Source: BUILDING WORLD magazine (June 2020)
Authors: Lukáš Syrový, Josef Adam
The first cases of COVID-19 infection were confirmed in the Czech Republic on 1 March 2020. This fact started a series of restrictive measures the impact of which has manifested itself in virtually every sphere of society, including the real estate market. How can the situation associated with the SARS-CoV-2 coronavirus pandemic be reflected in obligation relations having a real estate element?
The Civil Code, effective since 2014, regulates the so-called “hardship”, i.e. a change of circumstances justifying a fair amendment to an existing contract. If each contract is generally characterized by its binding nature and impossibility to amend it without the consent of the other party, then the change of circumstances may constitute an exception to this rule. A change of circumstances may result in an excusable delay, an amendment to the content of the contract and, in some cases, its termination.
The literature also classifies epidemics and quarantines as significant changes of circumstances. We therefore believe that the current situation in connection with coronavirus can also be considered a significant change of circumstances, on which the parties relied before concluding the individual contracts. However, it will always depend on the specific circumstances, the definition of the purpose of the contract, and other provisions in the contract in question.
By law, a change of circumstances must be substantial enough to create a particularly gross disproportion in the rights and obligations of the parties. On the contrary, the mere fact that performance under the contract has become more difficult does not relieve the party of the obligation to pay the debt. At the same time, a reservation of this type does not cover such a change in conditions which was caused by the simple development in the economy and the market, or which conceptually falls within the scope of so-called ‘ordinary business risk’. In specific cases, the question will therefore be whether the impact on the contractual relationship is caused directly by measures against coronavirus or only by a general decline in economic activity, where the application of provisions concerning a substantial change of circumstances may be questionable. In this regard, it is also important to point out the difficulty of proving the specific cause of the imbalance that has occurred between the parties.
The trend in recent years has been the general exclusion of provisions relating to a change of circumstances. The limits of such contractual provisions can be seen in the provisions that are to the detriment of the weaker party (especially the consumer), which can be considered null and void. There are also views that question whether the general exclusion of the change of circumstances clause can be considered a proper assumption of the risk of a change of circumstances and thus produce the desired effects – i.e. the inability of the party(ies) to demand an amendment to contractual provisions for a substantial change of circumstances.
The lease market, especially in the area of commercial retail space, was hit hard right at the beginning of the pandemic. It is therefore not surprising that in lease relations (especially in relation to the amount of rent) a substantial change of circumstances clause has become a frequently mentioned phrase.
With reference to the principle of clausula rebus sic stantibus (things standing thus), it can be concluded that a change of circumstances is implicitly agreed in each contract - the provisions of the current Civil Code concerning a substantial change of circumstances can also be applied to lease agreements concluded before its effective date.
The impact of the coronavirus pandemic on lease relations was clear, especially in light of government measures banning retail sale and sale of services in establishments. However, the government measures have also affected those tenants whose establishments were not closed by law, but nevertheless experienced a significant economic decline with regard to restrictions on the free movement of persons.
The situation raises questions as to who ultimately bears the risk of loss of income resulting from this extraordinary event. Not every lease contract constitutes an entire agreement of the parties, which excludes the application of the general regulation contained in the Civil Code. The content of the contract can thus be modified under the regulation that allows the renegotiation of the content of the contract due to a substantial change of circumstances, demanding a discount on rent, or even terminating the lease agreement.
The extraordinary period has also brought about a fundamentally different view of the interpretation of the law. In the area of rent, discussions have taken place, among other things, on whether the impossibility of properly using the subject matter of lease due to a crisis measure of the government can be considered as a disturbance in the use of the thing by a third party. The consequence of such a consideration would be the tenant’s entitlement to a reasonable discount on rent. Although the provision in question is inspired by the General Civil Code (ABGB), under which the discount or forgiveness of rent was expressly enshrined for the impossibility of use due to infection, it is difficult to predict how such an interpretation of the law would be assessed by a court in the case of a civil dispute.
In order to protect tenants, as the weaker parties to lease relations, the Act on Certain Measures to Mitigate the Effects of the SARS CoV-2 Coronavirus Epidemic on Tenants of Business Premises has been passed. Although various forms of this Act were originally discussed (including deferral of rent payments), in the end the only manifestation of this Act is the fact that the landlord is not entitled to serve a termination notice on the tenant for non-payment of rent which was delayed in the period between 12 March 2020 and 30 June 2020. However, this can certainly not be considered a deferral, when the landlord’s other rights arising out of the tenant’s delay remain unchanged, including the right to terminate the lease agreement for other reasons, the right to draw funds from security / bank guarantee, and the landlord’s right to claim a contractual penalty or default interest.
Further financial assistance to entrepreneurs is to be provided by the State subsidy program “COVID – Rent”, representing the participation of the State and of landlords in the loss of tenants affected by the forced closure of establishments.
Today, the question of whether or not the existing coronavirus pandemic emergency can be considered as force majeure also requires special attention. Under Czech law, the purpose of the institute of force majeure is to protect the obliged party from the obligation to compensate the other party for damage in situations where it cannot fulfil its contractual obligation due to an unforeseeable and insurmountable obstacle that has occurred beyond its will and control. Although the contract may contain a broader definition of force majeure, the fulfilment of its conditions does not have to affect the obligation to pay contractual penalties or the possible right of the other party to terminate the contract by notice or withdrawal.
The institutes of force majeure and of a change of circumstances affect many obligation relations. Their aspect can be reflected in contracts for work, future purchase and lease agreements, as well as agreements on a joint purpose.
The coronavirus pandemic has had a significant immediate negative impact on the stability of lease relations. In the long run, its impact can also be expected on other obligation relations and areas of the real estate market. Only time will tell how and whether the real estate market will return to “pre-pandemic” ways.
