When may a lessee waive performance of a lease contract?

Nikolay Andrianov, Partner, Exiora Law Firm

One of the principles of Russian civil laws is the principle of impermissibility of a unilateral waiver of an obligation and unilateral amendment of its terms and conditions established in Article 310 of the Russian Civil Code. Exceptions to this principle may be specified by law (Paragraph 1, Article 310 of the Russian Civil Code), and for participants of business activities – also by contract (Paragraph 2, Article 310 of the Russian Civil Code).

A property lease contract, as any lease contract, may be entered into for either specified or an unspecified period of time. In the latter case, the contract is deemed to have been entered into for an indefinite term (Paragraph 2, Article 610 of the Russian Civil Code).

Both a tenant and a landlord may unilaterally waive a lease contract concluded for an indefinite period of time by giving notice to the other party within a three months’ period (Paragraph 2, Article 610 of the Russian Civil Code). In this case, from the date of expiration of the notice period, the lease contract will be deemed terminated (Paragraph 2, Article 450.1 of the Russian Civil Code).

When Lease is Terminated Earlier: Unilateral Waiver, Agreement of Parties and Court Judgment

If a lease is for a definite term, an early unilateral waiver of such lease, as a general rule, is possible neither on the tenant’s, nor the landlord’s side, unless the lease provides for otherwise.

Pursuant to Paragraph 2, Article 310 of the Russian Civil Code, the parties to a lease entered into or a definite term may agree on the possibility of an early unilateral waiver of the lease. In this case, the right to unilaterally waive the lease may either be conditioned on the other party’s breaching the lease (e.g., the landlord may be granted the right to waive the lease in the event of a non-performance of improper performance by the tenant of its obligation to make rental payments) or be unconditional, i.е., not linked to any breach of the lease by the other party.

The tenant and landlord may also provide for that an unreasoned waiver by one party may be conditioned on its paying a specific amount to the other party (Paragraph 3, Article 310 of the Russian Civil Code).

If a lease does not provide for a unilateral waiver, such lease may be terminated earlier only upon the parties’ agreement or a court judgment. The claim to terminate the lease may be filed by a party only after the other party refuses to terminate the contract voluntarily or if no response is given to such offer (Paragraph 2, Article 452 of the Russian Civil Code).

A court may in its turn terminate a lease upon a party’s request only in the presence of grounds provided for by law.

For instance, a lease may be judicially terminated earlier at the landlord’s request, if the tenant: (i) uses the property with essential breach of the terms and conditions of the use or breaches the designated use of the property, or with multiple breaches; (ii) materially deteriorates the condition of the property; (iii) fails more than twice to make rental payments upon expiration of a contractually specified period for payment; (iv) fails to overhaul the property within the dates stipulated by the lease, and in if the lease is silent as to such dates, within a reasonable period of time in cases, where pursuant to laws, other legislative enactments or the lease, the overhaul is on the tenant (Article 619 of the Russian Civil Code).

A lease may be judicially terminated earlier at the tenant’s request, if the landlord: (i) fails to transfer the property for the tenant’s use or prevents the use of the property on the terms and conditions of the lease or in accordance with its designated use; (ii) the property transferred to the tenant has defects preventing its use which were not specified by the landlord when entering into the lease, were not previously known to the tenant and were not meant to be discovered by the tenant in the course of surveying the property or verifying its being in good state of repair when signing the lease; (iii) the landlord does not comply with its obligation to perform capital repairs of the property within the contractually specified dates, and in the absence of such dates – within reasonable dates; (iv) the property due to circumstances which are outside of the tenant’s responsibility becomes unfit for its further use (Article 620 of the Russian Civil Code).

A lease may provide for other material breaches which entitle one of the parties to claim its early termination through judicial proceedings (Paragraph 2, Article 450 of the Russian Civil Code).

Vacating Premises by Itself Does Not Entail Termination of Lease

Where a landlord properly performs its obligations under a lease and does not agree to its early termination, a tenant’s possibilities to terminate contractual relations are significantly limited.

