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25 May 20239 minute read

New legislation gives tenants more ways to terminate leases

The new Company Restructuring Act lowers the threshold that sets the boundaries within which a debtor can restructure its debts. This is good for debtors, who get more protection. But it increases the risks for landlords. And this is expected to affect the leasing market.

As a result of the amended law, landlords can impose stricter security requirements when signing lease agreements. There’s also a risk that landlords will be less inclined to invest in adapting tenant's premises if they can’t be used by future tenants. The debtor has more freedom to deal with their business's financial difficulties. They can, for example, terminate long and costly agreements, such as leases, in advance.

The new regulation gives tenants a significantly greater right of decision on issues related to the fulfillment of the lease terms. Tenants will probably take advantage of the possibility to invoke the right to partly or wholly terminate leases in advance. The requirements for financial difficulties for initiating Company Restructurings have been lowered and the debtor's liability for damages could turn out to be less burdensome, if the liability is used for being released from a long and burdensome lease agreement.

To avoid the new regulations affecting the landlord too adversely, it’s important that the landlord starts looking for a new tenant as soon as possible to limit the damages. As soon as the restructuring of a company has been approved, the landlord should inquire whether the tenant intends to comply with the terms of the lease agreement in whole or in part. Once the restructuring has been approved, the debtor can continue to use the premises for one month without having to notify the landlord of its plans regarding the fulfillment of the lease terms.

Like with the previous regulation, a guarantor's payment obligation is not affected by a debt settlement. So the landlord should also require security from a third party, covering all the tenant's obligations under the lease, including liability for damages, and not only rent payment. The landlord can avoid a burdensome process resulting from the tenant's restructuring process.

The new law was developed to limit unnecessary costs for the tenant, and to give greater predictability to the landlord regarding the future use of the premises. But the debtor's increased possibilities to influence its lease agreements may affect the landlord's income and business and may cause uncertainties regarding the parties' obligations under the agreement.

The Company Restructuring Act

The purpose of the Company Restructuring Act is to enable companies, which, to a certain degree, are still viable, to restructure their debts instead of filing for bankruptcy. A review of the Act took into account the EU directive on Restructuring and Insolvency (EU) 2019/1023. As a result of this work, the directive has been transposed into Swedish law through a new Act, which entered into force on August 1, 2022. The new regulations apply to company restructurings that were approved on or after this date. This means that restructurings that started before the new Act came into force are still governed by the old rules. The changes to the Act are pervasive. From a tenancy perspective, the regulations that can be applied to leases that the debtor has entered into are especially interesting.

The new regulation offers the debtor three options regarding the fulfillment of the agreement terms. Like before, it will be possible to insist that the terms be fulfilled in their entirety, meaning that the counterparty, the landlord, is not entitled to terminate the lease. The debtor can also choose to require performance of only certain terms of the lease. This means the parties' obligations under the remaining part of the agreement remain the same, unless the landlord chooses to terminate the part of the agreement that is not going to be fulfilled, or to terminate the agreement in its entirety.

Previously a debtor was unable to terminate an existing lease in advance

The debtor's ability to affect the operation's agreements was limited to the debtor’s ability to require fulfillment of the terms of an existing lease. If the debtor had not required the fulfilment of an agreement, the landlord could terminate the agreement. The debtor's ability to require fulfillment remains under the old regulation. But the new Company Restructuring Act introduces a major change. The debtor, unlike before, has the unilateral right to terminate the lease agreement in whole or in part, in advance, with the consent of the reconstructor. The new Act stipulates that three months' notice applies, if the debtor chooses to terminate the lease in advance. But if the counterparty has an exclusive right to the debtor's performances, and this right is protected against the debtor's creditors, the debtor is prevented from terminating the lease in advance.

Increased chances of a successful company restructuring

The purpose of giving the debtor more flexibility and extended right of decision is to increase the chance that the debtor applies for company restructuring earlier, a measure aimed at increasing the chance of a successful company restructuring. For example, part of the debtor's business may have to be closed down to save the rest of the company's operations. By waiving the leases attributable to the part of the business that has to be closed down, the debtor's debt burden can be reduced.

