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Only small and medium businesses will be able to break up rental agreements

Published on Vedomosti

21 /05 2020

The State Duma approved in the second reading the bill on supporting the Russian economy and preventing the consequences of the coronavirus, RIA Novosti reported. The document allows small and medium business companies to break up rental agreements with the owners of premises virtually without penalties.

The bill was submitted to the State Duma on May 7 and caused indignation among commercial property owners. They stated that in case of adoption of the law in this form the market would collapse, and the owners of premises would suffer mass bankruptcy. Tenant companies, on the contrary, supported the bill.

Initially, the document allowed bona fide tenants, in the event that their monthly income fell by more than twice, to introduce a regime of increased readiness or emergency situation, to unilaterally break agreements with the owners of premises without penalties. Tenants were also given the opportunity to demand the return of the security payment.

However, after a meeting of developers of the bill with representatives of owners of premises it was decided to make a number of amendments. One of them suggested that the tenant could demand reduction of payment for the premises. And if the owner does not give in, the tenant has the right to terminate the contract without penalties until October 1, 2020. The owners of the premises may also not return the security payment if it is stipulated in the agreement. The new amendment, now approved by the State Duma, clarifies that the bill concerns only small and medium businesses.

According to the Russian Union of Shopping Centers (RUSTC), in large modern shopping centers small and medium businesses generate up to 25% of rental income, and its share in the total turnover of tenant companies is up to 34%. The position of the shopping center industry has not changed at the moment: the relationship between the landlord and tenant is determined by a bilateral agreement, which, in turn, is based on the Civil Code, RCTC reports.

State intervention, according to the Union, will reduce confidence between the parties. However, RCTC considers the version of the document approved by the State Duma as the most correct, as agreements to reduce the rent will be temporary. This will allow for more confident planning of the economy of the shopping center in the medium term.

Owners of premises and commercial real estate consultants surveyed by Vedomosti have different views on the draft law. The new version of the document takes into account the interests of landlords to a greater extent than the one considered in the first reading, says Mikhail Rogozhin, director of the regional retail premises department at CBRE.

According to him, it also protects the most affected enterprises - small and medium businesses, which are under attack all over the world. Head of Commercial Property Department of Accent Capital Olesya Nikitenko agrees with him, who adds that now the bill gives an opportunity to predict and fix some of the losses to the owners of premises. In its original version, she said, it would destabilize the commercial real estate industry for a long time.

Olesya Nikitenko Director, Retail Real Estate

But Mark Groysman, General Director of AFI Development, still believes that after the adoption of the document, the commercial real estate market may expect a protracted crisis. The right of tenants unilaterally and in violation of all the principles of the Civil Code to break up lease agreements may provoke a huge cash gap among owners of premises and a succession of bankruptcies, he said.

Millions of people would be unemployed and cities would be deprived of important social infrastructure, Graysman said. The owners are willing to cancel all rent payments, he said, but if they are given a break too, they will still bear the cost of taxes, utilities and employee salaries.

"On the one hand, such a law is better than nothing: it gives small and medium enterprises of the industry the opportunity to have at least some dialogue with landlords," says Olga Kiseleva, President of the Association of Fitness Industry Operators of Russia. Now, according to her, fitness clubs are absolutely powerless: companies invest money in premises that do not belong to them, they bear all the risks, and they can only break agreements with huge fines, which sometimes reach the amount of annual rent. On the other hand, the changes, which have been adopted with a persistent lobby by the landlords, significantly reduce the ability of tenants to receive assistance, says Kiseleva. The law, she said, applies only to small and medium businesses, while in the fitness industry there are many large networks, which are included in the list of systemically important enterprises and have thousands of people in staff. They need help from the state in a dialogue with the owners of premises as much as small and medium businesses, she says. Kiseleva also draws attention to the fact that now in case of termination of contracts the landlords can keep the security payment while its size can reach six months of rent.

Flagships of industries that have grown from small and medium businesses to professional large market players have been left "overboard", complains Rosinter Restaurants Holding founder Rostislav Ordovsky-Tanaevsky Blanco. And such companies, he said, are the main tenants of commercial real estate, they declare revenue, pay taxes, give jobs to thousands of people and are in a much more difficult position in terms of their obligations.