Arbitration Practice of Lease Laws Application.

      Lease is a traditional institution of Russian law duly regulated in legislation. The latest Civil Code of RF (hereinafter the Code) has essentially changed the legal basis of the lease by adapting it to present-day conditions. Having preserved numerous provisions of earlier adopted laws, Chapter 34 of the Code has primarily widened the types of lease and reflected specific features of their regulation.

      The cases related to conclusion, execution, and termination of lease contracts make up a significant category of the disputes entertained by arbitration courts. The analysis of the rulings of the High Arbitration Court of RF (hereinafter the HAC) testifies that an absolute majority of the lease cases relate to the lease of buildings and nonresidential premises. Among these the disputes over termination of lease contracts and over rentals (change of the amount, recovery of debts, etc.), in their turn, have a significant place.

      The causes for termination of the lease contracts at the lessors request before the appointed time are set forth by Article 619 of the Code. Simultaneously it is stipulated that the contract may specify other causes for premature termination of the contract subject to para 2, Article 450 of the Code. The rule concerned was applied in the dispute where the lessor a Property Management Committee filed a claim seeking eviction of the lessee.

      The first instance court allowed the claim on the grounds that the contract stipulated its unilateral termination by the lessor in case of reconstruction of the building.

      The Presidium of the HAC (Resolution dated 23 December 1997, # 4180/97) upheld the award rendered by the above court. At the same time, it pointed out that since a premature unilateral termination of the lease contract by the lessor was provided for by the contract concerned, the respondent was aware of the consequences specified in a respective clause, because the contract had been signed and sealed by the parties.

      In accordance with Article 8 of the Federal Law On Enactment of Part Two of the Civil Code of the Russian Federation the rules of Part 2 of the Code, which concern the causes, consequences, and termination procedure for individual contracts and are mandatory for the parties to the contract, are also applicable to the contracts which remain in force after enactment of Part 2 of the Code irrespective of the date of their signing.

      Another issue related to application of Article 619 of the Code was reflected in the HAC circular dated 5 May 1997, # 14 Review of the Practice of Resolution of the Disputes Related to Conclusion, Amendment, and Termination of Contracts. Article 619 of the Code stipulates that the lessor is entitled to claim premature termination of the contract only after sending a written notice to the lessee warning the latter of the necessity to fulfil his obligation within a reasonable time period. The HAC explained that the claim to terminate the lease contract is not subject to allowance, if the violations which caused recourse to the arbitration court were eliminated within a reasonable time period. In the case under review such violations consisted in a systematic rentals default, the failure to fulfil the obligations to repair the premises rented, signing of sublease contracts without the lessors consent.

      However, such approach should not be unequivocally applied in all cases. In another case the HAC Presidium (Resolution dated 3 March 1998, # 7839/97) upheld the award on termination of the lease contract in connection with the lessee using the rented premises in essential violation of the contract terms and conditions. The court found that the lessee sublet the premises in violation of the contract, without the owners written consent, and failed to pay rentals for several years. At the same time, the HAC has pointed out that the court was right to pay no attention to the fact that after the lessor filed a claim seeking termination of the lease contract the lessee took measures to evict unauthorized organizations from the premises, since the fact of sublease to third parties of the space in the rented premises, irrespective of execution of sublease contracts, per se is an evidence of the failure to discharge a contractual obligation, and that constitutes a probable cause for premature termination of the lease contract subject to subparagraph 1, Article 619 of the Code.

      The above conclusion seems to be right. Elimination of the contract violations by the lessee may be regarded as a reason for refusal to terminate the lease contract before the appointed time only with due regard for all facts of the case, including, inter alia, the nature and gravity of violations, the possibility to eliminate these, and whether this is in line with the owners interests.

      On the whole, the analysis of the HAC Presidiums rulings in cases entertained in exercise of supervisory power shows that revision of valid awards rendered in the cases arising from lease relations, is mainly irrelevant to an erroneous application of the substantive law rules regulating lease relations. The most frequently encountered cause for alteration or setting aside of an award or ruling in exercise of supervisory power is unsoundness of a judicial act. This is true, first of all, of the rentals cases when valid judicial acts are revoked, and the case is referred to reconsideration in order to reveal and assess all facts of the case.

      For instance, the lessee brought a claim seeking recovery of the rentals paid in excess and the debt for re-equipping the premises rented.

      The lease contract stipulated that the lessee was to be reimbursed for capital expenditures on the premises repair and re-equipping by partial settlement of the rentals within a certain period, provided approved acceptance certificates of the work performed were submitted.

