E-journal: the real estate related practice of the Supreme Court (May-June 2015)
This GLIKMAN ALVIN’s e-journal of real estate and court practice introduces the following decisions of the Supreme Court from the period of May – June 2015 related to real estate:
1. Cancellation and compensations of lease agreement of commercial premises;
2. Flaws of the sales object of immovable property and withdrawal from the purchase contract;
3. Notifying about the flaws of the work in case of a contract of services;
4. Deciding on taking out a loan for repair works of an apartment building and concluding the respective contracts;
5. Restitution of sales of immovable property in case of the bankruptcy of
6. Usage of the apartment ownership in contravention with its intended purpose;
7. Bailiff’s right to enter the premises in the possession of the debtor;
8. Non-expansion of tax credit to other than residential land is constitutional;
9. Contract of services with the binding and non-binding budget.
1. Cancellation and compensations of lease agreement of commercial premisesIn court case no 3-2-1-65-15 the Supreme Court explained the issues of ordinary cancellation and implementing the contractual penalty in case of a lease agreement of commercial premises.
In the fixed-term lease agreement of commercial premises, the Parties agreed that:
i) they can ordinarily cancel the lease agreement without reason at any time, informing the other party in advance at least 12 months;
ii) in case the agreement is cancelled prematurely by the lessee, the latter is obliged to pay the 5-years rent to the lessor.
The Supreme Court found that:
i) In case of an agreement on such cancellation, it is additional basis of ordinary cancellation and concluding such agreement in case of a fixed-term lease agreement is legally possible. The reason is that the lease agreement of commercial premises is presumably concluded by equal parties and in that case the contractual freedom is presumed in case of termination of the contract and agreeing upon the procedure.
ii) In case of the agreement on payment of compensation, it is important whether the party from whom the compensation is claimed has breached the lease agreement or not. In the dispute in question, there was no breach of lease agreement.
iii) In case of concluding a fixed-term contract, both parties can presume that the contract shall be performed until the end of term and the law does not prohibit the parties of a fixed-term lease agreement of commercial premises to make an agreement that the lessee is obliged to pay the lessor a compensation in case the lessee cancels the lease agreement prematurely. Substantially, it is a claim for damages.
iv) Such damage can be for example rental income which the lessor would have likely received if the lessee had not cancelled the lease agreement prematurely. At the same time, the possibility of the lessor to use the lease premises itself in other ways and save costs by this or lease the premises to someone else on reasonable terms and save costs and make income, shall be considered as well.
v) At least generally it can be presumed that the premises leased in economic activities are soon leased on the similar terms and conditions, i.e., not for significantly lower rent. Therefore, the rent received and/or receivable from the new lessee shall be deducted from the loss of rent ordered to pay by the lessee for the benefit of the lessor.
- is the loan debt burdening the apartment association the flaw of apartment association above all in the sense of § 217 (2)4) of Law of Obligations Act and should the seller have informed the purchaser about the existence of the flaw;
- is the non-functioning association managing the apartment house the flaw of apartment association and should the seller have informed the purchaser about the existence of the flaw;
- is it possible to complement the grounds of withdrawal from the contract later, incl. during the court proceedings;
- what is the reasonable time for withdrawing from the contract.
The purchaser filed an application to withdraw from the sales contract, whereat the reasoning was provided by the purchaser in different documents, before and during the court proceedings. The Supreme Court found that:
- if several withdrawal applications have been filed, the next withdrawal application does not revoke the previous;
- if new flaws appear, the purchaser is entitled to rely on those flaws even if the action filed on the basis of the previous flaws is in the court proceedings already;
- the purchaser is entitled to complement the withdrawal application later in the court proceeding. It is important that in evaluating the reasonable time of withdrawal from the contract, the initial withdrawal application and its later additions shall be separated;
- filing a withdrawal application during the court proceeding in county court is not excluded.
