Taking counsel - Transactional booby-trap: claim rights against tenants on property transfers

  • 2007-12-19
  • By Martins Mezinskis [Kronbergs & Cukste]
Whatever the state of the market, many different factors go into pricing real estate. When buying a multi-level apartment building, other than the obvious factor of location, the price may be influenced by, for example, whether the building has tenants, the terms of lease agreements, and how many of the units are vacant. Unless the units are leased out at rates attractive to the landlord, it is usually the case that the more units are free of tenants the better.
In some cases, the seller of such a building may have commenced legal proceedings for evicting tenants based on non-payment of rent. Sometimes sellers who are involved in such eviction litigation might assert to the prospective buyer that the tenants who are undergoing eviction proceedings are "practically out," or that it is a "simple matter" to just take over the eviction case from the existing landlord and once title has passed to the buyer, to simply bring the case or cases to their conclusion.

Under this scenario, the existing landlord is basically inviting the prospective purchaser to assume the position of plaintiff 's i.e., replacing the existing landlord. What could be simpler than that? The landlord offers the buyer to enter into an assignment agreement, under which the landlord transfers its rights as plaintiff to the buyer.
At first blush, the situation seems to be in order. Assignment agreements are certainly not a novelty in Latvia, and why should these sorts of cases pose any complexities? The aim of the assignment is to change the plaintiff from that of the current owner to a subsequent owner, which seems reasonable enough.

But hold on 's it's not so simple. The Law on Civil Procedure stipulates that a change in the party is possible only in those cases when the claim may be assigned 's i.e., transferred 's to a third party. So we have to delve further into where such transfer is permitted under the law, with reference to two basic principles:

1) According to the Civil Law, claims may be assigned which are not connected with the person bringing the claim. Therefore, if the court considers the case to be closely linked to the person who wishes to assign the rights to the case, the court may decide not to recognize the assignment.
2) The Civil Law states that the rights under an assignment agreement and not the agreement itself may be transferred.

This means that claims resulting from the content of the agreement may possibly be assignable but not the agreements giving rise to the claims. The courts are not willing to rule that the assignee becomes a party to the original agreement. In other words, the assignee cannot step into the shoes of the assignor in terms of claiming a termination of the contract, as such rights are rights in personam. Only the lessor can bring a claim for termination of the lease. In plain English, the claim to terminate the lease cannot be transferred to the new owner.

The lack of transferability of the claim itself should be brought to the attention of any prospective purchaser, as it is not something that they will necessarily be aware of. As soon as the prospective purchaser takes title, the claim, whether "assigned" to the purchaser or not, potentially loses its force and effect. The result is that at the next court hearing after the new owner takes title to the property, the presiding judge may well reject the claim.
Of course this does not mean that the new owner is necessarily stuck forever with a bad tenant. It is possible for the new owner to start afresh with a claim for eviction if he or she has sufficient independent grounds. This means that the new owner, to try to effectuate the termination, will have to start all over again with written notice of breach, bringing of a new claim and incurring the various costs and potential time delays associated with the proceedings. This is true regardless of the nature of the breach, whether it is non-payment of rent, damage to the premises caused by the tenant, etc.

All the more reason to have proper representations and warranties in sale purchase agreements drafted by legal professionals well versed in the nuances of Latvian real estate transactions.

Martin Mezinskis is an 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.