Tenancy novelties. How will tenants be exempted from payments from April 13?
Bohdan Shmorhun, Associate of Real Estate and Construction at Arzinger
In times of pandemic and bans on the use of property by tenants as well as by landlords, it is important to have clear instruments to understand who is exempt from rent and how. Until recently, Ukrainian law provided only two main options for tenants and landlords:
The first option was that the tenant may claim a reduction in payment due to circumstances substantially impairing its ability to use the property.
The second one was the automatic exemption from rent for the entire period of the circumstances rendering the use of the property impossible.
On 30 March 2020, following the introduction of the quarantine due to coronavirus, the Ukrainian Parliament adopted the much-hyped Law No. 540-IX. The main problem with the law was an obvious thing written in one of its transitional provisions – during the quarantine, tenants may be exempted from payment for the use of property. In practice, it did not make things in the market any clearer, but everything changed on April 13 with the adoption of Law No. 3279-d, or didn’t it?
On April 13, having analyzed its own mistakes, the legislator set out the above-mentioned paragraph in a new wording. Now tenants using real estate in their business will be able to claim a reduction in the payment for real estate for the entire period when they were unable to use it to the full extent in their business due to restrictions and/or limitations imposed by the quarantine.
The main novelty of this paragraph is that, due to the application of the mentioned reduction, the amount of rent may not exceed the aggregate amount of costs payable by the landlord during the quarantine period for utilities and as a land fee and real estate tax. Besides, if the tenant leases part of a building/premises, the maximum rent should be proportionate to the leased area.
In fact, compensation for such costs of the owner should be the lease payment for the property use for the entire period, unless the tenant is already obliged to pay the same under the lease agreement.
Ultimately, the legislator has determined that the above provision shall not extend to those who have actually operated with the full use of the leased property and shall not apply to the property of the territorial communities.
All these changes are certainly favorable for the market. However, practice shows that most landlords have already exempted the tenants whose business is directly limited by the quarantine. Unfortunately, the most important issues for the market remain unaddressed yet again.
Thus, office tenants, business centers that are formally continuing their activity, cannot apply this provision directly, as the exemption criterion “impossibility to use the property in full” may virtually not be applicable to them. Nonetheless, most companies do not use offices due to the quarantine.
Marketing payments and property maintenance fees (the so-called “ОРЕХ” – operational expenses) are also not regulated by this provision. They are not even included in the statutory “property use payments”, being essentially charged for services provided by the property owner or its contractors.
The bottom line is that the new changes will undoubtedly bring some clarity to some tenants and landlords. However, for the larger part of the market, these changes will be a purely additional legal argument, which should be used very carefully in the tenant-landlord negotiations until cleared by the courts. At the same time, the issue of other payments under a lease agreement remains open.
This is why it is critically important in quarantine conditions to maintain an ongoing tenant-landlord dialogue and to negotiate all such reductions only through contractual mechanisms, such as additional agreements, rather than to rely on the automatic application of legal provisions.