It might turn out to be insufficient to evidence the above on the basis of contractual provisions and the Regulation. In order to modify the project schedule, a party to an agreement will need to provide a broader range of arguments. It will be necessary to embark on claim management processes.

Entities whose agreements do not contain force majeure clauses are in a completely different situation. They will not be able to “automatically” use contractual provisions, and their defense against the creditor’s claims related to non-performance or improper performance of an obligation (article 471 of the Civil Code) will need to be based on challenging the existence of: (i) fault on part of the debtor; or (ii) damage on part of the creditor. The agreement’s provisions will also play a vital role here. However, instead of the existence of force majeure (which will be examined by a competent court on the basis of applicable laws), the key issue will be to determine whether an entity invoking force majeure bears fault-based liability or whether its liability has been defined otherwise.

A special situation will occur in infrastructure projects and others based on FIDIC, where invoking force majeure might not lead to the fulfillment of the contractors’ goals. In case there are no binding crisis regulations that limit construction activities, contractors will be aware of additional difficulties, potential delays or increased costs, and will (in order to continue works) seek a reliable basis for submission of claims, especially ones for extension of deadlines and for Costs. It needs to be noted here that FIDIC offers a range of regulations that (when applied correctly) might produce better results than attempts at invoking force majeure.

Contractual penalties

In case the parties have included a contractual penalty for non-performance or improper performance, the creditor will be exempt (as a general rule) from the obligation to prove that it has suffered any damage.

The crucial issue is to check whether the agreement stipulates that the creditor is entitled to demand a contractual penalty irrespective of whether the debtor is at fault for untimely performance of an obligation, i.e. whether the delay is culpable or not.

If the parties link the debtor’s obligation to pay a contractual penalty with a culpable delay, courts (after determining that the current circumstances indeed affect the performance of obligations) will tend to release debtors from liability due to lack of their fault.

In case a contractual penalty applies to a non-culpable delay, it will not (as a general rule) cover a force majeure event, unless the agreement clearly specifies that the debtor’s liability has been extended to include force majeure. Needless to say, in case of any litigation, item 1 above will apply, i.e. it will be necessary to prove the emergence of force majeure and its impact on the delay.

Contractual amendments

The Coronavirus epidemic can also serve as a reason for which parties to an executed agreement will need to modify its contents. Such amendments could be introduced through negotiations of contractual provisions or litigation (in case of failure to reach an amicable solution).

If, due to an extraordinary change of circumstances, the performance of an obligation involves excessive difficulties or exposes one of the parties to a substantial loss (which was not expected by the parties when entering into the agreement), the court may – having considered the parties’ interests in accordance with the principles of social conduct – determine the manner in which the obligation will be performed, define the value of a payment due, or even terminate the agreement.

Given the current version of the Regulation, invoking a clause that permits amendments to the agreement in case of a fundamental change of circumstances (rebus sic stantibus) will pose a challenge in which an adequate technical and legal analysis will play the key role.

Since a court’s interference with the contents of the agreement might be extensive (e.g. the court will be able to modify the contractual provisions related to the fee, scope of works and project completion date), we need to keep in mind that such court-enforced amendments to the agreement can only take place when the performance/payment is not due yet (meaning that such lawsuit has to be filed before the maturity date) and specific criteria have been met, incl. a fundamental change of circumstances (which was not expected by the parties upon agreement execution) has occurred and excessive difficulties (that have a cause-and-effect relation with non-performance) in performance of an obligation have emerged, or there is a threat of a substantial loss for one of the parties to the agreement.

Judicial practice shows that in relations between business entities, it is relatively difficult to get courts to modify contractual provisions.

Given the fact that the situation might keep changing rapidly, an entity wishing to have an agreement modified by court needs to start by submitting a motion for interim relief (limited operations of courts in relation to the current state of epidemic threat do not apply to interim reliefs; motions in that respect are examined at closed-door sessions), followed by a statement of claim which needs to be filed within two weeks. The list of interim relief forms is non-exhaustive; for instance, the court might forbid the creditor to charge contractual penalties or set them off against the fee specified in the agreement.

Recommended actions:

  1. Analysis of construction works agreements in terms of: (i) force majeure; (ii) contractual penalties.
  2. Monitoring the submission of interim relief motions with competent courts.
  3. Monitoring notices/letters from business partners – potential pre-trial notices with demands related to modification of contractual obligations.

Restructuring and bankruptcy at the time of #coronavirus

Posted on by Lisa Fortmüller

On 13 March 2020, the Polish government announced the state of epidemic threat due to COVID-19, more commonly known as the coronavirus. The days that followed saw the government close the Polish borders, impose a mandatory 14-day quarantine for Polish citizens returning home from abroad and ban international air and rail travel. Malls, pubs and restaurants have been partially closed, with fairs, exhibitions, congresses, conferences and meetings cancelled. All activities related to sport, entertainment and leisure have also been suspended. Without a doubt, these and other warranted measures meant to curb the spread of the epidemic will affect the liquidity of many businesses.

Legislative solutions are being introduced gradually to help business survive the economic turmoil. Regardless of the government’s help offered in the face of the pandemic crisis, business owners would be well advised to stay on top of the situation and take appropriate steps to navigate the crisis.

