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Czech Republic: Commercial leases – COVID-19 – Where things stand

9 April 2020 – On 8 April, the Chamber of Deputies of the Czech parliament passed legislation mitigating the impact of COVID-19 on commercial leases (the “Bill”). It is expected that the Bill will now swiftly be approved by the Senate of the Czech parliament, signed into law by the President and then take immediate effect.

Main commercial impact of the Bill

The Bill seeks to mitigate the consequences of the state of emergency and other extraordinary measures imposed in response to the COVID-19 outbreak on tenants of commercial premises (in particular in retail, office, logistics and other premises used for business operations). The Bill allows tenants, under certain conditions, to defer rent payments during a specifically-defined period spanning the anticipated impact of the COVID-19 pandemic, and prohibits landlords from terminating leases due to tenant rent payment arrears.

Content of the Bill:

  • the Bill sets out a protection period until 31 December 2020 (the “Protection Period”), during which landlords are prohibited from terminating lease agreements due to tenant delays with rent payments, provided that the delay occurred between 12 March 2020 and 30 June 2020 and resulted from the extraordinary measures imposed due to the COVID-19 pandemic and which substantially limited tenant business operations (the “Limitations”).
  • tenants must submit documentary evidence of the impact of the Limitations within 15 days of the first delay in rent payments.
  • irrespective of the Protection Period, tenants must pay all due rent (i.e. payable from 12 March 2020 to 30 June 2020) no later than by 31 December 2020.
  • if a tenant does not pay all due rent by 31 December 2020, a landlord may terminate a lease agreement with a 5-day notice period. The same applies (i.e. termination within five days after the Protection Period) if the tenant declares that it will not pay such due rent.
  • landlords are also permitted to terminate leases for other reasons. The use of other rights resulting from tenant payment delays is not excluded.
  • if a lease terminates prior to the lapse of the Protection Period, a landlord is entitled to collect all due rent within 30 days following the termination.
  • a landlord is also entitled – after the Limitations end – to request that the lease in question be terminated if it would be deemed unfair to request a landlord to endure such a limitation.

Points to consider:

The Bill does not grant any rent-free period or moratorium on service charges, or any other payments under lease agreements. However, it deals with the consequences of failure to pay rent in a very limited manner, i.e. it prohibits the termination of a lease under very specific circumstances, and tolerates delays in rent payments.

Due to its somewhat general nature, the text of the Bill offers room for interpretation in a number of key areas. Such matters will likely either have to be determined through practical application of the legislation, or ultimately settled through the courts. The following is our interpretation of several areas which have not been explicitly dealt with by the Bill:

  1. a landlord’s right to utilise lease collateral to cover due rent should remain unaffected;
  2. a landlord’s right to request default interest and contractual penalties should still be granted, although this is somewhat undermined by the fact that the Bill delayed payments;
  3. a landlord’s right to terminate a lease due to rent arrears that occurred prior to the Protection Period should also remain unaffected (although tenant non-payment of rent continues during the period from 12 March 2020 to 30 June 2020);
  4. a landlord’s right to terminate a lease prior to the end of the Protection Period would mainly apply to situations in which landlords faced significant financial difficulties, or if the tenant would be in a situation tantamount to insolvency, regardless of whether such insolvency would be declared or not; and
  5. non-compliance with the 15-day deadline for the provision of the relevant documents evidencing the Limitation should not disqualify a tenant from the protections under the Bill.

    Please note that all the above conclusions will likely need to be tested before the courts. Such courts may significantly deviate from our conclusions, in particular if a significant change of circumstances or a conflict with “good morals” (in Czech: dobré mravy) is claimed during the relevant proceedings.

    No unifying or single approach can be taken with respect to the above. Each case will need to be broadly considered on the basis of the specific wording of lease agreements as well as the wider circumstances of a given situation.

    Recommended checks:

    In order to mitigate any negative consequences, we recommend that both parties check whether:

    • any rent delays are a result of the Limitations, and if this has been properly evidenced;
    • lease collateral is duly in place and under what circumstances it can be utilised;
    • any tax-relevant issues apply (such as invoicing and the obligation to pay VAT), which could be addressed by way of negotiations between the landlord and tenant, or by contacting the relevant financial authority, where appropriate; and
    • any other provisions of the lease have been breached.

    For more information please contact Klára Štěpánková, Partner, at

    e-mail

    .