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Certain Issues Related to Lease Takeover and Termination of Lease Contract for Nonresidential Premises.

      On May 5, 1993 the Committee for Management of the Moscow Property signed a contract of lease of nonresidential premises with a period of validity up to July 1, 1998 with Assol municipal enterprise (hereinafter Assol), and on November 14, 1996 a contract of lease of the same premises with JSC Lux du Mond.

      Assol filed a claim before the Moscow Arbitration Court seeking recognition of the contract with JSC Lux du Mond as invalid. In the claimants opinion, the contract concerned was made for the encumbered premises, since the contract of lease signed with the claimant on May 5, 1993 had not been terminated.

      The Arbitration Court agreed with the above opinion and justified its position by the following arguments. As follows from the materials of the case, signing of the contract with JSC Lux du Mond was aused, first of all, by the letter addressed to the Director of the Central Agency for Management of the Moscow Property to the effect that Assol had no objections to assignment of its lease right to JSC Lux du Mond which was a sublessee of a part of the premises and asked to make with the latter a contract of lease for the whole premises and, secondly, by the Order of the Committee for Management of the Moscow Property dated December 18, 1995 to let these premises to JSC Lux du Mond for a 5-year period.

      In accordance with Art. 384 of the Civil Code of RF the right of the initial creditor is assigned to a new creditor to the same extent and on the terms and conditions, which existed at the time of assignment of the right. Since the amount of rentals, the lease period and certain other conditions were modified in the contract with JSC Lux du Mond dated November 14, 1996, the Arbitration Court considered that there had been no assignment and the contract concerned was an independent one, unrelated to assignment under the contract dated May 5, 1993.

      The arguments of JSC Lux du Mond that the contract with them was signed in connection with termination of the contract with Assol, and not in connection with lease right assignment, were found groundless by the Arbitration Court. The Court pointed out that for termination of a contract the procedure and form set forth by Art. 452 of the Civil Code must be complied with. Since Assol and the Committee for Management of the Moscow Property failed to terminate the contract in a written form, the agreement of the parties to terminate the contract cannot be deemed reached in a proper form, nor, as a consequence, the contract terminated. Therefore, the contract with JSC Lux du Mond has been signed for occupied premises and subject to Art. 168 of the Civil Code of RF is void. In this connection Assols claims in action are subject to relief.

      The appellate instance of the Moscow Arbitration Court upheld the above award, but the Federal Arbitration Court of the Moscow District reversed both the award and ruling of the Moscow Arbitration Court as running contrary to substantive law rules. In the opinion of the Court there were neither assignment of rights, nor termination of the contract, and the Order of the Committee for Management of the Moscow Property, Assols letter and the contract with JSC Lux du Mond signed on the basis of these in the aggregate resulted in rearrangement of contractual relations in respect of the lease of the disputable premises. The Court did not find it necessary to justify its conclusion by the current law rules.

      The High Arbitration Court of the Russian Federation, having entertained the statement of protest against the ruling of the Federal Arbitration Court of the Moscow District disallowing relief sought by the claimant as regards recognition of the lease contract between JSC Lux du Mond and the Committee for Management of the Moscow Property as invalid, disallowed the statement of protest, too, but as a cause of disallowance pointed out that Assol had assigned its rights and obligations under the lease contract to JSC Lux du Mond by way of a lease takeover and advised the lessor accordingly. Hence, the contract of November 14, 1996 with JSC Lux du Mond cannot be recognized as invalid.

      As attested by the awards and rulings of the arbitration courts rendered in the case concerned, the courts had no uniform position as regards qualification of relations between Assol, JSC Lux du Mond, and the Committee for Management of the Moscow Property. The High Arbitration Court of the Russian Federation has acknowledged that Assol and JSC Lux du Mond entered into agreement on assignment of the rights under the contract of lease dated May 5, 1993, in execution of which the contract of lease for the premises previously occupied by Assol was signed with JSC Lux du Mond. The Arbitration Court of Moscow found that there was no assignment of rights and, since the contract with Assol has not been terminated in a proper form, the contract with JSC Lux du Mond for the lease of occupied premises is void. The Federal Court of the Moscow District found in the disputable relations neither assignment, nor termination of the contract, and qualified these as rearrangement of the contractual relations.

      We find it necessary to analyze each of the above positions.

1.      In compliance with para 2, Art. 615 of the Civil Code of RF the lessee is entitled, with the lessors consent, to assign his rights and obligations under the contract of lease to another person. Simultaneous assignment by the lessee of his rights and obligations is defined by the Civil Code as a lease takeover.

      The Civil Code provisions of the lease do not expressly regulate the procedure for the lease takeover (except stipulating a mandatory consent of the lessor to be obtained prior to closing the lease takeover deal), its form or other rules. Hence, general provisions of the Civil Code regulating change of persons in the obligation should be applicable to the lease takeover.

      The Civil Code (para 1, Art. 382) stipulates that the creditor enjoying the rights (having claims) resulting from the obligation may transfer these to another party under the deal, or such rights (claims) can be assigned to another person ipso jure. It follows from the above that a coordinated willingness of both parties, i.e. signing by them of an agreement, should be expressed for assignment by the lessee of his rights under the contract of lease.

      Provisions of Chapter 24 of the Civil Code concerning the change of persons in the obligation keep silence about the cause of the debt assignment. However, by virtue of Art. 155 of the Civil Code a unilateral deal cannot create obligations for the person not involved in it. Hence, for assignment of the debt the expression of the willingness of the person incurring the debt is needed, too, and not only that of the debtor. Consequently, a coordinated expression of the willingness of the lessee and the person taking the lease over is needed for assignment of the debt under the contract of lease.

