Maximum term for lease agreements

On November 21, 2007, Trial Judge No 90 in Civil Matters of the City of Buenos Aires authorized Wal-Mart Argentina S.R.L. to enter into a lease agreement for a 30-year term; even though Section 1.505 of the Argentine Civil Code provides that the maximum term for lease agreements is 10 years.

Two companies, of similar size, Panamerican Mall S.A. (“Lessor”) and Wal–Mart Argentina S.R.L. (“Lessee”), filed a joint motion, through a declarative action (Section 322 of the Procedure Code on Civil and Commercial Matters), requesting the Court to declare Section 1505 of the Argentine Civil Code not applicable to the lease agreement entered into by the parties, and to ratify the agreed upon 30-year term, on the grounds of the unconstitutionality of such Section.

The Trial Judge arrived at a decision on the understanding that, according to the lease agreement submitted by the parties, it was clear that, due to the nature of the mall that the Lessee intended to install in the commercial centre to be build by Lessor, the project was going to require a huge investment.

Consequently, considering the arguments of the judgment in “Segura” (a case similar to the one under analysis, in which the unconstitutionality of Section 1501 was declared), the Judge acknowledged that: “On the one side, the leased property is part of a bigger property, intended by Lessor to create a large-scale commercial centre, and on the other side, Lessee must make a significant down payment over time, so the continuity of the lease agreement is an important point to take into account in the investment. The economic function of the agreement exceeds what the legislator stipulated for the lease of assets. In view of the business the parties intended to start, it is essential to have certainty regarding the lease term.” 

To arrive at such decision, the Judge referred to the reasons given by the legislator for establishing a maximum term for lease agreements. Accordingly, the Judge in his decision explained that: “In those times, the legislator wanted to avoid the immobilization of the market through perpetual lease agreements, and thus the reasons that led the legislator to limit terms are of a social nature, since at that time economic enterprises such as shopping centers didn’t exist. This new type of business works as a company and enters into lease agreements with other companies that set up their business there. Therefore, the scale of the investment and the continuity of the lease agreement in order to allow time to finish the construction and recover the investment, are reasons of social economy that justify the execution of long-term agreements.”

The Judge considered the petition of non-applicability of Section 1505 of the Civil Code valid, continuing a recent jurisprudential trend, reflected in Segura’s judgment, in which for commercial leases, where huge investments are involved, they can authorize the extension of the term up to 30 years. However, it must be said that the Civil Code, which governs urban leases, has not been amended. Consequently, the judgment under analysis has effects on this particular case, but cannot be extended to other cases.