Kategorie: Corona

Does the coronavirus spread to contracts? A focus on commercial lease agreements.

Posted on by Luca Vicarioli

The restrictions on commercial and production activities imposed by the Italian Government and the other measures adopted could have a significant impact on pending contractual relationships.

If the parties predetermined in the contract the effects in case of exceptional, unforeseeable, unavoidable events, and/or they have expressly provided for the specific case of an epidemic, the consequences would be those determined by the parties.

On the contrary, whether the contract – and this is the most frequent case – does not provide anything in this regard, first, it should be determined whether the contract is governed by Italian law and, in such case, the following principles of Italian law apply.

The Italian law allows the parties legitimately not to fulfil and/or partially fulfil to the contractual obligations, or to delay the execution of the obligations, without incurring in negative consequences, if extraordinary circumstances and events occur.

In particular, pursuant to Article 1256 of the Italian Civil Code, the obliged party is not bound to fulfil the obligation when the latter becomes impossible for a cause not attributable to such obliged party.

In this regard, the obligation could be considered impossible in case: a) it is objectively impossible; b) it is permanent impossible, i.e. it does not permit fulfilment in any way; c) the obliged party did not cause the impossibility with its conduct. With respect to the latter requirement, causes not attributable to the obliged party are: i) the so-called factum principis, i.e. a legislative measure, or a measure of public authority, imposed for general interests, which makes impossible the performance, independently from the obliged party behaviour; ii) force majeure: an unforeseeable, unavoidable external event not attributable to the party which consists of a force to which it is not possible to oppose, whose effects cannot be removed and which prevents the technical execution of the performance, including natural events and acts of the Public Administration.  

If the impossibility is only temporary, when there is an objective situation which only temporarily prevents a party from performing, the contract cannot be terminated – except in the case the other party doesn’t have the interest to receive a late performance – and the party temporarily prevented from performing is not liable for the delay.

Likewise, if performance has become only partially impossible, the contract cannot be terminated  – except in the case the other party doesn’t have the interest to receive a partial performance – provided that it can be performed for the remaining part.

Pursuant to Article 1467 of the Italian Civil Code, in contracts with continuous, periodic or deferred performance, in case the obligation of one of the parties becomes excessively burdensome, the obliged party may request the termination of the contract, if such party proves that the excessive burdensomeness of the performance is due to: a) extraordinary and unforeseeable events which do not fall within the scope of the normal contractual risk, such as force majeure or factum principis referred to above; b) an alteration of the former conditions related to the initial relationship, determining inequality not existing at the time of the stipulation of the contract.

The other party may avoid the termination of the contract by offering to modify the terms of the contract in an equitable manner.

Having said the above, it should be noted that the recent Law Decree no. 70 of 17 March 2020 added a new paragraph 6-bis to Article 3 of Law Decree no. 6 of 23 February 2020, stating that: „compliance with the containment measures referred to in this decree is always assessed for the purposes of excluding, pursuant to and for the purposes of Articles 1218 and 1223 of the Italian Civil Code, the debtor’s liability, also with regard to the application of any forfeiture or penalties connected with delayed or omitted performance„.

The provision, therefore, relieves the debtor who has not performed his performance due to these measures from the obligation to compensate damages caused to the creditor, to incur in any forfeiture provided for in the contract and to pay any penalties for delays in the performance.

The same provision, however, does not clarify whether it also determines the impossibility of the performance (pursuant to Article 1256 of the Italian Civil Code) with the relevant consequences mentioned above.

In conclusion, without prejudice to what is explicitly provided for by the Law Decree no. 70 of 17 March 2020, it is not certain whether the Coronavirus outbreak, or the measures implemented by the competent authorities, could be a valid reason for justifying the non-fulfilment of contractual obligations. The contracts entered into by the parties shall have to be assessed on a case-by-case basis, taking into account several factors such as, for example, the applicability of the Italian law to the contract, the delay and/or the non-fulfilment reasons, the specific impact of the same on the performance and the absence of alternative solutions for the fulfilment of the contract.

Focus: commercial lease agreements.

The Prime Minister Decree 11 March 2020 ordered the mandatory closure of a large number of activities open to the public, thus forcing a large number of service and tertiary activities to remain suddenly closed.

As far as commercial leases are concerned, the restrictions on commercial activities imposed by the Italian Government if, on the one hand, they do not make it impossible for the landlord to perform its main obligation (to provide premises suitable for the agreed use), on the other side, they could make it temporarily impossible for the tenant to pursue its commercial activity in the rented premises and, consequently, cause difficulties for the payment of the relevant rent.

