Abolition of real estate acquisition tax and statutory pre-emptive right

We would like to inform you that the Government of the Czech Republic (the “Government”) has decided, not only in connection with the COVID-19 pandemic, to abolish certain legal institutes related to the real estate transfer.

It particularly concerns an abolition of:
(i) Real estate acquisition tax; and
(ii) Statutory pre-emptive right between co-owners.

While the Government has decided to abolish the real estate acquisition tax mainly in order to stimulate the real estate market, the reason for abolishing the statutory pre-emptive right is not so clearly detectable.

Abolition of real estate acquisition tax
As of 30 April 2020, the Government approved a draft law to abolish the real estate acquisition tax. The draft law is obliged to go through the standard legislative process. However, regarding the fact that it is a government law proposal, its relatively fast approval and adoption can be expected.

The abolition of this tax shall be effective retrospectively and shall apply (i) to all real estate acquisition for which registration in cadastre of real estate (completion of the registration proceedings) was made in December 2019 and later, and (ii) to all real estate not registered in the real estate cadastre if the agreement on their transfer entered into force in December 2019 and later. The tax due date has been already postponed by government measures. Those, who have already paid the tax, shall be entitled to claim a refund.

The related tax deductions of interest on housing loans shall be abolished with the effect from the beginning of January 2022. Thus, persons who acquire ownership of real estate in the meantime (from December 2019 to the end of the year 2021) shall not be obliged to pay the acquisition tax, but at the same time the possibility to reduce the tax base through respective deductions shall be maintained for them.

Abolition of the legal pre-emptive right between co-owners
The statutory pre-emptive right in case of a transfer of co-ownership share on the real estate has been returned into Czech legal order in 2018. However, with the effect from 1 July 2020, the current form of this institute will be abolished and the respective provisions of the Civil Code will be restored to their original form.

In practice it above all entails that the statutory pre-emptive right applies only in situations where the so-called undivided co-ownership has been established by a disposition mortis causa (typically testament, inheritance contract) or by another legal fact in a way that made it impossible for the co-owners to affect their rights and obligations from the very beginning. Furthermore, the statutory pre-emptive right to a co-ownership share shall only last 6 months from the establishment of the undivided co-ownership and will not apply to transfers to certain family members or other co-owners.

If you have any questions about real estate transfers, please, do not hesitate to contact us at tomas.slaby@randalegal.com.

The Most Important Rules Of Lease Agreements For Office And Business Premises, During The State Of Emergency

In order to prevent the spread of the coronavirus pandemic (COVID 19), a number of restrictive measures have been imposed, which also have a significant impact on tenancies. As a result of the restrictions, the home office has become commonplace, office buildings have become depopulated, a significant number of stores have been open for a limited time, their turnover has decreased significantly, however, leases still exist. The question rightly arises as to what rights and obligations the landlord and the tenant have in the current situation, whether the rent can be reduced and what rules apply to the termination of the tenancy.

Until 30 June 2020, a prohibition on termination will apply to some lease agreements

According to the newly released government decree, from the declaration of a state of emergency there is a prohibition on termination of the lease agreements until 30 June 2020, for the most endangered sectors, such as tourism, catering, entertainment, gambling, film, performing arts, event management and sports services. The prohibition on termination may be extended by the government until the end of the state of emergency.

Does this mean that non of the tenancy can be terminated at all?

No. This means that the leases of business premises belonging to the indicated sectors cannot be terminated by unilateral termination during the prohibited period, which in our opinion applies to all types of termination, thus both the so-called ‘ordinary’ and ‘extraordinary’ (immediate) termination. Of course, it is still possible for the parties to terminate the contract by mutual consent.

What about the lease agreements on office spaces? Does the prohibition on termination apply?

If the office spaces in question do not belong to any of the economic sectors listed in the government decree, so it is typically not a commercial business, the prohibition on termination does not apply to these leases. However, termination of these leases may not be the most economically viable option in the long run, so a temporary amendment to the lease should be considered, in which favourable conditions can be laid down for both landlords and tenants.

Can the tenant demand a reduction or waiver of the rent?

