Russian Federation Seeks to Strengthen Tenant Advantage in Foreign Currency Rental Payment Disputes

Publication February 29, 2016

The Ministry of Industry and Trade of the Russian Federation and the Moscow Arbitrazh Court attempt reversing the practice of resolving disputes about foreign currency rental payments to the advantage of tenants.

Following the 2008 crisis, the Bank of Russia abandoned the managed float regime policy, the USA and the European Union implemented sanctions against Russia and, amid plummeting oil prices, the exchange rate of the Russian rouble to foreign currencies (primarily to euro and US dollar) has dropped by more than half. Such exchange rate fluctuations have seriously affected the commercial property tenants whose rental and other payments under lease agreements were denominated in foreign currency (which means that payments are to be made in Russian roubles based on a foreign exchange rate established by the Central Bank of Russia as of the date of payment). As a result, the sharp rise in the actual rouble cost of rental payments has substantially increased tenants' expenses and affected their profitability and business as a whole.

Over the last few years, tenants have been actively attempting to negotiate a decrease in rental payments with their landlords or, in many cases, to resolve this issue in court. Unlike the landlords who, given the current developments in the commercial property rental market, sometimes make concessions to tenants and agree to reduce rental payments (by both decreasing the foreign currency denominated rental payments and setting a maximum rouble exchange rate), the courts always take the side of the landlords and dismiss tenants' attempts to revise rental payments. In doing so, the courts qualify sharp fluctuations in currency rates as business risks of the parties to a contract.

It became known on February 19, 2016, that the Ministry of Industry and Trade had drafted amendments to the Civil Code of the Russian Federation, establishing a legal ban on denominating rental and other payments under lease agreements (such as maintenance charges, service charges, marketing fees, etc.) either in a foreign currency or in so-called "conventional monetary units" (ECUs, special drawing rights and others). This bill should substantially strengthen the tenants' position in their disputes with landlords. However, the tenants should not expect the prompt passage of this bill, as it will be solidly opposed by both landlords (first, by the owners having foreign currency-denominated mortgage loans) and potential investors that would be prevented from planning and making investments in the Russian Federation as a result of such amendments.

The fact that the government has been slowly shaping its position on the matter was reflected in the Moscow Arbitrazh Court's decision issued earlier this month, in which the court granted a tenant's (VimpelCom's) claim and established, for the purposes of making settlements under the relevant lease agreement, the maximum RUR/USD exchange rate of 42 roubles per one (1) US dollar. This decision, going against the prevailing court practice on this matter, came as a genuine surprise, and all participants of the commercial property rental market almost immediately announced that they expected this decision of the Moscow Arbitrazh Court to be soon reversed by the appellate court.

If the bill prepared by the Ministry of Industry and Trade becomes law, then VimpelCom's position will get additional backing in the course of a review of the company's dispute by the appellate court, and the lessors should brace themselves for numerous lawsuits by their tenants seeking substantial reductions in rental payments.

We are closely monitoring the developments in this case and will keep you informed of any future progress.

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