Notwithstanding that, in terms of strict causality, the temporary closure of the business does not necessarily make it impossible for the tenant to continue leasing the premises and paying the relevant rent even more in light of the Article 65 of Law Decree no. 17 March 2020 that provides „in order to contain the negative effects deriving from the prevention and containment measures connected with the epidemiological emergency by COVID-19, persons carrying out business activities are granted, for the year 2020, a tax credit in the amount of 60% of the amount of the rent, relating to the month of March 2020, of buildings falling under cadastral category C/1„.

In light of the above, for the time being and unless the situation of impossibility becomes permanent it might be questionable for the tenant to argue that the lease agreement could be terminated or the payment of the rent suspended, for that reasons the tenant may consider to promptly send to the landlord a request for reduction or suspension of the rent, stating the reasons why it is impossible to fulfil its contractual obligations.

Does the coronavirus constitute an event of force majeure?

Posted on by Annette Knijnenberg

The coronavirus is spreading. The number of infections is increasing rapidly and the government has announced drastic measures to control the spread of the virus. Public life has virtually come to a standstill as a result. Trade and industry are also suffering from the exceptional situation facing the Netherlands and large parts of the world. Many companies will therefore most likely be unable at some point to perform all or some of their contractual obligations. Their contracting parties will in their turn incur losses as a result.

The question presents itself whether the corona pandemic and the government measures imposed as a result justify reliance on force majeure and, if so, what consequences successful reliance on force majeure will have.

1. What is the legal definition of force majeure? 

If a debtor fails to perform an obligation, the law provides that an event of force majeure is involved if the debtor cannot be blamed for the breach. That is the case if the breach is not due to any fault of the debtor and is not at its risk under the contract or by generally accepted standards.

In practice, briefly stated, this means that the debtor cannot perform its obligation as a result of an impediment that is not attributable to the debtor. 

2. May parties contract out of the statutory force majeure regulations?

Contracting parties may opt to contract out of the statutory force majeure regulations. That is frequently done in practice. Many (Dutch and international) contracts describe what the parties regard as force majeure and what consequences they attach to it. Parties may, for instance, classify circumstances as force majeure that are not classified as such by law. Government measures and force majeure at a supplier, for instance, are regularly classified as force majeure. It is then a matter of contract interpretation whether, for instance, the obligatory closure of bars and restaurants comes under the contractual definition of force majeure. If so, that does not yet mean that reliance on force majeure will succeed. There must also be a sufficient connection between the circumstance in question (the government measure) and the impossibility to perform the obligation in question. The interpretation of the agreement and the specific situation are therefore always relevant.

Once it has been established that force majeure exists under the contract, it must be ascertained whether the consequences are regulated in the contract. The parties may opt, for instance, to limit or rather to expand the other party’s rights under the law. That may be described in general terms or in very exact terms. It may relate to (unilateral) amendment or termination of the contract, but also to the obligation to observe waiting periods or to take measures to minimise the consequences of force majeure. The contractual arrangement prevails over the law and must therefore be the first point of reference.

3. Does the statutory arrangement apply if the contract contains no provisions on force majeure?

If force majeure is not regulated in the contract, the statutory arrangement applies. It is apparent from case law that strict requirements apply to force majeure. The impossibility to perform the obligation must be such that it is practically impossible for the debtor to perform, or performance must be so disadvantageous that it cannot be required of the debtor. Force majeure must be proven by the party that relies on it. That is usually the party that is required to perform but is unable to do so, i.e. the debtor. 

4. Does the coronavirus justify reliance on force majeure?

It cannot be said beforehand whether the coronavirus or the government measures taken in response justify reliance on force majeure. It must be assessed in each individual case what exactly the obligation entails, whether performance is indeed impossible and whether the reason for that impossibility is due to the corona crisis or the measures consequently imposed. All the specific circumstances must then be taken into account. If, for instance, the obligation can be performed with the help of a government aid measure, reliance on force majeure is unlikely to succeed. If performance of the obligation would jeopardise the debtor’s health, which is possible in the case of the coronavirus, the likelihood of successful reliance on force majeure is greater. At the time of the bird flu crisis in 2005, a court assumed force majeure when the debtor was unable to take delivery of eggs from its supplier due to a transport ban imposed by the government.

5. What happens if force majeure is established?

If an event of force majeure is established, the creditor can no longer demand performance of the obligation in question. The creditor furthermore cannot claim reimbursement of loss incurred. This applies for the duration of the event of force majeure. But the creditor is not left entirely empty handed. As a rule, it may opt to dissolve (ontbinden) all or part of the agreement, so that it is released from its own obligations. It can reclaim any advance payments made after such dissolution. If the debtor benefits from its failure to perform an obligation, the creditor may, in principle, also claim that benefit. But that benefit is capped at the creditor’s loss and is awarded only insofar as that is reasonable. The specific circumstances of the case play an important role also in this respect.

