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Notation regarding the lease contract in the land register protects the interest of lessees

02.07.2004

Piret Luiga

A lessee may have an unpleasant surprise if the lessor transfers the leased thing or decides to encumber it with a limited real right (right of superficies, usufruct, etc.) during the validity of the lease contract. A lessee may thus find oneself in a situation where the new lessor who has acquired the thing or obtained it on the basis of real right decides to cancel the lease contract and the lessee cannot use the leased dwelling or business premises anymore.

 Situation of lessees in the case of transfer of ownership

Although subsection 291 (1) of the Estonian Law of Obligations Act includes a provision protecting the lessee which sets out that if a lessor transfers an immovable after transfer of the immovable into the possession of a lessee or if the owner of a leased thing changes after transfer of the thing into the possession of the lessee in the event of the transfer of the thing upon compulsory execution or in bankruptcy proceedings, the rights and obligations of the lessor arising from the lease contract are transferred to the acquirer of the thing. In the same way, the rights and obligations arising from the lease contract are transferred from the owner of the thing to the person with the limited real right if the thing is encumbered after transfer of the thing into the possession of the lessee (subsections 291 (2) and (3) of the Law of Obligations Act). Yet, the protective effect on lessees offered by those provisions is reduced to a considerable degree by another provision of the Law of Obligations Act.

According to subsection 323 (1) of the Law of Obligations Act, 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 within three months by adhering to the terms for cancellation provided for in the Law of Obligations Act. Although the right of cancellation is limited by a provision according to which the new owner may cancel a residential lease contract or a lease contract of business premises only if the new owner urgently needs the leased premises (subsection 323 (1)), it is still highly likely that the lessee may lose the right to use the leased premises and that the lease contract may be cancelled.

Effect of notation

Fortunately, the Law of Obligations Act offers an opportunity for lessees to protect themselves against cancellation of the lease contract by the lessor. Lessees may secure their position by having a notation regarding the lease contract made in the land register. This option is provided for in subsection 324 (1) of the Law of Obligations Act. The notation ensures that the actual owner of an immovable or a person for whose benefit the immovable is encumbered with a limited real right shall permit the lessee to use the immovable pursuant to the lease contract and that a new owner does not have the right to cancel the lease contract pursuant to § 323 of the Law of Obligations Act. If a notation regarding the lease contract is made in the land register, it protects the lessee in the case of any kind of transfer or encumbrance.

Effect of compulsory execution on lease contracts

Of different kinds of transfer, the effect of notation on lease contract in the case of transfer of ownership of an immovable upon compulsory execution is worth to be treated separately. According to subsection 6420 (2) of the Estonian Code of Enforcement Procedure, in case a claim for payment is filed against the leased property, the purchaser has no right to cancel the contract unilaterally. Consequently, according to the valid Code of Enforcement Procedure, the person who has become the new lessor by way of compulsory execution has no right to cancel the lease contract unilaterally even in case no notation concerning the lease contract has been made in the land register. However, the notation regarding the lease contract may become more important after the entry into force of the new Code of Enforcement Procedure which is currently in the legislative proceeding of the Riigikogu. According to § 163 of the draft Act sent to a second reading, the purchaser may cancel the lease or commercial lease contract by adhering to the conditions and within the term specified in § 323 of the Law of Obligations Act. Yet, if a notation is made in the land register pursuant to § 324 of the Law of Obligations Act and the notation cannot be deleted from the land register due to ranking, the purchaser has no right to cancel the lease or commercial lease contract according to the draft Act of Code of Enforcement Procedure.

Procedure of entering the notation in the land register

A notation regarding the lease contract is made in the land register pursuant to the procedure provided for in the Estonian Land Register Act. According to subsection 34 (1) of the Land Register Act, any person whose rights are affected by an entry or for whose benefit the entry is made has the right to submit a registration application. Consequently, the application for making an entry regarding the lease contract in the land register may be submitted both by the lessor and the lessee. An application for the entry of a notation must be notarised (subsection 27 (6) of the Land Register Act). If the application is submitted by the lessee, the consent of the owner of the immovable must also be presented according to subsection 341 (1) of the Land Register Act. This consent must also must be notarised (pursuant to subsection 341 (5) of the Land Register Act).

Summary

In conclusion it can be said that a notation regarding the lease contract in the land register protects the lessee against possible cancellation of contract due to transfer of ownership in the case of different kinds of transfer and encumbrance. Although, pursuant to the law in force, even those lease contract regarding which no notation has been made in the land register are protected in the case of compulsory execution, according to the draft Act of the new Code of Enforcement Procedure, only lease contracts regarding which a notation has been made in the land register are protected against cancellation in the case of compulsory execution. In case the leased dwelling or business premises are of vital importance for a person or company, making a notation regarding the lease contract may be recommended as a good way of protecting oneself against unforeseen circumstances.

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