Early Lease Termination During COVID-19 – How We Saved a Client €355,000

We Saved a Client €355,000 in Early Lease Termination

I’ve been meaning to share one of the many cases from our practice for a long time, but now its time has come.

Introduction of an Early Lease Termination Case

During the height of the COVID-19 pandemic in 2020, businesses worldwide faced unprecedented challenges. Bulgarian companies were no exception. This case from the practice of Belcheva & Karadjova law firm demonstrates how the right legal strategy and knowledge of commercial legislation can save businesses hundreds of thousands of euros in crisis situations.

The Factual Background Behind The Early Lease Terminations Case

The Parties and the Contract

Our client – a leading IT company providing services to an European aviation giant – signed a lease agreement in April 2019 for office space in one of Sofia’s landmark business buildings, an entire floor of the building.

Key terms of the contract:

• Term: 7 years
• Early termination right: after the 3rd year, with 6 months’ notice
• Penalty for early lease termination: tenant owes all rental payments until the end of the 3-year period

The contract was executed despite our advice to wait for our remarks and revision of the clauses. This decision would soon prove problematic.

The Crisis Strikes

In March 2020, the COVID-19 pandemic hit Europe and Bulgaria in particular with full force. The aviation industry was among the most severely affected sectors. Our client began experiencing serious financial difficulties as their main partner’s business sharply declined.

The company approached us with a request to negotiate early lease termination of the agreement.

The Landlord’s Initial Position

When we initiated negotiations with the landlord, their position was categorical and firm:

Compensation demand: €360,000 – the full value of rental payments until the end of the three-year minimum contract period.

The landlord sent a draft agreement that:

• Did not account for the objective impossibility caused by the pandemic
• Offered no concessions or compromises
• Threatened our client’s financial stability

Legal Analysis and Strategy

Situation Assessment

After an in-depth analysis of the facts and applicable legislation, the Belcheva & Karadjova team identified a key opportunity in the Commercial Act that supported our client’s early lease termination intention.

Article 307 of the Commercial Act provides for the possibility of amending or terminating a contract upon substantial change of circumstances. This legal instrument assumes that when unforeseeable circumstances arise after the conclusion of a contract that substantially hinder performance or lead to manifest injustice for one of the parties, the contract may be adapted or terminated.

Prerequisites for Application of Art. 307 CA

In this specific case of early lease termination, all elements for successful application of the provision were present:

1. Unforeseeability of circumstances A global pandemic of COVID-19’s magnitude could not have been foreseen when the contract was signed in April 2019.

2. Substantial change The pandemic led to a dramatic decline in the aviation industry, directly affecting our client’s business and ability to fulfill contractual obligations.

3. No fault Neither party was at fault for the situation that arose.

4. Manifest injustice Requiring only the tenant to bear the full financial consequences of a force majeure situation constituted manifest injustice.

The Strategic Letter

Content and Approach

We prepared a detailed legal opinion that was sent to the landlord and his lawyers. In it, we openly and in good faith set forth our legal position for early lease termination, emphasizing:

Two possible paths to resolution:

1. By mutual agreement – we offered reasonable compensation, close to the value the landlord would realistically receive in a court dispute
2. Through court proceedings – via an arbitration claim based on Art. 307 of the CA

Key Arguments

In the communication, we clearly stated that:

• As of the time of writing (05.08.2020), there were no grounds for claims for penalties or compensation
• There was no breach of contract by the tenant
• The law provides mechanisms for adapting contracts under changed circumstances
• In a court dispute, the landlord risked not only failing to receive the requested amounts but also owing compensation for improvements, together with interest

Balanced Tone

Despite the firm legal position, the communication was written in a constructive tone that:

• Acknowledged the lack of fault on both sides
• Emphasized our client’s good faith
• Left the door open for negotiations
• Proposed a fair solution for both parties

The Result

Successful Compromise

After receiving our legal opinion, the landlord’s position changed dramatically. The parties reached an agreement for the early lease termination whereby:

Final settlement:

• Compensation: €5,000 (instead of the initially requested €360,000)
• Termination by mutual agreement
• Avoided court dispute
• Preserved good business relations

Economic Impact

Thanks to the correct legal strategy and competent negotiation management, we saved our client €355,000 – 98.6% of the originally requested amount.

Legal Lessons from the Case

1. The Importance of Art. 307 of the Commercial Act

Article 307 of the CA is a powerful tool for protecting merchants under unforeseeable circumstances. The provision allows for judicial modification or termination of contracts when:

• Unforeseeable circumstances arise after conclusion
• These circumstances substantially hinder performance
• Maintaining the contract in its original form leads to manifest injustice

2. Preventive Approach in Contract Law

This case of early lease termination illustrates why it is critically important to involve a lawyer before signing contracts, especially when dealing with long-term commitments with significant financial consequences.

3. The Power of a Well-Argued Position

Clear and professional formulation of a legal position, supported by in-depth legal analysis, can change the outcome of negotiations even without going to court.

4. Balance Between Firmness and Negotiation Flexibility

The successful resolution of the dispute was due to the combination of:

• A firm but well-founded legal position
• Willingness for constructive dialogue
• Realistic assessment of risks for both parties

Practical Advice for Business

For Commercial Space Tenants

1. Always consult a lawyer before signing a long-term lease agreement
2. Pay attention to clauses regarding early lease termination and associated penalties
3. Negotiate force majeure clauses that provide for adaptation under extraordinary circumstances
4. Seek legal advice immediately when problems arise, before the situation escalates
5. Know your rights under Art. 307 of the CA in case of substantial change of circumstances

For Landlords

1. Be flexible under force majeure circumstances – a rigid position may prove counterproductive
2. Realistically assess your chances in a potential court dispute
3. Reasonable compromise is often more beneficial than a long and expensive court process
4. Maintain good relationships with tenants – they may return as clients when the situation improves

COVID-19 and Contract Law in Bulgaria

Case Law

The COVID-19 pandemic led to numerous disputes related to commercial contracts in Bulgaria. Bulgarian courts and arbitrations reviewed hundreds of cases where merchants relied on Art. 307 of the CA.

Case law has shown that the success of such claims depends on:

• The specific business sector (aviation, tourism, hospitality were among the most affected)
• The degree of financial impact
• The party’s efforts to adapt to new circumstances
• Evidence of causal relationship between the pandemic and impossibility of performance

Alternatives to Court Proceedings

Our case, in particular early lease termination demonstrates the advantages of voluntary dispute resolution through negotiations, even when there is a strong legal position for a court claim. Arbitration at BCCI (Bulgarian Chamber of Commerce and Industry), although fast and effective, still requires time and resources. And it was our client’s intend as well.

Conclusion

This case from Belcheva & Karadjova’s practice illustrates several important truths about modern contract law:

1. Even the most solid contract can be adapted upon substantial change of circumstances
2. Legal strategy is as important as legal position – a well-argued opinion saved months of court proceedings
3. Preventive legal advice is an investment, not an expense – involving a lawyer during negotiation can prevent future problems
4. Reasonable compromise is a win for both sides – our client saved €355,000, and the landlord avoided a long court process with an uncertain outcome

The COVID-19 pandemic changed many aspects of business relations. Cases like this show that Bulgarian commercial legislation provides sufficient tools for fair dispute resolution, even under unprecedented circumstances.

For consultation on commercial law matters and contractual disputes, you can contact Belcheva & Karadjova law firm.

The article is based on a real case from the firm’s practice. Names and specific data have been anonymized in accordance with attorney-client privilege.