No court judgments in the field of force majeure as a result of the corona outbreak have been published yet. We will therefore have to wait and see how courts deal with this issue in specific cases. We will keep you informed.

The ten most frequently asked employment law questions regarding the coronavirus

Posted on by Annette Knijnenberg

The coronavirus has the Netherlands and the rest of the world in its grip. As of March 12 2020, additional measures apply that are also relevant to employers. Since the number of infections in the Netherlands is rapidly increasing, we will answer the ten most frequently asked employment law questions regarding the coronavirus in this blog.

1. Can employers force their employees to work from home?

As of 12 March 2020, the authorities advise employees to work from home whenever possible. Employers may obligate their employers to do so in these circumstances. It must of course be possible for the employees in question to work from home. Also, the employer must ensure that the obligations under working conditions and working hours legislation are observed also at home. Employees who show any symptoms, such as a runny nose, coughing and fever, are required to stay at home.

2. What precautions must employers take against the coronavirus?

Employers must protect the health and safety of their employees. Employers are therefore expected to protect their employees as far as possible against infection with the coronavirus. Employers will have to take precautions for that purpose. As of 12 March 2020, assemblies at work that are attended by more than 100 persons are no longer permitted. Other precautions may include distributing disinfecting hand gel to employees, giving hygiene instructions and advising employees against travelling to risk areas.

3. Can employers obligate employees to take leave?

No, that is not possible. Employers cannot obligate employees to take leave.

4. Must employers continue to pay their employees’ salaries if they are required to remain in quarantine?

Yes, in principle employers must continue to pay the salaries of employees who are required to remain in quarantine. If employees who cannot or may not work from home nevertheless stay at home because they are afraid of being infected with the coronavirus at work, the obligation to continue to pay their salaries does not apply.

5. May employers prohibit employees from travelling to risk areas in their private time?

No, that is not possible in principle. Employers may of course inform employees in writing about risk areas and advise them not to travel there. They can state, for instance, that if employees nevertheless travel to a risk area, the consequences, if any, are at their risk.

6. May employers force employees to submit to a coronavirus test?

No, only a company doctor may do so. The privacy rules continue to apply. The coronavirus has not changed them.

7. Can employers get financial support to pay wages?

With effect from 1 March 2020, Employers may apply for the new temporary Employment Bridging Emergency Fund  (Noodfonds Overbrugging Werkgelegenheid, or NOW), which provides for financial support for employers to pay their employees‘ wages during the corona crisis. Companies that expect a turnover loss of at least 20% may claim a compensation for their wage costs for a period of 3 months. This 3 months’ period may be extended for another period of 3 months. Employers may claim a maximum of 90% of their wage bill, depending on how much turnover they  lost. In order to be eligible for this financial support, employers must promise that they will not dismiss employees for economic reasons during the period in which they receive the support.

8. Are employees entitled to leave if the schools of their children close due to the coronavirus?

Yes, in that case employees are entitled to short-term emergency leave. Emergency leave applies to urgent, extraordinary and unforeseen circumstances. During that leave, employers are required to continue to pay the salaries of the employees in question. If a collective bargaining agreement applies, it may include different or additional provisions. Emergency leave may last from a few hours to a few days. It is therefore not a long-term solution.

9. May employees refuse to come to work for fear of the coronavirus?

Employers may require of their employees that they work at the location agreed on in the employment contract, for instance. Employees may therefore not simply refuse to go to work for fear of the coronavirus. If employees nevertheless stay at home, that may constitute refusal to perform work. Refusal to perform work may be grounds for summary dismissal. That is of course otherwise if the employees are not allowed to come to work because they have symptoms.

10. May employees refuse to travel abroad to attend a business meeting?

That depends on the travel advice issued by the Ministry of Foreign Affairs. Employers are required to make a careful decision in this case. In the case of a business trip to a red risk area, the Ministry of Foreign Affairs advises against travelling there. In the case of an orange risk area, the business trip must be essential.

If you have any questions about the employment law consequences of the coronavirus, please contact our partner employment law Elias van Kampen at elias.vankampen@actlegal-fort.com.

What to do (preventively) if the Coronavirus paralyses the business?

Posted on by Jessica Zenz-Spitzweg

The coronavirus is currently hitting the headlines worldwide. The German economy is already feeling the effects because many production facilities, especially in China, are no longer able to supply and business with other Chinese partners is also faltering considerably. If the coronavirus continues to spread epidemically in Germany, the economic impact in Germany and Europe will be even more drastic.

