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Impact of COVID-19 pandemic on rights and obligations under lease agreements

  • Czech Republic

    23-04-2020

    Update | 23. 4. 2020:

    The Parliament passed the act on certain measures to mitigate the effects of the SARS CoV-2 coronavirus epidemic on tenants of business premises. The new act will be effective once signed by the President and published in the Collection of Laws. Both should be a matter of days.

    According to the draft bill:

    • The landlord cannot terminate the lease solely on the grounds that the tenant has been in default with payment of the rent in the period between 12 March 2020 and 30 June 2020, provided that the delay was caused by the government restrictions which prevented or significantly hindered the tenant from operation of its business.
    • However, the right to terminate the lease for other reasons as well as other rights of the landlord arising from tenant’s delay with payment of the rent are not affected.
    • The tenant is obliged to present, to the landlord relevant documents proving, that there actually are / were circumstances due to which the lease agreement cannot be terminated, withing 15 days from the first delay with payment of the rent.
    • The tenant will be obliged to pay all receivables due between 12 March 2020 and 30 June 2020 by 31 December 2020 at the latest, otherwise the landlord will be entitled to terminate the lease.

    1. TENANT’S RIGHTS AND OBLIGATIONS UNDER THE CURRENT SITUATION

    1.1 Is the tenant obliged to continue paying the rent?

    • The rent and other payments under the lease agreement (such as service charges) are still payable.
    • However, according to the draft bill, the landlord would not be entitled to terminate the lease if the tenant has been in default with payment of the rent in the period between 12 March 2020 and 30 June 2020, provided that the delay was caused by the government restrictions which prevented or significantly hindered the tenant from operation of its business.
    • Under the current practice, decrease or loss of revenue (regardless of the reason) is not considered to be a force majeure event which would entirely release the tenant from its obligation to pay the rent or other payments.

    1.2 Does the tenant have a right to claim discount on rent or deferment of payments of rent and other payments payable under the lease agreement?

    • As mentioned above, loss of revenue does not release the tenant from its obligation to pay the rent and does not entitle the tenant to defer any payments under the lease agreement. However, thanks to the draft bill the lease agreement cannot be terminated only based on tenant’s default with payment of the rent.

    1.3 Is it possible to change terms of the lease agreement?

    • The forced closure of the leased premises which prevents the tenant from the agreed use of the premises might be considered as a material change of circumstances.
    • In such case the tenant is entitled to ask the landlord to renegotiate the terms and conditions of the lease agreement, including the rent.
    • Material changes of circumstances provides only for the right to renegotiate the lease conditions if there are new circumstances causing a gross disproportion in the rights and duties of the parties by disadvantaging one of them.
    • The tenant must ask the landlord to renegotiate the lease terms within 2 months from occurrence of the material change of circumstances.
    • The application of the material change of circumstances clause can be excluded in the lease agreement (exclusion is market standard). Please, always check the particular lease agreement.

    2. LANDLORD’S RIGHTS AND OBLIGATIONS UNDER THE CURRENT SITUATION

    2.1 Is the landlord obliged to grant to the tenant a discount on rent?

    • Generally no, as the loss of revenue does not release the tenant from its obligation to pay the rent and the loss of revenue itself does not entitle the tenant to claim discount on rent.
    • However, it may be agreed in the lease agreement that the tenant is entitled to a discount on rent if the tenant cannot use the premises for a reason not caused by the landlord (ie in cases like this). In such case, tenant’s claim to a discount may arise.

    2.2 Is it a breach of landlord’s obligations if the tenant cannot use the leased premises due to the governmental measures?

    • No, the landlord does not breach its obligations under the lease agreement as it cannot fulfil its contractual obligation because of an extraordinary, unforeseeable and insuperable obstacle created independently of its will (force majeure event).
    • In this situation, the landlord is not liable for any damages incurred by the tenant due to the fact that it is not allowed to use the leased premises.

    3. TERMINATION OF THE LEASE AGREEMENT

    3.1 Can the lease agreement be prematurely terminated by the tenant?

    • Czech law does not expressly provide for such an option.
    • As the landlord is prevented from fulfilling its obligations under the lease agreement directly by the governmental measures (it cannot allow the tenant to use the premises), it is not liable for such a “breach” of its obligations and it does not constitute a reason for termination of the lease by the tenant.
    • If there is no special provision in the lease agreement, the tenant might try to invoke the material change of circumstances clause and to renegotiate the lease conditions (see above).

    3.2 Can the lease agreement be prematurely terminated by the landlord?

    • According to the draft bill, the landlord would not be entitled to terminate the lease if the tenant has been in default with payment of the rent or service charges in the period between 12 March 2020 and 30 June 2020, provided that the delay was caused by the government restrictions which prevented or significantly hindered the tenant from operation of its business.
    • The right to terminate the lease for other reasons as well as other rights of the landlord are not affected.

    4. WHAT TO DO NEXT

    4.1 Tenants / Landlords: Analyse relevant lease agreements

    • It is necessary to review each lease agreement to analyse the position of your company in each particular case.
    • We recommend doing the review as a preparation before possible negotiation with the landlord / tenant.

    4.2 Tenants: Initiate discussion with the landlord

    • Regardless of tenant’s rights agreed in the particular lease agreement (ie whether the tenant is entitled to a discount on rent or not etc.), we recommend you to initiate and maintain a discussion with the landlord.
    • Even if the tenant’s position (as follows from the lease agreement) might not be good, we recommend trying to keep the negotiations on a business level and communicate with the landlord about sharing the current business risk with the tenant in order to find a mutually acceptable solution helping both parties to overcome this uncertain period.

    4.3 Landlords: Consider cooperation with the tenant and sharing the current risks

    • Although the draft bill in certain way legitimizes the postponement of rent payments, consider also different approaches which may be more commercially advantageous for both parties. For example, it can be provision of reasonable discount on rent in exchange for timely payment of the rent (ie on original due dates). This would reduce the drop of cash flow at the landlord’s side and, at the same time, it would mitigate the risk of later irrecoverability of receivables from the tenant if the tenant’s financial position would worsen as a result of the current situation.
    • If the tenant’s financial position deteriorates, we recommend considering the use of hedging instruments1.

    4.4 Landlords: Consult your financing bank / provider

    • If there is an external financing (by bank or other entity) for construction or reconstruction of your real estate (and possible mortgages and/or other pledges) in place, we advise to check the possibility to postpone the loan repayments according to a draft bill on certain repayment measures in connection with the COVID-19 pandemic (also currently approved by the government). At the same time, we recommend consulting to consult the current situation with your creditor without delay.
    • In particular, the creditor should be consulted prior to granting any discount to the tenant and/or before taking any other steps.

    5. FINANCIAL COMPENSATION FROM THE STATE

    • The government is continuously preparing certain instruments to support entrepreneurs affected by the economic impacts of Covid-19. If you are interested in more detailed information about possibilities of obtaining the state aid, please, do not hesitate to contact us.
    • Another remedy which might be available is a claim for damages (lost profit) against the state. You can find basic information about this option in the Q&As to contracts and regulation.

    6. HOW CAN WE HELP YOU?

    • We will be happy to assist you with the review and analysis of your lease agreements.
    • A brief review of your lease agreements in order to assess the legal position of your company in each particular case will take 1-2 hours per contract (review and assessment).
    • As mentioned above, the review and analysis should be done as a preparation for negotiations with the landlord / tenant in order to know well the legal position and options of your company in each individual case.


    1 If you are concerned that your tenant may go bankrupt, an automatic tracking of the insolvency register can be ensured.

     

    This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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