Supreme Court Revolutionizes Real Estate Industry By Justifying Rent Reductions Due To The Economic Crisis

22/12/2014 – El Confidencial

Court Rules In Favor of Accor Hotel Chain

The Supreme Court has ruled on a delicate issue. Last Thursday, the highest judicial body ruled in favor of a rent reduction under the clausula rebus sic stantibus (Latin for ‘things-thus- standing’ clause). The Civil Chamber has considered a legal doctrine which states that: “The clauses in contracts are set forth given the existing circumstances at the time of the conclusion of the contract. Any fundamental change in those circumstances may allow for amendment of the clauses.”

The particular case that has led to the Supreme Court’s decision affects the Spanish subsidiary of Accor Hotels, represented by the law firm, Ashurst. The Supreme Court has accepted the luxury hotel brand’s request for a rent reduction in a contract that was in force. The appeal was brought against an earlier ruling of the Provincial Court of Valencia that had denied them application of clausula rebus sic stantibus in a rental agreement for a hotel situated in Valencia.

According to the ruling, the rent agreed-upon in the contract is to be reduced by 29% and the landlord (who, prior to litigation, refused to renegotiate the contract) is to be obligated to return 29% of the rent paid from the date on which the lawsuit was filed. The Supreme Court justified the flexible interpretation of the legal doctrine by taking into account that a contract may be amended if exceptional or unforeseen circumstances arise after signing the contract; this applies to circumstances that may drastically change the economic basis of the contract, thereby making it onerous to enforce compliance.

As stated in writing, “…hereby proceeds the amendment of the contract, dated February 25th, 1999, regarding the rental agreement of Hotel Ibis [the brand under which Accor operates], in order to reduce the annual rent by 29% with respect to the rent agreed-upon at the time the lawsuit was filed.” In addition, it specifies that, “The rent reduction shall apply from the filing of the application for this lawsuit until the beginning of the fiscal year 2015, with the consequent return of rent charged in excess throughout the course of these proceedings.”

To date, this classic legal doctrine has only been applied under very exceptional circumstances. In this case, the Supreme Court understands, after partially accepting the demands of the appeal, that the economic crisis experienced over recent years is a factor that the interested parties could have never foreseen at the time in which the contract was signed, and that this factor may fundamentally change the circumstances related to the obligations set in the agreement. The Supreme Court also acknowledges as a valid argument the 50% rent and hotel rating reduction (down to 4 stars) which another hotel chain, Eurostars, managed to obtain from its landlord.

According to the legal team led by Oscar Franco and Juan Racionero, from the department of Litigation and Arbitration at Ashurst, we can expect the Supreme Court to uphold this criterion in future cases, which could greatly impact hotel companies, shopping malls, and businesses from other sectors entering into important real estate agreements in order to exercise their economic activities. “The implications of this legal precedent are very relevant for the hotel and real estate sectors, since they were particularly affected by the economic crisis.”

Original article: El Confidencial (by Carlos Hernanz)

Translation: Aura REE