Updated on May 14, 2020.
Through Executive Decree No. 145 of 1 May 2020 (the “Executive Decree”), enacted in Official Gazette 29,015 of the same date, the Panamanian Government established certain measures related to lease agreements and eviction procedures.
Among its recitals, the Executive Decree indicates “that the health crisis produced by the COVID-19 pandemic, has resulted in the loss of jobs, the suspension of the effects of contracts, as well as commercial and industrial activities, making timely rental payments under residential, commercial, professional, industrial and educational lease agreements impossible, and requires the intervention of the Executive Branch, to establish mechanisms that guarantee compliance with the rights and obligations of both parties to the relationship”.
Among the effects of the Executive Decree are the following:
- The suspension of “proceedings to evict lessees from real estate properties destined for residential use, commercial establishments, professional use, industrial and educational activities.”
- The “freezing” of rent payments owed, of clauses providing for increases or for penalties for unilateral termination of the contract, and those related to interest for late payments.
- A penalty to those lessees who, after the conclusion of the State of National Emergency decreed by Cabinet Resolution No. 11 of March 13, 2020, refuse to make payments accrued during said period and those lessees who do not pay their rents despite not being economically affected by the state of emergency.
- Lessors who suspend services such as gas, water, electricity, etc., to pressure the lessee to leave the property will also be subject to penalties.
As a general observation, it must be noted that because the State is not a party to lease agreements governed by private law, it cannot modify – via decree – the terms and conditions agreed to by the parties in a private document. Only the parties to that contract can agree to such modifications. On the other hand, the Civil Code of the Republic of Panama is clear when it indicates that, in contractual matters, the laws in force at the time in which the parties entered into an agreement are understood to be incorporated into contracts. The application – via decree – of a new legal regime on leases subject to private law that are already underway is, at the very least, questionable.
As a result of the gaps and ambiguities created regarding lease agreements in the wake of the issuing of the Executive Decree, especially seeing how this may have serious implications on contractual relationships between lessors and lessees, we hereby offer the following observations that should be considered by a lessor or lessee vis-à-vis the Executive Decree.
- The Executive Decree does not expressly establish that its provisions apply exclusively to those residential, commercial, “professional, industrial and educational” lessees who have been affected by the national emergency declaration, and/or by other orders and decrees that have established curfews and closed commercial establishments.
- Article 5 is of special concern because it refers to the “freezing” of rent payments owed, of clauses providing for increases or for penalties for unilateral termination of the contract, and those related to interest for late payments. What the Executive Decree does not address is the lessee’s ability or inability to unilaterally terminate a lease in advance. In this situation, it is not clear whether the penalty for early termination must be paid later or if it is completely eliminated. Article 7 does not provide additional guidance, since it only mentions the obligation to make rental payments that remained unpaid during the state of national emergency, but it does not specify how (or if) penalties are to be addressed.
- On the other hand, nothing in the Decree expressly establishes that lessees who have suffered such damages are exempt from the obligation to make their monthly rental payments during the state of national emergency. Although the Decree mentions “freezing” rental payments, this – as we have already indicated – can be interpreted as a prohibition on altering the rent installments during said period. Thus, it is not clear why Article 6 mentions sanctions for lessees who do not pay rent accrued during the validity of the state of national emergency, “after the effects of the declaration of the state of national emergency have ceased.”
- Article 9 suggests that all lessees who have not been economically affected by the declaration of a state of national emergency must continue to make rent payments as established in the terms of the corresponding lease agreement. Assuming this is the intention with which the provision was written, a breach of that provision would leave lessees subject to penalties. Depending on the amounts involved, this could be an insufficient remedy for lessors given that, during the state of national emergency, no interest may be charged for late payments and eviction proceedings may not be initiated.
