Transfer of the Tenancy - Law Firm Psarakis & Kefalas

Legal Insight

May 2022

Danae Stamarga, LL.M

Summary: In practice it often happens that a new person enters into a tenancy relationship either in the place of the tenant or the lessor. In such a case a variety of questions arise, such as: How can the transfer of the tenancy relationship be validly effected? What exactly happens to the rights and obligations arising from the tenancy? Which of these are transferred to the new member entering the tenancy? Which ones continue to be owned and borne respectively by the original party who left the relationship? Does the lease agreement continue to be in force as it stands or does it change identity? These questions and a number of others are attempted to be answered in this article.

1. Introduction

Any contractual relationship can be transferred as a set of rights and obligations from one person to another. These rights can be transferred through the institution of assignment, while obligations can be transferred through the institution of debt assumption. In this case a new contract takes place between three parties: a) the transferor of the contractual relationship, b) the transferee and c) the original counterparty of the transferor. There are, of course, exceptions to this rule, i.e. a contractual relationship may be transferred by agreement between two parties or even the transfer may take place automatically by operation of law. A common example of a transfer of a contractual relationship is the transfer of a tenancy, which will be the subject of this article.

2. Mode of transfer: partnership between the original contracting parties and the acquirer

Whether it is a residential or commercial lease, when a new person takes over either the tenant's or the landlord's position, in principle the partnership of the landlord and the tenant and the third party to whom the tenancy is transferred is required, without the transfer contract having to be of a specific type. As stated in the Commission's Communication no. 8/2021 decision of the Piraeus Court of Appeal "The transfer contract may be informal, and so may the consent of the contracting party, which is usually express but not excluded, and implied, as when after the announcement of the transfer agreement between lessor and third party or lessee and third party, the lessee pays the rent to the lessor's successor or, respectively, the lessor collects it from the lessee's successor without reservation or protest" (see also Supreme Court 1510/1999 in Supreme Court 973/2010 Athens Court of Appeal 4161/2001, Athens Court of Appeal 4156/2001). It is also possible that a subsequent approval may be granted by the party that did not participate in the transfer and then the effects of such approval are retroactive from the moment the transfer took place (see also Supreme Court 561/2010 "Thus, if the lessor transfers the tenancy, the consent of the lessee is required and if the lessee transfers it, the consent of the lessor is required. Consent in both cases may be implied and may be given afterwards by approval, i.e. the party to the contract who did not participate in the transfer may be aware of the transfer and not object, thus tacitly approving it"). Moreover, case law has held that "this consent may be given in advance if there is a relevant provision in the lease contract, which may also provide for the terms and conditions in general, subject to which the transfer of the lease relationship will be possible" (Thessaloniki Single-Member Court of First Instance 3526/2018).

Therefore, according to what has been said, the announcement of the transfer is at the same time a proposal to draw up the transfer contract to the party that has not consented to the transfer by that time. Thus, if this proposal is accepted, the transfer of the tenancy is completed. The mere contract between the old tenant and a third party for the transfer of the relationship to the second party, without the consent of the lessor, has no effect, does not make the third party a new tenant and, consequently, the latter acquires no rights from the tenancy (see Supreme Court 1175/2019). It is understood that in order for a transfer of a lease relationship to take place, the lease which is being transferred must be valid and effective, since it is not possible to generate rights and obligations from an invalid or expired lease in order to become the subject of an assignment or debt assumption respectively.

3. Maintaining the terms of the old lease

As noted in the judgment of the Thessaloniki Court of First Instance No. 3526/2018 "The transferred relationship is not new, but a continuation of the old one and, therefore, the lease is not considered new and does not change its identity, and what was originally agreed is valid". Consequently, all the terms agreed in the original lease contract concerning the duration, use, rent, rent adjustment, security deposit, penalty clause, remain in force. This does not mean, of course, that the new parties to the relationship do not have the right to terminate the old contract and conclude a new one on the terms they themselves agree, or even to modify the old one, while keeping in force some of the terms of the old contract. However, if they do not modify or terminate the existing contract and draw up a new one, it goes without saying that the new lessee or lessor will be liable to his counterparty and will have to fulfil his obligations under the agreed terms of the original lease agreement, to which he had not actively contributed. This is so because the transferor is cut off from any obligation arising from the lease and is replaced by the transferee, with the result that the new lessee or lessor becomes subject to the rights and obligations of the former.

