Are the limitations on contractual penalties in apartment leases also valid for sublease relationships?

A sublease relationship, like a lease, represents a contractual obligation that grants a third party (the subtenant) the right to use a certain property, such as an apartment, for a fee. At first glance, it may seem that both relationships—lease and sublease—are very similar and should therefore be subject to the same or similar rules. In reality, however, this is not entirely the case, as demonstrated by the recent Supreme Court ruling, which deals with the possibility of freely agreeing on a contractual penalty in a sublease relationship (Supreme Court ruling of August 20, 2024, file no. 26 Cdo 2018/2023).

Lease vs. Sublease Relationship: The Accessory Nature of Sublease

A sublease relationship is a specific type of contractual relationship that is accessory to the main lease relationship. This relationship depends on the existence of a lease agreement that the tenant has concluded with the landlord. The accessory nature is mainly reflected in the fact that the termination of the lease relationship automatically results in the termination of the sublease relationship, as stipulated by law, and this conclusion was further elaborated by the Supreme Court, among other things, in the above-specified decision.

In another Supreme Court ruling, specifically file no. 26 Cdo 1524/2019 from March 17, 2020, it was stated (although it concerned the sublease of non-residential premises) that the provisions on leases apply to sublease relationships only reasonably, taking into account the specifics of the sublease relationship and only to the extent that the rights and obligations of the participants in the sublease relationship are not regulated by the sublease agreement.

Contractual Penalty in Apartment Leases: Limited Possibility Until June 30, 2020

In apartment leases under the legislation effective until June 30, 2020, the agreement on a contractual penalty in a lease agreement was essentially prohibited. Section 2239 of the Civil Code clearly stated that the landlord of an apartment could not demand a contractual penalty from the tenant for breaching their obligations under the lease agreement. This regulation was considered mandatory and was meant to protect the tenant as the weaker party in the contractual relationship, as repeatedly confirmed in case law, for example, in the Supreme Court ruling of June 5, 2019, file no. 26 Cdo 2059/2018.

On July 1, 2020, a change in legislation occurred, according to which a contractual penalty in apartment lease agreements is no longer prohibited. The parties to an apartment lease agreement can now contractually agree on a penalty for the tenant’s breach of obligations, but the total of the security deposit and the contractual penalty may not exceed three times the monthly rent.

Contractual Penalty in Apartment Subleases: Different Approach Compared to Apartment Leases

The sublease of an apartment is regulated relatively briefly under Sections 2274 et seq. of the Civil Code, and the rules for its conclusion are based on the general provisions on leases. While apartment leases are highly regulated to protect the tenant as the weaker contractual party, apartment subtenants, according to the Supreme Court, do not enjoy the same level of legal protection as apartment tenants.

In its ruling of August 20, 2024, the Supreme Court states: “If sublease is considered a ‘weaker’ relationship than a lease, and therefore the subtenant does not enjoy the same protection as the tenant, then (logically) the relatively mandatory regulation protecting the tenant of an apartment cannot apply to the subtenant, even when the subject of the sublease is an apartment” (see the previously cited ruling, file no. 26 Cdo 1002/2023). There is no reason to extend the special protection of the tenant to other legal relationships that grant the right to use an apartment. The prohibition of agreeing on a contractual penalty in apartment leases before June 30, 2020, was an expression of this relatively mandatory regulation, and therefore it only applies to the protection of the tenant and not the subtenant.”

Unlike apartment leases, in the case of apartment subleases, the possibility of agreeing on a contractual penalty for breach of obligations by the subtenant is not restricted, according to the aforementioned Supreme Court decision. The Supreme Court noted that this was also the case under the legislation in effect before June 30, 2020, when it was entirely prohibited to agree on any contractual penalty in apartment leases.

The Supreme Court clearly distinguished between lease and sublease relationships concerning apartments in the cited decision. It stated that sublease agreements concerning apartments allow for greater contractual freedom than apartment leases, and the possibility of agreeing on a contractual penalty for the subtenant’s breach of obligations is generally permissible, regardless of explicit legal limitations on apartment leases. However, this contractual freedom should not be understood as absolute. As with all contractual arrangements, the limitation imposed by the principles of good morals applies, meaning that a contractual penalty must not be disproportionate or discriminatory toward the weaker party.

Sublease Relationship as a Consumer Contract

The Supreme Court also concluded in its decision that if a sublease relationship is concluded between a business entity and a non-business entity (consumer), this relationship may fall under the legal regulation of consumer contracts. This means that the subtenant, as a consumer, may be protected against unreasonable contractual provisions, including contractual penalties.

Conclusion

Based on the above conclusions, it can be stated that subtenants of apartments are not protected against the agreement of a contractual penalty in sublease agreements in the same way as tenants of apartments. This was also true under the legislation in effect until June 30, 2020, when it was not even possible to validly agree on any contractual penalty in apartment leases.

The Supreme Court's decision highlights the importance of distinguishing between lease and sublease relationships.