From our experience of the work with the lease contracts of the office premises we may tell that the lessors, generally speaking, have two approaches to the conclusion of the lease contract with maximum regulation of the parties relations or with minimum regulation. In every of this approaches there are hided particularities about which a lessee and very often a lessor has no idea because of the lack of the knowledge about the legislation, misunderstanding of the final objectives etc. Here we will review some particularities of such lease contracts and possible solutions of the situations appeared as a result of their application.
When relations of the parties are regulated at a maximum degree
Lessor very often does not consider his real needs and those of a lessee and limits a lessee in all respects:
- to have a prior consent about the size and the color of any advertising signboard or a direction sign;
- to coordinate with the security a prospective relocation of any property of a lessee from/to the building with the provision of a list of property;
- to respect the office building working time schedule etc.
As a result, a lessor spends a lot of time in the administration of such contracts (control, record-keeping, additional education of the personnel etc.), lessee gets tired to approve constantly all these documents with a lessor. Worst thing is that such overregulation leads to the fact that both parties ignore the conditions of a lease agreement and do not fulfill them. In this case, work on the maximum regulation of the parties’ relations becomes a groundless loss of time and money.
In order not to make unnecessary steps and to guarantee the observation of the condition of a lease contract it is necessary to answer the following simple questions.
- If it is necessary to provide a uniform approach to the design and the order of distribution of all the lessors of the marketing materials and sign boards in the building it may be worth to elaborate unified rules understandable to all which would be an annex to the lease agreement? In this case it is possible not to oblige a lessee to have a prior approval beforehand – main thing is that they conform to the unified rules.
- Why a lessor to control the relocation of the lessee’s property? If we are talking about the material responsibility taken by the lessor or security company it is enough that such property is relocated by the authorized employee of a company. If a lessee is concerned for the damage to the building or premises as a result of careless relocation of the property it is enough to send one security guard to accompany the relocation of a large size property of the lessor. Such employee will watch for the accuracy of relocation of the property. It is also possible to draft rules defining on what time such actions are possible through which entrances and exits etc.
- If a lessor does not have an opportunity to control all actions of the lessee or to constantly approve any questions it is enough to establish an obligation to preliminary notify about the important action. Then the lessor will consider does he need to go further into this question or not.
When the relations are regulated at a minimum degree
There is an opinion that it is not necessary to include into the agreement many detailed terms. Since the Civil Code has already regulated everything and it is not necessary to explain something additionally. As a result we have a small sized text of the lease agreement.
According to the Article 542 of the Civil Code property lease contract shall specify the data to set the property, which shall be transferred to the hirer as an object of property lease. It means that the contract shall contain the whole address of the building and the land plot on which it is situated, identify a premise (premises) in this building (according to the technical passport) its area (including general area). In the absence of these data in the contract, the terms about the property, which shall be transferred to the property lease, is considered to be non-consensual by the parties, and the respective contract is not concluded (Art. 542 of the Civil Code).
If the property lease contract doesn’t specify its duration, it is concluded for an indefinite period (Art. 545 of the Civil Code). If there is no deadline for the termination of a contract parties may initiate termination by way of notification not earlier than before three months before the date of termination.
Lease contract may not be gratuitous. It follows from the notion of the lease agreement stated in the Article 540 of the Civil Code. Under the contract of property lease the lessor shall be obliged to provide the lessee for payment a property for temporary possession and use.
If lease contract does not establish other procedure, terms and format of the payment of the rent it is considered that the established procedure, terms and format, are usually used in hiring a similar property under comparable circumstances (Para. 1 Art. 546 of the Civil Code). However, such approach is very subjective aspect and may lead to the disputes unless regulated by the agreement.
Preemptive right of a lessee to extend lease agreement on the same condition for a new term is established in the Article 557 of the Civil Code. This right is deemed as stated by default if the terms of the contract do not provide otherwise. It is enough for a lessee to notify a lessor on his intent to use this right. If a contract does not provide otherwise the lessor is obliged to provide such right. It is difficult to avoid this condition when the respective circumstances have occurred. However, it is possible to avoid it by making a respective provision in the lease contract.
Recommendations of a local Kazakhstan based lawyer
Before signing a contract for a lease of an office it is recommended:
- to check a legal entity (a contract party) on the availability and validity of it’s state registration;
- to ensure that the lessor actually has right to lease (sublease) and the lessee is not limited by its corporate rules in accepting the documents into lease. It is necessary to ensure that according to the statutory and other documents of the lessor/lessee signatory of the agreement is provided with the right to represent a lessor / lessee whilst signing of the contract on the transfer/acceptance of the premises for a necessary term of a lease without any reservations. If there are reservations it is necessary to carefully examine how they can affect a contract at a time of registration of a contract at the authorized bodies and in the changing of the parties of the lessor/lessee;
- if it is a sublease it is necessary to learn a main contract as Civil Code establishes certain limitation in the sublease;
- for the understanding of possible risks of future relations with a lessee/lessor it is preferably to gather additional information about a lessor/lessee according to the registry of a tax body (temporary suspension of activity, liquidation etc.) and according to the database of the courts of the Republic of Kazakhstan (availability of many disputes may serve as an argument against establishing any relations with this such party). Mentioned information may be accessed from the free sources (egov, EAIAS, site of the tax committee etc.) or be demanded directly from a lessor/lessee.
