Although one of the main principles of the right of obligation is the binding nature of concluded contracts, some exceptions exist for exceptional cases. Under § 97 of the Law of Obligations Act (the LOA) alterations to contracts are possible and one party to the contract may initiate adjustments if and when a change of circumstances takes place that essentially differs from the circumstances on the basis of which the parties proceeded when concluding the contract. LOA § 97 has become topical within the last couple of years as (usually) under recession conditions one or another party to the contract feels that the terms of the contract have become too demanding. The need to adjust agreements has become especially acute in the case of tenancy contracts as tenants seek lower rentals in an increasingly difficult business environment.
The Supreme Court reviewed LOA § 97 with reference to adjustment and termination of a contract. However, the case reviewed did not concern a tenancy situation. As a result, there is still no specific understanding of the circumstances under which the terms of tenancy contracts could be altered in a deteriorating economic situation.
Nevertheless, based on the relevant Supreme Court judgment some conclusions may also be drawn regarding tenancy agreements.
The most important provisions are in subsections 1 and 2 of LOA § 97. Subsection 1 states that “if the circumstances under which a contract is entered into change after the contract is made and this results in a material change in the balance of obligations of the parties so that the cost to one party of performing an obligation increases significantly or the value of what the other party is to receive under the contract decreases significantly, the affected party may claim amendment of the contract from the other party in order to restore the original balance of obligations“.
In order to alter the contract all of the following circumstances must be satisfied (LOA § 97 subsection 2):
1) when entering into the contract, the affected party could not reasonably have expected that circumstances might change, and
2) the affected party could not influence the change in circumstances, and
3) the risk of a change in circumstances is not borne by the affected party by law or under the contract, and
4) the affected party would not have entered into the contract or would have entered into the contract under significantly different terms if aware of the change in circumstances.
First, one must note that, according to the Supreme Court, alteration of the terms of any contract (including tenancy contracts) under LOA § 97 should be allowed only in “very exceptional cases”. This is mostly due to material interests depending on the legal certainty of transactions. Therefore, no one should expect alteration of tenancy contracts to be easy.
The circumstances on the basis of which the parties proceeded when concluding the contract must have changed. However, these changes cannot be measured against the expectations of one party only unless the other party has been informed of those expectations. Usually tenants try to rely on a sudden decrease in business, forgetting that everyone has to bear their own business risks. This is why tenants are usually not able to meet the requirements of article 3 in subsection 2 of LOA § 97 (see above). Comparing this with inflation or currency devaluation, which are risks borne by the landlord (unless stated otherwise in the contract), few people could claim that any landlord has ever been able to rely on LOA § 97 on the happening of the mentioned circumstances.
Alterations in circumstances must result in material changes in the balance of obligations of the parties. It is important to consider the balance of mutual obligations. This usually does not change, as the tenant continues to use the premises and the landlord continues to supply the same services. As a rule, tenants’ problems arise from contracts between tenants and third parties (e.g. clients), whereas these contracts do not concern tenant-landlord relationships.
Tenancy agreements are bilateral and usually long-term, ensuring expectations of legal certainty of both parties. Normally, landlords also have some obligations with reference to the leased property (e.g. bank loans secured by leases). Tenants may rely on fewer customers, for example, but this does not give landlords reasonable grounds to claim more lenient terms for their loans, which cannot be justified by tenants claiming a lower rent due to slow business.
Therefore, tenants must support claims for lower rent with proof that the decreased rent does not impair the landlord’s situation or that the landlord should reasonably have expected a decrease in rental income. A tenant’s claim should not create a situation where the balance of obligations becomes too tilted in the tenant’s favour. Moreover, tenants are usually uninformed of details of transactions between landlords and their banks, so that they may be unable to establish a landlord’s circumstances under conditions of reduced rent.
Clearly, the Supreme Court judgment stating that LOA § 97 can be executed only in exceptional cases is true even if for the reason that landlords have a hard time proving that a rent reduction request is justified due to the more complicated burden of proof. Of course, each case is unique and requires individual assessment.
