Slovakia: Legal implications on the real estate sector
The economic effects of the Covid-19 pandemic are already being felt in every corner of the globe and in various areas such as trade relationships, employment, finance, and also real estate. Due to the imposed measures, certain premises may no longer be used or their use might be restricted, construction projects will likely be delayed since, for example, the cross-border movement of goods is restricted and landlords might experience financial problems if their tenants stop paying rent.
Can the Covid-19 pandemic be used as an argument for exempting liability in case of breach of contractual obligations?
The effects of the Covid-19 pandemic are already apparent. If these will continue to last, it might be cumbersome or almost impossible to perform e.g. for suppliers in construction projects obligations under existing contracts (e.g. goods are “stuck” in another Member State due to imposed measures).
Covid-19 pandemic and the public measures introduced to reduce its outbreak may be used in order to excuse the non-performance of contractual obligations, but only if they can be considered as a force majeure event.
Before assessing the possibility to use a force majeure event as an excuse for the non-performance of contractual obligations, it is necessary to review the existing contract in detail on whether it includes a so-called force majeure clause; if so, the consequences for invoking such clause should be checked. Usually, when negotiating contracts, not much attention is paid to this clause, but in these difficult times, they are becoming increasingly important.
Even if the contract does not include the force majeure clause, the Slovak Commercial Code regulates the exemption of liability in case of an unforeseeable, unavoidable and insurmountable obstacle that occurred independently of the will of the respective contractual party, i.e. an event of force majeure. If the party can prove that its non-performance was caused by a force majeure event, it will not be obliged to compensate for damage suffered by the other party.
It is worth mentioning that, based on Slovak law, a force majeure event does not affect the obligation to pay contractual penalties nor does it restrict the other party to termi-nate the contract, unless agreed ot-herwise contractually.
However, in commercial relationships, the above mentioned statutory regulations may be contractually excluded by the parties – in such case, they are not applicable.
Can legal obligations be cancelled as a result of the Covid-19 pandemic?
The occurrence of a force majeure event does not mean that the defaulting party’s obligation to perform is cancelled. The above mentioned exemption from the defaulting party’s liability lasts for the duration of the force majeure event. After this event ceases to exist, the defaulting party is obliged to perform.
However, if the force majeure event has a permanent nature (which currently is not the case, as the measures imposed in Slovakia are time-limited), the defaulting party’s non-performance could be considered as a so-called “impossibility to perform” where in such case, the obligation of the defaulting party to perform is cancelled. It is not impossible to perform if the performance is possible under harder conditions, with increased costs or after the agreed time.
Is the tenant, by law, entitled to reduce rent or even stop paying rent?
It is necessary to differentiate between the impossibility to use the premises and the restricted use of the premises due to force majeure.
Under the Slovak Civil Code, if it is not possible to use the premises at all for reasons not caused by the tenant, the tenant is not required to pay rent. If their use is restricted, the tenant may request a discount. However, in both cases, the tenant shall notify the land-lord of its right to demand discount or non-payment.
A frequently used argument by tenants will likely be that paying rent for premises which cannot be used for any purposes without any fault on the part of the tenant is contradictory to the principle of good manners and fair commercial relationships.
Commercial lease agreements usually contain provisions handling this case so the statutory regulation is not relevant in most of the cases.
Are the parties bound by concluded agreements on future agreement, letters of intent, and similar documents?
Various foreign laws recognize the so-called rebus sic stantibus principle, under which a contract becomes inapplicable if the circumstances after its conclusion fundamentally change. Slovak law does not recognize this principle in general, but only in specific cases.
One of these cases is the fundamental change of circumstances after the conclusion of an agreement on future agreement or a similar document (e.g. letter of intent). If the circumstances have fundamentally changed in the time-frame between the conclusion of the agreement on future agreement and the future agreement itself, the parties are no longer obliged to conclude the future agreement.
Are there any statutory extraordinary termination rights for agreements in the real estate business?
There are no special and explicit statutory termination rights for various real estate agreements due to the Covid-19 pandemic and the introduced public measures.
It could be though argued that e.g. retail premises in shopping malls, which are closed under a public measure, are no longer capable for the agreed use and therefore, the ten-ant is entitled to withdraw from the respective contract.
Furthermore, the tenant could argue that due to the closure, the purpose of the entire lease agreement has been frustrated and the tenant may therefore withdraw.
The considerations above are based on the applicable law and do not take into account the contractual agreements between the parties. These need to be reviewed on a case-by-case basis in order to assess the rights and obligations of the parties in respect of the Covid-19 pandemic.