4. Respect for future rights and obligations (principle of non-regression)

As is typically noted in the decision of the Patras Magistrate Court No. 151/2021 "The new tenant's special successor does not enter into the rights and obligations of the tenant's lessor, which existed prior to the transfer of the tenancy, unless the content of the agreement made in accordance with Articles 455, 471 and 477 of the Civil Code shows that the transfer of these rights and obligations was also agreed". By way of some practical examples this means that:

a) The new lessor may exercise his right to terminate the lease for the rents that became due and therefore became due after the transfer of the tenancy, and not for the rents that were due to the old lessor. Similarly, the old lessor does not have the right to terminate the lease if the lessee starts to default on the payment of the rent after the transfer. This right will only belong to the new lessor.

b) On the contrary, the new lessor cannot demand payment of rent which had become overdue before the transfer, as this right belongs to the old lessor. The new lessor will only be able to exercise this right exceptionally if the transfer of the lease as a whole has also transferred to the new lessor the rent due before the transfer. Where, of course, in such a case (assignment of the rent already due before the transfer) the latter (new lessor) can also terminate the lease contract on the grounds of the tenant's misbehaviour, who was already in arrears with the payment of the rent due before the transfer.

c) The new tenant may claim compensation for defects in the lease only if they exist after the transfer.

d) The lessee may not demand the return of the security deposit from the new lessor unless the latter has accepted the relevant debt or has received the amount of the security deposit. However, the opposite view is also argued, namely that the new lessor is liable to return the security deposit in any event.

e) If the lease agreement provides for the forfeiture of a penalty clause upon the occurrence of an event, then the new party to the lease (new lessee or new lessor) may claim the forfeiture of the penalty as described above only if that event occurs after the transfer of the lease.

As already mentioned above and as can be seen from the above example under b), it is not excluded that, depending on the content of the transfer agreement, and always on the basis of the principle of freedom of contract, the parties may stipulate that rights and obligations that arose prior to the transfer are also transferred, or even stipulate that even if the transferor is cut off from the tenancy, the transferor will continue to be jointly and severally liable with the new tenant for the obligations arising from the tenancy.

5. Taking into account the franchisor's time for the calculation of the duration of the lease

In addition, since, as stated above, this is not a new contract, it is important that both parties are aware that the time that has elapsed before the transfer is counted where the law says it is relevant. That is, let's say that a commercial lease, which under Article 13 par. 1(b) of Act No. 4242/2014 should have a minimum term of three years, was concluded in March 2019, and in October 2020 a new tenant enters into this lease in place of the old tenant. In this case, the minimum three-year term of the lease will expire in March 2022 and not in October 2023. Similarly, if in the same contractual relationship as above, the original parties had agreed that the rent would start to be adjusted two years after the commencement of the contract, then the first adjustment of the rent should take place in March 2021 and not in October 2022 (see 8/2002 Dodoni Court of Appeal and 109/2021 Patras Court of Appeal).

6. Differentiation from subletting or assignment of use of the lease

The transfer of the tenancy should not be confused with subletting or assignment of the lease, which are different contracts from the main lease contract, and therefore new, while the tenancy relationship between the original contracting parties continues to exist. In these cases, that is, no transfer of the main lease relationship takes place, but a new wholly contractual relationship is established, whose parties are the lessee of the main lease contract and a new third party (thus in Supreme Court 455/2017 and Supreme Court 1255/2019 "However, this assignment of the use of the lease to a third party either by subleasing or by establishing a company is an ancillary relationship, in relation to the main lease and does not subjectively alter the lease relationship, which continues to operate between the original parties"). It goes without saying, therefore, that the existence of a clause in the lease contract prohibiting the assignment of use or subletting has no influence and does not prevent the parties from transferring the lease relationship if they so decide. Whereas, according to what has been mentioned above, the existence of such a clause prohibiting the above mentioned contracts (i.e. the assignment of the use of the leasehold property and subleasing) will continue to apply after the transfer of the tenancy, in which case it will also bind the new member who enters into it and who, if he is a tenant, will not have the right to assign the use of the leasehold property or to sublease it. This will only be possible if the parties make an amendment to the relevant contractual term.

