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Rental rate

17:41 03/06/2019

 

MOSCOW, May 23 (RAPSI) – A commercial court in the Novosibirsk region of Siberia is considering a peculiar case. Owner of premises has filed a request seeking payment from a tenant who has nothing to do with the space.

Earlier, OOO ITE Expo International (tenant) filed a suit against OOO Sibir Ekspotsentr (owner of premises) seeking an annulment of rent increase.

The parties made a premises lease contract for a 10-year term in 2012 and agreed to a fixed fee, according to court materials (Judge Anzhelika Aidarova, A45-3072/2019).  

The complainant and the defendant experienced no problems for several years. The rental fee was reconsidered each year, and additional agreements were signed. Taking into account inflation assumptions, the payment increased every year, but not more than by 10 per cent.  

In 2015, the parties signed another additional agreement, which amended the rental fee calculation. The new agreement said that premises owner was authorized to unilaterally increase the rental fee if the tenant’s earnings were in excess of a certain amount.

Such a “turnover charge” scheme applies often enough in rental business. The tenant, whose only activity at that time was organization of exhibitions on the premises of OOO Sibir Ekspotsentr, reasonably expected the calculation of rental payments to be based on its proceeds from the exhibitions  held on the owner’s premises. OOO Sibir Ekspotsentr had similar expectations.

In 2016, the tenant merged with a structure operating not only in the Novosibirsk region, but across Russia. Accordingly, the proceeds of the new company increased by more than 1000 per cent.

After the merger was completed, the premises owner informed the tenant about rental increase for 2016 and 2017.

The notification said that the rental fee increased by almost 500 per cent as compared with earlier periods. The increased fee exceeded several times the profit that the tenant made in the Novosibirsk region.

The premises owner paid no attention to the arguments presented by the tenant. OOO Sibir Ekspotsentr, claimed that the fee should be calculated based on the profit the company made in Russia and not just the proceeds from its business on the premises of OOO Sibir Ekspotsentr in the Novosibirsk region.

 

“Analyzing the terms of the contract, the court has to take into account literal provisions of the agreement. The parties may stipulate that rental payments should be determined under a certain procedure, the payments may depend on the profit made by the tenant,” says Danil Bukharin, the lawyer.

Besides, the court may change at the request of the tenant the terms of the agreement or find the agreement terminated in accordance with the provisions of the Civil Code of the Russian Federation (Article 451). The rental contract may be amended or annulled due to a significant change in the circumstances that were different at the time the contract was concluded, Bukharin says.

Apparently, there is no reasonable economic basis for the extra rental increase, and the premises owner tries to take advantage of the situation at the expense of such a “convenient” reorganization of the tenant. OOO ITE Expo International is held hostage under these circumstances: it received the rights and obligations under the rental contract together with a small company, which run its business in the premises owned by OOO Sibir Ekspotsentr.

It is unlikely that the will of the parties included such an expansion of the tenant, and it is unlikely that the tenant could anticipate that the premises owner would opt to use its right for rental fees increase in such a manner.

The court has to attend to the aforementioned issues.

Will the court assess the good faith of the parties to the contract in this situation.

The case law shows that there is a mechanism in place to counter such actions of premises owners. The Supreme Commercial Court of the Russian Federation pointed out in 2011 that regardless of the terms of an agreement a court may reduce the rental fee in case it was increased disproportionally compared to average market rates and substantially exceeded such rates as a result of a unilateral correction (Article 22 of the Plenum of the Supreme Commercial Court of 17 November 2011 No. 73 “On certain issues of the practice of applying the rules of the Civil Code of the Russian Federation on the rental contract”). It should be noted that in this case, according to a report provided by the tenant, the rental fee exceeded the average market indicator by 500 per cent.

The judge presiding over this case specializes on rental disputes. “The situation is an extraordinary one. However, I doubt that reduction of rental payment to the average market figures will take long at the hearings. Since 2011, the case law in such situations is clear: reduction may apply regardless the terms of the contract agreed by the parties,” a representative of the tenant says.

“When analyzing a controversial situation related to the recovery of rental payments as a set share of products, proceeds, or earnings generated as a result of the use of the rented property (turnover charge), it should be noted that such a statutory concept is indeed envisaged by item 2(2) of article 614 of the Civil Code of the Russian Federation; nevertheless, it is directly linked not with the total proceeds of the renter, but only with the proceeds generated by the use of the rented property,” Alexander Zorin, lawyer, Candidate of Legal Sciences, says.

Therefore, in case these terms of an agreement are in conflict with this provision of the law, a court may find these terms to be not agreed and not concluded. In such a case, a court may use a comparative approach to the determination of rental payments as established by item 1 of Article 614 of the Civil Code of the Russian Federation. It provides that in case where the agreement does not determine the procedure, conditions and terms of making the rental payment, it shall be held that the procedure, conditions and terms are usually applied in the lease of similar property under comparable circumstances.

Accordingly, an expert report on the amount of rental payments for these premises under concrete conditions, territorial location of the property, its intended use, as well as evaluation of other factors will be required. Such an anomaly in determination of rental fees may be also examined by the court in accordance with the provisions of Article 10 of the Civil Code of the Russian Federation. It provides that exercise of civil rights is inadmissible with the express purpose of inflicting damage to a person, actions bypassing the law with illegal purpose are forbidden as well as any other deliberately malevolent use of civil rights (abuse of rights).   

A court of justice, an arbitration court or an arbitration tribunal may reject person's claim for the protection of the right he possesses in full or in part, as well as to apply other measures envisaged by the law in case the person does not abide by the requirements, stipulated in Item 1 of the present Article, (Item 2).

Therefore, analyzing the claims in each concrete case the court is authorized to apprise the evidence contained in the case materials to establish the set of facts pertaining to the abuse of rights envisaged by Article 10 of the Civil Code of the Russian Federation on the basis of the principles that no one is entitled to gain an advantage as the result of the unlawful or unfair behavior (item 4 of Article 1 of the Civil Code of the Russian Federation) in accordance with the rules established by Article 71 of the Code of Commercial Procedure of the Russian Federation.



 

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Rental rate

17:41 03/06/2019 A commercial court in the Novosibirsk region of Siberia is considering a peculiar case. Owner of premises has filed a request seeking payment from a tenant who has nothing to do with the space.
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