Lease

From Max-EuP 2012

by Thomas Rüfner

1. Lease and hire within the system of private law

Under a contract of lease or hire, the owner of a thing (or another person with equivalent powers) may grant the other contracting party the use of that thing for a certain period of time in exchange for a certain amount of money. Like contracts of sale, lease and hire contracts respond to fundamental economic needs and are provided for in most systems of private law.

The terminology used in this area is not always consistent. In the common law tradition, the arrangement under which one party may use a piece of land in exchange for money is called ‘lease’, whereas ‘hire’ is the common term for arrangements concerning movable property. The Study Group on a European Civil Code drafted Principles of European Law for what it called the ‘Lease of Goods’. In the present entry, the terms ‘lease’, ‘lessor’ and ‘lessee’ will thus be used indiscriminately for contracts concerning both movable and immovable property. The terms ‘landlord’ and ‘tenant’ will occasionally be used as far as leases of immovable property are concerned.

a) English law

The distinction between real and personal property has played a fundamental role in the development of English law. The history of contracts for the temporary use of land is very different from the history of contracts for the temporary use of a movable thing.

Originally, leases involved a contractual relationship between landlord and tenant. However, as early as the Middle Ages, English lawyers devised remedies for the protection of tenants entitled to the possession of a piece of land for a term of years against interference by the landlord or any third party. The action of ejectment, which was the tenant’s remedy against eviction by third parties, allowed for the recovery of the land in specie and was not restricted to damages. Thus, the position of the termor (lessee) gradually became similar to that of a freeholder. The lessee came to be regarded as the holder of a right in rem. Despite the fact that even to this day the lessee’s right to possession retains some characteristics of personal property, it was then classified as an estate in land. It is therefore oxymoronically classified as a chattel real.

Due to the fact that the lessee has a right in rem, his position is not affected when the landlord sells the property. The lessee’s right is good also against the buyer. Thus, English law since the Middle Ages has followed the maxim emptio non tollit locatum—sale does not break hire.

While the lease of a piece of land has long been recognized to involve conveyance of a right in rem to the tenant, the hire of movable things is a purely obligatory relationship. Hire is thus but an instance of bailment. Bailment, according to English law, covers all contracts entailing a transfer of control over a movable thing. This includes contracts for work to be performed on a thing placed under the bailee’s control by the bailor, or contracts for the safe keeping of a thing.

b) The civilian tradition

Roman jurists did not have a special term for contracts according to which the temporary use of a thing was transferred to the contracting party in exchange for money. According to the Roman legal tradition (Roman law), lease and hire—whether relating to movable or immovable property—were instances of locatio conductio. This contractual type comprised not only lease and hire, but also contracts for work and services. To the Roman jurists, the common feature of all these contracts was that something was placed by one contracting party (the locator) at the disposal of the other party (the conductor). In the case of contracts of lease and hire, the locator was the lessor who transferred possession of a thing to be used by the conductor (lessee). In the case of a contract for work, the locator provided the conductor with the material to work with. In terms of a contract for services, the locator placed himself at the conductor’s disposal.

The Romans must have been aware that they were dealing with three economically different types of contract. However, they persisted in treating the three forms of locatio conductio jointly. It was thus only the jurists of the ius commune who introduced the terms locatio conductio rei (lease and hire), locatio conductio operis (contract for work) and locatio conductio operarum (service contract).

As the Roman jurists were comfortable with this broad concept of locatio conductio and perceived no need to find a special term for contracts of lease and hire, they were even less inclined to introduce different terms for different forms of lease and hire. A contract was considered to be a locatio conductio irrespective of whether it concerned real or personal property. Another distinction absent from the Roman sources is the one between, on the one hand, contracts allowing the lessee to enjoy the fruits of a piece of land (usufructuary leases) and, on the other hand, contracts according to which the right to the fruits is retained by the owner while the other party is only allowed to use the land or thing in question.

