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A Lessee’s Dream: the Drastic Devaluation of the Russian Currency Has Triggered New Discussions of

February 2016 - Finance. Legal Developments by Sirota & Partners.

More articles by this firm.

The rent for leases, especially those in downtown Moscow and other large cities, is often based on the foreign currency exchange rate, which has recently increased almost threefold. Many businesses have been taken aback by this consequence of the economic crisis. Some of them have been put on verge of bankruptcy because of the increased rent and were forced to seek remedies in courts.

At the same time, Russian courts have traditionally refused to terminate or alter such lease contracts. Their standard rationale has been that entrepreneurs assume the risks of economic changes when entering into contracts based on a foreign currency, and, in any event, can foresee the economic crisis. Hence, many businesses are forced to settle their difficulties by resorting to quasi-legal means, for instance by attempting to find a replacement or by abandoning the leased premises.

However, the Moscow City Arbitrazh Court has recently issued a very controversial decision on the matter. It forcibly established a currency band in a lease agreement between Vympelkom (a Russian mobile service provider, operating under the “Beeline” trade name) and its lessor Tizpribor (Ruling of the Moscow City Arbitrazh Court in Case No. А40-83845/15-54-532 dated February 1, 2016). As a result, many desperate lessees have found new hope for a civilized legal solution for their plight.

Although this decision is a move in the right direction, in itself, unfortunately, it is poorly motivated. Its wording and legal arguments open the door to reversal upon appeal, which is scheduled for the next month. However, we believe that feasible grounds for the same outcome do exist in the Russian law. In particular, the Court based its decrease of Vympelkom’s rent on the observation that the payments were higher than the comparable market average rent. This approach, however, can be relied upon only where the lease agreement is found to be void and the court has to retroactively calculate the price for using the premises in question. In the case at hand, however, the lease was valid, and the parties willfully negotiated its pricing terms. For this reason, motivating the decision by the mere fact that the rent exceeded the comparable market average was absolutely unjustified.

Vympelkom v. Tizpribor is strikingly similar to a case examined by the Senate of the Reichsgericht in 1920 to 1921 in Germany. An agricultural lease contract was concluded in 1913 for the term of 15 years (until 1928) without the right to unilateral termination. The rent was to be calculated based on the price of gold, which was a common practice aimed at minimizing economic risks during that historic period, when German economy was weak, the country lacked resources and had high inflation rates. By 1920, the gold coin drastically went up in price. The lessee therefore demanded to fix the rent in the nominal value of the Deutschemark, while the lessor insisted on payments in the paper equivalent of gold.

In 1921, the court of appeal remanded the case to a lower court with instructions to fix a fair rental price taking into account the equitable interests of both parties. The court specifically underlined that currency devaluation had shattered the balance of interests between the lessor and the lessee turning the leased property to a liability instead of an asset, while the lessor could derive economic profit from the onerous position of the lessee. The court declared such an arrangement inconsistent with the principle of good faith and applied the doctrine of fundamental change of circumstances.

Nowadays, agricultural lease is no longer a common phenomenon. Nonetheless, the currently widespread long-term lease of real estate is not too different. Much like the farmer, who leases land for several decades, lives there, fertilizes and digs it, perceiving the land as an inherent part of his life, modern lessees take the lessors’ buildings and develop, repair, restructure and upgrade them. After that, the buildings have been brought to suit their needs with such precision that it is almost impossible for the lessees to leave, as moving would cause inconvenience for the employees, business and clients.

Much like in the 1920s Germany, in Russia, where economic crises have been the recurring phenomenon of the last few decades, many long-term lease contracts are fixed in US dollars or Euros and provide no opt-outs for early unilateral termination. After the exchange rate peaked much like gold in the 20th century Germany, thousands of lessees have been stuck with an asset that has suddenly transformed into a liability. They have neither legal nor other options to terminate the contract and are therefore forced to continue performing onerous contracts. At the same time, many lessors, who have no other currency obligations and, thus, no real grounds to receive payments in foreign currency, obtain unjustified benefits.

Vympelkom appears to be just one very prominent example of such a lessee. It leased office premises with the area exceeding 30,000 sq.m. in Moscow with the annual rent of approximately 25 million US dollars (payable in rubles). The contract was signed in 2009, when the yearly average exchange rate was 31.7 rubles per US dollar, while by the end of 2015, it had peaked to approximately 80 rubles per US dollar. As a result, the lease expenses of Vympelkom, which primarily receives its revenue in rubles, increased by almost 1 billion rubles. At the same time, according to Vympelkom’s lawyers, the lessor had no currency obligations and was merely taking advantage of the situation refusing to renegotiate the contract terms.

Much like the farmer in an agricultural lease, Vympelkom took an unfit building, restructured and upgraded it for own business needs to the extent that it stopped being the same place visually. Inevitably, moving to another office would not only be highly undesirable but would also cause inconvenience for the business and employees. On the other hand, the lessor also has no interest in terminating the contract. It is unlikely that a new lessee could be easily found without a significant drop in the rent, given the size and the specific features of the premises.

Thus, the contract undoubtedly became excessively onerous for Vympelkom and unjustly profitable for Tizpribor while being impossible to terminate. In such a case, the law must interfere and restore the balance of their interests. The problem is therefore the way the court motivated its decision in the case under review. All of the legal rules used in the German case and other more recent cases do exist in the Russian law. Hence, upon closer consideration there are real legal bases for taking the same decision, which were not, however, fully made use of.

We will continue to monitor the progress of the case in the higher courts and whether they will approve of the new lessee-favouring turn in court practice, or will reverse the decision due to its shaky motivation.

Currently, however, it is essential to ensure that contracts are fully equipped with the necessary exigency provisions prescribing renegotiation or termination of contracts in the events resembling currency devaluation. At the same time, as demonstrated above, even if a particular contract lacks such clauses, it may still be challenged in court. While the chances of success may not be high at present, the initiation of such a judicial process may trigger significant changes in the lessors’ approach. Thus, the contract may be altered amicably and the lessees’ dreams may come true.

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