Legal Status - NOVEMBER 2020
Leasing of business premises during the Covid-19 period.
Since the beginning of the Covid-19 pandemic and the related economic crisis, one of the biggest victims of the situation has been the real estate market for the rental of premises.
Initially, and in the framework of the State of Alarm promulgated by the Government under Royal Decree 463/2020 of 14 March, of its successive extensions and in particular, under Royal Decree Law 15/2020 of 21 April, a series of measures were established to regulate the conflict of interests between lessors and tenants that in general consisted of the possibility of requesting a moratorium on rent payments, with different treatments depending on whether or not the lessor was considered a “large property owner” or not, all of which has already been dealt with in detail in previous posts.
These measures, however, expired recently as their duration could not extend beyond four months after the end of the state of alert, which ended on 21 June.
At present, it seems that the apparently normal new economic and health situation is still abnormal, with total or partial restrictions on the opening of premises depending on the type of activity carried out there. Notwithstanding the above, and without prejudice to specific regulations such as the case of Catalonia, the truth is that at national level there is no express regulation which gives specific treatment even to the most sensitive cases, such as those where it is totally impossible to open the business premises.
During the first lockdown, and in the absence of the specific regulations that were later issued by virtue of the aforementioned Royal Decree-Law 15/2020 of 21 April (or even in conjunction with such measures), the “rebus sic stantibus” principle came into play, a jurisprudential creation that lacks express regulation in our legal system and operates as an exception to the general principle of “pacta sunt servanda” (what has been agreed must be complied with). Its requirements are, in general terms, the concurrence of external elements that are totally unforeseeable at the time of the conclusion of the contract, which in turn imply a very significant alternation of the balance of the services that are incumbent on each party by virtue of the contract. Its legal consequences, if any, are in principle the rebalancing of the services to which each party is obliged, although the possibility of granting a suspension of or even terminating the contract has been defended.
To date, we have not learned of any rulings that have taken a position on whether or not the “rebus sic stantibus” clause should be applied in the context of the health and economic crisis caused by the global Covid-19 pandemic in the rental of business premises.
However, precautionary suspensions of the execution of guarantees in the event of non-payment of rent for business premises are beginning to be issued in application of the “rebus sic stantibus” principle. Among others, Order 288/2020, 25 September, issued by the Court of First Instance and Instruction number 4 of Navalcarnero (Madrid), establishes the precautionary suspension of the execution of the guarantee in the event of non-payment by the tenant of the rent of a business premises. The reasoning is as follows: “... it is a well-known fact that the current health crisis and the confinement of citizens established by Royal Decree 463/2020, of 14 March (RCL 2020, 376), has had a serious economic and social impact. It can be generically stated that the rights and obligations of the parties arising from a lease of business premises located in a shopping centre have been affected by these circumstances. Thus, the obligatory cessation of the professional activity of many tenants may make it impossible for the rent to be paid, a circumstance that must be proven in the main lawsuit, as well as the contractual consequences and whether or not the acceptance of the main or subsidiary claim is appropriate”.
Order 162/2020 of 7 July, issued by Benidorm Court of First Instance No 2 goes further, granting the application for the interim measure sought by the tenant and, by virtue of that order, partially suspending payment of the rent for premises intended for use in the hotel industry. Note in particular this part of the reasoning: “In this case the documentation provided proves that the parties have entered into a business premises rental contract that is currently in force, and the plaintiff has also proved a decrease in income that has its immediate cause in the suspension of hotel and restaurant activities that was ordered in Royal Decree 463/20 (LAW 3343/2020) which declared the State of Alarm. Therefore, the lawsuit is based not only on the jurisprudence of the Supreme Court in relation to the application of the rebus sic stantibus clause, but also on the Royal Decree Law 15/2020 of 21 April (LAW 5476/2020) which contains a specific regulation of this clause for the case in question. In the main proceedings, it will be necessary to discuss and determine whether or not the reduction in rent requested is proportionate to the loss of income, a decision which cannot be anticipated in this ruling, in which I will merely agree to a provisional suspension of payment of rent in the part for which a reduction is requested and a prohibition on evicting the tenant who is now a plaintiff, considering that there is an appearance of good standing from the moment that there was a business premises lease in force to the date of filing of the suit and in which a bar-café activity was being carried out which has been interrupted as a result of the State of Alarm in Spain occasioned by the Covid-19.”
