Difference Between Assignment And Subletting Ukraine

Rents: Can landlord and tenant freely agree rents in Ukraine?

As a general rule rent in private leases can be freely agreed between the parties, and is not subject to control.

Rent increases between private parties are not in general statutorily regulated, and the parties may agree on a procedure for periodic increases (e.g., depending on inflation).

The Civil Code provides that limits on maximum rent may be imposed by special legislation. For instance rent with respect to land leased from the state may not be less than the amount of the land tax or more than 10% of the land´s statutory value. The law regulates rent increases for specific kinds of leases, e.g., rent in respect of municipal agricultural land is reviewed every three years.

Deposits

Security deposits for leases are not regulated, and the parties are free to agree the mechanics of a security deposit. In practice, landlords often require security deposits.

One type of security device expressly provided by the Civil Code which may be used in lease agreements to secure rent payments is earnest money. The earnest is a sum of money paid by the debtor to secure his performance. Thus if the tenant fails to pay on time, the earnest is kept by the landlord, and if the landlord fails to perform for his part (e.g., by not delivering the property), he must return twice the earnest amount.

The Civil Code specifically permits security devices not expressly provided by law.

What rights do landlords and tenants have in Ukraine, especially as to duration of contract, and eviction?

No notice is required to evict a tenant at the end of a fixed term contract. Any tenant may be expelled from the property if he does not leave voluntarily after the termination of a lease agreement.

Notice however is required in some instances. The rules vary, depending on the duration of the lease, and the reason for termination.

The tenant may at any time terminate the lease without application to the court, by giving three months notice to the landlord, or without notice, if the property has become unfit for habitation.

The landlord in a lease of no fixed duration is obliged to give three months advance termination notice. At the same time a landlord may terminate a lease without prior notice and without application to court if the tenant fails to pay rent for three consecutive months.

A landlord may terminate a lease agreement by application to court where the tenant:

  • uses the leased property in a manner contrary to the lease agreement or the intended use of the property;
  • has sublet the property without the consent of the landlord;
  • by his negligent conduct has created a threat of damage to the property;
  • has not carried out capital repairs of the property where obligated to do so.

A tenant may terminate a lease by application to court if:

  • the leased property is not in compliance with the terms of the lease or is not fit for its intended use;
  • the landlord has not carried out capital repairs of the property where obligated to do so.

With respect to residential leases (as opposed to commercial or other leases), a landlord may terminate a residential lease by application to court if the tenant fails to pay rent for six consecutive months (unless the lease agreement provides a longer time period), or destroys or damages the property;

A landlord may terminate a lease by application to court with a two months notice, if he needs the property for personal use;

The landlord may demand the termination of a residential lease agreement if the tenant, after a demand to stop, continues to use the property contrary to its intended use or systematically breaches rights of the neighbors.

A lease agreement may further be unilaterally terminated by either party either on a ground specially agreed by the parties, or in case of a material breach of the lease agreement by the other party.

How effective is the Ukraine´s legal system?

Ukraine does not have special tribunals for hearing disputes under lease agreements. Lease disputes involving business entities are handled by commercial courts, and those involving at least one individual are handled by the general courts.

In commercial courts disputes by law should be decided within two months (three months in exceptional cases) after their acceptance by the court. In reality this requirement is often not observed, and cases drag on for many months and even years.

As to proceedings in general courts, the law does not set any time limit on their duration. In practice lease disputes in such courts may last from one to three months, and in some cases even longer.

Uncontested claims in general courts may be resolved pursuant to a summary proceeding. This may be used for instance for the recovery of overdue rent. Under this proceeding the debtor is not summoned to the court, and the court order is issued within three days after the court´s hearing the case. But the court order does not take effect until after the debtor has reviewed the order and if he does not contest it within three days of receipt. If the court determines that a dispute is involved, the claim for summary enforcement is rejected and the creditor may bring a regular court action.

