Issue link: https://maltatoday.uberflip.com/i/975483
maltatoday SUNDAY 29 APRIL 2018 Opinion 22 Termination of pre-1995 commercial sub-leases O wners or tenants of commercial tenements leased before 1st June 1995 (a 'protected ' lease) should already know that legal amendments introduced in 2009 provide that these leases will terminate on 31 May 2028. We are now already at the half way mark for this date. However, another deadline imposed in the same law is already upon us. Article 1613 of the Civil Code states that if the tenant of a pre-June 1995 commercial lease had sub-leased to a third party, this will terminate on 31 May 2018. The law clarifies that a sub- lease also exists in the case of management agreements and, when the tenant is a company, if controlling power in the company or its business are transferred, or if 50% of its shares are transferred. The law is not apparently clear whether it is only the sub-lease that will terminate or whether it is also the original lease. However, parliamentary debates leading to the 2009 law indicate an intention that such leases will terminate absolutely in 2018 and the properties would revert in favour of the owners. The only limitation to the 2018 termination is where the sub-lease is "done by agreement with the lessor". It is not specified what form this agreement should take, but it would probably require a specific agreement or act of recognition entered into between the owner and the sub-lessee. The salient points of the law extending the protection of sub-lessees are: 1. Sub-lessees of leases which are terminating on 31 May 2018, may request permission from the Rent Regulation Board to continue in the lease if they manage to show that they would suffer "serious prejudice" should they not continue to operate the business. 2. The request must be made before the end of May 2018, and may be opposed by the owner and lessee. 3. Even if the request is acceded to, the Rent Board may only extend the sub-lease for a period of not longer than 10 years or the period of the lease, whichever is shorter. 4. The Rent Board must set a rent equivalent to open market rates, except where such rates would result in "harsh consequences" for the sub-lessee. These new amendments could thus allow sub-lessees to continue occupying the leased property after May 2018. However, from the owner's point of view, the amendments are another setback and may be considered an unconstitutional interference with their property rights and their legitimate expectation that they would take back possession of their property at the end of May 2018. After all, the law is effectively imposing an extension on leases which, according to the law as in force up till very recently, would have terminated at the end of May 2018. On the topic of pre-June 1995 commercial leases, it may once more be time to consider whether these protected leases are illegal and therefore whether even those leases which are terminating at the end of May 2028 in terms of Act X of 2009, can be contested and terminated due to a breach of human rights or, it is being suggested, for being anti-competitive. Legality of protected pre-95 commercial leases Pre-June 1995 commercial leases are protected by law, which allows the automatic (and indefinite) extension of the lease by the tenant with limited possibility for rent increases, with limited grounds for termination and whereby the lease can also be inherited. Amendments to the law in 1995 ensured that leases entered into after 1st June 1995 no longer afforded such generous protection to tenants. However, leases entered into before June 1995, were still subject to legal protection. There was pressure to phase out these 'protected' leases which were undoubtedly placing an undue burden on owners and infringing on their fundamental right to enjoy their property. In order to address this, Act X of 2009 effectively introduced two remedial provisions: 1. It set a definitive period of 20 years (till 1st June 2028) for the termination of these leases, and 2. It provided for (moderate) increases in the rent until the termination of the lease in 2028. The law could still be causing a breach of human rights and give rise to claims for compensation by owners if the rent is disproportionately low, as occurred in the case Zammit and Attard Cassar v. Malta decided by the European Court of Human Rights in 2015. However, since the amendments slightly eased the financial burden on the owners and removed the position of uncertainty regarding termination of the lease, there would seem to be limited opportunity for owners to bring a constitutional action trying to resume possession of their property. Therefore, except in order to claim compensation in cases where the rent is disproportionately low, the human rights route seems to be quite limited for owners. However, the government's justification in the Zammit and Attard Cassar case for the protection of commercial leases, namely the protection of the economy, raises red f lags in terms of European Union law and competition law. The cornerstone of the EU is the creation of the single market which has its basis in the freedom of movement of goods, capital, services and people. The EU safeguards these freedoms by ensuring that states do not take measures which restrict or interfere with the market unless duly justified. It is apparently clear that the protection of commercial leases restricts and distorts trade since it favours certain businesses over others in a discriminatory manner. Although the protections could in theory benefit both Maltese and non- Maltese tenants, since the protections were removed in 1995, in practice the protections predominantly protect businesses of Maltese nationals. Furthermore, any EU citizen who ever attempted to exercise his right to establish and relocate business to Malta could never enter in such a beneficial lease (since we joined the EU in 2004) and would clearly not be on a level playing field with a business benefiting from a protected lease. Laws restricting trade could be justifiable under EU law in specific circumstances. However, the justification for these protections, as stated by the Government itself, is (amongst others) protecting the stability and economic viability of business. This is no justification under EU law, and in fact is the sort of economic restriction which the EU seeks to eliminate in favour of free competition. Persons seeking to exercise their right to establishment in Malta and who are faced with competition from businesses enjoying protected leases could therefore have grounds to seek a legal remedy, which may very well benefit the owners of properties subject to protected leases. Furthermore, should the EU take an interest in these protected commercial leases, it could open a can of worms for the Government and lead to severe consequences. The EU is empowered to impose hefty lump sum fines and daily fines on States which violate the Treaty until they take the necessary measures to comply. Should this come to pass, it would put immense pressure on the Government to take remedial action with regard to these protected commercial leases before the 2028 deadline. Douglas Aquilina is a lawyer at Saga Juris If the tenant of a pre-June 1995 commercial lease had sub-leased to a third party, this will terminate on 31 May 2018 Douglas Aquilina