      Assol expressed its consent to the lease takeover in its letter, but that expression of willingness was forwarded not to JSC Lux du Mond, but to the Committee for Management of the Moscow Property. There is no confirmation of the consent of JSC Lux du Mond to assignment of Assols rights and obligations to the former in the materials of the case. Moreover, JSC Lux du Mond denied at the court hearing that there had been assignment of the rights. Since JSC Lux du Mond did not express its willingness to assume the rights and obligations under the contract of lease dated May 5, 1993, one cannot say that Lux du Mond and the lessee reached an agreement on the lease takeover.

      Besides reaching an agreement on the rights and debt assignment between the initial party to the obligation and the new party, the agreement, subject to Art. 389 of Civil Code, should be in a proper form: either a simple written form or notarized form, depending on the form of the deal under which the rights and obligations are to be assigned.

      The contract of lease of nonresidential premises must be executed, in compliance with para 1, para 2, Art. 609 of the Civil Code, in a simple written form and is subject to statutory registration. Consequently, if the agreement of the lease takeover had been reached, Assol and JSC Lux du Mond would have concluded the lease takeover contract in writing and registered it (prior to enactment of the Federal Law On Statutory Registration of Rights to Real Estate and Transactions Therewith, contracts of real estate lease in Moscow were subject to registration with the Committee for Management of the Moscow Property).

      The Civil Code makes another requirement to the change of persons in the obligation: notification of the rights assignment to the creditor (para 3, Art.382 of the Civil Code). Consequently, after signing the contract of lease takeover, it is necessary to notify the lessor of the assignment of the lessees rights to another person.

      Hence, in case of the lease takeover the Civil Code does not require termination of the contract with the previous lessee and signing of the contact with the person who has taken the lease over.

2.      Assol in its letter to the Central Agency for Management of the Moscow Property expressed no objections to assignment of the lease rights to JSC Lux du Mond and asked to sign the contract of lease for the whole premises with the latter. Since the above letter contained two alternative provisions, these should have been interpreted.

      In compliance with the Civil Code provisions concerning the change of persons in the obligation, Assol should not have given its consent to the lessor for assignment of its rights to another party, on the one hand, and, on the other hand, no new contract of lease with the person taking the lease over is required for assignment of rights. A new contract must be signed only in case the previous lessee repudiates the contract of lease, i.e. wants to terminate it. For termination of the contract, the agreement of both parties is required in accordance with para 1, Art. 450 of the Civil Code. Since JSC Lux du Mond used under the contract of sublease a part of the premises rented by Assol, the latter gave the lessor in the above letter its consent to assignment of the right to use the whole premises to JSC Lux du Mond, by terminating the lease contract, since without such termination the contract with JSC Lux du Mond could not be made.

      It should be noted that in justification of their claims nether Assol, nor JSC Lux du Mond referred to Assols willingness to assign its rights expressed in the letter concerned. Therefore, Assol actually was willing to terminate the contract rather than to assign its rights.

      The Moscow Arbitration Court has not acknowledged as terminated the contract between Assol and the Committee for Management of the Moscow Property due to the failure by the parties to comply with the requirements to the form of the agreement on termination of the contract.

      The Civil Code of RF (para 1, Art.452) stipulates that the agreement on amendment or termination of the contract is to be executed in the same form as the contract. As has already been pointed out, the contract of lease of nonresidential premises must be executed in a simple written form. At the same time, contrary to the contract of lease of the buildings, constructions and enterprises, the Code (para 2, Art. 434) does not stipulate that the contract of lease of nonresidential premises should be executed only in one copy signed by the parties. Hence, rules of para 3, Art. 434 of the Civil Code are applicable to the form of the contract of lease of nonresidential premises, subject to which a written form is deemed complied with if a written proposal to make a contract was accepted in the manner specified by para 3, Art. 438 of the Civil Code, i.e. by way of actions in implementation of the contract concerned undertaken by the party that has received the offer.

      It follows from the above that the agreement on termination of the contract will be deemed made in writing, provided in reply to a written statement by one party of its consent to termination of the contract the other party undertakes actions which obviously point to acceptance of such consent. Assols letter to the Committee for Management of the Moscow Property expressed consent to termination of the contract, which consent was accepted by the latter by issuing on December 18, 1995 the Order to let the disputable nonresidential premises to JSC Lux du Mond and sign the contract of lease with the latter. Consequently, the proposal to terminate the contract by implied actions should be acknowledged as accepted and a written form of the termination of the contract dated May 5, 1993 complied with.

      Hence, the contract between Assol and the Committee for Management of the Moscow Property has been terminated in a proper form and the contract with JSC Lux du Mond has been signed for unoccupied premises and is valid. Therefore, Assols claims seeking recognition of the contract concerned as invalid were subject to no relief.

3.      The Federal Arbitration Court of the Moscow District pointed out that there had been neither assignment, nor termination of the contract, but rearrangement of contractual relations. A more controversial conclusion can hardly be conceived. If the contract between Assol and the Committee for Management of the Moscow Property has not been terminated, as has been found by court, Assol is a lawful lessee and rearrangement of contractual relations without its consent is illegal, and if Assol is a lawful lessee the contractual relations can be rearranged only by the lease takeover, which, as the court asserted, was not the case.

Tatiana L. Levshina,
Member of the Scientific & Consultative Council at LEGIST Law Firm


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