You surely know that the answer to the question of whether to pay the rent must be examined on an individual basis, and in order to give you the appropriate answer one must review the agreement you signed together with all the circumstances relating to your unique business. We are confident that we can assist each and every one of you, large business or small, since we have the expertise in handling situations of this kind. If you have further questions, you are welcome to send a message to the firm’s email address and we will make sure to answer everyone.
Three questions about your business during the coronavirus
Before we dive into legal defenses and the question of whether non-payment of rent amounts to breach of contract, you must ask yourselves 3 questions whose answers may tip the scales:
1. Do you have the financial resources to continue keeping the business running?
Most business owners took out loans in order to establish the business from the outset, or subsist day by day on the profits the business generates for them. As any sensible person well knows, the name of the game right now is financial liquidity. Anyone who does not have the financial ability to rehabilitate themselves with the funds required to reopen the business will find themselves closing the business but with larger debts.
2. Are there additional variables that may affect the continued existence of the business?
The reference is to any person or family member, for example, to whom you owe money that was used to found the business, and who has now fallen into debt and is asking for their money back, and you cannot finance the continued operation if you return their money to them.
3. Do you intend to continue operating the business after the crisis?
If you are not thinking of operating the business for any reason, you must act now to bring the engagement to an end, and the recommendations later in the article will probably be less relevant to you.
So once you have answered the questions and found that you wish and are able to operate the business, you are welcome to continue reading the article. If you have chosen to close the business, contact us and we will guide you on how to do so in a legally smart manner and enable the landlord to mitigate the harm as far as possible.
If you have any doubt, you are welcome to contact our firm and we will provide the appropriate guidance.
What does the law say about the matter of rent?
Is this frustration of contract?
To answer this question, one must review the content of the contract that was concluded and examine whether the parties agreed in advance how they intended to deal with unforeseen events and what their degree of influence on the contract would be.
So what, in fact, is frustration of contract?
Frustration of contract is quite literally a defense. Frustration allows a party to a contract to be released from obligations it is required to perform under the contract. Frustration provides a defense against liability for breach of contract, and it is not for nothing that quite a few situations that could have granted that defense have not fallen under the “defense of frustration.”
Meeting the conditions of Section 18 of the Contracts Law (Remedies for Breach of Contract), 5731-1970, grants a defense against liability for breach of contract when a situation of coercion or frustration of contract arises.
For a claim of frustration to be established, three conditions must be met cumulatively:
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The breaching party had no knowledge or foresight of the frustrating circumstances;
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The breaching party’s inability to prevent those circumstances;
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The occurrence of circumstances that frustrate the performance of the contract.
Therefore, at this stage, the recommendation is to read the contract and check whether one of the clauses refers to the coronavirus pandemic as a foreseeable event for which the parties prepared in advance.
What defense does Section 18 of the Contracts (Remedies) Law grant?
The frustration clause grants a defense against enforcement of an agreement or the granting of compensation, but the party that breached the agreement is still regarded as the breaching party and therefore cannot use the clause in order to rescind the contract. That right is reserved to the other party to the contract.
On whom does the court impose liability for breach of contract?
Ostensibly, the courts have consistently regarded contractual liability as absolute liability, and have prevented a party that chose to breach a contract from defending itself with a claim of a change of circumstances causing frustration of the contract.
The courts have not accepted the claim of frustration even in “classic” cases in which the claim of frustration could have been accepted, and to illustrate this we have attached a number of examples from the past (natural disasters, wars, a change in mental state; the winding-up of a company and a strike in the economy).
Do natural disasters establish a claim of frustration?
In CA 421/74 Shagan v. Madar, the court rejected a claim that natural disasters establish a claim of frustration:
“The phenomenon of frost is not something out of the ordinary that a farmer cannot foresee in advance at the time he makes an agreement with respect
to his produce… everyone, and all the more so a farmer, knows that frost or similar natural disasters occur more than once…”.
And in a further case, CA 736/82 Kfar Hasidim Religious Workers’ Moshav Ltd. v. David Avraham, it was held that (seasonal) rains do not constitute force majeure.
