"Letter of the Law ": Superior Economic Court (SEC) clarifies disputable issues of lease legal relationships

17 Mar 2012

Firstly I suggest determining the laws to be applied for the purpose of regulation of various lease legal relationships. The resolution of plenum specifies that for the legal relationships resulting from lease agreements for real estate, being in ownership of economic entities, in relation to which the Republic of Belarus or an administrative-territorial unit, possessing shares, shares of the authorized capitals, may determine decisions to be made by those economic entities, Edict No.518 shall be applied in the first place, and the law on leasing and Chapter 34 of Civil Code shall be applied only in the part not conflicting with the above edict. Hereby, in order to correctly determine exact commercial organizations to be covered by operation of Edict No.518, it is essential to understand the phrase “the Republic of Belarus…may determine decisions to be made by those economic entities”.

The laws do not contain any legible decryption of this term. The judicial practice has also failed to work out integrated approaches towards interpretation of this term in the laws. Meanwhile, it is possible to follow Edict No.518 in relation to the economic entities, where the state has controlling interest in the authorized capital. In other situations, when the state’s share is considerably smaller, the dispute nature, provisions of the charter of the particular entity should be regarded and then corresponding conclusions should be made.

According to art.578 of Civil Code the lease object is a thing. In practice, lease agreement shall be also signed in relation to a part of the thing, for example, a part of the isolated premises. To what extent shall a lease agreement in relation to a part of the property be legitimate, to your mind? Is it possible to rent 1 square meter of premises?

It is quite often that the lease object is a part of the isolated premises. You can’t say that such lease agreements have no right to exist. You can be guided by the provisions of Edict No.518 stipulating the possibility to transfer a part of separate isolated premises for a lease. It is possible in regard to the real estate. As far as it goes to lease of any other property, it depends on particular type of property. For example, it’s difficult to lease a part of a vehicle.

Widely-spread example: conclusion with the distribution network of a lease agreement for a part of the shelf, a part of the shelf stand, on which the leaseholder exposes the goods. Is it possible to rent such a part? How can it be transferred upon the act?

The laws do not contain any legible bans on lease of a part of the property so far, so you cannot say that such a transfer is impossible in principle. You should proceed from practical and physical ability to lease a part of the thing. I believe, as far as shelves and shelf stands in a salesroom is concerned, it is possible. Some difficulties arise at the moment of actual transfer: location of leased property should be precisely indicated. But if the parties come to the mutual understanding of the terms and conditions in relation to the leased property, it is possible.

Shall preliminary lease agreement be legitimate in respect of the real estate item being under construction?

I know such situations in practice. We should use a more formal approach to applying the laws here. If we refer to the real estate item to be subject of the lease agreement, such real estate should exist both de facto and de jure. As far as the real estate is being under construction, it exists neither de facto, nor de jure.  Correspondingly, some difficulties arise during conclusion of the preliminary lease agreement with determination of the subject of the future lease agreement. And if it is not possible to agree upon the subject of the agreement, the agreement shall not be concluded. I would also mention that preliminary lease agreements for the real estate under construction are often concluded with particular purposes dealing with issues of disguised construction financing. The preliminary lease agreement provides the terms of assignment of definite amounts of money in the form of advance, deposit and prepayment. I would like to draw your attention to the following point. Pursuant to the regulations of the civil laws stipulating the procedure of conclusion of a preliminary agreement, the preliminary agreement may contain only one condition – conclusion of a master agreement in the future. Enclosure of any other conditions (including financial ones) to the preliminary agreement does not conform to the requirements of the laws. The judicial practice follows the line that all other conditions, including issues on transfer of money under any other pretence, shall be null and void.

Suppose, what if the parties managed to quite accurately detail the object of the preliminary lease agreement? For example, the construction has been practically ready-built, not put into operation, but it is possible to make measurements. Could such a preliminary agreement be feasible?

In such a situation, when the object has been practically finished, and it has just remained to register its creation, conclusion of a preliminary agreement is possible.

Let us assume, we have concluded an ideal preliminary lease agreement. But an unfair lessor has ignored the earlier concluded preliminary lease agreement and after putting the building into operation leased it out to another person upon more profitable conditions. Is such a potential leaseholder who has concluded a preliminary lease agreement earlier, able to protect his rights in a judicial procedure?