Despite a common misconception, the very fact of a tenant’s vacating the leased premises and their return to the landlord does not automatically entail termination of the lease and does not release the tenant from the obligation to make rental payments. This circumstance, in particular, was drawn to the attention of commercial arbitration courts as long ago as in 2002 by the Presidium the Supreme Arbitration Court of the Russian Federation (Paragraph 13 of the Newsletter of the Presidium of the Supreme Arbitration Court of the Russian Federation dated 11.01.2002 No. 66).

The Supreme Court of the Russian Federation also confirmed this position in its Ruling dated 01.09.2016 No. 306-ЭС16-3858 (MD Tol’yatti LLC vs. BoscoVolga LLC).

As follows from the circumstances of the case considered by the Supreme Court, in 2011 MD Tol’yatti LLC (the landlord) and BoscoVolga LLC (the tenant) entered into a 5 years’ contract for lease of part of non-residential premises located in a shopping and entertainment center in the city of Tol’yatti. The lease was registered in accordance with the statutory procedure in the Unified State Register of Title to Real Property and Transactions Therewith (EGRP).

In January 2014, i.е., prior to expiration of the lease, the tenant gave notice to the landlord of its winding up its business activities and requested to terminate the lease from April 2014, notified it in writing on setting off part of a guarantee deposit against rental payments for the last month of the lease and sent a termination agreement signed by it. The tenant’s requests were left unanswered by the landlord, it did not sign the termination agreement and did not deliver it to the tenant.

In April 2014 the tenant informed the landlord on the return of the premises requesting to send its representative for acceptance. Due to a no-show of the landlord’s representative, the tenant executed a unilateral certificate on vacation of the premises, filled in an inventory clearance list, submitted the keys to the security personnel of the shopping and entertainment center.

In the absence of rental payments, in June 2014 the landlord submitted a claim to the tenant on payment of indebtedness and penalties, and a notice on early termination of the lease by reason of the tenant’s materially breaching the terms and conditions of the lease.

Since the tenant failed to settle the debt, the landlord filed a claim on recovery of the debt and penalties with a commercial arbitration court.

Courts of three instances dismissed the landlord’s claim by referring to the fact that the tenant (the defendant), in its acting reasonably and in good faith, notified the landlord (the claimant) on termination of lease relations and willingness to return the non-residential premises. The landlord fail to take steps to accept the premises from the tenant, and further accrual of the debt depended further exclusively on the landlord’s actions. The courts dismissed the landlord’s references to the facts that the lease did not provide for the tenant’s right to a unilateral waiver of the lease and that termination of the use of the leased premises initiated by the tenant in the absence of any obstacles by the claimant did not release it from the obligation to make rental payments for the whole period of the premises being used by the tenant and before they were returned to the claimant.

The Supreme Court did not support such approach, reversed the judgments issued in favor of the tenant and re-opened the case by specifying that early vacationing of the leased premises by itself does not serve as the grounds for termination of the tenant’s obligation to pay the rent. The Supreme Court of the Russian Federation noted that the obligation to make acceptance of the premises from a tenant may only arise upon termination of a lease, and the lease, in its turn, may only be terminated on the grounds and accordance with the procedure provided by law. Since the courts did not established in the disputed lease contract a condition providing for the tenant’s right to waive the lease, the Supreme Court held that their conclusions as to the landlord’s further avoidance of accepting the premises were unsubstantiated.

Landlord Has to Give Reasonable Grounds for Terminating Lease Contract Earlier

However, a missing clause providing for a tenant’s right to waive a lease contract does not automatically entail its obligation to use the leased premises by all means before expiration of the lease and pay the rent for the whole term of the lease. A situation where a court finds it possible to terminate a lease upon the tenant’s request in the absence of any violations by the landlord may be exemplified by Case No. А65-18291/2009 heard by the  Presidium of the Supreme Arbitration Court of the Russian Federation in 2011 (Award of the Presidium of the Supreme Arbitration Court of the Russian Federation dated 20.10.2011 No. 9615/11 issued in the dispute between “UK “AS Management” CJSC vs. State-Funded Educational Establishment of Higher Vocational Training “Moscow State University of Economics, Statistics and Informatics”).

