COVID-19: Russia Adopts Rules Allowing to Renegotiate Leases and Postpone Lease Payments

May 20, 2020

Russia has adopted rules allowing to renegotiate real estate leases and postpone lease payments in certain cases. These rules affect both landlords and tenants. In this LawFlash we address the basics of these rules as adopted on the federal level. The rules may differ depending upon where the real estate in question (buildings, premises, or land plots) is located as some Russian regions have adopted their own regulations on this subject matter.

Federal Law 98-FZ Dated 1 April 2020

Article 19 of Federal Law On Amendments to Certain Legislative Acts of the Russian Federation on Prevention and Liquidation of Extraordinary Situations, No 98-FZ. dated 1 April 2020 (98-FZ Law) allows parties to renegotiate the lease. It states that upon the introduction of a so-called “high alert regime” in a particular region of Russia (this regime has been introduced in all Russian regions by now), a tenant of a real estate located in that region may request its landlord that the lease payments be postponed, and the landlord must accommodate such request within 30 days, by entering into an addendum to the lease agreement. The tenant may also request that the lease payments are reduced if it is unable to use the leased property because of the measures it must take under the laws aimed at preventing the spread of the coronavirus (COVID-19).

The 98-FZ Law required the Russian government to elaborate these rules.

Governmental Regulations on Lease Payments Postponement

On 3 April, the Russian government adopted the Requirements to Terms and Conditions and Timeline for Postponement of Lease Payments under Real Estate Lease Agreements (the Requirements).

The Requirements provide that, if a tenant requires so, the following measures apply:

  • Lease payments are postponed until 1 October 2020, and the amounts that become outstanding must be paid between 1 January 2021 and 1 January 2023
  • As soon as the restrictions on the use of real estate are removed, payment of the regular lease payments should resume, but at 50% of their amount
  • Fines, interest, and other liability for breach of payment terms do not apply until 1 October 2020
  • Landlords may not claim additional fees from tenants in exchange for having the lease agreement amended
  • Parties may (but are not obliged to) agree on a reduced amount of the lease payments
  • Utility payments (if they are part of payments under the lease) are generally not subject to postponement and must be timely paid

The Requirements mention that the parties can renegotiate the terms of existing leases to find an amicable solution.

Supreme Court Overview Dated 30 April 2020

On 30 April, the Russian Supreme Court issued the Overview of Court Practice Involving Application of Legislation and Measures for Prevention of Spread of the New COVID-19 Infection in Russia, No.2 (Overview No. 2). Overview No. 2 provides that:

  • A landlord must accept the postponement of lease payments in 2020, if a tenant asks for it by sending a request provided that such request is legitimate.
  • If a tenant fails to timely make lease payment, and such tenant is engaged in one of the industries most affected by COVID-19, and its landlord knew or should have known this, the landlord must inform the tenant about its right to request the lease payments postponement. (The list of industries most affected by COVID-19 was adopted by the Russian government on 3 April 2020, and is amended from time to time.) Failure by the landlord to inform the tenant is construed as the landlord’ s consent to the postponement.
  • Postponement may be provided in relation to lease payments for nonresidential property only.
  • In case a tenant did not suffer as a result of the COVID-19 restrictive measures but still seeks the lease payments postponement, such tenant’s conduct may be construed as acting in bad faith. (Under the Russian Civil Code, abuse of rights including acting in bad faith with the intent to cause harm to other party, may serve grounds for a court to dismiss a claim of the abusing party.) In practice this means that a court might treat such tenant’s request for the lease payments postponement as not legitimate. Whether a tenant can be viewed as one who has suffered because of the COVID-19 restrictive measures needs to be determined on a case-by-case basis.

Notably, the Supreme Court does not have legislative power and cannot interpret the matters of substantive law in the absence of court cases on these matters. Given Overview No. 2 was issued just about one month after 98-FZ Law, the legal force of Overview No. 2 is unclear. However, courts in Russia will be guided by Overview No. 2, and, therefore, landlords and tenants must take it into the account when considering how to deal with the existing leases.

The COVID-19 situation remains extremely fluid and rules keep changing. For example, Russia’s Ministry of Economic Development prepared a draft law allowing tenants of nonresidential premises and land plots to early terminate their real estate leases without bearing termination fees, provided (i) they have not been in breach of their obligations under existing lease; and (ii) their revenues fell by at least 50% during the “high alert regime.” This draft has been adopted in the first reading by the State Duma, the lower chamber of the Russian parliament, on 12 May and is currently scheduled for further deliberations. It faced significant criticism and currently it is unclear whether (and if yes, how quickly) this draft will go through further readings and become law.

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