- Additionally, and as mentioned previously, given that Article 9 suggests that those who have not been economically affected by the declaration of a state of national emergency must continue to make rent payments in the ordinary course of business, it could then be understood that those who havebeen affected would be excused from said payments. This, in turn, raises doubts about precisely what constitutes an “economic impact.” This could be understood in the widest possible sense and excuse practically all businesses in the national territory from paying rent. Although it is true that, for example, those businesses that were forced to close by executive decree have suffered the most obvious impacts, even businesses which have not been ordered to close have nonetheless been economically affected.
- Lastly, Article 11 establishes that the General Office on Leasing of the Ministry of Housing (“MIVIOT,” for its initials in Spanish) will be the competent entity to hear, process and decide “on complaints between the lessor and lessee that arise from the legal effects” of the Executive Decree, which could directly conflict with those lease agreements in which the parties have agreed that any and all disputes that may arise between them will be subject to arbitration proceedings.
On May 14, 2020, MIVIOT issued Resolution No. 247-2020, establishing an “adequate and transitory process” for the registration, before said institution, of all lease agreements that had not been registered and in which lessor and lessee had decided to settle conflicts arising from the non-payment of monthly rental fees through mutual agreements. Said lessors and lessees will be exempt from having to place a deposit at MIVIOT for an amount equal to the monthly rent, which would be an obligation of the lessee under article 13 of Law 93 of October 4, 1973.
In addition, MIVIOT approved a form by which tenants and lessors can mutually agree to defer monthly rents, as stipulated in article 7 of the Executive Decree.
For the past few decades, Panama has established public-private partnerships (“PPPs”) in projects as diverse as toll roads, water treatment plants, ports, telecommunications networks and the generation and distribution of electricity. These projects, however, have been created and managed under either a general (and, for current-day standards, insufficient) concessions law dating back to 1988; industry-specific (and, sometimes, project-specific) legislation enacted in the mid-to-late-90’s; or the general public procurement law enacted in 2006. In recent years, framework PPP legislation was discussed by the National Assembly, only to be voted down in 2011. It was then considered again at various points between 2014 and 2018, although never formally given any debate before the legislature. In the meantime, a 2017 study commissioned by the Inter-American Development Bank and conducted by The Economist Intelligence Unit, ranked Panama 18th (out of 19 countries listed, with only Venezuela lagging behind), in terms of PPP regulatory frameworks in the region.
In light of these circumstances, the Panamanian Government took a decisive step forward in developing an updated (and more comprehensive) PPP legislative framework, as a means to: a) provide an option for developing major infrastructure projects without compromising the Government’s indebtedness levels, b) encourage private investment and job creation, and c) strengthen Panama’s competitive position vis-à-vis other Latin American countries (many of which enacted successful PPP legislation long ago). On July 31, 2019, barely a month after taking office, the Administration of President Laurentino Cortizo submitted a framework PPP bill before the National Assembly. On September 11, 2019, the Assembly passed the bill, which is now only pending signature by the President and publication in the Official Gazette in order to be enacted into law.
The new law will provide a much-needed regulatory and institutional framework in order to allow for the development of major projects without requiring substantial short-term disbursements of public funds.
The new legislation seeks to attract capital from private investors who, at the same time, will bring forth their experience, know-how, equipment, technologies and technical and financial capabilities to the fore. These resources will be used in order to “create, develop, improve, operate and / or maintain public infrastructure for the provision of public services.” Thus, the PPP law both allows and requires the private sector to develop, finance, build, operate and maintain – for an amount of time specified in the corresponding contract – projects geared to provide public services (e.g., roads, bridges, subway lines, electric transmission lines, etc.). The law provides for a maximum contract length of 30 years (which can be extended for up to 10 additional years). Thus, the idea is for the State to enter into long-term partnerships with investors that have the requisite experience to not only build, but also operate and maintain these projects, meeting the service and quality standards established in the RFP documents as well as the PPP contract.