Business owners should take steps towards restructuring and renegotiate cooperation terms sooner rather than later. It may also be a good idea to reach out to creditors to discuss potential repayment solutions. Worst case scenario, businesses may be forced to file for restructuring, or even bankruptcy (own or contractor’s).

When to file for judicial restructuring?

Generally speaking, restructuring proceedings are designed for debtors who are either insolvent or facing insolvency. So, filing for restructuring should be considered by any debtor who is not able to reach an out-of-court agreement with its creditors on debt restructuring terms and believes it will not be able to pay its debts as they fall due. In this type of proceedings, an arrangement is adopted when the majority of the voting creditors, representing at least two-thirds of the total claims participating in the voting, vote in favor of the arrangement (in the case of arrangement approval proceedings, the majority is counted based on the number of all creditors entitled to vote, and not only those who exercise the right to vote). This means that the decisions made during restructuring proceedings by the majority of the creditors are binding on the rest of them.

Restructuring proceedings should be also considered by a business which has not been paid by its key client and knows that as a result it is about to suffer cash flow difficulties because this may bring about its insolvency. Practice shows that restructuring proves successful if the application for restructuring is filed well in advance, which is soon after the first signs of financial trouble, when the debtor is still able to pay its debts on time, in spite of facing insolvency. Unfortunately, the majority of restructuring applications are filed much too late, when the debtor is deep in financial distress and the odds of survival are slim.

Four types of restructuring proceedings – how to choose?

In accordance with the Restructuring Law, debtors seeking to arrange with the creditors have four types of restructuring proceedings to choose from: arrangement approval proceedings, expedited arrangement proceedings, arrangement proceedings and remedial proceedings. The best proceedings to tackle cash flow difficulties caused by the pandemic depend on the situation of the individual debtor and, most notably, the severity of the debtor’s financial distress. The arrangement approval proceedings allow debtors to obtain approval of the arrangement quickly, with the court’s involvement brought to a minimum. Remedial proceedings are the most radical in nature and dedicated to entities with the most difficult economic situation, requiring profound changes in the way they operate.

Arranging with creditors in restructuring proceedings – what are the available solutions?

An arrangement proposal sets out the plan for the repayment of the insolvent company’s debt. It may include the following restructuring tools:
1) payment date rescheduling;
2) division of the payment into installments;
3) debt reduction;
4) debt-to-equity conversion;
5) modification, replacement or cancellation of the security interest created for specific debt;
6) grant of a loan to the debtor or modification of the legal relationship or rights, or creating a security interest for the debt;
7) sale of the debtor’s assets.

The debtors and the creditors have much leeway to shape the arrangement as the law does not provide a finite list of ways in which debts may be restructured. Unusual arrangement terms can be often found in arrangement proposals regarding non-monetary obligations. Arrangement proposals may also specify more than one way of restructuring a debt as well as divide creditors into interest groups.

If a business files for restructuring, does it still have to file for bankruptcy?

If a business files for restructuring or arrangement approval, it is not exempt from the obligation to file for bankruptcy. However, as soon as the restructuring proceedings are opened (or the arrangement submitted as part of arrangement approval proceedings approved), the debtor is no longer required to file for bankruptcy, meaning that the court must grant the application – and must do so within 30 days from the day when the debtor became insolvent – in order for the debtor to be exempt from the obligation. Given the workload of the courts and the pace at which they work (which is expected to slow down even more during the epidemic), applicants filing for restructuring may have to wait a while before their applications are examined. The implications may be severe for those with the obligation to instigate the proceedings (the debtor’s representatives) – they may be held liable for belated filing of the bankruptcy application under civil or criminal law.

To solve this issue the business which filed for restructuring and in the meantime became insolvent should within 30 days file for bankruptcy as well. If both applications are filed, the one seeking restructuring will generally have the priority. The rule according to which the restructuring application has priority stems from the assumption that the goal of restructuring proceedings is to avoid the debtor’s bankruptcy by enabling the debtor to restructure its debt through arrangement with creditors and, in the case of remedial proceedings, remedial measures (without prejudice to creditor’s rights).

When is a business required to file for bankruptcy? Is the obligation to file for bankruptcy affected by the pandemic?

If a business becomes insolvent due to the coronavirus pandemic, it remains obligated to file for bankruptcy and the debtor’s representatives may still be held liable for belated filing of the application. Each business which becomes insolvent is required to file for bankruptcy within 30 days from becoming insolvent, irrespective of the reason for insolvency (even if insolvency has been caused by measures aimed at curbing the spread of the epidemic or key client’s failure to pay resulting from the coronavirus outbreak).

Under the Bankruptcy Law, there are two tests that may be applied to determine if a business is insolvent: the cash flow test and the balance sheet test. The cash flow test looks at whether a business is able to pay its liabilities (a debtor is presumed not to be able to pay its debts as they fall due if the delay in payment exceeds 3 months). The balance sheet test determines if the debtor’s assets are less than is liabilities (a debtor is presumed to be insolvent if its liabilities exceed its assets for a period of no less than 24 months).

