The signing of a lease agreement by the lawful representative of a tenant should be sufficient for concluding a binding and valid lease agreement (assuming all other conditions for validity of a contract are fulfilled). Where the tenant is a public company, special attention should be paid to whether the agreement is subject to prior authorization by the general meeting of the shareholders.
Corporate authorization for entering into a lease agreement
Under Bulgarian law, managing directors in limited liability companies and executive directors, as well as board of directors and managing boards in joint stock companies, including public companies, (“Managing bodies”) are authorized to represent companies in all matters concerning their business by virtue of law.
For certain actions, however, the Managing body is required to obtain a prior authorization or approval by virtue of law or by virtue of the company’s articles of association or resolution of another corporate body. In the absence of such authorization, the validity of the Managing body’s action may be challenged. There is, indeed, inconsistent case law on the legal effect of management actions without the required corporate authorization from other corporate bodies, especially in a case where the matter concerns acquisition and disposal of real estate in limited liability companies. According to Bulgarian legislation, such authorization is also required for lease agreements with a duration exceeding 3 years.
The lessor has two main concerns in respect to tenants – legal entities:
Is corporate authorization required for entering into a lease agreement by virtue of law and, if so, what is the effect of a missing authorization?
In limited liability companies, any disposal of or acquisition of real estate is subject to an authorization by the general meeting of the shareholders. Concluding a lease agreement as a tenant, including for a period of longer than 3 years, does not qualify as acquisition or disposal of a real estate, hence from a tenant’s perspective there is no requirement for special authorization given in the form of a deliberate resolution of the general meeting of the shareholders.
For joint stock companies, some material transactions must be concluded only upon resolution of the general meeting of the shareholders. Even if the lease transaction would fall within the ambit of the mentioned provision, there is an explicit clause stating that the absence of a corporate authorization may not affect the validity of the transaction. It may only give rise to liability of the Managing body to the Company.
Public companies require prior authorization of the general meeting of the shareholders for certain transactions (e.g. undertaking obligations to a single person or related persons exceeding certain value, etc.). Prior to the transaction, the general meeting has to pass a resolution specifying the material terms and conditions of the transaction, including parties, subject and value, as well as in whose favor the transaction is executed. Any transaction infringing on this requirement is invalid. These provisions do not apply to transactions undertaken in the course of the ordinary business activity of the company.
Therefore, where the tenant is a public company, a preliminary assessment is recommended in order to determine whether a prior resolution of the general meeting of the shareholders is required for concluding a valid lease agreement.
If corporate authorization is required by virtue of the Articles of Association or an internal resolution of a corporate body, what would be the effect of a missing authorization for the lease agreement?
The representative powers of the Managing bodies are statutory determined and may not be limited by any provisions in the articles of association or any resolution of the general meeting of the shareholders. The only restriction that would be binding for third parties is the requirement for joint representation in case of several managing or executive directors.
Therefore, where the articles of association of a tenant provide for a special authorization for entering into contracts (apart from joint representation in case of several members of the Managing body), the violation of this provision would not affect the validity of a lease agreement. Such kind of limitation of the managing bodies’ representative powers would affect only the internal relations between the tenant – legal entity - and its Managing body. This remains valid even if the limitation is registered in the Bulgarian commercial register.