Blog » CAN COURTS AMEND LEASE CONTRACTS DUE TO CORONAVIRUS IN HUNGARY?
CAN COURTS AMEND LEASE CONTRACTS DUE TO CORONAVIRUS IN HUNGARY?
08 April 2020
Although efforts are being made around the world to curb the spread of the epidemic, it can already be seen that entire sectors of the economy have to face a difficult situation, which is also affecting companies ’contracts. For example, many businesses request the reduction of the rent for the premises they lease for business, due to the coronavirus situation. The question arises as to whether there is another option for amendment if the parties fail to reach a mutual agreement.
1. Amendment of the contract
A contract can be amended in the following ways:
Amendment of the contract by the parties: In general, the parties may amend the content of the contract by mutual agreement. Unilateral amendment is only possible if it is expressly permitted by contract or law. An example of the latter is the lessor's right under the Land Act to unilaterally review the lease fee in case of a land lease.
Amendment of the contract by virtue of legislation: In some cases, the contract is amended by virtue of legislation. State intervention can only take place in exceptional cases. Such happened in Hungary in 2014, when foreign currency-based mortgage loan agreements were amended by virtue of the “Forint Conversion Act”.
Amendment of the contract by court: If the conditions specified in the Civil Code are met, the court may also amend the content of a contract.
2. Conditions for amendment by the court
Before encouraging anyone to ask the court to amend his/her contract, it should be noted that the courts will only change the content of a contract in exceptional cases, provided that the following conditions are met:
Requested by the party: The court can only amend the contract at the request of one of the parties and can never review the content of the contract ex officio.
Permanent relationship: An amendment by a court can only be requested in the case of a permanent (long-term) legal relationship. A property lease typically qualifies as a permanent relationship.
Changed circumstances: A contract may be amended by a court only if the equilibrium of the contract has been altered by the occurrence of external events. Accordingly, the court may amend the contract only if:
- the event that changed the circumstances occurred after the conclusion of the contract; and
- the performance of the contract with unchanged conditions would harm his substantial legal interest.
In addition to the above, the party may rely on the circumstance only if:
- the possibility of a change in the circumstances was not foreseeable at the time when the contract was concluded;
- the change in circumstances was not caused by him; and
- the change in circumstances falls outside his normal business risk.
Since the purpose of the amendment is to restore the equilibrium, it is permitted to the extent that the changed circumstances do not adversely affect the substantial legal interests of either party.
3. Amendment by a court due to the coronavirus epidemic
In the light of the rules on judicial modification, we can examine whether there is a practical possibility of modifying property leases due to the coronavirus epidemic.
a. What do we mean by a change in circumstances? It is important to clarify that judicial modification is possible in order to restore the equilibrium of the contract, i.e. the balance between the value of the performance provided by the parties. In the present situation, the equilibrium can alter if, for example, the contractual use of the leased premises becomes impossible or unrealistic for a longer period due to the epidemic.
This may be either caused directly by the prohibitions, but use in accordance with the purpose of the contract may also fail for business reasons (eg: attendance at a bar usually visited by tourists has reduced to zero).
If the leased premises can still be used in accordance with the purpose of the contract, the equilibrium of the contract has not been altered, so its amendment cannot be requested on the grounds that the lessee is in a difficult financial situation due to the epidemic.
If the alteration in the equilibrium has occurred, the business risk of the lessee should be further examined.
Business risk: the party’s request for amendment cannot be accepted if the change in circumstances falls within his normal business risk. Based on relevant case law, conditions of market competition, changes in supply and demand, the widespread consequences of socio-economic changes, or inflation all fall within the scope of business risk. 
However, the degree of risk-taking should be judged on the basis of “average” market conditions, thus extreme changes due to extraordinary circumstances are beyond the scope of normal business risk. So, the issue of business risk shall be assessed on a case-by-case basis, according to the above principle. Business risk may include, for example, having fewer customers in the store, resulting in a 10% loss of revenue, but it is beyond the scope of normal business risk, if, for example, attendance at a bar has reduced to zero due to the epidemic.
The possibility of the amendment can therefore be decided in the light of the impact of the epidemic on the specific contract, a reference to a downturn affecting the economy in general is not sufficient, as changes in market conditions are, up to a certain degree, included in normal business risk.
b. Who causes the change in circumstances? In case of real estate leases, it is a relevant question that who actually caused the change in circumstances in relation to the contract? Actually, there is a difference between the fact that the leased office cannot be used because entry is prohibited by an authority or because the manager has ordered work from home in order to protect the employees. In the latter case, amendment by the court might not be possible.
c. Applicability of the legal institution: The possibility “mass amendments” by court has already been raised in connection with the issue surrounding foreign currency-based mortgage loan agreements. The Curia then found that judicial modification is a legal institution to remedy the adverse effects of certain changes in the case of specific contracts, but not suitable for remedying the effects of nationwide economic problems. The decision highlights that tackling comprehensive, societal-scale problems requires legislative intervention. Where legislative intervention has taken place, there is no longer any room for judicial discretion.
Such legislative interventions have already taken place concerning commercial leases, in case of certain sectors, termination of leases or the increase of the rent are prohibited by government decree.
Although the above guideline clearly states that the legal institution of judicial modification is not appropriate to remedy problems existing nationwide, an action for amendment cannot be dismissed merely on the guideline. However, it can be assumed that the courts will follow the guideline and will apply the legal institution in a very limited scope.
d. Suitability of the legal institution: Finally, it must be examined whether the legal institution of judicial modification can be suitable for remedying the economic effects of the epidemic. As mentioned, the purpose of the amendment is to restore equilibrium, therefore the amendment must not lead to a result that would be disproportionately detrimental to the other party. The interests of both parties must be considered together. It is questionable to what extent changes can be made during the economic downturn, which in the end will not result in a disadvantage for either party.
In our article we presented in which cases can a lease contract be amended by a court based on the Hungarian Civil Code, then we analysed how the legal institution can be applied in the present situation in order to adapt long term contracts to the changed circumstances.
Since it is not the task of the judiciary to remedy problems affecting a wide range of the society, it is unlikely that the courts would amend large number of leases based on the downturn affecting businesses in general. On the other hand, the possibility of adjustment is not explicitly ruled out if it is necessary in order to restore the equilibrium of the contract.
 Section 6:192 of the Civil Code
 It shall be noted that according to the Civil Code, the rental fee shall not be due for the period during which the lessee cannot use the thing for a reason outside of his interest. (e.g. : lockdown by authority) If the lessee is released from his obligation in this way, the modification may not be relevant.
 Except in the case of a significant drop in rent prices.
 According to judicial decisions No. BDT2008. 1784.; BH1992. 123.; BDT2008. 1784.
 Civil law uniformity Decision No. 6/2013.
 BH1996. 145.
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