In particular, internationally operating companies must be prepared for the coronavirus to have a temporary negative impact on their own business, regardless of whether the underlying cases of the disease are to be found within their own ranks or with business partners or anywhere else in the supply chain.

Many companies are already receiving large numbers of force majeure notices from suppliers. These ads are likely to become commonplace in the near future.

In this context, the question arises as to whether and to what extent the coronavirus leads to a suspension of suppliers‘ obligation to supply and what steps the affected customers must take to avoid errors and major damage, possibly even threatening their existence, as far as possible.

Legal classification

Usually, national as well as international supply contracts contain so-called force majeure clauses, which provide that in cases of force majeure the supplier’s obligation to deliver is temporarily suspended. In return, the customer is regularly entitled to terminate the supply contract extraordinarily if the delivery stop exceeds a period agreed in the force majeure clause.

In this context, it must first be examined whether the specific supply contract is to be assessed at all under German law. The following statements apply exclusively to this case. If, on the other hand, the supply contract is subject to another legal system, an examination must be carried out on the basis of the foreign law applicable in each case.

German law does not contain any special provisions on cases of force majeure. Courts must therefore refer to the general regulations when assessing obstacles to performance. In principle, the following applies: Whether a case of force majeure exists is, according to case law, strongly influenced by the individual case. As far as is known, there is no comparable reference case in German jurisdiction to date in which a decision has ever been made as to whether a failure to supply as a result of a pandemic outbreak constitutes a case of force majeure. Only travel contract law and UN sales law recognise that epidemics fulfil the requirements for classification as force majeure.

There are certainly good arguments for classifying the outbreak and the consequences of the coronavirus as a case of force majeure, also in the context of supply contracts. But that is not certain.

What is clear, however, is that a case of force majeure will in any case only be present if the supplier cannot avoid the delivery stop, i.e. if the supplier cannot eliminate the delivery stop with reasonable measures.

Important from the supplier’s perspective

Against this background, the primary concern for suppliers is to ward off customer terminations of supply contracts and claims by customers for damages or payment of contractual penalties due to failure to deliver. In doing so, the supplier should not rely on a mere display of force majeure at the time of its inability to deliver:

Firstly, this is not the case because in practice most force majeure clauses do not explicitly provide for pandemics as a case of force majeure.

Secondly, in a possible later legal dispute a court will ask whether the supplier has taken all reasonable measures to prevent the failure to deliver. The supplier who „with his eyes open“ for a long period of time does nothing, despite the ever-increasing Corona problem, until his own inability to deliver is established, will not be able to stand up to this question. On the supplier side, it is therefore already important to look into alternative possibilities for securing one’s own ability to supply. This includes, for example, identifying alternative resources and transport routes in good time, drawing up emergency plans within the company, etc. It is advisable to document the search for and results of alternative possibilities accordingly. If the supplier is able to present a comprehensible and verifiable argument in later disputes (also in court), liability can also be excluded due to lack of fault. In this case one must know: It is also reasonable for the supplier to take measures even if they involve additional financial expenditure for him, for example in the form of higher transport costs due to the changeover from sea to air freight. Similarly, customers can demand the procurement of replacement goods as a reasonable measure.

Thirdly, the supplier should inform his customers in good time of any concretely emerging delivery bottlenecks, even if he is not expressly contractually obliged to do so. This is because such information enables the customer to prepare for the delivery shortfall and to avert his own damage early and as effectively as possible. This can have just as much of a damage-reducing effect as allowing the customer to participate in the development of solutions to problems and to have a say in decisions.

Important things from the customer’s point of view

From the customer’s point of view, it is a high priority to avoid own damages as far as possible or to hold the supplier harmless. Since the supplier does not owe any compensation in the event of a delivery stop, if it is a case of force majeure, and since customers must also probably also prepare themselves for the fact that their risk of default is likely to increase, even in the case of justified claims against suppliers, if suppliers see their existence threatened as a result of the claim, customers should prepare themselves as early as possible for the possibility of delivery stops due to the coronavirus. If a customer wants to keep open the possibility of taking action against a supplier due to a delivery failure at a later date, he is advised to document any damage that occurs as well as possible. After all, it is ultimately the customer who must explain and prove in detail all breaches of duty by the supplier and the resulting damages in order to successfully assert claims.

COVID-19 – Decisions based on proper factual basis

Posted on by Jessica Zenz-Spitzweg

The rapidly expanding Corona-19 pandemic puts significant pressure on companies of all sizes in each segment. Entrepreneurs, managing directors and board members have to make far-reaching decisions in the shortest possible time with considerable uncertainty about forecasting in a situation that has hitherto been completely unknown. It is clear that many decisions will not have the desired success; some will do even more harm than good in hindsight.