Changes to tenancy contracts feasible under § 97 of the Law of Obligations Act
Although one of the main principles of the right of obligation is the binding nature of concluded contracts, some exceptions exist for exceptional cases. Under § 97 of the Law of Obligations Act (the LOA) alterations to contracts are possible and one party to the contract may initiate adjustments if and when a change of circumstances takes place that essentially differs from the circumstances on the basis of which the parties proceeded when concluding the contract. LOA § 97 has become topical within the last couple of years as (usually) under recession conditions one or another party to the contract feels that the terms of the contract have become too demanding. The need to adjust agreements has become especially acute in the case of tenancy contracts as tenants seek lower rentals in an increasingly difficult business environment.
The Supreme Court reviewed LOA § 97 with reference to adjustment and termination of a contract. However, the case reviewed did not concern a tenancy situation. As a result, there is still no specific understanding of the circumstances under which the terms of tenancy contracts could be altered in a deteriorating economic situation.
Nevertheless, based on the relevant Supreme Court judgment some conclusions may also be drawn regarding tenancy agreements.
The most important provisions are in subsections 1 and 2 of LOA § 97. Subsection 1 states that “if the circumstances under which a contract is entered into change after the contract is made and this results in a material change in the balance of obligations of the parties so that the cost to one party of performing an obligation increases significantly or the value of what the other party is to receive under the contract decreases significantly, the affected party may claim amendment of the contract from the other party in order to restore the original balance of obligations“.
In order to alter the contract all of the following circumstances must be satisfied (LOA § 97 subsection 2):
1) when entering into the contract, the affected party could not reasonably have expected that circumstances might change, and
2) the affected party could not influence the change in circumstances, and
3) the risk of a change in circumstances is not borne by the affected party by law or under the contract, and
4) the affected party would not have entered into the contract or would have entered into the contract under significantly different terms if aware of the change in circumstances.
First, one must note that, according to the Supreme Court, alteration of the terms of any contract (including tenancy contracts) under LOA § 97 should be allowed only in “very exceptional cases”. This is mostly due to material interests depending on the legal certainty of transactions. Therefore, no one should expect alteration of tenancy contracts to be easy.
The circumstances on the basis of which the parties proceeded when concluding the contract must have changed. However, these changes cannot be measured against the expectations of one party only unless the other party has been informed of those expectations. Usually tenants try to rely on a sudden decrease in business, forgetting that everyone has to bear their own business risks. This is why tenants are usually not able to meet the requirements of article 3 in subsection 2 of LOA § 97 (see above). Comparing this with inflation or currency devaluation, which are risks borne by the landlord (unless stated otherwise in the contract), few people could claim that any landlord has ever been able to rely on LOA § 97 on the happening of the mentioned circumstances.
Alterations in circumstances must result in material changes in the balance of obligations of the parties. It is important to consider the balance of mutual obligations. This usually does not change, as the tenant continues to use the premises and the landlord continues to supply the same services. As a rule, tenants’ problems arise from contracts between tenants and third parties (e.g. clients), whereas these contracts do not concern tenant-landlord relationships.
Tenancy agreements are bilateral and usually long-term, ensuring expectations of legal certainty of both parties. Normally, landlords also have some obligations with reference to the leased property (e.g. bank loans secured by leases). Tenants may rely on fewer customers, for example, but this does not give landlords reasonable grounds to claim more lenient terms for their loans, which cannot be justified by tenants claiming a lower rent due to slow business.
Therefore, tenants must support claims for lower rent with proof that the decreased rent does not impair the landlord’s situation or that the landlord should reasonably have expected a decrease in rental income. A tenant’s claim should not create a situation where the balance of obligations becomes too tilted in the tenant’s favour. Moreover, tenants are usually uninformed of details of transactions between landlords and their banks, so that they may be unable to establish a landlord’s circumstances under conditions of reduced rent.
Clearly, the Supreme Court judgment stating that LOA § 97 can be executed only in exceptional cases is true even if for the reason that landlords have a hard time proving that a rent reduction request is justified due to the more complicated burden of proof. Of course, each case is unique and requires individual assessment.