Real estate lease agreements

Almost every business entity, regardless of its organizational and legal form, uses real estate in its activities: from small parts of non-residential premises to industrial complexes. And these objects are not always owned by enterprises or entrepreneurs, which forces them to enter into lease relations with the owners of such objects. Often, the location of a property or its other features can be so attractive and useful for doing business there that a sudden loss of the right to use such a property can cause significant losses for the company.

The biggest misconception among tenants or subtenants of commercial real estate is that they firmly believe that the term for which the lease agreement is concluded will ensure that they will be able to use the leased premises without any obstacles during this term. However, landlords may usually have many “hidden” grounds for early termination of the agreement, even if the leased property is used properly and the tenants pay the rent on time. Here is what tenants (subtenants) should pay attention to when entering into a lease agreement.

• When entering into a real estate lease agreement that does not require notarization, i.e. for a term of less than 3 years (part 3 of Article 793 of the Civil Code of Ukraine requires the parties to a lease agreement for a building or other capital structure (their separate part) concluded for a term of three years or more to have it notarized), be sure to require the lessor to not only confirm its ownership of the premises, but also to confirm that it has no restrictions on its lease (no rights of other persons to the premises). Failure to do so may result in, for example, the following:

Pursuant to Article 9 of the Law of Ukraine “On Mortgage”, the mortgagor has the right to transfer the mortgaged property for joint activity, leasing, rent, or use only with the consent of the mortgagee.

Thus, if the premises are mortgaged at the time of entering into the lease agreement and the lessor “forgets” to tell you about it, such a transaction may be invalidated. As a result, the tenant may be asked to vacate the leased property on the same day, but it is unknown whether the tenant will receive any money and damages from the fraudulent counterparty.

• Tenants often use the premises not only to set up offices, but also to set up “retail outlets”. If the tenant is not yet sure of the commercial attractiveness of the premises for conducting business there, he or she may agree to enter into a lease agreement for a one-year term with subsequent auto-renewal (extension of the agreement for the same term).

However, after a year, the lessor may refuse to extend the lease term due to its intention to use the premises for its own needs. Such a refusal will make it impossible for the lessee to apply the provisions of Article 777 of the Civil Code of Ukraine on the lessee’s preemptive rights to enter into a new lease agreement.

 Or vice versa: mistakenly believing the location of the leased object to be potentially profitable and advantageous, agree to a long-term lease without the possibility of terminating the agreement on its own initiative, which may lead to significant financial losses on the part of the lessee.

There is no need to be afraid to enter into long-term leases, but you should always remember to specify in the lease the tenant’s right to terminate the lease with a reasonable notice to the lessor.

• One of the grounds for early termination or withdrawal from the agreement by the lessor may be the lessee’s failure to fulfill its obligations under the agreement. In this case, the landlord usually provides in the agreement for the possibility of increasing the rent (subject to certain circumstances: exchange rate increase, introduction of new taxes or fees, etc.; or review of the rent after a certain period of time, etc.) The tenant’s disagreement with the new rent amount may be grounds for early termination of the lease. Thus, if the landlord wants to terminate your contractual relationship early, it is enough to increase the rent to the point where it is no longer financially feasible for the tenant to use the premises.

Reasonable restrictions by the landlord on the grounds and setting limits on rent increases in the agreement will allow the tenant to avoid such a situation.

• When entering into sublease agreements, the sublessee should pay attention to the main lease agreement under which the lessee (sublessor) transfers the premises to the sublessee. In particular, the term of its validity and the terms of its early termination (termination), since according to part 2 of Article 774 of the Civil Code of Ukraine, the term of the sublease agreement may not exceed the term of the lease agreement. For the sublessee, this means the following: if the main lease agreement is terminated early, the sublease agreement will terminate along with it. The panel of judges of the Commercial Court of Cassation of the Supreme Court of Ukraine in its Resolution dated 16.03.2018 in case No. 910/17082/17 expressed this quite categorically.

In order to eliminate such risks, it is possible to reach an agreement with the owner of the premises to enter into a “direct lease agreement with the subtenant in the event of such events, or to include in the sublease agreement penalties against the tenant (sublessor) that will be applied to him in the event of early termination of the main lease agreement due to the tenant’s violation of its terms or on his initiative. And most importantly, preventive measures are always more effective than emergency measures. Therefore, define your goals and priorities in advance, and communicate their importance to your counterparties. Remember that it is better to seek help from a qualified lawyer of DEXTRA LAW firm, who will help you find the best way out of a difficult situation.