This also raises the question of civil or even criminal liability risks for decision-makers.

Now and in the upcoming months, many entrepreneurs and board members will have to make many atypical risk decisions. The object of their actions is not the ordinary course of business activity, which, in addition to new opportunities, also entails known and unknown risks. What is needed is action to reduce risks arising from a sudden and dynamic change in the business environment that is hardly predictable. The cushioning of these risks may require measures that were unthinkable a few days ago – from the termination of a transaction to the deferred investment to the temporary closure of plants or the application for state aid.

Business leaders operate in a black box in crisis management as well as politicians: whether the drastic measures are ultimately necessary and successful will only tell the future – but action must be taken now. Unlike politics, managers and entrepreneurs carry a significant personal liability risk. If they are wrong, they threaten not only existential consequences for the company, but also personal reputation and, at worst, loss of office, as well as tangible legal consequences.

As a result, corporate leaders find themselves in a dilemma where both options for action – immediate action and further waiting – are risky, and in which any decision made can prove to be wrong in retrospect. It would therefore be highly unfair to make the occurrence of legal consequences dependent on the outcome of the decision. In order to prevent this, the German corporate (§ 93 German Stock Corporation Act) and case law limits the risks of liability. A breach of due diligence is only due to „totally unacceptable action„.  For example, if the error is already obvious to an outsider, as in the case of insufficient collection and evaluation of information prior to a decision.

It is necessary, but also sufficient, for management to establish an ‚appropriate factual basis‘ in the specific situation and for the decision-makers to assume this ‚reasonably‚ at the time of the decision. It does not matter whether a subsequent review concludes that the decision was in fact based on appropriate information or was to the benefit of the company.

These criteria, which are admittedly soft, give decision-makers in companies what they need most now: a sufficiently broad basis for decision-making.

We are happy to support you. Please contact us.

Liability of the state for damages in connection with the measures adopted in crisis

Posted on by Gabriela Fuchsová

In order to slow down the spread of the COVID-19 virus, the government has decided to introduce the state of emergency in the Czech Republic. Subsequently, it has adopted a number of crisis measures the list of which is being extended every day. The most important measures include restrictions of the free movement of persons, closing of most shops (except groceries, pharmacies and other vital stores) and catering facilities, prohibiting of sale of accommodation services, restrictions on travel and transport and prohibiting of social, cultural and sporting events.

These measures bring significant economic consequences. There is no doubt that many entrepreneurs will suffer economic losses.

What can be claimed as damages?

According to the Crisis Management Act the state is liable for any damages incurred in connection with the emergency measures. The law stipulates that the state is obliged to compensate the injured natural and iuristic persons for the damages. In general, damages include both actual damages (damnum emergens) and loss of profit (lucrum cessans). The actual damages comprises not only of a loss or damage to property (e.g. expired food or unusable goods), but also the costs incurred as a result of crisis measures or the costs of avoiding damages, costs of damages calculation or remedying them, including the costs of related legal assistance. This applies provided that the expenses incurred necessarily and effectively. The state can only be exempted from its responsibility if it is proved, that the damage was inflected by the injured party itself.

In order to claim the damages the injured party needs to provide sufficient evidence (a) about the amount of damages incurred and that (b) suffered damages are result of adopted crisis measures. This can be difficult in many cases, especially when proving loss of profit.

Currently it is unclear how the state will handle damage claims resulting from the measures adopted under the Crisis Management Act and what will be the actual amount of compensation granted to entrepreneurs. An effective (across-the-board) solution could be compensating for the loss of income suffered by entrepreneurs as a result of the measures adopted, considering the most affected industries.

Any injured party is entitled to file a claim at court if it considers the compensation awarded by the state as inadequate.

What to do Next?

The claim for damages must be raised within 6 months after becoming aware of damages. Given the unusual nature of the situation and the extent thereof, there is no relevant previous experience or precedent in claiming damages. Historically, the courts dealt with a number of cases related to floods happening back in 2002, but the case facts are going to be very different in current situation.

We could reasonably expect that the government will take economic measures that will aim to mitigate the impacts on the most affected industries. The aforementioned provisions of the Crisis Management Act will constitute one of the possible measures to compensate suffered damages.

Currently the clear priority is to protect the health and safety of all persons. However, given the expected economic impact of the crisis, it is strongly recommended to commence immediately with gathering evidence and underlying documents to prove the cause as well as amount of the damages resulting from the crisis measures.

In summary, we would like to note that the measures undoubtedly impact certain industries and services significantly more than other industries. In our opinion, the state should aim to make sure that economic losses are borne by the whole society as the measures adopted in times of a crisis aim to protect the health and lives of all individuals.