The Roman locatio conductio was a purely obligatory contract. It did not entail the conveyance of a right in rem to the lessee. It was therefore conceptually different from the right of usufruct (ususfructus) and other limited rights of use over a thing, such as for example superficies and emphyteusis. While these rights serve a similar economic purpose, they were kept separate from locatio conductio in the Roman sources.

Due to the fact that the lessee had no right in rem, he had no remedy against a third party purchaser. If the lessor conveyed the property to a third person, and that third person was unwilling to let the lessee continue using the thing, the latter was only able to bring a contractual action against the lessor. However, he had no defence against the vindicatory action of the purchaser. Thus, under Roman law, the rule was ‘sale breaks hire’ (emptio tollit locatum).

Although the Roman jurists did not come up with different names for the different types of locatio conductio, they developed finely tuned rules for the contracts that would come within the definition of lease and hire today: Ulpian stated that every lessor had a general duty to hand over the property to the lessee in good condition and to maintain it in that condition throughout the term of the contract. If the locator failed to comply with this duty, the conductor was entitled to reduce the rent or—if the locator was at fault—to claim damages. For leases of land, the Roman jurists followed the rule that the contract is presumed to have been tacitly renewed if—after the expiry of its term—the lessee remains in possession of the land with the lessor’s acquiescence (relocatio tacita). Another rule developed by the Roman jurists for leases of land was that the lessor had a right of pledge over property that the lessee brought onto the land. Originally, this security interest had to be expressly granted by the lessee. Later, it was thought to have been implicitly granted even where there was no indication of any express grant. Finally, the Roman jurists developed the rule of remissio mercedis (reduction of the rent). Where land was leased for agricultural use and the lessee was allowed to enjoy the fruits, the rent due was reduced by operation of law in the case of crop failures.

Many of the characteristics of the Roman locatio conductio were retained in the ius commune. There was, however, a tendency to draw a clearer distinction between the different types of locatio conductio. The fact that the name locatio conductio rei was coined for contracts of lease and hire is the most obvious evidence of this tendency. As far as leases of immovable property were concerned, security of tenancy became an important issue. Furthermore, the lawyers of the ius commune searched for ways to strengthen the lessee’s position. By the Middle Ages, it had already become accepted that the lessee under a lease exceeding ten years acquired a position similar to that of tenants holding under an emphyteusis or superficies—in effect, a right in rem was accorded to him. Medieval legal scholarship conceptualized this right as a type of inferior ownership—the dominium utile. From the 17th century onwards, under the influence of non-Roman customary law, the view came to prevail that even a lessee under a lease for a shorter term had a right in rem which could be invoked against a third party purchaser. Thus, the older rule of emptio tollit locatum was abandoned. Like in English law, the rule thus became that sale does not break hire.

2. Tendencies of legal development

The development of the law in this area in the 20th century is characterized by efforts to strengthen the lessee’s position further. Apart from the rule ‘sale does not break hire’, which was adopted everywhere, albeit sometimes only for immovable property, various special provisions were made in order to protect lessees. There was also a ubiquitous tendency to draw distinctions between different types of leases of land based on the characteristics and the economic function of the land or building forming the object of the lease.

The laws enacted as a consequence did not follow traditional distinctions. Regardless of the legal tradition on which they are based, virtually all legal systems in Europe have special regimes for residential leases—a type of lease that was not previously subject to particular provisions in either the common law or the continental legal tradition. German, French and English law also have special rules for agricultural leases. Many systems furthermore have a special regime for commercial leases.

Without exception, these special rules are designed to protect the lessee. The protection often entails severe restrictions of the parties’ freedom of contract. This is justified by the difficult situation of a tenant who—after the end of his lease—needs to find a new location for his private or business life. The cost of relocation provides a strong incentive for tenants under residential, agricultural, and commercial leases alike to accept monetary and other demands on the part of the lessor, even if those demands would not otherwise be sustainable on the market.

