A law on new measures supporting tenants has passed its first reading in the Russian State Duma

Pepeliaev Group advises that on 12 May 2020 the State Duma considered in the first reading draft law No. 953580-7 (the “Draft Law”)[1] which stipulates, among other things, a tenant’s right to unilaterally withdraw from a commercial lease without any penalties and to extend leases for public immovable property.

The Draft Law is to amend Law No. 98-FZ[2] which came into effect on 1 April 2020 and at present provides for the following measures supporting tenants who have suffered from the COVID-19 outbreak:

• a deferral of rental payments provided for in 2020 until 1 October 2020;[3]
• a reduction of rent (if it has become impossible to use the rented property owing to the high-alert regime or a state of emergency introduced in the constituent entity of the Russian Federation).[4]

The above measures can be supplemented with a tenant’s right to unilaterally and without recourse to a court withdraw from a lease without any penalties and the right to demand an extension of a lease of public or municipal property.

The tenant’s right to unilaterally withdraw from a lease without penalties[5]

The Draft Law proposes that tenants whose monthly revenues have dropped by more than 50% be granted a right to unilaterally withdraw from leases without any payments being charged, including a payment for withdrawing from the lease, and losses in the form of lost profits and termination losses for which article 393.1 of the Civil Code provides and which are associated solely with early termination of the lease. The relevant withdrawal can be effected by sending a notice of withdrawal to the landlord.

A prerequisite for exercising the above right is the due performance by the tenant of the lease before the date when high-alert regime or a state of emergency has been introduced.

The security deposit (if provided for by the lease and paid by the tenant) should be returned, except when the tenant failed to perform or improperly performed its obligations that are not related to the payment of rent after the state authority has adopted the above decision.

It is worth mentioning that leases for commercial property rarely provide for a tenant’s right to unilaterally withdraw from the lease before its term expires; therefore, this opportunity may be especially relevant for tenants who wish to early terminate their operations in the leased facility for economic and other reasons.

At the same time the current version of the provision introduced contains ambiguous wordings, leaving with a court the final decision as to whether specific leases were terminated lawfully. It remains particularly unclear whether a tenant’s income means its revenues or profits only, or how the drop in such revenues should be determined (by comparing it with the previous month, with the same month of the preceding year or average monthly income of the tenant for any previous period).

Extension of leases for public immovable property[6]

The Draft Law stipulates that before 1 March 2021 a tenant of a land plot in public or municipal ownership may demand from the landlord that a supplemental agreement to the lease be concluded extending the term of such lease, irrespective of the rent arrears. This right is granted to the tenant subject to the following conditions:

• a lease for the land plot was concluded before the high-alert regime or a state of emergency has been introduced in a constituent entity of the Russian Federation;
• at the date the tenant makes a relevant demand, the term of the lease for the land plot has not expired or the landlord has not made a claim in court to have such lease terminated;
• at the date the tenant files a relevant application, a competent authority does not have information regarding any outstanding breach of Russian legislation committed during the use of the land plot which has been identified within the scope of state land supervision.

The period to which the lease for the land plot will be extended is determined by the tenant; it cannot, however, exceed the term of such lease the parties have agreed upon before it was extended or three years if the lease’s term is over three years. The provisions of the Russian Land Code which restrict the periods to which a lease for a land plot in public or municipal ownership can be concluded do not apply.

The landlord is obliged to conclude such supplemental agreement with the tenant not later than 5 business days from the date when the tenant demands that it should be concluded.

As regards other public and municipal immovable property (primarily non-residential premises) that has been leased out through an auction, the landlord will not be able to refuse to enter into a supplemental agreement to the lease extending its term in 2020 for a tenant that had duly performed its obligations before a decision was made to introduce the high-alert regime or a state of emergency.

According to the draft law, such lease should be extended for a period of up to one year on the same conditions or on different conditions that the parties will agree on, provided that such conditions do not deteriorate the tenant’s position. The supplemental agreement must be concluded outside any auction and without the market value of the leased facility being assessed.

What to think about and what to do

We advise landlords and tenants to bear in mind that the draft law under review will most likely be adopted and may enter into force in the near future.

Help from your adviser

Pepeliaev Group’s specialists promptly advise you of any changes in statutory regulation in the sphere of real estate and are ready to provide integrated legal support to the parties to a lease on all matters arising when a tenant implements measures of support granted to it.