Empty hotel lobbies are becoming a familiar image
For the first time (February 10, 2021) a Provincial Court (2nd Instance) has ruled on the famous “rebus sic stantibus clause” in business rentals. In this case in hotels, and specifically in the rental of a hotel in a tremendously seasonal tourist market such as the Balearic Islands. The resolution confirms the interim measures to suspend payment of rent. It does not get to the bottom of the matter. You can see the resolution in this link.
The operator of a hotel in Son Caliu (Mallorca) requested the application of an interim measure consisting of the postponement, from June 2020 of payment of 50% of fix rent during the legal process. The lease contract was signed between the hotel operator and Atom Hoteles Iberia, SL (a REIT) as the owner.
The first instance court, in application of the rebus sic stantibus clause, agreed to such a measure, as well as the maintenance of the postponement of the income generated from March 2021 if the legal restrictions on premises occupancy and border access for tourists remain.
Atom Hoteles Iberia, S.L., the owner, filed an appeal opposing the adoption of said measures based on the following two reasons:
1) Lack of grounds, given the fact that the contract itself already includes a risk mitigation mechanism (a fixed income and a variable).
2) Lack of proportionality
The most relevant aspects highlighted by the verdict 66/2021 of the Valencia Provincial Court of February 10th 2021 to deny the appeal filed by Atom Hoteles Iberia and maintain the precautionary measure are the following: the establishment of a minimum contractual income (fixed part of the rent) does not prevent the application of the rebus sic stantibus clause. This conclusion is particularly important, because many hotel operating formulas contain such rent structure.
The very nature of the rebus sic stantibus clause, as stated by the Supreme Court, requires (1) the existence of an extraordinary alteration of the initial circumstances (2) disproportionate split of burdens and that ( 3) such alteration has a certain permanence or duration. Therefore, the rebus clause constitutes a subsidiary remedy that is applied in the absence of a forecast, not being able to understand that the establishment of a minimum income in the contract (in the case in question had established a fixed income and a variable income based on billing) constitutes per se a contractual allocation of risk. Likewise, the AP states that the unprecedent situation justifies the “rebus” clause.
A red alert to be considered by all business owners renting to industries hit by Covid-19-