We will be happy to answer any questions you may have, also ones regarding the coronavirus crisis. Our lawyers provide comprehensive advice on bankruptcy proceedings (incl. pre-pack bankruptcy) and restructuring proceedings, and will help you through business negotiations and litigation, incl. court disputes arising from failure to perform or inadequate performance of contractual obligations. They will analyze your contracts in terms of force majeure clauses, provide adequate tools to mitigate financial risks and efficient legal solutions.

Coronavirus and public procurement procedure

Posted on by Lisa Fortmüller

What about agreements executed under public procurement law act? Potential actions for contractors and contracting authorities

Undoubtedly, we are and will continue to be affected by the COVID-19 (“coronavirus”) pandemic and the state of epidemic threat, introduced in Poland on March 13, 2020. Complications might result from distorted supply chains, employee absences and transport problems. Consequently, there is a high risk of a drop in productivity. It is almost certain that some obligations will not be performed in a timely fashion. This includes obligations arising from agreements executed on the basis of the Public Procurement Law Act (“PPLA”), which might give rise to contractors’ substantial liability and contracting authorities’ problems related to public finance discipline.

The special-purpose act of March 07, 2020, whose article 6 touches upon issues related to public tenders, is not of much help as regards the above. It only points to the possibility to preclude the application of PPLA for orders of goods or services that are necessary to combat coronavirus, under specific conditions:
i. if the disease is highly likely to spread in a fast and uncontrollable manner; or
ii. if required for the purposes of public health protection.

The special-purpose act does not cover problems related (in particular) to the performance of existing agreements, ongoing public procurement procedures and opening of bids.

Below you will find recommended actions for contractors to adequately assess the situation and mitigate/eliminate risks involving liability for (non-)performance of agreements (especially for delays in their performance), as well as recommended actions for contracting authorities, related to ongoing public tenders and existing agreements.

Contractor

[Limitation / preclusion of liability]

  1. It is highly advised to conduct a comprehensive analysis of provisions of executed agreements, especially in terms of liability for performance of obligations. We recommend focusing on contractual penalties, liability for damage (incl. its preclusion in case of force majeure), the manner of notifying the contracting authority about circumstances that prevent or hinder agreement performance, and suspension of agreement performance. There is no universal method that would make it possible to globally assess liability resulting from all agreements executed under PPLA. Each case needs to be examined on its own.
  2. If an agreement does not cover aspects related to liability, amendments or rescission (or contains insufficient provisions in that respect), applicable legal regulations will be used – mostly PPLA and the Civil Code; they offer the possibility to make relevant amendments to agreements.
  3. If an agreement includes provisions based on which the contractor’s liability is precluded as a result of force majeure, the contractor will be able to invoke such circumstances. In our opinion, the coronavirus outbreak meets the criteria necessary for it to be regarded as an unusual and extraordinary situation that is beyond any control of the contractor (force majeure). Once again, we wish to emphasize that each case will need to be assessed separately, e.g. in terms of whether other circumstances attributable to the contractor had not contributed to the contractor’s delays before the state of epidemic threat was introduced.
  4. If an agreement does not include provisions related to force majeure or does not preclude the contractor’s liability in case of force majeure events, it will be difficult for contractors to effectively invoke such circumstances to limit/preclude their liability. In such case, it might be necessary for a contractor to file a lawsuit, e.g. on the basis of article 357(1) of the Civil Code (rebus sic stantibus), or to consider rescinding the agreement in order to avoid substantial costs related to its performance.
    [Request to amend an agreement]
  5. It is required to analyze an agreement in terms of the possibility to amend it, e.g. as a result of circumstances that are beyond the parties’ control and could not be foreseen despite exercising due diligence.
  6. Irrespective of the basis for amendments, specified in the agreement itself, the contractor is entitled to seek amendments pursuant to PPLA. For example, on the basis of article 144 section 1 item 3 of PPLA, it is possible to amend an agreement if this proves necessary due to circumstances that the contracting authority could not expect. In such case, amendments can also apply to the remuneration but cannot change it by more than 50% of the original value – such amendment is independent from the provisions of the agreement itself.

Note: amendments to the agreement require both parties’ consent, meaning that nothing happens automatically here. Also, given the fact that force majeure is not the contracting authority’s fault, there is a potential risk that the contractor will be unable to seek additional remuneration from the contracting authority for periods of downtime (suspension) or for storage of the purchased devices/materials that cannot be installed or used for objective reasons.

As regards the impact of the current situation on the performance of construction works agreements, incl. ones executed on FIDIC templates, please read our legal alert covering the construction sector. Please note that FIDIC draft contracts include some provisions concerning an epidemic or force majeure. Irrespective of such provisions, the situation of each individual contractor always needs to be analyzed in detail.

Summing up, we cannot rule out the possibility that disputes with contracting authorities will arise in relation to delays resulting from the state of epidemic threat. In order to mitigate the risks, we recommend contractors to take the following actions in particular: (i) documenting all actions related to force majeure notifications sent to contracting authorities, and steps taken by contractors to properly perform agreements; (ii) ensuring due diligence in meeting the deadlines for such notices (or submitting the notices promptly).

Contracting authority

The current situation may also affect ongoing public contract award procedures handled by contracting authorities. The opening of bids usually entails direct participation of all parties involved.

