Edited by Jürgen Basedow, Giesela Rühl, Franco Ferrari and Pedro de Miguel Asensio
Chapter L.1: Lease contracts and tenancies
I. General context
Lease, tenancy and related contracts can be defined as legal relationships in which the owner or rightful possessor grants another person the temporary right to occupy and use movable or →immovable property or other legal entitlements in exchange for consideration. Under Roman law, these contracts were covered by the locatio conductio, which, however, extended also to services, including labour as well as works contracts. Only the medieval ius commune introduced the distinction between locatio conductio rei (tenancy and lease contracts), locatio conductio operis (works contract) and locatio conductio operarum (service contract). All of these contracts had in principle only an obligatory character, which meant that due to privity of contract, lessees and tenants were not protected in case of sale of the used thing to a third party (emptio tollit locatum). However, the influence of natural and customary law from the 17th century onwards led to the recognition of a partially real character of leases, to the extent that the lessee was to be protected in case of sale (emptio non tollit locatum). The oscillation of leases and tenancies between contract and property, which induces different connections in private international law, may still be observed today. In common law, leases (also called leaseholds) and tenancies are generally considered real rights. On the Continent, however, they are generally considered contractual rights only, often complemented by real right features such as emptio non tollit locatum.
Lease contracts or leaseholds (Miete, loyer, locazione, arrendamiento) constitute the general concept for the grant of a right of use over foreign property. The English concept lease or leasehold, the French bail and the Italian affitto cover not only the German concept of Miete but also that of Pacht, which, similar to the land law category of usufruct (Nießbrauch), gives its holder not only a right of use but also a right to enjoy the fruits and other proceeds of a thing or a right. A related land law concept is emphyteusis, or ground lease (bail emphytéotique, Erbbaurecht, enfiteusi), which gives its holder the right to build and own a house on the ground of another person, thus constituting an exception to the principle according to which the ownership of a plot of land extends to all buildings erected on it (superficies solo cedit). Another relevant land law concept is easements, also called servitudes (Grunddienstbarkeiten, servitudes), which may include a right of residence (Wohnrecht, droit d’habitation). On account of its real status and registration, this right is independent of the existence of contractual relationships and, therefore, stronger than an obligatory right of residence based on a lease or tenancy agreement.
Leases may have as their object movables, immovables and intangible property (→Property and proprietary rights). Examples for the latter category are computer programs, radio frequencies, the clientèle or customer base of a company or, most importantly, immaterial rights referring to the use of such intangible property – eg patents, brands and other immaterial property rights. In this context, it is worth mentioning that the delimitation of movables and immovables is not identical in different legal orders; for example, rights referring to p. 1079immovables such as mortgages (Hypotheken) may in some systems be classified as immovables. Finally, the related term leasing prescribes a modern special contractual regime, typically employed for the use of valuable movables such as cars, which is composed of lease and sales elements. Nowadays, it is often treated as a type of contract sui generis.
Within contractual leases, manifold variations may be found in different legal orders. Whereas in Germanic systems leases may be, and often are, open-ended contracts without time limit, in the French legal family going back to the Code Napoléon, there is a general prohibition of open-ended contracts, which are viewed as excessively restraining. In common law systems, there is an even greater variety of concepts. For example, in the USA, art 2A of the UCC (Uniform Commercial Code, American Law Institute, Uniform Commercial Code, Official Text with Comments, St. Paul 2012) regulates commercial leases of movable property while explicitly excluding leases of immovable property from its scope. However, in England, the term lease is generally limited to immovable property, whereas the use of movables is often termed hire. A lease requires the exclusive possession of a defined area of land for a fixed period (or series of periods) of time with the intention to create an estate in land, ie an interest in the land itself which can be assigned or sold. Conversely, a licence is simply a permission to use land which allows someone access to the land of another for an agreed purpose but does not confer any interest in land. Another related common law feature is the so-called bailment, which is a general type of contract encompassing, similar to the Roman locatio conductio, several contracts which have as their object the temporal use of movables including deposit, works and service contracts. Moreover, in all legal systems, the instrument of a sublease exists, yet almost exclusively in relation to dwellings. A sublease (or, less formally, sublet) is the name given to a contract under which the lessee in a lease assigns the lease to a third party, thereby making the old lessee the sublessor, and the new lessee the sublessee.
