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Country - Italy
Commercial Leases
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A. SOURCES OF LEASE LAW
Applicable legislation
Leases are generally governed by the provisions contained in art. 1571 to art. 1614 of the Italian Civil Code (Codice Civile or c.c., Law Decree 16 March 1942, no. 262 as amended) with some supplemental statutory provisions, particularly in relation to business leases (Law no. 392, of 27 July 1978, so-called Legge sull'equo canone).
Do any specific rules apply to commercial leases?
Generally parties are free to contract as they wish. The Codice Civile specifies basic rights and obligations under leases, whereas Law 392/1978 stipulates some mandatory provisions regulating the lessor/lessee relationship in favour of the lessee. These include those establishing the duration of the lease, any increase in rent, the rights of the lessees to carry out activities vis-à-vis the public, etc.
Any deviation from these provisions which has a prejudicial effect on the lessee's position is considered to be void, even if explicitly accepted by the lessee. An invalid clause would not trigger the invalidity of the entire contract.
Do different regimes apply to leases of commercial premises depending on the use of the premises by the lessee (offices, warehousing, industrial, retail)?
Some minor distinctions are made by Law 392/1978 in connection with hotels and premises used for carrying out activities involving contact with the public (like retail).
However, if the object of the lease is a "going concern" or "business branch" (azienda), then the rules of the Codice Civile mentioned above and Law 392/1978 do not apply, and the parties are free to contract as they wish.
Under Italian law a "business branch" is defined as a complex of assets organised by an entrepreneur for carrying out an activity. For example, in the case of shopping centres, premises are usually occupied by lessees under a business branch lease agreement, not a separate lease agreement.
B. DURATION AND TERMINATION OF LEASES
Is there a minimum or maximum obligatory term?
Yes, there is a minimum term of six years for commercial leases and nine years for hotel leases. Parties are also free to agree longer periods.
Does the lessee have a right to renew the lease upon expiry of the initial contractual period?
After six years (nine in the case of hotels) have expired, a lease is automatically renewed on the same terms and conditions for another six (or nine) years, unless either party notifies its intention not to renew the lease at least 12 months (18 months in the case of hotels) prior to the end of the first term.
The lessee may freely decide not to renew the contract; however, the lessor can do so only in very limited circumstances. These include the intention to use the premises itself, to demolish and rebuild it, or to refurbish it in order to comply with certain regulations.
Lessee may therefore usually rely on the renewal of the lease after the first term. After the second (renewed) term, no restrictions apply to the lessor's right to refuse to renew the lease.
Do lessees enjoy security of tenure (i.e. the right to remain in occupation after their lease expires)?
See above.
Do leases involve a lengthy procedure for the effective recovery of possession?
Leases invariably contain a termination clause setting out the conditions which, if breached by the lessee, would allow the lessor to consider the lease terminated, usually after a cure period.
However, if the lessee does not return the premises, the lessor must seek a court order to recover possession. This can take several months.
Courts nearly always allow a lessee to rectify a breach and retain the premises, unless there is a long history of breaches.
Can government/local authorities require the compulsory termination of a lease?
Yes, local authorities have certain rights to acquire property on a compulsory basis and this includes property held under leases. These powers may only be exercised on certain grounds, such as to enable new developments. The lessee will receive the market value of its interest in the property and may be entitled to other compensation.
Is there a preferential right of acquisition?
Save for hotel leases and those used for activities involving direct contact with the public, the parties are free to contract as they wish. However, pre-emption rights in favour of the lessee are not common. Any such right would constitute a contractual obligation only, and would not entitle the tenant to challenge the transfer of the property to a third party.
C. RENT AND COSTS
Are variable rental agreements common?
No. There is currently a debate concerning whether parties may agree contractual provisions regarding rent increases during the course of the lease.
Law 392/1978 states that rent may be adjusted once per year by a maximum of 75% of variation in the ISTAT index, which measure increases in living costs.
"Turnover rents" and "step up rents" (where rent changes over time to reflect objectively increasing benefits for the lessee or the investment made by the lessee in the premises) are in principle also valid.
It is currently advisable to specify in the contract express reasons for a rent increase, so that it is clear that any increase is not for the purpose of compensating losses due to inflation.
Most common indexation
Law 392/1978 states that the rent can be adjusted annually on the basis of a maximum of 75% of the ISTAT index variation. Usually, in the case of an initial reduced rent, the ISTAT adjustment runs from the year in which the date when full ordinary rent first becomes payable.
Who usually pays the common expenses?
Lessees usually pay operating expenses related to common services organised by the lessor. Payment is proportional to the size of the let unit compared to the total rentable space.
Law 392/1978 specifies which services can be charged back to the lessees. The general principle is that lessees can be charged with the full costs of anything for their benefit, while anything done partly or solely for the lessor must be divided or paid for by the lessor. It is advisable to define in the contract what kinds of expenses are charged to the lessee.
Are there any other expenses connected with the lease?
Register tax (imposta di registro) is due on signing of a lease contract. The registration of the lease contract must be either for the entire duration of the lease or on an annual basis. The registration tax is equal to 1% of the overall rent in the first case and of the annual rent in the second case. The registration tax is usually paid 50% by each party.
Lessees usually arrange services such as electricity, water, etc. directly with suppliers, although this may not be the case in large developments.
Which indirect taxes are applicable?
Commercial leases are exempted from VAT, unless the lessor expressly elects in the contract to apply VAT (at 20%).
D. OBLIGATIONS OF LESSOR AND LESSEE
Who is responsible for the different works on the premises?
Generally, the lessor is obliged to ensure that the premises remain fit for their normal or agreed use. In a multi-tenanted building, the lessor will repair and maintain the common areas and the structure. Each lessee will be responsible for repairing the interior of its individual unit, excluding structural and external parts.
