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Supreme Court’s New Compensation Criteria in Cases of Unilateral Withdrawal by the Lessee from the Lease of Business Premises

Cristina Lopez's picture
Published: 09/08/17 - Country: Spain

During the years of economic crisis in which the Spanish real estate market has been particularly affected, many lessees have seen their businesses failing to meet the initial economic expectations and they have been forced to close their establishments and, therefore, to withdraw from the lease before the end of the mandatory term initially agreed upon. Therefore, what everybody wants to know is what will be the legal consequences of this unilateral withdrawal ?.

First of all, for those who are not familiar with the legal terminology , the term "withdrawal" refers to the abandonment of the lease before the end of the period agreed in the contract as the minimum mandatory term.

This issue has caused some uncertainty to both lessors and lessees as it has been subject to many legislative changes and it has provoked a wide-ranging doctrinal and jurisprudential debate in the last decades, which has led to an enormous amount of different judgements.

Article 56 of the old Urban Leases Act (ULA) of 1964 recognized the lessee the right to withdraw from the lease before the expiration of the mandatory term agreed upon by compensating the lessor with the amount equivalent to the remaining rent according to the term of the lease.

While the Courts were initially inclined to consider the imperative nature of this provision and, consequently, to sentence the lessee to pay all outstanding rent payments until the end of the lease (Supreme Court judgment of February 28, 1995), then they opted for a more moderating attitude since they understood that there was a clear unjust enrichment for the lessor who received the rent from the non-complying lessee and also had the option to re-lease the business premises (Supreme Court judgment of May 23, 2001), and therefore they chose to reduce the compensation and limit it to the time the lessor took to find a new lessee.

However, the debate re-emerges with the entry into force of the current Urban Leases Act of 1994, which does not stipulate anything about the unilateral withdrawal from leases for use other than housing, leaving the Parties agree on the terms of the withdrawal from the lease under the principle of autonomy of the will. However, in many cases the Parties do not formally agree anything about it and there is where the main problem arises.

In the absence of an express agreement between the Parties, the general legal framework applies, that is, the Civil Code, which in various of its precepts (articles 1256, 1258, 1091) states that the signing of the contract irreversibly binds the Parties to its fulfillment. That means that the lessee is not entitled to withdraw from the contract before it ends without a justified cause.

However, in order to avoid such unjust enrichment, in these cases, the Courts and Tribunals have been exercising their moderating power by taking into account the circumstances in each case and from both points of view, the one of the lessor, whose legitimate contractual expectations must not be frustrated, and from the perspective of the lessee, who cannot be punished with an exaggerated or disproportionate legal consequence when his/her behavior is not arbitrary and life events make it impossible or very difficult for him/her to maintain the contractual relationship (Supreme Court judgement of October 30, 2007).

The compensation criteria used by the Courts have been very diverse. Some judgments determine the compensation taking into account the reasonable time needed to find a new lessee; others apply Article 11 of the Urban Leases Act of 1994 - applicable to residential leases - which sets out that the lessee must compensate the lessor with an amount equivalent to one month’s rent for each remaining year until the lease ends; there are also judgements which have determined the compensation in accordance with the full remaining term. But, as we have already mentioned, this last criterion has not been majority since, the Courts have chosen to exercise their moderating power.

The Supreme Court in an attempt to define its doctrine has established new case-law in relation to the unilateral withdrawal from leases for use other than housing, which, far from facilitating the interpretive work of law professionals, has given rise to new interpretive criteria difficult to apply in practice.

What is the current position of the Supreme Court in relation to the unilateral withdrawal from leases for use other than housing?

The recent Supreme Court Judgments of March 18, 2016 and May 16, 2017, have compiled the cases of unilateral withdrawal from leases for use other than housing, establishing three groups:

  • Cases in which the business premises lease has a clause that gives the lessee the right to terminate (rectius: unilaterally withdraw) the contract and obliges him/her to pay the lessor a certain amount of money (penitential fine), (Judgments of December 23, 2009, November 6, 2013, December 10, 2013 and May 29, 2014).
  • Cases in which said clause does not exist and the lessee expresses his/her will to terminate the lease, but the lessor does not accept it and requires the fulfillment of the contract, that is to say, the payment of the rents according to the terms agreed in it (Judgment of June 26, 2002).
  • Cases in which such a clause does not exist, but when the lessee expresses his/her will to terminate the lease the lessor accepts or ends by accepting the termination and claims compensation for the damages caused by the lessee’s decision (Judgment of April 9, 2012) ".

In this classification, the High Court distinguishes two clearly differentiated cases: on the one hand, cases in which the Parties expressly agree on the possibility of abandoning the lease before its conclusion, in which case the Courts have continued to exercise their moderating power in accordance with the previously mentioned terms and, on the other hand, cases in which the Parties have not agreed on any provision of withdrawal or penalty clause.

The Judgment of the First Chamber of the Supreme Court of May 16, 2017 provides that, in leases for use other than housing, if the lessee withdraws from the contract before its termination and there is not a clause that provides for this possibility, the lessor does not accept the withdrawal and requires the full compliance with the contract, then the lessee will be sentenced to pay all remaining months/years of rent.

It follows that if the lessor requires the lessee to comply fully with the contract, the latter will be entitled to use the property during the mandatory period and in practice there will be few lessors who choose this option since if they require compliance before the Courts, they will risk facing an uncertain result from a lawsuit that, if it reaches the Supreme Court, would take four or five years, and they will not be allowed to rent the property again until then.

The High Court bases the change of course in the jurisprudential doctrine on the fact that the moderation in the compensation for damages does not apply when the Parties do not agree a penalty clause and the lessor does not request the termination of the contract but the fulfillment of the same - pursuant to art. 1.124 of the Civil Code - and the consequent payment of rents owed.

In short, it is too early to make an assessment of the application of this new jurisprudential doctrine to practice. However, we can already note that the Supreme Court tends to condemn the lessee to the payment of all the rents owed and leaves to the discretion of the lessor the consequences of the unilateral withdrawal in cases in which a penalty clause has not been agreed.

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Cristina Lopez's picture

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