Czech Republic: Coronavirus - Lease contracts
Many entrepreneurs are feeling the impact on their business of the current spread of the new SARS-CoV-2 virus and the restrictions associated with this pandemic. The current situation affects leases due to the forced closure of some businesses and lessees’ potential insolvency due to loss of sales.
Some typical situations currently faced by lessors and lessees:
- Lessee has been compelled to close its business as a direct result of a government order or other official order
Czech law does not have any specific provision that would automatically release a lessee that has been compelled to close its business as a result of a government order or other official order from the obligation to pay rent. The wording of the lease, which may include the lessee's rights beyond the standard guaranteed by law, is crucial for assessing the lessee's rights.
A lessee is however entitled under applicable law to exercise its right to a rent reduction if he or she encounters interference in the use of leased property or is otherwise affected by the actions of a third party. Although this provision is primarily aimed at interference by other legal or natural persons in the peaceful use of the leased premises, not at interference from an official position of power, in our opinion, it is possible to apply this right by analogy even to the current situation. However, it is impossible to know at this time whether this interpretation will be accepted in judicial practice.
A lessee may also claim rights arising from a substantial change of circumstances and force majeure (details below).
- Lessee cannot use its business because it is located in a complex that has been shut down
A number of lessees have been compelled to temporarily close their businesses because they are located, for example, in shopping malls or complexes that have been closed down. Such closure may have occurred on the basis of a voluntary decision of the owner of the premises, or as a result of an order by the government or another public authority. The lessees thus cannot use their premises solely because of their location in an area that is shut down, although the restrictive regulation issued by the government or another authority does not apply directly to them.
In this case, it is a defect in the rented premises that prevents their use. This defect triggers the lessee's right to a rent reduction, or compensation. However, in this case as well, the wording of the lease itself is crucial, as it may provide for different rules that apply to this situation.
A lessee in this situation may also claim rights arising from a substantial change of circumstances and force majeure (details below).
- Lessee is unable to fulfil its obligation to pay rent due to loss of income
Last but not least, lessees are facing payment difficulties caused by the loss of their income. However, even a lessee’s insolvency, without additional grounds, does not release the lessee from its obligation to pay rent.
However, if the coronavirus pandemic has caused the lessee's insolvency, the lessee may claim rights arising from a substantial change of circumstances and force majeure (details below).
Substantial change of circumstances – change or cancellation of a contract
Czech law provides that if, after a contract has been concluded, the circumstances change so substantially that the change entails a particularly gross disparity in the rights and obligations of the parties, the party concerned has the right to seek resumption of lease negotiations with the other party. If the parties do not agree within a reasonable period of time, either party may apply to a court to amend the contract and restore the balance of the parties' rights and obligations, or to cancel the contract.
Depending on the assessment of the particular circumstances (especially the duration of the effects of the coronavirus pandemic), the current situation may be deemed a significant change in circumstances that places the lessee at a considerable disadvantage and creates a gross disparity between the rights and obligations of the two parties. Thus, a lessee can approach a court with a proposal to modify or cancel the lease. However, exercising rights arising from a substantial change of circumstances does not entitle the lessee to discontinue paying the rent until the court has decided to amend or cancel the contract.
Furthermore, substantial changes in circumstances cannot be claimed if the lessee has assumed the risk of a change in circumstances, as is the case with most leases for business premises.
Substantial change of circumstances – cancellation of a contract
Unless otherwise agreed in the lease contract, a substantial change in circumstances also constitutes a notice of termination for fixed-term leases. This right concerns the lease of both residential and business premises. Thus, contrary to the situation described in the previous paragraph, the lessee does not have to go to court to cancel the lease, but may terminate it himself/herself.
However, even in this case, the wording of the lease contracts will be crucial, as it may specify other grounds for terminating the lease.
A coronavirus pandemic can be considered a force majeure. However, unless the lease contract stipulates otherwise, this does not release the lessee from its obligation to duly pay the rent. However, if the performance of obligations under the lease contract (including the payment of rent) becomes impossible for the lessee due to force majeure, it is not obliged to compensate the lessor for the damage incurred.
Future developments and new legislation
The present pandemic is a ground-breaking event, with consequences that our society has not yet encountered in its modern history. These consequences will certainly lead to a number of changes throughout society and will undoubtedly also be reflected in the legal order, judicial practice and general perception of justice, which are always a reflection of the society. As can be seen from the answers above, the Czech legal system currently does not have comprehensive regulation that could be applied to the current situation in order to achieve fair interparty disposition in situations which are sometimes quite unbalanced (for example, some lessees are at a considerable disadvantage). As this situation cannot be perceived as just and fair in the long term, it can be assumed that, sooner or later, legislation or judicial practice will change to such an extent that lessees will not have to bear the impact of the pandemic alone. Neither lessees nor lessors have any power over the pandemic, but the impact on lessees is generally stronger.
Certain new laws aiming the lease agreements were already adopted recently. The first of the prevents the landlord from terminating the lease of both residential and commercial premises in case the tenant is in delay with payment of the rent due to the recent crisis, in case the delay occurred between 12 March 2020 and 30 June 2020 and in case the outstanding rent is fully paid by the end of the year.
The other law establishes a temporary ban on any increase of the rent.
Any questions? Please contact: Mgr. Bořivoj Líbal, Barbara Kusak, Mgr. Michal Janíček, Mgr. David Němeček
Practice group: Real Estate Investment Group