What should guide the permitted use of leased land

We look at the ruling of the Commercial Court of the Moscow District of 1 August 2023 in case No. A40-186253/2022.

The facts:

A company leased a land plot from the city. The lease stated that the purpose of the use was the operation of a shop. After 10 years, a scheduled inspection found that the building on the plot in dispute was being used to accommodate a cafe.

The city went to court to recover a penalty of RUB 1.7 million from the party in breach, taking the view that the use found on the plot it had leased out clearly contradicted the terms of the lease.

The courts of first and second instance supported the city. They held that the defendant was not entitled to use the plot in breach of a purpose expressly provided for in the lease.

The court of cassation, however, sent the case back for a fresh hearing, because the courts below had failed to take the following into account:

(1) The legal regime of a land plot is determined first of all by the regulations of the local authority, and not by the lease that was concluded. It is a failure to comply with those regulations that constitutes a breach and that attracts liability.

(2) It follows that a tenant's choice of the permitted use of the plot, whether the principal use or an auxiliary use, within the town-planning regulations in force for the territorial zone, is lawful even where it cuts across the purpose in the lease, and it does not indicate a breach of the legal regime of use.

(3) The district court also recalled that legislation has now settled a question which used to be open, namely whether the user of a leased plot must enter in the Unified State Register of Real Estate (EGRN) the auxiliary permitted use he has chosen. From 10 January 2022, he need not.

In the light of the explanations given by the court of cassation, the case was sent back for a fresh hearing.

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