Leases and Rent Payments Amidst the Financial and Coronavirus Crises in Lebanon

2021-02-17    |   

Leases and Rent Payments Amidst the Financial and Coronavirus Crises in Lebanon

Since October 2019, Lebanon has been experiencing a stifling financial and economic crisis, which was only deepened by the COVID-19 pandemic. Between October 2019 and March 2020, several establishments closed entirely or in part, many workers lost their jobs or the bulk of their salaries, and the national currency depreciated.


On 15 March 2020, to confront the pandemic, the government issued a general mobilization decree stipulating that citizens must “stay home and not go out except for utmost necessity”. The decree also stipulated “the closure of public and municipal administrations and institutions, independent departments, and governmental and private universities and schools except for a few to meet citizens’ needs; the suspension of work in all kinds of companies, private establishments, and shops; and the suspension of work in offices of people working in the free professions, taking into account absolute operational necessity in coordination with the syndicates of these free professions”. The general mobilization was extended several times, occasionally in conjunction with a general shutdown and controls on movement.[1]


Subsequently, after many Lebanese lost part or all of their incomes and activities in the productive economy declined and were forcibly stopped by a governmental decision, causes of conflict are now growing between many tenants and property owners regarding both residential and non-residential leases. This issue has been compounded by the discrepancy in exchange rates: What rent payments are due if the contract specifies the amount in USD? Are they calculated based on the exchange rate that the central bank adopts for transactions among banks? Or are they calculated based on the widely divergent and increasingly numerous rates adopted by banks and money exchangers? Today, exchange rates vary from 1,500 lire to the dollar, to 4,200 lire to the dollar in the money exchange market, to almost 9,000 lira to the dollar on the “black market”.


Hence, three situations that all necessitate legislative intervention are now emerging:


The first is the commotion over the lira value of rent payments specified in American dollars because of the conflicting exchange rates.


The second is an escalating threat to many Lebanese people’s right to housing due to their declining incomes and the increasing disparity between these incomes and rent payments, which undermines social justice principles and constitutional rights (foremost among them the right to housing itself). This threat has grown more serious because of the state’s failure, since 2014, to establish the Rent Assistance Fund.


The third is the commotion over whether rent payments are even due, especially in all economic fields not excepted from the general mobilization decree.


Despite the gravity of these situations, the legislature is not lifting a finger. The lack of any effort to confront any of these challenges or treat them seriously portends an escalation of disputes among citizens and an increase in poverty in several regions.


The Need to Ban “Betting” Against the Lira and Calculate USD Specified Rent Based on the Exchange Rate on the Date of Contract


Disputes between tenants and property owners over residential and non-residential leases that specify payments in USD are increasing. These disputes concern not only conflicting exchange rates but also the legality of specifying rent payments in a foreign currency, particularly given the policy of a fixed exchange rate. While it is acceptable to include in a lease an index that allows rising incomes to be taken into account, applying such an index amidst the collapse of the national currency and decline of incomes bears great danger as it encourages betting on the depreciation of the national currency and threatens citizens’ enjoyment of the right to housing in a manner commensurate with the average national income. Moreover, it threatens the sustainability of productive economic activities, along with the public interest of reviving and revitalizing the economy, which must of course take precedence over protecting the rentier economy.


Legislations in several countries, including France, have addressed this issue, deeming the use of a foreign exchange rates index in domestic leases void because it runs counter to public order. French jurisprudence initially deemed clauses that include such an index (gold-value or foreign currency-value clauses) void by drawing an analogy between them and clauses that require debts to be settled in a foreign currency (gold or foreign currency clauses) in contravention of the principle of the fixed legal-tender power of the Franc (France’s currency before it adopted the Euro). The jurisprudence justified this stance on the basis that such clauses involve betting on the depreciation of the local currency. While some French courts were thereafter hesitant to adopt this stance, the legislature settled the issue on 4 February 1959 by amending Organic Law of 30 December 1958 to deem these clauses legal only when directly linked to the contract’s subject matter or one of the party’s activities (e.g. banking or finance), and jurisprudence followed suit.[2]


Hence, there is a need for legislative intervention to deem any rent payment specified in USD before 17 October 2019 to be calculated on the basis of 1,500 lire to the dollar, i.e. the exchange rate under which the contract was made.


Protecting the Constitutional Right to Housing


The right to housing is a fundamental human right[3] and has constitutional status as it is stipulated in the international conventions ratified by the Lebanese state in the Constitution’s preamble.


In this regard, the Committee on Economic, Social and Cultural Rights (CESCR)[4] has deemed that,


“Personal or household financial costs associated with housing should be at such a level that the attainment and satisfaction of other basic needs are not threatened or compromised. Steps should be taken by States parties to ensure that the percentage of housing-related costs is, in general, commensurate with income levels. States parties should establish housing subsidies for those unable to obtain affordable housing, as well as forms and levels of housing finance which adequately reflect housing needs. In accordance with the principle of affordability, tenants should be protected by appropriate means against unreasonable rent levels or rent increases”.


