Registration of a lease in CEE – should it be on your checklist or not?
When two do the same, it is not the same. This old saying is true especially when comparing legal regulations in different countries. Businesses that are present in various jurisdictions sometimes tend to expect the same, when, at first glance, the regulation seems to be similar. A good example is the legal regulation regarding registration of leases in public registers. We have selected five jurisdictions in the CEE region – Czech Republic, Hungary, Poland, Russia and Slovakia – and with these examples we will show how variable the regulations can be even if they appear to be implementing the same legal principle. In each case we also summarize another related issue – the effect of transfer of ownership title to a leased property on the related lease agreement.
In some countries, registration of a lease in a public register is obligatory; in other countries, it can be viewed as a tool beneficial for tenants and landlords, especially in connection with third party claims.
In Russia, registration of a lease in a public register is obligatory for long-term leases.
Under the Russian Civil Code, a lease of non-residential property with the term of more than one year becomes valid and effective for third parties from the moment of its registration. If a lease with a term of less than one year is extended and the total lease period becomes more than one year but the extended period is less than one year, that lease is still not subject to state registration. If the title to the leased property passes to the new landlord for any reason (e.g., the sale of leased property) then the registered lease will be binding upon the new landlord. The Higher Arbitrage Court opined in 2014 that non-registered long-term leases are binding on the parties to the lease agreement, but they have effect neither on third parties nor on the new owner of the real estate that becomes a new landlord unless there is evidence that the new owner (landlord) knew about the lease. Leases that are not subject to registration obligation pass to the new owner of the lease property without further ado.
In Slovakia, the information regarding existing lease agreements on land, the term of which is at least five years, must be recorded in the Cadastral Register. According to the prevailing opinions of legal experts, breach of this statutory provision does not have any impact on the effectiveness of the lease agreement itself. In addition to that, change of ownership has also no direct effect on the existing lease relationship, whether it is registered or not. The rights and obligations of the landlord related to the time period after the change of ownership are automatically transferred to the new owner, while rights and obligations related to the period prior to the transfer remain with the original landlord.
Yet by the strict interpretation of the law, a breach of this statutory provision regarding lease registration may result in imposition of penalties of up to €331. However, also in this area the common practice is that even if the statutory registration of leases is not followed by the parties, the Cadastral Register does not impose any penalties and it is truly unusual to observe any administrative procedure in this regard.
The practice of public authorities, may, however, change at any time.
In Poland and Czech Republic, registration of a lease in a public register is voluntary.
In Poland, registration of a lease creates a presumption of existence or non-existence of the lease. This can be a double-edged sword, because if the owner (landlord) manages to deregister the lease from the Land and Mortgage Register (which he may do without a tenant’s consent, only with sufficient evidence of termination of the lease, as further described below), the owner will have additional arguments to prove that the lease is no longer binding.
One important benefit of registration in Poland is that it changes the lease from a contract that has effect between the landlord and the tenant into one of rights in rem with limited effect on other persons. As a consequence of the registration, the lease takes precedence over later created rights in rem. In addition, future leases (and other rights in rem) cannot be exercised to the detriment of the registered lease. The consequence of that right has to be analyzed on a case-by-case basis, but, the tenant of a registered lease has enhanced legal means of protecting his or her lease in the event of conflicts between tenants or other persons who want to establish rights in rem on the property.
In the Czech Republic, registration of a lease may be beneficial for the tenant in the event that the landlord transfers the property to a third party. The general rule is that change of ownership does not affect existing lease of the property. It remains valid and neither party may terminate the lease. However, if the acquirer did not know and had no reason to suspect that the property is leased, its termination right kicks in. Registration therefore makes sense primarily in cases where it may not be obvious that the property is leased. Also, the new landlord is not bound by contractual provisions of the lease agreement it did not know about when acquiring the property. Registration of the lease may increase the tenant’s comfort in connection with this risk as well.
The advantage of registration of the tenant is obvious – the tenant is protected in case of transfer of the property. The benefit for the landlord is that the registration of a lease can prove that the acquirer cannot claim that it did not have a chance to get acquainted with the fact that the property is leased.
In both Poland and the Czech Republic, the lease can be registered only with the consent of the owner of the property, whose signature must be officially verified. The best time to open this issue with the landlord is thus during the lease negotiations. In the Czech Republic, the lease can be deleted from the register only if termination of the lease is proven to the cadastral register, except for cases of its termination due to the lapse of lease term, in which case a simple declaration of the landlord is sufficient. In Poland, the motion to deregister the lease can be submitted by the owner of the property or by the tenant. The consent of the other party of the lease agreement is not required; however, the lease can be deregistered only if a document certifying that the lease agreement has been terminated (ex. a termination notice) is attached to the motion.
In Hungary, registration of leases in the real estate register available to anyone without limitation is not currently possible.
However, the Hungarian land registry offices keep separate records of the usage of arable land (the arable land usage register). Lease (and other agreements) concluded with respect to arable land in Hungary (except for forests) must be reported to, and registered by, the competent land registry office in the arable land usage register.
Nevertheless, the right to use a certain property (whether arable or non-arable) based on a usage agreement or court order may be registered in the real estate register. However, such records are never based on lease agreements, but rather on usage agreements, where no consideration is paid for the use of the property.
As to the change of ownership, the general rule in Hungary for commercial or residential lease agreements is that the change in the ownership of the real property does not affect the tenant’s rights and obligations under the lease agreement. Neither party is entitled to terminate the lease in this connection, except for specific situations related only to lease agreements for definite term. In this case, the law provides the new owner with a right to terminate the lease as a sanction imposed on the tenant in the event that the tenant provides the new owner with misleading information as to the existence or main terms and conditions of the lease relationship (which may happen e.g. in cases where the original lease agreement was not executed in writing).
An interesting aspect of the Hungarian regulation is that the previous owner remains to have joint and several liability with the new owner for the fulfillment of the landlord’s obligations towards the tenant.
To sum up, the decision whether to register a lease or not depends mainly on the appropriate jurisdiction. In countries where voluntary registration is possible, a proper assessment of advantages and disadvantages of registration is fundamental, especially with regard to your position in the pre-contractual relationship.
This post features contributions from Hubert Binkiewicz.