The institutional framework for PPPs is also an innovation of the new law since – unlike the existing public procurement and administrative concession laws – PPP contracts involve not only the contracting government entity and the PPP contractor, but also three new government entities:
- A Governing Body (the Ente Rector), comprised by the Minister of the Presidency (who will preside over it), the Minister of Public Works, the Minister of Economy and Finance, the Minister of Commerce and Industries and the Minister of Foreign Affairs. In addition, the Comptroller General of the Republic, although not granted voting rights within the Ente Rector, will nonetheless be a part of it and entitled to voice her/his opinion at meetings. Among other functions, the Ente Rector will authorize the drafting of technical reports on projects that may be subject to implementation as PPPs, the approval for projects to be designed as PPPs and of the RFP documents (including the draft PPP agreement), as well as approving any changes to the PPP contract once it is in force;
- A National PPP Secretariat, serving under the Ministry of the Presidency and whose functions include – among others – providing technical and operational support to the Ente Rector, as well as developing the criteria for selecting PPP projects, the guidelines for assigning risks and granting of guarantees, as well as the guidelines for the design of the RFP documents and model PPP contracts; and
- An Advisory Committee, made up of four members of the business sector, two members of the academic sector and two representatives of organized labor. The Advisory Committee can recommend potential PPP projects to the Ente Rector, through the National PPP Secretariat.
Prior to the PPP bidding process, preliminary studies must be carried out based on six eligibility elements established in the law (social benefits, economic cost-benefit analysis, risk allocation, service indicators, feasibility studies, as well as environmental and legal aspects). The Contracting Public Entity must then prepare a technical report, subject to the opinion and observations of the National PPP Secretariat, which must then be sent to the Ente Rector, so that it can decide whether the project will be bid out as a PPP project.
Projects with a value of less than fifteen million dollars cannot be tendered as PPP’s, except in the case of municipal projects, in which case the criteria for granting exceptions will be further developed in the regulations that will be issued after the law comes into effect. Furthermore, projects cannot be implemented as PPP’s in any of the following cases: a) if existing commitments under government contracts then in force exceed 30% of actual investments in the previous year, b) if existing commitments in the following five years – under contracts then in force – exceed 30% of the projected investment of the contracting public entity, pursuant to the Government’s Five-Year Investment Plan in the respective fiscal years, or c) the total cumulative present value of existing commitments of the Non-Financial Public Sector in PPP contracts exceeds 7% of gross domestic product.
The selection of PPP contractors will be carried out under objective criteria, since the contract will be awarded to the bidder that meets the mandatory requirements and submits the best economic offer. In addition, there are clear limits on the amounts and time periods for which PPP contracts can be modified. These provisions seek to eliminate subjective factors in awarding PPP projects, as well as avoiding overly expensive addenda to PPP contracts.
In order to facilitate financing structures – either through syndicated credit facilities or through capital markets – the law provides for the option (or, in case the project is partially funded through government subsidies or contributions, the obligation) for the assets involved in the project to be placed into a trust to be managed by a trustee that is licensed in Panama. This will further inoculate the projects and their related assets should the contractor face liabilities vis-à-vis third parties throughout the duration of the contract.
Finally, the grounds for disqualification currently included in the existing public procurement law are toughened, as these will disqualify bidders for a 10-year period, rather than the 5-year period established under the public procurement law.
It is important to bear in mind that the PPP law does exclude certain services and institutions from contracting under the PPP framework. Namely, the State-owned water company, the Panama Canal Authority, the Social Security Administration and the governmental financial entities and regulators, may not contract for any work or service under the PPP law. Furthermore, public health, education and public safety services cannot be contracted by any government entity under a PPP structure. Time will tell if – once PPPs begin to be implemented under the new law – the political climate will allow the excluded entities and/or services into the fold.
All in all, the new law is an important milestone in bringing Panama’s PPP regulatory framework in line with those of other Latin American countries, which will hopefully usher in a new era of success in major infrastructure investment.
