Forced reduction of rent to 40% violates constitutional rights

The draft Covid-19-Business-Rental-Act stipulates that tenants and leaseholders who have had to close their business due to official measures to combat coronavirus will only owe 40 percent of the rent or lease for this period. The new law is intended to implement the motions that the National Council and the Council of States passed in June in a hurry and without closer examination of the constitutionality. A closer analysis shows that the planned reduction in rent violates several constitutional rights.

Many tenants of commercial properties lost a large part of their income this spring when they had to close down their businesses due to the Corona pandemic. Some landlords accommodated the tenants by waiving all or part of their rent during the closure period. In March, the Federal Council expressly supported such consensual solutions and rejected state intervention in tenancies. Parliament, however, saw a need for action. In June, the National Council and the Council of States passed two motions with the same wording, demanding a government-imposed rent reduction to 40 percent of the amount owed for the period of the lockdown. The majority in the Council of States was, however, conceivably close by 20:19 votes.

To implement the two motions, a Covid 19 Business Rental Act is to be passed. It is to be passed by parliament in December as an urgent federal law and is to have retroactive effect on the l7. March 2020 will come into force. If the law were to be passed in the planned form, landlords would have to accept subsequent losses, which are estimated by the federal government at around CHF 212 million. The rent reduction is to benefit only small and medium-sized businesses. There would be no entitlement to it if the rent was more than CHF 20,000 (if it was between CHF 15,000 and 20,000, there would be an exit option).

The rent reduction to 40 percent would apply regardless of whether tenants are at all dependent on it for the continued existence of their business. Yes, it would even apply if a tenant had given up his business in the meantime for purely personal reasons without economic hardship. And all those parties who have agreed to a larger or smaller rent reduction than the 60 percent for the closing period would remain bound by it.

The direct and retroactive intervention in existing contractual relationships is very unusual and inevitably raises the question of constitutionality. The thorough examination of this question is one of the central tasks of parliament, since Switzerland has no constitutional jurisdiction that could intervene to correct the situation. Unfortunately, there is the impression that, when adopting the motions, Parliament deliberately refrained from a thorough constitutional examination in order to avoid having to admit the multiple violations of constitutional rights of citizens. The reference to the crisis situation seemed to justify everything.

Violation of the guarantee of ownership

The government's reduction of the rent to 40 percent of the agreed amount reduces contractual claims that are protected by the property guarantee (Article 26 of the Federal Constitution). It has not yet been clarified by the highest court whether tenants are entitled to a reduction of the rent under the Swiss Code of Obligations for the period of the pandemic-related business closure. It is clear, however, that a schematic reduction of the rent to 40 percent deviates from the Code of Obligations and, according to the prevailing legal opinion, will impose considerable sacrifices on landlords in particular.

Such an intervention in contractual claims is constitutionally permissible only if it is necessary to protect public interests, i.e. if no milder means are available. This condition is not fulfilled, because it is by no means mandatory that landlords have to waive part of their interest claims in order to enable the continued existence of commercial enterprises. It is not the landlords who have caused the economic difficulties of these businesses, but the state, which has ordered their closure. It would therefore also be up to the state to provide economic aid, if this is necessary at all. The approach of the new bill is crooked. If it were transferred to other areas, the state would also have to oblige employees, for example, to waive part of their contractually agreed wages in order to save commercial enterprises from bankruptcy.

Violation of competitive neutrality

However, the new template also puts the interests of tenants in the foreground in a one-sided way. The rent reduction only benefits businesses that have rented their premises; on the other hand, businesses where the owner is the owner of the business premises do not receive any support. However, it is not at all clear why the landlord who runs his business in other people's premises is better off than the one who does so in his own premises. Even the tradesman with his own business premises usually has to pay interest, such as mortgage interest to the banks. However, he cannot demand a reduction of this interest. The submission of the bill results in a blatant improvement in the position of the tenants compared to the owners. It thereby distorts free competition. Such unequal treatment of fellow traders who are in direct competition violates legal equality and economic freedom (Articles 8, 27 and 94 of the Federal Constitution).

Inadmissible unequal treatment of tenants and landlords

It jumps into the eyes that the bill does not create straight victim symmetry between tenants and landlords despite appropriate protestations in the parliament. The sacrifice is greater for the landlords, as they will have to forego 60 percent of the interest. The regulation should quickly create legal certainty in the as yet unresolved question of whether and to what extent the closure due to the pandemic will give rise to a claim for a reduction in rent under the Swiss Code of Obligations. However, if the legal situation under the Code of Obligations is open, it is not justified to distribute the risk unequally among the parties to the contract. In fact, the rent reduction to 40 percent was the result of a long rope-pulling in parliament. No valid reasons have been put forward by the landlords to justify a greater waiver, nor are there any apparent reasons.

Mandatory waiver of the Business Rental Act

The constitutional shortcomings of the bill weigh heavily. They are of a fundamental nature and are not diminished by the fact that in some cases the reductions in rent should not amount to large sums. Since the shortcomings cannot be fully remedied, Parliament should refrain from enacting the Business Rental Act altogether. Constitutional rights are particularly important in times of crisis, when the state must severely curtail citizens' freedoms. The Federal Council's assessment of March is also correct in the current period, in which operational restrictions are still to be expected: Tenants and landlords should seek solutions in dialogue if the payment of rent causes problems. On the other hand, it is to be refrained from intervening directly in existing contractual relationships through government measures.

Source: "The Zurich Homeowner" ("Zürcher Hauseigentümer") No. 9.2020

Author: RA Dr. iur. Peter Karlen, former federal judge