It must be emphasised that for the time being these are only initial rulings, not judgments, which rule on the request for precautionary measures and as such do not definitively rule on the substance of the case, without prejudice to making a first approximation on their concurrence in compliance with the requirement “bonus fumus iuris” (appearance of good standing) which requires the acceptance of any precautionary measure. However, they are a first indication of the potential viability of the applicability of the “rebus sic stantibus” clause in those contractual relations whose balance has been heavily altered, as is the case of certain business premises whose opening has been restricted, either totally or partially because of the health measures adopted in the framework of the health crisis caused by the Covid-19 pandemic.
We will, therefore, be attentive to the rulings made in the coming months in this regard, with particular attention not only to the possible acceptance of the “rebus sic stantibus” principle, but especially to the mechanisms for rebalancing contractual benefits that may be applied by the Courts.
New distance sale regulations.
The rise of e-commerce has led the European Union to adapt its legal regulations on Value Added Tax to combat fraud and improve revenue collection. The main objective of the European Union is to seek a path towards a single VAT territory.
Therefore, Directive 2008/8/EC was approved in 2016 to change the approach used until then regarding the place of supply of telecommunications, radio and television broadcasting and digital services. The previous standard established that entrepreneurs from an EU Member State who provided services to final consumers would have to pay VAT in the supplier’s country. However, if the entrepreneur was outside the EU, VAT was levied in the country where the recipient was based.
With the adoption of this Directive, what is set out above is amended so that the place of supply of telecommunications, radio and television broadcasting and digital services will now be at the recipient’s place of residence, regardless of whether the VAT payer is a final consumer or a company owner.
As a result of this change in criteria, the MOSS (Mini One Stop Shop) system came into effect on January 1, 2015. The objective of this system is to simplify the taxation of VAT both for companies established in the European Union or otherwise in order to reduce the registration obligations of suppliers in the country of residence of their clients, as well as the costs that this would entail.
In January 2021, a new Directive will come into force, allowing the European Union to come ever closer to its goal. Council Directive (EU) 2017/2455 of 5 December 2017 amending Directive 2006/112/EC and Directive 2009/132/EC as regards certain value added tax obligations for supplies of services and distance sales of goods.
The objective of the approval of this new Directive is to adapt the VAT regulations to the distance sales scheme, with a special focus on online sales. The first measure of this Directive entered into force on January 1, 2019, setting out an exception as to the rules on the location of supplies of telecommunications, radio and television broadcasting and digital services. This exception involves the creation of an annual threshold of 10,000 euros for all EU Member States which, if not exceeded, the supplier of the service will continue to accrue VAT at the supplier’s company.
Furthermore, as of 1 January 2021, companies will not have to register in each of the Member States in which they operate. Instead, they will be able to declare and settle the VAT due in their Member State of residence or origin through the MOSS (Mini One Stop Shop).
Notwithstanding the above, and taking into account the current situation, these changes will not come into force on January 1, 2021 due to the COVID-19 pandemic. The Member States have decided to extend the entry into force for a further 6 months, that is, until 1 July 2021.
New challenges for audiovisual media services and video sharing platforms in view of the New Spanish general audiovisual law and Directive 2018/1808.
The Audiovisual Media Services Directive 2018/1808 established a new regulatory framework that aims to update EU Member States’ rules in order to adapt to the digital revolution that this sector has undergone in recent years. Traditional television consumption continues to plummet while internet pay TV (“IPTV”) and video on demand (“SVoD") services are growing at a rapid pace. The emergence of these new alternatives has completely changed the way in which we in Spain consume television. Thus, the consumption of pay TV and SVoD grew by 53.8% in 2019, which means that half of Spanish households consume this type of audiovisual services. It is worth mentioning that over-the-top contents (OTT), that is to say, those which are viewed through platforms accessible through the Internet, have grown at a rate of 38% in 2019.
Article 2 of Directive 2018/1808 establishes that European countries had until 19 September, 2020 to bring into force the necessary regulations and administrative provisions to comply with it, a deadline that has been extended due to the pandemic. In order to comply with this transposition obligation and provide an adequate response to the current needs of the industry, Spain has now completed the drafting of its General Audiovisual Law.
