Judicial practice in disputes on the recognition of unlawful refusals of the State Property Fund of Ukraine’s regional branches in granting tenants consent to make inalienable improvements is formed in favor of the state

Legal disputes arise due to the application by the State Property Fund of Ukraine the new lease legislation rule, providing that the reason for refusing to agree on the tenant’s claim to make inalienable improvements is to obtain property for lease without holding an auction or competition.

"This rule was established by Part 6 of Article 21 of the Law of Ukraine No. 157-IX "On Lease of State and Communal Property", which was enacted on February 1, 2020, and aimed to limit the possibility of uncompetitive pulling out from state property of property that was also leased without competition. It is this right, the right of buyout without an auction, is provided for those tenants, who have made inalienable improvements on the property leased from the state. The new law limited the opportunities for obtaining consent to make inalienable improvements that entitle them to buyout, but allowed tenants to carry out major repairs of the leased property with the approval of the balancer. Such repairs do not provide the right to buyout instead," - Leonid Antonenko, First Deputy Chairman of the Fund, said, commenting on the innovations.

We’ll look in more detail at recent court cases, in which tenants of state property appealed against the decision of the Fund’s regional branch to refuse to agree on their claims for inalienable improvements at the objects leased by them.

The claimants and the Fund’s Regional Branch in Kharkiv, Donetsk and Luhansk regions concluded lease contracts for state property located in the center of Kharkiv city, in 2018 and 2019, without auction or competition, based on the results of the demand study. During 2020, the claimants asked the landlord to grant them permits for inalienable improvements, but received refusals. Subsequently, each of the tenants appealed against the refusal to make inalienable improvements in the courts that decided the case in favor of the Regional Branch of the Fund (cases No. 922/1015/20 and No. 922/2963/20).

The court of first instance concluded that the rule of Part 6 of Article 21 of the Law No. 157-IX applies only to lease contracts concluded under this law, and does not apply to contracts concluded before it enters into force. The competitive procedure while concluding lease contracts with the claimants was not required, since the claimants were the only contenders for lease objects. Therefore, they lawfully received state real estate for lease according to the results of studying the demand for it.

However, the Eastern Economic Court of Appeal overturned the decision of the court of first instance and refused to satisfy thetenants’ claims.

The Court of Appeal recognized (linksto the courts’ decisions: https://bit.ly/2QxTKn2, https://bit.ly/3vVnQBj) that the court of first instance cannot decide on the issue of granting consent to the implementation of inalienable improvements ofstate property, as this is within the competence of the State Property Fund. The Court cannot replace public authorities and make decisions instead, since such actions go beyond the powers of the court determined by the Constitution of Ukraine and the Commercial andProcedural Code.

Similarly, the Court of Appeal, when making its decision, was guided by the general principles of law, according to which the effect of the normative legal act in time begins from the moment it enters into force and terminates with its loss of validity. Lease contractsstipulate that the relations of the parties that are not regulated by them are governed by the current legislation of Ukraine. The previous lease legislation came into force in 1992 and expired on February 1, 2020. Taking into account the general principles of the normative legal acts in time, as well as the fact of approval by the parties in the lease contractsof the possibility of applying the current legislation of Ukraine, the Court of Appeal established the legitimacy of the landlord's reference (the Fund’s Regional Branch) to Part 6 of Article 21 of the Law No. 157-IX.

After satisfying the appeal of the Regional Branch of the Fund, the Supreme Court refused the tenantsto open cassation proceedings on their cassation complaints (linksto the Supreme Court’s decisions: https://bit.ly/39hgEWa, https://bit.ly/3rpO2QM, https://bit.ly/3delNjk).

The State Property Fund instructed regional branches to use this litigation practice in similar disputes with tenants during the construction of a strategy to protect the interests of the state.