Termination of a lease agreement

Legal grounds for a lease termination

A lease agreement is always concluded for a fixed term – it is not possible to conclude an open-ended lease agreement. Contracts concluded for a fixed term, as a general rule, cannot be terminated early by giving notice (unless specific provisions provide for this possibility or such a possibility is expressly provided for in the contract itself).

The above principle is directly applicable to a leasing contract – the possibilities of early termination of this contract are significantly limited. This will only be possible if a specific provision allows the lease to be terminated, or if the parties have included the power to terminate in the lease itself.

Termination of the lease agreement under the Civil Code

Under the provisions of the Civil Code, the lessee may terminate the lease agreement only if the leased object has defects that prevent its use in accordance with the agreement and the lessor is responsible for these defects. In such a case, the lessee may terminate the contract without observance of the notice period (i.e. with immediate effect), but only if the defects are significant and the lessor has not removed them within a reasonable time after notification.

The lessor has a much broader power to terminate the lease under the Code. The lessor may terminate the leasing contract in the event of, among other things:

• the default of the lessee in the payment of at least one payment instalment;
• breach by the lessee of obligations to maintain the leased property in good condition;
• breach by the lessee of the obligation to use the leased property and derive benefits from it in a manner specified in the lease agreement or in a manner corresponding to the properties and intended use of the property.

In each of these cases, the lessor must summon the lessee in writing to properly perform the agreement and to remedy the consequences of the breaches before issuing a notice of termination of the lease agreement. Only after an ineffective summons does the lessor have the right to terminate the lease agreement with immediate effect, unless a different termination period is set out in the lease agreement.

Contractual grounds for termination of the lease agreement

The right to terminate the lease agreement may also be written directly into the lease. It then constitutes, in addition to the code rights, an additional ground for termination of the lease agreement. It is important to note that the right to terminate the lease does not have to be granted to both parties, nor does it have to benefit both parties equally. Very often, additional grounds for termination of the lease are reserved primarily for the benefit of the lessor.

Examples of situations where lease agreements grant the lessor the right to terminate the lease are:

• giving the leased vehicle to a third party for use without the lessor’s consent (i.e. subletting the leased vehicle without the lessor’s consent);
• the inclusion of the lessee on official sanction lists within the meaning of the Act of 1 March 2018 on the prevention of money laundering and terrorist financing;
• the lessee’s loss of entrepreneurial status (e.g. by closing down its business);
• the lessee’s misleading the lessor (e.g. by providing false information) about the lessee’s business activity or financial situation, if these were material to the conclusion of the lease agreement.

The right to terminate a lease is much less often reserved in favour of the lessee. An example of a situation entitling the lessee to terminate the contract may be, for example, the failure to deliver the leased object for reasons attributable to the lessor.

Consequences of termination of the lease agreement

Upon termination of the lease agreement as a result of a notice of termination, the lessor has the right to demand the return of the leased object and the immediate payment of all remaining instalments provided for in the agreement (importantly: the lessor has the full right to demand both together, which often comes as a surprise to lessees). However, the amount to be reimbursed is reduced by the benefits that the lessor obtains from the early termination of the agreement, e.g. the market value of the returned vehicle after its sale (i.e. the lessor sells the returned vehicle and reduces the amount of remuneration from the lease agreement that the lessee should reimburse by this value).

In practice, the above means that the lessee has to return the leased object and, at the same time, pay a substantial one-off sum (generally the equivalent of the remaining instalments to be paid).

Alternatives to lease termination

An alternative to the termination of a lease may be the assignment of the lease, i.e. the transfer of the lease to another party who will take over the obligation to pay the instalments. However, making a lease assignment requires the lessor’s consent and is often a fairly complex procedure.

The contract may also provide for the lessee to request an early termination of the lease by mutual agreement of the parties. This form of termination, however, requires the lessor’s consent and may involve an obligation for the lessee to repurchase the leased asset. In this case, the terms and conditions of the termination of the agreement (in particular, the principles of repayment of the remuneration instalments and other fees not yet paid) will usually be set out in an agreement concluded by the parties. The content of such an agreement is most often imposed by the lessor, as a condition for agreeing to the early termination of the contract. In this case, the lessee has limited influence over them.