The Malta Independent 3 December 2021, Friday

Law Report: Material obligations in rental agreements – Landlord, tenant and subtenant relationships

Wednesday, 20 October 2021, 13:19 Last update: about 2 months ago

Neil Bezzina is an Associate at Ganado Advocates.

In its judgement on the 27 September 2021, delivered in the names of Bonnici & Zahra Limited (the "Plaintiff") vs Caros Holdings Limited (the "Defendant"), the Rent Regulation Board (the 'Board'), presided over by Dr Josette Demicoli analysed Article 1570 of the Civil Code and the rescission of rental contracts when resolutive conditions are not present.

The plaintiff filed a claim on the 14 February 2018 stating that through a lease agreement (the "Agreement") the Plaintiff had leased out to the defendant a commercial premises in Qormi (the "Property") for a period of 20 years commencing on the 28 June 2000. The plaintiff further claimed that a specific clause in the Agreement, obliged the Defendant to take out an insurance policy with a reputable insurance company to cover any risks related to the lease of the Property for the duration of the lease and that the Plaintiff's interests are specifically mentioned and covered through this policy.

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The plaintiff held that with regards to this policy: i) it was never approached by the defendant in order to provide its consent with regards to the chosen insurance company; and ii) the defendant never provided a copy of the policy to the plaintiff, notwithstanding that the plaintiff sent two letters requesting receipt of a copy of the policy (dated August 2008 and February 2019).

Based on the above facts, and in light of Article 1570 of the Civil Code which reads as follows:

"A contract of letting and hiring may also be dissolved, even in the absence of a resolutive condition, where either of the parties fails to perform his obligation; and in any such case the party aggrieved by the non-performance may elect either to compel the other party to perform the obligation if this is possible, or to demand the dissolution of the contract together with damages for non-performance:"

the plaintiff requested the rescission of the agreement and that the defendant vacates the property given that the defendant did not perform its obligation of obtaining the necessary policy as required in the agreement.

In its reply, the defendant held that: i) as will be proven, the property was covered by a policy and the plaintiff's interests were adequately protected and thus there were no grounds for the recession of the agreement; ii) without any prejudice to the case in hand, in order for party to fail to perform an obligation which leads to the recission of an agreement, such obligation must be a material obligation; and iii) notwithstanding that the plaintiff's claim that the defendant failed to honour its obligations under the agreement, the plaintiff still accepted all rent payments, notwithstanding that it had serious reservations as to whether a policy was taken with regards to the Property and such rent was accepted up until 31 January 2018.

In analysing the merits of the case. the board noted that in the agreement, the defendant had the right to sub-lease the property without the consent of the plaintiff subject to the subtenant being a person of good repute. The board further noted that the defendant initially used the premises to provide car mechanical services, following which, it sublet the property to Maltapost p.l.c and once the latter vacated the property, this was sublet to We Media Limited to be used as studios and the latter still occupied the property when this case was initiated.

In further submissions presented by the plaintiff, in invoking Article 1570 of the Civil Code, it was held that once it was proven that:

It was never the defendant who purchased the policy with regards to the premises;

When the subtenant purchased the policy with regards to the premises, the defendant failed to provide a copy to the plaintiff; and

The plaintiff did not approve the policy and has serious reservations as to whether its interests were fully protected.

On the other hand, the defendant held that the property was protected by a policy (taken out by the subtenant) with one of the leading local insurance companies, in relation to all risks covered in similar situations and covering all the risks relating to the property, the plaintiff, the defendant, the subtenant and the property. The defendant does concede to the fact that it never passed on a copy of the policy (and proof of its extension) to the plaintiff, however, this never prejudiced the plaintiff's rights in any way.  In fact, the plaintiff allowed a gap of 10 years between requests for the insurance policy accepting the rent payments throughout this entire period

The board analysed how the plaintiff sent a letter stating 'Please note that up till today we have no copy of the said Insurance Policy. This is a breach of Contract. Please provide urgently' in 2008, and the subsequent letter, sent in 2018, asking for 'a copy of the insurance policy of the Premises for the purposes of filing it in our records'. Twelve days after the second letter, the plaintiff brought forward this case in front of the Rent Regulation Board. The board further noted that the plaintiff always accepted the rent payments and never accepted the rent payment subject to some reservations or comments. It was only once the case was started that the rent was not accepted and sent back to the Defendant.

On examination, Emanuel Zahra on behalf of the plaintiff held that the defendant did not secure a policy for the property, since such policy was bought by the subtenant and furthermore that the Plaintiff was not adequately covered by the policy. He further claimed that he used to verbally ask for the policy once a year when receiving the rent and that he was not happy with the choice of insurance company. In conclusion, he held that he first saw a copy of the policy once this action was brought about.

The defendant, through its witnesses, a director of We Media Limited and a director on behalf of the insurance company, presented a copy of the policy to the Board, which was an "Accidental Damage (Property) Insurance" and that the insured parties were the subtenant, the Defendant and the Plaintiff, 'each for their respective rights and interests'  in relation to 'the Buildings (including Landlord's fixtures and fittings, professional fees for reinstatement and debris removal) being the property of the Insured and/or held in the care, custody or control of the Insured situated at the premises address above' and 'The insurer will pay to the insured the value of the property at the time of the happening of its accidental physical loss or destruction or the amount of such accidental physical damage (accidental physical loss destruction or damage being hereinafter termed Damage) or at its option reinstate or replace such property or any part thereof' up to a maximum of €700,000.

On analysing the above, the board concluded that, the property and the plaintiff was adequately covered by the policy and by a reputable insurance company in line with the agreement entered into between the plaintiff and the defendant. Furthermore, the plaintiff could not prove that there were periods when the property was not covered by an adequate policy.

The court, in its interpretation of Article 1570 of the Civil Code, concluded that it was not the intention of the legislator to provide powers to the Board to be able to rescind a contract where it is proven that one of the parties failed to perform his obligation, when such an obligation is not subject to a resolutive condition. When the parties agree to a resolutive condition, the creditor is to inform the debtor with a judicial letter with regards to his intention to enforce the resolutive condition and the Board is expressly precluded from providing further time for such an obligation to be performed, since the contract is rescinded ipso jure. Thus, the interpretation which follows is that where there isn't a resolutive condition, the board is vested (and hence the wording of Article 1570 of the Civil Code reads "a contract of letting and hiring may also be dissolved" and not "has to be") with the power to rescind the contract when the creditor seeks to dissolve a contract, and such a rescission does not occur on an ipso jure basis.

The board, based on the above facts and that the plaintiff kept accepting rental payments without any reservations, led to the plaintiffs tacit acceptance that the property was adequately covered by the policy, irrespective of the number of requests for the provision of the policy. Furthermore, the Plaintiff waited for 18 years to initiate any legal proceeding and kept accepting rental payments all throughout. Furthermore, the board held that there was no specific requirement for the policy to be paid for directly by the defendant or that such policy is taken out on the defendants name as being claimed by the plaintiff.

In view of the above, the board decided this case by rejecting all the pleas raised by the plaintiff.

 

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