Renting Commercial Real Estate in Russia
bedrijfsruimte huren in Rusland

Renting Commercial Real Estate in Russia

Renting commercial real estate in Russia

For many companies,  the cost of renting business space is one of the biggest expenses they will face. It is therefore of crucial importance to know what to pay attention to when signing a lease agreement for commercial real estate. The purpose of this blog post is to give an overview of this.

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Terminology and the Key differences with Renting a Home

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The Russian legislator uses  a separate term for renting residential property. In Russia, a contract for renting a home is called договор найма жилого помещения (nayma contract). 

When the lessee is a legal entity or an entrepreneur, the legal term is аренда (arenda). Arenda can refer to both real estate and movable property, but in this blog post I focus solely on real estate. However, it is also useful for you to know that this term is also  applicable to movable property.

Rental of Housing by a Company

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Article 671 paragraph 2 of the Russian Civil Code provides that a legal entity may rent accommodation on the basis of an arenda contract or any other contract. Although it is not specifically stated, it is also of note that many believe that as a result it follows that a legal entity may not rent housing on the basis of a nayma contract.

Focus of this Blog Post

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In connection with the above, in this blog post I focus on the details that come into play when signing an arenda contract, because this is the most common contract on the basis of which commercial real estate is rented in Russia. 

Identification of the Real Estate Object

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Without a correct identification of the object to be rented, a rental agreement is not valid (Article 607 paragraph 3 of the Russian Civil Code). 

Who is Authorized to Sign an Arenda Contract

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Pursuant to Article 608 of the Russian Civil Code, the owner of a property is entitled to rent it out. Therefore, legal representatives or a persons authorized by the owner are entitled to sign an arenda agreement.

You should always check whether people are actually authorized to sign the contract.

It is also necessary to consider, even though it only tends to appear in  exceptional case, that someone who has not yet acquired property but expects to obtain it signs a rental agreement before they have acquired proper title. Case law shows that the agreement is valid from the moment this person has actually acquired ownership,  but not before this. 

Rights of the Tenant

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Pursuant to Article 606 of the Russian Civil Code, a tenant has a stated durational right of temporary possession and usage, or just the right of temporary usage of the rented space. Logically, temporary possession and usage is a more comprehensive right than mere right of usage. Usage means the property may be used in accordance with the manner agreed in the contract or in accordance with its destination. When it comes to management, you should remember that you have constant actual control over who has access to the property.

Lease from Fiduciary Management

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It is very common in Russia for an owner of a lot of real estate to sign a contract with a fiduciary manager to rent out his properties for him. The Russian term for fiduciary management is ‘доверительное управление’. The fiduciary manager signs the lease agreement in his own name (not on behalf of the owner) and he acts on the basis of a fiduciary management agreement (договор доверительного управления). In order to make it clear that this is a fiduciary management agreement, the letters ‘Д.У’ must be included in the agreement. (Article 1012 paragraph 3 of the Russian Civil Code).

Risks of Renting from a Fiduciary Manager

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Although the fiduciary manager signs  the rental agreement in his own name,he must act in the best  interest of the owner. 

However, there is a risk that the owner may consider that the fiduciary manager is not performing his duties properly and therefore, pursuant to Article 301 of the Russian Civil Code, take a claim to court in order to terminate the illegal possession of the fiduciary manager.

However, there is a risk that the owner may consider that the fiduciary manager is not performing his duties properly and therefore, pursuant to Article 301 of the Russian Civil Code, take a claim to court in order to terminate the illegal possession of the fiduciary manager.

It is therefore important that if you rent premises in Russia from a fiduciary manager, you also check the fiduciary management agreement.

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In my blog post about setting up a legal entity in Russia I have already indicated that it is not a given that you can register your company at the address where you rent your office.

Are costs of Renting Business Space Tax Deductible if they are not for the Legal Address?

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Opinions on this differ. Many Russian accountants will say that the most important thing is that acts are signed by both the landlord and your Russian company.

However, other argue that expenditures must be justifiable in order to be deductible, and if the address for which you pay rent is nowhere officially used by the company, the tax authorities might consider that these expenses are not justifiable, even though you have all your financial papers in order.

