Lease Of Property By A Company Under Formation: The Supreme Court Clarifies The Scope Of Article 15A, Cap.113

The recent judgment of the New Supreme Court of Cyprus, dated 10 September 2025, in Civil Appeal No. 74/2017 highlights a classic yet often misunderstood issue in company and contract law: when a contract entered into before the incorporation of a company binds the company itself, and when it binds personally the individual who signed it.

The Facts

An individual (the respondent) signed a lease agreement for a residence to be used as a kindergarten. The lease made no reference to any company, nor that it was signed on behalf of or for the account of a company under formation.
Shortly afterwards, he and his wife incorporated a company, which began operating the kindergarten on the leased premises and paying the rent.

The District Court held that the lease became binding upon the company after its incorporation, applying Article 15A of the Companies Law, Cap.113.
The New Supreme Court, however, overturned that finding.

The Legal Issue

Article 15A of Cap.113 regulates the validity of contracts made before a company's incorporation. It provides that such a contract is provisional and binds the company only if it was entered into on behalf of or for the account of the company under formation by persons who signed the memorandum of association or were duly authorised by them.

If the company is not incorporated, or if the contract does not meet these requirements, it binds only the individual who signed it.

The Court's Reasoning

The Supreme Court held that Article 15A did not apply in this case, because:

1. The contract did not state anywhere that it was signed on behalf of or for the account of a company under formation.
2. The company under formation was not named in the lease.
3. It was not proven that the individual signed as a founder or authorised representative of the company.
4. To invoke Article 15A, the agreement must have been signed by all persons who executed the memorandum of association, or by someone authorised by them. In this case, the memorandum was signed by two shareholders, but the lease was signed only by one.
5. The fact that the company was incorporated one month later and subsequently paid the rent did not alter the identity of the tenant.

The mere use of the premises by the company or payment of rent by company cheques does not create a legal obligation for the company when the written agreement clearly identifies the individual as the contracting party.

The Court relied on the principle of pacta sunt servanda, emphasising that rights and obligations flow from the text of the contract itself, not from external circumstances or subsequent conduct.

The Outcome

The appeal was allowed. The Supreme Court ruled that the tenant was the individual, not the company, and ordered him to pay the landlord €51,800, plus statutory interest from 1 January 2015 and legal costs of €3,500 + VAT.

The Significance of the Judgment

This decision is particularly significant for company and contract law:

• It reaffirms that a company acquires legal personality only upon incorporation, not before.
• It underscores that "under-formation" contracts must be drafted with absolute clarity, otherwise they expose the signatory to personal liability.
• It guides lawyers to include in such agreements a specific clause stating that:
• • the contract is made on behalf of and for the account of the company under formation,
  • the company will ratify the agreement after incorporation, and
  • if incorporation does not occur, liability will remain personal.

Conclusion

This case is a reminder that in company and contract law, intentions do not replace written terms — what matters is what the contract actually says.
If a company did not yet exist at the time of signing and is not expressly named in the agreement, it can never be bound, even if it later "takes over" the business or pays the rent.

A single sentence, properly inserted in the lease, could have prevented twelve years of litigation and tens of thousands of euros in costs. (The lease was signed in 2013, the action was filed the same year, and the case reached final judgment in 2025.)

That is why even "simple" or "standard" contracts are not for experimentation.
They should be drafted by lawyers and legal professionals, not by agents or business owners — because one misplaced word can determine who bears the legal burden.

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