Depending upon what they have in mind, purchasers of older residential apartment buildings, particularly where such buildings are in poor condition, may wish to proceed with demolition in order to build something entirely new, or conduct major construction work for restoration purposes. However, the presence of pre-existing tenants tends to complicate such plans.
What should you keep in mind when buying a building full of tenants if you would like to demolish the building or engage in major renovation (often referred to as "capital renovation" in Latvian)?
In order to demolish a building or engage in major renovation, the owner generally has to or would like to terminate lease agreements concerning the property. Of course if the intention is to sell the property, unless the existing tenancies are lucrative, it is also likely to be beneficial to sell the building free of protected tenants.
Tenants' rights are governed by the law "On Residential Tenancies," which contains six scenarios under which an owner may legally terminate a tenancy. For our purposes two of those legal grounds of termination are of particular interest: (1) where the owner has decided to demolish the building, and (2) where the owner wishes to engage in major renovation.
There is a popular misconception that an owner, based on the need to conduct major renovations, is entitled to terminate a lease agreement and remove tenants from residential premises without allocating alternate residential premises for same. Such rights are essentially conferred only upon those regaining title to the property as a result of denationalization.
After any subsequent transfer, such rights cease to exist and a new owner terminating the lease is obliged to provide alternate residential space of a similar quality for the tenant. Such obligation also arises if the premises are sold during a period in which there is a trial in progress over lease rights. In the case of demolition, the landlord must also provide alternate accommodation.
Under the law, space of a similar quality is space that is fitted out just as well as the original space, having at least as many square meters, and located in the same town or district respectively.
Although the law contains minimum standards for what are similar quality premises, there is always the possibility of a dispute over the issue, and a court has wide discretion in its finding as to whether the alternate premises are of a similar quality or not.
If the dispute ends up in court, then the lessor is required to identify the specific premises that it considers to be of a similar quality for occupancy by the tenant. In effect, the landlord must ensure that such premises are available by reserving or purchasing or otherwise securing eventual access for use of the purported similar quality premises by the tenant. This may prove to be costly if the process of reserving the similar quality premises stretches out for months and perhaps years. There is, of course, the risk that the premises put forth by the landlord as being of similar quality will ultimately be found by the court to be inadequate, in which case the landlord's costs of reserving or acquiring and disposing of the inadequate premises may be substantially sunk costs.
Potential acquirers of a tenanted building intending to evict tenants are well advised to bear in mind that the process of eviction is by no means a walk in the park. Obtaining proper legal advice before embarking on the eviction path may help to maximize the chance for success.
Martins Mezinskis is associate at Kronbergs & Cukste, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms which includes Teder, Glikman & Partnerid in Estonia and Jurevicius, Balciunas & Bartkus in Lithuania, dedicated to providing a quality 'one-stop shop' approach to clients' needs in the Baltics.