We will consider certain commercial clauses that may at first sight appear as insignificant but in practice they become sometimes a reason of the significant problems.
The exploitation and operation expenses rate for the maintenance of the building (premises).
It is necessary to understand clearly what is included in these expenses and when this amount may be changed. A reservation that the list is not exhaustive and is not subject of a broad interpretation will not be out of place. It is not good to leave the list open for the both parties, as it is a cause of the future disputes.
The amount of the exploitation and operation expenses is established as fixed sum or is calculated based on the formula. The formula needs to be understandable for the both sides. Therefore, it is necessary to achieve its uniform understanding of its application.
If a payment is supposed for the premises of common use calculation should be made on the basis of technical passport for the object of condominium. If there is no such technical passport, a calculation provided by the lessor should be clear and adequate and correspond to the market realities and the rules of the business practice applicable on this territory. In the lease agreement lessor may be forced to do such calculations on the similar conditions to the other lessees of a building.
Works done by the lessee prior to the moving into an office and during a term of a lease.
Such works may be a part of the minor repairs or related to the making of alterations. It is natural for the long-term lease contracts.
In the large offices, the lessors may dictate to agree a project of the office reconstruction with a certain company that may entail the additional financial expenses. Such limitations of the lessee’s rights may be appealed in practice, however, nobody do this.
If there is a requirement on the obligatory approval, it shall have strict terms and procedure, identify the responsible parties (it is sufficient to indicate a position) to approve the project of repairs (reconstruction) of an office at the authorized state bodies etc.
It is worth to remember to get obligatory approval of the state architectural construction control about the alteration of the premises. An additional time should be allocated for such actions and a subcontractor or a designer should be charged with the obligations on obtaining such approval.
If it is clearly indicated in the lease contract that this is an obligation of a lessor, that he must be insured that the fire safety system in the leased premises is in working conditions and works at the moment of their acceptance. With such reservation a lessee is responsible for the working capacity of a system, availability of fire extinguishers in the leased premises (if there is no such system) and for the observation of other requirements of the legislation with respect to the nomination of the responsible persons, its employees etc.
If lease contract does not directly indicate that fire safety (part of it) is obligation of the lessor at least at the stage of the transfer of the premises he will never be responsible for that.
If a record is being made by the separate counters according to their indications it is important that the counters to be sealed and accepted into use in Kazakhstan, to be easily accessible for the visual control of the lessor (and to be situated on the territory of a leased premise).
If the counters are common or if there is no counters at all, the calculation usually made based on the formulas. They need to be clear to both parties. For this, it is necessary to achieve a unified understanding of the procedure and rules of application of the formulas. Lessor should have access to all indicators used in the formulas.
There is a possible option when a payment for the utilities on the territory of common use is imposed. Why imposed? Because utilities on the territory of common use are not always actually consumed by the lessee or his visitors. For the justification of this requirement of a lessor there should be objective features of the location of the office premise. Thus, if there is no lavatory (toilet) on the territory of common use sewage expenses cannot appear in such calculations. The same concerns other expenditure items. It is necessary to check what a lessor accounts for the utilities on the territory of common use and what he considers as a territory of common use.
Fines and penalties
It would be practical to make a limit on the sum of all the fines and penalties, i.e. make a reservation in a lease contract “no more than 10 per cent”.
Very often, a lessor includes in the conditions of a lease contract his right to deduct fines and penalties from any payment of a lessee. It is acceptable but a right shall occur after the lessee’s accept or after lessee’s receipt of the respective notice beforehand. In other words, before anything is deducted lessee needs to know and understand that such deduction will take place as well as to know when such deduction will happen.
Lessor’s reference to his own internal rules or rules of building maintenance is not acceptable without their attachment to the text of a contract, even more, when we are talking about the amount of fines and procedure of their recovery (deduction). Very often a lessor becomes aware of such rules (that has been not attached to the contract) after signing the lease contract.
If a lease contract contains a lot of fines and penalties the sum may be limited by the amount maximum allowable for a month/year or maximum allowable for the whole duration of a lease contract.
It is important to limit any damages by the real loss. Otherwise, lawyers should know about it, damages include real loss and lost profit, which is more significant.
Managing Partner of the Artyushenko and Partners Law Firm.
Prepared for the Magazine Accountant and Law, #5(107)
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