by Maria Laura Pereira Lourenço de Oliveira
It is widely known that covid-19, the infectious disease caused by the new coronavirus, has spread rapidly, infecting more than half a million people and causing around 27,000 deaths worldwide (as of 3/27), which is why the World Health Organization (WHO) declared it a pandemic.
In Brazil, to contain the growing number of infections, the authorities of numerous municipalities and states have ordered the complete closure of places providing non-essential services, especially commercial establishments (stores, gyms, schools, shopping malls, etc.), a measure whose medium- and long-term effects have worried even the most optimistic entrepreneurs.
A survey by the National Confederation of Services (CNS) forecasts that retail will lose around BRL 80 billion in revenue, leading to two million layoffs in the sector. For example, a large retail chain reported that, with the closure of its 175 stores, it expects zero revenue for three months.
One of the alternatives found to deal with this period without revenue is to revise the terms of certain contracts, especially lease agreements, so as to rebalance them in line with the parties’ economic and financial situation, whether by reducing rent or granting a grace period for lease charges, given the occurrence of a supervening, unforeseeable event that places an excessive burden on the tenant.
Leases of urban commercial property are, with some exceptions, governed by Law 8,245/91 (Tenancy Law), which provides a mechanism for rebalancing the contract by adjusting the rent to market conditions after 3 years from the start of the contract or the last change in rent, through a Rent Review Action (art. 19), which does not require any extraordinary or unforeseeable events to be shown.
Nevertheless, there is no provision for rebalancing the contract when the objective requirements of the Tenancy Law are not met, which significantly restricts the application of that provision. Thus, given this gap in the Law, the Civil Code (Law 10,406/03) applies on a subsidiary basis, especially the provisions on excessive onerousness, as an instrument for giving effect to objective good faith, the social function of the contract, solidarity and contractual fairness.
On this point, it should be noted that, although in business contracts it would be hasty to accept the termination and/or revision of contracts based on excessive onerousness, even when resulting from extraordinary and unforeseeable situations, the Economic Freedom Law (Law 13,874/2019) added an express provision to the Civil Code (art. 421-A, item III) on the limited and exceptional availability of contract revision.
The Civil Code provides, in arts. 478, 479 and 480, for the possibility of a contract being terminated or modified due to relevant and unforeseeable factual changes that make performance excessively burdensome for one of the parties.
Jurist Carlos Alberto Bittar explains that the theory of unforeseeability embodied in the Civil Code through the theory of excessive onerousness is the “radical change in the factual situation at the time of contracting (objective basis of the transaction) caused by extraordinary and unforeseeable events, resulting in excessive onerousness in the performance of the obligation and, therefore, the possibility of contract revision”.
In this sense, there are three requirements for applying excessive onerousness: (i) contracts with continuous or deferred performance over time, such as commercial lease agreements; (ii) a substantial change in the factual situation underlying the contract due to extraordinary, unforeseen and unforeseeable circumstances, such as the occurrence of a pandemic causing the complete closure of commercial establishments; (iii) excessive onerousness for one of the parties, such as tenants who need to spend large sums to meet their obligations to suppliers, employees and the landlord, without, however, having sufficient revenue to cover these liabilities, because they are unable to carry on their commercial activity.
Although an excessively burdened tenant is entitled to termination, actually exercising this right would be overly harmful to the parties if the contract can still be adjusted so as to restore the original contractual balance, considering the current — exceptional — factual situation of substantial change in the party’s economic capacity.
Thus, considering the applicable legislation mentioned above, the Court, when faced with a revision claim, in addition to observing the guarantee of private autonomy and freedom of contract, must effectively protect competition, economic freedom and the social function of the contract in order to avoid excessive imbalances of one party to the detriment of the other, in line with the guidelines established by the Federal Constitution (art. 170) and the Economic Freedom Law (Law 13,874/2019).
Moreover, it is incumbent on the Court to weigh the practical effects of its decision (art. 20 of Decree-Law 4,657/1942 – Law of Introduction to the Norms of Brazilian Law), especially the economic and financial impacts on the sustainability of the economic activity carried on by the commercial tenant, as well as on the thousands of other lease agreements that would be indirectly affected by the decision, and the chain effect that denying revision may have, given the unprecedented factual situation affecting the sector.
Furthermore, it should be stressed that contract revision, given the effects of the pandemic on business activity, will only be available where the contract has not previously allocated this supervening and unforeseeable risk to either party, as provided in the final part of art. 393 of the Civil Code, in which case the parties must observe the contractual provision, under art. 421-A, item II, of the Civil Code.
Therefore, although there is no express provision on the availability of revision for commercial lease agreements, by subsidiary application of the Civil Code the theory of unforeseeability may be applied, given the evident excessive onerousness resulting from a supervening unforeseeable event, exceptionally justifying judicial revision, in compliance not only with the Civil Code but also with the Federal Constitution, the Economic Freedom Law and the Law of Introduction to the Norms of Brazilian Law.
Finally, without prejudice to the foregoing, before filing any lawsuit, in keeping with the objective good faith inherent in contractual relationships, it is advisable for the tenant to contact the landlord beforehand, preferably by extrajudicial notice, to inform them of the economic and financial situation of its business and put forward a reasonable and proportionate proposal, in support of contractual balance.
Article originally published in Estadão, in Fausto Macedo’s column (in Portuguese), on 04.03.2020.
