How to extend the lease of land: disputes, pitfalls, and the current judicial practice
- May 13, 2019
- news of legislation
Recently, many agricultural producers are faced with the need to extend (renew) land lease agreements concluded with landowners who acquire the right of ownership as a result of the re-division of lands of former collective farms. Most of these agreements were concluded in the 2000s for a period of 10-15 years, so now it is time to extend, renew or revise the lease terms.
Coincidence or not, there is a new round of aggravation of struggle for land, the main component of agricultural production in recent years. There is much talk now about agrarian raiding. More sophisticated schemes of capturing someone`s land, crops, or even the entire commercial farm unit are developed every day. Agricultural producers in the process of renegotiating lease agreements with landowners or those who will have such a period very soon are at the risk zone of raider attacks. The purpose of such attacks is the illegal seizure of land assets.
Thus, it is highly important for producers who use leased land to understand all aspects of the renegotiation of land lease agreements, as well as to know about the pitfalls and positions of courts in case of disputes.
It seems to be nothing difficult in the process of renegotiation of land lease agreements. To collect a small package of documents, signatures of shareholders on draft contracts for a new term and to take these documents to the registrar. Perhaps, in an ideal world, this is what happens. Until a competitor shows up, who will go round the landowners and offer them golden mountains for transferring the right to lease their land to him. As usual, it takes not so much time to convince landowners to agree on a competitor`s terms. As a result, the previous lessee watches how his hectares literally evaporate in front of his eyes, realizes that something needs to be done with this.
The best advice in such cases is to carry out systematic and thorough preventive work to extend the lease in strict accordance with the requirements of the Law of Ukraine “On Land Lease”. Article 33 is devoted to regulation of legal relations concerning grounds and procedure of renegotiation of a land lease agreement.
The position of the Supreme Court on the interpretation of Article 33 is following: the article contains two independent grounds for renewing a land lease agreement, which the "old" tenant can use to maintain the right to use the land. Firstly, this is a priority right of the tenant to conclude a lease agreement for a new term and, secondly, the renewal of the lease on the same term and under the same conditions if the tenant continues to use the land.
Priority right to enter into a lease for a new term. For an agricultural producer who is not familiar with all the intricacies of legislation and enforcement, the term “priority right” sounds quite obvious and understandable: since he has concluded an agreement, pays the rent on time, he has the full right to rent the same piece of land again. If the landowner refuses to renew the lease, you can take legal action and force him.
This is no longer the case, because a priority right as such is a rather unstable thing. Of course, the "old" lessee should use his priority right, and take legal action. To get the expected result, it is necessary for the lessee to strictly observe the procedure described in parts two through five of Article 33 of the Law of Ukraine “On Land Lease”: first, to fulfill obligations under the agreement; second, before the expiration of the agreement (at least not later than one month) to notify the lessor in writing of his intention to exercise the priority right to conclude an agreement for a new term; third, to attach a draft additional agreement to your notification letter; fourth, the lessor does not notify the lessee of any objections within a month.
What are the grounds for the lessee to refuse the lessor in concluding a contract for a new term? According to the requirements of the law, the lessor is obliged: (1) to consider a notification letter regarding its compliance with the requirements of the law; (2) if necessary, to agree with the lessee new conditions of the contract; (3) to conclude a lease for a new term. Or, the lessor may (a) notify the lessee of his objections since the notification letter or the draft additional agreement does not comply with the law; (b) propose its wording of the essential conditions of the agreement. The lessor's refusal to conclude a contract for other reasons or delaying the signing of an additional agreement are considered as inequitable conduct and may be grounds for legal action.
It should be noted that the lessee's priority right terminates if the parties have not agreed on the new conditions of the agreement. In practice, this means that the lessor, in response to an offer of an existing lessee to conclude a contract for a new term, may require, for example, a higher rent, and if the parties do not agree on this condition, the lessee no longer has any advantages in concluding an agreement on new term in comparison with other applicants for the lease of the same land.
If the “old” lessee, in an attempt to conclude a contract for a new term, acted by the procedure established by law, and the lessor ignored his messages and concluded a lease with a “new” lessee, according to the position of the Supreme Court, such an agreement is subject to recognition void as violating the priority right.
It is also worth noting that the judicial practice on violation of the priority right to conclude a contract for a new term is rather ambiguous even within the Supreme Court. The positions of different court chambers sometimes are inconsistent with each other. For example, in one case, the Supreme Court of Ukraine (old), which was reaffirmed the Supreme Court (new) agrees, says that the priority right is violated if the lessor first says that he is going to cultivate the land on his own, and then enters into an agreement with the new lessee. In another case, the Supreme Court ignores the circumstances of such lessor conduct and does not find violations of priority rights.
Renewal of the agreement by “tacit consent” of the lessor. This is the second ground for the renewal of the land lease agreement, under part six of article 33 of the Law "On Land Lease". Its implementation requires the presence of several other circumstances, although this approach can also be used to preserve the right to lease land in certain cases.
To renew the contract following with part six of article 33, it is necessary, first, the expiration of the lease term; second, the continuation of the lessee`s use of the land and fulfillment of obligations under the agreement; third, no objections to renew of the agreement submitted by the lessor within a month.
At the same time, two key aspects on renewal of the agreement by “tacit consent” must be kept in mind: (1) the agreement can be renewed exclusively on the same conditions and for the same period as the initial lease; (2) the signing by the parties of an additional agreement is mandatory. If, for example, one of the conditions of the agreement in the process of its extension by “tacit consent” was changed in the draft supplementary agreement, then the lessee loses the right to renew the land lease agreement.
It is important to formulate the requirements of lessee correctly when applying to the court to renew the lease for a new term. Indeed, according to the principle of “tacit consent”, an agreement is considered to be concluded on the same conditions and for the same period by force of law, but at the same time the parties must still sign an additional agreement.
In practice, lessees used to follow two paths, declaring in court the requirements of either recognizing the lease as renewed under the same conditions for the same period of time or declaring it concluded an additional extension agreement as proposed by the lessee.
The judicial practice of the Supreme Court on the application of these methods to protect the lessee's rights is ambiguous. The Economic Court of Cassation, as part of the Supreme Court, adheres to the position that recognition of a lease as renewed is an inappropriate way of defense, but only an attempt to establish a fact. In the Court's view, an appropriate and effective way to protect the rights of the tenant is the requirement to recognize as concluded an additional agreement indicating its contents.
The Civil Court of Cassation as part of the Supreme Court does not pose any problem in upholding the decisions of the courts of previous instances, which provide, in particular, for the recognition of the lease agreement as renewed.
It is also very important to share the grounds for renewing the lease. If the lessee has begun the process of renewing the contract by exercising his priority right, he cannot refer to g the principle of “tacit consent”.
As you can see, understanding all the intricacies of legislation and judicial practices when renegotiating land leases is not so simple, while the importance of this knowledge for lessees is difficult to overestimate. Of course, an understanding of the legal side of the issue will not replace work with landowners and the “economy” of rent (after all, owners will always give land for rent on the most favorable terms for them), but they can equip a bona fide lessees with the instruments to protect their land assets.