On 13 July 2020, the President of Ukraine signed Bill No. 3377, passed by Parliament on 16 June 2020, into law ("Law"). The Law restates Clause 14 of Section "Final and transitional provisions" of the Civil Code of Ukraine and aims at, among others, supporting lessees during the lockdown period by allowing them to demand rent reduction. In this context, the following should be taken into account.
Who may demand rent reduction?
- The Law gives the right to demand rent reduction to the lessees of both state-owned and privately owned real estate (except for real estate owned by territorial community). The lessees may benefit from rent reduction, provided that they had no objective possibility to use the leased object to the full extent for conducting their business activity due to restrictive quarantine measures.
- Although the Law does not explicitly require the lessees to prove that they could not use the leased object to the full extent, it is advisable to seek the lessors' recognition of this fact. For this purpose, the parties may proceed with inspecting the leased object and executing a relevant act (report) thereafter or agree on any other procedure.
Are the lessees of office premises entitled to demand rent reduction?
Since restrictive quarantine measures do not apply to office-based businesses, which are allowed to operate throughout the lockdown period, the right of lessees of office premises to demand rent reduction is challengeable. However, the lessees of office premises may point to certain other restrictions (such as non-availability of public transport for their employees) that practically prevent them from operating an office to the full extent. Those restrictions should also be taken into consideration while substantiating the claim for rent reduction.
By how much may the rent be reduced?
The rent, which is subject to reduction under the Law, shall be equal to and may not exceed the total amount of the utilities cost, land tax and real estate tax incurred by the lessors. It means that the Law virtually exempts the lessees from the rent and the lessees will only reimburse the lessors for the utilities cost, land tax and real estate tax, calculated in proportion to the lettable area.
For what period may rent reduction be sought?
The Law provides that the rent may be reduced for the whole period that the lessees could not use the leased object to the full extent due to restrictive quarantine measures. It is worth noting that this provision has a retroactive effect. At the same time, the Law does not clarify if the lessees will be indemnified for the rent unduly paid for the periods for which rent is subject to reduction. If this is the case, however, the lessees may claim to recover the sum exceeding the amount of reduced rent under the general provisions of civil law.
Is the rent subject to automatic reduction?
The enactment of the Law does not mean that the rent is subject to automatic reduction. The lessees should consider notifying the lessors on their intent to have the rent reduced and providing the lessors with documents and information confirming their right to rent reduction. The parties should further agree on rent reduction and introduce the relevant amendments to the lease agreement. If the parties fail to agree on reducing the rent, the dispute may be referred to a court for its resolution.