This content is from: Local Insights

Hardship theory

The effects of the global economic crisis are felt in all sectors. Among those affected are tenants in shopping centres in Romania. In addition to the international context, they faced a spectacular depreciation of the national currency. This had a big impact on their business due to the fact that, when concluding the lease agreements, the rent was expressed in euros, but must be paid in national currency on the day of maturity.

Considering the increase of the exchange rate with the euro, the level of the rent, when converted into Romanian leu, increased dramatically. But given the state of the market their turnover has remained the same or even decreased.

So many tenants sought to either cancel their agreements or renegotiate them with the landlord on the grounds that such a serious increase in the rent was not foreseen at the execution of the contract and, if they had forecasted it, they would have not entered into the agreement.

Romanian doctrine speaks of the so-called hardship theory (teoria impreviziunii). According to this, if the performance of a party's obligation becomes overly onerous due to the substantial modification of the economic conditions considered on the execution date of the contract, modification (adaption) is allowed.

Romanian legislation on lease agreements does not contain an express application of the hardship theory. Consequently, we have analysed the possibility of modification, cancellation or early termination of a contract based on the general principles acknowledged by the Romanian doctrine. To this end, we would like to make several remarks.

First, according to the hardship theory the economic conditions supporting the right to a potential modification of the onerous obligation must have been unpredictable at the moment the contract had been executed. In Romania, the national currency is not stable and often fluctuates.

Second, the exchange rate with the euro has indeed risen in the past year, causing tenants to pay a higher leu amount to the landlords. Nevertheless, the price of the contract is the amount expressed in euros (not its equivalent in leu). Even if the amount of leu owed by the tenants has increased due to the variations of the exchange rate, this amount still represents the exact equivalent of the rent.

Also, according to Romanian scholars, by setting the price of the contract in euro as reference currency, with the obligation of the tenants to pay the rent in leu, at the rent's maturity irrespective of its variation in time, the landlords aimed at securing the real value of the reference currency and shifting the entire risk of depreciation onto the tenants. This may be regarded as a cause for the adaption of the contract to the risks associated with the depreciation of the payment currency and it would remove, according to the doctrine, the applicability of hardship.

As regards the application of the theory by the Romanian courts, there is no unitary practice either supporting or rejecting its application.

In conclusion, taking into consideration the economic environment and Romanian legal practice, it is arguable whether the hardship theory may be successfully invoked by the tenants to cancel or renegotiate their lease agreements.

Iulia Bunescu and Ciprian Glodeanu

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