If execution or bankruptcy proceedings are commenced against the owner of leased or tenanted real estate, the lease or tenancy contract may be terminated early by the administrator or trustee. Rent paid in advance may then be deemed ineffective. How should lessees and tenants protect themselves when entering into a contract with an owner in poor financial condition?
Termination of contract by administrator in execution proceedings
Attachment of real estate is a temporary state that has no impact on the effectiveness of a lease or tenancy contract in force at the time administration is appointed. However, the administrator may terminate such contracts without obtaining the consent of the parties. Under Art. 936 of the Civil Procedure Code, appointment of administration has no impact on concluded contracts of lease or tenancy in force at the time of appointment. The administrator is authorised to terminate such contracts in compliance with the applicable regulations and to conclude new contracts for a time accepted by local practice, but tenanting of real estate requires consent of the parties, or absent their consent, permission from the court. In our view, in the case of contracts of lease or tenancy concluded for a definite period, termination of the contracts by the administrator may occur only if grounds for termination exist as provided for in the contract or the regulations.
Significantly, the administrator is bound by contracts of lease and tenancy concluded by the owner, regardless of whether the real estate was delivered before announcement of attachment of the property. However, from the date of attachment, rent should be paid to the administrator. Collection of rent in advance prior to attachment (for a period longer than three months in the case of lease or six months in the case of tenancy, counting from the date of attachment) does not release the lessee or tenant from the duty to pay rent to the bailiff (Civil Procedure Code Art. 929 §11). This rule should be borne in mind when negotiating the terms of a lease or tenancy contract.
Termination of contract by acquirer
Under Art. 1002 of the Civil Procedure Code, when the order adjudging ownership becomes legally final, ownership of the real estate is transferred to the acquirer, who as a rule enters into the rights and obligations of the lessor or landlord arising out of the relationship of lease or tenancy. The acquirer may then terminate such contracts.
If the contract was concluded for an indefinite period, the acquirer may terminate it in accordance with the periods set forth in the contract. If the parties did not provide for such periods in the contract, then under Civil Code Art. 673 §2 the termination notice period depends on the rent payment terms.
The acquirer has a broader right of termination in the case of contracts concluded for a period of longer than two years. The acquirer may terminate such a contract within one month after the order adjudging ownership becomes legally final, upon one year’s notice, unless the contract provides for a shorter notice period. It should be remembered, however, that lapse of the one-month period for submitting a declaration terminating the contract results in loss of the right to terminate the lease or tenancy contract.
Termination of contract by bankruptcy trustee
Under Art. 107 of the Bankruptcy Law, during the course of a bankruptcy proceeding, lease and tenancy contracts remain binding on the parties if possession of the property subject to lease or tenancy was delivered. The bankruptcy trustee becomes the performer of the contracts on behalf of the lessor or landlord. The trustee may terminate the contract in accordance with its provisions or the Civil Code. Additionally, under Art. 109 of the Bankruptcy Law, the trustee may terminate a relationship of lease or tenancy pursuant to an order by the judge-commissioner, who may consent to termination if maintaining the contract would hinder liquidation of the bankruptcy estate or if the rent for lease or tenancy deviates from average rents. Termination on the basis of such an order occurs on three months’ notice. Consequently, in a bankruptcy proceeding the trustee has broader authority to make an early termination of lease or tenancy than the administrator in an execution proceeding.
In a bankruptcy proceeding, the effects of payment of rent in advance for a longer period, as well as sale of the real estate, are the same as in execution proceedings.
The right to early termination of a lease or tenancy contract cannot be contractually excluded, whether in the event of attachment and sale of the real estate in an execution proceeding or in the case of sale of real estate constituting part of the debtor’s assets in a bankruptcy proceeding. However, a mortgage can be established to secure the claims of the lessee or tenant for rent paid in advance or expenditures invested in the leased or tenanted property. This should be considered when concluding a lease or tenancy contract with an owner in poor financial condition.
Sylwia Moreu-Żak, attorney-at-law, Karolina Dawidczyk, Real Estate practice, Wardyński & Partners