Pacta sunt servanda

Sometimes two lease contracts are concluded for a subject matter which partially overlaps (a so-called “double lease”). We see this in buildings, land and other properties. The previous case law of the Supreme Court was strict in this respect and automatically considered the later lease to be invalid from the outset. This has immediate negative consequences for both the lessor and the lessee, as each of them may require the immediate cessation and abandonment of the leased object. At the same time, both parties must cope with complex unjust enrichment and other mutual claims, something everyone likes to avoid.

The situation was recently reviewed by the Constitutional Court[1] and, in our opinion, has reached a very encouraging conclusion.

In this case, the lessor entered into a land lease agreement with the first lessee in 1995 (i.e. under the previous Civil Code[2]). As the purpose of the lease, the parties agreed to use the land for growing vegetables and grass.

Subsequently, the lessor was approached by the second lessee, which wanted to place and operate a billboard on part of the land used by the first lessee. The first lessee agreed to this. Thus, in December 2011, the lessor concluded a contract with the other party to place the billboard on the part of the land that was already being used by the first lessee. The contract for the placement of the billboard was concluded for a definite period of 10 years. However, no amendment to the original lease agreement was concluded with the first lessee, which would narrow its subject matter so that the first and second lessee did not overlap. Why, too, did the first lessee agree to use the billboard, and the second lessee state directly in the billboard placement contract that it knew about the long-term lease of land by the first lessee? At the same time, the lessor stated that the existing lease agreement with the first lessee does not prevent the implementation of the billboard placement contract. There was thus a situation where, for the agreed period, the first lessee’s right of use should partially overlap with the second lessee’s right of use. The problem occurred when the other lessee (the lessee of the billboard space) wanted to break out of the contract and objected to the overlapping rent as the reason for the invalidity of its contract.

The situation in which two rights of use overlap (double lease) has long been judged by the case law of the Supreme Court[3] as the absolute nullity of the second (later) use title because of the so-called initial legal impossibility of performance. In that view, the prerequisite for the conclusion of a usage contract is the legal freedom of the subject matter at the time the contract is concluded. Thus, at the time when the usage contract is concluded, there must not be a usage right for another person. This interpretation does not follow from the literal wording of the law; it arose out of the interpretation of the previous Civil Code[4].

The Constitutional Court resolved the situation differently from the previous opinion of the Supreme Court. It concluded that the absolute nullity of the second (later) usage contract as a result of a double lease (i.e. the case of the conclusion of several usage contracts on the same subject matter) is not constitutional. Such a conclusion is contrary to the right to freedom[5] of action and the principle of protection of autonomy of will and contractual freedom derived therefrom in conjunction with the principle of pacta sunt servanda[6], and infringes the right of the lessor (owner) to own property. By supporting an interpretation implying the absolute nullity of the second contract, the courts would deny the lessor (owner) the right to use the good[7]. In addition, such an interpretation would allow the other lessee to plead the absolute nullity of the billboard placement because of the mere existence of another lease relationship with the land, even if the other lessee knew of it at the time it signed the contract. According to the Constitutional Court, the objection of absolute nullity by the other lessee in proceedings before the general courts must be regarded as a purposeful effort of the other lessee to get out of the contract (in this case a contract for the placement of a billboard concluded for a definite period).

The Constitutional Court endorsed the view in the professional literature[8] that “the lease of land for the placement of advertising equipment does not prevent the lease of the same land for agricultural purposes”; according to the Constitutional Court, double lease must always be assessed individually based on whether the right of use of the first lessee (i.e. use of land for grassland and growing vegetables) excludes the right of use of the second lessee (i.e. to place and operate a billboard).

In the case under consideration, the first lessee agreed to the placement of the billboard on the land used by the first lessee before signing the billboard, and the second lessee confirmed in the contract its knowledge of the existing lessee’s right of use. Nevertheless, in the Constitutional Court’s opinion, the consent of the first lessee is not a necessary condition for the validity of the second exploitation contract (i.e. a billboard placement contract), but serves as clear evidence that in the present case there was a consensus. Consequently, the Constitutional Court concluded that “In this case, the ordinary courts have acted in violation of the will of all the individuals concerned and that their interference in the autonomous sphere of those individuals has not had a legitimate aim.“).

In our practice, we sometimes encounter disputes (relating to leases, acquisitions and developments) that are based on a formal and purely linguistic interpretation of the law and the case law of the courts without considering the substance of the contractual relationship and the will of the parties. Such an interpretation is unfortunate. It does not make it possible to capture the true depth of relationships and interests between the various players in the real estate market.

In our opinion, the cited case law of the Constitutional Court brings several positive aspects. Firstly, it guarantees lessors and lessees a reasonable degree of freedom in regulating their relationships, which will help both parties to achieve greater certainty (both legal and commercial) as well as greater predictability of the duration of contractual relationships. The Constitutional Court emphasized the principle of pacta sunt servanda (i.e. contracts must be observed), which stands “above the law” and, in the opinion of the Constitutional Court, follows from constitutional principles. We agree with this and would like to see it regarded as an indispensable value on which our society is built. It is also positive to emphasize the need to deal with the individual situation of a particular case, taking into account whether the first usufruct right precludes the second. Finally, we find it very positive and practical that the Constitutional Court confirmed the above conclusions for lease relationships arising under the existing legislation, as well as for relationships arising under the effectiveness of the previous Civil Code[9].

Are you worried about the validity of your lease agreement being questioned or are you afraid of another double lease risk? Do you have any doubts about the status of your lease? Contact us. We work with lease contracts daily and believe we can recommend a procedure that is right for your situation.

 

If you require further information, please contact Pavel Fára or your contact person in our office.

This document is a general communication and does not constitute legal advice on a specific matter.

 

[1] Finding of the Constitutional Court of the Czech Republic II. ÚS 4247/18, of 13 September 2019

[2] Act No. 40/1964 Coll., the Civil Code, as amended

[3] decision of the Supreme Court file no. 26 Cdo 2396/2000 of 30 May 2001, ref. 26 Cdo 916/2001 of 30 June 2003, ref. 26 Cdo 4217/2010 of 8 March 2011, ref. 26 Cdo 3720/2011 of 12/06/2012

[4] Act No. 40/1964 Coll., the Civil Code, as amended

[5] Article 2 (3) of the Charter of Fundamental Rights and Freedoms

[6] Article 1 (1) of the Constitution of the Czech Republic

[7] Article 11 (1) of the Charter

[8] Hulmak, Milan. § 684, in the commentary Švestka, Jiří, Spáčil, Jiří, Škárová, Marta et al. Civil Code I, II. 2nd edition. Praha: C. H. Beck, 2009, pp. 1946

[9] Act No. 40/1964 Coll., Civil Code, as amended

 

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