Recommended actions:

  1. Extending the dates of submission and opening of bids (if possible);
  2. Online streaming of bid opening procedures – this solution allows everyone to learn basic details about the submitted bids in real time.
    At the same time, due to potential consequences related to performance of agreements in the future, contracting authorities:
  3. That are running a public procurement procedure should consider provisions permitting amendments to the agreement in case of force majeure, or suspension of its performance for the period over which a force majeure event persists;
  4. That have entered into public contracts should analyze their provisions in detail, in terms of potential amendments related to the state of epidemic threat, with a view to eliminating liability for improper performance of obligations arising from the Liability for Breach of Public Finance Discipline Act
    – as long as this is in line with their interest.

This legal alert only indicates the potential emergence of certain problems against the background of public procurement laws. We are ready to assist you in evaluating your particular situation.

Employers’ rights related to declaration of state of epidemic threat

Posted on by Lisa Fortmüller

On March 13, 2020, the Minister of Health announced the state of epidemic threat in Poland. One of the main consequences is the fact that many retail and cultural facilities are closed.

Below you find key comments on the employer’s rights related to the necessity to perform obligations arising from regulations issued by the Ministry of Health.

Leave

The employer is not allowed to impose a mandatory leave (paid annual leave or unpaid leave). Such leave can only take place upon a given employee’s consent.

Remuneration

Based on applicable laws, it is impossible to unequivocally determine whether employees are entitled to receive remuneration for the work they don’t perform as a result of the fact that workplaces are closed due to the state of epidemic threat.

As a general rule, remuneration is paid for the work performed. In can also be paid in the situations expressly defined in applicable legal regulations. Such regulations include the ones concerning remuneration for the time of inactivity and interruption. In order to receive such remuneration, specific criteria need to be fulfilled. One of them is that the employee needs to be available on standby (ready to perform work).

There are numerous arguments in favor of the view that the employer is not obliged to pay salaries/wages for the period over which work is not performed as a result of closing of workplaces due to the state of epidemic threat. However, when examining this issue, other aspects (which are important from the perspective of labor law) also need to be taken into consideration, especially the social dimension, the division of liability between the employer and the employee, and the employee’s privileged position in such relation.

Consequently, employers should realize that it might be necessary to pay remuneration upon the same conditions which apply to idle time pay.

Remote work

During the state of epidemic threat, the employer may ask the employee to work remotely (if possible). In such case, the employee is entitled to receive the same remuneration as if s/he was at the workplace.

Social insurance benefits

During the state of epidemic threat, employees are entitled to receive the following social insurance benefits:
1) in case of inability to work due to coronavirus infection – remuneration/sickness benefit;
2) in case of isolation or quarantine (recommended by a medical doctor) – remuneration/sickness benefit;
3) in case the employee submits a request for time off to take care of a child below 8 due to the fact that schools and other similar facilities are closed – additional care allowance of 14 days (added to other rights; however, it cannot be used by both parents at the same time).

Refusal to perform work

The state of epidemic threat means that only some workplace are closed. Others continue business as usual. It is worth noting here that restrictions related to assemblies of over 50 people do not apply to workplaces with over 50 employees. As long as they do not engage in operations listed expressly in the Regulation of the Minister of Health, they can continue operating in the same way as before.

However, an employee might refuse to perform work (in particular, this might happen at grocery stores, pharmacies and laundry shops). As a general rule, such refusal is possible if working conditions do not meet applicable OHS regulations and pose a direct threat to human life or health, or in case the work performed by a given employee exposes others to danger. This provision only applies under extraordinary circumstances, when the threat is real and unquestionable (rather than potential).

In view of the current situation, we can reasonably assume that if the employer provides protective measures (antibacterial gels, soap, etc.) and has notified employees about the rules of conduct (arising from guidelines of sanitary authorities) aimed at infection prevention, there is no reason to decide that an employee can effectively refuse to work.

However, such situations are discretionary in nature and might be affected by a range of factors (e.g. with respect to high-risk groups, cancer patients, etc.). Thus, every single case should be analyzed separately.

In its messages published so far, the National Labor Inspectorate (PIP) has noted that an employee can refuse to go on a business trip to regions with coronavirus infection.

Epidemic – practical guide for the real estate sector

Posted on by Lisa Fortmüller

Below you will find detailed information and recommendations related to the state of epidemic threat for the real estate industry, which took effect on March 14.

We can already see clear impacts on our sector, as listed below.

I. Some tenants of commercial developments cannot run their operations; this applies to the following types of businesses:

  1. Restaurants, canteens, cafés, fitness clubs, movie theaters, conference centers, clubs and art galleries;
  2. Entities operating in the retail (clothes, textiles, shoes, furniture, lighting, home electronics, household appliances, bookstores), food service and entertainment industry.

II. Tenants expect that they won’t have to pay the rent, service charges and marketing fees for the period over which their premises are closed.