Do wars establish a claim of frustration?
In CA 715/78 Katz v. Nitzhoni Mizrahi, the court addressed the Yom Kippur War and held that war in the State of Israel is a foreseeable event:
“As long as peace does not prevail between Israel and all its neighbors, the danger of war breaking out at some time, near or far, always exists,
so that in matters of war and peace, the unforeseeable is always within the realm of the foreseeable for a person in Israel.”
Does a change in mental state establish a claim of frustration?
In CA 1/84 Barda Natan v. Shimon and Roza Strod, sellers of an apartment sought to retract their intention to sell their apartment, claiming that the seller was in a depressive state as a result of the sale of the home (and had even threatened suicide), and that they were therefore “rescinding” the contract. The court held that this case does not relate to the issue of frustration at all:
“It does not fit cases of force majeure, causing an inability to perform the contract… the seller’s depressive state is a separate matter,
standing on its own, and has nothing to do with the possibility of performing the contract…”.
Does a strike in the economy establish a claim of frustration?
In CC (TA) 10431/05 Esther Bustan v. El Al Israel Airlines Ltd., passengers purchased an organized tour package with flight tickets to St. Petersburg through El Al. Ultimately the flight intended to bring the passengers back to Israel was cancelled, owing to a general strike that broke out in the economy. The court held that El Al could not have foreseen that a strike would break out:
“Life experience teaches that El Al could not have foreseen that a strike would break out… circumstances of a general strike in the economy that shuts down
the airports constitute circumstances of frustration of contract, which are unforeseeable.”
These are only a few examples for understanding the issue of frustration of contract; and if one wishes to examine whether a breach of contract is “excused” under Section 18, one must distinguish not only between impossibility of performing the contract, but also the case in which performance of the contract is still physically possible, yet owing to an unforeseeable event (for example — the coronavirus pandemic) there exists an impracticability of the contract being performed — which is sufficient to give rise to the claim of frustration.
And if we take, for example, a commercial business that does not meet the Ministry of Health’s definition of an essential business, continued performance of the contract is physically possible, since the property owner makes available to the tenant the possibility of using the property, but it is impractical since it does not serve customers at this time and has therefore lost its purpose.
Does the court continue to impose absolute liability on the breaching party?
This approach (absolute liability) has softened over the years, and standards of morality, fairness, justice and good faith have taken their place in the case law, and the courts began to examine the conduct of both parties before discussing the question of liability.
Hence the natural question is, in which cases will the court hold that frustration of the contract exempts the parties from performing their obligations, will depend on the fundamental determination of where to place the emphasis:
Is it right to hold that contracts must be performed at any price, or, conversely, to place the emphasis on the moral obligation that accords with the principles of fairness, good faith and justice, in which case the tendency will be not to impose liability on an obligor who is unable to perform their undertaking through no fault of their own.
In CC 1072/07 Moran Gideon v. Tziki Fox, which dealt with the question of whether, as a result of the Second Lebanon War, a financing contract was frustrated, the court held that “war is not within the realm of the foreseeable, even in a region such as ours. The very possibility that exists in a region where full peace does not prevail, that war will break out, does not lead parties to contracts to take this matter into account within the framework of their business considerations at the time of concluding a contract.”
Section 15 of the Hire and Loan Law, 5731-1971
Beyond the claim of frustration, there is a further law relevant to our matter, which grants the tenant the option of suspending the payment of rent temporarily or of rescinding the agreement. If the tenant chose to suspend the payment of rent, the landlord may rescind the lease agreement after a reasonable time.
Section 15 of the Hire and Loan Law — exemption from the payment obligation
(a) If the leased property was real estate and the tenant was prevented from using it for the purpose of the lease owing to circumstances relating to the leased property or to the means of access to it, and the tenant did not rescind the contract on that account, the tenant is exempt from paying rent for the time the use was so prevented; the landlord may, after a reasonable time in the circumstances of the matter, rescind the contract, unless the tenant notified them beforehand that they waive the exemption from paying rent.
