As we previously informed, on December 29, 2015, the Moscow Commercial Arbitration Court recognized ruble devaluation resulting from the policy of the Russian Central Bank concerning an independent exchange rate, to be reasonable grounds for entering amendments into a lease agreement concluded in foreign currency (case No.А40-83845/15). 

The grounds for the court adopting such decision have become known only now, when the grounds for the decision have finally been published. 

As we informed earlier, PAO Vympel-Kommunikatsii filed with the Moscow Commercial Arbitration Court a claim against PAO Tizpribor on (1) terminating the lease agreement of office premises concluded between them, and (2) entering amendments into the agreement concerning fixation of the applicable foreign exchange rate when calculating rent payments, in the range from 30 to 42 rubles per one US dollar for one sq.m of leased premises. 

The court satisfied the claim of PAO Vympel-Kommunikatsii to the extent of modifying the concluded lease agreement by fixing the said limits of the exchange rate band therein. At the same time, the tenant’s claim to terminate the lease agreement was dismissed. 

While denying termination of agreement to the tenant, the court supported the old approach: change of monetary, credit and currency policy of the Government of the Russian Federation and the Russian Central Bank, as well as increase of foreign currency exchange rate is not deemed a substantial change of circumstances granting the right to terminate an agreement under Article 451 of the Russian Civil Code. 

In the course of concluding the lease agreement in a foreign currency, the tenant (plaintiff) should and could have foreseen the inflation processes in the country and possible growth of prices, including for lease of real estate. The court emphasized that the correlation of the ruble and foreign currency constantly changes, so the plaintiff could not have been unaware of the possibility of change in the currency exchange rate and could not have a lack of foresight about adverse consequences for it resulting from such exchange rate changes. The probability of such negative consequences was considered by the court, as before, to be standard entrepreneurial risk, which the tenant should foresee when entering into a lease agreement. 

However, the court’s position on modifying the concluded lease agreement is rather ambiguous. 

The court specified that nobody is entitled to take advantage from unlawful or bad-faith conduct without considering the rights and legal interests of the other party. According to the court, considerable increase of the market value of rent, as well as its considerable decrease, can lead to substantial unjustified enrichment/savings in the form of rent. Based on the expert examination reports provided, the court established that the rent under the disputed agreement exceeded the market value of rent for similar property. 

While satisfying the plaintiff’s claims to the extent of entering amendments into the lease agreement, the court considered that it was possible to establish minimum and maximum equivalent of the foreign currency for purposes of observing a balance of the party’s property interests under the agreement. 

It should be noted that the said court decision seems rather muddled and not well-elaborated. The court, while justifying its decision with the arguments on balance of interests, good faith of conduct and non-admission of abuse of rights, at the same time, does not assess the landlord’s position as to whether it had similar currency obligations before its creditors, whether the landlord indeed received unjustified enrichment, or whether the currency risks due to the economic situation were equally borne both by the tenant and by the landlord. The court does not provide an assessment of these issues and the court hardly reached the desired balance of the parties’ interests under the agreement. 

On January 28, 2016, the landlord filed an appeal without waiting until the decision is drawn up in full. 

We will watch the development of the situation in the case described and possible similar disputes, and will inform you in the event a new approach of the courts is established in relation to change and early termination of lease agreement due to fluctuation in the currency exchange rates.

Elena Stepanova  Partner                                Moscow   estepanova@cls.ru  Tel.: +7 (495) 970 10 90

Denis Osipchuk      Senior Associate               Moscow   dosipchuk@cls.ru   Tel.: +7 (495) 970 10 90

Additional notes

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.