Lessee’s rights in the event of defects in leased property

One of the basic elements of the legal protection afforded to lessees is the lessor’s liability under the warranty for physical and legal defects in a leased asset.

The regulations draw a distinction in the lessor’s liability depending on the type of defects in the leased asset. Under Art. 664 §1 of the Polish Civil Code, if the defects only limit the usefulness of the asset for the agreed purpose, the lessee may demand from the lessor an appropriate reduction in the rent for the duration of the defects.

If the defects are more serious and prevent the use of the leased assets for the agreed purpose, the lessee is entitled to terminate the lease without observing any termination notice period, but is first required to notify the lessor of the defects. If the lessor does not cure the defects, or they are incurable, then the lessee may terminate the agreement effective immediately (Civil Code Art. 664 §2).

However, the lessee is not entitled to a reduction in rent or immediate termination of the lease, as the case may be, if the lessee knew of the defects as of conclusion of the lease agreement (Supreme Court of Poland judgment of 10 August 2006, Case No. V CSK 155/06). There is an exception if the defects pose a threat to the health of the lessee or persons employed by the lessee. The lessee then has a right to immediate termination of the lease even if the lessee knew of the defects upon conclusion of the lease.

Neither Civil Code Art. 664 nor any other regulation gives the lessee the right to refuse to pay rent altogether, but only gives the lessee the right to demand a reduction in rent or to terminate the lease without observing any period of advance notice (Supreme Court of Poland judgment of 12 October 2011, Case No. II CSK 29/11).

The lessor’s liability under the warranty against defects in a leased asset does not depend on the fault of the lessor, but is objective in nature. However, the degree of limitation on the agreed use of the property, as the grounds for the lessee’s claim, should be determined on the basis of the content of the specific lease relationship. The Supreme Court of Poland held, for example, in its judgment of 14 December 1965 (Case No. II CR 470/65), that a reduction in the amount payable for central heating is justified if it is found that the extent to which the premises are heated is inadequate and demonstrates a reduced usefulness of the central heating but does not make it completely useless for the lessee’s needs. But if the heating is so weak that it may be regarded as useless, the lessee has a right to complete relief from the duty to pay fees for central heating. And in the resolution of 19 April 1988 (Case No. III CZP 25/88), the Supreme Court held that if water does not reach the water and sewer equipment in the premises of certain members of a cooperative, such members may set off the amount of the fees corresponding to their share in the overall water supply costs.

It has also been held that an example of a defect limiting the usefulness of the leased asset for its agreed purpose, and thus justifying a claim for a rent reduction, is delivery of leased premises with an area smaller than specified in the lease (Wrocław Court of Appeal judgment of 8 February 2012, Case No. I ACa 8/12). The situation is similar if the lessee receives a certificate inaccurately stating the amount of energy needed to satisfy various requirements related to use of a building or premises. This is tantamount to the leased asset lacking the properties which the lessee was assured it had, which in turn constitutes a physical defect in the leased asset.

Apart from the lessee’s rights under Civil Code Art. 664, the lessee may also demand necessary repairs in the leased property. Resort to the general provisions on contractual liability (Civil Code Art. 471) may also be available. However, there is some controversy surrounding the applicability of Civil Code Art. 491 and 493, concerning renunciation of a bilateral contract. In its judgment of 12 August 2004 (Case No. I ACa 299/04), the Katowice Court of Appeal held that Civil Code Art. 664 §2 excludes application of these provisions because a lease agreement is a long-term or continuous obligation, and from the nature of such a relationship it may be terminated effective only going forward, not retroactively (in Latin, ex nunc, not ex tunc) as would be the case with renunciation of a contract. Under this view, a lease agreement may be renounced under general rules only prior to performance of the agreement, i.e. before delivery of the leased asset. But there is also a differing view presented in the literature, under which in the event of defects limiting the agreed use of the property, the lessee has a right to terminate the lease under Civil Code Art. 491, and if there are grounds to terminate the lease under Civil Code Art. 664 §2 the lessee may elect between termination under that provision and renunciation under Art. 491 or 493.

The lessor’s liability in warranty also applies to legal defects in the property. Under Civil Code Art. 665, if a third party asserts claims to the property against the lessee, the lessee should promptly notify the lessor. Notification of the lessee is relevant for the lessee’s ability to pursue its rights under Civil Code Art. 664. Regulations concerning formal service of legal papers do not apply to such notice, and thus it may be made in any form.

Termination of a lease under Civil Code Art. 664 §2 is a unilateral legal act by the lessee directed to the lessor. The lease relationship ceases to exist when the lessee’s notice of termination reaches the lessor in a manner enabling the lessor to learn of its contents. The notice of termination must be made in writing if such form is required or if the lease agreement was made in writing (Supreme Court of Poland judgment of 29 December 1983, Case No. I CR 387/83).

Przemysław Szymczyk, Real Estate & Construction Practice, Wardyński & Partners