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18 February 2011
In a recent decision the Supreme Court applied the rules of unlawful return of equity to a rental agreement. The decision will have a significant impact on M&A transactions involving property.
The case at hand concerned a lease agreement between a company and its majority shareholder. The parties agreed on rent payments of approximately three times the market value. The landlord then sold its share in the company to a trust, which subsequently sold the shares to a third party.
The company realised that it was overpaying on its rent payments and ceased to pay the full amount, arguing that the excessive rent payments constituted an unlawful return of equity. The landlord and former shareholder filed an action for unpaid rent, arguing that it was no longer shareholder of the company and therefore unlawful return of equity principles did not apply. Under Austrian tenancy laws, commercial tenants must give notice of excessive rent when first taking on the property. Thereafter, the right to challenge the rent lapses.
The court decided in favour of the company. When applying the principles of unlawful return of equity, the shareholders at the time the agreement was concluded are relevant. If, at that time, the agreement conclusion constitutes an unlawful return of equity, then the agreement is null and void insofar as this principle is breached, irrespective of any later change in shareholders.
This decision highlights that unlawful return of equity principles need to be considered in M&A transactions concerning leased property. When buying property, in particular with respect to older lease agreements, it is of paramount importance to establish the shareholders of the tenant company at the time when the lease agreement is concluded. If the landlord holds shares in the tenant company at the time, then it must be established whether the rent at the time is above market value. This can be a tricky undertaking with regard to older lease agreements in particular. If the rent is excessive, the tenant may be entitled to challenge the rent payments and what seemed like a promising investment may appear in a different light.
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 (firstname.lastname@example.org or email@example.com). The Graf & Pitkowitz Rechtsanwälte GmbH website can be accessed at www.gpp.at.
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