Comments:

The following scenarios are possible here, depending on specific circumstances and provisions included in lease agreements:

  1. The tenant proves that a force majeure event has occurred, and is not obliged to pay the rent or any other fees;
  2. The tenant does not pay the rent but continues to pay the service charges due to the fact that it is necessary to ensure continued operations of the building/complex, security services for the closed shop, etc.;
  3. The tenant submits a rent reduction statement covering the period of restrictions arising from the Regulation of the Minister of Health, dated March 13, 2020, on declaration of the state of an epidemic threat in Poland; in such statement, the tenant refers to the premises’ legal defects (in case the premises are located in a retail facility of over 2,000 m2);
  4. The above combined (e.g. discounts);
  5. None of the above – depending on specific circumstances.

We need to keep in mind that in case of externally financed developments (esp. bank loans and bonds), any rent/service charge discount requires the financing entity’s consent or back-transfer.

Recommended actions:

  1. Analysis of lease agreements in that respect, especially in terms of:
    (i) provisions related to force majeure;
    (ii) the type of the tenant’s operations (this might be debatable in case of chain stores that combine different types of operations, as well as those stores whose operations might turn out to be crucial from the point of view of panic prevention and access to necessary resources);
    (iii) any provisions specifying that tenants are not exempt from the obligation to make payments in case a building/lease object gets closed due to a sanitary threat, force majeure, etc.);
    (iv) provisions related to liability arising from warranty that covers the premises’ legal defects;
  2. Monitoring notices/letters from tenants (some tenants that are not even covered by retail restrictions have already sought to invoke force majeure);
  3. Defining the actual group of tenants covered by the restrictions (the Regulation makes a reference to PKD [Polish Classification of Business Activity] and the criterion of “main activity”);
  4. Determining a unified approach to all tenants covered by the restrictions (uniform practice).

III. Litigation-related actions taken by tenants

Tenants might embark on litigation in order to secure changes to their obligations arising from lease agreements, especially suspension, reduction or deferral of payments of the rent, service charges and other fees.

Comments:

The following scenarios are possible here, depending on specific circumstances:

  1. Lawsuit for establishing the existence of force majeure, along with motion for interim relief:
    – filing a lawsuit for establishing the existence of a force majeure event, as a result of which the tenant might hold specific rights defined in the lease agreement, especially the right not to pay the rent/other fees or the right to terminate the agreement;
    – as a consequence of force majeure, it is not possible to use the lease object, meaning that the principle of equal consideration of interests is not respected (which, in itself, might serve as the basis for voidance of payment obligations);
    – alternatively, the tenant might file a lawsuit for establishing that rent was effectively reduced as a result of submission of a relevant notice based on the premises’ legal defects (such objection can also be raised in case the lessor files a lawsuit for payment covering the period of retail restrictions);
    – in order to quickly arrive at the desired results, such lawsuit may be combined with a motion for interim relief involving temporary measures that regulate the legal relation between the tenant and the lessor (e.g. an obligation to pay the rent/other fees into a court deposit);
    – it is also possible to submit a motion for interim relief before filing a lawsuit; limited operations of courts in relation to the current state of epidemic threat do not apply to interim reliefs; motions in that respect are examined at closed-door sessions (which continue to be held without any limitations as of now);
    – within two weeks of securing an interim relief, the tenant is obliged to file a lawsuit with a court (otherwise the interim relief is lost).
  2. Lawsuit for amendments to legal relation due to fundamental change of circumstances (rebus sic stantibus), along with motion for interim relief:
    – a fundamental/extraordinary change of circumstances (i.e. implementation of the state of epidemic threat), which renders it impossible to use the lease object, might serve as the basis for a lawsuit aimed at amending the legal relation between the lessor and the tenant;
    – the tenant could seek exemption from the obligation to pay the rent for a given period, or a modification of its value; each situation would be examined separately; in such cases, the court is in no way bound by the requests specified in the statement of claim;
    – the court is obliged to balance the parties’ interests, meaning that the tenant would be more likely to get a favorable ruling if there was a higher risk of: (a) lack of the possibility to fulfill a specific obligation in the future (e.g. the lessor is unable to deliver the lease object again / the tenant cannot run its business operations); or (b) considerable losses on the tenant’s part;
    – in practice, the above means that such option would be of interest to tenants that are at the verge of insolvency;
    – the aforesaid remarks concerning interim relief apply to this situation, as well.
  3. Other potential litigation-related actions resulting from lease agreements.

Recommended actions:

  1. Analysis of lease agreements in that respect, especially in terms of other litigation-related actions which might be taken by tenants;
  2. Monitoring the submission of interim relief motions with competent courts. Jurisdiction might be determined on the basis of contractual provisions or applicable legal regulations;
  3. Monitoring notices/letters from tenants – potential pre-trial notices with demands related to modification of contractual obligations.

IV. Limitations in the operations of other tenants (which are not covered by the retail restrictions)

Comments:

When some tenants suspend their operations, others will seek to limit their activities, request a reduction of their rent/other fees, and pursue contractual penalties for suspended/interrupted operations.

Recommended actions:

  1. Analysis of lease agreements signed by tenants that are not covered by the restriction (in terms of force majeure, the type of the tenant’s operations, and clauses concerning warranties, the minimum required occupancy rate, the presence of specific other tenants or sectors, and footfall/turnover targets);
  2. Monitoring notices/letters from tenants that are not covered by the restriction; monitoring their operations;
  3. Defining the actual group of tenants covered by the restrictions (the Regulation makes a reference to PKD [Polish Classification of Business Activity] and the criterion of “main activity”);
  4. Determining a unified approach to all tenants covered by the restrictions (uniform practice).