(b) The said exemption shall apply only if, at the time of concluding the contract, the tenant did not know of the circumstances referred to in sub-section (a) and was not required to know of them, or did not foresee them and was not required to foresee them in advance, and could not prevent them.
What is the purpose of Section 15? The purpose of the section is to allow the tenant not to pay the rent, while at the same time continuing to maintain the lease relationship. However, there are those who hold that the tenant has no right to rescind a contract.
When does Section 15 of the Hire and Loan Law apply? The section applies in cases in which the tenant is unable to derive enjoyment or benefit from the leased property owing to external circumstances relating to the leased property or to the means of access to it, and the prevention may also be legal, and not necessarily physical.
Did the coronavirus pandemic — following which the Ministry of Health enacted emergency regulations to restrict activity and reduce going out into the public space, the closure of non-essential shops — render the means of access to the leased property impossible, amounting to a change of circumstances that exempts the tenant from paying rent? This may well become, in the future, the question of questions.
Further evidence leading to the conclusion that, in light of the existing situation, the tenant has the option of postponing the payment of rent comes from Section 43 of the Contracts Law, which allows the postponement of performance of the payment. This means that the tenant may suspend the payment until the prevention has been removed — in our case, until the removal of the restrictions imposed by the Ministry of Health.
And what is the right of the property landlord?
Section 15 of the Hire and Loan Law allows the landlord to rescind the contract, after a reasonable time, in order to prevent a situation in which the tenant does not rescind the contract but continues to hold the property without paying rent.
Therefore, anyone who wishes not to pay the rent had better weigh their steps carefully, because after a reasonable time the landlord may rescind the contract, and all the investment in the property may go to waste.
Are owners of private daycare centers obligated to pay rent?
An important preliminary note to remember is that the purpose of a lease under the law is the right of use, and not the possession or ownership that the tenant receives. Thus, if the tenant was prevented from using the property, the tenant should not pay the rent.
If we refer for a moment to private daycare centers, it is neither reasonable nor economical for a party to a contract to be able to prepare in advance for every possible catastrophe, and it is precisely for this that the law of frustration was established. The owners of private daycare centers cannot operate the daycare and meet the terms of the contract, cannot collect the parents’ payments on which they relied, and in the near future will be required to pay rent estimated at tens of thousands of shekels. This state of affairs is unacceptable.
Even though in practice the leased property is still available to the tenant (the daycare owners), they cannot use it and enjoy the fruits of the engagement, and therefore they are not obligated to pay the rent. In the existing circumstances, the lease contract was frustrated, and if the property owner insists on performing the contract, their conduct may well be regarded as a lack of good faith in performing the contract. This interpretation is also consistent with the nature of the lease contract as a continuing contract.
In light of the obligation to perform the contract in good faith, and in view of the extreme and exceptional nature of the situation in the country because of the coronavirus, one may assume that each case will be examined on its merits, and we are likely to see particularly lenient rulings — rulings that will reduce the degree of fault of those who breach the agreement.
How did the large chains act on the matter of rent?
In an article in the The Marker newspaper, it was reported that the chains decided not to pay the rent — some decided to cancel the payment and there are those who chose to freeze it. It is important to remember that when the crisis ends, no one wants to find themselves wasting precious time and money on legal confrontations while busy mending and rehabilitating the business.
Summary
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We recommend acting responsibly and not taking unilateral steps that will be seen by the other party as defiant or even disrespectful, and will be interpreted as conduct in bad faith.
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You may certainly approach the property owner and update them regarding your financial situation, and demand that they keep the information confidential, in order to act together at this time.
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Anyone among you who is not familiar with the information on the matter of frustration is advised not to make use of it and conduct the negotiations by themselves; otherwise they will lose the opportunity to persuade the landlord why it is worthwhile for them to assist you at this time.
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This is not a simple situation for anyone, but it is important that you know that you are not alone in the battle, and we will be glad to help you get through this difficult period, with professional legal support tailored specifically to your business and, above all, one that will protect your business for you.
