The State Duma has adopted a law that grants the lessor a number of additional rights in a situation when the lessee is a commercial and/or public catering organisation and is connected with a hostile state/territory

Pepeliaev Group advises that on 28 June 2022 the Russian State Duma adopted a Law whereby lessors, under certain conditions, are granted (i) the right to charge a larger rent from lessees that are connected with hostile states/territories and (ii) the right to withdraw from lease agreement with such lessees unilaterally.

The purpose for which the Law has been adopted is to protect Russian lessors from a failure to make rental payments on the part of lessees that are controlled by foreign persons in connection with hostile actions of a number of countries against Russia .

At the moment the Law is being examined by the Federation Council (the upper chamber of Russia's parliament).

Pursuant to the Law[1] the lessor receives new rights with respect to the lessee if all of the following circumstances are present:

1. the lessee is a commercial and / or public catering company;
2. the lessee is directly or indirectly controlled [2] by a foreign person (foreign persons) connected with[3] a hostile foreign state or territory;[4]
3. pursuant to the lease agreement the rent (or part of the rent) is established in the form of a portion of the income generated with the use of the leased property (or in another form, depending on the results of the lessee’s business activities);
4. the lessee has suspended or ceased the use of the leased property for performing its business activity;
5. as a result of such suspension or cessation of use there has been a considerable reduction of the amount of the lease payment.

In the above situation the lessor may:

1. request that the rent be paid for the period of suspension (cessation) of the use of the leased property in the amount of the monthly rent received for the previous period;[5] and
2. if the lessee has refused to perform the specified requirement or has actually failed to perform it within 10 business days – to refuse to perform the lease agreement unilaterally; and
3. withdraw from the lease agreement unilaterally, unless the lessee has resumed the use of the leased property within 10 business days from when it received a request to this effect.

At the same time, it is important to note that the specified provisions of the Law regarding the lessor’s right to withdraw from the performance of the lease agreement (clauses 2 and 3) will start to apply upon expiry of 60 days after the official publication of the Law, rather than immediately.[6]

Pursuant to the Law, the following situations shall be regarded as a considerable reduction of the amount of the rent:

1. If the lease term started to run before 1 January 2022: a reduction of the rent amount by more than 50% as compared with the same period in 2021 (and if in 2021 no rent was paid for the similar period, then as compared with the amount of the average monthly rent received for 2021);
2. If the lease term started to run after 1 January 2022: a reduction of the rent amount by more than 50% as compared with the average monthly rent calculated for the period before the suspension/cessation of the use of the leased property.

Pursuant to the Law the lessor is not subject to any measures of liability connected with the above withdrawal of the lessor from performance of the lease agreement. This is true, among other things, for the measures of liability stipulated by the lease agreement.

The law also establishes that, once the foreign person (foreign persons) connected with a hostile state/territory ceases to control the lessee, the above right to unilaterally withdraw from the agreement no longer applies.

The law also provides that a lease agreement entered into before 25 February 2022 with a lessee that is a commercial and/or public catering company may not be terminated at the lessor’s initiative and it may not be amended (including by a court ruling) if:

1. a lessee that, after 24 February 2022, ceases to be controlled by a foreign person (foreign persons) connected with a hostile foreign state / territory, changes its company name / trade name / trade mark / service mark or other trademarks or the trademarks / service marks of its goods / work / services; or
2. after 24 February 2022, a lessee ceases to be controlled by a foreign person (foreign persons) connected with a hostile foreign state / territory and it is transferred under the control of a Russian legal entity (legal entities) or a Russian individual (individuals) or a foreign legal entity (legal entities) controlled by a Russian legal entity (legal entities) or a Russian individual (individuals).

What to think about and what to do

We recommend following up on the Law coming into force, studying the provisions of the Law carefully and taking them into account when planning activities in the area of commerce, public catering and leasing out premises to commercial and public catering companies, including when decisions are taken to suspend commerce (the supply of public catering services) in the leased premises.

Help from your adviser

Pepeliaev Group’s lawyers are ready to provide legal support to companies on matters connected with demanding the higher rent provided for in the Law, as well as with terminating lease agreements on the grounds provided for in the Law.

[1] Article 5(2) of the Law.

[2] What points to a person being under control is determined under article 81 of Federal Law No. 208-FZ “On joint stock companies” dated 26 December 1995 and article 45 of Federal Law No. 14-FZ “On limited liability companies” dated 8 February 1998.

[3] Being “connected” with a hostile state (territory) is understood, among other things, as being a person that is a citizen of or is registered or primarily conducts business in, or primarily generates income from activities conducted in such state (territory).

[4] The list of hostile foreign states and territories is approved by the Russian Government’s Directive No. 430-r “On approving the list of foreign states and territories which are committing hostile actions against the Russian Federation, Russian legal entities and individuals” dated 5 March 2022.

[5] For 2021 or for the period from January 2022 to 24 February 2022, if the use of the leased property started in the period from 1 January 2022. The Law does not clarify how to determine the average monthly pay if the lease period started running after 23 February 2022 (in other words, it is impossible to calculate average monthly pay for the period from January 2022 to 24 February 2022).

[6] Article 6(3) of the Law.