You cannot provide any clear practice advice what shall such a potential leaseholder do if he failed to implement his rights. The plenum refers just to the point that it is impossible in such a situation to transfer the leaseholder’s rights to him upon the newly concluded lease agreement. As regards contestation of the lease agreement having been concluded with another person as invalid transaction upon any other grounds, stipulated by the civil laws, it is theoretically possible to raise such a question. Yet, I cannot remember any example from my practice, when any suit on transaction invalidation would have been filed and the dispute would be settled in favour of the potential leaseholder.

And what if the lessor who has concluded a preliminary lease agreement, did not lease this premises out, but avoids concluding the master lease agreement with the ‘preliminary’ leaseholder?

General provision on preliminary agreements of Civil Code comes into operation here. It is possible to apply to the court with the suit on compulsion to conclude the master lease agreement. This situation has been in detail regulated by Civil Code and has been working in practice.

It is quite a frequent situation when the lease agreement shall be dissolved notably not upon the agreement of the parties, but in conflict situations, via repudiation of the agreement, unilateral dissolution of the agreement upon initiative of one of the parties in judicial procedure. In which cases is unilateral repudiation and in which unilateral dissolution of the agreement possible? What is the difference between both of them?

Speaking of the unilateral repudiation of the agreement, we should firstly mention the indefinite lease agreements, in relation to which such repudiation has been provided by the law. The lessor may at any time notify the leaseholder of his unwillingness to continue lease relations. For ordinary property this term comprises the period of a month in advance, and for the real property – 3 months. A particular letter should be written, which shall be then regarded as unilateral repudiation of the agreement. From this moment on the agreement shall be regarded discontinued. By unilateral repudiation it is not required to initiate a separate legal action.

A fixed-term agreement may provide for such a condition, but it should be put down in the agreement. It shall be legibly specified in which situation is lessor’s or leaseholder’s unilateral repudiation of agreement possible. It is essential in practice that in case of delivering a corresponding written appeal, it should be explicitly noted in the writing that the party of the lease agreement shall repudiate the lease agreement, and does not have intention to unilaterally dissolve it.

 Should it be written “shall repudiate extra judicially”? Or is it possible not to make any particular focus on it?

When we speak of litigation, the court’s task is to clear up the real will of the parties to the agreement, what they had in mind when stipulating such a condition. In case the lessor and the leaseholder say that it is namely the unilateral repudiation that they had in mind, the court shall proceed from that point and interpret the agreement in accordance with the will of the parties. But it is more frequently when the agreements enclose such a recording as “statement of right of the party to unilateral dissolution of the agreement”. If there is such a recording, the courts shall proceed from the point that in case of presence of such a condition the interested party shall have right to legal recourse with the requirement to dissolve the agreement. Then dissolution of the agreement and termination of lease relations may be possible only upon judicial procedure and after coming of the court judgement into legal force.

Should intercourse in correspondence preface the legal recourse?

There should be a claim setting forth a suggestion to dissolve the agreement. Presence of the complaint procedure allows coming to a consensus upon dissolution of the agreement extra judicially. If after issuing a claim the parties fail to come to an agreement, the interested party correspondingly may take legal recourse with the respective suit. I would like to draw your attention to the party raising the issue on dissolution of the agreement judicially. Dissolution of an agreement for a leaseholder shall be carried out upon the regular procedure, similar to other types of agreements. Before the lessor raises the issue on dissolution of the agreement due to violation by the leaseholder of its obligations, the lessor shall provide the leaseholder with the term for corrective actions. As soon as violations fail to be eliminated within the settled term, it shall be possible to take legal action on dissolution of the agreement.

It occurs that a claim to the leaseholder has been written, the term for corrective actions has been given, but he fails to eliminate violations within the set term. The lessor took legal action, has filed a suit, and after initiation of proceedings the leaseholder comes to the court saying that he has eliminated everything. What does the plenum resolution stipulate upon this issue?

If corrective actions have been taken before pronouncement of the court’s sentence, there is no reason for dissolution of the agreement.

If it has been established in legal proceeding that the lease agreement shall be null and void or shall be not concluded, what happens to restitution upon such relations between the parties? One of them was using the real estate and paid money; the other one gave the real estate away and was getting money. By the way, these relations may become complicated by the fact that someone has done non-removable improvements, carried out capital and current repairs. After that it is coming out that the lease agreement has no legal force. How can all the property consequences that came into existence be settled?