The Civil Code stipulates that no rent is payable for the period during which the tenant may not use the thing for reasons beyond his or her own interest. In view of the restrictive measures introduced due to the coronavirus pandemic, the remission of rent can only occur in a very narrow scope. It can only take place if the restriction imposed directly affects the operation of the rental property and makes it impossible to use it. If the restrictions only indirectly affect the use of the rental property, but do not make it impossible, the tenants are not released from their obligation to pay the rent.

Furthermore, the parties may deviate from the cited provision in the lease agreements with the same will, so it is worth examining the concluded agreements, because if the lease agreement excludes the applicability of this provision, the tenant cannot rely on the cited provision and refuse to pay the rent.

However, a reduction in the rent requires an amendment of the contract based on the mutual agreement of the parties. Under the contract amendment, the parties can agree on a number of provisions that will alleviate their situation (e.g. rent reduction, subsequent rent settlement, extension of the lease term, etc.). Mutually agreed amendments to the contract are in the interests of both the tenant and the landlord. Although it currently appears that a contract amendment will bring more favourable changes to the legal relationship for tenants, a contract amendment by mutual agreement may also be more economical for landlords. If the obligations of the tenant are left unchanged, there is a high risk that the tenants will become economically paralysed and will be liquidated. In such case, the landlord’s claims against the tenant might be enforced up to the amount of the contractual guarantees only.

Urgent and extraordinary measures to support the most vulnerable tenants affected by COVID-19

Royal Decree-Law 11/2020, of 31 March, which takes additional urgent measures in the social and economic sphere to deal with COVID-19.

The measures aim to minimize the impact of this situation and to protect tenants who remain vulnerable, but also to articulate those actions necessary so that landlords, also sometimes in difficult circumstances, can also overcome the impact of this crisis.

More relevant measures

(1) Suspension of eviction procedure and releases affecting housing leases, in situations of vulnerability without housing alternative. In eviction procedures affecting the usual dwelling, launches without a housing alternative will be suspended for a period of up to six months.

In the event that the lessor concerned is also subject to vulnerability, it will be the Judge who determines the period of suspension or the measures to be established, taking into account the report issued by the competent social services.

(2) Six-month extension on leases ending in this period, at the request of the tenant. In those housing leases in which their validity (or extensions) ends within the period from the entry into force of this royal decree-law and until the day on which two months have elapsed since the end of the alarm status, an extension period of up to six months is established.

This extension shall be mandatory for the landlord if requested by the lessee, under the same conditions set out in the current contract, unless an agreement has been reached on this matter between the landlord and tenant.

(3) State-guaranteed line of guarantees, which will allow to cover the payment of up to six months of rent, for any tenant who is in a situation of vulnerability as a result of COVID-19.

A Transitional Funding Aid Programme is created for all households that may be affected in their income by the expansion of COVID-19, so that, through an agreement with the Official Credit Institute (ICO), these households are offered the possibility of covering rent payments for a period of up to six months, without any expenses or interest for the applicant, and can be returned within six years.

(4) In situations of vulnerability, where the lessor is a public entity or a large holder, 50% reduction in income, or moratorium of up to four months in the payment of rent.

In the event that the tenant is affected by situations of vulnerability arising from the expansion of COVID-19, and the lessor is a public entity or a large holder (natural or legal person holding more than 10 urban properties, excluding garages and storage rooms, or more than 1,500 m2 of constructed area), and in the absence of an agreement between tenant and owner, it is established that for the period that such vulnerability persists, the owner may grant during that period, and with a maximum of four months, a 50% reduction in rent, or a moratorium on the payment of rent during that period to be repaid for up to three years.

This moratorium would be suspended if the tenant agreed to the financial aid explained in the previous point.

(5) Additionally 100 million euros are provided for the State Housing Plan 2018-2021. A new aid Program is implemented that will allow the granting of direct rental aid to regular housing tenants who, as a result of the economic and social impact of COVID-19, have serious problems in meeting the partial or total payment of rent.

The management of the Plan is relaxed and streamlined, in order to provide direct coverage to the vulnerable tenant for the payment of the rent or for the payment of the financing through the Official Credit Institute (ICO) subscribed by the tenant with which the rent will have been satisfied.