V. Impact of the restriction on the dates specified in pre-lease agreements, relocations, etc.

Comments:

The restriction of business operations, imposed on selected tenants, means that it is not possible to keep opening dates. This has a considerable impact on other dates, e.g. early access or handover for the purpose of works performance.

Recommended actions:

  1. Analysis of pre-lease agreements, relocations, etc. (in terms of force majeure, setting/calculation of deadlines, notices, penalties for untimely handover, penalties for failure to embark on operations, as well as clauses concerning the occupancy rate, the presence of specific other tenants or sectors, and footfall/turnover targets);
  2. Monitoring notices/letters from tenants that are not covered by the restriction; monitoring their operations;
  3. Defining the actual group of tenants covered by the restrictions (the Regulation makes a reference to PKD [Polish Classification of Business Activity] and the criterion of “main activity”);
  4. Determining a unified approach to all tenants covered by the restrictions (uniform practice).

VI. Limitation of services provided by lessors for their buildings due to some tenants’ force majeure-related suspension of operations

Comments:

If the lessor does not regard the restriction of the tenants’ activities as a force majeure event (that exempts them from the obligation to pay the rent and/or service charges), it will be difficult for the lessor to invoke force majeure when trying to justify the limitation of services provided for a given building.

Recommended actions:

  1. Analysis of service provision/maintenance agreements (in terms of force majeure, contractual termination for the so-called “just cause,” and temporary suspension of services);
  2. Coordination of the aforesaid activities with credit facility agreements, terms of the bond issue, external loans and lease agreements – especially in terms of performance of services for operating tenants (e.g. grocery stores), consequences of temporary service interruptions, etc.;
  3. Coordination of the aforesaid activities with insurance conditions – in order to avoid a loss of insurance coverage due to limited services.

VII. Considering the need for an extended scope of services for buildings, if justified by the epidemiological situation, e.g. additional disinfection and cleaning services

Comments:

The question arises whether it is possible to settle increased costs as part of the service charge. We need to keep in mind that grocery stores (for example), which are facing onslaught of customers and can continue their operations, often have a service charge cap specified in their lease agreements. Tenants that are obliged to limit their operations might not want to pay higher service costs that allow other tenants to continue their operations.

Recommended actions:

  1. Analysis of lease agreements (in terms of service charge settlements and caps/other limits);
  2. Coordination of the aforesaid activities with credit facility agreements, terms of the bond issue and external loans – e.g. with respect to the operating budget communicated to banks, bondholders and lenders;
  3. Coordination of the aforesaid activities with insurance conditions – in order to avoid a loss of insurance coverage due to limited services.

VIII. Considering the need to cancel parking fees (and open the gates)

Comments:

If justified by the epidemiological situation (e.g. in order to limit the customers’ contact with parking machines), it might be necessary to cancel parking fees.

Recommended actions:

  1. Analysis of lease agreements (in terms of parking lot-related settlements);
  2. Coordination of the aforesaid activities with credit facility agreements, terms of the bond issue and external loans – with respect to the operating budget communicated to banks, bondholders and lenders;
  3. Analysis of service provision/maintenance agreements in terms of parking fee cancellations.

IX. Considering setting a maximum number of customers in a shop at a time

Comments:

The question arises as to whether to adopt a rule based on which only a specific number of people can be inside a store at the same time. The aim is to minimize the risk of contact (if justified by the epidemiological situation). Such limitation can be introduced as part of a tenant’s internal policy (e.g. a grocery store or a pharmacy) or by competent authorities (at a later date).

Recommended actions:

  1. Analysis of lease agreements in terms of the possibility to extend the scope of services and payments for additional services (e.g. access coordination and extra security services);
  2. Analysis of lease agreements (in terms of service charge settlements and caps/other limits).

X. Impact of lack of rent/service charge payments on external financing (credit facility agreements, terms of the bond issue, external loans)

Comments:

Irrespective of how long the current epidemiological situation persists, the impact on external financing will be unfavorable.

Recommended actions:

  1. Analysis of credit facility agreements and terms of the bond issue in light of:
    – existing obligations (principal and interest);
    – indicators (esp. DSCR);
    – possibility to apply a higher margin, request additional security or terminate financing (e.g. material adverse change or amendments to the Banking Law);
    – updates of operating budgets;
  2. Considering asking the financing entities for a grace period for repayment of interest/principal, or preclusion of the obligation to reach specific ratios;
  3. Considering asking the financing entities to mobilize reserves (e.g. blocked resources, rent surplus, CapEx/supplementary accounts);
  4. Considering asking the financing entities to activate special tranches that allow buildings/complexes to operate as usual under extraordinary circumstances;
  5. Considering asking for a standstill agreement in case of a crisis.

XI. Impact of the epidemiological situation on the executed preliminary property sale agreements

Comments:

Given the epidemiological situation and the resulting difficulties in operations of commercial facilities (incl. the risk that new lease agreements will not take effect on the original dates), the execution of final agreements might be delayed. Moreover, in view of the above, purchasers (and also sellers – in certain cases) might wish to rescind preliminary agreements.