Even more important than these variations of lease is the concept of tenancy, which is typically reserved to the lease of residential or commercial buildings. In all Western countries, residential tenancy law is characterized by socially motivated interventions into freedom of contract to protect the tenant beyond emptio non tollit locatum, such as limitations of notice by the landlord, minimum duration of contracts, minimum quality standards, rent control and succession rights. On account of their social flavour, residential tenancies are very close to labour and consumer law, though they are not normally treated as a branch of the latter area. Likewise, in several countries special regulation of commercial and agricultural tenancies (bail commercial and bail rural) exists, even though such regulation is normally based on lease law. The same is true for special regulation on the lease of water vehicles such as bareboats (termed ‘charter contract’) and commercial ships as well as airplanes.
Lease law is not harmonized at European level with its core branch, residential tenancy law, being politically highly sensitive and dependant on the interaction with national or subnational housing policies. Nevertheless, with the increase in mobility of European citizens, the growth of Europe-wide job markets and the boom in tourism, tenancy regulation is increasingly important to the Single European Market. Even though equal access to national housing markets is generally available to foreign citizens, national systems in the host country may place tenants in unexpectedly unfavourable conditions. The same may be true for relatively long periods of notice required of tenants in their country of origin, which may force a worker who moves to pay rent on two different properties over an extended period. Beyond the free circulation of workers, the freedom of capital is affected by tenancy law. As a consequence of globalization and the establishment of new asset classes such as Real Estate Investment Trusts (REITS), real estate and capital markets have integrated dramatically in Europe and beyond. These investments predominantly concern commercial property, but in some countries they also extend to large municipal housing stocks put on the market by cities which are under heavy financial constraints. Therefore, the tenancy laws of a country are important economic parameters for investors.
However, the European impact on tenancy law derives also from the manifold, though mostly indirect, effects on tenancy law exerted by EU regulation and policy in other fields. For example, EU social policy against poverty and social exclusion extends to selected issues of housing, such as the amelioration of housing conditions and the provision of housing to vulnerable groups. Tenancy law and housing p. 1080policy have also been affected by European competition and state aid rules, particularly with regard to state-subsidised social housing for the poor. In this context, the Commission allowed →Ireland, for example, to provide bank →guarantees for borrowings by the public Housing Finance Agency, which were qualified as a service of general interest (State Aid N 209/2001 – Ireland). Likewise, the Commission has repeatedly allowed public subsidies for housing developers aimed at promoting homeownership among socially disadvantaged groups in deprived urban areas. In tax law, the Council decided in 1992 that the supply, construction, renovation and alteration of housing provided as part of social policy may be subject to reduced VAT rates (VAT Directive (Council Directive 92/77/EEC of 19 October 1992 supplementing the common system of value added tax and amending Directive 77/388/EEC (approximation of VAT rates),  OJ L 316/1)), while the letting of accommodation is completely exempted from VAT in all Member States (Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment,  OJ L 145/1). Further aspects of tenancy law are dealt with under European consumer law. Whereas the Doorstep Sales Directive (Council Directive 85/577/EEC of 20 December 1985 to protect the consumer in respect of contracts negotiated away from business premises,  OJ L 372/31) excludes lease contracts from the scope of its application (art 3(2)(a)), the Unfair Terms Directive (Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts,  OJ L 95/29) extends to clauses contained in lease contracts, provided that the tenant is a consumer and the landlord is a commercial entity (which generally requires that the landlord lets several apartments). The tenant is also protected against misleading advertising and similar practices by the Unfair Commercial Practices Directive (Directive (EC) No 2005/29 of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) No 2006/2004 of the European Parliament and of the Council concerning unfair business-to-consumer commercial practices in the internal market,  OJ L 149/22), which provides in art 2(c) that the expression ‘products’ includes immovable property. The Injunctions Directive further enhances these safeguards, encompassing tenants’ actions for enforcing their rights (Directive 2009/22/EC of the European Parliament and of the Council of 23 April 2009 on injunctions for the protection of consumers’ interests,  OJ L 110/30, codifying Directive 98/27/EC on injunctions for the protection of consumers’ interests ( OJ L 166/51)). Tenancy law is also affected by European provisions on energy saving according to which, inter alia, the landlord is bound to inform the tenant about the building’s energy consumption when they enter into the agreement. In several EU Member States including →Germany, these provisions have prompted the legislator to allow rent increases after modernization measures aimed at energy savings have been completed. Furthermore, the provision of housing has been incorporated in European →antidiscrimination legislation. Based on art 19 TFEU (The Treaty on the Functioning of the European Union (consolidated version),  OJ C 326/47), the Council adopted Dir 2000/43/EC implementing the principle of equal treatment (Council Directive 2000/43/EC of 29 June 2000 implementing the principle of equal treatment between persons irrespective of racial or ethnic origin,  OJ L 180/22) against discrimination based on race and ethnic origin. This Directive includes in art 3(1)(h) access to and the supply of goods and services available to the public, including housing, which is particularly relevant to members of ethnic minorities. Finally, European constitutional law has deployed only limited relevance in this area so far. Although a human right to housing (‘droit au logement’) is recognized in several Member States, including →France and →Italy, it is not recognized generally across the EU, and the drafters of the EU Charter of Fundamental Rights (Charter of Fundamental Rights of the European Union of 18 December 2000,  OJ C 364/1) could only agree on including a right to ‘housing assistance’ (without defining this term) in the Solidarity chapter of the Charter (art 34(3)), which has had little legal or political impact so far.
