Retention of a tenant's property – is it arbitrary or is it lawful?

1. Introduction

The introduction of a state of emergency in light of the COVID-19 pandemic, the subsequent quarantine and related restrictions had a negative impact on the solvency of SMEs. There are cases when a dispute arises between the tenant and the landlord regarding the fact that the tenant does not pay rent payments and the landlord decides to hold the tenant’s property until payment is received.

Without touching on the issue of recognizing the period of the state of emergency (03/15/2020 – 05/11/2020) as force majeure circumstances, which in itself, taking into account the latest clarification of the Supreme Court of the Republic of Kazakhstan dated 05/06/2020, is the subject of a separate analysis, we propose to consider the situation in its “pure” form (i.e., as, for example, if the dispute occurred during a period of time not affected by any force majeure).

Questions posed: does the landlord have the right to retain the tenant’s property in order for the tenant to fulfill his obligations under the concluded lease agreement? Can the landlord’s actions be considered arbitrary? What is the recommended course of action within the framework of applicable legislation, taking into account law enforcement practice?

I reviewed about 50 court cases on arbitrariness and 15 cases on issues of retention of property for (2010-2020). Court cases that were freely available on the portal were consideredsud.gov.kz, bestprofi.com and IP

"PARAGRAPH". See findings below.

2. About arbitrariness

What is self-government?

According to Art. 389 (Arbitrariness) Criminal Code of the Republic of Kazakhstan:

“Arbitrariness, that is, unauthorized, contrary to the procedure established by the legislation of the Republic of Kazakhstan, the exercise of one’s actual or alleged right, disputed by another person or organization.”

A valid right is understood as “a right that legally belongs to a person, but which he exercised without following the established procedure.”

An alleged right is understood as “a right that is not actually legally owned by a person, but which he relies on, mistakenly considering it to be his legitimate one.”

The objective side of a criminal offense is an act in the form of an unauthorized act, contrary to the procedure established by law for the exercise of one’s actual or perceived right. Those. an act that results in significant harm to a citizen or organization.

The sanction for arbitrariness is:

• a fine of up to 100 MCI (277,800 tenge); or
• corrective labor in the same amount; or
• involvement in public works for up to 100 days; or
• arrest up to 45 days.

Based on existing practice, we can conclude that courts tend to choose a penalty in the form of a fine of 25 MCI (69,450 tenge) for committing a criminal offense.

At the same time, it is important to remember that depending on the consequences of the offense, possible sanctions also change, which can reach up to imprisonment from 3 to 7 years for serious consequences.

Judicial practice

The following cases can be cited as examples of arbitrariness:

Example 1 (06_01_2020). Citizen S., having come to a relative’s apartment, demanded that she cancel the will for real estate in the name of his mother and instead draw up a deed of gift. Citizen S. took a mobile phone (worth 64,000 tenge) from his relative against her will, warning that he would return it after drawing up a gift agreement.

Citizen S. was found guilty by the court of committing arbitrariness. Sanction: fine in the amount of 63.125 tenge.

Example 2 (24_03_2016). Citizen A. turned to Citizen S. due to financial problems in order to borrow money from him. Citizen S. agreed to give money in the amount of 3,000 US dollars on the condition that Citizen A. would put a car as collateral. Upon expiration of the promised terms, Citizen A. did not fulfill his obligations. Then Citizen S., contrary to the procedure established by law, to exercise his alleged right, sold the car (3,415,228 tenge), causing material damage.

Citizen S. was found guilty of committing arbitrariness that resulted in grave consequences.

Sanction: imprisonment for a period of three years, due to the fact that the actions of Citizen S. entailed grave consequences, which, according to the Criminal Code of the Republic of Kazakhstan, means a violation, the amount of which exceeds 1000 times the MCI (2,778,000 tenge) (Part 38 of Article 3 of the Criminal Code of the Republic of Kazakhstan).

I note that among the court cases I reviewed there were no arbitrary court decisions related to the retention of property.

The reason for this is most likely that the right to retain property is expressly established by the Civil Code of the Republic of Kazakhstan, as described below.

3. About retention

What is retention?

Among such types of security for the fulfillment of obligations are pledge, penalty, deposit, guarantee, etc. The Civil Code of the Republic of Kazakhstan contains rules that allow the lessor to retain the tenant’s property until he fulfills his contractual obligations.

So according to Art. 338-1.1 Civil Code of the Republic of Kazakhstan:

“The creditor, who has an item to be transferred to the debtor or a person specified by the debtor, has the right, if the debtor fails to fulfill the obligation to pay for this item or compensate the creditor for the costs and other losses associated with it, to retain it until the corresponding obligation is fulfilled.”

Retention of a thing can also secure claims, although not related to payment for the thing or reimbursement of costs for it and other losses, but arising from an obligation, the parties to which act as entrepreneurs".

The ability to retain a thing arises by force of law and does not require additional regulation in the contract. However, this does not mean that the right of retention or the conditions for its implementation cannot be provided for in the lease agreement (See Example 4).

The moment from which the lessor has the right to retain the tenant’s property is not defined by law. Consequently, this moment is determined based on the period established by the lease agreement for the fulfillment of obligations by the tenant.

Judicial practice

The following cases occur in judicial practice:

Example 3: The lease agreement between the tenant and the landlord has expired. The day after the lease expired, the landlord changed the locks in order to steal someone else's property. According to the tenant's testimony, his property has not yet been removed from the rented premises. The landlord kept the tenant's property on the premises and did not prevent the tenant from removing the property.