The Codice Civile distinguishes between ordinary and extraordinary maintenance. Unless otherwise set out in the contract, the lessee is responsible for minor repairs and ordinary maintenance while the lessor is responsible for extraordinary maintenance.
Can the lessee alter or improve the premises?
Most leases limit the lessee's rights to alter or improve the premises. Structural alterations are frequently prohibited, particularly where the lessee only leases part of the building. Non-structural alterations usually require the lessor's consent, although the law requires that consent should not be unreasonably withheld.
Under the Codice Civile, the lessee has the right to compensation on the termination of the lease for any improvements made during the lease. Therefore it is normally stipulated that the lessor may demand the removal, on termination, of any improvements at the lessee's expense.
What restrictions are there on the lessee's right to use the premises?
Leases normally specify the permitted use of the premises. The use may also be restricted by planning law to one which has been approved by the planning authority.
Is there a right to transfer the lease?
Except in the case of leases under which the lessee is entitled to carry out activities involving direct contact with the public, lessees may not assign the lease to a third party without the lessor's prior consent.
On the other hand, the lessor can freely transfer the title to the let premises. This does not automatically trigger the early termination of the lease either by the lessee or by the lessor.
Is there a right to sub-let the premises?
Sub-letting of the premises is possible, unless the parties have agreed otherwise.
In the case of premises used for activities carried out for the public, however, the lessee may sub-let or assign the lease without the prior consent of the lessor, provided that the accompanying business is also assigned or let.
What are the usual guarantees?
According to law, the rent guarantee cannot be higher than three monthly instalments. This will be kept by the lessor and returned upon termination of the lease, provided that no damage has occurred and no other obligations exist in connection with the lease.
The parties usually agree on a cash deposit equal to three months' rent, and an additional bank guarantee. The deposit may also take the form of a first demand bank guarantee or an insurance policy for a maximum of one year's rent.
E. PARTICULAR TYPES OF LEASE
Do office leases have any particular characteristics?
Leases of office premises usually include clauses similar to those described above.
Generally they will not include lessee's pre-emption rights or turnover rents, nor charge extraordinary maintenance expenses to the lessee (except in the case of new buildings where this may be possible).
Do retail leases have any particular characteristics?
Special rules are provided for commercial leases under which the lessee is allowed to carry out activities involving direct contact with the "public of consumers and users". This is typically the case where shops and bars/restaurants are concerned, as well as banks and public offices. In order to protect and recognise the goodwill generated by the lessee in the premises during the course of the lease, a lessee in this category has a number of legal rights which may engender additional expense for the lessor. These are as follows:
- Indemnity for goodwill (art. 34 of Law 392/1978) - upon termination of the lease the lessee is entitled to receive an indemnity for the loss of goodwill calculated at 18 times the last monthly rent paid. Moreover, if the premises are subsequently let to a lessee carrying out the same or similar activities within a year of the termination, a further indemnity of the same amount is payable. The indemnity is not payable, however, if the lessee decides not to renew the lease; decides to exercise a break option; the contract is terminated due to a breach by the lessee; or the contract is terminated in the context of a winding-up procedure. In practice, the obligation to pay a goodwill indemnity is frequently passed to the incoming lessee who is asked to make a payment for the goodwill inherent in the premises.
- Pre-emptive right in the case of sale (art. 38 of Law 392/1978) - the lessor must offer the lessee first refusal of the premises on the same terms and conditions as another potential buyer. The law provides for a term of 60 days from the notification of the offer, within which the lessee must decide whether to purchase the property. If the lessor does not comply with the correct procedure, the lessee is entitled to claim the property from the new owner within six months from the registration of title by paying the purchaser the price indicated in the sale and purchase agreement. This pre-emptive right only applies where the let premises and the premises which are the object of the sale and purchase are identical.
- Pre-emptive right in the case of new letting (art. 40 of Law 392/1978) - the lessee has the right to take a new lease of the premises even after the lease has expired. As explained above, at the end of the initial 12-year period the lessor is free to terminate the lease and let the premises to a new lessee. In the case of a lease that gives rise to contact with the public, the lessor must offer the old lessee a new lease on the same terms and conditions as any potential new lessee. The lessor must notify the lessee and the latter must make a decision within 30 days. The lessor must pay damages to the lessee if he does not comply. A lessee is not usually allowed to sub-let or to assign the lease without the lessor's prior consent but art. 36 of Law 392/1978 varies this general rule and grants the lessee the right to sub-let and to assign the lease without the lessor's consent when this is done as part of the lessee's ongoing business activities in the premises. In this case the lessee need only inform the lessor of the transfer or sub-letting. A lessor may oppose this within 30 days for "serious reasons" which may relate to the new lessee's financial status or, in rare cases, reputation.
These are mandatory rights to protect the tenant.
The rules apply only where the activity giving rise to contact with the public prevails over any other activity carried out by the tenant.
Retail leases, in particular in shopping centres, may have turnover rents where all or part of the rent is determined by the profits of the store.
Retail lessees may be subject to obligations which exist for the benefit of the shopping centre as a whole such as an obligation to open and trade during specified hours and to contribute towards marketing the centre.
Although the lessor will maintain the structure and exterior of the premises, a retail lessee may be given the right to maintain its own shop front in its usual trading style.
Do hotel leases have any particular characteristics?
Hotel leases are similar to retail leases, except for the minimum term of the lease which is nine years and the indemnity for goodwill, which is equal to 21 times the last monthly rent. The same provisions of art. 34, 36, 38 and 40 of Law 392/1978 indicated above also apply.
Hotel leases often contain detailed provisions relating to the management of the property. Alternatively details of management may be set out in a separate contract with a dedicated hotel management company.
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