In contrast, the European Convention on Human Rights (European Convention of 4 November 1950 for the Protection of Human Rights and Fundamental Freedoms, 213 UNTS p. 1081221) has played an increasingly important role in tenancy law in recent years. The European Court of Human Rights has recognized several social rights such as the right of foreign tenants to install a satellite TV set to receive radio and TV channels from their home country (derived from the freedom of opinion enshrined in art 10 ECHR; Mustafa et al v Sweden App no 23883/06 (ECtHR, 16 March 2009)) and the right of a homosexual partner to succeed in a tenancy contract after the death of his partner who had concluded the contract (derived from the non-discrimination right, art 14, and the protection of the private sphere and family life, art 8; Kozak v Poland App no 13102/02 (ECtHR, 2 June 2010)). Interestingly, it has also been discussed in the English House of Lords whether the protection of the private sphere laid down in art 8 ECHR extends to a protection of the tenant against eviction (London Borough of Harrow v Qazi  UKHL 43). Moreover, the ECtHR has repeatedly found a violation of the landlord’s right of property in cases concerning extremely long waiting periods for eviction in Italy – even in cases in which the landlord intended to use a house or apartment for herself or close family members (see Immobiliare Saffi v Italy App no 22774/93 (ECtHR, 28 July 1999); AO v Italy App no 22534/93 (ECtHR, 30 May 2000); Ghidotti v Italy App no 28272/95 (ECtHR, 21 February 2002)). Most importantly for a private law context, the ECtHR has started to balance the property rights (→Property and proprietary rights) of the owner against national regulation protecting the tenant. As has become apparent in cases from →Malta (Edwards v Malta App no 17647/04 (ECtHR, 24 October 2006)), →Poland (Hutten-Czapska v Poland App no 35014/97 (ECtHR, 19 June 2006)) and →Norway (Lindheim and others v Norway App no 13221/08, 2139/10 (ECtHR, 12 June 2012)), which seem to have overruled previous jurisprudence (Mellacher and others v Austria App no 10522/83, 11011/84, 11070/84 (ECtHR, 19 December 1989)), the Court is prepared to intervene when the economic balance of the contractual exchange is manifestly disturbed, in particular when the rent to be gained by the landlord is so low that it does not even cover costs and/or when the landlord is prevented from repossessing the house for an excessive, or even unlimited, period of time.
As regards comparative law, lease law in general and residential tenancy law in particular remain an underrepresented area in which only selected fields have been examined. However, during the last ten years, the European Commission has funded two major comparative projects (‘Tenancy Law and Procedure in the EU’ and ‘Tenancy Law and Housing Policy in Europe’), the results of which are available on the Internet. In addition, in the framework of the European contract law harmonization, the Study Group on a European Civil Code, a transnational academic initiative, has analysed the lease of movables in depth. This field has subsequently also been integrated into the so-called Common Frame of Reference (Study Group on a European Civil Code/Research Group on EC Private Law (Acquis Group) (ed), Principles, Definitions and Model Rules of European Private Law, Draft Common Frame of Reference (DCFR) (Outline Edition 2009)), which is an academic compilation of rules and principles of a European contract law similar to a draft codification in the continental European style; yet the lease of immovables, especially residential tenancies, has again been left out due to its politically sensitive character. The Common Frame of Reference has so far led only to a draft of a Common European Sales Law (Commission, ‘Proposal of 11 October 2011 for a Regulation of the European Parliament and of the European Council on a Common European Sales Law’ COM(2011) 635 final), which does not incorporate the rules on leases. However, in the absence of an explicit exclusion, lease and tenancy contracts might be partially covered by the general rules of a possible future European contract law.
