Questions about what happens to a lease agreement when the landlord, whether an individual or a legal entity, becomes insolvent seem to cause considerable concern.
The issue is not clear-cut, and to resolve it we must refer to two provisions of the Civil Code which, in this case, could even be said to conflict with each other, as there is no other exceptional provision which, at least in our opinion, unequivocally resolves the problem.
Let us look at what Article 1057(1) of the Civil Code, applicable to lease agreements, tells us: “the purchaser of the right on the basis of which the agreement was concluded succeeds to the rights and obligations of the lessor.”
In other words, when the landlord transfers ownership of the leased property (the object of the lease), there is no effect on the lease agreement other than the buyer's succession to the landlord's position, which takes effect on the date of transfer.
However, there is another rule that must be taken into account.
We refer to Article 824(2) of the Civil Code, which deals with “Sale in Execution.” The following is taken from this provision: “[t]he assets are transferred free of any encumbrances, as well as any other rights in rem that were not registered prior to any seizure, attachment, or encumbrance, with the exception of those that were established on an earlier date and have effect in relation to third parties regardless of registration.”
Well, the central issue here is, first and foremost, the legal qualification of the tenant's position. While for some, the right to enjoy the leased property is a lesser real right, and therefore the right is linked to the property and not to the person, for others—the majority—it is a personal right of enjoyment, that is, the tenant's position is intrinsically linked to the tenant's position as a party to a contractual relationship.
Taking this second line of reasoning, the result would be the removal of the rule that affirms the expiration of the lease, maintaining it even after the foreclosure sale, even in the event that there is a real guarantee prior to the conclusion of the lease agreement on the property subject to foreclosure sale. However, the reader would be mistaken to think that the issue is resolved and the debate closed.
It so happens that most of the doctrine and extensive case law on the issue under consideration have given voice to the solution of subjecting the lease agreement to the same solution found for other minor real rights, considering that the lease agreement is considered a true encumbrance on the building, thereby leading to lease agreements entered into after the constitution of a priority real guarantee (mortgage) on the property subject to foreclosure lapse under the terms of paragraph 2 of Article 824 of the Civil Code. Underlying this understanding is the rationale of not allowing the lease to have a more favorable or less favorable regime than a lesser real right of enjoyment.
In simple terms, the lease only remains in force if it predates the creation of the mortgage on the property in question. In the opposite scenario, i.e., if the mortgage is subsequent to the conclusion of the lease agreement, then we understand that the lease expires with the foreclosure sale.
Source: idealistanews