EVICTION FOR NON-PAYMENT OF RENT

Duration until completion of service of process14
Duration of trial90
Duration of enforcement120
Total Days to Evict Tenant224
Courts: The Lex Mundi Project

Effectiveness of law


Legislation

The landlord and tenant relationship is governed by the following main laws: the Civil Code of Ukraine (2003); the Land Code of Ukraine (2001); and the Law of Ukraine "On the Lease of Land" (1998).

The Civil Code of Ukraine sets out the principles of law applicable to all contracts, including leases of land and of other immovable property. In Ukrainian law leases belong to the area of contract, not property. Specifically, a lease is a variety of the contract of rent, which encompasses all transfers for temporary use for a fee of movable or immovable property.

Rules relating to the formation, validity and performance of lease agreements are set out in the general part of the Civil Code dealing with rules applicable to all types of contracts. The specific regulation of leases is contained in the part of the Civil Code regulating the contract of rent. In that part the Code first establishes the general rules applicable to all rent contracts, and then proceeds to separately regulate contracts for the lease of land, buildings and residential property.

The Land Code generally governs all matters related to the creation, transfer and termination of all - public and private - rights in land. In the Land Code land leases are treated as a method of acquisition of use rights over land. The main focus of the Land Code as concerns land leases is on the procedure for the allocation of state-owned land to individuals and private firms under lease agreements.

The Land Lease Law, enacted before the Civil Code and the Land Code in response to a need to regulate growing land transactions, supplements the Civil and Land Codes in that it regulates issues not expressly addressed in the Civil and Land Codes or expands on their provisions.

The major weakness of all the above enactments appears to be the overly general character of most of their provisions, making their application uncertain in the absence of sufficient court practice applying them. Further the Land Code´s provisions in particular seem to be unduly restrictive and cumbersome, especially as regards the leasing of state-owned land.

Brief History: Recent changes in Ukraine´s landlord and tenant law

Leases of immovable property, especially of land, were of limited application while Ukraine was part of the Soviet Union. Although the Ukrainian Civil Code of 1964 did provide for the agreement of rent, its application was almost exclusively limited to movable property.

In the Soviet Union all land was owned by the state, and land plots were assigned for use permanently or for fixed time periods to state organizations, enterprises (including collective farms) or individuals.

State enterprises and organizations did not own other kinds of immovable property, such as buildings, which were also in state ownership and assigned to state organizations and enterprises for use and operation. An authorized state agency could at any time take a building from an organization without compensation and transfer it to another entity.

As regards private persons the state could grant to individuals use rights to small land plots (typically for up to 0.06 ha) for gardening purposes. Rights to such land plots were more secure than those of state organizations, but still fell well short of full ownership.

As to residential properties, two forms of individual occupancy prevailed. First, city residents were mostly provided with state-owned apartments such that persons registered as official occupants in such apartments in fact if not in right acquired inheritable occupancy rights to them. Although the arrangement resembled a permanent lease in that it involved periodic payments to the state, it was based on a unilateral decision of the relevant housing authority rather than agreement. Second, many individuals lived in so-called service apartments provided by state organizations that employed them. Their occupancy was conditional on continued employment, the termination of which terminated occupancy rights.

In 1991 Ukraine adopted the Land Code, which permitted various forms of land leases, and in 1992 the law "On the Leasing of Assets of State Enterprises and Organizations", which allowed state enterprises and organizations, subject to the consent of responsible state agencies, to lease out state-owned assets held by them to third parties. Also 1992 saw the passing of the law "On the Privatization of the State Housing Stock", which over time brought about a gradual transfer of the bulk of state-owned apartments into private ownership of their occupants and thus created conditions for a sharp rise in residential leases.

As in time the 1991 Land Code proved inadequate in the regulation of land leases, it was supplemented in 1998 by the law "On the Lease of Land", and in 2001 was altogether replaced by the current Land Code.

Finally in 2004 the current Civil Code came into effect, which replaced the provisions on rent agreements in the 1964 Civil Code that had continued to governed leases until that time.


I.            INTRODUCTION.

Assignments and subleases are commonplace.  The difference between the two is a product of common law.  Without a thorough understanding of the differing rights among landlords, tenants and transferees resulting from assignments and subleases, parties may find themselves unpleasantly surprised.  This article will outline the fundamental differences between assignments and subleases, how the common law arranges the on-going rights among the parties, and the advisability of certain express agreements that change the common law results.