The facts of the case are as follows: the parties signed a contract for lease of commercial premises located in the city of Kazan’ for a term of 8 years. The lease was duly registered in EGRP.

Due to closing of its Kazan representative office, the tenant notified the landlord in three months’ period of its intention to terminate the lease relations. The landlord did not agree to terminate the lease supposing that it would lead to negative consequences for its business in the form of lost profit and refused to accept the premises from the tenant when it vacated the premises.

The landlord’s refusal to terminate the lease served as the grounds for the tenant’s filing a claim to terminate the lease with a commercial arbitration court. The first instance considered that a condition of the lease under which the tenant was entitled to demand an early termination of the lease provided it gave notice to the landlord not later than within 90 days granted the tenant the right to unilaterally waive the lease. The appellate and cassation courts rebutted this argument specifying that the lease did not grant the tenant the right to a unilateral waiver, however, they considered the closing of the representative office to be a material change of the circumstances which by itself constituted an independent ground for terminating the lease.

The Presidium of the Supreme Arbitration Court of the Russian Federation adopted a different position in this case by noting that since the tenant pursuant to the terms of the lease gave prior notice to the landlord of its intention to terminate lease relations due to the closing of its representative office, and the landlord did not raise any reasonable objections to the termination, the lease may be terminated upon the tenant’s request through judicial proceedings.

Tenant’s Waiver of Lease if Landlord Abuses its Right

It appears that, considering the latest trends in court practice, the right to unilaterally waive a lease may be recognized to exist with the tenant also in situations where the landlord apparently abuses its right.

Thus, or instance, in  its Resolution dated 14.03.2014 No. 16 “On the Freedom of Contract and its Limitations” (Paragraphs 9, 10), the Plenum of the Supreme Arbitration Court of the Russian Federation explained that in cases where it is established that when entering into a lease which draft version was suggested by one party and contained terms and conditions which are apparently burdensome for its counterparty and which materially distort the balance of interests between the parties (unfair contract terms), and the counterparty was in a position which made it difficult for it to agree on other content of separate contract clauses (that is, did not have sufficient bargaining power), a court may amend or terminate a relevant contract if requested by such counterparty.

Simultaneously, the Supreme Arbitration Court of the Russian Federation emphasized that since nobody is entitled to take advantage of its acting contrary to good faith, the weaker party to a contract may claim impermissibility of application of unfair contract terms pursuant to Article 10 of the Russian Civil Code or that such terms are null and void under Article 169 of the Russian Civil Code.

The Plenum of the Supreme Court of the Russian Federation in its Resolution dated 23.06.2015 No. 25 “On Application by Courts of Certain Provisions of Section I, Part 1 of the Russian Civil Code of the Russian Federation” (Paragraph 1) specified that when deciding on whether parties acted in good faith or not, courts need to rely on conduct expected from any participant of the civil turnover that takes into account rights and legitimate interests of the other party and facilitating implementation thereof. If it is established that one of the parties acted not in good faith, a court depending on the circumstances of the case and considering the nature and consequences of such conduct may deny to defend a right held by it in full or in part and apply other measures ensuring protection of interests of the party acting in good faith or any third party from unconscientious conduct of the other party (Paragraph 2 Article 10 of the Russian Civil Code).

Therefore, if when entering into a lease its content was actually dictated by the landlord and the tenant was not given an opportunity to negotiate other contract terms, a court, after establishing an obvious misbalance of the interests of the parties, not only may but is obliged to protect the weaker party. So, if the landlord contractually formalizes its right to waive the lease for no good cause at any time, and the tenant is not granted such right, a court when restoring the balance of interests, may recognize that a right to a unilateral waiver equally exists with the tenant.