COVID-19 epidemic – practical guide for the real estate sector

Posted on by Jessica Zenz-Spitzweg

Below you will find information and recommendations on the status of the epidemic threat to the real estate industry due to the regulations and decrees that have now come into force.

1. Tenants and leaseholders of commercial (and also office) properties are unable to conduct their business

The officially ordered closures due to the corona virus are probably to be judged as extraordinary coincidences in the sense of §§ 1104f ABGB (Austrian Civil Code), which leads to the need to clarify whether the owners of the property are exempted from paying the interest (including ancillary charges such as operating costs) or can demand a reduction corresponding to the impairment, even if the owner is not at fault. Although there is no relevant case law on an exactly comparable case, § 1104 ABGB expressly mentions, for example, epidemics as an extraordinary coincidence; the fulfilment of this definition has been assumed by case law, among other things, also in the case of an officially decreed ban on product processing in the leased company. In addition, the tenant may under certain circumstances terminate the tenancy agreement with immediate effect for good cause, whereby a certain minimum period of uselessness may be required. In the event of only partial unusability (if only one part of the business is affected) there is probably a claim to a corresponding reduction in rent.

The provisions on the legal consequences of the unusability of the existing property due to extraordinary coincidences are not mandatory law, so that deviating agreements are possible and the contractual agreement is therefore of particular importance.

On the other hand, a mere reduction in customer frequency without official closure or other causes inherent in the inventory item is generally assigned to the sphere of the property owner, unless a specific business transaction has been guaranteed or the contract has been used as the basis for the transaction. Here, the contractual agreement is of major importance.

In addition to the purely legal assessment, in the current phase the future procedure for the continuation of desired inventory relationships, e.g. dissolution of unwanted existing relationships and, if necessary, appropriate agreements with the existing owners must be made.

It is recommended that you analyse the rental and lease agreements, especially with regard to

  • Definition of the actual group of tenants covered by the restrictions;
  • Provisions relating to force majeure;
  • The nature of the lessee/tenant’s business activity (maintenance of the necessary resources for the population);
  • Provisions relating to liability under the warranty covering the defects of title of the building;
  • New regulations/measures by the government, establishing a uniform approach for all tenants covered by the restrictions (uniform practice);
  • Monitoring notices/letters from tenants;
  • Analysis of the leases, in particular with regard to other process-related measures that could be taken by the tenants;
  • Monitoring the filing of applications for interim relief with the competent courts. Jurisdiction could be determined on the basis of contractual provisions or applicable legal regulations;
  • Monitoring of notices/letters from tenants – potential pre-litigation announcements with requests for modification of contractual obligations.

2. The effect of the restriction on the dates laid down in stock contracts, removals, etc:

The restriction of business activities means that it is not possible to meet the opening or transfer dates. This also has a significant impact on other deadlines, e.g. early access or handover for the purpose of carrying out the work.

Recommended measures:

  • Analysis of contracts with regard to force majeure, setting or calculating deadlines, terminations, penalties for late delivery, penalties for not starting operations, and clauses on occupancy rates, the presence of certain other tenants or sectors and pedestrian/turnover targets;
  • Monitoring of notices/letters from tenants/leaseholders not affected by the restriction; monitoring of their activities;
  • Definition of the actual group of tenants covered by the restrictions;
  • Establishing a uniform approach for all tenants covered by the restrictions (uniform practice).

3. Limitation of the services provided by the landlords for their buildings due to the suspension of the tenants‘ operations due to force majeure

Recommended measures:

  • Analysis of service/maintenance agreements (with regard to force majeure, „force majeure“ contract termination and temporary suspension of services);
  • Coordination of the above activities with credit lines, terms of the bond issue, external loans and rental contracts/leases – in particular with regard to the provision of services to building operators (e.g. food stores), consequences of temporary service interruptions, etc;
  • Coordination of the aforementioned activities with the insurance conditions – in order to avoid loss of insurance cover due to restricted services;
  • Taking into account the need for an extended scope of services for buildings if the epidemiological situation justifies it, e.g. additional disinfection and cleaning services;Dealing with tenants/tenants/ owners who are obliged to restrict their business and therefore do not wish to pay higher service costs that would allow other tenants/owners / tenants to continue their business;
  • Analysis of the rental contracts (in terms of service charge settlements and ceilings/other restrictions);
  • Coordination of the above activities with the credit facility agreements, terms of the bond issue and external loans – e.g. in relation to the operating budget communicated to banks, bondholders and lenders;
  • Coordination of the above activities with the insurance conditions – to avoid loss of insurance cover due to limited benefits.

