Weak ruble is grounds for amending a lease agreement
The current economic situation forces tenants to appeal to landlords with an initiative to reconsider the terms of existing lease agreements for commercial property or even to terminate them altogether. Not every owner embraces the idea of reconsidering the effective lease terms, while unsuccessful negotiations sometimes lead to tenants seeking to amend or terminate lease agreements early through court.
At the same time, there are not so many legal grounds for amending or terminating lease agreements early upon a tenant’s initiative. Because of the limited number of instruments for withdrawing from lease agreements early or for amending their terms, tenants sometimes need to be creative.
In the past, in the periods of crises of 1998 and 2008, tenants applied to court with claims on amending or terminating lease agreements early arguing, as one of the most frequent reasons, that a substantial change in circumstances has taken place (Article 451 of the Russian Civil Code). This means a change in circumstances, where, if the parties could have foreseen them, the agreement would not have been entered into or would have been entered into on different terms.
However, tenants’ attempts to amend or terminate lease agreements early based on these grounds during the mentioned periods were not successful. According to the position of the courts, an unfavorable economic situation, fluctuations in the exchange rate, or weakening of the financial standing of the parties, or a drop in demand for goods being sold, is not a substantial change in circumstances. The possibility of such negative consequences is recognized to be nothing but ordinary entrepreneurial risk, which has to be foreseen by the tenant when entering into a lease agreement.
Tenants have attempted to terminate lease agreements referring to crisis factors and change of currency exchange rates as being force majeure circumstances (Article 401 of the Russian Civil Code). The courts have likewise not supported these grounds, unambiguously highlighting that an economic downturn is not a force majeure event.
Nevertheless, the apparent stability of the courts’ approach to examining claims on early termination of lease agreements or on amending their terms based on the said grounds was shaken at the end of last year.
On December 29, 2015, the Commercial Arbitration Court of Moscow, with reference to Article 451 of the Russian Civil Code, has recognized devaluation of the ruble due to the policy of the Bank of Russia on transition to a free-floating ruble, as reasonable grounds for amending the lease agreement (case No.А40‑83845/15).
PJSC VimpelCom-Kommunikatsii applied to the court with two claims against PJSC Tizpribor to (1) terminate the existing lease agreement between them and (2) amend the agreement by freezing the applicable currency exchange rate for lease settlement purposes, in the range from 30 to 42 rubles per 1 US dollar for each sq. m of the leased premises, due to a significant change of circumstances.
The court satisfied the claim of PJSC VimpelCom-Kommunikatsii on amending the existing lease agreement by indicating the currency exchange rate limits in the agreement. However, the court refused to satisfy the tenant’s claim on terminating the lease agreement.
It is worth noting that the court’s position in this case is different from the established approach and gives reasonable grounds for concern, because if agreements in foreign currency are reconsidered on a mass scale, this could lead to instability of civil turnover, which could further aggravate the economic situation in the country. On the other hand, if this position of the court is supported during further formation of court practice, it will help many market participants to keep their head above water.
We will continue to follow up on further developments of the situation both in the described case and in similar disputes. We will inform you if a new approach of the courts is established as regards amending and terminating lease agreements early due to currency exchange rate fluctuations.
Should any questions arise in connection with the above or if you need any additional materials, please contact Elena Stepanova or Denis Osipchuk, Moscow Office of Capital Legal Services.
This Information letter keeps the clients of Capital Legal Services and other interested parties abreast of information that may, to any extent, affect their activity or cater to their particular interests. The opinions and commentaries expressed in this information letter shall not be deemed as legal opinions and do not cancel the need to obtain legal advice or legal opinion on separate issues.