Clearer information gives the landlord advantages, but there are more impediments to termination

The new Act states the counterparty can ask whether, and to what extent, the debtor intends to fulfill its obligation under the lease. The debtor must give notice within a reasonable period of time, otherwise the counterparty may terminate the agreement. The landlord can get information regarding the debtor's plans at an earlier stage, and, depending on the answer, immediately start looking for a new tenant for the premises.

Under the old regulation, the landlord was entitled to get this information from the debtor only if the debtor was in default to such an extent that grounds for termination had arisen. Or they could get the information if there was an anticipated delay in paying rent when the decision on company restructuring was made.

A common reason for a tenant to be in company restructuring is difficulties in paying rent. This may, under the Swedish Act on Leases, lead to the lease being forfeited. However, a landlord has limited possibilities to terminate a lease on account of late payment of rent if the tenant is subject to restructuring.

The new Act extends the scope of this impediment to termination, and now applies from the day of filing the application for company reconstruction. Previously, the impediment to termination didn't arise until the decision on reconstruction was made. The purpose is to prevent the landlord from not using the period for terminating the lease due to forfeiture from the day the application is submitted until the day the decision on the reconstruction is made.

Even if not clearly stated in the new Act, there are reasons to assume that a termination for forfeiture that’s made when an application for company restructuring has been submitted, will become invalid even if the District Court does not decide on company restructuring.

How can the tenant change the terms of a current lease?

The new provisions regarding the debtor's ability to claim limited fulfilment of its lease terms are interesting. The tenant can claim that a lease will be fulfilled only for a certain period of time or regarding a certain amount of the services, that are continuous or divisible and remain to be fulfilled pursuant to the agreement. For example, the tenant can decide that a lease with a term of five years will instead be valid for four months. But it’s not permitted to claim that only certain parts of the agreement be fulfilled, if this is deemed to cause significant inconvenience to the counterparty.

When assessing what significant inconvenience for the counterparty entails, we can look at the Swedish Sale of Goods Act (köplagen). A significant inconvenience for the counterparty would be, for example, a debtor who has to deliver a machine and who is not entitled to deliver only certain components, if all the components of the machine are necessary for the machine to function.

From a tenancy law point of view, it’s reasonable to assume that a tenant's request to lease only a smaller part of the total area of the premises would cause significant inconvenience to the landlord. The landlord would then have to be able to lease the redundant area to another tenant. But there are several aspects that can affect the assessment of how inconvenient it will actually be for the landlord. For example, the extent to which certain premises can be adapted and divided depends on their shape.

The debtor's obligations under the lease are still applicable regarding the conditions the debtor has chosen not to terminate. Under the new provisions on early termination, only the landlord can terminate these remaining conditions of the lease.

The counterparty's right to compensation

The counterparty is entitled to compensation for the damage caused by the termination, such as compensation for the loss of rental income, regardless of whether the lease is terminated in whole or only in part. The counterparty can then file a claim for damages and, like with the previous regulation, the damages are deemed to have occurred before the decision on company reconstruction. So they’re covered by any debt settlement in the reconstruction plan.

As far as damages are concerned, according to the general tort law principles, the injured party is also obliged to limit the damages incurred, which the tenant can do by quickly finding a new tenant.

Another important part of the new regulation is that a debtor who’s consumed any form of performance from the counterparty is deemed to have decided that the agreement for the performance will be fulfilled. This also includes the situation where a debtor has taken possession of the premises set out in lease. But an exception to this rule was made by the adoption of a time limit, which means that the regulation doesn't apply to the use of premises that takes place during the prescribed period. The time limit is one month starting from the date of the decision on company reconstruction. In practice, this means the debtor has one month from the date of the reconstruction decision, to decide if they want the lease to continue or be terminated (in whole or in part).