In terms of the main new features established by Directive 2018/1808 and the preliminary draft General Audiovisual Law, which will affect the business models of the platforms that offer audiovisual services and video exchange, the following aspects are worth highlighting:
i. The concept of audiovisual communication service providers is broadened to include video exchange services through platforms whose main purpose is to offer the public programmes or videos created by users to inform, entertain, or educate. These include social media services such as social networks (Facebook, Instagram, YouTube), blogs and forums. While the service providers who own these platforms do not have editorial responsibility for the content they share, the providers do determine the organisation of their content and are therefore obliged by the Directive to take the necessary measures to protect minors and the general public.
ii. Directive 2018/1808 establishes that Member States may require greater transparency from platforms under their jurisdiction regarding their organisation and may request information regarding their structure and ownership. Member States must also communicate a list that includes the service providers under their jurisdiction to the European Commission. According to the preliminary draft of the General Audiovisual Law, in Spain platforms must be listed in a registry that will be controlled by the National Commission for Markets and Competition and must provide, at a minimum, information on the number of subscribers in Spain and the income derived from these subscriptions.
iii. Content which may harm the physical, mental, or moral development of minors shall only be accessible in a manner which ensures that minors do not see or hear it. Consequently, the co-responsibility of service providers is established to promote mechanisms for the description, rating and recommendation of the content they offer, according to the age of the user, in order to provide enhanced protection of minors against violence, hate speech and terrorism.
iv. In order to preserve European audiovisual content production and cultural diversity, service providers (other than video-sharing and social media service providers) should maintain at least 30% of content of European origin on their platforms. Half of this content, i.e. 15%, must be in any of the official languages of Spain (Spanish, Galician, Basque or Catalan). A film or series is considered European if it is made essentially with the participation of European authors and workers and is controlled or co-produced mainly by European producers.
v. The preliminary draft General Audiovisual Law provides a boost to the financing of cinema and series at the national level by establishing the obligation for audiovisual media service providers on request to allocate 5% of their income generated in Spain for the financing of European cinematographic works and series, including independent audiovisual production. This brings them into line with the obligations already met by traditional television channels such as Mediaset, Atresmedia, and other pay-TV services such as Movistar, Vodafone, and Orange. Smaller content platforms, those with revenues of less than 10 million EUR will be exempted from this obligation.
The whole set of measures and legislative developments will have a significant impact on most platforms since their activity will be more regulated and therefore subject to greater control by the state. We will be able to exhaustively assess and analyse the new measures and their effects on the Spanish audiovisual market once the final regulatory text is published.
Evaluation stage of insolvency proceedings.
The evaluation stage is a procedural phase of insolvency proceedings that aims to evaluate and ascertain whether the administrator of the insolvent company is personally liable for the debts. This stage begins when the resolution approving the agreement is issued or the settlement plan is approved, unless it is an agreement with less than 33% of the debts and the waiting period is less than three years, in which case this stage is not carried out.
The Revised Text of the Insolvency Law approved by Royal Decree Law 1/2020, which came into effect on 1 September 2020, is currently in force. This regulation has not modified the content of the previous insolvency regulations, but it has extended them and set them out in greater depth.
The insolvency may be classified as fortuitous or as culpable. The general principle is that is fortuitous, and it will only be culpable when there are facts that establish a fraud or serious negligence on the part of the administrator to be evaluated. The law establishes some clear signs of culpability:
i. Asset stripping
ii. Acts that hinder or prevent the effectiveness of a seizure in an execution.
iii. Fraudulent removal of property or rights in the previous two years.
iv. Simulation of fictitious assets.
v. Falsity or serious inaccuracy in the documents submitted to the insolvency procedure.
vi. Non-keeping of legally necessary account, or double accounting, or significant accounting irregularities.
vii. Non-compliance with the agreement without the insolvent party requesting the opening of liquidation.
The law also establishes presumptions of culpability, which allow evidence to be provided to the contrary:
a. Failure to comply with the duty to apply for a declaration of insolvency, i.e. more than 3 months have passed without filing for insolvency.
b. Failure to comply with the duty to collaborate with the judge and the insolvency administrator.
c. Not having formalised annual accounts in any of the last three financial years.
When the evaluation stage is opened, any creditor may appear in person and present a written statement of arguments regarding it within a period of 10 days. After this period, the administrator must submit a report classifying the insolvency as fortuitous or culpable. Following that, the Public Prosecutor must present a similar report.
If both reports classify the insolvency as fortuitous, the judge will issue a decision to classify the insolvency as such and this decision cannot be appealed.
If either or both of the reports classify the insolvency as culpable the court summons the insolvent party and the person affected by the classification, so that they can defend their positions, should they think it necessary to do so. After this, the court will issue a classification judgement, which can be appealed.
A ruling that classifies the insolvency as culpable will determine the damages that the affected party must pay, which may include the payment of the debts of the insolvency with their personal assets. It will also determine the prohibition of that person from being the administrator of other people’s assets, for a period that can range from 2 to 15 years.