Russian Federation: Office Lease Agreements In Moscow

1. Introduction

The Moscow office market has changed dramatically over the past 15 years. While many office buildings have been constructed, demand for new and better office space has increased at least as quickly. Therefore, rents are still high. Annual rent, which often does not include operating expenses and utilities charges, for class A offices ranges from about US $500 to US $800 per square meter.

A lease agreement must be executed in writing. The parties must sign a single document. The agreement is invalid if the parties do not comply with that requirement.

In addition, a lease agreement for a term of not less than one year requires state registration. The agreement is deemed to be entered into by the parties and enforceable only from the moment of its state registration. State registration requires about six to eight weeks from the day when the application is filed with the competent authority. However, the parties may stipulate in their lease agreement that the agreement applies retroactively from an agreed date.

The state registration requirement has a significant disadvantage. An application for the state registration of a lease agreement cannot be filed before the property rights of the owner of the building are recorded in the state register and those property rights cannot be recorded before the construction of the building (except for the fit-out works) has been completed.

The agreement is invalid if it does not identify the premises without ambiguity. The landlord must provide the premises in accordance with the terms of the lease agreement and the purpose of the premises. Potential tenants should employ an engineer who can check the technical parameters (for instance, ventilation, heating, air conditioning) of the premises. Moreover, tenants should require that the lease agreement specify relevant technical parameters. Potential tenants should also employ an experienced architect if the tenant is responsible for the fit-out works in the premises.

Accessories of the premises are deemed to be included in the lease unless otherwise provided by the lease agreement.

At the beginning and the end of the use of the premises by the tenant the parties must sign a transfer act. The transfer act documents the acceptance of the premises by the tenant at the beginning and by the landlord at the end of the use of the premises. Therefore, the landlord and tenant each should carefully list in the transfer act any claims regarding the conditions of the premises.

The landlord is liable for defects of the premises that totally or partly prevent the use of the premises. Upon the discovery of such defects, the tenant has the right at his choice:

- to demand the repair of the defects at the expense of the landlord;

- to demand a proportional reduction of the rental payments;

- to demand the compensation of the tenant's expenditures for the repair of the defects;

- having notified the landlord accordingly, to withhold from the rental payments the amount of the expenditures made by the tenant for the repair of the defects;

or to demand early termination of the lease agreement.

However, the landlord may choose to repair the defects at his expense. Independently, the landlord is liable to compensate losses of the tenant resulting from defects.

The landlord is not liable for defects of the premises if such defects:

- were reserved by the landlord at the time of the conclusion of the lease agreement;

- were previously known to the tenant; or

- should have been discovered by the tenant during an inspection of the premises at the time of the conclusion of the agreement or the signature of the transfer act.

Moreover, if the landlord fails to inform the tenant of any rights (for example, a mortgage) of third parties to the premises the tenant is entitled to:

- a reduction of the rental payments; or

- an early termination of the lease agreement and compensation of his losses.

The amount of lease payments must be determined by the lease agreement. The general provision of Russian contract law that the price is established on the basis of comparable conditions if it is not determined by the contract itself does not apply.

The amount of rent is usually fixed in US dollars or Euros. If in accordance with Russian currency regulations payments have to be made in Russian rubles, usually the exchange rate set by the Russian Central Bank on the day of the payment is agreed.

Usually, lease agreements provide for the payment of rent quarterly in advance. Unless the lease agreement provides otherwise, in the event of a substantial delay of a rental payment, the landlord has the right to claim the early payment of up to two rental payments.

Usually, lease agreements provide for the payment of a service charge and the reimbursement of utilities cost (electricity, hot and cold domestic water, heating). Sometimes, services are provided by a management company. One of the reasons for the provision of services through a management company is the optimization of Russian value added tax.

Due to the comparatively high interest rates in Russia, landlords usually insist on a relatively high level of default interest in the lease agreements. If the landlord is not a Russian company, tenants should be aware of Russian withholding taxes. Russian withholding taxes may apply even if the tenant is also not a Russian company.

Usually, lease agreements require the payment by the tenant to the landlord of a security deposit which serves to secure the payment obligations of the tenant. The amount of the security deposit is usually equivalent to rent for three months.

Typically, the lease agreement regulates the conditions of access by the landlord to the premises, for instance, for inspection, maintenance and repair or showing to potential tenants.

The landlord is required to make at his expense major repairs unless otherwise provided by the lease agreement. The term "major repairs" is not defined by the law.

If the landlord fails to make major repairs the tenant is entitled:

- to make major repairs and recover the cost of such repairs from the landlord or withhold from rental payments;

- to demand a proportionate reduction of the rental payments; or

- to demand early termination of the lease agreement and the compensation of his losses.