The tenant filed a claim to declare the actions to retain the property illegal and impose an obligation on the lessor to return the property in the amount of 5,562,790 tenge.

The court of first instance (08/19/2017) rejected the plaintiff’s demands. The court found that the tenant did not prove the violation of his rights and legitimate interests by the landlord due to the retention of property, and also did not prove the fact of carrying out business activities on the premises.

The appellate court (10_26_2017) overturned the decision of the first instance court and imposed on the lessor the obligation to return the property in connection with the acceptance of the primary and accounting documents presented by the parties as admissible evidence.

The court of cassation (05_02_2018) left the decision of the second instance unchanged.

Example 4. The tenant filed a lawsuit to recover property from someone else’s illegal possession. The tenant indicates that the lease agreement for part of the property complex concluded between the tenant and the landlord has been terminated.

The landlord did not admit the claim; he believes that the tenant damaged the property during the period of use of the property and caused real damage in the amount of 5,380,017 tenge.

In connection with these circumstances, the lessor withheld the amount of the guarantee fee stipulated by the contract in the amount of 1,000,000 tenge. and the tenant’s property (equipment for grinding and mixing various products Cutter-350 (hereinafter referred to as the “Cutter”)).

By a court decision (09/23/2011), the tenant's claim was satisfied. Reclaimed from someone else's illegal possession of Cutter equipment.

The appellate court (11/10/2011) left the decision of the first instance court unchanged.

The court found the lessor's actions illegal due to the fact that, in accordance with the lease agreement, the lessor had the right to choose only one of several types of security for the fulfillment of obligations specified in the lease agreement.

So, according to clause 4.3 of the lease agreement:

“The lessor has the right to withhold the lessee’s property or from the amount of the guarantee the amount of any damage caused by the lessee to the lessor under the terms of the agreement, as well as the amount of unpaid or late payments by the lessee in full or in part due to the lessor under

agreement, fines and penalties for improper fulfillment by the tenant of the terms of the agreement, based on the claim made by the lessor.”

This case was not considered by the cassation court.

4. Conclusion

Question: Can the landlord retain the tenant’s property if he is in debt, and will this retention lead to criminal liability?

Answer: Yes, based on judicial practice, the landlord can retain property to secure the tenant’s obligation to pay rent only in the event of (i) termination of the contract and (ii) unauthorized abandonment of the property by the tenant in the previously rented premises (unless otherwise provided by the contract). The retention will only be legal if both conditions stated above are met.

In this case, the following nuances must also be taken into account.

Firstly, if the lease agreement provides for the lessor's right to retain the tenant's property, then such contractual provisions take precedence over the provisions of Art. 338-1 Civil Code of the Republic of Kazakhstan (see Example 4).

Secondly, if the lease agreement has not yet expired, then in the absence of a direct indication of such a right of the lessor in the agreement, the retention of the tenant’s property by the lessor may be considered as containing elements of a criminal offense. It is necessary to take into account that if after the expiration of the lease agreement the tenant continues to use the premises, then in accordance with Art. 558 (Renewal of a property lease agreement) of the Civil Code of the Republic of Kazakhstan and in the absence of objections from the lessor, the contract is considered renewed on the same terms for an indefinite period.

Thirdly, it should be noted whether the tenant and the landlord signed an act of acceptance and transfer of property upon termination of the lease agreement. I have not found articles by Kazakh lawyers or court decisions regarding the applicability of this criterion, however, it should be noted that according to the opinion of Russian lawyers¹, in this case (i.e. in the presence of such an act), the lessor has no right to retain the tenant’s property under Russian law governing lease relations, which is in many ways similar to Kazakh law.

Fourthly, there is a risk that the tenant may recover lost profits from the landlord if the court finds the retention of the tenant’s property unlawful. In one of the court decisions I reviewed, the appellate court sided with the tenant and declared it unlawful for the landlord to retain the tenant's property after the expiration of the lease agreement on the following grounds. The landlord, due to the tenant’s debt in the amount of 1 month’s rent (1,009,312 tenge), sealed all property worth more than 20 million tenge. The court ruled that these actions of the landlord to seal all property for a long period of time in the presence of a debt in the amount of only 1,009,312 tenge indicate the disproportion of his actions to ensure repayment of the debt and abuse of his right. Whereas, according to paragraphs 5, 6 of Art. 8 of the Civil Code, actions of citizens and legal entities aimed at causing harm to another person, abuse of rights in other forms, as well as the exercise of rights contrary to its purpose are not allowed; no one has the right to take advantage of their dishonest behavior (see Example 5).

To summarize, based on existing law enforcement practice, we can conclude that in most cases, the retention of a tenant’s property does not entail the initiation of a criminal case based on the elements of a crime. Courts tend to consider the legality of the lien of property in civil proceedings.

For example, in the court case indicated in Example 3, the tenants contacted the police department and local inspectors, but they refused to accept applications and recommended filing a civil lawsuit.

Taking into account all these facts, we can conclude that the only way to protect the rights of a tenant in the event of retention of his property is to go to court in a civil manner. In turn, in addition to retaining the tenant’s property, landlords can also go to civil court to protect their interests in terms of collecting rent.

Author: Olzhas Abubakirov, legal assistant

GRATA International, Kazakhstan