7. Transfer by unilateral action of one party

With the exception of the above, the transfer of the tenancy by unilateral action of one of the parties is permitted in the following cases:

a) The sale of a leasehold property

This case is governed by Article 614 CC for civil leases, the provisions of which apply by analogy to commercial leases, except that in commercial leases it is not necessary for the lease to be evidenced by a document of definite date in order for the new owner of the property to enter into the lease as lessor. In the case of a sale of the lease, such as the sale of the property, the new owner enters into the lease relationship as the new lessor from the transcription of the sale contract (see Piraeus Court of Appeal 177/2021). In civil leases, i.e. residential leases, a prerequisite for this to happen is that the lease must be evidenced by a document of a definite date. In addition, in civil leases it is possible to agree that in the event of a sale of the lease the new tenant will have the right to terminate the lease or even that the lease will be automatically terminated since this provision is of intrastatutory law. Finally, another difference between civil and commercial leases in the case of a lease sale is that in civil leases under Article 616 CC "Advances of rent, made to the lessor who sold or assignments of rent, made by the tenant, as well as the seizures of rents made by his creditors, are invalid against the new tenant for rents beyond three months starting from the time when he notified the tenant of the sale", which is not the case in commercial leases.

b) Serious illness of a commercial lease tenant

In the case of serious illness of the tenant of a commercial lease where, according to Article 12 of Decree 34/1995, if this illness results in the complete incapacity of the tenant to continue the business carried out in the leased premises, then the latter has the right to transfer the lease relationship completely to a third party within one year from the occurrence of the illness or, more correctly, from the occurrence of complete incapacity. At the same time, the same article provides that in the event of the death of the lessee, this right may be exercised by his spouse or children within one year of the acceptance of the inheritance. In such cases, a contract between the lessee and the person who takes his place and a written notice from the original lessee or his heirs to the lessor, which must contain the terms of the transfer, are required. Therefore, the cooperation or consent of the lessor is not required here. What is interesting, as it constitutes a further difference from what has been mentioned above, is that in this case, i.e. the transfer of the tenancy due to the tenant's serious illness, the original tenant or his heirs are jointly and severally liable with the new tenant towards the lessor for all obligations already existing at the time of the transfer (see the following. This practically means that the lessor is entitled to take action against the old lessee or his heirs and claim restitution for the use of the leasehold for repeated misconduct existing at the time of the transfer of the lease. It is also noted that the above applies to both old and new commercial leases, i.e. those concluded after the entry into force of Law No. 4242/2014. The severity of the disease is judged by the result, and incapacity is considered to be the inability to manage the business in person, regardless of whether the continuation of the business is possible with the help of an agent or staff. And the classification of the disease by an insurance agency as a joint disease does not bind the court to classify it as severe. In other respects, the same applies in this case as mentioned above, namely that no new lease is concluded but the old one is continued, the terms of which remain unchanged.

8. Other cases of statutory transfer of tenancy

a) Death of the lessee or lessor

In the event of the death of either the tenant or the lessor, under CC 1710, his heirs shall take his place either by will or intestacy, provided they accept the inheritance, automatically and without the need to give notice to the lessor or the tenant respectively. This is also clear from Article 612 of the Civil Code, which expressly states that the tenant's heirs have the right to terminate the lease, a provision which implies that they are subrogated to the lease contract. Of course, the above provision is of an intrastatutory nature, so that the original parties may have agreed that in the event of the death of the lessee his heirs would not be entitled to terminate the lease without good cause or, on the contrary, that in such a case the lease would be automatically terminated without the need to terminate it.

b) Auction of leasehold property

In the event of an auction of the leasehold property, the successful bidder enters into the lease as lessor but now has the right (following the amendment of Art. 1009 CCC by Art. 81 of Law 4842/2021) whether it is a commercial lease or a civil lease to terminate it immediately, and the termination will occur after six months from the date of termination. The only restriction in this respect, and with regard to civil leases only, is that in order for the successful bidder to be able to terminate the lease, three years must have elapsed since its commencement, otherwise the tenant is protected and the person acquiring the property cannot remove him from the use of the property before the expiry of three years from the commencement of the lease (see Law 1703/1987 as amended by Law 2235/1994).

9. Epilogue

It is clear from all the above that, regardless of the way in which a person enters as lessor or lessee in the place of another, he should always ensure that he is immediately aware of the terms of the lease contract originally concluded between his lessor and his counterparty, since he enters into a legal relationship which has already been established and, although he has not himself actively contributed to the formation of the terms of that relationship, from the moment he enters into it he is required to apply those terms, assuming the obligations arising from that relationship and acquiring the corresponding rights.