Conversely, the law regulating leases of movables was less dynamic. Leasing contracts emerged in all European systems as special types of leases involving primarily movable property. Apart from this important development, the tendency to provide special regimes for certain types of objects of lease can equally be detected in the area of movable property. The charter party thus developed independently of the general law of lease and hire and as a special type of commercial contract. The charter party occupies a middle ground between a standard lease and a contract for services. Its place within contractual taxonomy is contentious in many systems. Today, some legal systems also have special rules for leases of aircraft. However, while the special regimes for leases of immovable property invariably tend to strengthen the position of the lessee, the purpose of the special regimes in the area of movable objects of lease is not to benefit one party at the expense of the other, but to provide a balanced solution for the specific issues arising under such contracts.

The range of possible objects is not always restricted to a single, corporeal entity. Many European systems accept leases of a business as such or other aggregates of things and intangible assets. Such leases are—at least in principle—governed by the standard provisions for lease contracts. Frequently, intellectual property rights and similar legal positions are also accepted as objects of lease contracts.

3. The regime of lease and hire in detail

To the extent that modern legal systems are based on the civilian tradition, they share common features deriving from that tradition. Thus the lessor’s duty to maintain the object of the lease in proper condition throughout the term of the lease, the possibility to reduce the rent in the event of defects of the object, the possibility of a tacit renewal of the lease, and the lessor’s right of pledge over the lessee’s property can be found in many legal systems. Except for the lessor’s right of pledge, these rules are usually applicable to leases of movable and immovable property alike. The various special provisions regulating leases of immovable property have already been mentioned. Some of them had already been introduced at the beginning of the 20th century.

In addition, a strong level of protection for residential tenants is part of the common core of European private law. The pertinent norms usually provide for some protection against the termination of the lease and against demands for rent increases.

a) Protection against termination of the lease

As far as the tenant’s protection against the termination of the lease by the landlord is concerned, there are notable differences regarding both the level of protection and the means employed to protect the tenant. In the United Kingdom, an important distinction is made between leases from private landlords and leases from local authorities or Registered Social Landlords. Protection for tenants from private landlords is relatively weak. A private landlord is entitled to terminate a residential lease after a minimum duration of only six months. In Germany, there is usually no fixed term for residential leases. The lease can be terminated by giving notice but only when the termination can be justified by one of the grounds fixed by statute. Such grounds are, for example, the landlord’s need to use the residential property for himself or the violation of contractual terms by the tenant. Other countries have similar rules, but they can often be circumvented by concluding a lease for a fixed term. This is not possible under German law because special grounds similar to those necessary for the valid termination of an open-ended lease are required for the conclusion of a fixed-term lease agreement. French law follows a different paradigm: residential leases are always concluded for a fixed term. The duration of the fixed term is prescribed by law. It is three years if the landlord is a natural person. If it is a corporate entity, the term is six years. After that time, the lease ends unless it is—expressly or tacitly—renewed. A special ground is only required if the landlord wishes to terminate the lease before the end of the fixed term. In Italy, too, there is a compulsory fixed term (of two or four years). If at the end of the term there are no grounds justifying the termination of the lease, it is renewed for a further two or three years. After this second fixed term, the landlord is free to terminate the lease.

b) Rent control

Similar differences exist in the area of rent control. In some countries, rent control laws are only applicable to leases of government financed housing, or they restrict the permissible rent only during a fixed term of years. In some cases, rent control statutes govern only increases of the rent during the lease (eg in England, as far as private landlords are concerned); in other countries, the initial rent agreement between landlord and tenant is also subject to government control (this is the case in Germany, although the provisions regarding subsequent increases are much more rigid than those against excessively high rent agreements which are made at the outset of the contractual relationship). The mechanisms used to calculate the permissible rent also vary greatly. In some countries, no detailed legal guidelines exist and the determination is left to the judge (France) or to a government agency. In other countries, the relevant factors are legally fixed with varying degrees of precision. Frequently, the law requires the rent to be within the boundaries set by a local rent index.