Morgan & Morgan and 3 lawyers of the firm are nominated in the first edition of the Latin American Energy and Infrastructure Awards, an event organized by the Iberian Legal Group and its publication The Latin American Lawyer, with the aim to recognize the excellence and achievements of professionals in the energy and infrastructure sector in the region.
The nominations include the following categories:
Morgan & Morgan is characterized by its participation as legal advisors in the most important infrastructure projects in the country. The mining project Cobre Panama, the Panama Metro system, the hydroelectric power plant Changuinola I, the country’s first wind farm, among others; are just a few in which our team of lawyers has participated in all phases from its development to its financing.
The awards gala will take place on October 24 in Mexico City.
The 2019 edition of Latin Lawyer recommended Morgan & Morgan as the largest firm in Panama. “A large headcount and an established presence in the market gives Morgan & Morgan the manpower and experience required to guide some of Panama’s most significant transactions”, states the guide.
Partners Juan David Morgan Jr., Francisco Linares, Enrique De Alba, Jazmina Rovi, Inocencio Galindo, Francisco Arias, Ramon Varela, Roberto Lewis, Raul Castro, Ricardo Aleman, Albalira Montufar, Maria Teresa Mendoza, Mercedes Arauz de Grimaldo, Enrique Jimenez and Jose Carrizo, received mentions as key players.
Morgan & Morgan advised IDB Invest, a worldwide financial institution with presence in Latin America and the Caribbean region, in connection with a loan facility granted to Global Bank Corporation for an amount of up to US$60,000,000.00 (with an option for further supplements).
Up to 70% of the proceeds of the loan will be used by the Panamanian bank to provide loans to local small and medium-sized enterprises, with the remaining 30% to be used to provide loans to women and women-led businesses.
This cross-border deal, which closed on March 15, 2019, involved attorneys from the Republic of Panama and the United States of America.
Partner Ramon Varela represented Morgan & Morgan in this transaction.
Morgan & Morgan represented Electron Investment, S.A. in an arbitration process filed by Constructora Seli Panamá, S.A. before the International Chamber of Commerce
Morgan & Morgan was part of the team of lawyers that represented Electron Investment, S.A. (“EISA”), in an arbitration process filed by Constructora Seli Panamá, S.A. (“SELI”), before the International Chamber of Commerce (“ICC”).
The request for arbitration was filed by SELI following certain disputes related to the contract for the construction of the tunnels of Pando and Monte Lirio Hydroelectric Projects, a contract that had been terminated by EISA as a result of a series of breaches by SELI, mainly due to failure to meet the deadline for the completion of the works. The construction contract was an EPC (engineering, procurement and construction) using the silver book of the International Federation of Consulting Engineers (FIDIC, by its initials French), where the contractor assumes responsibility for the design and construction of the project, in this case, of the tunnels of the hydroelectric power plants.
The process was under arbitration at law, according to Panamanian law and according to the rules of procedure of the ICC, having seat in Panama City, Republic of Panama. The total sum of the claim filed by SELI amounted to US$94,065,202.00; and EISA, for its part, filed a counterclaim for an amount of US$110,000,000.00.
After the evidence was heard and the corresponding steps of procedure were concluded, the arbitral tribunal issued the final award dated January 29, 2018, communicated to the parties on February 14, 2018, accepting most of the EISA’s claims and ordering SELI to pay EISA the sum of US$22,524,862.58; that after compensating the sums recognized in favor of SELI, results in an amount in favor of EISA of US$14,653,362.12, plus costs and expenses.
SELI subsequently filed a motion for annulment of the award before the Fourth Chamber of General Businesses of the Supreme Court of Justice, which is pending resolution.
EISA is a Panamanian company whose shareholders are Aurel, S.A. (a Panamanian company owned by Grupo Eleta), Compañía Española de Financiación del Desarrollo, COFIDES, S.A. (a Spanish company whose purpose is to provide medium and long-term financing for viable private investment projects abroad in which there is Spanish interest), and Genera Avante, S.L. (a Spanish owned company of Grupo Inveravante).
