During the pandemic, the issue of rental relations and ways to defer or reduce the rent has been raised so often that it was discussed even at the highest level. Although it is fair to say that nothing has become clear, here we focus on another aspect: the actual practice of negotiations with landlords shows that a tenant may encounter an attempt by the landlord to manipulate the provisions of the contract rather than a direct dismissal of the tenant’s lawful claims. In this article, we want to share an example of such behavior, along with our recommendations on how to oppose such actions.

Please note that the case under consideration does not give the only right solution, it only provides ways in which the tenant can protect itself from the landlord who is behaving legally in a formal sense, but improperly in terms of business ethics. 

The underlying situation is classic: leased premises are used for a network of mini-hotels, which, due to COVID-19 restrictions, has lost guests. Completely. Being recognized as one of the most affected industries, the tenant sends the landlord a reasonable request to defer and reduce the rent. The parties initiate negotiations and discuss for a while the details of financial relations: the landlord demands calculations and additional documents, the tenant complies with these conditions in good faith, but at the finish line it unexpectedly receives a notice from the landlord that the contract is being unilaterally terminated in accordance with the right granted by the contract.

The question is whether a tenant interested in maintaining its investments in repair of rented facilities can protect itself from a landlord acting legally in the formal sense and according to the contract, but clearly against economic interests of the other party?

On the one hand, a landlord has a right to terminate a contract at any time, and it apparently can exercise this regardless of economic conditions. On the other hand, a tenant has a right to prove that such unilateral termination of lease, even formal and legal, in the current conditions is abuse of rights. Judicial practice allows sustaining a claim for invalidating a contract termination as an independent unilateral transaction. If such a claim is sustained, the contract shall be deemed not terminated.

The law provides that even if a party has a right to terminate the contract, it must do it in good faith and reasonably (Paragraph 4 Article 450.1 of the Russian Civil Code). This is true for any actions where the discretion of one party is sufficient.

In the case under consideration, the tenant can reasonably argue that the landlord not willing to grant a deferral (and thereby breaching the law), is exercising its right to terminate the contract just to avoid deferring and reducing the rent. That is, it in fact uses the contractual right in order to avoid its legal obligation! That certainly deprives the tenant of the opportunity to survive the economically difficult period and restore its business once the pandemic ends.

In this case, we recommended the Tenant, inter alia, to rely on the provisions on bad faith negotiations. Article 434.1 of the Russian Civil Code requires the parties to act in good faith when entering into negotiations, during them and upon their completion. In particular, a party negotiating, obviously, without intention to reach an agreement with the other party, as well as a sudden and unjustified termination of negotiations when the other party could not reasonably expect this, can be recognized as bad faith. In the case under consideration, the tenant acted in good faith, and therefore legitimately expected that the parties would eventually reach an agreement. Further actions of the landlord, who ceased the negotiations and terminated the lease, should be regarded as contradicting behavior, which is a form of abuse of rights.

Indirect support of such a logic can be found in issue No.4 of Review No.2 of the Russian Supreme Court on COVID-19 dated April 30, 2020. It states that the tenant is not allowed to knowingly act in bad faith. However, exactly the same requirement clearly should apply to the other side – the landlord, who must also act in good faith. Moreover, the Supreme Court notes that if the landlord, by its behavior, has given the tenant reason to believe that a deferral will be granted, the deferral will be deemed granted on the terms set out in the relevant legislative acts.

In such cases, we propose building a position through preparing a detailed reasoned response to the landlord, specifying that it has the effect of a pre-trial claim. This will clearly outline the opportunity for the landlord to be involved in a drawn-out trial with ambiguous prospects, which for many may become grounds for negotiating a compromise.

Of course, the issue of abuse of rights always depends on the discretion of the court and the adversarial efforts of the parties to provide convincing evidence that the specific situation between the parties has individual aspects and cannot be resolved formally. Therefore, of course, the above logic is only one of possible options and does not always mean a guaranteed victory for the tenant. However, the mere fact that a party has a clear legal position in a case that at first glance seems hopeless may well be the key to success.

In conclusion, we cannot hide our professional enthusiasm from anticipating the many fascinating and non-trivial disputes that will soon be examined by courts that reopen their doors after several weeks of quarantine. We dare hope that we are on the verge of new trends in judicial practice, and topics for new articles will be coming soon.

Authors: Igor Gorokhov, Principal Associate at Capital Legal Services, Lyubov Doroshenko, Associate.