The declaration of a State of Public Health Emergency throughout the Philippines and of different levels of community quarantine, including the Enhanced Community Quarantine (“ECQ”) over the entire Luzon and in certain parts of Visayas and Mindanao due to COVID-19, has severely affected the livelihood of many Filipinos and the operation of numerous businesses. Their capacity to comply with rental obligations has, thus, been significantly diminished.
In this article, we examine the state of the Philippine leasing business during the COVID-19 pandemic, and how the industry is impacted by the efforts of the Government to provide economic relief to those affected and to deter the spread of the virus.
Rental Payment Grace Period and Other Concessions to Tenants
To provide temporary economic relief to Filipinos and these businesses, among other purposes, Republic Act No. 11469, otherwise known as the “Bayanihan to Heal as One Act”, was promulgated. The Bayanihan to Heal as One Act provided for a minimum of 30-day grace period on rental payments for residential units which shall fall due within the ECQ period. To implement the said law, the Office of the Executive Secretary and the Inter-Agency Task Force for the Management of Emerging Infectious Diseases (“IATF”) tasked the Department of Trade and Industry (“DTI”) to issue the relevant guidelines.
On 4 April 2020, the DTI issued Memorandum Circular No. 20-12 (“DTI Guidelines on Rent Concessions”) providing concessions not only for residential rents of individuals but also for commercial rents of Micro, Small and Medium Enterprises (“MSMEs”) that have temporarily ceased operations due to the ECQ. MSMEs refer to any business activity or enterprise engaged in industry, agribusiness and/or services whose total assets, inclusive of those arising from loans but exclusive of the land on which the entity’s office, plant and equipment are situated, do not exceed PhP100 Million.
A minimum of 30-day grace period on rental payments falling due within the ECQ period was granted by the Government to the covered tenants, without interest, penalties, fees and charges. The cumulative amount of unpaid rent falling due within the ECQ period shall be equally distributed within the next 6 months following the end of the ECQ and shall be added to the rents due on those succeeding months. No eviction for failure to pay the rent due may be enforced within the 30-day period after the lifting of the ECQ. The refusal of the landlord to provide the 30-day grace period shall be penalized with imprisonment of not less than 2 months or a fine of not less than PhP10,000.00, or both, at the discretion of the court.
Such concessions are just the minimum reliefs extended by the Government. The Government does not prevent landlords who wish to extend the following benefits to the tenants:
a. Total or partial waiver of commercial rents that shall fall due during the ECQ;
b. Reprieve or discounted amount of commercial rents due after the ECQ;
c. Renegotiation of the Lease Term Agreements with the tenants; and/or
d. Other recourse to mitigate the impact of the ECQ to MSMEs.
In any case, landlords are not obligated to refund the residential and commercial rents paid by the tenants during the ECQ period.
Notably, the DTI Guidelines on Rent Concessions is silent on rent concessions for large enterprises and big businesses, regardless of the impact of COVID-19 on their operations, as well as for charges other than rent, such as Common Use Service Area (“CUSA”) fees, condominium or associations dues and utilities.
On 15 May 2020, the Government issued the Omnibus Guidelines on the Implementation of Community Quarantine in the Philippines, which was later amended on 22 May 2020 through IATF Resolution No. 38 (collectively, “Quarantine Guidelines”). The Quarantine Guidelines specifies which industry or sector may fully or partially operate during the four levels of community quarantine: the ECQ, the Modified ECQ (“MECQ”), the General Community Quarantine (“GCQ”), the Modified GCQ (“MGCQ”).
Under the Quarantine Guidelines, for residential rents of individuals and commercial rents of MSMEs and other sectors not allowed to operate during the ECQ, MECQ and GCQ, a grace period of 30 days from the last due date or until such time that the ECQ, MECQ and GCQ is lifted shall be granted, whichever is longer, without incurring interests, penalties, fees or other charges.
It bears noting, however, that while DTI Guidelines on Rent Concessions only cover residential rents of individuals and commercial rents of MSMEs, the Quarantine Guidelines appear to have extended the benefits of the 30-day grace period to “other sectors not allowed to operate during the community quarantine” and includes the effectivity of MECQ and GCQ and not just the ECQ. Moreover, the Quarantine Guidelines provide that the expanded scope of the rental concessions shall have retroactive effect starting 17 March 2020 in areas where the applicable community quarantine had been declared.
Towards the New Normal: Restrictions and Requirements Which Impact Landlords and Tenants
As the Philippines transitions to the new normal, the Government has imposed numerous restrictions for the safety and health protection of the people. A number of these restrictions and regulations which usher the way to defining the “new normal” of everyday living in the country have either a direct or indirect impact on the leasing industry.
Certain minimum standards at work are required to be implemented pursuant to the Department of Health’s (“DOH”) Memorandum No. 2020-0220 (the “Return to Work Interim Guidelines”). Employers are required to adopt business continuity plans to prevent the spread of COVID-19. Workplace facilities shall screen returning employees for influenza-like symptoms and implement temperature checks and proper disinfection of inbound and outbound persons. Non-pharmaceutical interventions are to be implemented in the workplace, such as infection prevention and control measures, including hygiene promotion, environmental cleaning, disinfection, and other public health and safety measures. Employers are required to ensure that the workplace is properly disinfected, ventilated, and maintained.
