Real Estate Leasing and Associated Risks

The real estate market and its associated relations, such as tenancy and leasing, are considered one of the foundations of a market economy. Facilitating real estate transactions from a legal perspective essentially means that the state should not hinder commerce. As Ilia Chavchavadze once pointed out: "Every producer must convert their product into a value that possesses a universal and indisputable force to facilitate exchange."

The development of the real estate market is closely linked to the Civil Code of Georgia, as this code determines the fate of property rights, the rules for encumbering real estate with a mortgage, and the procedures for its acquisition and alienation. The same code establishes the rules for leasing real estate and defines the consequences when "the other party fails to fulfill the obligations imposed on them." Leasing real estate is a stable source of income; however, this stability is only truly stable when the law does not prevent individuals from resolving their own issues, or when the law stands on the side of the owner in cases where property rights are violated. Until December 11, 2015, Article 172, Paragraph 3 of the Civil Code recognized a rule protecting the owner's rights. For example:
Suppose person X leased their real estate Y to person A. In the event that person A failed to pay the rent, person X could appeal to law enforcement agencies and demand its immediate return. The legal logic behind this was as follows:
The right to property is a constitutional right; in a society of property owners, the state has an obligation to assist the owner, because if the state cannot protect property rights, the constitutional norm becomes "inactive." Furthermore, if a person cannot use their real estate and generate income, the owner spends less; if they spend less, the state subsequently fails to collect revenue, and so on;

Following the amendments of December 11, 2015 (which were driven by a series of social and political factors), this article was annulled, and consequently, the same rule no longer applies. What does this mean?!
Suppose person X leases their real estate Y to person A. If person A fails to pay the rent, person X can no longer do the following:
a) Appeal to law enforcement agencies;
b) Regain possession of their property without a court decision;
c) Throughout this entire period, the bad-faith tenant continues to possess someone else's property;

The legal logic was turned upside down. Specifically, the Civil Code entrusted the fate of the lease to the court, rather than to the Public Registry extract and/or its presumption. It also left a loophole allowing a bad-faith individual to withhold rent, reside in the real estate throughout the entire dispute, and leaving the owner with no choice but to recover the property solely through enforcement proceedings;

For the owner to reclaim and recover their leased property through the court, they incur additional expenses, such as:
a) The person has to hire an attorney and pay the corresponding fees;
b) Pay the state court fee;
c) In most cases, litigate through three instances of court to regain possession of their property to lease it again;
d) Even after obtaining a judgment, the process does not end there; they must conduct an expert appraisal of the real estate's value and pay the expert's fee;
e) Submit this appraisal to the LEPL National Bureau of Enforcement and pay an additional 2% of the real estate's value (not exceeding 5,000 GEL);
f) The story does not end there either; subsequently, they must wait in their so-called "queue" at the National Bureau of Enforcement, which can drag on for years;

Meanwhile, the lessor loses income. If the lessee acts in bad faith and has no assets registered in their name, demanding the lost income on top of the unpaid rent simply places them in the Registry of Debtors, while the financial damage remains with the owner. On top of everything else, to recover the enforcement fees (e.g., 1,000 GEL) paid during the proceedings from the bad-faith tenant, you must initiate another lawsuit. Furthermore, if you attempt self-help enforcement and personally try to evict the bad-faith tenant from the property, their call to the police could trigger a criminal investigation against you under Article 160 of the Criminal Code of Georgia (Violation of the inviolability of a domicile);

As surprising as it may be, this is our reality. The law and its imperfections have resulted in a failure to stand guard over the rights of the owner in a property-owning society. Is it possible to escape all of this? There are several methods you can use to protect yourself if you find yourself, or might find yourself, in this situation. The tips are as follows:
a) First and foremost, clarify exactly who you are leasing the real estate to, as it is common for the property to be leased to one person who then subleases it to others;
b) Request that the prospective tenant provide contact information for previous landlords or a letter of recommendation from them (although the law does not mandate this, it is a tool to help you understand who you are dealing with);
c) Absolutely and without exception, execute a written contract with the person you are leasing the real estate to;
d) Merely signing a written contract is not enough; the contract must also include:
d.a.) Security Deposit — require the advance placement of 2 or 3 months' rent into a deposit account; if they breach the payment terms, you will retain the funds;
d.b.) Penalty (Liquidated Damages) — if they violate the payment schedule, a penalty should be imposed, which must be reasonable (e.g., 0.07% daily);
d.c.) Debtor's Guarantee — in the event they fail to pay the rent, they should be liable for alternative performance in addition to the contractual rules (be it transferring ownership of their vehicle or other assets to you);
e) The above list is not exhaustive. In some cases, you can also require them to bring a third party to sign a suretyship agreement to guarantee the rent payment, ensuring that someone else will be held liable if they default, etc;

Adhering to these rules may not guarantee that a bad-faith individual turns into a good-faith one; however, if the issue comes down to damages, you will at least be insured and able to recover the inflicted damage, if not fully, then at least minimally;