Lease termination: is the courts’ approach likely to change? Ivan Veselov and Angelika Doguzova for AEB Real Estate Monitor, 3/2017
Russia’s sharp economic downturn has made changing or cancelling long-term leases, especially those setting the rent in foreign currency, an urgent issue for many companies.
This issue becomes particularly acute when talks with landlords come to nothing because they are reluctant to revise foreign currency rents, claiming to have other foreign currency liabilities (such as bank loans for building the leased property) or are just disinclined to compromise.
Such reluctance on the part of the landlord usually means the tenant has to go to court to get the lease amended or cancelled.
Since the beginning of the currency crisis in 2014, several different judicial approaches have emerged when tenants try to get their leases changed or cancelled. The courts had already developed some of these during the many previous such crises.
For instance, claimants have sometimes referred to force majeure (Russian Civil Code art. 401) or a material change in circumstances (Russian Civil Code art. 451).
Since art. 451 of the Russian Civil Code had already been rejected by the Russian Supreme Commercial Court1 as grounds for amending or cancelling an agreement, Vimpel-communications PJSC vs. Tizpribor PJSC was a landmark case: the first instance court acknowledged that the sharp devaluation of the rouble was sufficient grounds for amending agreements setting prices in foreign currency2.
This case might have set a precedent for future lease cases, but the decision of the Moscow Commercial Court was later reversed by a higher court and the parties subsequently reached an amicable settlement.
The prevailing current trend is still not to accept economic crises as a material change in circumstances3.
Nor have courts ever included exchange rate changes in force majeure, and justifiably so, since the latter usually relates to emergencies and Acts of God (such as government actions and natural disasters).
Since whether a given circumstance is unforeseeable or extraordinary is a matter of fact, it is pointless to expand the force majeure clauses of a lease. Even if a court were to recognise an exchange rate change as force majeure, this would merely put off performance of the obligation to pay the rent, without allowing for change or cancellation of the lease itself.
Another, relatively new, argument for amending or cancelling a lease is that the landlord is the stronger party to the agreement. There are different variations on this theme: to have the payment in foreign currency recognised as an unfair contractual condition (Russian Civil Code art. 428) or abuse of rights (Russian Civil Code art. 10), or have the lease invalidated on special grounds (such as it being oppressive, etc.).
To rely on art. 428 of the Russian Civil Code for having an agreement amended or cancelled, the tenant needs to prove that the relevant condition meets the following criteria: the wording was proposed by the landlord, the tenant was not in a position to argue, the condition is clearly unreasonable and materially unbalances the parties’ interests4. It is usually not too difficult to prove the first three criteria, since the landlord is most often a professional on the property lease market (such as a retail and entertainment centre owner that uses basically the same lease template with tenants of separate premises). To classify proposed adhesion contract terms as coercive, the court assesses both the parties’ negotiating strengths and other factors, such as competition on the market, whether the adhering party can in reality negotiate or conclude a similar contract with another party under different conditions, etc.
Yet this practice is not widespread and there are but a few court judgements amending or cancelling a lease5. Why? Because the last criterion, imbalance of the parties’ interests, is the most difficult to prove under the conditions prevalent in the Russian economy today, when a currency clause is a way to insure (hedge) against the risk of inflation. This risk is particularly great if the lease is concluded for a long period. If the currency strengthens, the debtor naturally gains from a monetary liability under a currency clause, which then appears unfair from the creditor’s (landlord’s) point of view. This is how the courts traditionally argue when dismissing a tenant’s claim for termination or amendment of a lease6.
So where do we stand now? No: currently the courts do not provide a universal way to escape long-term obligations. This can be regarded as a sort of judicial contribution to economic stability.
Another way of insuring exchange risks is to conclude a lease setting exchange rate corridors (exchange rate changes are introduced within certain bounds as a condition for calculating a payment) or entitling the parties to withdraw unilaterally from the agreement if the exchange rate changes sharply. If a lease lacks such conditions, an attempt could be made to cancel it on other grounds. For example, by having an expert review conducted of the condition of the leased premises in order to refer subsequently to violation by the landlord of its obligations. Such an expert review often throws up a multitude of defects. It is riskier just to vacate the leased premises and sign a unilateral statement of delivery and acceptance, providing the landlord with a list of candidates interested in concluding a lease.
1Resolution of the Praesidium of the SCC RF of 13.04.2010 on case No. А40-90259/08-28-767
2Decision of the Moscow Commercial Court of 01.02.2016 on case No. А40-83845/2015
3Ruling of the RF Supreme Court of 07.03.2017 No. 305-ЭС17-713; Ruling of the RF Supreme Court of 15.08.2016 No. 305-ЭС16-10566
4Resolution of the RF Supreme Court Plenum No. 16 of 14 March 2014 “On Freedom of a Contract and Its Limits”.
5Resolution of the Commercial Court for the Volga Circuit of 27.10.2014 on case No. А12-1193/2014.
6Resolution of the Commercial Court for the Moscow Circuit of 13.05.2016 on case No. А41-71971/2015.
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