Interventions in rental relationships regarding premises for business purposes because of COVID-19 reasons in Czech Republic. The terms and conditions of the prohibition of the termination of a business lease
Czech Act on Certain Measures to Mitigate the Impact of the SARS CoV-2 Coronavirus Epidemic on Business Tenants in Czech Republic
On the April 1, 2020, the Czech Government approved a bill on certain measures to mitigate the effects of the SARS CoV-2 coronavirus epidemic on tenants of business premises, namely by the Resolution of the Government of the Czech Republic dated on the April 1, 2020 under No. 380/2020. The draft of this Act was not published on the website of the Government of the Czech Republic in comparison with the draft of the Act on some measures to mitigate the impacts of the SARS-CoV-2 coronavirus epidemic on tenants of premises used to satisfy housing needs, apartments and non-residential premises in a house with apartments.
The draft of the Act on certain measures to mitigate the impact of SARS CoV-2 coronavirus epidemic on tenants of business premises, including explanatory memorandum was subsequently submitted to the Chamber of Deputies on the April 2, 2020 and should be discussed at the Meeting No. 44 on the April 7, 2020.The Czech Senate returned the proposal to the Czech Chamber of Deputies with amendments, but the Chamber of Deputies maintained the original wording.
On April 27, 2020, the new Czech Act No. 210/2020 Coll. on certain measures to mitigate the effects of the SARS CoV-2 coronavirus epidemic on tenants of business premises was published in the Czech Collection of Laws, and entered into force on the same day.
How the prohibition of termination of the business leases due to COVID-19 in Czech Republic look like? The new law should provide for measures to mitigate the impact of the epidemic on business tenants, particularly with regard to their current financial situation. It is therefore proposed that businessmen / tenants affected by an emergency should be postponed with the lease or sublease payments of non-residential premises or rooms if these premises are used at least mainly for business purposes. This is a rather controversial proposal, which was most likely copied under the same law to protect tenants with housing needs. Entrepreneurs should have been protected even more than flat tenants, but this original proposal was modified during the adoption of the new Act. Unfortunately, the proposed arrangement is different from the relatively simple German arrangement, which was most likely the inspiration. Unlike the German scheme, it only deals with the lease of premises, while the German scheme also covers the lease of land.
Limitation applicable to lease, sublease and tenancy of premises serving for business purposes in Czech Republic
The new restrictions should apply to the lease, sublease or even a lease of space or a room where the purpose of the lease is to pursue a business activity in that space or room and where the space or room serves at least mainly to business, regardless whether the purpose of the lease is expressed in the lease agreement. The proposal does not apply to the lease of premises serving to meet the tenant's housing needs, which is dealt with by a separate law (see our article The prohibition of the termination of a lease of flat because of COVID-19 and ban on rent increase).
Prohibition of termination by the lessor from April 27, 2020 until the December 31, 2020 (according to the original bill until March 31, 2022) for delay in payment of rent from March 12, 2020 until June 30, 2020 (according to the original bill until September 30, 2020)
The Lessor shall not be entitled to terminate the lease unilaterally from April 27, 2020 until December 31, 2020 (according to the original bill until March 31, 2022) solely on the grounds that the lessee is in delay with the payment of rent (and originally under the bill also of services), if there is a delay:
a) in the period from March 12, 2020 till the day following the end of the emergency measure in the event of the epidemic, but no later than by June 30, 2020 (according to the original bill until September 30, 2020), and
b) predominantly as a result of the restriction resulting from the emergency measure of the epidemic, which made it impossible or substantially hindered to carry on business.
The above limitation should be without prejudice to the lessor's right to terminate the lease for other reasons such as other breaches of the lease by the lessee or other lessor's rights arising from the lessee's delay. Consequently, the abovementioned restrictions merely limit one of the reasons for the termination of the lease, namely the non-payment of the lease rent. If the lessee breaches other provisions or other conditions for termination of the lease are met, the prohibition of termination will not apply to them. Therefore, if the lessor has a problematic tenant who does not pay rent due after March 12, 2020, he should hurry to give notice. In our opinion, the prohibition of termination will not apply to any delays in the payment of previous rent aand the landlord will therefore be entitled to terminate the lease.
The bill does not contain any transitional provisions, so it is not clear whether tenants will be able to rely on the new law if they are in delay with the payment of the rent after the March 12, 2020, but before the law itself becomes effective. In the light of legal certainty and the prohibition of retroactivity, this should not be the case, and therefore in our opinion the terminations served until April 27, 2020 should be valid, even if their submission should no longer be possible after the entry into force of the new Czech law.
