Early Termination of a Commercial Lease Agreement

Two companies, of similar size, executed a commercial lease agreement for a 10 year term. The agreement stipulated that the indemnification for early termination would be higher than the one provided by Section 8 of the Urban Lease Law No 23,091 (the “Law”). Lessee terminated the lease agreement before the expiration of the term, and tried to pay only the indemnification provided by Law. Lessor filed a claim to collect the indemnification agreed by the parties in the lease agreement.

The Trial Judge resolved in favor of Lessor under the understanding that, although public policy according to Section 29, a judge is legally authorized to review both the agreement of the parties and the spirit of the Law and is the only one authorized to determine which section of the Law is actually public policy, and therefore not subject to any changes by the parties.

Consequently, the Judge acknowledged the mandatory nature of the provisions of Section 8 of the Law, but only the part providing for the early termination rights of Lessee, and not as regards the amount of the indemnification.

To reach such decision, the Judge understood that only in special cases where the legislator expressly gives the provision a mandatory nature based on public policy reasons (i.e. a section, a hypothesis, a particular situation) the judge must apply his/her interpretative powers restrictively.

In those cases where the lawmaker characterizes a law as public policy in a general sense, a judge is allowed to interpret each particular case without having to declare the law unconstitutional, but always within the parameters of said power.

Beyond the constitutional discussion that may arise from qualifying a law as public policy, it is important to point out the powers of the judge in relation to the interpretation (extended or restrictive) of such Law resorting to the final cause of the legislator, analysis for which the circumstances of the case are important, the relation existing between the scope of the norm and the res-judicata principles and its statement as public policy.

The Court of Appeals No 5 in Civil and Commercial Matters of the Province of Cordoba upheld the decision of the Trial Judge two votes against one, reasoning that the qualification of a law as public policy does not prevent the parties, who entered into an agreement in equal terms and conditions, from altering and modifying the indemnification payable in case of early termination of the agreement; and that the analysis thereof must always take into consideration the particular circumstances of the agreement. The dissenting vote, on the contrary, states that the indemnification agreed upon by the parties, in case of early termination of the agreement, is not applicable if the agreement strays from the rule determined by law, since the Law must be considered as public policy. In such a case there is no room to discriminate or exclude a section of the law. However, as is clearly stated in the majority vote, their interpretation is coherent, and according to the Argentine law, only applicable for these particular cases, like the one we are analyzing (an important commercial lease agreement), not for typical cases such as lease agreements involving real estate to be used for residential purposes.

Accordingly, the Court of Appeals considered the clause under analysis valid, as they understood it was not abusive to agree on a higher indemnification for long-term contract when an expensive property is involved.