In order to stem the spread of COVID-19 in Latvia the emergency situation is extended until 9 June 2020. Until then restrictive measures established by the Government that have serious impact on all sectors of the national economy shall be in effect. The rental housing market is no exception and has encountered a sharp drop in rent and significant changes to the situation on the lease market.
Changes to the Rental Housing Market and Underlying Factors
One of the factors affecting the rental market is the fact that the declared emergency situation and restrictive measures have resulted in a number of companies suspending or downgrading their business activity. Therefore, many employees lose their jobs or otherwise suffer from lost income and they are unable, or uncertain of their ability in the nearest future, to pay rent and utilities. Notices of termination of lease contracts are increasing on the market. Even for many people who have not yet lost their jobs, the same uncertainty about the near future exists and impacts their attitude about how they will be able to cover everyday expenses, including rent. Another factor affecting the rental housing market is the fact that the market for short-term rent has virtually ceased to exist. The shirt-term rental market previously focused on rent of residential premises to foreign nations and tourists and which inherently has higher rents in comparison with the market prices for long-term rent. Landlords in this segment are forced to shift to long-term rent and offer their residential premises on the rental housing market at lower rent in comparison with the pre-crisis levels. The abovementioned factors in specific have contributed to the drop of rent on the market by approximately 10 to 15 per cent.
If it could be said that rents on the market before the crisis caused by the pandemic were not proportionate to the income of residents, especially in Riga and its environs, right now it might be said that rents have become more adequate. The reason for high rents in Riga and its surrounding area, for the most part, was the fact that the demand for quality rental apartments on the market exceeded the supply. There is an apparent shortage of quality housing in Riga and its suburbs. The figures show that construction of new and quality multifamily residential houses in Riga is far behind that in both Tallinn and Vilnius, leaving room for growth in Latvia. Currently, the crisis caused by the infectious disease Covid-19 slightly stabilizes the balance between supply and demand. However, this is highly unlikely to become a permanent trend. As soon as the economy recovers, this issue will become pressing once again, because the rents have not been commensurate with the acquisition prices of housing on the market.
Both Panic and Pragmatic Approach Permeating the Rental Housing Market
The rental housing market felt the blow right after the declaration of emergency situation in the country due to the pandemic of Covid-19 and restrictive measures were announced.
On the rental housing market, many of the tenants who have lost their jobs and faced dramatic immediate drop of income have served notices of termination of their leases. Such reaction is understandable and logical in those cases where tenants understand their own inability or pending inability in the nearest future to settle the payments. Some tenants aware of the potential difficulties with performing contractual obligations in full often ask landlords for a reasonable reduction of the rent and, failing to reach an agreement with the landlord, then serve a notice of termination. However, there are also tenants who have not suffered a drop in income and who nevertheless claim reduction of the rent from landlords or early termination of the lease contracts by erroneously referring to the emergency situation declared in the country and/or the crisis caused by Covid-19 pandemic as a force majeure event.
There is a widespread tendency where landlords, at their own initiative, communicate with their tenants and offer a reasonable reduction of the rent for a certain period of time (most often 3 months) in order to retain the current tenant. Such proactive steps are mostly taken by those landlords whose principal line of business is renting their property and who serve as a good example for the rest. However, tenants should keep in mind and understand that landlords usually do not have contractual obligations to reduce the rent established in the lease contract and that such voluntary reductions are in the discretion of the landlord. Exceptions to the rule might exist where special provisions are stipulated in a lease contract that are applicable in such a situation; however, most often leases do not contain such clauses. Notwithstanding the foregoing, landlords should not ignore the current situation on the rental market and should assess whether it would be reasonable to reduce the rent payable by the tenant at least temporarily. If considering possible reduction of the rent for a tenant, it would be advisable for the landlord to first assess whether the rent established in the lease contract corresponds the market price. Landlords have not always established the highest possible rent effective on the market at the time of conclusion of the contract, and the rent set forth in the contract can always be compared with the current market rent. Secondly, it is advisable for the landlord to evaluate its own obligations, its amount of credit facilities (if any) and other internal factors, when considering the possibility to reduce the established rent.
Are the consequences resulting from the Covid-19 pandemic to be recognized as a force majeure event?
Even though no definition of the force majeure is given in the Civil Act, it is acknowledged in the legal literature and case law in Latvia that the concept of force majeure is comprised of four mandatory elements; namely, force majeure is an event: 1) which cannot be prevented and consequences of which cannot be overcome; 2) which could not be predicted by a reasonable person at the time of conclusion of a contract; 3) which has not occurred due to actions of a party or a person under its control; 4) which renders performance of obligations not only burdensome but also impossible.
For the tenant to rely on the force majeure to allow non-performance on its obligations, all four of the criteria for force majeure must exist. The fact whether performance of the obligations has become just burdensome, for example, due to financial difficulties, or completely impossible as a result of the new circumstances is a decisive difference. The emergency situation declared in the country and the measures for stemming spread of the infectious disease Covid-19 do not prevent a tenant from using the rental housing facilities, whereas the loss or reduction of income incurred by the tenant would be considered financial difficulties. From the legal perspective, the declared emergency situation in the country and the consequences of the Covid-19 pandemic, as well as lost or diminished income of the tenants within the scope of lease relationship, shall not be deemed to be force majeure and may not serve as grounds in and of itself for non-performance of the provisions of leases or their revision. Consequently, unless a landlord and a tenant reach a mutual agreement, the legal relationship shall be addressed within the scope of the already concluded lease contracts.
In summary, the following conclusions may be drawn on the impact of the Covid-19 pandemic on the rental housing market:
1) As a result of the emergency situation declared in the country and the restrictive measures aimed at curbing the Covid-19 pandemic, the rental housing market has suffered immediate effect where the market of short-term lease has virtually ceased to exist. The residential facilities offered for short-term lease have been moved to the market of long-term lease causing a drop in the rent on the market.
2) A significant number of tenants who have lost their income or suffered from drop in income, or expect it to drop in the nearest future, terminate their lease, thus contributing to the reduction of rent on the market.
3) A number of tenants are undergoing what could be termed a kind of panic and are asking their landlords for a discount on the rent, sometimes speculating on the consequences of the Covid-19 pandemic as a force majeure event.
4) Proactive approach can be observed among landlords where they offer temporary reduction of rent to their current tenants in order to retain the tenants.
5) The emergency situation declared in the country and the consequences of the Covid-19 pandemic, as well as lost or diminishing income of tenants should not be deemed to be force majeure in the legal relationship of lease and may not serve as grounds for non-performance of the provisions of the concluded lease contracts or revision thereof. Only a mutual agreement can form grounds for application of a reduced rate of the rent.
6) Drop of the prices on the rental market is not anticipated to be a longstanding one – it will persist until the time when the economy recovers from the economic crisis caused by the Covid-19 pandemic.
7) Finally, even though the number of litigations on the rental market for collection of late payments and eviction from residential facilities has been comparatively small, in the future a rise in the number of judicial proceedings in this category is anticipated.