Regarding the reasonable time of filing the withdrawal application, the Supreme Court noted that:
- before receiving the application, it is normally impossible to be informed about the flaws;
- if one was being guided by the prerequisite that the possession was transferred to the purchaser on the day of concluding the contract or the day after that, we cannot say that the purchaser was to become aware of all flaws in such a short term as of receiving the possession;
- generally, the reasonable time of withdrawal from the contract cannot be shorter than six months.
flaws of apartment ownership cannot be limited to physical share only, but also
include the legal share of co-ownership and actually the living environment as a
on whole, at least in the immediate vicinity of the
apartment building. The purchaser has a recognizable, significant interest
for example to find out that in loud parties with music take place often
the neighboring apartment or in the yard of the apartment building,
housing services are offered to strangers in the apartment building, that
the apartment association has trouble with debtors, etc.;
- if the purchaser has not been informed about it, a debt burdening the apartment association, non-functioning association and electrical installation not conforming to requirements can be considered as flaws;
- the usual quality of the apartment to be sold is that the apartment ownership is managed as required, i.e., at least in the minimum necessary extent;
- it cannot be required from the seller that the apartment association must function normally and the elimination of such flaw cannot be required, as well, but the purchaser must be informed about the fact of the non-functioning of the association or relations of co-owners;
- it would be appropriate, necessary and honest to add clauses into the sales contract on flaws of the apartment ownership known to the seller. If the seller does not bring forth these flaws in the contract, he has the risk that the purchaser may use the legal remedies prescribed by law against the seller;
- the information of the sales ad, which may become a part of the contract, is also important;
- it is not impossible that all breaches of contract in collection may form a ground for withdrawal from the contract. For that, amongst other, the monetary influence of all flaws must be assessed compared to the price of the object of the contract.
Notary’s part in certifying the sales contract:
The Supreme Court found that the notaries should
explain to the parties at the performance of the obligation of explanation that
the circumstances of managing the apartment ownership are significant and the
contract should describe the flaws known to the seller of the apartment ownership.
Especially in cases when older/used accommodations are sold. Mechanical
rewriting of provisions of laws at the end of the notarial contract cannot be
considered as the proper performance of obligation of explanation.
3. Notifying about the flaws of the work in case of a contract of services
In the decision made in court case no 3-2-1-60-15 the matters of discovering and notifying about the flaws arising from the contract of services were explained. The Supreme Court found that:
i) similarly to the sales contract, also in case of the contract of services, the flaws that can be discovered on average review and so-called hidden flaws shall be separated. The flaws which the contracting entity could have discovered by examining the object externally with care expected from him can be considered as hidden flaws;
ii) as a rule, the reasonable time of informing about the flaws shall begin from the inspection of the work;
iii) the contracting entity active in the economic activities shall not presume that he is delivered a flawed object and therefore he shall not take special measures for discovering the flaws. Therefore, as a rule, the person active in economic and professional activities must not hire an expert to inspect the work.
iv) the carefulness presumed from the contracting entity (incl. necessity of hiring an expert) may vary depending on the uniqueness, complicatedness, purpose of use, value of the purchased object;
v) also in case the work is inspected by an expert, the contractor must be informed about such flaws that can be discovered during the external inspection;
vi) if it is a hidden flaw, the reasonable time for informing does not begin from the inspection of the work but from finding out about the flaw;
vii) if the contractor knew or must have known about the hidden flaw and did not inform the contracting entity, the contracting entity may base on the flaw, despite of the fact that he did not inspect the work and did not inform about the flaw at the right time;
viii) the performance of inspection with higher carefulness prescribed by law does not exclude the contractor whose work does not conform to the conditions of the contract, from the responsibility;
ix) contractor who has concluded the contract in economic activity cannot justify the possible non-quality work with the faulty owner’s supervision of the contracting entity;
x) in case of informing about the flaws it is not necessary to bring forth the reason but describing its nature in the extent it is possible after external inspection of the work not requiring special knowledge. Also the contracting entity active in economic or professional activities does not need to conduct an expertise to describe the flaws, i.e., the professional contracting entity can also be general in describing the flaws;
xi) even if the contracting entity is active in the economic or professional activities, the professional within the frames of contract of services, is the contractor.
4. Deciding on taking a loan for repair works of an apartment building and concluding the respective contracts
In the decision made in court case no 3-2-1-49-15 the Supreme Court explained
that granting the authorization for concluding a loan or suretyship contract is
in the competence of the general meeting of the apartment owners and this can
be decided by the apartment owners on the basis of the majority of votes at the
general meeting. In addition the Supreme Court explained that the activity of
the head of the apartment building, it is presumed that he/she acts as the
representative of the apartment association. Also in conclusion of a loan or
suretyship contract and other contracts necessary for conducting the necessary
repair works in the apartment building.
