Real Estate Flash/Focus
6. 12. 2019
Author: Lukáš Syrový
Source: Building World (4/2019)
The latest news from the residential market assert that the apartment price growth rate is slowing down. The prices in the luxury apartment segment are stagnating or even dropping. Yet, the current prices of apartments especially in larger towns are still too high for many people. The situation is even worse given the tightening of the terms for getting a mortgage, making mortgage loans less accessible.
This trend spurs the demand for rental housing. Higher demand increases rents for apartments, especially in Prague. Rents are expected to keep rising, and particularly in Prague apartments, the rent level will be getting closer to that in larger towns in Germany or Austria.
Together with other factors, this leads to an increasing number of residential development projects that are not intended for sale to end users but for rent. There might be a number of various letting concepts – from standard long-term rents to mid-term or short-term rents, which may be linked to the provision of above-standard services to tenants, e.g. regular apartment cleaning services.
Developers who are considering residential projects for rent to end users will first of all have to face the reluctance of banks to finance such projects given the significantly longer repayment period as opposed to standard residential projects intended for sale.
If developers manage to obtain financing for their projects, they should also consider legal risks associated with residential lease.
Compared to landlords, tenants are significantly more protected by law. Landlords are not even allowed to secure a more enhanced position for themselves in lease agreements than that granted to them by law. Provisions in a lease contract restricting tenant’s statutory rights are not taken into account.
The key risk associated with residential lease is when tenants breach their duty to pay rent. In fact, the law does not provide the landlords with an efficient defence against such breach and does not even allow them to use standard mechanisms applicable in the event of such breach in other types of leases (lease of office, retail or warehouse premises).
Namely, the law does not allow the security deposit the tenant provides to the landlord to secure rent payments to be higher than three times the monthly rent. At the same time, the law lays down that the landlord is entitled to terminate the lease by notice if the tenant defaults on the payment of their rent and the service charges for at least three months. Evidently, the landlord may terminate the lease by notice only at the moment when the security deposit provided in not sufficient to cover the overdue rent and service charges. Furthermore, the apartment can be handed over to the landlord within a period of up to one month of the service of the notice, without the tenant’s breaking the law in any way. These statutory provisions take precedence over an agreement. In other words, if an agreement laid down different provisions (more advantageous to the landlord), the provisions could not be validly applied. Currently, there is a rising demand among landlords to secure the obligations of the tenant by a notarial deed that includes a direct enforceability clause. This solution, however, has its limits – it is costly and may arouse negative feelings among tenants. A possible solution lies in making lease agreements for the term of three months with the possibility of renewals, but this is not very practical especially with long-term rents.
The law also forbids confirming any tenant’s obligation by a contractual fine.
It is therefore not possible to apply contractual fines to defaults on rental or service charges payments or for instance on the duty to vacate and hand over the apartment after the end of the lease period. The law in fact stipulates that in the event of default on vacating the apartment, the landlord is merely entitled to receive an amount equalling the rent due for the period of default. Obviously, the amount paid is not a sanction but merely a compensation for the lost rent. It does not motivate the tenant to actually vacate and hand over the apartment to the landlord.
Another issue worth mentioning is the indexation of rent paid for the apartment. Under the law, the landlord is entitled to request an increased rent to the level of usual rent at the given location and time but no more than by 20% in the period of three years. This increase can be laid down in the lease at variance with the above provisions in which case only the provisions of the lease agreement apply. According to the latest case law, however, the landlord’s statutory right to increase the rent is excluded also in case the lease contains rent indexing provisions. According to the law, the tenant has similar statutory right to request a decrease in rent to the usual level. The tenants’ right would not be likely to affect the standard rent indexing provisions in the lease agreement.
The grounds for terminating the lease by the landlord are a different topic. These grounds are laid down by law and cannot be expanded in an agreement. Statutory grounds for terminating a lease by the landlord are rather limited. For that reason, it has become a common practice that residential lease agreements for a fixed term tend to be concluded for one year with the possibility of renewal. Despite the above legal restrictions on residential lease, residential developer projects for rental housing can be expected to be more common in the future. Commercial rental housing should clearly not be the solution to the housing crisis. Instead, what should be done is greater support to housing construction projects. Development projects could be primarily supported through simplification of approval proceedings. That could be achieved in particular by adopting a new building act.Download PDF