Clearly, incomes have declined significantly in Lebanon during the general mobilization period and as a result of the severe financial and economic crisis. Consequently, state intervention to bring rent payments in line with this decline is warranted.


From another angle, the state must reconcile and balance between the constitutional rights of housing and property ownership. The right of ownership is not absolute; rather, according to scholar Louis Josserand, it is linked to a social function. It may therefore be restricted pursuant to the legitimate need to provide housing at rent prices commensurate with the incomes of the country and individuals or – in other words – to guarantee the right to housing, which rivals it in constitutional force. The Constitutional Council underscored this notion in Decision no. 6/2014 and Decision no. 3/2017, issued on 6 August 2014 and 6 April 2017, respectively.


Needless to say, this equilibrium no longer exists now that the country’s production and GDP have declined while rent payments remain unchanged. Moreover, some property owners are attempting to impose fantastic rent increases (in excess of 100%) by calculating the dollar’s lira value using high exchange rates.


From yet another angle, because of the economic recession, banks’ withholding of deposits, cessation of housing loans and any housing policy, and failure to establish the Rent Assistance Fund since 2014, the new rent law[5] now unequivocally violates the Constitution. The Constitutional Council deemed the law constitutional and dismissed two challenges filed against its original form in 2014[6] (the Constitutional Council merely nullified some of its articles) and against the amendment to it in 2017.[7] To do so, the Constitutional Council relied on the aforementioned principle, namely the law’s success in striking a balance between the constitutionally protected rights of property ownership and housing. Hence, the law’s constitutionality depended on the interconnection and complementarity of the mechanisms it establishes, particularly the mechanism for determining real rent value and the mechanism of the Rent Assistance Fund. This interconnection and complementarity between mechanisms is the foundation of the balance about which the Constitutional Council spoke and was the basis for saying that the law reconciles between the right of ownership and the right to housing and is therefore constitutional.


Hence, the provisions of the law to liberalize leases (Rent Law no. 2/2017) related to recovering rental properties for the sake of demolition and reconstruction, and gradually increasing rent payments, must be suspended. The period remaining to fully liberalize each lease must also be extended by at least three years.


In this regard, during 2019 two bills were submitted to Parliament to amend Rent Law no. 2/2017[8] in relation to residential leases. A third bill was submitted to suspend the law and temporarily restore Exceptional Rent Law no. 160/1992 until all the proposed legislative amendments have been decided upon.[9] The rationale of the last bill justified suspending the law on the basis that it must be amended to be “commensurate with the Lebanese situation, the dangerous gaps that the law created, and its total or partial nonapplication”, especially given the country’s difficult economic conditions and the accompanying rise of rent payments and real estate prices while purchasing power declines and the minimum wage remains unraised. The rationale also mentioned the state’s failure to adopt any housing plan or alternative amidst its inability to establish and finance the aforementioned fund, which puts a large segment of the citizenry at risk of eviction and homelessness. However, these three bills are still pending in Parliament.


Note also that Law no. 194/2020 on Protecting and Supporting the Reconstruction of Areas Affected by the Beirut Port Explosion included an article extending all leases (whether residential or non-residential and whether regular or connected to the exceptional law) concerning damaged buildings for an entire year from the date of its publication. It also included a paragraph freezing legal procedures against people who default on housing loans pertaining to damaged homes for one year beginning on 1 August 2020.


Protecting the Productive Economy and the Need to Waive Rent Payments for the General Mobilization Period in All Fields It Encompasses


Certainly, all establishments in which work has been suspended are facing a force majeure[10] that prevents them from using the rental property. These establishments, many of which are in extreme financial distress, can invoke force majeure to absolve themselves of rent due for the general mobilization period.[11] Likewise, establishments not encompassed by the general mobilization decision also face a force majeure because the restriction imposed on citizens’ freedom of movement under the decision has certainly affected their business and, by extension, the conditions surrounding their performance of their obligations. French jurisprudence has deemed that administrative decisions (fait du prince) need only make it impossible for debtors to execute their obligations under the same conditions to constitute a force majeure.[12] Tunisian[13] and Moroccan courts[14] have adopted the same stance.


Hence, countless legal disputes could now arise unless the legislature intervenes to resolve the matter with a law that enshrines a sound application of the concept of temporary force majeure, i.e. that exempts these establishments from rent payments for the period of compulsory closure.


Such intervention also serves public interest and the future economic vision, as the productive economy cannot be suspended in its entirety while the rentier economy is kept as is.