II.            DISTINGUISHING BETWEEN AN ASSIGNMENT AND A SUBLEASE.

The quantity of interest transferred distinguishes an assignment from a sublease.  This distinction can be summarized as follows:

Assignment.   When a tenant transfers its entire interest in a leasehold estate, the transfer is an assignment.  To qualify as such, the transfer must include the tenant's entire estate for the duration of the lease.

Sublease.   When a tenant transfers less than the remaining term or less than the tenant's entire estate, thus leaving the original tenant with a reversionary interest in the lease, the transfer is a sublease.

For these purposes "estate" is tantamount to term.  Determination of whether a tenant has retained a portion of the estate does not depend on the whether the tenant receives less rent than it owes under the lease, or even on whether the tenant transferred the entire premises.  An assignment can occur regardless.  But, retention by the tenant of even the smallest right with respect to the term constitutes a "reversionary interest" and creates a sublease.  For instance, courts have construed a transfer as a sublease where the original tenant retained an option to terminate, extend or renew the prime lease.  In fact, the reversionary interest need not even be under the control of the original tenant to qualify the transaction as a sublease.  At least one court has held that a tenant may have retained a reversionary interest where a third party to whom premises are conveyed has the option to terminate the conveyance.[1]

Surprisingly, one factor that does not distinguish an assignment from a sublease is the portion of premises involved.  As long as the tenant relinquishes its interest in the portion of the premises transferred for the entire term of the lease, an "assignment pro tanto" occurs.  Such a transfer carries all the legal implications of any other assignment, except that the assignee has liability for only a portion of the rent proportionate to the interest it receives in the premises.  Most people would think that a sublease has occurred, because less than the entire premises has been conveyed.  However, such a transfer creates a form of assignment.  This means that the assignee will have privity of estate with the landlord, and may have privity of contract as well.

Landlords and tenants may not find pro tanto assignments desirable.  A landlord will be concerned about dealing with two separate tenant interests under one lease document.  For instance, what if the original tenant defaults under the lease with respect to its space, but the assignee continues to meet its obligations under the lease for its portion of the premises?  Would the landlord be forced to terminate the lease for only a portion of the premises?  The landlord certainly did not intend this result when it entered into the lease.  Although the landlord might be able to control this risk if the lease requires its consent for a transfer, what if the lease is silent?  From the assignee's or tenant's perspective, what if it wants to terminate the lease? Can it do so without the consent of the other party?  What if either the tenant or assignee bankrupts?  If the trustee rejects the lease, does this terminate the assignment?  No easy answers exist for these issues.  Comprehensive transfer provisions in leases and assignment documents provide the only real solution.

III.            WHAT'S AT STAKE: THE LEGAL IMPLICATIONS OF IDENTIFYING A TRANSFER.  

A.             Privity of Estate v. Privity of Contract.   The classification of a leasehold transfer as an assignment or sublease carries differing legal implications regarding future liability arising under the prime lease.  A party's liability under the terms of the prime lease ultimately depends upon the somewhat archaic term of "privity."  The common law recognizes two general types of privity: (a) privity of estate and (b) privity of contract.

Privity of Estate.   Privity of estate rests upon a landlord-tenant relationship.  Acquisition of a leasehold interest by the new tenant, regardless of whether it is an assignment or sublease, establishes privity of estate.

Privity of Contract.   Privity of contract rests upon the existence of an agreement, regardless of whether a landlord-tenant relationship exists.  Privity of contract does not run with the land, unlike privity of estate.  Accordingly, the original lease will not bind a new tenant under privity of contract unless the new tenant assumes the lease.

The original landlord and tenant under a lease have both privity of estate and privity of contract.  When the original tenant transfers its interest in the lease to a third party, these relationships inevitably change.  The manner and extent of the transfer determine what forms of privity will thereafter exist.