This question may be divided into two parts, as far as the answers will be different. If we are talking of void or not concluded agreement, upon which there have been actual relationship within a certain period of time between the owner or the holder of the property and its user, or the leaseholder, it has been unconditional that everybody was getting certain benefit: the lessor was getting lease payment, the leaseholder was using the property.

In this connection, by resolution of the issue on restitution in case of void agreement or by resolution of the issues of reimbursement of the money received, the courts proceed from the point that lease payment and use of the property shall level each other. The parties shall get equal compensation. Actually we may talk about setoff. In practice, when the question of reimbursement by means of restitution of the lease payment paid by the leaseholder upon the void agreement arises, the courts are likely to reject suit. They proceed from the point that the leaseholder has been using the property and he is not able to return the use to the lessor as far as it can be expressed in money terms.

We have discussed a standard situation, when use and payment are equivalent from the point of view of use period. And what if another situation took place, for example, when the lease payment had been paid for one year, but the leaseholder had used the premises during a year and half? Shall be the lessor authorized, in case the agreement has been recognized null and void, to recover the balance? And according to what rules?

For the whole period of use of property the lessor shall be authorized to demand lease payment from the leaseholder. If there is no any lease agreement, we cannot refer to the regulations stipulating the effect of the lease agreement. Accordingly, we shall follow the regulations of Chapter 59 of Civil Code, for unreasonable gains. 

The leaseholder has made inseparable improvements; in the end the lease agreement has been regarded null and void. Is it possible to return money?

Absolutely, it is possible to raise the issue on recovery of money so long the lessor is getting improvement of his property. All these costs may be regarded as unreasonable gains in the form of improvement of the property. The regulations of Chapter 59 of Civil Code shall be applied in this case.

And what if the lessor says the agreement to be null and void, correspondingly, there is no consent of the lessor for the inseparable improvements then, isn’t it? Is it possible to ask for compensation for the spoilt walls?

 I cannot recall such a situation from my practice. I suppose, the unaccomplished leaseholder shall be right, because he has suffered expenses. Talking of the lease agreement in operation, such a situation has normative provision. If there is consent, consequently the lessor shall compensate the expenses. If not, then all these shall refer to the leaseholders. 

The user’s questions: “I would like to know, to what extent is it real to claim through legal action the money from the lessor, which have been paid on account of lease upon the agreement, which does not conform with the amendments to Edict No.518? Namely, no amendments have been made according to the laws and the old lease payments continued to be charged”.

You should understand that the issue is that pursuant to the amendments to the laws the lease payment rate has become significantly lower than in the existing lease agreement. The mandatory regulations of the law shall be applied from the moment of their coming into legal force. Consequently, irrespective of whether the parties made amendments to the agreement or not, the provision stipulating the lower rate shall be applied. From the moment of coming this regulation into force the leaseholder shall have right to recall the lease payments exceeding the above rate. The same shall be applied in respect of the reverse situation, when the lease payment rate has been increased, but the parties failed to make amendments to the agreement, and since the regulation has mandatory nature, then the lessor has right to claim additional payments from the leaseholder.

One more question from the user: “The leaseholder fails to make lease or utility payments on the due date. Is it allowed for the lessor to block access to the lease premises up to the moment the leaseholder has paid off his debt?  Shall it be regarded lawful without indication of that point in the agreement, but upon prior notification of the leaseholder hereof? Shall any similar actions be provided for in the lease agreement? ”

If such a procedure shall be stipulated in the agreement, then it is possible. If the agreement does not contain any conditions of such lessor’s powers, then it shall be considered illegal.

The user is asking: “Do Minsk City Executive Committee and district administrations have right to interfere in the relations between the leaseholder and the lessor upon issues of dissolution and termination of agreements?”

As far as I understand, we are speaking of the communal property. Accordingly, all the powers of property disposal shall be within the competence of local government authorities. They can exercise their rights by means of giving instructions to the lessor, but they are not authorized to directly interfere in the lease agreement between the public utility company and the leaseholder. It is not quite clear from the user’s question, what was the form of interference, so it is difficult to say whether the local authorities were right or not. It depends on particular actions taken by the local authorities and how it affected the lease relations. After we have known the details it shall be possible to come to any conclusions. 

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