Rental guarantee and force-majeur

Buying apartments from a developer followed by a guaranteed rental agreement is very common, especially in Phuket.

Many apartment owners give their apartments to the management company and regularly receive a fixed amount of profit or part of the rental income.

The question arises, whether to expect guaranteed rental payments during quarantine? Can the management company terminate the guaranteed rental agreement by invoking force majeure? Is the coronavirus a force majeure in this situation?

Let us define the concept of force majeure. These are circumstances which make the performance of obligations impossible, that could not have been foreseen and that could not be influenced. In this case, the fulfilment of the obligation may be suspended for the duration of such circumstances.

A difficult economic situation in itself is not a force majeure. The fact of border closures, flight cancellations, cancellations of bookings are not sufficient grounds for terminate the performance of the obligations under the guaranteed lease agreement. But the prohibition of government authorities on the work of hotels and other similar businesses in this case is considered as a force majeure.

After all, the purpose of the management company when signing the contract is to use the apartment for daily or long-term rent. An order banning this activity makes it impossible to use the apartment. Accordingly, the management company may suspend the payment of the guaranteed income. Until the operation of hotels and similar companies is again allowed.

Can the management company terminate the guaranteed rental agreement due to the force majeure? The answer to this question must be found in a guaranteed rental agreement. If the contract does not say anything about force majeure, it cannot be terminated unilaterally. Once the circumstances of force majeure have been finished, the guaranteed rent must be renewed.

The management company may unilaterally terminate the contract if such conditions are specified in the contract, e.g. if the circumstances of force majeure exceed 6 months. But in any case, only after 6 months of confirmed force majeure event, not before.

For example, the guaranteed rental contract was concluded on January 1, 2020, while the payment of the guaranteed rental is made every six months, i.e. on July 1, 2020.

The agreement stipulates that if the force majeure lasts more than 2 months, the management company may terminate the agreement.

The ban on agency activity came into force on April 1, 2020 and was lifted on June 15, 2020.

Starting from June 1, 2020 the management company sends letters to the owners about termination of the agreement on the basis of force majeure and about refusal to pay guaranteed rental income for the whole period of the agreement.

What can the owner of the apartment do in this case?

Require guaranteed rental payments for the period before the force majeure, i.e. from January 1 to March 31 - 3 months.

Start using the apartment himself - for living purposes or transfer it to another manager.

If the apartment is in a long-term lease (leasehold) and was purchased for the purpose of obtaining a guaranteed rental income, the main lease agreement can be terminated and the developer can be required to pay back the rent for the remaining period of the lease.

In any case, if you believe that the management company's actions are inappropriate you can challenge them and get your income and/or compensation for breach of the contract in the court. And the court will decide whether or not to consider certain events as force majeure.