While the regulations place the burden on the employers, the landlords of office buildings and other commercial spaces, who have control over the facilities, may be bound by contractual obligations or deemed to have the social responsibility to ensure the implementation of these safety measures. These necessarily entail additional costs and expenses. However, depending on the contractual stipulations in the lease agreements, the landlord may demand the tenants, as employers, to shoulder these costs and/or to reimburse the expenses shouldered by the landlord on behalf of the tenants.
During the community quarantine, malls and shopping centers are allowed to operate. However, tenants of leisure establishments and services, such as cinemas, theaters, karaoke bars, ticket/visa reservation offices, playroom and kiddy rides, gyms, libraries, fitness studios and sports facilities, massage parlors, sauna, facial care and waxing, shall continue to be closed. Restaurants are allowed to operate but for delivery and take-out only.
In addition to implementing the minimum health standards prescribed for the workplace, DTI Memorandum Circular No. 20-201 Series of 2020 (“Mall Operation Guidelines”) requires mall and shopping operators to strictly monitor foot traffic and enforce safe distancing inside its premises, such as limiting the number of people inside the mall or an individual store, reducing the number of open mall entrances, limiting access to elevators, or reducing the seats available to customers. Further, mall operators are encouraged to assign a centralized pick-up location for stores where delivery service providers can pick-up goods. In order to discourage the public from going to or staying in the malls, mall operators are also advised to regulate air-conditioning inside the mall, turn-off free Wi-Fi for customers, and suspend the conduct of sale and other marketing events.
An opportunity for landlords amidst the challenges brought about by the COVID-19 pandemic is the requirement for employers to implement physical distancing in the workplace and alternative working arrangements. Physical distancing will necessarily entail re-arranging the current workplace setup and may require additional space to ensure that required physical distancing among employees is complied with. Although employers are encouraged to adopt alternative working arrangements that will reduce the number of people in the workplace, certain industries which need or prefer to fully operate on-site would require additional space to ensure compliance with the regulations. This could potentially increase the demand for office space. On the other hand, work-from-home arrangements could result in the increase in demand for residential spaces in certain segments of the market as employees seek to upgrade their homes to a home office or to construct workstations on adjacent or nearby residential units.
Invoking Force Majeure Clauses in Lease Agreements
It is beyond doubt that the COVID-19 pandemic has significantly disrupted, and continues to significantly disrupt, the livelihood of individuals and enterprises in various sectors and industries. The financial difficulties brought about by the pandemic and the restrictions imposed by the Government could severely restrict a tenant’s capacity to pay rent, either temporarily or permanently. This applies to both residential and commercial spaces, with people losing jobs and businesses closing shop. It goes without saying that landlords are financially affected by the economic losses suffered by their tenants.
Generally, force majeure events may be a ground to terminate a lease agreement or excuse the tenant from complying with its obligations. However, reference must be made to the language of the lease agreement. The rights of a tenant to terminate the lease agreement and its corresponding obligations depend on the provisions of the contract. Once agreed upon, the contractual stipulations, as long as they are not contrary to law, morals, good customs, public order, or public policy, have the force of law between the parties and should be complied with in good faith.
Notably, it is customary in lease agreements to include a force majeure clause excusing the parties from obligations arising from events which could not be foreseen, or which, though foreseen, were inevitable, such as an “act of God” (e.g., natural occurrences such as floods or typhoons) or an “act of man” (e.g., riots, strikes or wars). An event may be deemed as a force majeure if the following elements exist:
a. the event must be independent of the human will;
b. the occurrence must render it impossible for the debtor to fulfill the obligation in a normal manner; and
c. the obligor must be free of participation in, or aggravation of, the injury to the creditor.
Arguably, the COVID-19 pandemic and the imposition of community quarantine may satisfy the requirements above and could, therefore, be considered as a force majeure event. Note, however, that contracts may expressly limit the definition of force majeure to exclude certain events or expressly provide that the contract may not be terminated regardless of the existence of force majeure.
In the absence of express stipulation on the effects of force majeure on the obligations of the parties, there may be room for the parties to invoke the COVID-19 pandemic as basis to: 1) pre-terminate the contract; 2) suspend contractual obligations; or 3) renegotiate the terms of the lease.
Much has been said about how the Philippine real estate business, including leasing, is forecasted to fare in the next couple of months or years. Admittedly, the state of the leasing business is largely dependent on the state of the economy in general and dictated by the trends in doing business, such as the irrevocable shift from the traditional brick-and-mortar stores to e-commerce sites especially in the services and retail industries.
From a legal perspective, we anticipate that parties may wish to go back to the negotiating table and review their lease agreements or restructure rental payments considering the extraordinary business environment, instead of fighting it out in a long-drawn court case. Under the circumstances, a contract renegotiation and payment restructuring could be the win-win solution to a case of landlord versus tenant in the time of COVID-19.