B.             Assignment.  If the original tenant assigns its interest in the lease, its privity of estate terminates, but its privity of contract remains intact.  In other words, assignment of the lease ends its right to possession, but, absent an express release under the terms of the lease, its liability under the lease continues.  When the assignee takes possession of the premises, the assignee obtains privity of estate.  Privity of estate binds the landlord and assignee to the terms of any covenants running with the land, but only so long as the privity of estate continues.  As a result, the assignee becomes liable to the landlord for the payment of rent and the breach of any other lease covenants running with the land.  Likewise, the landlord becomes liable to the assignee for the covenant of quiet enjoyment.  However, the assignee does not come into privity of contract with the landlord unless the assignee expressly assumes the tenant’s obligations under the lease.  Without an assumption, the assignee would not be liable for contractual agreements that do not run with the land, such as an original tenant/assignor's undertaking to pay a note made in favor of the Landlord.[2]   Further, absent the assignee's assumption of the lease, a subsequent assignment will end the assignee's privity of estate, and with it, all of that party's obligations to the landlord.  Thus, the absence of privity of contract between the landlord and assignee prevents the assignee from being liable for any breach committed by the original tenant or any prior or subsequent assignee.

As previously alluded, the tenant cannot relieve itself from liability under the lease merely by assigning the lease to a third party.  Despite an assignment, the tenant remains secondarily liable for the obligations of the assignee under the lease.  This means that if the landlord cannot recover from the assignee, it can thereafter pursue the tenant.  From the landlord's perspective, it would prefer to pursue either or both of the tenant and assignee, at its election and without exhausting remedies against one or the other. To achieve this end, the lease must expressly provide that the original tenant remains primarily liable notwithstanding a transfer of its interest.

If the assignee assumes the obligations of the tenant under the lease through agreement with the assignor, both the tenant and the assignee have privity of contract, while only the assignee has privity of estate.  The landlord can enforce the lease against the assignee as a third party beneficiary, regardless of whether the landlord was a party to the assignment/assumption agreement.  However, some jurisdictions have held that in limited circumstances, when a landlord has accepted the assignee in place of the assigning tenant, either expressly or by implication, then the assigning tenant is released from liability arising under the terms of the lease.[3]

Notwithstanding its initial liability under the lease following an assignment, the original tenant may later be released from liability, if the terms of the lease are amended by agreement between the landlord and the assignee.  Thus, from the landlord's perspective, it is important for the lease to provide that the tenant remains liable, at least for the initial lease obligations, regardless of any later amendment of the lease terms.

C.             Sublease.       A sublease, unlike an assignment, does not establish privity of estate or privity of contract between the landlord and the subtenant.  Instead, when a sublease occurs, the original tenant retains both privity of estate and privity of contract with the landlord.  No legal relationship exists between landlord and subtenant.  A sublease therefore does not transfer any of the original tenant's rights or obligations under the lease to the subtenant.  Accordingly, the landlord cannot hold the subtenant liable for a breach of the lease, even if caused by the subtenant, nor can the subtenant enforce the terms of the lease against the landlord.

Despite the lack of privity between the landlord and subtenant, a sublease does establish a new leasehold estate between the tenant and subtenant, creating both privity of estate and privity of contract.  Thus, the sublease document will control whether and to what extent the subtenant can hold the tenant liable for breaches of the lease by the landlord, and what happens if the subtenant's failure to perform under the sublease creates liability for the tenant under the lease.  These agreements do not, however, disturb the privity of contract and estate existing between the landlord and tenant, despite the subtenant's possession of the premises.  Thus, for either the landlord to have rights against the subtenant or vice versa, the landlord and subtenant must execute a separate document establishing them.