4. Effects of the lack of rental/service fee payments on external financing (credit framework agreements, terms of the bond issue, external loans)

Regardless of how long the current epidemiological situation lasts, the impact on external funding will be unfavourable.

Recommended measures:

  • Analysis of the credit facility arrangements and the terms of the bond issue with a view to existing commitments (principal and interest);
  • Indicators (especially debt service coverage ratio);
  • The possibility of applying a higher margin, requiring additional collateral or terminating the financing (e.g. significant adverse change or amendments to the Banking Act);
  • Updates of the operating budgets;
  • Consideration of asking the financing institutions for a grace period for repayment of interest/principal or to exclude the obligation to achieve certain ratios;

5. Impact of the epidemiological situation on the executed provisional land sale contracts

In view of the epidemiological situation and the resulting difficulties in operating commercial facilities (including the risk that new leases will not enter into force on the original dates), the implementation of the final agreements may be delayed. In addition, in view of the above, the purchaser (and in certain cases the seller) may wish to terminate the preliminary agreements or withdraw from the contract.

Recommended actions:

Analysis of the executed preliminary agreements with regard to:

  • Fulfilment of obligations in terms of turnover, handover/takeover or start of operations (in view of the fact that some lessees cannot open their shops);
  • The possibility of adjusting prices;
  • The possibility of changing conditions (e.g. extension of deadlines);
  • The possibility of terminating or revoking agreements, including those relating to repayable and non-repayable advances, the costs incurred (e.g. legal and technical due diligence costs) and the financing arrangements.

6. The impact of the epidemiological situation on the sales contracts executed, which entails an adjustment of the sales price on the basis of turnover or profit

In the event of a reduction/suspension of rent and a significant decrease in turnover, it could be difficult to determine prices, especially if they are based on the income of a specific building.

Recommended actions:

Analysis of executed contracts in terms of:

  • Effects on price settlement (particularly important for share transactions) and adjustment;
  • Impact of the extraordinary situation on the earn-out and reconciliation clauses (these clauses do not take into account the reduced turnover or rent as a result of extraordinary situations);
  • Possibility to modify the conditions (for example, extension of the deadlines for targets);
  • The possibility of terminating or revoking agreements, including those relating to repayable and non-refundable advances, the costs incurred (e.g. the costs of legal and technical due diligence) and the financing arrangements.

7. Effects of the epidemiological situation on insurance policies

Many buildings are covered (due to bank conditions) by rental loss insurance (and/or service charge). Most insurers will refuse to make payments due to the exceptional situation. It should be noted that in the case of debt financing, the insurance claims have been (conditionally or unconditionally) transferred to the financial institutions.

Recommended measures:

  • analysis of executed insurance contracts (general terms and conditions) with a view to the possibility of obtaining insurance compensation for loss of income;
  • analysis of the executed credit line contracts with a view to activating the insurance procedure (whether an insurance claim has been transferred to the financial unit; whether such a transfer was conditional or unconditional; whether the conditions were met; how the corresponding procedure is applied, etc.);

8. The impact of the epidemiological situation on construction contracts (general contractors, equipment, etc.), egneral contractors and other contractors of buildings or fitting-out

They may not be able to meet deadlines or budgets for reasons beyond their control. The delivery dates foreseen for buildings and leased property/rental agreements may not be met.

Recommended measures:

  • Analysis of agreements with contractors with regard to force majeure and changes in deadlines/budgets;
  • Analysis of related agreements (credit line agreements, terms of the bond issue, loan agreements) with regard to deadlines and activation of additional tranches.

The 2nd COVID-19 legislative package also introduces something new with regard to deadlines for merger notifications:

Posted on by Jessica Zenz-Spitzweg

For merger notifications (Art. 9 KartG 2005) received by the Federal Competition Authority prior to April 30, 2020, the deadline for review applications pursuant to Art. 11 KartG 2005 shall run from May 1, 2020; for review applications pending before the Cartel Court at the time of the entry into force of this Act or made by the end of April 30, 2020, the decision period pursuant to Art. 14 KartG 2005 shall run from May 1, 2020.

Lessees‘ claims against lessors as a result of governmental measures

Posted on by Gabriela Fuchsová

In connection with efforts to slow down the spread of the COVID-19 virus, the government decided on Thursday, March 12, 2020, to declare state of emergency in the Czech Republic. In the following days, it has adopted a number of emergency measures. The list of these measures is being expanded every day and will certainly have far-reaching impacts in the economy as well. In this respect, the most important measures are the general restriction on the free movement of persons, the ban on the operation of most shops (except groceries, pharmacies and other stores selling vital goods) and catering facilities, the ban on the sale of accommodation services, restrictions of travel and transport, ban of cultural and sporting events. As a result, many entrepreneurs will suffer significant economic losses.

