Covid-19: a few considerations about the impact on the real estate market in Italy

On 11 March 2020, the World Health Organization declared the spread of coronavirus a global pandemic. On the same date – following the initial decrees issued to face the escalation of the Covid-19 emergency, which provided for limits only to certain activities and to certain areas of the country – the Italian Government issued the 11 March 2020 Law Decree (the "Lockdown Decree") providing for a shutdown of many
activities and several limits to others on the whole Italian territory. Strict limitations to people circulation have also been imposed.
In addition, some important economic measures have been established by the Italian Government in the 17 March 2020 Law Decree (the "Economic Measures Decree").

Moreover, following the continuous spread of coronavirus, on 22 March 2020 the Italian Government issued another Law Decree ("Shutdown Decree") according to which, among others, all productive activities are
shut down, with the express exclusion of those specifically listed in Annex 1 to the Shutdown Decree.

The purpose of this memo is to sum up the main measures impacting the real estate market in Italy – with particular regard to the main real estate classes – and to provide some general comments in relation to lease agreements in place.

Summary of the main governmental measures impacting on the various real estate classes

Retail activities
On the basis of the Lockdown Decree (as modified by the Shutdown Decree) until 13 April 2020 (and unless such term is further postponed with further decrees) all the retail, restaurant and leisure activities (which include retail, bars, shopping malls, restaurants, gyms, theatres, cinemas, etc.) are shut down, with the only exclusion of essential and first necessity commercial activities selling the goods indicated in Annex 1 to the Lockdown Decree (such as, for instance, pharmacies, food stores, healthcare shops, hardware stores, petrol stations, laundries, funeral services, banks, professional activities, public transports).

Please note, however, that some Regions (namely, the Lombardy Region) issued special and more restrictive measures in relation to some of the above activities (see below under each section).

Hotel activities
At national level, hotel activities are allowed to operate (i.e. they do not fall under the activities which have to shut down based on the Lockdown Decree and the Shutdown Decree). However, the Lockdown Decree provides for specific measures heavily impacting on hotel activities, such as (i) stop to all public and private events; (ii) stop to all restaurant and bar activities, including those within hotels; (iii) restrictions to travel to and from Italy.

In addition to the above, the Economic Measures Decree provides for specific measures impacting on hotel activities, such as (i) the possibility, until 31 July 2020 (unless such term is postponed with further decrees) for the competent local authorities to order the requisition in use of hotel
facilities to accommodate persons under health surveillance or quarantine and (ii) the termination, until 3 April 2020 (unless such term is postponed with further decrees), of all travel packages, with the possibility for the purchaser to obtain a full refund for bookings of hotel accommodations, travel expenses and events tickets, for various grounds related to the Covid-19 emergency and listed in the Economic Measures Decree.

For the sake of completeness, it is important to underline that in the Lombardy Region more restrictive measures have been issued in relation to hotel activities. Indeed – on the basis of a specific regional order dated 22 March 2020 – hotel activities and all accommodation facilities are not allowed to operate until 15 April 2020 (unless such term is postponed by future orders). An exception applies only to hotels hosting certain categories (doctors/sanitary staff, staff serving at the same hotel, crew members, etc.).
Please note that such provision does not apply to certain accommodation categories such as residences, university student housing and social housing facilities.

Professional activities/offices
For the time being, the closure of professional activities and office activities has not been ordered (apart in the Lombardy Region) although these activities can be carried out in smart working regime.
Lots of leased premises for office use are therefore empty now.
See below for some considerations on commercial lease agreements.

Logistics
Logistics is facing a double-side effect from the Covid-19 crisis. While traditional transport and distribution of non-essential goods (e.g. goods not linked to food and pharma, which are basically the only retail activities allowed to remain open the public) are facing a severe stop, e-commerce is boosting and platforms often have problems in guaranteeing delivery due to the huge number of online orders and difficulties in finding carriers.
This leads to completely different positions depending on the specific sector where the specific logistic platform is involved.
See below for some considerations on commercial lease agreements.

General considerations on commercial lease agreements

The following analysis contains some comments about commercial lease agreements, as applicable to all the mentioned real estate classes.

At the moment, there are no law provisions allowing suspension or postponement of the payment of the rent in Italy in relation to Covid-19. In principle, there may be arguments to qualify the Covid-19 pandemic
as a “force majeure” event, for the purposes of invoking termination of a lease agreement or suspension of certain obligations provided thereof (e.g. payment of the rent). Nevertheless, such qualification is not straightforward.

First of all, it would be necessary to review what is stated in the relevant lease agreement in relation to what may be considered as a “force majeure” event, or whether a “rebus sic stantibus" clause (or a similar concept) is provided in the agreement. For instance, provisions concerning guaranteed minimum rent are generally structured and interpreted as "aleatory provisions", meaning that the risk of potential losses weighs on the tenant as part of its commercial/professional activity.

If no clear regulation on “force majeure” is provided in the lease, evaluations have to be made on a case-by-case basis, taking into account the applicable Italian legal framework, including the fact that Italian law
does not provide for a specific definition of “force majeure” – although various provision of the Italian civil code ("ICC") may help in this respect.

For instance, inter alia, article 1463 ICC provides that in contracts with mutual obligations, the party exonerated due to intervening impossibility of performance owed may not demand counterperformance, and must return what it has already received, according to the rules relevant to claim for return of undue payment. Pursuant to article 1464 ICC, where the performance by one party has become only partially impossible, the other party is entitled to a corresponding reduction in the performance due by it, and may also withdraw from the contract if it has no appreciable interest in partial performance.
Moreover, article 1467 ICC provides that in contracts with continuous or periodic performance, or contracts with deferred performance, if the performance of one of the parties has become excessively onerous due to the occurrence of extraordinary and unforeseeable events, the party who owes such performance may request termination of the contract. Termination may not be demanded if the occurrence of such onerousness falls within the normal scope of the contract. The party against whom termination is sought may avoid such termination by offering to modify the terms of the contract in an equitable manner.

Bearing in mind what stated above, and that Italian case law consistently held that a law or a regulation of an authority shall be deemed as force majeure, if no clear regulation on "force majeure" is provided in the relevant lease agreement, different scenarios may come into consideration, depending on whether (i) the tenant is totally prevented from carrying out the hotel activity due to an order of a competent authority (e.g. if authorities ordered the suspension of all hotel activities and/or the closure of the hotel for health reasons, as it happens in the Lombardy Region pursuant to regional order dated 22 March 2020) or (ii) the force majeure event does not prevent the tenant to carry out the hotel activity, but has either a direct or an indirect impact on the hotel activity (as it happens for hotel activities in all Italy apart from the Lombardy Region, where hotel activities are allowed, although severely impacted by current restrictions applicable to bars, restaurants and travels).

In addition to the above, law no. 392/1978 contains a general provision granting to the tenant a right to withdraw from the agreement at any time in the presence of serious grounds (i.e. “gravi motivi”) by sending a registered letter with at least six months' notice – unless the applicability of this law provision was expressly excluded by the parties in the agreement (derogation is possible only for agreements having an annual rent higher than Euro 250,000). However, it must highlighted that Courts have always been quite reluctant to recognize withdrawal for serious grounds, and in any case have maintained that the serious grounds must be determined by objective facts unrelated to the tenant’s will (not events pertaining to the normal business risk), unforeseeable and occurring during the establishment of the relationship, such as to make its continuation extremely burdensome to the tenant – taking into
account that general reference to financial difficulties of the tenant have often been considered too vague and generic to support a request of
termination of the lease agreement for good cause. Right to terminate under the above provision needs to be evaluated case by case.

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