Member Article

Through Executive Decree No. 145 of 1 May 2020 (the “Executive Decree”), enacted in Official Gazette 29,015 of the same date, the Panamanian Government established certain measures related to lease agreements and eviction procedures.

Among its recitals, the Executive Decree indicates “that the health crisis produced by the COVID-19 pandemic, has resulted in the loss of jobs, the suspension of the effects of contracts, as well as commercial and industrial activities, making timely rental payments under residential, commercial, professional, industrial and educational lease agreements impossible, and requires the intervention of the Executive Branch, to establish mechanisms that guarantee compliance with the rights and obligations of both parties to the relationship”.

Among the effects of the Executive Decree are the following:

1. The suspension of “proceedings to evict lessees from real estate properties destined for residential use, commercial establishments, professional use, industrial and educational activities.”
2. The “freezing” of rent payments owed, of clauses providing for increases or for penalties for unilateral termination of the contract, and those related to interest for late payments.
3. A penalty to those lessees who, after the conclusion of the State of National Emergency decreed by Cabinet Resolution No. 11 of March 13, 2020, refuse to make payments accrued during said period and those lessees who do not pay their rents despite not being economically affected by the state of emergency.
4. Lessors who suspend services such as gas, water, electricity, etc., to pressure the lessee to leave the property will also be subject to penalties.
   
   

As a general observation, it must be noted that because the State is not a party to lease agreements governed by private law, it cannot modify – via decree – the terms and conditions agreed to by the parties in a private document. Only the parties to that contract can agree to such modifications. On the other hand, the Civil Code of the Republic of Panama is clear when it indicates that, in contractual matters, the laws in force at the time in which the parties entered into an agreement are understood to be incorporated into contracts. The application – via decree – of a new legal regime on leases subject to private law that are already underway is, at the very least, questionable.

As a result of the gaps and ambiguities created regarding lease agreements in the wake of the issuing of the Executive Decree, especially seeing how this may have serious implications on contractual relationships between lessors and lessees, we hereby offer the following observations that should be considered by a lessor or lessee vis-à-vis the Executive Decree.

• The Executive Decree does not expressly establish that its provisions apply exclusively to those residential, commercial, “professional, industrial and educational” lessees who have been affected by the national emergency declaration, and/or by other orders and decrees that have established curfews and closed commercial establishments.

• Article 6 is of special concern because it refers to the “freezing” of rent payments owed, of clauses providing for increases or for penalties for unilateral termination of the contract, and those related to interest for late payments. What the Executive Decree does not address is the lessee’s ability or inability to unilaterally terminate a lease in advance. In this situation, it is not clear whether the penalty for early termination must be paid later or if it is completely eliminated. Article 7 does not provide additional guidance, since it only mentions the obligation to make rental payments that remained unpaid during the state of national emergency, but it does not specify how (or if) penalties are to be addressed.

• On the other hand, nothing in the Decree expressly establishes that lessees who have suffered such damages are exempt from the obligation to make their monthly rental payments during the state of national emergency. Although the Decree mentions “freezing” rental payments, this – as we have already indicated – can be interpreted as a prohibition on altering the rent installments during said period. Thus, it is not clear why Article 6 mentions sanctions for lessees who do not pay rent accrued during the validity of the state of national emergency, “after the effects of the declaration of the state of national emergency have ceased.”

• Article 9 suggests that all lessees who have not been economically affected by the declaration of a state of national emergency must continue to make rent payments as established in the terms of the corresponding lease agreement. Assuming this is the intention with which the provision was written, a breach of that provision would leave lessees subject to penalties. Depending on the amounts involved, this could be an insufficient remedy for lessors given that, during the state of national emergency, no interest may be charged for late payments and eviction proceedings may not be initiated.

• Additionally, and as mentioned previously, given that Article 9 suggests that those who have not been economically affected by the declaration of a state of national emergency must continue to make rent payments in the ordinary course of business, it could then be understood that those who have been affected would be excused from said payments. This, in turn, raises doubts about precisely what constitutes an “economic impact.” This could be understood in the widest possible sense and excuse practically all businesses in the national territory from paying rent. Although it is true that, for example, those businesses that were forced to close by executive decree have suffered the most obvious impacts, even businesses which have not been ordered to close have nonetheless been economically affected.

• Lastly, Article 11 establishes that the General Office on Leasing of the Ministry of Housing will be the competent entity to hear, process and decide “on complaints between the lessor and lessee that arise from the legal effects” of the Executive Decree, which could directly conflict with those lease agreements in which the parties have agreed that any and all disputes that may arise between them will be subject to arbitration proceedings.
  
  

In case of any additional queries, please contact Ramón Varela ([email protected]) or Miguel Arias ([email protected]).