IV.             CONSENT, WAIVER AND BREACH:

The law favors free transferability of rights.  As such, a party may prohibit assignment or subletting only through the use of express prohibitions in the lease.  Absent such prohibitions, tenants may sublease or assign their leasehold interests freely.  However, simple restrictions on transfer in the lease may not be sufficient.  Many courts perceive restrictions against assignment or sublease as restraints on alienation.  As a result, courts often interpret restrictive language against the landlord.  For instance, a prohibition only against assignments does not preclude subleases, and vice versa.[4]   Furthermore, under the majority rule, a simple covenant against subletting would not bar subletting only a portion of the premises.[5]

Some states have enacted statutory limitations upon a tenant's right to transfer its leasehold interest.   For instance, a Texas statute prohibits tenants from subleasing or assigning a leasehold interest without the consent of the landlord.[6]   Other states have adopted similar restrictions, but only as to short term leases.[7]

Given the common law, and absent satisfactory statutory provisions that change the common law result, most leases contain language requiring landlord consent for transfers of the tenant's leasehold estate.  Where a requirement for landlord consent exists, in most jurisdictions the tenant's failure to obtain such consent will enable the landlord to recover damages.  However, in certain circumstances or where a statute or the language of a landlord consent requirement expressly provides, a landlord may be able to declare the assignment or sublease void, sue the tenant for breach of covenant or obtain an injunction.[8]   It is important to note, however, that the breach of covenant prohibiting assignment or sublease does not, in and of itself, terminate the lease.[9]   While an assignment in breach of the restriction may provide the basis for forfeiture, the assignee will still receive good title to the lease as a result of the assignment.  As such, the landlord is still entitled to recover rent from the assignee despite the breach.[10]

To ensure that the landlord can terminate the lease or void an unauthorized transfer regardless of jurisdiction, the lease should expressly provide such rights, at its election.  A landlord may, however, waive the breach of a transfer restriction against or otherwise prevent itself from objecting.  As such, although a lease may prohibit assignment or sublease without consent, the landlord may expressly, or by implication, be deemed to have waived a transfer in violation of the lease by acting in a manner that implies that the breach of this covenant has been waived.  For instance, the landlord's knowing acceptance of rent from an assignee or subtenant may constitute such a waiver, and prevent the landlord from declaring a lease forfeiture.

Another pitfall arises after a landlord has either consented to a transfer or waived a breach of a non-assignment clause.  Unless the lease expressly provides to the contrary, the restriction on transfer will terminate for future transfers.

V.            PRACTICAL ASPECTS

An assignment can differ from a sublease in only the most nominal way – at the very limit a transfer for an hour less than the full term constitutes a sublease, while a transfer for one hour longer constitutes an assignment.  In either case, the original tenant will remain liable to the landlord for the lease obligations.  But the rights of the landlord and transferee will differ.  In case of an assignment, the assignee will at least have privity of estate and therefore certain rights against the landlord and vice versa.  In case of a sublease, the subtenant has no rights against the landlord, nor does the landlord have any rights against the subtenant.

Each party will have different goals.  The landlord will want to enforce the lease against both the tenant and transferee to the maximum extent possible.  It would therefore prefer an assignment where the tenant agrees to remain primarily liable under the lease.  The transferee will want the freedom to enforce the essential lease obligations against the landlord with minimum liability.  It would therefore prefer and assignment without assumption.  The tenant would prefer either to have total absolution or total control.  Thus, it may prefer an assignment with assumption by the assignee and release of the tenant.  If the tenant cannot absolve itself of liability under the lease, it may opt for the other end of the spectrum, and create a sublease, retaining a nominal portion of the estate, in order to prevent the transferee from having direct dealings with the landlord.

Any of the foregoing results and infinite variations can arise.  The trick comes in making the results intentional.  A tightly crafted transfer clause in the lease provides the best solution.  The following list comprises the key elements to include:

1.          No transfer of all or any portion of the premises or the tenant's leasehold estate may occur without the landlord's consent.

2.          Any transfer without the landlord's consent is voidable, at the landlord's option.

3.          Any transfer without the landlord's consent may result in a forfeiture of the lease, at the landlord's option.

4.          The acceptance of rent by the landlord from any transferee will not be deemed to be a waiver of the landlord's right to consent or declare the lease forfeited or the transfer void.

5.          The landlord's consent to one transfer will not be deemed to be a waiver of the right to consent to any future transfer.

6.          Following an assignment, the tenant will remain primarily liable under the lease.  If the assignee defaults, the landlord may proceed directly against the tenant without the necessity of exhausting remedies against the assignee.