Transfer of the Space from the Lessor to the Lessee

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It is customary in Russia for both the landlord and the tenant to sign deeds to confirm that the leased space has been transferred. The full Russian name of this deed is акт приема-передачи нежилого помещения.

It is customary in Russia for both the landlord and the tenant to sign deeds to confirm that the leased space has been transferred. The full Russian name of this deed is акт приема-передачи нежилого помещения.

Although it is not required by law to sign these deeds, most rental agreements do contain a provision according to which it is mandatory to sign such deeds at the moment the tenant takes possession of the leased space and at the moment the tenant returns the space to the lessor.

If your commercial lease agreement stipulates that transfer is effected by signing of deeds, you must ensure that these deeds are indeed signed, otherwise, the landlord may claim that you have not returned possession to the owner at the stipulated time. The chances are that you can successfully challenge such a false statement are small in such a case. Russian courts tend to see deeds (or the absence of them) as important evidence.

The Landlord’s Taxation System

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As I mentioned earlier on my blog, there are different taxation systems in Russia. If the landlord is a large company it will automatically have to apply the general tax system and this means they will have to charge you VAT. If you are on the Russian simplified tax system you will not be able to deduct this VAT. 

It is therefore often more advantageous for a business operating on the simplified taxation system to rent from a lessor who is also on the simplified system. However, this limits your choice and there is already a lack of good commercial real estate in most Russian cities.

Defects of the Rented Space

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The standard rule is that the lessor must remove defects that prevent use according to the intention for which the leased space is supposed to be used, even if he did not know of these defects when the contract was signed (Article 612 paragraph 1 Russian Civil Code). The exception to this rule is if the tenant was aware of the defects or if they were so obvious that he could not have overlooked them when inspecting the premises (Article 612(2).

However, if the tenant did not know, nor should have known of the defects, the law offers him the following options:

  1. Remove the defects himself and recover the costs from the landlord
  2. Require the landlord to remove the defects
  3. Demands that the rent be reduced proportionally 
  4. Withhold the costs of removal of the defect from the rent payable (provided he has warned the landlord in advance)
  5. Terminate the contract prematurely (this is done through the courts if the lessor does not agree to this)

So what does this mean in practice? If you rent business space in Russia, you need to document the obvious visible defects of the space and require the landlord to remove them when signing the contract. The hidden defects that only become visible later can be remedied via the above mentioned 5 points.

Technical Requirements

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It is very important that in cases where the tenant has certain technical requirements for the use of the space, that these requirements are included in the written agreement. For example, if the lessor’s machinery needs a certain voltage, or, if machines are also rented, or how fast they work.

If such items are not included in the contract they are unlikely to be regarded as infringements. If you want to start production in Russia, I recommend that your engineer, together with us, draw up this provision of the contract. 

Contract Period

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The rental agreement shall be signed for the period indicated in the agreement. If the agreement does not include an end date, it will be deemed to be an agreement for an indefinite period of time (Article 610 paragraph 1 and 2).

It is  important that you realise that the contract period does not necessarily start to run at the same time as the term of the lease. It is often the case that the agreement commences at the moment it is signed and the actual lease only begins to run, once the deeds have been signed.

You can include an end date in both the lease and the agreement. In doing so, you have to be careful for the correct wording. If you want to rent until a certain date, it is advisable to include the word ‘включительно’ in the agreement.

However, instead of an end date, you can also agree that the agreement will end when a certain event occurs. This should be an event that is unavoidable and independent of the will of the parties. An example of this is renting equipment until the end of the navigation season. If the event specified in the agreement does not occur (and is therefore not unavoidable), it will be regarded as  an agreement for an indefinite period of time.

Pre-emption Rights

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Pursuant to article 621 paragraph 1, a tenant who has fulfilled his obligations (has paid the rent on time) has the preference over third parties to sign a new lease agreement. This pre-emptive right only applies to a tenancy agreement relating to the same object that he already rents, not to other objects owned by the lessor. The pre-emptive right does not mean that the landlord cannot raise the rent substantially or cannot use the property himself. 

The tenant can only make use of this pre-emptive right if he:

  1. The landlord has stated that he wants to make use of his right of first refusal.
  2. Pays the rent on time and also meets his other obligations under the agreement

The pre-emption right can be limited or completely excluded in the rental agreement. 

