Disposal of land plot from state property

This year, in the spring, a client approached us with a question about the possibility of a unilateral and arbitrary increase in rent due to a change of the owner of the land plot he is renting. The land plot was previously owned by the local administration, and everything appeared to be in order. The conditions established by the rental agreements were supported by government instructions and regulations, there are no risks, and there is a clear system of payment and rental rate changes. 

However, our client found out several court cases in which an ownership of the land plots that it leases is called into question. In light of this, the issue of the consequences of changing the lessor to a legal entity that is more interested in inflating the rental rate has become critical. 

How is it possible for a tenant to protect his rights? We decided to prepare a detailed opinion based on an analysis of current contractual terms and judicial practice on disputes arising from similar wording in the agreement's clauses regarding] unilateral increase in rent. 

According to the provisions of the agreements, a unilateral increase in rent is not allowed arbitrarily. However, the conditions are formulated as vaguely as possible, and it gives the right to the owner to interpret them freely without any references to administrative regulations, and to change this one time unilaterally. 

We analyzed two clauses from two contracts in the following wording: 

"The Lessor may unilaterally revise the amount of the annual rent in connection with decisions of state authorities of the Russian Federation, the Voronezh region, and executive bodies of local government, that centrally establish assessment zones, indexation coefficients of land tax rates, and base rent rates, with written notice to the tenant." 

"The Lessor may unilaterally change the amount of the annual rent without the Tenant's consent, considering changes in the market value of the annual rent for the plot based on the projected maximum inflation rate provided for in the federal law on the Federal budget in the corresponding fiscal year, but no more than once a year. The amount of rent at the new (changed) rent price is calculated one month before the payment deadline and should be notified in writing to the tenant." 

After analyzing practice, we reached the following conclusion regarding the first clause of the contract. If incorrectly calculated coefficients are used to deliberately increase the amount of rent and these contract provisions are abused, the tenant has a better chance of recovering overpaid rent through litigation because in this category of cases, the courts first consider the legality of applying the coefficients and corrective allowances chosen for a unilateral increase in rent, as well as the application of decisions made by state authorities in the Russian Federation, the Voronezh region, and executive bodies of local government that centrally set base rent rates. 

For example, based on the wording of the contract clause, the rent for 2024 in relation to the land plot is calculated using the following formula: 

AG=KS x AST x K1 x K2 

where: AG – the amount of the annual rent; KS – cadastral value of the land plot; with AST – rental rate set as a percentage of the cadastral value depending on the permitted (functional) use; K1 – correction (increasing) coefficient; K2 – correction (reducing) coefficient, i.e. 

KS (valid for the corresponding period) * 5.57% (adjustment coefficient for land leased for agricultural activities in the rural settlement) * K1, K2 are absent = AG

Furthermore, the specified formula only allows for changes to the cadastral value or additional decisions by local government bodies using other correction coefficients. Any other interpretation of such a clause of the contract by the courts is excluded. 

For the second analyzed point, we reached the following conclusion after analyzing practice. When analyzing a unilateral groundless increase in rent in connection with the establishment of the market value of rent (the list of analogues will include prices established during the exercise of the right to lease land plots at auctions held by public authorities), and considering the maximum level of inflation, judicial practice as a defense method provides for the possibility of challenging the report on the market value of the rental rate. 

For example, the rent for 2024 in relation to a land plot can change only if the market value increases (confirmed by an assessment report according to the requirements of the Federal Law of July 29, 1998 N 135-FZ "On Valuation Activities in the Russian Federation") based on the projected maximum inflation rate, namely 4.5%, provided for by Federal Law No. 540-FZ of November 27, 2023 "On the federal budget for 2024 and for the planning period of 2025 and 2026." 

Furthermore, it is worth noting that regarding the initial indicators used to calculate rent, namely the cadastral value and market value of land plots for the corresponding period, retrospective recalculation of the rental rate cannot be implemented retrospectively within the framework of the presented agreements, allowing the client to avoid such risk. 

According to civil legislation, the transfer of ownership (economic management, operational management, lifelong inheritable ownership) of leased property to another person does not constitute grounds for changing or terminating the lease agreement. It is also impossible to unilaterally change the terms of the lease agreement that govern the amount of rent. 

Thus, within the framework of our client's lease agreements, we summed up the security and possibility of protection from the new owner's claims in the event of dishonest behavior.