Recommended actions:

Analysis of the executed preliminary agreements in terms of:

  1. performance of obligations related to turnover levels, handover/acceptance or start of operations (given the fact that some tenants are unable to open their stores);
  2. possibility to adjust the price;
  3. possibility to change the conditions (e.g. extend deadlines);
  4. possibility to terminate or rescind agreements, incl. with respect to refundable and non-refundable advances, the costs incurred (e.g. the costs of legal and technical due diligence) and financing arrangements.

XII. Impact of the epidemiological situation on the executed sale agreements that entail adjustment of the sale price on the basis of turnover or profits (incl. any reconciliation and earn-out clauses).

Comments:

In case of rent reduction/suspension and a significant drop in turnover, it might be difficult to determine the prices, especially if they are based on revenue generated by a given building.

Recommended actions:

Analysis of the executed preliminary agreements in terms of:

  1. impact on price settlement (especially important for share deals) and adjustment;
  2. impact of the extraordinary situation on earn-out and reconciliation clauses (these clauses do not take into account reduced turnover or rent as a result of extraordinary situations);
  3. possibility to change the conditions (e.g. extend deadlines for targets);
  4. possibility to terminate or rescind agreements, incl. with respect to refundable and non-refundable advances, the costs incurred (e.g. the costs of legal and technical due diligence) and financing arrangements.

XIII. Impact of the epidemiological situation on insurance policies

Comments:

Many buildings are (due to banking conditions) covered by rent (and/or service charge) loss insurance. Most insurers will refuse to make payments due to the extraordinary situation. It is worth bearing in mind that in case of external financing, insurance claims have been transferred (conditionally or unconditionally) to financing entities.

Recommended actions:

  1. Analysis of the executed insurance agreements (general terms and conditions) in light of the possibility to get insurance compensation for lost income;
  2. Analysis of the executed credit facility agreements in terms of activation of the insurance procedure (whether an insurance claim has been transferred to the financing entity; whether such transfer was conditional or unconditional; whether the conditions have been met; how the relevant procedure is applied, etc.).

XIV. Impact of the epidemiological situation on construction agreements (general contractor, fit-out, etc.).

Comments:

General contractors and other contractors of buildings or fit-out works are already saying that they will not be able to meet deadlines or budgets for reasons beyond their control. Delivery dates scheduled for buildings and lease objects might not be met.

Recommended actions:

  1. Analysis of agreements with contractors in terms of force majeure and changes to deadlines/budgets;
  2. Analysis of related agreements (credit facility agreements, terms of the bond issue, loan agreements) in terms of dates and activation of additional tranches.

In case of any questions or doubts, we are available to address them at any time, including weekends and outside typical business hours (if need be, we will also involve experts in labor law and tax law).

Below you will find contact details of key real estate team members:

Michal Wielhorski
+48 605 911 303
michal.wielhorski@actlegal-bsww.com

Marek Wojnar
+48 601 379 610
marek.wojnar@actlegal-bsww.com

Marta Kosiedowska
+48 605 107 997
marta.kosiedowska@actlegal-bsww.com

Alicja Sołtyszewska
+48 663 004 333
alicja.soltyszewska@actlegal-bsww.com

Małgorzata Wąsowska
+48 694 326 212
malgorzata.wasowska@actlegal-bsww.com

Piotr Pośnik
+48 607 880 133
piotr.posnik@actlegal-bsww.com

Katarzyna Marzec
+48 603 112 225
katarzyna.marzec@actlegal-bsww.com

Magdalena Banaszczyk-Głowacka
+48 503 575 012
magdalena.banaszczyk@actlegal-bsww.com

Michał Sołtyszewski
+48 604 541 101
michal.soltyszewski@actlegal-bsww.com

Izabela Żmijewska
+48 603 300 382
izabela.zmijewska@actlegal-bsww.com

Mateusz Prokopiuk
+48 606 383 247
mateusz.prokopiuk@actlegal-bsww.com

Marta Łobzowska
+48 607 144 121
marta.lobzowska@actlegal-bsww.com

Marcelina Daszkiewicz
+48 665 667 670
marcelina.daszkiewicz@actlegal-bsww.com

Aneta Gierzyńska
+48 667 664 224
aneta.gierzynska@actlegal-bsww.com

Epidemic as basis for tax relief

Posted on by Lisa Fortmüller

We are still waiting for the draft special-purpose tax act. Plans for its adoption were announced by the Ministry of Development. It is supposed to include a range of relief measures for taxpayers, such as postponement of the effective date of the “new” SAF-T VAT, quicker VAT refunds and easier application of the split payment mechanism (as discussed in further detail in our tax alert of March 13, 2020).

Payment reliefs

In its official announcement, the Ministry of Finance declared that “in case of negative financial consequences for businesses, arising from the coronavirus epidemic, tax offices will take these unusual circumstances into account while processing applications for relief in payment of tax obligations (payment term deferral, payment in instalments, cancellation of tax debt, etc.).” Taxpayers’ applications related to the above will be examined before any others.

