During the negotiation of any contract, it is important to be anchored in the reality of the market, which includes also the legal reality; the unrealistic expectations of the parties when entering into a lease can lead to frustrations that may adversely affect the long-term relationship between the landlord and the tenant.
More than 6 years after the amendment of the Civil Code, with its multiple effects on lease agreements, landlords and tenants are generally well informed and can negotiate their contracts in full understanding and awareness.
1. Under these circumstances, are there any players in the Romanian real estate market can be surprised by the New Civil Code?
If you entered into a lease agreement before 1 October 2011, under the old Civil Code, and you sign or are in the process of signing amendments to the agreement in the recent period, you may find yourself surprised by the applicability of the relevant provisions of the New Code Civil.
There are frequent situations in which a lease is modified by the parties by execution of addenda thereto. Changes may vary from simple operational aspects (name, address updates, etc.) to changes in essential contractual terms, such as duration, rent, extension or reduction of leased premises, etc. In most of the situations we have encountered in practice, the parties did not ask themselves at all whether the signing of an addendum after 1 October 2011 may have other effects than those expressly mentioned with the addendum. However, there are situations, and not a few, where the execution of such an addendum may lead to a change in the legal status of the entire lease agreement, even if that was not the parties’ intention.
The legislation states that the amendment of an agreement is made in compliance with all the conditions stipulated by the law in force at the date of the amendment, and, in respect of the elements not subject to amendment, the law in force at the signing date of the agreement will continue to apply. However, the legislation fails to address those situations where a contractual amendment is so significant that the parties may be deemed to practically enter into a new contractual relationship.
Thus, an addendum concluded after 1 October 2011 to extend the term of a lease governed by the old Civil Code may reasonably be considered as a new agreement with respect to a new legal lease relationship, which is therefore born under the New Civil Code. In such case, it would be difficult to argue that the only contractual element governed by the New Civil Code is the term of the contract and the rest of the rights and obligations remain governed by the old legislation; in the absence of the term extension addendum, there would be virtually no right and/or obligation after the initial expiry date of the agreement. Consequently, we consider that the reasonable interpretation is that such an agreement, extended after 1 October 2011, will be governed by the New Civil Code from the moment when the term extension becomes effective. This is also the direction in which the practice case seems to be moving, although the approach of the courts is not yet unitary.
The case of addenda amending other essential terms of the contractual relationship (others than the term), namely the rent or size and/or parameters of the leased premises, or other terms that the parties have designated as essential, is different. These are complex situations and they have not been ruled upon by the Romanian courts.
Following the above interpretation line, a change in rent may take place under various circumstances. The permanent reduction of the rent changes an essential element of the contract, as it is a new agreement between the parties. Unlike a discount for a specific period, which may be considered as a one-off change that does not affect the future life of the contract, a rent reduction applicable until the end of the contractual period or for a sufficiently long period, considering the original term, could be considered as a new contractual relationship. In case of a rent increase, the situation seems clearer; in practice, the increase occurs almost exclusively in situations where the rent was not fixed for the entire duration of the contract, but the parties had agreed a periodic renegotiation of the rent or the termination of the contract if no agreement was reached on the new level of rent. In this situation, virtually any continuation of the contract, even at the level of the initial rent, can be seen as a new legal relationship that can no longer be governed by the old law.
Another difficult situation in practice, which requires a complex case-by-case analysis, occurs during the extension of the leased premises, the rest of the contractual terms remaining unchanged. In this situation, the question arises whether, with regard to the additional premises, a new lease relationship is born, which will be governed by the New Civil Code, alongside the initial legal relationship that would continue to unfold under the rule of the old law. It would be difficult to argue that the entire contract will be covered by the New Civil Code, but at the same time, the existence of two parallel legal relationships does not seem to be exactly what the parties had in mind.
2. What do you need to know if your lease falls under the New Civil Code as a result of the amendment of some essential terms?
Firstly, the public order provisions of the New Civil Code, from which derogation is not allowed by the agreement of the parties, will become applicable even if the original contract provided for rights and obligations to the contrary. The effect most often challenged in court by tenants concerns the writ of execution of the modified contract, nature acquired quite simply and easily from the point of view of the procedure, the time allocated and the costs generated by the registration of the initial contract and the addendum with the tax authorities. Other examples of public order provisions include the right of any party to terminate the lease for repeated successive breaches of the contract by the other party and the prohibition to invoke the non-execution exception if, according to circumstances and taking into account the minor significance of the non-fulfilment, this refusal to perform obligations may be contrary to good faith principle.
Secondly, the provisions of the New Civil Code that are not related to public order will become applicable if the parties have not established obligations and rights to the contrary either by the addendum or by the original contract.
The new provisions brought by the new Civil Code compared to the previous regulation concern both new rights of landlords, but also many new tenants’ rights, who enjoy extensive rights and guarantees. These include the tenant's preference right for a new lease on equal terms to those offered to a third party, the tenant's right to directly carry out the repairs that the landlord does not carry out (with the risk for the landlord to lose certain guarantees from contractors), the reduction of the landlord’s term to perform urgent repairs from 40 days to 10 days, and the landlord's right to sue the subtenant directly for unpaid rents.
Therefore, if you do not like surprises, we recommend that you obtain in advance information about all the consequences before amending your lease agreement. A minimum of caution when negotiating and signing addenda can ensure your peace of mind during the performance of your contract.