Under the original bill also fees and advances for services were included
On the contrary to the bill on some measures to mitigate the effects of the SARS-CoV-2 coronavirus epidemic on tenants of housing needs, the recipient of a loan provided by the State Housing Development Fund and in connection with the provision of services related to the use of apartments and non-residential premises, the draft law should also apply to service charges related business premises. Therefore, the bill effectively required landlords to finance the services consumed by the lessee. However, the bill was not approved in this wording.
Default interest on late rent for tenants will still accrue
The Act does not explicitly address the impact on default interest and therefore the landlord should be entitled to default interest or other penalties under the lease agreement. The current amount of statutory interest on late payments is 10% p.a., with contractual interest on late payments or fines under the lease agreements tending to be higher. Late payment of rent may be a further relatively heavy burden for the tenant in the future, especially if cheaper bank financing of rent is available. For the tenant, interest on late payments may represent partial compensation for late payment of rent as a result of the new legislation.
The possible dispute regarding the assessment of the impact of emergency measures on tenants
It shall be up to the lessee to prove to the lessor without undue delay and with certainty corresponding to the available facts the circumstances of the delay according to the above mentioned letter b).
The act does not address the consequences of failure to substantiate these facts. if these are questionable. In the event of a dispute, they would have to decide on the ordinary court or. arbitration court according to the concluded lease agreement. Especially in the case of arbitration, the result could be relatively quick.
Lessor's termination for non-payment of "crisis" receivables for payment of rent after December 31, 2020 (according to the original bill until March 31, 2022)
If the Lessee fails to pay all receivables due from the March 12, 2020 till the day following the end of the emergency epidemic, but no later than by June 30, 2020 (according to the original bill until September 30, 2020), in the period from the entry into force of the new Act until December 31, 2020 (according to the original bill until March 31, 2022), the landlord has the right to terminate the lease with a notice period of 5 days. The Lessor shall have this right even if the Lessee declares or otherwise becomes unquestionable that these receivables will not be paid by the December 31, 2020 (according to the original bill until March 31, 2022).
The Act does not impose any further restrictions on the landlord, so in our opinion it is possible for the landlord to set off the provided security (deposit or bank guarantee) for any outstanding rent. However, there may be a controversial procedure whereby the lessor sets off the security for the rent due and at the same time requires the security to be supplemented to the original amount and subsequently terminates the lease with justification for its other serious breach, which could actually circumvent the law itself. § 2 (3) of the Act expressly provides that, „ Any arrangement deviating from the provisions of this Act to the detriment of the lessee shall not be taken into account “, and therefore such a procedure could be questionable.
The tenant's right to demand the cancellation of the lease after the end of the state of emergency for his own scarcity
Pursuant to original version of Section 4 of the bill, the lessor may, after the circumstances under point (b) have ceased to exist, however, at the earliest after the end of the state of emergency, require the cancellation of the lease if it cannot be reasonably required to tolerate the limitation to a specified extent, in particular if the lease is the sole source of his livelihood. The original extension of the definition by the addition of "especially if rental is the only source of livelihood" was not finally approved. The term 'livelihood' used, in particular in relation to lessors as legal persons, could be dificult to interpret.
Consistency with the constitutional order? Are there other options?
The explanatory memorandum to the bill is more comprehensive than the bill to housing needs and states:
„The proposed law is in accordance with the constitutional order of the Czech Republic. In particular, Articles 1, 4 and 11 of the Charter of Fundamental Rights and Freedoms can be considered relevant from the point of view of the conformity assessment of the proposed regulation.
Certain criteria for evaluating the proposed amendment can also be found in the Constitutional Court's case-law on regulated rent issues ( Pl. ÚS 3/2000, Pl. ÚS 8/02 a Pl. ÚS 20/05). This leads to the following conclusions:
(i) Contractual freedom, in this case the equality of the contracting parties, can be restricted only on the basis of the public interest.
(ii) Regulation must be proportionate.
(iii) The regulation must not affect the substance of ownership (ownership right under art. 11 Charter of Fundamental Rights and Freedoms).
To point (i) the following can be mentioned. The proposed measure constitutes a restriction of the willful autonomy in private law relations and undermines the equality of the parties. However, this measure is appropriate in the general interest caused by the COVID-19 epidemic, which at the time of the proposed amendment has serious social and economic impacts. This situation is wholly outside the circumstances which the parties can reasonably foresee when contractual obligations are entered into under normal circumstances. As a result of the epidemic, people who are substantially restricted by the extraordinary measures of the epidemic will irreversibly lose their existing means of subsistence as a result of the epidemic.