II. European private international law
In Europe, the private international law regulation of leases and tenancy contracts is ensured by the Rome I Regulation (Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I),  OJ L 177/6; →Rome Convention and Rome I Regulation (contractual obligations)). In art 4(1)(c), it covers contracts ‘relating to a right in rem in immovable property or to a tenancy of immovable property’ and subjects them to the lex rei sitae (see II.2. below). As opposed to real property law matters (→Property and proprietary rights), which are under most national private international laws also subjected to the lex rei sitae, an overriding ex ante choice of law remains possible (see II.1. below). Different p. 1082rules apply to certain short-term tenancies (see II.3. below) and timeshare agreements (see II.4. below). The remaining constellations, in particular leases of movables and rights, are mostly governed by the general connection with the law of the characteristic performance (see II.5. below).
1. Choice of law and its limits
In line with the contractual characterization of contracts relating to a right in rem or to a tenancy of →immovable property, a choice of the applicable law remains possible pursuant to the general provision of art 3 Rome I Regulation. The →choice of law is subject to general requirements: first, the existence and validity of the consent of the parties as to the choice of the applicable law needs to be determined in accordance with the requirements foreseen by the chosen law itself (arts 3(5), 10, 11 and 13 Rome I Regulation). Moreover, the choice of law may be explicit or implicit, provided that it is clearly demonstrated by the terms of the contract or the circumstances of the case (art 3(1) Rome I Regulation). However, in tenancy cases such an implicit choice should not simply be assumed in favour of the law of the common citizenship of the contractual parties if the immovable property in question is located in another EU state. Importantly, when all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of non-dispositive provisions of the law of that other country (art 3(3) Rome I Regulation). The ensuing juxtaposition of two national laws is in principle the same as the one foreseen in contracts with passive consumers (art 6(2) Rome I Regulation) and workers (art 8(1) Rome I Regulation). For example, if both the landlord and the tenant have German nationality and are domiciled in Germany, the choice of English law as lex contractus in a tenancy contract which has as its object a flat located in Germany is not capable of overriding the non-dispositive provisions of German law, especially the provisions protecting the tenant. Furthermore, the sole foreign citizenship of a landlord should not be a sufficient element to enable a choice of law which allows evading the non-dispositive provisions of the law where the flat is located. Thus, a landlord of Turkish nationality domiciled in Germany for ten years should not be allowed to rent out a flat in Germany with a choice-of-law clause opting for Turkish law, thus evading all German provisions protecting the tenant.
Significantly, the restrictions on →choice of law to the disadvantage of consumers do not apply to tenants, with the exception of timeshare contracts within the meaning of the Timesharing Directive (Directive 94/47/EC of the European Parliament and the Council of 26 October 1994 on the protection of purchasers in respect of certain aspects of contracts relating to the purchase of the right to use immovable properties on a timeshare basis,  OJ L 280/83), art 6(4)(c) Rome I Regulation. This exclusion is not justified, as residential tenancies providing a tenant with a home are typically of existential importance, usually higher than of most other consumer contracts. As a consequence, only mandatory provisions in the sense of art 9 Rome I Regulation may be invoked against the law chosen by the parties (often imposed on the tenant on a take-it-or-leave-it basis). However, it is accepted in the literature that one may consider mandatory provisions all important legislative devices protecting the tenant contained in the law of location of the dwelling, in particular, limitations of notice by the landlord, minimum duration of contracts, minimum quality standards, rent control and succession rights. This interpretation counteracts the shortcomings of art 6(4)(c) Rome I Regulation.
2. The objective connection of contracts relating to a right in rem in immovable property or to a tenancy of immovable property
According to art 4(1)(c) Rome I Regulation, contracts ‘relating to a right in rem in immovable property or to a tenancy of immovable property shall be governed by the law of the country where the property is situated’. The wording of this provision is different from that of its predecessor, art 4(3) of the Rome Convention (Rome Convention on the law applicable to contractual obligations (consolidated version),  OJ C 27/34), which covered contracts whose ‘subject matter is a right in immovable property or a right to use immovable property’. The reason for the changed wording, which does not seem to amount to any change of substance, is to conform to the Brussels I Regulation (Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments p. 1083in civil and commercial matters,  OJ L 12/1; →Brussels I (Convention and Regulation)), an objective expressly referred to in Recital (7) of the Rome I Regulation. According to art 22 (no 1) Brussels I Regulation, the exclusive jurisdiction for ‘proceedings which have as their object rights in rem in immovable property or tenancies of immovable property’ lies ‘with the courts of the Member State in which the property is situated’. Article 4(1)(c) Rome I Regulation should therefore be interpreted in line with that provision in order to achieve conformity between jurisdiction and the applicable law.
Manifold reasons militate in favour of the application of the lex rei sitae to lease and tenancy contracts: the permanent localization of immovable property which determines the place of delivery of the performance and thus also the closest link; public law connections, in particular to real estate tax and the land register; the respect for mandatory rules on the protection of residential tenants; the familiarity of courts with the rules and practices of their own state; conformity between jurisdiction and applicable law.