c) Further provisions for the protection of residential tenants

There are also some common features of the law of residential leases which do not concern the areas of security of tenure and rent control. These common features are reflections of a similar social development throughout Europe. In many legal systems, tenants now have the right to share their house or flat with a homo- or heterosexual partner to whom they are not married even without the landlord’s consent. Provisions allowing the unmarried partner of a deceased tenant to step in and continue the lease are also frequently encountered. These rules are designed to ensure that tenants may organize their private lives as they see fit. If the tenant wishes to take in additional inhabitants under a subleasing arrangement, stricter rules apply. The landlord is—at least under certain circumstances—entitled to prohibit the sublease or to withhold his consent.

d) Protection for lessees outside the area of residential leases

Many legal systems contain provisions for agricultural and commercial tenants that afford a level of protection similar to the one granted to residential tenants. In the case of commercial leases, the protection against the termination of the lease and against unjustified demands for rent increases is as important as in the context of residential leases. In addition, in some systems the tenant may claim compensation from the landlord even when the landlord has a legal right to terminate. There are, however, major differences regarding the prerequisites and the contents of such claims.

Similar provisions limiting the landlord’s right to terminate as well as the permissible amount of rent, and allowing a claim for compensation in the case of termination exist in the area of agricultural leases. In many legal systems, the old institution of remissio mercedis (reduction of the rent) in the event of crop failures has survived as an additional means to protect agricultural tenants.

4. Towards a European law of lease and hire

So far, the core areas of the law of lease and hire have hardly been touched by the various projects for a unification of European private law. Existing European regulations and directives have almost no direct impact on the law of lease and hire. The only exception is Art 3(1)(h) of the Anti-discrimination Directive (Dir 2000/43), which prohibits any discrimination based on race and ethnic origin in the context of concluding residential lease agreements. Apart from this special provision, the general provisions on contract law, including eg the norms of Dir 93/13 on unfair terms in consumer contracts, are applicable to lease agreements. The same is true of the European Convention on Human Rights and, in particular, Art 8. European measures to promote housing construction have only an indirect effect on the law of residential leases.

The Principles of European Law on the Lease of Goods—mentioned at the outset of this article—are to be noted as the first set of model rules in the area of lease law. Although these Principles, which have now been integrated into the Common Frame of Reference (CFR) as Book IV.B, do not address issues regarding leases of immovable property, many of the traditional provisions originally developed for leases of immovables have found their way into this text. The rule of relocatio tacita was incorporated into Art 2:103, while the lessor’s duty to maintain the object of the lease in proper condition found its way into Art 3:104. Article 4:104 gives the lessee the right to reduce the rent in the event of defects. Article 7:103 states that the lessor’s agreement is needed to conclude a sublease. The venerable rule ‘sale does not break hire’ is enshrined in Art 7:101.

Literature

Klaus Genius, Der Bestandsschutz in seiner historischen Entwicklung bis zu den Naturrechtskodifikationen (1972); Eltjo Schrage, ‘Zur mittelalterlichen Geschichte des Grundsatzes “Kauf bricht nicht Miete”’ in Eltjo Schrage (ed), Das römische Recht im Mittelalter (1987) 281 ff; Reinhard Zimmermann, The Law of Obligations (1996) 338 ff; Johannes Stabentheiner (ed), Mietrecht in Europa (1996); Marie Pierre Bagnéris, Le loyer du bail commercial (1997); Sebastian Wulff, Kündigungsschutz und Mietzins im Gewerberaummietrecht Europas (2001); Hans Hattehauer, ‘Bricht Miete Kauf?’ in Gedächtnisschrift Jürgen Sonnenschein (2003) 153–79; Paul du Plessis, A History of Remissio Mercedis and Related Legal Institutions (2003); John Baker, The Oxford History of the Laws of England, vol 6, 1483–1558 (2003) 631 ff; Christoph U Schmid (ed), Tenancy Law and Procedure in Europe, preliminary version 2004: <www.iue.it/LAW/ResearchTeaching/ EuropeanPrivateLaw/tenancyLaw.shtml>; Kåre Lilleholt, ‘A European Law of Lease?’ in Antoni Vaquer (ed), European private law beyond the common frame of reference: essays in honour of Reinhard Zimmermann (2008) 55–64.

Retrieved from Lease – Max-EuP 2012 on 02 October 2022.

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