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New changes to property leases due to Covid-19 restrictions

On 16 July 2020, Law of Ukraine No. 692-IX "On amendments to certain legislative acts of Ukraine concerning state support of culture, creative industries, tourism, small and medium-sized businesses in connection with the restrictions related to spreading of coronavirus disease COVID-19" (the "Law") came into force.

The Law, inter alia, has impact on property leases and, in particular, it provides that, as regards immovable properties in lease, rental fee shall be reduced during the entire period when the property could not be used in the tenant's business in full due to the restrictions and (or) prohibitions caused by COVID-19.

In such case, rental fee shall not exceed total amount of costs that lessor has borne or will have borne for the relevant period to pay for land, real estate taxes (other than land plot) and utility bills.

The core effect of the Law, in our opinion, is that those tenants, who are forced to stop using the leased premises in their business due to further quarantine restrictions, will have special legal grounds to require lessors to reduce rental fee, in addition to general provisions of the Civil Code.

Although, it should be noted that the provisions of the Law appear to us rather vague and potentially leading to a number of uncertainties, such as the following:

  • The issue of retrospective application of the Law, especially in cases where the parties have already agreed on the specific lease terms during the quarantine;
  • Absence of clear criteria for determining "full" or "not full" use of the leased property. As recent practice suggests, there are a lot of "middle-ground" situations where business is restricted in part (for example, restaurants being closed for visitors, but operating in "to go" mode, or entertainment establishments being closed from 11 p.m. to 7 a.m., etc.). Such cases fall into a grey area under the new Law.

Also, we should not disregard discriminatory nature of the Law, because the above provisions shall be applied only to privately owned properties, while its effect on municipal properties is expressly excluded.

In conclusion, the above matters should be carefully reviewed on a case by case basis. We are inclined to believe that the Law, in absence of further amendments aimed at clarification the above controversial issues, may lead to inconsistent court practice.

 

For further information, please contact Asters' Partners Oleg Boichuk and Roman Kostenko.

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