If economic analyses lead you to a conclusion that financial liquidity might be affected, we recommend prompt submission of an application for a relevant relief. Such application should be supported with adequate financial forecasts and a description of the taxpayer’s justified interest which – in our opinion – emerges when the ability to engage in business operations is restricted on the basis of a special-purpose act.

Requests and recommendations

In our opinion, the solutions presented by the aforesaid Ministries are incomplete, meaning that additional reliefs and facilitations should be added to them. In view of limited resources, it might turn out to be impossible to perform tax and accounting obligations in a timely fashion. In particular, the special-purpose act should include solutions that reschedule the deadlines for tax/accounting obligations, incl.
• postponing deadlines for submission of annual CIT-8 returns for 2019, annual PIT returns for 2019 and the annual IFT-2R form for non-residents;
• postponing the deadline for preparation, signing and approval of 2019 financial statements;
• lack of sanctions for failure to timely submit SAF-T, VAT returns and mandatory disclosure reports, or (optionally) deferral of submission dates;
• lack of sanctions for untimely payment of CIT, PIT and VAT advances, as well as property tax instalments;
• suspension of ongoing tax audits and refraining from any new ones.

Please feel free to contact us and communicate your needs related to the ad-hoc assistance that should be offered as part of the special-purpose tax act. Any needs that you report will be forwarded to relevant Ministries.

0% VAT on donation of medical products

In the meantime, on March 12, 2020, the Ministry of Finance published a draft regulation pursuant to which entities that donate the following types of goods will be able to apply the 0% VAT rate on such donation: medical devices, laboratory glassware, laboratory equipment, medicines, active substances, biocidal products (only disinfectants and specialist diagnostic tests used for analysis and identification of pathogens in water, air and soil), personal protective equipment (only masks, protective suits, shoe protectors, caps and gloves). The above applies on condition that a written donation agreement is executed between a taxpayer and the Material Reserves Agency or the Central Base of Sanitary and Anti-Epidemic Reserves, clearly specifying that the donated goods will be used for the aforesaid entities’ tasks related to combating risks caused by SARS CoV-2. In our opinion, donors should retain their right to deduct VAT on the donated goods. The draft act entails the possibility to apply the 0% VAT rate for donations made between February 01, 2020 and August 31, 2020.

COVID-19 – Energy and Competition / State aid: Review of the main measures provided by the state of emergency decree

Posted on by Ana Pandelea

The state of emergency was instituted in Romania for a period of 30 days as of 16 March 2020 (i.e. the date when Decree No. 195/2020 establishing the state of emergency in Romania was published in the Official Gazette).

We have included below a short review of the main measures provided by the state of emergency decree from an energy and competition / state aid perspective:

  1. The Government may adopt measures to support the economic operators in the areas affected by COVID-19;
  2. Beneficiaries of European funds affected by the emergency measures provided in the state of emergency decree may decide, together with the managing authorities / intermediary bodies, to suspend the financing agreements;
  3. The Ministry of Economy, Energy and Business Environment may issue, upon request, to the economic operators whose activity is affected in the context of COVID-19, certificates attesting the emergency situation, based on supporting documents;
  4. Measures will be provided to ensure continuity in supply, respectively extraction, production, processing, transport, distribution, supply, maintenance and repair, of resources and raw and / or semi-processed materials necessary for the proper functioning of the national energy system, as well as ensuring the continuity of operation of the energy system and all public utility services;
  5. The validity of documents issued by the public authorities that were to expire during the state of emergency is maintained;
  6. During the state of emergency, prices for medicines and medical equipment, for foods of strict necessity and for public utility services (electricity and heat, gas, water supply, sanitation, fuels, etc.) can be capped, within the limit of the average price of the last 3 months before declaring the state of emergency;
  7. During the state of emergency, it is forbidden to declare, commence or carry out collective labour conflicts within the units of the national energy system, operating units from nuclear sectors, continuous fire units, health and social assistance units, telecommunications, radio and public television, rail transportation, units ensuring public transport and sanitation of towns, as well as supplying the population with gas, electricity, heat and water.

Last Call – Be prepared for the possible shutdown!

Posted on by Ana Pandelea

Starting Sunday, nationwide curfews are threatened. Ensure the legally compliant work of your employees in the mobile office. The conclusion of appropriate agreements is very useful for this.
In addition to the framework conditions under labour law, above all data protection regulations must also be laid down, as is the case with office work.

Read more (german version): https://act-newsletter.com/Coronakrise_Arbeiten_im_mobileoffice_datenschutzkonform_gestalten.pdf

We are happy to support you. Please contact us.

COVID-19 – The activity of the National Trade Registry Office and of local trade registry offices

Posted on by Ana Pandelea

The state of emergency was instituted in Romania for a period of 30 days as of 16 March 2020 (i.e. the date when Decree No. 195/2020 establishing the state of emergency in Romania was published in the Official Gazette).

During the state of emergency, the activity of the National Trade Registry Office and of the local trade registry offices continues as regards the registration of amendments regarding legal and natural persons registered with the trade registry. Such activity will be carried out by electronic means, based on the request for registration of the amendments and documents attached to it in electronic form, having incorporated, attached or logically associated the extended electronic signature.

act legal continues to provide assistance regarding the registration of amendments with the trade registry, by using extended electronic signature.