Partner Aivar Taro: the current situation in property-related legal counselling
Partner Aivar Taro has acted as an expert in many complex real estate transactions, such as acquisitions and disposals of business and industrial premises, and development projects.
On the one hand, the number of successful major transactions closed has decreased considerably. On the other hand, a great deal of problems and issues related to past transactions have emerged instead. During the rapid growth years, many hasty and ill-advised transactions were concluded (both sales and leases) with terms and conditions that no longer appear attractive or affordable. Therefore, it is only logical that these transactions are being scrutinised in order to find ways to withdraw or options to amend.

Lately, many clients have come to us for contract analysis in order to determine the tenant’s prospects for contract cancellation. Landlords are interested in whether a declaration for cancellation is lawful. Each instance must be evaluated individually but generally the pacta sunt servanda principle settles the case. This principle, implying that all contracts are to be honoured – that is, fulfilled – dates back to Roman law and forms part of the basis of the Estonian Law of Obligations Act.

Thus, a tenant who has agreed to a ten-year contract may not, after just two years into the contract, withdraw unilaterally by relying on the changed economic situation. Abandoning the leased premises is of no help either as in that case the landlord is entitled to rent until the end of the agreed term.

However, in some cases the tenant may find a basis for unilateral termination in the contract terms, the landlord’s behaviour, or other case-specific circumstances. In that case, in order to be able to make well-advised decisions for finding best action plans, it would be reasonable to analyse the legal aspects of any disputes or controversies (or, even better, to do it preventively). For example, if the landlord has breached the contract, the tenant may have a basis for extraordinary cancellation, although in that case a defect in the premises should be considerable enough so that their use is seriously impeded. Minor breaches may trigger the legal remedy of rent decrease. Basically, in such a case the tenant may by unilateral expression of will determine the rent rate he considers appropriate for (substandard) premises as compared to their agreed use value.

With lease contracts, disputes often arise as landlords execute their statutory right of security on account of tenant or third party assets. This brings about the issue of interpretation of the right of security: does it extend, for example, to objects of leasing on the premises or to items sold to the tenant with a reservation of ownership (retention of title); which third party rights have precedence over the landlord’s right of security (for example, a commercial pledge in favour of another creditor established prior to the lease agreement); what are the limits of self-help in exercising the right of security; how can the tenant impede execution of such right.

Time and again we have to resolve disputes arising from transactions involving purchase and sale of immovables. In today’s situation, most cases have to do with defects in property purchased. Disputes arise very easily as hastily concluded contracts have paid little attention to the quality of the property or the seller’s possible liabilities. At the same time, buyers are now often motivated to reverse contracts due to their high price or to reduce the price. In order to minimise the number of such disputes in the future, we recommend that the parties discuss the extent of the seller’s liability in detail and include agreed aspects in the contract. Additionally, an audit, even a limited–scope audit, is a good idea, as this will reveal any possible problems related to the property to be purchased. These might include, for example, lack of relevant technical documentation, access problems, third party rights, or restrictions under nature or heritage conservation requirements. Unless the parties have agreed otherwise, the seller is usually liable for defects related to the property existing at the time of transfer (more specifically, when the risk of accidental loss or damage transfers to the buyer), regardless of whether the seller is responsible for any such defect or of whether the seller is even aware of any such defect.

Today, the indications are that the property market is becoming livelier again. Let us hope this is for real and that the sales and leasing market will soon be properly functioning again. But in case of new transactions we suggest a more informed approach – important aspects must be checked and documented, with professional help, if needed. This will prevent futile disputes in the future, thereby saving time and money so that all efforts can be channelled into developing main business interests.