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24 July 2009
Section 12a of the Tenancy Act provides that if the shares in a company that rents property are sold, the landlord has the right to increase the rent to market level. The managing directors of such company must inform the landlord of the change in ownership.
In a recent judgment the Supreme Court held that failure to notify the landlord can result in managing directors being held personally liable by future landlords. This judgment has significant importance for any officers involved in M&A deals concerning property.
The case concerned a company that rented premises for business purposes. In 1997 the defendant acquired all the shares in the company and was also appointed sole managing director. The change in ownership was never notified to the landlord.
In 2004 the plaintiff bought the property from the landlord and entered into the lease agreement on its behalf. The new owner researched the corporate history of the lessee and discovered the change in ownership. It raised the rent to market levels and requested the difference between the actual rent paid and the market rent for the time between 1997 and 2004 in damages. As the company subsequently fell into bankruptcy, the plaintiff claimed the damages from the managing director personally.
The Supreme Court found partly in favour of the plaintiff and confirmed that Section 12a of the Tenancy Act protects not only the current, but also future landlords. The managing director of a renting company has an ongoing duty to disclose structural changes and can be held personally liable for breaching this duty if the lessee itself is unable to pay the outstanding debts. However, the Supreme Court did not award damages for the period before the plaintiff acquired the property.
The case was remitted to the court of first instance. The judgment is not final.
This judgment is important because it stipulates that a manager's obligation to notify the landlord does not end as long as the lease agreement has not ended. The only time limit to these claims is the absolute time bar of 30 years.
The judgment provides the plaintiff with a double windfall profit. Firstly, as the previous owner was unaware of its right to increase the rent, the purchase price was based on the actual (lower) rent, enabling the plaintiff to acquire the property relatively cheaply. Secondly, at the same time, the plaintiff could increase the rent and even request damages for the time between acquiring the property and the date on which the rent increase took effect.
This case clearly illustrates that M&A deals involving property require not only careful contract drafting, but also careful implementation. A relatively small error - failure to notify the landlord - can result in heavy payment obligations in the future.
For further information on this topic please contact Nikolaus Pitkowitz or Martin Foerster at Graf & Pitkowitz Rechtsanwälte GmbH by telephone (+43 1 401 17 0), fax (+43 1 401 17 40) or email (email@example.com or firstname.lastname@example.org). The Graf & Pitkowitz Rechtsanwälte GmbH website can be accessed at www.gmp.at.
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