Real Estate Flash/Focus
14. 4. 2020
The government’s proposal addressing the impacts that its measures adopted during the state of emergency in response to the COVID-19 outbreak might have on the tenant-landlord lease relationship is currently attracting major attention. According to the press releases of cabinet members, namely the Minister of Industry and Trade, the measures will lead to the “postponement of rent payments” for a certain period of time.
Though being frequently quoted by the media, this statement is not reflected in the wording of the bill approved by the government and by the Chamber of Deputies.
According to the wording that includes changes approved by the Chamber of Deputies, a tenant’s failure to pay rent that falls due between 12 March 2020 and 30 June 2020 does not entitle the landlord to terminate the lease. The landlord is entitled to terminate the lease if the payments are still overdue after 31 December 2020.
This concept, in our view, applies also after the adoption of the amending motions despite the fact that part of the new wording of the act may lead to interpretations that the rent payments are postponed, which we do not consider correct.
The bill does not presume the postponement of rent payments but merely prevents the landlord from terminating the lease in the specified period. That, however, is something fundamentally different. This means that the tenant is still obliged to pay the rent as it falls due pursuant to the lease agreement. The act merely cancels one of the sanctions for the breach of this obligation, namely the right of the landlord to terminate the lease.
This has a number of practical implications. The act does not affect other sanctioning and securing mechanisms. The failure to pay the rent will standardly lead to accrued statutory or agreed upon default interest, the right to contractual penalties (where agreed for such breach) and namely it is likely that it will be possible to use the provided deposit (bond) or bank guarantee to pay the overdue rent. If the tenant fails to subsequently pay the used part of the deposit or bank guarantee, the landlord will be entitled to terminate the lease by notice due to the breach of this duty (if the breach of this duty is listed as a reason for notice under the lease).
The bill also contains several provisions that may lead to considerable uncertainty among the landlord and tenant. The prohibition of termination by notice, for instance, applies to cases where the emergency measures have disabled or severely aggravated the performance of the tenant’s business. This tenant is obliged to substantiate (prove) this fact to the landlord by evidence. The fulfilment of this condition may be disputable in a number of cases, either because of the insufficient description of such impact on the tenant or because it is questionable to prove that the business activity performed in certain premises (namely office premises) has been disabled or aggravated. Consequently, it is also questionable whether landlords may terminate such lease by notice or whether they are prohibited from doing so under the bill.
Another provision that may lead to disputes regarding the validity of the termination of lease is that landlords are entitled to terminate the lease earlier than after 31 December 2020, unless they can be reasonably expected to endure the restrictions imposed by law.
Moreover, the wording of the bill does not address some crucial related issues such as the impact of this act on the landlord’s obligation to pay VAT. We are inclined to believe that landlords will be obliged to pay this tax.
The bill only addresses default on rent payments and does not address default on the payment of other related services charges. The duty to pay for services related to the lease thus remains unaffected by the bill. The articulated wording of the bill in principle fails to correspond to the declarations in the media and, on the contrary, creates a number of uncertainties and risks in relation to the landlord-tenant relationship. We believe that the bill is yet to undergo some changes that will be discussed by the professional public in order to find a solution acceptable for both tenants and landlords, and eventually also for the state.