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Leases

The most common form of arrangement which allows the occupation and use of real property for a limited period of time in Russia is a lease. Although all forms of lease are governed by the same provisions of the Russian Civil Code, Russian law does include specifc rules in relation to leases of certain kinds of real property (for example, residential leases – known as ‘наем жилого помещения’, nonresidential leases and land leases).

6.1 Duration of lease

In general, parties to a lease are free to agree to any length of term, but, in some cases a minimum or maximum term of lease is stipulated by law.
A residential lease may not be entered into for a period of more than fve years (this rule may not apply if the residential premises are leased by legal entities). The term of a lease of non-residential premises is not limited by legislation. Currently in Moscow, offce leases are usually for a term of fve to seven years, and retail leases for anchor tenants are for about 10-15 years.
The Russian Land Code establishes a mandatory range of possible terms for a lease of publicly owned plots of land allocated for different purposes or to different types of tenants. In general, if publicly owned plots of land are allocated for construction, then the lease term must range from three to ten years. However, when plots of land are allocated for the construction of cables, pipelines and other conduits or for the operation of a building or another real property asset by its owner, the lease term may be up to 49 years.
If the term of the lease has not been set by the contract, the lease is considered to be for an indefnite period.
Under Russian law, leases of real property entered into for one or more years must be registered with the registration authority and are only deemed to have been concluded upon state registration. A residential lease for a period of at least one year is subject to state registration as an encumbrance on the leased residential property.

6.2 Rent

Rent in commercial leases usually consists of a fxed element (generally calculated per square metre of leased area) and a variable element (usually comprising service charges, utilities consumed or, for retail leases, turnover rent). Rent for residential premises is usually established as a fxed sum for the entire premises.
Rental payments are normally subject to VAT in Russia at the current rate of 18 per cent. However, land leased from the state or municipal authorities is VAT exempt. Foreign companies acting through branches or representative offces in Russia are not charged VAT on the rent of premises in Russia if the legislation of the relevant foreign state (or an international treaty with the Russian Federation) provides for a reciprocal exemption for Russian companies and citizens.

6.3 Rent review

According to the Russian Civil Code, as a general rule the level of rent is adjusted no more than once a year. However, parties to a lease contract may agree a more frequent indexation or fx the level of rent for the entire lease term. The amount of rent payments for some types of property (for example, publicly owned land plots) is usually established and adjusted according to rules of statutory acts. Indexation of the fxed rent in commercial leases can be linked to changes in market rentals for the same type of property, inflation rates or the Consumer Price Index.
Changes in the variable elements of rent depend on the nature of those elements. For instance, rent based on turnover is linked to an increase or decrease in the tenant’s turnover. Service charges and utilities costs payable by the tenant are normally linked to the costs which the landlord
has actually incurred.

6.4 Operation expenses

In commercial leases, the tenant is generally obliged to pay or reimburse the landlord for all operating expenses relating to the leased property (maintenance and repair of common areas, land tax, insurance, etc). Where applicable, lease contracts require the tenant to pay operating expenses in proportion to the area leased. The exact arrangements depend on the terms of the contractual agreement.

6.5 Maintenance, repair and renovation at end of lease

Unless the lease specifes otherwise, the landlord is liable for capital repairs to the leased property and the tenant must carry out current repairs and bear any expenses incurred maintaining the leased property. If the tenant fails to carry out the necessary repairs, then the lessee may seek compensation and has the right to terminate the lease. Improvements to the leased property are divided into separable and inseparable improvements. Separable improvements (for example, installing furniture) can be performed by the tenant without the consent of the landlord and remain in the ownership of the tenant. Inseparable improvements (for example, repair of the building) can be performed only with the landlord’s consent and, after the termination of the lease, the tenant is entitled to compensation for such improvements, unless otherwise provided for in the lease.

6.6 Assignments/Transfers

Generally, the tenant may assign its rights and obligations under a lease to a third party subject to obtaining the prior consent of the landlord. It is common practice for the landlord to provide prior consent on the assignment of the rights and obligation under the lease to the tenant’s affliates. According to Russian law, a tenant using a publicly owned land plot under a land plot lease contract entered into for a period of more than fve years can assign its rights under the land plot lease contract without the landlord’s consent, but subject to notifying the landlord.
Assignment must be executed in the same form as the initial lease. Assignment of a lease for a period of more than one year is subject to state registration.

6.7 Subleases

A tenant is entitled to sublet leased property to a third party subject to the landlord’s prior consent. Any subleases are subject to the lease term under the primary head-lease and any contractual restrictions in the primary headlease. Unless otherwise provided in the main lease, early termination of the primary head-lease entails the early termination of any sublease.
Subletting residential premises is only possible when the space requirements of occupants are taken into consideration. Subletting a plot of land owned by a public body, which is leased for a period of more than fve years, does not require landlord consent. However the tenant must notify
the landlord of the sublease.

6.8 Termination

Under Russian law the landlord can terminate a lease contract following court proceedings where there has been a material breach of the contract by the tenant (for example, where the tenant fails to pay rent on two successive occasions following the expiry of the relevant payment date, or where the tenant uses the property in a way that is contrary to the conditions of the lease or the designation of the property or where the tenant allows or
causing material deterioration of the property). The law also provides additional grounds for terminating a lease of land (for example, failing to use the land plot designated for agricultural production or residential or other construction for a period in excess of three years).
For land plots owned by public bodies, Russian law stipulates that leases for more than fve years may be terminated only if:

  • the tenant makes a signifcant breach of the contract; and
  • a relevant court decision is rendered.

Furthermore, under Russian law, it is possible for a lease contract to include the right of any party to unilaterally repudiate the lease. Parties to a lease contract for an indefnite term have the right to terminate the contract at any time by giving three months’ advance notice unless a different period is specifed in the contract.
Generally, neither the government nor any other authority can directly require the termination of a lease. The property itself (e.g. a plot of land) may, however, be subject to compulsory purchase, in which case, the lease may come to an end.
Residential leases can be terminated by the tenant with the consent of other persons permanently residing with him or her by giving three months’ advance notice to the landlord.
Either party to a residential lease is entitled to require lease termination through court proceedings in certain case, for example if the premises cease to be suitable for permanent occupation or became hazardous.