Article of bad faith

Lease contracts sometimes run to more than a hundred pages - and the legal traps hidden in them can be the source of many problems for those unfamiliar with the law. On the other hand, they can help an owner increase the value of a property. Article 685.1 of the civil code was incorporated into Polish law in 2011 as one of the provisions of the tenant protection act. The regulation is mainly addressed to the inheritors of tenement flats and was intended to help them increase unprofitable rent rates which have been losing value for years. The idea was to help those inheriting dilapidated residential buildings raise funds for renovations. The amendment to the civil code that came into force in April 2003 limited the application of the article only to lease contracts for residential units that had been concluded for an indefinite period of time. However, in December 2004, an act to amend the act on the protection of tenants within a borough's purview, which also amended the civil code as well as other acts, reinstated the former wording and interpretation. This means that in accordance with the article, the owner of a building may attempt to increase rents by as much as several percent. In order to be protected against the consequences of the act, it is necessary to include a provision excluding the application of this regulation when with a building owner.
Acting in advance
"The issue regarding Article 685.1 of the civil code is so complicated that I would rather not talk about it," - was the typical response of a few agents we spoke to who are regularly involved in negotiating contracts and the lease of commercial space. They believe that lawyers should handle such cases, because they themselves do not want to fall into disfavour with clients or officially discuss such practices used on our market. "I quite often deal with lease contracts. When I negotiate them myself, I have the chance to word them so as to exclude the regulation from being applied," says Rafał Dębowski of the Dębowski & Wspólnicy law firm. He has also applied the regulation twice to the benefit of his clients. "I have argued cases over the lease of residential units on ul. Nowy Świat in Warsaw. My clients did not notice that the 10-year leases concluded for their apartments were coming to an end. The value of the rents had long ago fallen and according to the lease contracts would have been automatically prolonged on the previous conditions unless an annexe was drawn up. This is why using this regulation was the only way to introduce new rent rates," explains Rafał Dębowski. The cases were taken to the supreme court. However, they did not come up for adjudication because the parties came to agree on a settlement.
Different court, different case
A different case connected to the same article was brought before the court of arbitration. In 2007, Celtic Asset Management became a tenant of the Rondo 1 office building, with a five-year lease. "At the beginning of 2010 we became aware that Rondo Property Investments was holding negotiations with another tenant in the building that was to take over our office. Of course we treated it as a piece of gossip at first," reveals Piotr Turchoński, head of the construction department of Celtic group. The information was confirmed in spring later that year. "Rondo Property Investments suggested that we moved to another area in the building or alternatively withdraw from the lease agreement and move out. After studying the market and the costs of such an operation, including the costs we would have to pay for moving and finishing a new office, the proposal was rejected, mainly on financial grounds," recounts Piotr Turchoński.
At the end of July the owner sent a letter to the tenant notifying them of their current rent rate pursuant to Article 685.1 of the civil code. Rondo Property Investments then raised the rent by app. 60 pct to EUR 36 per sqm. On the basis of the provisions of the lease contract, Celtic decided to appeal to the court of arbitration and obtained a court order securing the current lease conditions. This did not last long because after only two months the court of appeal overturned the order and upheld the position of the landlord. "Article 685.1 should not be used in business relations. Lease contracts are signed for a definite period of time and include provisions that set the rental rates. The issuing of non-contractual notices of rental rates by lessors contradicts the essence of the legal relationship created by a lease contract concluded for a definite period of time and undermines the security of turnover," argues legal adviser Małgorzata Sobol. In her opinion a good lease is a contract that provides for: the securing of rent payments, the option to move out of the building, the absence of contractual penalties for tenants, a say over the service costs in the building, and the establishment of the currency the rent is to be paid in (if a tenant's revenue is in złoty, paying in euros will not be ideal). "In my opinion there are only two reasonable situations when Article 685.1 of the civil code can be used by a lessor. The first is when market rental rates are growing rapidly and tenants continue to earlier rates (then you need to react in some way) and the other is when a good tenant wants to expand its premises in the building but there is no available space for them. Then you have to do everything in order to find some space, and from the point of view of the building's owner the fact that an anchor tenant wants to stay for longer is very important, as it has an impact on the building's value," claims Włodzimierz Jędruszak, director of the Fisheye Properties agency.
Court decision
Last December the court of arbitration of the Polish Chamber of Commerce in Warsaw ruled in favour of the tenant and ordered the building's owner to repay all the costs incurred from the lease of office space at a higher rate as well as the legal expenses borne by the tenant. So far the supreme court has not ruled on any similar case. According to data provided by the court of arbitration of the Polish Chamber of Commerce, app. 5 pct of lease-related cases result from Article 685.1 of the civil code. In 2010, the court adjudicated a total of 98 lease- and tenancy-related cases, a year later there were 130 (out of a total of 396 cases adjudicated by the court). By February 20th this year ten such cases were pending (out of a total of 33 cases). The building's owner was unhappy with the verdict and objected to the publication of the ruling.
Radio silence
This controversial clause has brought about a conspiracy of silence. Everyone supposedly knows of it or has heard of its application, but nobody wants to talk about it. In 2008, power company CEZ Polska leased an area of over 680 sqm in the Rondo 1 office building. But now the address of its head office is not Rondo ONZ 1. Even though nobody would confirm this information officially, we were anonymously informed that CEZ Polska met the same fate as Celtic. Is there any truth to such rumours? The building's owner denies and suggestion that the company left the building under pressure. Karol Bartos of MGPA told us that the contract with CEZ Polska was terminated by mutual agreement. He did not wish to comment on the conflict with Celtic, however. CEZ Polska spokesman Sebastian Włodarski declined to go into the details of the contract, but emphasised that the cooperation with the manager of the building was free of any conflict until the very end. Does using Article 685.1 make any sense, if it has a negative impact on the image of a building's owner? "In the case of the owners of prime properties on a given market employing such practices should not have any influence on the prestige of the facility. In my opinion there only three buildings in Warsaw for which the owners could afford to take such steps. Each has a considerable advantage resulting from their locations and the quality of the facilities themselves," declares Włodzimierz Jędruszak of Fisheye Properties. According to him the most prestigious buildings in the best locations in the capital city are Rondo 1, the Warsaw Financial Center and the Metropolitan. Article 685.1 is incredibly potent. Even though it has only been applied in a few cases, these have sent an important signal to the market - never let your vigilance slip.