The Federation Council approved the draft law allowing tenants to refuse to perform lease agreements

June 2, 2020, the Federation Council approved the draft law No. 953580-7 “On amendments to certain legislative acts of the Russian Federation for the adoption of urgent measures aimed at ensuring sustainable economic development and mitigation of the spread of the new coronavirus infection” (hereinafter – the “draft law“) giving tenants of the most affected industries the right to unilaterally terminate the concluded lease agreements.

The law was drafted as a compromise solution to the situation where the tenant bears the loss because of the impossibility of implementing the activities in one of the most affected industries (cafes, restaurants, hotels, beauty salons, etc.) and is unable to reach an agreement with the landlord about getting a discount on the rent.

The draft law, among other things, amends article 19 of Federal law dated April 1, 2020 No. 98-FZ “On amendments to certain legislative acts of the Russian Federation for prevention and liquidation of emergency situations” (which we analyzed in detail previously), and entitles tenants to unilaterally and extrajudicially refuse to perform a lease agreement under the following conditions:

the tenant is a small or medium-sized enterprise (SMEs),

  • the tenant carries out activities in sectors of the Russian economy, that are the worst affected in the deteriorating situation with the spread of a new coronavirus infection (in accordance with the List approved by the RF Government Decree of April 3, 2020 No. 434),
  • the lease agreement was concluded before the decision of the public authority of the subject of the Russian Federation to introduce the of high alert regime or emergency situation,
  • the lease agreement is concluded with respect to buildings, constructions, non-residential premises, or parts thereof, used for activities in the industry most affected by the spread of coronavirus infection,
  • the tenant has asked the landlord for rent reduction, but an agreement between the tenant and the landlord has not been reached within 14 days after the request of the tenant,
  • the tenant has demanded reduction of the rent for up to one year,
  • the tenant has exercised its right to unilaterally refuse the lease no later than October 1, 2020.

In case of such termination, the security deposit provided by the lease agreement remains with the landlord. With losses in the form of lost profits, damages, contract termination losses, or other payments causing the tenant’s rejection of lease, the tenant will not be charged.

It is worth noting that the draft law does not establish any criteria for reduction of rent. The tenant may potentially require the landlord to reduce the rent amount by 90% or more. In case of no agreement, the tenant will have the right to unilaterally refuse the contract. In addition, a situation may arise when the landlord has previously agreed with the tenant a discount on the lease, but the tenant now requests larger discounts. The draft law also does not establish the deadline for notification of the landlord by the tenant on the proposed termination of the lease. This may prevent the landlord from searching for new tenants in advance.

The correlation of stipulated in the draft law provisions on rent reduction with the previously adopted provisions of paragraph 3 of article 19 of Federal law dated April 1, 2020 No. 98-FZ “On amendments to certain legislative acts of the Russian Federation for prevention and liquidation of emergency situations” is unclear. In the said paragraph, the legislator has already provided the right of the tenant to demand from the landlord reduction of rent for the year 2020. This right was conditioned upon the tenant’s inability to use the leased property. However, the current draft law does not contain such conditions.

Contact us

Dr. Thomas Mundry
Partner, Legal, Tax & Interim Management, Moscow
+7 / 495 / 956 55 57
Evgenia Sinanova
Head of Commercial Law Practice
+7 / 495 / 956 55 57
Ksenia Dikopolskaya
Senior Legal Expert
+7 / 495 / 956 55 57

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