April, 2020 – Israel – Granot-Speiser

Due to the COVID-19 outbreak, major limitations were imposed by the Israeli government. Some are obligations imposed on non-essential workplaces such as: function halls, restaurants, and gyms, to shut down their operations at their workplace entirely, other business such as: law firms and high tech companies need to reduce the number of their employees simultaneously at the workplace to only 15% of their total workforce, while other workplaces which were defined as essential, will continue their operation almost without any change in their routine.

Such above-mention limitations raised legal questions concerning the validity of lease agreements and the obligations of lessees to continue and make lease payments under lease agreements.

In order to create clarity on the subject in light of the unusual situation, and after reviewing, inter alia, the Israeli law with respect to ‘Frustration of a Contract’, ‘Force Major’, and ‘Good faith (bona fides)’ provisions and principles, the Israeli Bar Association (“IBA”) issued a position paper, whose main points are as follows:

The main guiding principle to be adhered to as far as possible is – contracts must be performed, a principle known as ‘Pacta sunt servanda’. Crisis should not lead to anarchy, and each contract must be examined according to its content and circumstances, and accordingly the position paper was drafted.

Residential lease agreements – in this case, there is no breach of contract that justifies an exemption, there is no base for frustration of a contract argument. The lessee continues to stay in his residence and uses them, this even if the lessee doesn’t enjoy its residence in full. The Israeli law does not recognize partial frustration of contract or partial prevention. The purpose of the lease agreement in this case is being kept. A difficult economic situation cannot constitute a justifiable cause, and recognition of such justification can be detrimental to economic and commercial certainty, this will have dangerous consequences.

Lease agreements of businesses which had to shut down their workplace – the IBA holds the opinion that there is a full frustration of contract in that case, although temporarily. This is due to the fact that the lessee cannot enjoy the leased property at all, he is not able to exercise, even partially, his main right from the contract, and the purpose of the lease agreement is far from being materialize.

Lease agreements of the businesses under the 15% workforce limitation – the IBA holds the opinion that although there is no frustration of contract as there is no full prevention from using the leased property, it would be right to perform certain adjustments in the contract, this is by virtue of the principle of ‘good faith’ in performance of a contract. Materially the use of the leased property is in fact not possible due to legal obligations and regulations, and the purpose of the lease agreement changes substantially, while the lessee continues to hold it and rely on it for the purpose of operating the business remotely. Therefore, the IBA recommends reducing the lease and management fees by 50% in this case.

Lease agreements of essential workplaces (or businesses that do not rely on human capital such as warehouses or factories) – IBA does not see any possibility of frustration of contract. The material liabilities of the parties have not changed as a result of the situation, there is no breach at all, therefore there is no frustration of contract nor justification for adhering to the principle ‘Good faith’.

The IBA position paper is not legally binding, as the IBA does not have any formal standing such matters. This however provides a taste of the issues the legal community would be dealing with soon. The question of enforcement of agreements that are de-facto frustrated during the Covid- 19 era, will probably keep the courts in Israel, and worldwide, busy for a long time.