As regards its substantive scope, art 4(1)(c) Rome I Regulation includes all kinds of contracts for the use of immovable property, which means primarily plots of land and buildings, including condominiums. Relevant contracts therefore extend to residential and commercial tenancies; subleases and short-term leases or licences; agricultural tenancies and leases; leases of holiday homes, parking lots or camping spaces exceeding the period of six months (see infra III.3.); gratuitous loans; as well as to all contracts which have the transfer or securitization of immovable property as their subject, like contracts to sell, to donate, to exchange, to pledge or to levy charges on the immovable property (not mere brokerage or management contracts).
In accordance with the scope of the Regulation, only contractual agreements under the law of obligations are included, which, as with all provisions of the Regulation, have to be characterized autonomously, not according to the lex rei sitae. It is certain that real property law contracts, such as the real transfer under §§ 929 or 925 German Civil Code (Bürgerliches Gesetzbuch of 2 January 2002, BGBl. I 42, as amended, henceforth German CC), are excluded. However, it seems wrong to limit the provision on the basis of the German principle of abstraction (Abstraktionsprinzip) to contracts which only engender obligations and do not entail real property effects. Instead, it should be borne in mind that under most legal systems, which follow the principle of consensus, including for example →Italy, valid sales contracts entail the automatic transfer of property. Such contracts should also be covered by art 4(1)(c) Rome I Regulation. Nevertheless, their real property law effects should be governed under private international law by the property law connection. In almost all legal systems, this is also the lex rei sitae (eg art 43(1) Introductory Act to the German Civil Code (Einführungsgesetz zum Bürgerlichen Gesetzbuche of 21 September 1994, BGBl. I 2494, as amended)), albeit with the notable difference that a choice of the applicable law, at least on an ex ante basis, is generally not permitted. Thus, effects in rem of lease and tenancy contracts – eg the landlord’s lien (§ 562 German CC), consequences related to land registration and the principle emptio non tollit locatum – are covered by the real property law connection.
Based on this distinction, contracts establishing usufruct agreements and easements, such as a right of residence, should be dealt with under art 4(1)(c) Rome I Regulation, while the exercise of these rights is subject to the real property law connection.
In the case of mixed contracts, ie contracts composed of multiple elements dealt with under art 4(1) Rome I Regulation, the application of art 4(1)(c) Rome I Regulation requires that the prevailing purpose of the contract concerns a right in rem or a tenancy of immovable property (unless, of course, art 4(1) Rome I Regulation itself identifies the applicable private international law rule, as is the case when art 4(1)(d) Rome I Regulation states that the private international law rule contained therein applies notwithstanding art 4(1)(c) Rome I Regulation). This may be held for a tenancy contract with the option for the tenant to purchase the rented dwelling at the end of the contract, as this option constitutes a minor element when compared to the prevailing lease element. The same might generally be held for the lease of an entire company (Unternehmenspacht), extending to a plot of land, the buildings erected on it and all other assets of the company, which normally constitute minor elements of the overall contractual obligation. Otherwise, if the contract is constituted of elements of equal or similar rank, it is governed by the general rule contained in p. 1084art 4(2) Rome I Regulation, according to which the law of the country applies where the party who effects the characteristic performance has her habitual residence. Only if a characteristic performance cannot be determined is the most closely connected law applicable according to art 4(4) Rome I Regulation.
Moreover, art 4(3) of the Rome I Regulation contains a special rule based on a manifestly closer connection of the facts of the case to the law of another country than that applicable under art 4(1) and (2) Rome I Regulation. Thus, if it is clear that a lease or tenancy contract is manifestly more closely connected to a country other than that of the lex rei sitae, the law of the other country shall apply pursuant to art 4(3) Rome I Regulation. For this rule to apply, it is not enough, though, that the landlord and the tenant have their common domicile (→Domicile, habitual residence and establishment) in another country, as such a rule would circumvent the narrower requirements contained in art 4(1)(d) Rome I Regulation.
Finally, under art 11(5) Rome I Regulation, the lex rei sitae is also the applicable law with regard to formal requirements of the transactions in the sense of art 4(1)(c) Rome I Regulation, ‘if by that law those requirements are imposed irrespective of the country where the contract is concluded and irrespective of the law governing the contract and those requirements cannot be derogated from by agreement’.
