Has Poland violated EU state aid rules by helping retail tenants?

The Turów coal mine conflict, a media law amendment that may limit media freedoms and the reform of the judicial system are not the only problems that Poland will have to face in the coming months.

On July 7, the Polish Council of Shopping Centres (PRCH) notified the European Commission that Poland had granted unnotified state aid to retail tenants during Covid-19 pandemic worth a total of nearly 1.1 billion euros (five billion Polish złoty).

This happened after many months of unsuccessful attempts to be involved in the public consultation process when creating statutory rent regulations for the shopping centre industry and the lack of reaction from the Polish government.

In late March 2020, following the outbreak of the Covid-19 pandemic, Poland introduced a statutory mechanism ordering the expiry of rent obligations for the duration of the ban on commercial activity in retail facilities with a sales area exceeding 2,000 square metres.

As a result of four lockdowns lasting almost six months, tenants were statutorily exempted from rents and service charges. At the same time, landlords were excluded from aid programmes implemented by the state and institutions cooperating with the government.

The adopted aid scheme covered, without exception, all tenants of large retail facilities regardless of revenue decrease and without the right of landlords to obtain any financial compensation for the temporary expiry of lease agreements, resulting in a lack of rental revenues.

Landlords were only given the right to accept from tenants an offer to extend a lease agreement on the same terms and conditions as on the date of temporary expiry of the lease agreements for a period of the ban duration plus an additional six months.

Unfounded objections

The Polish government says the claims made by the shopping centre industry are groundless and that the rent abolition for retail tenants did not violate state aid regulations as the tenants did not receive any aid from the Polish government using state resources and the statutory expiry of lease agreements and rent obligations was not connected with any transfer of state funds.

Officials argue that the government’s interference in the content and duration of lease agreements did not violate the prohibition of state aid set forth in Article 107 of the Treaty on the Functioning of the European Union (TFEU), as only state interventions or interventions using state resources that give selective advantage to enterprises which may distort competition on the internal market and affect trade between member states are forbidden.

The adopted aid scheme, according to the Polish government, did not use state resources, because it is fully financed from the landlords budgets.

So is it state aid or not?

The definition says that state aid is, in particular, “any direct or indirect measure or support from state authorities in respect of production, sales or exports, even if not imputable to the state budget, if it gives the enterprise an economic advantage by reducing the costs incurred in the normal course of business, including financial measures granted to an enterprise that exceed, in terms of their engagement, the normal capital risks determined by the standards of market-economy.”

As such, state aid may take many forms, some of them atypical; TFEU does not introduce any limitations in that regard.

“Typical” forms of state aid include grants, loans, guarantees, warranties, subsidies, or any actions reducing the burden of public levies, including tax exemptions, tax abolitions, reliefs, instalment schemes, or rent exemptions in public real estate management.

Atypical forms of state aid include interpretations of tax law, granting access to the public domain, natural resources or special or exclusive rights without adequate remuneration consistent with market rates, as well as statements or declarations by a member state that may result in a better rating or credit score of the entrepreneur.

Contrary to the arguments made by the Polish government, state aid does not have to come directly from the state if a given entity did not have any other choice but to redistribute its own funds in compliance with the will of the state. Consequently, state aid may also be provided by wholly private entities, which, as a result of state compulsion, transfer their own funds, thus granting benefits to other enterprises. Importantly and most glaringly in the case of Poland, beneficiaries do not have to meet any conditions in order to receive this aid, unlike aid programmes offered directly by the state.

In order to determine whether state resources are involved, it is crucial to establish who decides on the manner of distribution. That is why state aid, as pointed out by the Court of Justice of the European Union (CJEU) in Preussenelektra ag v. Schleswag AG can be any form of aid adopted by a member state and financed by private enterprises in compliance with terms and conditions statutorily determined by public authorities (statutory obligation). This is precisely the situation in Poland in the area of statutory rent regulation for retail facilities.

A European outlier

The aid scheme adopted in Poland has no equivalent in the legal regulations of other EU member states, in particular in the group of aid measures implemented by member states and notified by them to the European Commission during the pandemic

Belgium offered national and local government loans to tenants for rent up to 60,000 euros, Czechia provided rent subsidies for tenants up to 10,000,000 crowns, while Italy gave tax relief of 30–50 per cent of rents.

At the same time, Slovakia provided rent subsidies for tenants in the amount equal to the relief negotiated by the tenant with the landlord, the Netherlands offered financial compensation for tenants of up to 50,000 euros, Germany gave a temporary ban on termination of rental agreements for non-payment of rent, Romania granted a conditional right for the tenant to request an extension of the time limit for paying rent/service charges, and Luxembourg suspended evictions for a specific period..

An uphill struggle

We look forward to the European Commission’s decision in the matter. The whole case is atypical, just like the form of state aid granted by Poland to retail tenants.

Was it prohibited state aid? Time will surely tell. We cannot forget that the tenants are not the only ones who suffered losses due to the pandemic but also the landlords who, in 2020 alone, made a voluntary, temporary reduction of rents based on the individual financial situation of each tenant, amounting in total to some 450 million euros (or two billion Polish złoty) and covered the costs of the statutory rent abolition in the amount of some 1.1 billion euros (or five billion Polish złoty) from their own sources. This has resulted in a gap in their budgets reaching over 50 per cent of their annual revenues.

Unfortunately, it is not the end of their struggles. On July 23, another, new – and also unnotified – statutory aid scheme came into force. It introduces, contrary to the many objections, further relief measures to retail tenants, not only during lockdowns but also for three months afterwards.

Landlords operating in Poland, who are billions of euros in debt, are looking anxiously into the future, with experts already predicting a fourth wave of the pandemic in late August and early September.

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