From another angle, the owners of these establishments can invoke the jurisprudential principle of nonperformance[15] or the contractual principle of good faith[16] to suspend these payments for the periods in question. One aspect of the good faith principle is the obligation of each party of the contract to facilitate the other party’s performance of its obligations.


This article is an edited translation from Arabic.


[1] The extensions occurred via Decree no. 6209/2020 (issued 27 March 2020), Decree no. 6251/2020 (issued 9 April 2020), Decree no. 6292/2020 (issued 24 April 2020), and the decisions of the Council of Ministers on 5 May 2020.

[2]  Henri Capitant, François Terré and Yves Lequette, «Les grands arrêts de la jurisprudence civile», T2, 11e édition, Dalloz, p. 399.

[3] Article 25 Paragraph 1 of the Universal Declaration of Human Rights, which stipulates, “Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services”; Article 11 of the International Covenant on Economic, Social and Cultural Rights, which Lebanon ratified on 3 November 1972; Article 14 Paragraph H of the Convention on the Elimination of All Forms of Discrimination Against Women, which Lebanon ratified via Law no. 572/1996, issued 24 July 1996; Article 27 Paragraph 3 of the Convention on the Rights of the Child, which Lebanon ratified in 1990.

[4] Clause 8 Paragraph C (“Affordability”) of CESCR General Comment No. 4: The Right to Adequate Housing (Article 11 (1) of the Covenant), 1991.

[5] Despite its amendment in 2017, the new rent law remains unapplied by many courts.

[6] Decision no. 6/2014, issued on 6 August 2014.

[7] Constitutional Council Decision no. 3/2017, published in issue 16 of the Official Gazette, issued on 6 April 2017.

[8] The two bills aim to amend Law no. 2/201720 (the method for determining actual value, amending the period for extending leases, amending the bases for increasing rent payments and calculating recovery compensation, the bases for benefiting from the fund, the temporal application of the legislation, and the date that must be adopted for the law’s entry into effect).

The first bill, numbered 363, was submitted on 21 March 2019 by MPs Nadim Gemayel, Albert Mansour, Henri Chedid, Ziad Assouad‎, Salim Khoury, Kassem Hachem, Hagop Pakradounian, Paula Yacoubian, and Abdul Rahim Mrad. It amends articles 3, 4, 10, 15, 20, and 22, Article 32 paragraph D, and articles 38, 45, and 60.

The second bill, numbered 457, was submitted on 21 August 2019 by MPs Paula Yacoubian, Antoine Pano, Kassem Hachem, Albert Mansour, Oussama Saad, Mohammed Khawaja, Michel Daher, Elwalid Sukkarieh, Jean Talouzian, and Hagop Pakradounian. It abolishes the provisions pertaining to the Rent Assistance Fund, i.e. articles 3 to 13, articles 16, 18, 19, 27, 28, Article 45 Paragraph 2 and Paragraph 3, and Article 57. It also amends articles 15, 17, 20, 22, 33, 45, 46, 55, 58, 60.

[9] Expedited Bill no. 474, submitted on 29 August 2019 by MPs Elwalid Sukkarieh, Jean Talouzian, Moustafa El Husseini, and Albert Mansour.

[10] The theory of force majeure appeared in Lebanese law in relation to the performance of obligations in articles 243, 341, 342, and 343 of the Code of Obligations and Contracts. These articles waive obligations that become impossible to perform and waive the corresponding obligations in back-to-back contracts. To constitute force majeure, emergent situations must fulfill three criteria: they must have been unforeseeable at the time of contract (imprévisibilité, or imperceptibility), they must be external (extériorité, or exteriority), i.e. “beyond the debtor’s control” (Article 1218 of France’s New Civil Code), and they must be insurmountable (irrésistibilité, or irresistibility).

[11] In addition to natural factors, the pandemic’s effects also stem from measures that the administration took. Hence, fait du prince, which constitutes an absolute, insurmountable obstacle to performing contractual or legal obligations, is present.

[12] Cass. Soc. 19 Novembre 1980 n° de pourvoi 78-41574.

[13] First Instance Court in Nabeul, Ruling no. 11120, issued 18 August 2020.

[14] “Mahkamat Marakish Tu’fi al-Musta’jirin min Mustahaqqat al-Ijar Khilala Fatrat al-Tawari’ al-Sihhiyya”, The Legal Agenda, 4 January 2021.

[15] The principle remains jurisprudential in Lebanon, whereas the new French Civil Code (2016) stipulated it in Article 1219 and Article 1220, albeit requiring that the nonperformance bear a degree of seriousness. In back-to-back contracts, this principle allows a party to refrain from performing its obligations until the other party performs theirs.

[16] Article 221 of the Code of Obligations and Contracts stipulates that, “Legally established contracts are binding on the contracting parties and must be understood, interpreted, and implemented in accordance with good faith, fairness, and custom”.

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