3. Short-term leases and tenancies
According to art 4(1)(d) Rome I Regulation, tenancies of immovable property concluded for temporary private use for a period of no more than six consecutive months shall be governed by the law of the country where the landlord has her habitual residence. This provision applies only insofar as the tenant is a natural person and has his habitual residence in the same country as the landlord. While the provision includes all possible uses of an immovable, it is directed in particular to the lease of holiday accommodation other than package holiday contracts.
A pertinent case decided by the ECJ is at the origin of the provision (Case 241/83 Erich Rösler v Horst Rottwinkel  ECR 109). In this case, a German landlord had let a flat in his Italian holiday villa to a German tenant for a period of three weeks; afterwards, the landlord sued the tenant inter alia for →damages before the Regional Court (LG) of Berlin. The ECJ, to which the case was referred under the preliminary reference procedure, denied the international jurisdiction of the German court based on art 16(1) of the Brussels Convention (Brussels Convention of 27 September 1968 on jurisdiction and the enforcement of judgments in civil and commercial matters,  OJ L 299/32, consolidated version,  OJ C 27/1), which provided for the exclusive jurisdiction of the courts of the country of location of the property. Therefore, the two Germans were required to bring the dispute before an Italian court. This situation was regarded as unsatisfactory and led to the introduction of art 22 (no 1, 2nd sentence) of the Brussels I Regulation as well as art 4(1)(d) Rome I Regulation.
If, however, the tenant and the landlord have their domicile in different countries, or also in the case of commercial tenancies, the lex rei sitae according to art 4(1)(c) Rome I Regulation remains applicable. Thus, when an Englishman rents his Italian holiday home to a German, Italian law applies. Regarding the maximum period of six consecutive months, the contractually agreed period is crucial; as far as an agreement is lacking, the actual duration of the contract is decisive.
4. Timeshare agreements
Unlike lease contracts and tenancies, timeshare agreements are not governed by the lex rei sitae. According to art 6(4)(c) of the Rome I Regulation, these contracts are subject to ‘the law of the country where the consumer has his habitual residence provided that the professional pursues his commercial or professional activities also in this country or, by any means, directs such activities to that country and the timeshare agreement falls within the scope of such activities’.
5. Lease of movables and rights
The lease or (gratuitous) loan of movables as well as the ‘lease of rights’, in particular →licence contracts and similar agreements in the field of immaterial property, are not specifically regulated in art 4(1) Rome I Regulation. Therefore, they need to be dealt with under the ‘catch-all rule’ contained in art 4(2), according to which the law at the seat of the party who effects the characteristic performance applies. It is generally agreed that, in lease, loan, tenancy p. 1085and licence contracts, the lessor, the landlord and the licensor regularly render the characteristic performance. Only if a characteristic performance cannot be determined, as for example in the case of barter contracts, is the most closely connected law applicable according to art 4(4) Rome I Regulation.
III. Private international law of other countries
Private international law in →Switzerland is contained in the Swiss Private International Law Act (Bundesgesetz über das Internationale Privatrecht of 18 December 1987, 1988 BBl I 5, as amended, henceforth Swiss PILA). Article 116 Swiss PILA lays out the general principle that parties to a contract may choose the law that will govern contractual issues, and the form required for a valid choice of law is governed also by the law chosen by the parties. In addition, the Swiss act sets a minimum standard that the choice of law must be made expressly or clearly demonstrated by the terms of the contract or the attendant circumstances. Furthermore, the parties may at any time agree to or modify a choice of law. A choice of law agreed to or modified after conclusion of the contract will have effect from the time of conclusion of the contract, but such choice or modification shall not adversely affect the rights of third parties.
In the absence of a →choice of law by the parties, art 117 Swiss PILA provides that the law governing the contract is the law of the country with the closest connection to the contract. The article also provides that the country with the closest connection is assumed to be the country in which the party who is obligated to deliver the characteristic performance has his habitual residence or, in the event that the contract is concluded based on a professional or commercial activity, the country in which the party has an office or branch. Particularly, in the case of a contract to convey a right to use moveable property, the performance of the party granting the right of use is to be considered as the characteristic performance, with the result that the law of the country where the owner has his habitual residence will govern such contracts.
However, this is not the same for contracts related to →immovable property. Although art 119 Swiss PILA similarly allows parties to choose the applicable law, the article provides that, in the absence of a valid choice of law by the parties, contracts regarding immovable property or the use of immovable property shall be governed by the law of the country in which the property is situated (lex rei sitae). Issues regarding the form required for such contracts to be valid will also be governed by the law of the country in which the immovable property is situated, unless the law of that country allows the application of the law of another country. Furthermore, Swiss law shall always apply to the form required for contracts related to immovable property situated in Switzerland.