EISA has two hydroelectric generation concessions that use of the waters of the Chiriqui Viejo, Pando and Monte Lirio Rivers, which together have an installed capacity of 85MW. Monte Lirio started operations in October of 2014, while Pando is still under construction due to delays in the excavation of the tunnel.
José Carrizo and Ramón Varela, partners; and the associates Mayte Sánchez, Ana Carolina Castillo Solís and Analissa Carles, participated in this process.
Attorneys Ricardo Aleman, Aristides Anguizola, Jose Carrizo, Mayte Sanchez and Ramon Varela, participated as contributors in the investigation process for Panama of the publication Doing Business 2019: Training for Reform, an emblematic report of the World Bank Group that summarizes regulations that enhance business activity across 190 economies.
The full report is available for download here.
Morgan & Morgan and five attorneys of the firm recognized by the IFLR1000 Financial and Corporate guide 2019
Panama, January 4, 2019. Morgan & Morgan received top-tier rankings in the IFLR1000´s 2019 Financial and Corporate guide in the categories Financial and Corporate and Project Development.
In addition, five (5) lawyers of the firm are listed as leading professionals in their areas of practice:
• Francisco Arias
• Carlos Ernesto Gonzalez Ramirez
• Inocencio Galindo
• Ramón Varela
• Aristides Anguizola
The IFLR1000 rankings are the result of a 6-month, in depth research project by IFLR 1000 independent editorial team who consider three main criteria: transactional evidence, peer feedback, and client feedback.
Panama, October 15, 2018. Morgan & Morgan represented Engie Solar in the sale of its ownership in PanamaSolar2, S.A., to Latin Renewables Infrastructure Funds managed by Real Infrastructure Capital Partners.
Engie Solar through its subsidiaries Solairedirect Global Operations and Solairedirect Panama designed, procured, developed and built a photovoltaic power plant “Pocri” with an installed capacity of 16MW located in the Province of Cocle, Republic of Panama, owned and operated by PanamaSolar2, S.A.
PanamaSolar2, S.A., won a public bid for the sale of photovoltaic energy to all three distribution companies operating in Panama, for the supply of electricity to the national market. Even though the power plant is still undergoing operational tests, it is already generating and supplying renewable energy through the national grid.
Panama, September 25, 2018. Morgan & Morgan and sixteen attorneys of the firm were recognized in the Chambers Latin America 2019, guide of the best lawyers and law firms across 20 countries of Central America, the Caribbean, South America and Mexico.
The firm has been ranked in the first Bands within the areas of Banking & Finance, Capital Markets, Corporate/M&A, Dispute Resolution, Energy & Natural Resources, Intellectual Property, Offshore, Projects, Real Estate, Shipping and Shipping Litigation.
Likewise, the publication noted as leaders in their areas attorneys Inocencio Galindo, Francisco Arias, Ramon Varela, Roberto Vidal, Simon Tejeira, Jose Carrizo, Luis Vallarino, Ana Carolina Castillo, Allen Candanedo, Maria Eugenia Brenes, Roberto Lewis, Luis Manzanares, Enrique De Alba, Jazmina Rovi, Juan David Morgan Jr. and Francisco Linares.
One of the clients interviewed stated that “Judging by the results that the firm achieves, I can say that their advice is effective and arrives in a timely manner. I would highlight their availability and technical competence”.
About Morgan & Morgan
With over 80 lawyers and 20 practice areas, Morgan & Morgan is a full service Panamanian law firm, regularly assisting local and foreign corporations from different industries, as well as recognized financial institutions, government agencies and individual clients. Of particular note is our continuous advice for clients involved in all stages of the development of important projects related to energy, water supply, construction, oil, mining, public infrastructure, retail, ports, transportation, among others. Learn more at www.morimor.com.