Lease agreements in the private rented sector | In Principle

More and more residential tenants recognise the advantages of institutional leasing over renting from private individuals, due to the security and stability of the lease relationship, the attractive standard of the units offered, and the package of property management services. The question is what type of agreement to conclude in such a lease relationship.

In the private rented sector (PRS), institutional leasing is an activity conducted by professional businesses in which they lease standardised residential premises in buildings designed to be let, usually containing common areas such as gyms, terraces, etc.

On the Polish market, professional lessors have so far held a relatively small fraction of the total stock of apartments for rent. However, the PRS has been growing rapidly in recent years, at the same time opening up the field for discussion of legal solutions that can be applied in this type of lease relationship.

In this article, we outline three types of agreements that may be applied in lease relationships in the PRS and the consequences of their use, for both tenant and landlord.

Institutional lease agreement

The recommended legal form of lease agreement for PRS residential developments is the institutional lease agreement, relatively recently introduced into the Polish legal system. It is regulated in Art. 19f–19j of the Tenants’ Rights’ Act (Act on Protection of Tenant’s Rights and Communal Housing Stock and Amending the Civil Code of 21 June 2001).

An institutional lease agreement is a residential lease agreement entered into by a natural person, a legal person, or an organisational unit without legal personality, conducting the business of letting residential units.

As an institutional lease agreement constitutes a subtype of lease agreement within the meaning of Art. 659 §1 of the Civil Code, it is governed by the lease provisions of the Civil Code and the Tenant’s Rights Act. However, the Tenants’ Rights Act does not apply to institutional rental with respect to:

• Rent increases
• Contract termination
• Right to social housing and temporary accommodation.

To be valid, amendments to an institutional lease agreement must be made in writing.

For an institutional lease to be effectively concluded, the tenant must make a declaration in the form of a notarial deed in which the tenant:

• Submits to enforcement of the obligation to vacate and surrender the premises
• Acknowledges that in the event of the need to enforce this obligation, the tenant is not entitled to a lease of social housing or temporary premises (an exclusion of Civil Code Art. 1046 §4), which we write about in more detail in the article “Deed submitting to enforcement in an institutional lease agreement.”

This mechanism greatly facilitates the potential eviction of a tenant who refuses to leave the unit at the end of the lease relationship.

Regulation of the institutional lease is based on the regulation of the occasional lease. However, while in the case of an occasional lease, the landlord can only be a natural person who is not engaged in the business of leasing premises, in the case of an institutional lease the landlord can be any entity engaged in this type of activity. Therefore, the occasional lease agreement is not applicable at all in the private rented sector.

When entering into an institutional lease agreement, tenants do not have to indicate substitute premises where they will be able to live if the premises occupied under the institutional lease agreement have to be vacated, nor do they have to submit a statement from the owner of the substitute premises that they will be able to live there. This provision not only streamlines conclusion of the agreement, but is also advantageous from the perspective of a potential tenant, since the inability to designate replacement premises does not preclude the establishment of a lease relationship.

The landlord may require a security deposit from the tenant to secure the amount due under the institutional lease, as well as any potential costs of enforcement of the obligation to vacate the premises. However, to protect tenants from a landlord’s demand for an exorbitant security deposit, the parliament set a maximum of six times the monthly rent. The security deposit is refundable within one month after vacating the premises, after deducting any amounts due to the landlord.

The institutional lease is concluded for a fixed term, but the upper limit is not specified as it is in the case of an occasional lease. The law provides for exclusion of Civil Code Art. 661 §1, according to which a lease agreement concluded for a term longer than 10 years shall, upon expiration of that term, be deemed to have been concluded for an indefinite period. Thus, an institutional lease can be concluded for any term, including with a rent-to-own option for the tenant to become the owner of the premises. And the landlord does not have to notify the tax office of conclusion of an institutional lease agreement.

Lease under general terms

An alternative to the institutional lease may be a classic lease agreement, entirely covered by the Tenants’ Rights Act. However, such an agreement does not sufficiently protect the interests of the lessor, due to a number of provisions of the Tenants’ Rights Act geared toward broad protection of tenants’ rights, including provisions governing setting of the rent and a formalised procedure for rent increases, subject to statutory restrictions, among other things a minimum three-month notice period and a ban on raising the rent more frequently than every six months. The Tenants’ Rights Act also strictly defines the conditions for termination of the lease, as well as the termination notice periods, depending on the reason. Lease terms providing for termination of the lease by the landlord on non-statutory grounds would be ineffective (but are allowed in an institutional lease). But the most momentous provisions are those mandating that in certain situations, the landlord can be required to obtain social housing for a tenant who refuses to voluntarily vacate the premises after termination of the lease relationship. Therefore, evicting a tenant can take up to several years if the municipality cannot provide social housing.

In commercial practice, we also encounter leases entered into by tenants who operate a business and lease residential premises to provide housing for their employees. Doubts have arisen as to whether entering into this type of agreement is subject to the risk of applying the protections of the Tenants’ Rights Act if the tenant refuses to vacate the premises after termination of the lease. This is not expressly regulated in the law, but the risk that such a tenant will also be protected against eviction cannot be ruled out, and it is worth introducing safeguards for such circumstances in the agreement.

Contract for lodging services

It is also worth pointing out the possibility of using a contract for lodging services in the private rented sector. This type of agreement is most often used for short-term leases, usually for a number of days or weeks. In this type of agreement, premises are not delivered for residential purposes, and therefore there is no obligation to apply the provisions on protection of tenants’ rights. Typically, the entity providing the lodging is required to provide additional services such as cleaning, catering, reception or other services typical for the hospitality industry. But because lodging contracts are by definition applicable to short-term stays, they will usually not be appropriate in PRS practice.

Summary

The institutional lease agreement is the best choice in the private rented sector. The regulations governing these agreements adequately protect the landlord without imposing excessive demands on the tenant. This was the aim of the parliament in introducing this type of lease agreement, seeking to standardise and, above all, simplify the rules for leasing residential premises by professional landlords.

As for a traditional residential lease agreement, covered entirely by the Tenants’ Rights Act, it has a too-rigid framework geared toward protecting the tenant and does not adequately protect the landlord’s interests.

Also, contracts for lodging services are unlikely to be commonly used in PRS practice, as they are designed for short-term rentals of days or weeks, not months or years, as is usually the case when letting premises for residential rather than recreational purposes.

Sylwia Moreu-Żak, attorney-at-law, Aleksandra Szczepińska, Real Estate practice, Wardyński & Partners