The tenant is obliged to make current repairs and to bear the expenditures for the maintenance of the premises unless provided otherwise by the lease agreement. The terms "current repairs" and "maintenance" are not defined by the law.

The tenant is not entitled to sub-lease the premises or assign his rights and obligations to a third party without the consent of the landlord.

The term of a sub-lease agreement may not exceed the term of the main lease agreement.

A sub-lease agreement is invalid if the main lease agreement is invalid.

Early termination of the main lease agreement entails the early termination of the sublease agreement unless provided otherwise by the main lease agreement. However, the sub-tenant has the right to enter into a contract with the landlord for the remaining term of the sub-lease agreement and the sub-leased premises on the terms established by the main lease agreement.

A transfer of ownership is not a basis for the change or termination of a lease agreement. In other words, the new owner of a building "inherits" the existing lease agreements.

If the land, on which the office building is located, is not owned by the landlord (what is usual in Moscow where most land plots still belong to the city or the federal government) the consent of the owner of the land to the lease of office premises may be required by the legislation applicable to the land or by a contract between the owners of the land and the building.

The law does not establish a maximum term. If the lease agreement does not fix a term for the agreement, the lease agreement is deemed to be for an indefinite term. A lease for an indefinite term may be terminated by either party by three months notice unless the parties have agreed a different notice period.

While many lease agreements are for a term of 364 days (to avoid the need for a state registration) or three or five years, sometimes lease agreements are concluded for much longer terms. Lease agreements for longer terms provide for regular rent reviews.

If the premises are mortgaged, the term of the lease agreement may not exceed the term of the mortgage without the consent of the mortgagee.

The tenant friendly statutory provisions summarized hereafter on early termination of a lease agreement are usually amended by the parties in favor of the landlord.

After having given the tenant written warning and a reasonable time period to cure violations, the landlord is entitled to demand early termination of the lease agreement by the competent court if the tenant:

- uses the premises in a substantial violation or repeated violations of the terms of the lease agreement;

- causes significant damage to the premises;

- is overdue with two succeeding rental payments;

- does not make major repair (if the tenant is obligated by the lease agreement to make major repairs); or

- in other events established by the lease agreement.

The tenant is entitled to demand early termination of the lease agreement by the competent court if:

- the landlord does not provide the premises or unduly disturbs the use of the premises;

- the premises have defects which disturb the use of the premises and which:<

- should have been discovered by the tenant at the time of inspection at the time of the conclusion of the lease agreement;

- the premises became unsuitable for use due to circumstances for which the tenant is not responsible; or

- in other events established by the lease agreement.

Usually, the tenant undertakes to fit-out the premises and the landlord grants a rent free period and a reduction of rent to compensate (often partially only) the tenant for the value of the fit-out works.

Such improvements are the property of the tenant unless provided otherwise by the lease agreement.

Unless otherwise provided by the lease agreement, upon expiration of the agreement the tenant is entitled to compensation of the value of such improvements made at the tenant's own expense and with the consent of the landlord.

Upon termination of the lease agreement, the tenant is obliged to return the premises to the landlord:

- in the condition in which the tenant received the premises, taking into account ordinary wear and tear; or

- in the condition established by the lease agreement.

For the period of any delay, the landlord is entitled to lease payments and the compensation of his losses.

If liquidated damages were agreed for late return of the premises, the landlord may claim the compensation of additional losses unless otherwise provided by the lease agreement.

If the landlord does not object to the use of the premises by the tenant after the expiration of the lease agreement, the agreement is deemed to be renewed on the basis of the same conditions for an indefinite term.

Unless otherwise provided by the lease agreement and subject to having performed his obligations under the lease agreement, the tenant has a preferential right before other persons to enter into a lease agreement for a new term.

Within a reasonable time period before the expiration of the lease agreement or the time period stipulated in the lease agreement, the tenant must inform the landlord of his intention to exercise his preferential right. The preferential right is valid for a term of one year after the expiration of the lease agreement.

If the landlord violates the preferential right of the tenant, the tenant is entitled to claim the transfer to himself of the lease agreement with the third party and the compensation of his losses or the compensation of his losses only. The preferential right only applies if the premises are let to a third party. It does not apply if the premises are used by a third person on another basis (for instance, joint activity agreement) or by the landlord.

Usually, lease agreements provide that each party shall insure its civil liability (death, injury, damage to the property of the landlord, the tenant or third parties). However, the minimum levels agreed by the parties are relatively low. The landlord is often required to insure the building and the tenant the value of his property and the fit-out works.

In Russia, currency regulations apply. Therefore, payments between landlords and tenants may be subject to restrictions or controls imposed by those currency regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.