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The right of security of a lessor with respect to a lease contract may precede the reservation of ownership

09.04.2008

The Law of Obligations Act provides that the lessor of an immovable has the right of security over movables located on the leased immovable and, upon the lease of a room, over movables which are part of furnishings or are used together with the room in order to secure claims arising from a lease contract. However, certain limitations are also applicable to such a right of security. For example, the law provides that the right of third parties to things concerning which the lessor knew or should have known that the things do not belong to the lessee precedes the right of security of the lessor. A recent decision of the Supreme Court clarified the application of the right of security of a lessor in relation to the rights of third parties.

In particular, the relevant case concerned a dispute in which the lessor of an immovable had exercised its statutory right of security in relation to goods which were not owned by the lessee, but by third parties instead (i.e. the lessee was a reseller of the goods in question, and the ownership of the goods had not yet transferred to the lessee). Therefore, the third parties who actually owned the goods claimed that the lessor could not use the right of security because the rights of third parties (i.e. their rights) preceded the right of security of the lessor.

However, the Supreme Court took the position that the lessor is entitled to presume that all movables in the possession of the lessee belong to the lessee. The lessor's right of security arises by operation of law upon the conclusion of the lease contract. If third parties want to preclude the lessor's exercise of the right of security over their things, they must ensure that the lessor is immediately informed of their right of ownership to things at the time when the things are brought onto the premises of the lessor.

Thus, the Supreme Court found that the right of security of a lessor extends to goods owned by third parties, provided that the lessee used premises owned by the lessor, the goods were on the premises and, at the time when the goods were brought onto the premises, the lessor did not know and should not have known that the goods did not belong to the lessor. This case indicates that the lessor's right of security precedes the reservation of ownership if the lessor did not know and should not have known of the reservation of ownership.

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