The Swiss PILA deals with property rights specifically in ch 7, which lays out the application of lex rei sitae as the general principle. Article 99 Swiss PILA provides that rights in rem in immovable property are governed by the law of the country in which the property is situated, and art 100 Swiss PILA extends the principle of lex rei sitae to movable property. Thus, the acquisition and alienation of interests in movable property shall be governed by the law of the country where the property is situated at the time of the event from which the acquisition or alienation arises, and the substance and enjoyment of interests in movable property shall also be governed by the law of the country in which the property is situated.
In the USA, choice-of-law analysis is part of the common law of the several states, and each state has developed its own jurisprudence in this area. Consistent with the rule that there is no general US Federal common law, US Federal courts must apply the choice-of-law rules of the state in which they are located when deciding cases under diversity jurisdiction (see Klaxon Company v Stentor Electric Manufacturing Company, 313 U.S. 487 (1941)). Although there is no uniform set of rules, the most comprehensive overview of the choice-of-law jurisprudence of the several states is found in the Restatement (Second) of Conflict of Laws (American Law Institute, Restatement of the Law, Second: Conflict of Laws 2d, St. Paul 1971; →Restatement (First and Second) of Conflict of Laws) which does not constitute binding authority, but is among the most widely-cited sources of secondary authority on the state of and trends in the common law.
Restatement (Second) § 186 lays down the principle that contracting parties are free to choose the law to govern issues of contract p. 1086law. Regarding contracts for the conveyance of interests in →immovable property, §§ 189 and 190 of the Restatement permit party choice of the law applicable to issues regarding the validity of and the contractual duties arising from such contracts. In the absence of a valid choice of law by the parties, contracts for the conveyance of interests in immovable property are governed by the law of the state where the property is situated (lex rei sitae; referred to in the USA more commonly as ‘law of the situs’), subject to the limitation that the law of another state will be applied to determine a particular issue if the other state has a more significant relationship regarding that issue (§§ 189, 190 Restatement (Second) of Conflict of Laws). Additionally, issues regarding the formal requirements (→Formal requirements and validity) for such contracts are governed by the law of the situs, unless the parties have designated that the law of a different state will be applied for this purpose (§ 224 Restatement (Second) of Conflict of Laws).
When determining issues concerning rights in rem in immovable property (→Property and proprietary rights), particularly the validity and effect of transfers of interests in immovables, the law of the situs will apply without regard to a choice of law agreed by the parties in an underlying contract (§ 223 Restatement (Second) of Conflict of Laws). This rule is based on criteria enumerated in § 6 Restatement (Second) of Conflict of Laws regarding the needs of the interstate and international systems, as well as the principles of certainty, predictability and uniformity (see comment a. to § 223 Restatement (Second) of Conflict of Laws). In contrast, interests in movable property will be determined by the law of the state that has the most significant relationship to the thing and to the parties, in consideration of the criteria enumerated in § 6 Restatement (Second) of Conflict of Laws.
While no explicit provision has been promulgated to protect consumers from a disadvantageous →choice of law in contracts regarding immovable property, an analogous protection has developed in case-law. In all types of contracts, the law chosen by the parties will be applied to all issues that the parties themselves could have resolved by including an explicit provision in their agreement (§ 187(1) Restatement (Second) of Conflict of Laws), but the law of a state chosen by the parties shall not apply to issues that the parties could not have otherwise resolved by an explicit provision in their agreement unless the chosen state has a substantial relationship to the parties or to the transaction or if there is another reasonable basis for the parties’ choice (§ 187(2)(a) Restatement (Second) of Conflict of Laws). In addition, the law of the state chosen by the parties will not be applied to a particular issue if such application would be contrary to a fundamental policy of a state that has a materially greater interest in the particular issue than the state chosen by the parties (§ 187(2)(b) Restatement (Second) of Conflict of Laws). This rule excludes the possibility that the chosen law could be applied in contravention of non-dispositive provisions, such as those found in consumer protection law. Comment g. to § 187 of the Restatement clarifies that a fundamental public policy may be embodied in a statute intended to protect against the ‘oppressive use of superior bargaining power’. Furthermore, no rule in the Restatement excludes contracts for the transfer of interests in immovable property from the protections provided under § 187 of the Restatement.