7.          The landlord may consent to subsequent sublettings or assignments or amendments or modifications to the lease by transferees without notifying the tenant, and without obtaining the tenant's consent thereto.  No such actions will relieve the tenant from primary liability under the lease.

VI.             CONCLUSION.

Under the common law and some state statutes, assignment and subletting create specific sets of rights among the landlord, tenant and transferee.   These pre-established results may be undesirable from the standpoint of the parties and the structure of a particular transaction.  Thus, drafting a comprehensive transfer clause plays an essential role in ensuring results consistent with the expectations of the parties.



[1]See Orchard Shopping Center, Inc. v. Campo, 485 N.E.2d 1248 (Ill. App. 5th Dist. 1985) (holding that where, as a term of a lease transfer, a Sublessee retains the right to terminate the sublease for any reason upon seven days notice, a reversion is retained by the transferor and, as a result, the transaction is a sublease). See also Indian Refining Co. v. Roberts, 181 N.E. 283 (Ind. App. 1932).

[2] Gateway Company v. DiNoia, 654 A.2d 342 (Conn. 1995) (fn. 8); Dolph v. White, 12 N.Y. 296 (1855).

[3]See 185 Madison Associated v. Ryan, 174 A.D.2d 461 (N.Y.A.D. 1991) (stating "[i]t is well settled that in order to relieve the original tenant-assignor from its continuing liability after assignment, it must be expressly shown that the lessor not only consented to the assignment, but accepted the assignee in place of the tenant and such release of the tenant must either be express or implied from facts other than the lessor's mere consent to the assignment and its acceptance of rent from the assignee").  But see, De Hart v. Allen, 161 P.2d 453 (Cal. 1945) (maintaining that an assignor/lessee of lease remains as primary obligor under the lease).

[4]See, e.g., Board of Commissioners v. Lions Del. County Fair, Inc., 580 N.E.2d 280 (Ind. App. 1991); Smith v. Hegg, 214 N.W.2d 789 (S.D. 1974); Gagne v. Hartmeier, 611 S.W.2d 194 (Ark. App. 1981); Rogers v. Hall, 42 S.E.2d 347 (NC 1947).  See also, M. Friedman on leases, § 7.303.

[5]See Drake v. Eggleston, 108 N.E.2d 67 (Ind. App. 1952). For minority view, see Minneapolis, St. Paul & Sault St. Marie R.R. v. Duvall, 67 N.W.2d 593 (N.D. 1954).

[6]V.T.C.A. Property Code § 91.005 (1995), discussed in 718 Associates, Ltd. v. Sunwest N.O.P., Inc., 1 S.W.3d 355 (Tex. Civ. App. 1999); Lawther v. Super X Drugs of Texas, Inc., 671 S.W.2d 591 (Tex. Civ. App. 1984).

[7]See M. Friedman on Leases, § 7.301 (citing Sooner Pipe & Iron Co. v. Bartholomew, 248 P.2d 225 (Okla. 1952)).

[8]See generally, Shropshire v. Prahalis, 419 S.E.2d 829 (S.C. App. 1992) (allowing a forfeiture remedy where the lease contained a forfeiture clause); Clasen v. Moore Bros. Realty Corp., 413 S.W.2d 592 (Mo. App. 1967); Artesia Medical Development Co. v. Regency Association, Ltd., 214 Cal App. 3d 957 (Cal 2d Dist. 1989); Twelve Oaks Tower I, Ltd. v. Premier Allergy, Inc., 938 S.W.2d 102 (Tex. Civ. App. 1997) (providing that under a Texas statute, failure by a tenant to obtain consent to assignment renders the lease voidable at option of lessor, and is not terminated unless landlord undertakes to terminate it, declare forfeiture or reenter). See also M. Friedman on Leases § 7.304.

[9]See Chessport Millworks, Inc. v. Solie, 522 P.2d 812 (N.M. 1974); Cities Serv. Oil Co. v. Taylor, 45 S.W.2d 1039 (Ky. 1932).

[10]See Klee v. United States, 53 F.2d 58 (9th Cir. 1931); Fink v. Montgomery Elevator Co., 421 P.2d 735 (Colo. 1975).

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