      Such provision corresponds to para 1, Article 616 of the Code regulating distribution of the parties duties to maintain the premises rented. Hence, the lessee was entitled to request the reduction of the rentals in order to have his expenditures on re-equipment of the premises reimbursed. However, the ertificates of acceptance of the work performed or other documents attesting approval of the lessees expenditures were missing from the materials of the case. In this connection the case was referred to reconsideration (Resolution of the HAC Presidium dated 11 April 2000, #8567/99).

      In another case (Resolution of the HAC Presidium dated 2 July 1996, #678/96) the lessor brought a claim seeking recovery of the debt in rentals and the default fine.

      In compliance with Article 614 of the Code the lessee is obliged to pay for the property used (rentals) in due time. However, the respondent claimed that the lessor failed to discharge the obligation to transfer the premises according to the acceptance certificate and that the premises rented were being overhauled. Therefore, the lessee could not use it, as intended, until acceptance of the premises by an interdepartmental commission.

      The HAC Presidium revoked the valid judicial acts which had allowed the claims and pointed out to the erroneous conclusion of the appellate instance that the respondent was obliged to pay rentals irrespective of the lessors fulfillment of or failure to fulfill his obligations to transfer the premises to the lessee. Subject to Article 307 of the Code, by virtue of the obligation accrued from the contract a person (debtor) must perform in favor of another person (creditor) a certain action (to transfer the property, to accomplish work, to pay money), and the creditor is entitled to request that the debtor discharge his obligation.. Hence, the lessor is entitled to demand the rentals only after the premises have been transferred to the lessee pursuant to the acceptance certificate.

      Among other cases interesting are the disputes related to buying out of the leased property. Subject to Article 624 of the Code the contract may stipulate that the property leased is transferred to the proprietorship of the lessee upon expiration of the lease term or prior to such expiration, provided the lessee has fully paid the redemption price specified by the contract.

      Thus, in the dispute under review the lessee brought a claim seeking compulsory signing of the building purchase and sale contract on the basis of the right specified in the contract to buy out the building rented at its price on the day the lease contract was signed. Initially the claim was allowed. The HAC Presidium (Resolution dated 16 May 2000, # 9377/99) revoked the valid judicial acts and referred the case for reconsideration on the grounds that the lease contract signed by the parties contained only a reference to the lessee preemptive right to buy the building out, but neither stipulated the transfer of title to it, the terms and conditions of such transfer, nor the redemption price and the procedure of its payment. At the same time, in accordance with Article 555 of the Code in case the clause stipulating the price of the real estate agreed by the parties in writing is missing from the contract, the real estate sale contract is deemed not concluded.

      Hence, whenever the right to buy out the rented property is incorporated in the lease contract, the requirements to the contract of sale of a specific property to be bought out should be taken into account, and respective provisions must be included in the lease contract, which must also stipulate the procedure for resolution of disagreements over the contract of sale.

      On the whole, the level of the lease legislation development allows the arbitrators to render, in most cases, lawful and justified awards. Exhaustive regulation in the Code of the majority of issues related to the lease contract predetermined the fact that during 5 years Part 2 of the Code has been in effect there arose no necessity to prepare separate comments on application by arbitration courts of the lease legislation, except with respect to statutory registration of nonresidential premises lease contracts.

      The question is that according to para 2, Article 609 of the Code real estate lease contracts are subject to statutory registration. At the same time, lease contracts for buildings and constructions are subject to statutory registration only in case they are concluded for a term of less than 1 year (para 2, Article 651 of the Code). As regards statutory registration of nonresidential lease contracts, respective special rules are missing from the Code. That is why the question of statutory registration of nonresidential premises lease contracts subject to para 2, Article 609 of the Code, irrespective of the lease term, was raised repeatedly.

      The HAC Presidium explained in its circular dated 1 July 2000, # 53, that in view of the fact that nonresidential premises are a part of real estate, different from a building or construction in which these are located, but at the same time inseparable from such building or construction, applicable to nonresidential premises lease contracts should be the rule of statutory registration of the lease contracts for buildings and constructions provided for by para 2, Article 651. Accordingly, a nonresidential premises lease contract concluded for a term exceeding 1 year is subject to statutory registration and is deemed concluded from the date of such registration. A nonresidential premises lease contract concluded for a term of less than 1 year is not subject to statutory registration and is deemed concluded from the moment defined in accordance with para 1, Article 433 of the Code.

David E. Tiagai,
Doctor of Law,
General Director & partner

Vladimir P. Sumin,
Chief expert, associate lawyer