As a result of the governmental measures, the lessees of the establishments concerned are prevented from using the leased premises for the agreed purpose of lease and from conducting their business therein. Even short-term closures of several weeks will mean significant economic losses for the lessees.

However, the lessee may not be exempted from the obligations arising from the lease, in particular from the obligation to duly pay the rent, service charges, etc. Breach of these obligations by the lessee may be penalized by the lessors, for instance by contractual penalties, exercising retention rights, claiming for the damages or by the termination of the lease agreement.

So how can the lessee eliminate or reduce the negative impacts of the situation?

Agreement with the lessor on a reasonable compensation

First of all, it is advisable to try to make an agreement with the lessor to provide a reasonable compensation for the duration of the government restrictions, such as a rent discount, rent free or other form of compensation.

In the event that such agreement with the lessor is not possible, the lessee has several options how it can possibly unilaterally reduce its rental costs and thus reduce its damages arising in connection with the governmental restrictions.

Temporary Rent Discount

Lessees may request the lessor to provide it with a reasonable rent discount for the duration of government restrictions. From the legal point of view, such request could be based on the impossibility of using the leased premises for the agreed purpose of lease which means that there is no consideration by the lessor in relation to the paid rent.

Initiating Negotiations to Change the Conditions of the Lease Agreement

As a result of the governmental restrictions, the lessee also may have right to initiate negotiations to change the terms and conditions of the lease agreement due to change of circumstances. The lessee shall, however, initiate such negotiations with the lessor within a reasonable period of time, no later than 2 months after the change in circumstances has occurred. If the lessor does not agree with a suggested change of the lease agreement, the lessee may apply to a court to make a decision.

Termination of the Lease Agreement

The ultimate solution of the situation by the lessee may be the termination of the lease if such lease was agreed for a definite period due to the change of circumstances on which the parties apparently relied on when the obligation arising from the lease agreement was created to the extent that the lessee cannot be reasonably required to continue the lease.

The wording of the Lease Agreement is always decisive

It must be noted that lessees‘ rights for rent discounts or other forms of compensation or for the termination of the contract are very often limited in the lease agreements. In the most cases, such rights are completely excluded or are set different conditions upon which they can be exercised. In order to assess the possible rights of the lessee and to determine the next steps towards the lessor, we always recommend as a first step to make a detail analysis of the lease agreement.

Compensation for Damages Caused by Crisis-related Measures

For the sake of completeness, we add that, as a result of the governmental restrictions, the lessees may be also entitled to claim damages against the state with regard to the adopted crisis measures under the Crisis Act. For more details, please see our newsletter dealing with this topic.

The measures undoubtedly impact certain industries and services significantly more than other industries. The state should aim to make sure that economic losses are borne by the whole society as the measures adopted in times of a crisis have as their goal to protect the health and lives of all of us.

COVID-19 and its impact on Court Proceedings (3/3)

Posted on by Jessica Zenz-Spitzweg

3. Criminal Court Proceedings

Special provisions are also made in criminal matters. The Federal Minister of Justice may order the jurisdiction of another prison for the duration of measures taken to prevent the dissemination of COVID-19.

In addition, the Federal Minister of Justice is authorised to order an uninterrupted interruption of the time limits for the maximum duration of preliminary proceedings (section 108a of the Code of Criminal Procedure), the two-month time limit for the retrial of an interrupted trial (section 276a of the Code of Criminal Procedure) and the time limits for the filing and execution of appeals (section 88(2) of the Code of Criminal Procedure). 1, § 106, Sub-Clause 3, § 108a, § 284, Sub-Clause 1 and 2, § 285, Sub-Clause 1, § 294, Sub-Clause 1, § 466, Sub-Clause 1 and 2, and § 467, Sub-Clause 1, Code of Criminal Procedure) for the duration of the ordered prohibitions of entry.

In addition, it can be ordered that detention hearings do not have to take place and that the decision on the continuation of pre-trial detention or provisional detention must be made in accordance with § 175.4, second sentence, of the Code of Criminal Procedure. Furthermore, an authorisation to conduct detention hearings by means of a video conference was determined. The corresponding ordinance was announced in BGBl II No. 99/2020. Under certain circumstances, however, it may be necessary to keep the traffic with the outside world as low as possible in order to avoid the spread of COVID-19. According to the explanations, it should be noted that the detention periods continue to apply, so that a decision on the continuation of detention with a comprehensive examination of the conditions of detention must be made before the expiry of the period. Urgent suspicion, reasons for detention and proportionality of pre-trial detention shall continue to be strictly examined.