The Supreme Court found in the referred matter that if the head does not have an actual authorization for concluding the loan or suretyship contract, then basically it is possible to approve the named contracts by the decision of the apartment owners, by which the apartment owners approve the management plan from which it can be seen that the bank loan is paid by the payments of repair fund on the invoice. The Supreme Court still stresses that it is important that the approval of the previous transaction would be clearly expressed in the decision.
5. Restitution of sales of immovable property in case of the bankruptcy of the purchaser
During the resolving of court case no 3-2-1-47-15 the Supreme Court had to
answer the question whether the seller is entitled to keep the immovable
property and the sum of money in the situation where the purchaser has partly
paid for the immovable property but the main
of the sales price has not been paid due to the bankruptcy of the purchaser and
the bailiff has informed that waives performing the obligation of payment of
the sales price. The seller claimed that in such situation the restitution of
the contract would be contrary to good faith. As the purchaser had not paid the
sales price of the registered immovable, the seller had not transferred its
ownership to the purchaser.
Contrary to the sellers’ position, the Supreme Court found that it would not be acting in good faith if the seller could keep the part of sales price paid by the purchaser if the purchaser has not received the exchange for the paid. The court found that the seller must return the money received and in addition, pay the statutory fine for delay to the purchaser for delaying with the return payment.
6. Usage of the apartment ownership in contravention with its intended purpose
In the decision made in court case no 3-2-1-3-15 the court prohibited
conducting dance lessons on the real share of apartment ownership located on
the first floor of a business or apartment building, also granting the right of
use for conducting the afore-mentioned activity to third parties.
In Supreme Court’s evaluation, the action of the persons on the named basis was in contravention with the intended purpose of the building noted in the authorization of use and therefore prohibited. The intended purpose of the building noted in the authorization of use, in addition to residential building, was building connected to beauty treatment and personal services, such as hairdresser, solarium or sauna. Actually, a dance studio is located in the disputed premises and dance lessons are given.
The Supreme Court noted in its decision that the holders of the dance studio can apply the amendment of the intended purpose of the premises in question pursuant to Building Act and Apartment Ownership Act together with the majority of the apartment owners. Until the amendment of the intended use, conducting dance lessons is not permitted.
7. Bailiff’s right to enter the premises in the possession of the debtor
In the decision of the court case no 3-2-1-35-15 the Supreme Court has admitted
the right of the bailiff to enter the premises in the possession of the debtor
without the consent if it must be done on the purpose of introducing the
premises to the potential purchaser. In such case the court ruling shall
replace the consent of the owner. In other way, the bailiff could not conduct
the forced sale and carry out the auction of the immovable property.
8. Non-expansion of tax credit to other than residential land is constitutional
In court case no 3-3-1-13-15 the Supreme Court explained that a situation where
persons whose residential buildings have non-residential rooms and land under
residential building is partially residential land for the purpose of cadastral
units, partially commercial and social land, shall only receive tax credit on
the residential land, is not in violation with the constitution of the Republic
The Supreme Court agreed that such persons shall be treated less favorably compared to apartment owners whose residential building is completely on residential land and who for that reason get tax credit for the whole land. But in the Supreme Court’s evaluation the less favorable treatment of such persons is not in violation with the constitution.
The chamber stressed that the Supreme Court may expand the tax credit by law, to full extent on the non-residential land belonging to the accommodation, independent of the circumstances of usage of non-residential land.
9. Contract of services with the binding and non-binding budget.
In court case no 3-2-1-72-15 the
Supreme Court treated the subject of contract of services with a binging and
non-binding budget to the contractor.
In the court case there was a dispute over the fact whether the parties agreed pursuant to the contract of services on the final sum payable to the contractor, independent of the actual amount and expense of works (binding budget) or the fee payable to the contractor was depending on the actual amount and expense of the works (non-binging budget), accordaing to which the contractor is entitled to demand payment for alleged extra works from the contracting entity.
The Supreme Court found, amongst other, in this decision that in a situation where parties have provided the binding nature of the budget in the contract in writing, conditions of the contract on parties’ mutual agreement and the prohibition of the price correction, the significant meaning cannot be given to the circumstances of concluding the contract and proposal as to the amount of fee. In the Supreme Court’s opinion, the price agreements, being the annexes to the contract, prove the amount of works and increase or change of budget during the performance of the contract, as they were done prior to concluding the contract.