The Russian Commercial Court recognizes a tenant’s right to terminate a lease agreement based on the “adhesion” doctrine and unequal bargaining power.

The current financial crisis in Russia is prompting some tenants to seek new methods for renegotiating their leases, especially when rental rates are linked to foreign currency and subject to periodic upward adjustments.

Although some landlords are willing to make concessions, others may not be inclined to reconsider the terms of existing agreements for various reasons. Generally, landlords tend to be less cooperative when the tenants have no rights to terminate their leases. In this context, a recent Russian court judgment (matter No. А12-1193/2014) deserves close attention.

Background

In 2007, a landlord and a tenant entered into a long-term lease for 138.1 square meters of retail space in a shopping center in Volgograd. Under the lease agreement, the tenant had a right of unilateral termination. However, the parties removed this termination right from the agreement in 2009 by signing an addendum.

From 2011 through 2014, the tenant faced various business challenges. The tenant informed the landlord about these on numerous occasions and asked either to renegotiate the rent or terminate the lease agreement entirely. The landlord repeatedly refused such requests and each year exercised the right to increase rent.

In 2014, the tenant brought a claim against the landlord in the Commercial (Arbitrazh) Court of Volgograd Region, seeking termination of the lease agreement on the grounds of a “material change in circumstances,” as provided under Article 451 of the Russian Civil Code.

Weaker Party Concept

The Commercial Court ruled in favor of the tenant, but cited a different part of the Civil Code as its rationale.  Under Article 428.2 of the Civil Code, the court commented that

The party adhering to the contract has the right to demand rescission . . . of the contract, if an adhesion contract . . . deprives this party of the rights generally granted under contracts of this type, . . . or contains other conditions which are clearly onerous for the adhering party and which it would not have accepted based on its reasonably understood interests had it had the opportunity to participate in defining the conditions of the contract.

Basically, a contract of adhesion is one that is imposed on a consumer or tenant without equal rights to negotiate the terms. We are not aware of any prior cases when this concept was applied to a commercial lease agreement in Russia, which is quite unusual.

In support of its ruling, the Commercial Court also cited prior comments by the Plenum of the Russian Supreme Commercial Court (in its directive “On Freedom of Contact and its Limits”, clause 9):

In cases when it is found that when executing a contract, the draft of which was suggested by one of the parties and contained terms and conditions that were clearly onerous for the counterparty and materially upset the balance of interests between the parties (unfair contractual terms), and the counterparty was put into a situation hindering the negotiation of different content of certain terms and conditions of the contract (i.e. making it the weaker party to the contract), a court may apply Article 428.2 of the Russian Civil Code to such provisions, thus amending or rescinding the corresponding contract upon the request of such counterparty. . .

Key Factors

In this case, the court applied the above approach based on several key factors.

First, the terms and conditions of the lease agreement and addendum were proposed by the landlord. The court considered that by deleting the tenant’s right of unilateral termination while retaining such right for itself, the landlord “abused rights” (a concept arising from Article 10 of the Civil Code). According to the court, the deletion upset the balance between the parties' interests and made the tenant the “weaker” party.

Second, despite repeated requests from the tenant to renegotiate the rent or terminate the agreement because of the tenant’s difficult financial situation, which was clearly in evidence, the landlord repeatedly raised the rent. The court determined that the tenant would not be able to continue entrepreneurial activities unless the lease agreement was terminated.

However, none of the courts involved in this case have clearly explained what prevented the tenant from renegotiating the “unfair terms” of the agreement. Further, the decision appears to have ignored Article 428.3 of the Civil Code, which provides that Article 428.2 does not apply when a “contract of adhesion” is entered into in connection with entrepreneurial activities (such as the tenant’s business).

The decision raises a number of important questions. Accordingly, landlords and tenants may wish to consider the following points when negotiating, signing, and performing lease agreements:

• It may become necessary to demonstrate that the agreement reflects a negotiated compromise between the interests of the tenant and the landlord.

• Actions that relate to the lease agreement may be challenged under the principle of good faith, which seems to be taking on increasing importance in Russian civil law. Therefore, each party should consider whether its exercise of rights is justified given the specific circumstances presented or could be attacked as unfair.

• Additional scrutiny may be advisable where certain provisions of the agreement exclude or limit the rights of one party while retaining rights for the other (so-called unilateral provisions).

Of course, this is only one decision and does not necessarily indicate a trend. Contracts in Russia are still subject to the general principles of the free market, and lease agreements are often heavily negotiated, subject to certain mandatory provisions of Russian law. However, unless the economic situation in Russia improves soon, it can be expected that other tenants may seek to pursue similar arguments.