Finally, the choice-of-law provisions of the UCC must also be considered when dealing with contracts for lease of moveable property. While lease of goods is regulated in UCC Article 2A, choice-of-law provisions are contained in the general part of the code, UCC Article 1. In its main variant, UCC § 1–301(a) allows parties to a transaction to agree a state or nation whose law shall apply to the transaction, but the choice is effective only if the ‘transaction bears a reasonable relation’ to the agreed state or nation. Otherwise, if an effective agreement on applicable law is lacking, UCC § 1–301(b) dictates that the law of the forum shall apply to transactions bearing an appropriate relation to the forum. Subsections (a) and (b) of the section are subject to the limitation in UCC § 1–301(c) that the specification of applicable law in eight enumerated UCC sections – including UCC § 2A-106 pertaining to lease of goods – shall govern and contrary agreement by the parties shall be effective only if permitted by the particular law specified. Specifically in the context of lease of goods, UCC § 2A-106 limits the autonomy of parties to a consumer lease to agree an applicable law and the forum for adjudication. For the agreed law to be enforceable, UCC § 2A-106(1) requires that the chosen law must be that of the jurisdiction in which the lessee resides at the time the lease p. 1087agreement becomes enforceable or will reside within 30 days thereafter or the jurisdiction where the goods are to be used. Regarding personal jurisdiction, UCC § 2A-106(2) allows parties to agree a judicial forum only to the extent that the forum chosen by the parties would otherwise have personal jurisdiction over the lessee.
Notably, the commercial code of the US Virgin Islands contains a substantively different choice-of-law provision in its § 1–301 (United States Virgin Islands Code, Title 11A, Article 1 § 1–301), adopted as the result of a short-lived revision introduced from 2001 to 2008. This variant provides more party autonomy in business-to-business transactions by removing the general requirement that the chosen law bear a reasonable relation to the transaction, while the requirement is retained only for transactions involving a consumer party. However, this revised version was not enacted by any jurisdiction other than the US Virgin Islands, and the choice-of-law provisions found in all other commercial codes enacted by the states are substantively identical to one another.
In Japan the main statute of private international law is the Act on General Rules for Application of Laws (Hōno Tekiyō ni Kansuru Tsūsokuhō, Act No 78 of 21 June 2006, henceforth Japanese PILA). This Act is a complete revision of the former Act (Act No 10 of 1898), which was based on German law. Choice-of-law rules are stipulated by art 7 and art 8 of the Japanese PILA, and both provisions govern issues regarding the law of obligations, exemplified by contract.
If the parties agree on a choice of applicable law in a juridical act, such as a contract, that law shall apply to issues of formation and effect of the juridical act (art 7 Japanese PILA). Furthermore, art 9 Japanese PILA permits the parties to change the law applicable to contractual issues, but any change shall not be applied to prejudice the rights of third parties.
However, there is a limitation on the choice of law from the perspective of consumer protection. If a contract is concluded between a consumer and a business operator (excluding a labour contract, art 12 Japanese PILA) and the consumer has manifested to the business operator an intent that a specific mandatory provision from the law of the consumer’s habitual residence should be applied, the mandatory provision shall also apply to matters stipulated by the provision regarding the formation and effect of the consumer contract, even though the applicable law (as a result of a choice or a change of law under art 7 or art 9 Japanese PILA) is a law other than the law of the consumer’s habitual residence (art 11(1) Japanese PILA). Article 11(1) also covers tenancy contracts in which the tenant is a consumer residing in Japan and the landlord is a foreign business operator. In that case, tenant-protective provisions in the Act on Land and Building Leases (Act No 90 of 1991) are regarded as mandatory provisions, and they apply in addition to the law chosen by the parties if the tenant has manifested an intention that those provisions shall apply.
If there is no agreement between the parties, the law of the place with which the contract is most closely connected at the time the contract is concluded shall govern issues of formation and effect of the contract (art 8(1) Japanese PILA). If only one of the parties is to provide the characteristic performance involved in the contract, the law of the habitual residence of the party providing said performance shall be presumed to be the law of the place with which the contract is most closely connected (art 8(2) Japanese PILA). This provision is based on the principle of characteristic performance, which was similarly adopted in art 4(2) of the Rome I Regulation.
Particularly, if the subject matter of the contract is real property – eg a contract for the sale of real property or a tenancy contract – the law of the place where the real property is situated (lex rei sitae) shall be presumed to be the law of the place with which the contract is most closely connected (art 8(3) Japanese PILA). Regarding issues concerning real rights and other rights requiring registration in the registry, art 13(1) Japanese PILA states that they shall be governed by the law of the place where the property associated with the right is situated. Other rights requiring registration include rights which, through registration, gain countervailing power against third parties similar to that of real rights. Typical examples are a tenancy right when it is registered and a special agreement for redemption attached to a sales contract of real property. However, acquisition or loss of a right shall be governed by the law of the place where the property associated with p. 1088the right was situated at the time when the facts constituting the cause of the acquisition or loss occurred (art 13(2) Japanese PILA).
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