The Russian Supreme Court explains how to apply new rules concerning deferred payments and a reduction of rent

Pepeliaev Group advises that, on 30 April 2020 the Praesidium of the Russian Supreme Court (the “Supreme Court”) approved a Review[1] in which, among other things, it explained certain issues of the application of legislation concerning the granting of deferred payments to a tenant and the reduction of rent in connection with the spread of the new coronavirus infection (COVID-19) in the Russian Federation.

Please be reminded that on 1 April 2020 Law No. 98-FZ came into force[2]. This law provides the following support measures for tenants affected by the COVID-19 outbreak:

• a deferral of payments of rent 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 a high-alert regime or state of emergency being enacted in the constituent entity of the Russian Federation).[4]

The application of these measures may be used by tenants (companies and individual entrepreneurs) who rent both an entire immovable item and part of one,[5] whether state owned or in private ownership.[6]

1. Grounds for granting deferred payments of rent[7]

The ground for granting deferred payments of rent is the performance of activity by the tenant in those sectors of the Russian economy that have been affected most in the deteriorating environment as a result of the spread of the new coronavirus infection[8].

The Supreme Court has clarified that it is not required to establish the presence of other additional grounds or conditions for granting deferred payments of rent (it being is impossible to use the rented property according to its intended purpose).

However, if the landlord proves that the specific tenant in fact has not suffered and obviously will not suffer in the conditions of the deterioration of the situation as a result of the spread of COVID-19 and requirements of the tenant are a demonstration of conduct known to be in bad faith (for example, if it has used the rented facility contrary to the established restrictive measures) the court may, depending of the facts of the case and taking into account the nature and consequences of such conduct, refuse to protect the tenant’s right in full or in part.

2. The date for granting deferred payments of rent[9]

In order to obtain a deferred payment of rent, the tenant needs to enter with the landlord into a supplemental agreement to the lease. At the same time the Supreme Court has explained that deferred payments are considered granted to the tenant irrespective of the date when the specified supplemental agreement is entered into from the date when the high-alert regime or state of emergency was enacted in the constituent entity of the Russian Federation.

If the landlord was evading entering into the corresponding supplemental agreement, and the tenant ensured entry into it under the court procedure, then the deferral is considered granted retroactively (from the date when the high-alert regime or state of emergency was enacted) irrespective of the date when the court decision came into force compelling the landlord to enter into a supplemental agreement to the lease agreement.

3. The granting of deferred payments in a case of bad-faith actions of the landlord[10]

The Supreme Court has explained that the entry into a supplemental agreement for obtaining a deferral is not necessary in all cases. If the tenant has not paid rent in the amount and within the deadline established by the lease agreement, and the landlord was aware or could not have been unaware that the tenant carries out activity in the sectors of Russian economy mostly affected in the deteriorating environment owing to the spread of COVID-19, the landlord should inform the tenant that it is eligible for deferred payments to be granted to it under Law No. 98-FZ. This rule follows from the general obligation of the parties to civil relationships to act in good faith.[11]

In the absence of such information the landlord is considered to have granted the deferred payments under the conditions established by clause 3 of the Requirements. Similar consequences apply if the landlord unjustifiably evaded entering into a supplemental agreement or by its conduct gave grounds to the tenant to believe that the deferral would be granted, or made no objections to the payment of rent by the tenant pursuant to the conditions established by the resolution and the Requirements[D.1] .

4. The date from which the rent should be reduced[12]

The tenant under lease agreements for real estate has the right to demand that rent be reduced for 2020 in connection with it being unable to use the property because of a decision made by a state authority of a constituent entity of the Russian Federation to introduce a high-alert regime or a state of emergency in the constituent entity of the Russian Federation[13]. In this case the rent might be reduced under a supplemental agreement to the lease agreement.

At the same time the rent should be reduced from the date when the specified impossibility to use the property according to its intended purpose occurred irrespective of the date when the supplemental agreement for the reduction of the amount of rent was entered into or when the court decision came into effect that forces the landlord to amend the lease agreement with regard to reduction of the rent.

5. The reduction of rent by the court if the landlord acts in bad faith[14]

The Supreme Court has additionally explained that the tenant has the right to specify as an objection to a claim for the collection of rent the fact that the landlord has unjustifiably evaded entering into a supplemental agreement for the reduction of rent. In such a case the rent should be collected in a reduced amount which will be determined by the court. At the same time the court may take into account the amount of the ordinary reduction of the rent in the situation at hand.

What to think about and what to do

We recommend that landlords should first of all analyse whether their tenants are engaged in those sectors of the Russian economy that have been affected most in the deteriorating environment as a result of the spread of the new coronavirus infection.

If the corresponding tenants are identified, it is necessary to inform them that they have the right to a deferral under Law No. 98-FZ and to send them a draft of the corresponding supplemental agreement to the lease agreement.

We also recommend timely reacting to applications of tenants concerning the granting of deferred payments of rent and a reduction of rent, and holding productive negotiations on these issues in order to avoid the subsequent classification by the court of such conduct as acting in bad faith.

Tenants are recommended to take into account the above explanations and to refer to the Review when conducting negotiations with landlords to enter into a supplemental agreement to a lease agreement concerning the granting of deferred payments of rent or concerning the reduction of the rent.

Help from your adviser

Pepeliaev Group’s lawyers are ready to provide comprehensive legal support to the parties to a lease agreement concerning any questions arising in connection with the granting of deferred payments of rent and a reduction of rent.