What to do if the Landlord Ignores your Wish to Make Use of the Pre-emption Right

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If the landlord ignores the tenant’s wish to make use of the pre-emption right and this right is not limited or excluded in the lease agreement, he runs a high risk. Pursuant to art. 621, the tenant may, for a period of one year after the tenancy agreement has been terminated, demand that a tenancy agreement with a third party be converted into a tenancy agreement with him and may also demand payment of damages.

Exclusion to automatic extension of the Contract

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If such a provision is included in the agreement, the agreement cannot be automatically extended in accordance with Article 621(2). In this case, the lessor can negotiate a new agreement with the lessee, without being bound to the limited rent increase of the previous agreement, for example. 

It should be mentioned, however, that, case law is not clear on the admissibility of such a ban on automatic renewal.

The Rental Price

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If the rent is paid in money, it must be paid in roubles. However, this does not mean that the price also has to be fixed in roubles in the agreement. In large shopping centres, it is still customary for the rent to be fixed in US dollars equivalents.

Part of the turnover 

Article 614(2) also states that it is permitted to fix the rent as a percentage of the turnover achieved on the leased property. A combination of a fixed rent and a percentage of part of the turnover is also possible. For example, a fixed rent in roubles plus 15% of the income received by the tenant by subletting part of the space to third parties.

Services as payment

Instead of payment in cash it can also be agreed that the rent will be paid by providing services to the lessor. 

Allowing Goods Be Used

Parties may also agree that the lessee shall allow certain goods to be used by the lessor as payment of the rent.

Transfer Ownership of Goods

Instead of granting a right of use to the lessor, parties can also agree to transfer ownership of goods to the lessor as payment of the rent.

Improvement of the leased property

For example, it can be agreed that the tenant will carry out far-reaching repairs as payment of the rent  (i.e. repairs that would fall beyond the scope of reasonable repairments).

Increase of the Rent by Mutual Agreement

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The rent can of course be increased by agreement between the parties. Interestingly,, Article 614, paragraph 3 prohibits changing the rent more often than once a year by mutual agreement. However, there is Russian jurisprudence that allows changes to maintain several addenda in one year with changes to the rent, even if there is no deviating provision in the agreement.

Nevertheless, there are some judges that consider the provision of 614(3) to be mandatory and therefore consider several addenda to raise the rent in one year to be null and void.

Agreed Extension of the Lease

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The Russian term for agreed (non-automatic) extension is продление, also the term пролонгация is often used. This renewal can also take place automatically if the parties have included in the lease agreement that it is automatically renewed for the same period of time, for example. 

Indexation of the Rent in Russia

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Inflation in Russia is quite high, compared to what people in estern countries are used to. This is why it is very common to include a provision on the indexation of the rent in the lease.

“Lease holiday” 

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When moving into a new building, businesses  often spend a lot of money on renovating it. This renovation is not only in the tenant’s best interests, but it also makes the landlord’s premises more valuable. For this reason, it is common in Russia to grant the landlord a rental holiday (арендные каникулы) during the period of the renovation, or at least during part of it. This simply means that he doesn’t have to pay rent during this period.

If you take into account that this is customary when negotiating a rental agreement, you might be able to save yourself a sizable  amount of money.

Obligatory Registration of Lease Agreement with Rosreestr

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Article 609 paragraph 2 of the Russian Civil Code states that a lease of real estate must be registered, unless otherwise provided by law. What does this mean?

Article 651 paragraph 2 of the Russian Civil Code states that a lease of real estate with a term of one year or more must be registered and that such a contract only takes effect from the moment it is registered. Shorter leases may also be registered if the parties agree, but usually avoiding mandatory registration is the motivation for signing a lease with a term of less than one year.

If a tenancy agreement needs to be registered, it is advisable to specify in the agreement which of the parties should do this and who should pay the registration fee, therefore avoiding ambiguities.

What is customary in practice is that parties sign a new agreement every 11 months. This avoids the hassle involved in registering a rental agreement, because even if you previously rented the same space from the same party, a new agreement shorter than 11 months does not have to be registered. However, with this method you run the risk that the rent will be substantially increased. The limited increase provision included in the previous agreement with the same landlord does not apply to a new agreement.

How Can We Help you

Van Rhijn & Partners will be glad to check your rental agreement for you in order to point out any possible risks. Our experts have a client oriented approach

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