To point (ii) the following can be mentioned. In the judgement Pl. ÚS 20/05 ÚS the court expressly pointed out that the restriction of the right of property within the meaning of Art. 11 paragraph. 4 LZPS (in the present case in the concept of rent regulation) represents an exception that "should be limited in time to the necessary time". From this point of view, the proposed measures meet this requirement. The proposed suspension of the lessor's right to terminate the lease unilaterally is intended to apply in tightly defined cases where the lessee is in default due to extraordinary measures. The content of the lessee's obligations under substantive law shall remain unaffected and shall be subject to an additional period of time to fulfill them. Its length (until the 31st of March 2022) seems generally adequate to restore its business activities and to provide funds to meet all its obligations. It is also comparable to the duration of similar measures abroad (e.g. in Germany). For specific cases, there are also insurance policies for the protection of the lessor, which allow him to terminate or cancel the lease even before the expiry of the statutory period. The obligation to tolerate the restriction, at least for the duration of the emergency (or until emergency measures), does not impose a disproportionate burden on the lessor. Especially with regard to the fact that restrictions resulting from extraordinary measures may also limit the lessor himself to the possibility of using the premises serving business for other purposes.
To point (iii) the following can be mentioned. From the judgement Pl. ÚS 3/2000 it follows that the price regulation of rent clearly reduces the price (rent) of the property by eliminating at least the cost recovery of the property owner (landlord) to the rented property. The proposed regulation temporarily restricts the owner from exercising the right of the owner (landlord) to unilaterally terminate the lease and use the space serving the business in another way. However, this right should be limited in a legitimate case which would not occur in the normal course of events (delay due to an emergency measure). The lessor is also not restricted in any right to demand payment of all payments due to him in the present case. The measure is de facto in the form of merely postponing the receipt of profit without changing its amount. In this respect, it is only possible in the alternative to refer to the Constitutional Court's judgment in the matter of photovoltaic power plants (Pl. ÚS 17/11), where the Constitutional Court pointed out that it does not contravene the principle of legal certainty, if the change in legal regulations effectively delays the receipt of profits if its amount remains unaffected by the change in the regulation.
The proposed measure is needed and cannot be achieved without amending the legislation or using another less restrictive measure. The possibility of applying the provisions § 2212 art. 3 act n. 89/2012 Sb., Civil Code, as amended (hereinafter „o.z.“) may seem to be at least a questionable. In that regard, it may be questionable whether the adoption of emergency measures can be regarded as a cancellation of the lease by a third party (the State). It can also be questionable whether it is appropriate that the landlord should bear the risk associated with this situation and must therefore give the tenant a discount on the rent. The proposed arrangement, consisting solely of a de facto delay in the performance of the lessee's obligations, constitutes a less restrictive interference with respect to the lessor's rights.
Finally, from the point of view of the conflict of interests, the general interest in preserving business and its whole sectors as well as in minimizing the impact of the crisis exceeds the interest in temporarily asserting a part of the ownership right consisting in unilaterally terminating the lease.“
We assume that the bill will trigger a heated debate and objections from property owners. Among other things, because it is stricter than the bill, which provides protection to tenants to meet housing needs and unreasonably lays down conditions for tenants of entrepreneurs and restricts landlords of business premises by, inter alia, the fact that tenants of business premises should not only pay rental, but also services.
However, the comparison with the German legislation is not entirely appropriate, as shown below. The risk that the proposed amendment will not be accepted in the proposed wording is therefore, in our opinion, relatively large and, if adopted, the question is whether it will lead to a wide range of legal disputes, including those arising from state liability and international arbitration.
Do the tenants and landlords have different protection arrangements in Germany?
If we look at other countries such as Germany, where there was accepted German law on mitigating the consequences of a coronavirus pandemic in civil, insolvency and criminal procedural law , then its modification is general and does not differentiate lease conditions and regulates the ban on dismissal not only in relation to all premises, but also land. § 2 of the German Coronavirus Pandemic Mitigation Act in civil, insolvency and criminal procedural law provides that:
Limitation of termination of lease and lease agreements
(1) The lessor may terminate the lease of land or space solely on the grounds that the lessee will not pay the rent despite the maturity period between 1 April 2020 and 30 June 2020 if the non-compliance is based on the effects of the COVID-19 pandemic. The link between the COVID-19 pandemic and non-compliance must be documented. Other rights of termination shall remain unaffected.
(2) It may not derogate from paragraph 1 to the detriment of the lessee.
(3) Paragraphs 1 and 2 shall apply mutatis mutandis to leases.
(4) Paragraphs 1 to 3 shall apply only until 30 June 2022.“
You can also read more on our German colleagues website Ist aufgrund der Corona-Pandemie jetzt im Mietrecht alles erlaubt?
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JUDr. Mojmír Ježek, Ph.D.
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