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The Supreme Court provided clarification as to the cancellation of a lease contract in relation to the transfer of rights and obligations arising from the lease contract to a new lessor

15.05.2008

The Estonian Law of Obligations Act establishes that upon the transfer of rights and obligations arising from a lease contract to a new lessor due to the transfer or encumbrance of a leased thing, the new lessor may cancel the lease contract by adhering to the terms for cancellation provided for by law. However, a residential lease contract or a lease contract of business premises may be cancelled by the acquirer for such reason only if the acquirer urgently needs the leased premises. But the law does not specify in which cases the new lessor can rely on its urgent need to use the leased premises. A recent judgment of the Supreme Court brings some clarity to the situation.

The Estonian Law of Obligations Act establishes that upon the transfer of rights and obligations arising from a lease contract to a new lessor due to the transfer or encumbrance of a leased thing, the new lessor may cancel the lease contract by adhering to the terms for cancellation provided for by law. However, a residential lease contract or a lease contract of business premises may be cancelled by the acquirer for such reason only if the acquirer urgently needs the leased premises. But the law does not specify in which cases the new lessor can rely on its urgent need to use the leased premises. A recent judgment of the Supreme Court brings some clarity to the situation.

The said judgment concerns a case where the new lessor (i.e. the acquirer of the property encumbered with lease contracts) cancelled a lease contract before expiry of its term, relying on its urgent need to use the premises. The reason for the urgent need was said to be the wish of the new lessor to transform the building encumbered with the lease contract into a hotel, which would have enabled the lessor to earn more profit than the lease contract concluded with the lessee.

The Supreme Court did not agree that this would constitute an urgent need to use the premises. In the opinion of the Supreme Court, an "urgent need" means the lessor's direct, serious and burning need to use the object of the lease contract, which must be duly supported by evidence. The Supreme Court held that the need to use the premises did not necessarily mean that the lessor had to be in an emergency situation or under strong compulsion (e.g. on the verge of bankruptcy, which could be avoided by premature cancellation of the lease contract) but it should rather be understood as referring to a situation where the lessor would be able to keep down its expenses to a significant extent by using the acquired premises. The Court added that, among other things, a legal entity might also rely on an urgent need if it needed to use the premises for its own production activities or office purposes, i.e. in legal terms the person entitled to cancel the lease contract and the person who would later use the premises should be identical.

To sum up, the above judgement indicates that a lessor may rely on an urgent need to use the premises as a reason for cancelling a lease contract prematurely first and foremost if the lessor needs to use the object of the lease contract itself and if the need is direct, serious and burning.

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