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15 September 2006
Commercial tenants enjoy significant protection under Austrian tenancy laws. In particular, the charging of rent is subject to certain limitations and a lessor may terminate its lease agreement only in certain specific circumstances (for further details please see the Overview (December 2004)). However, Section 12a of the Tenancy Act provides that if a business which operates in a leased property is sold in an asset deal, the lease automatically transfers to the buyer, in which case the lessor may in turn increase the rent to the market level. Similarly, if the tenant entity is transferred in a share deal, the lessor is also entitled to increase the rent to the market level, provided that the opportunity to exercise legal or economic influence in the entity subsequently changes.
In the past the Supreme Court has more or less consistently adhered to the change of control theory, granting lessors the right to increase rent only if more than 50% of the issued share capital of a limited liability or stock company is acquired by one individual (for further details please see "New Supreme Court Decisions on Section 12a of Tenancy Act"). In 2004 the Fifth Chamber of the Supreme Court seemed to reject the change of control theory by applying the economic benefit theory (for further details please see "Supreme Court Challenges Change of Control Theory"). However, in a recent decision the Sixth Chamber not only explicitly confirmed the change of control theory, but also comprehensively set out its theoretical basis.
The case concerned a rent agreement between a landlord and its tenant, the Austrian Federal Railways (ÖBB). The ÖBB was initially wholly owned by the state. In 2004 the state transferred its stake in the ÖBB to a holding company, which was in turn wholly state owned. The holding company was then demerged into several different companies, each ultimately owned by the state. The landlord argued that a change of control had occurred within the ÖBB, which triggered its right to increase the rent to the market level. The ÖBB contested this claim, arguing that the opportunity to exercise economic influence had not changed, as the ÖBB was still controlled by the state, albeit indirectly.
The court first confirmed that, notwithstanding previous decisions by the Fifth Chamber, the landlord's right to increase the rent on a property pursuant to Section 12a is triggered if a change of control occurs within the tenant entity. A change of control occurs if, as a result of a transaction, the new majority shareholder is able to exercise control of the company and no corporate law mechanisms are available to prevent it from doing so.
The court highlighted that one of the main tests of control is whether the new shareholder is in a position to appoint and remove the managing directors of the company on its own. However, this is only one of many indicators. In each case a test is required to establish whether the opportunity to exercise legal and economic influence over the company has changed as a result of the transaction. A change of control at shareholder level also triggers the right to increase the rent.
The court further stated that if the shares in a tenant company are transferred within a group of companies and the ultimate owner of the company remains unchanged, this does not constitute a change of control for the purpose of Section 12a.
The landlord argued that the transfer of shares from the state to the holding company constituted a change of control, irrespective of the fact that the holding company was ultimately owned by the state. It stated that the holding company was a joint stock corporation, and that therefore the shareholder could not issue instructions to the board of directors under corporate law. Therefore, the opportunity to exercise legal and economic influence on the joint stock corporation was vested not in the state as stockholder, but in the board of directors. The transfer of the shares in the ÖBB from the state to the joint stock corporation therefore led to a change of control in the ÖBB.
The court rejected this line of argument, stating that Austrian law grants ultimate control to the stockholder. The supervisory board of a joint stock corporation can remove the company directors with good cause and the stockholders in the general assembly can instruct the supervisory board to remove the managing directors. Therefore, the stockholder is able to influence the company. Since the state was the sole stockholder, it still controlled the holding company and indirectly controlled the ÖBB. No change of control had occurred for the purpose of Section 12a.
This decision confirms the change of control theory and highlights the importance of the ability to appoint and remove managing directors as a test of the control of a company.
The court's statements on exercising control over a stock corporation are of more limited application. The decision is relevant only if the stock corporation has a single shareholder which controls the general assembly. Furthermore, the landlord raised the objection that a joint stock corporation differs from a limited liability company in that the stockholders of a joint stock corporation do not necessarily have to be listed in the Commercial Register. Therefore, it is not always possible for the landlord to identify the stockholder of a stock corporation and establish whether the stock is passed on. The court dismissed these arguments, stating that in the present case the establishment of the ÖBB's new structure and thus also the transfer of the shares were effected by acts of Parliament. As all acts are published in the Federal Gazette, the landlord was able to identify the stockholder at all relevant times. However, as this would not have been the case in the case of a private corporation, it is possible that the court may reach a different conclusion in future cases.
For further information on this topic please contact Nikolaus Pitkowitz or Martin Foerster at Graf & Pitkowitz Rechtsanwälte GmbH by telephone (+43 1 401 17 0) or by fax (+43 1 401 17 40) or by email (firstname.lastname@example.org or email@example.com). The Graf & Pitkowitz Rechtsanwälte GmbH website can be accessed at www.gmp.at.
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