The document verification process and requirements for access to the State Housing Plan’s rental assistance programs speed up. Taking into account the exceptionality of the situation, the requirements to be met by beneficiaries of any rental aid financed under the State Housing Plan 2018-2021, including those of the aid program to help minimize the economic and social impact of COVID-19 on regular housing rentals, may be verified by the Autonomous Communities after the resolution of granting the aid, which is conditional on the fulfilment of the requirements.

Poland’s shopping malls to close?

A draft amendment to the COVID-19 Act has been published on the Polish parliament’s website today. The full version of the document is available here.

Based on this draft, article 15ze of the Act, which provides for a 90% rent discount for entities whose operations in large retail centers have been restricted, is supposed to be replaced with a new provision, according to which the obligations of parties to lease agreements or other similar agreements (under which retail space is let for use) will expire for the period of restrictions applicable to malls with a sales area of over 2,000 sqm. Additionally, this provision entitles tenants to submit a proposal for extension of the lease term by six months; in case such proposal is not delivered, it will be assumed that there has been no temporary expiration.

As specified in the statement of reasons to the draft amendment, “it is now forbidden or substantially less profitable (due to a drop in the number of customers) to conduct operations in large shopping centers. Hence, lease agreements should expire temporarily, so that lessors and tenants are not obliged to perform their contractual duties which generate costs for the parties while restrictions are in force„.

Both the provision itself and the statement of reasons indicate that the lawmaker’s goal is for all lease agreements in large retail malls across Poland to “expire temporarily.”

It is unclear if parties that want to continue their operations in shopping centers will be able to enter into settlement agreements based on which leases could remain in effect despite the statutory “temporary expiration.”

Given the implications arising from failure to submit an extension proposal (which should be submitted within 3 months of the ban lifting date, rather than now), it might be challenging to determine whether lease agreements are in effect as of now (and to handles a range of related processes, such as invoicing).

Contact us in case of any questions.

Corona pandemic can be classified as force majeure

In a decree issued by the Federal Ministry of Construction on 23.03.2020, the federal government announced that the corona pandemic can be classified as force majeure in individual cases for public buildings. At the same time, however, it intends to continue with its construction projects and only interrupt them when official measures come into force, if these measures make further construction activities impossible, such as the construction of a new building, for example:

– quarantine of most construction workers or

– decree of prohibition to enter.

This is stated in a decree of the Federal Ministry of Building and Construction from Monday. The addressee is the Federal Office for Building and Regional Planning.

Force majeure possible in individual cases

In the letter, which was addressed to the Federal Office for Building and Regional Planning, the ministry gives advice on how to deal with process disturbances in construction. According to this, the Corona pandemic is in principle suitable to trigger the facts of force majeure according to § 6 Para. 2 No. 1 VOB/B (German Construction Contract Procedures). ‚Force majeure usually means an unforeseen event which cannot be averted economically even by exercising the utmost care.‘

The ministry does not see these strict requirements as generally given. The Ministry recommends that the subordinate authorities check in each individual case why a company is not efficient. Exemplary reasons are:

– that the authorities have quarantined a large number of employees,

– no replacement can be found,

– Building material is missing or

– that workers can no longer come to the construction site due to travel restrictions.

The Ministry of Construction is thus responding to the demands of the building associations, whose interest is to protect defaulting companies from recourse claims by clients.

In case of doubt for the construction company

Doubts may remain during the examination. The authorities are required to ‚handle the statements required by the contractor in individual cases with a sense of proportion, pragmatism and with a view to the overall situation‘. With the letter, the Ministry of Construction also took into account the demand of the construction industry for fee payments and thus for securing liquidity. Invoices are to be checked and paid immediately, the decree warns.

COVID-19 – Real Estate: Review of the main measures provided by the state of emergency decree

The state of emergency was instituted in Romania for a period of 30 days as of 16 March 2020 (i.e. the date when Decree No. 195/2020 establishing the state of emergency in Romania was published in the Official Gazette).

We have included below a short review of the main measures provided by the state of emergency decree from real estate projects perspective:

  1. Issuance of emergency situation certificates in order to prove that an economic operator’s activity was affected because of COVID-19’s impact:
    • the Ministry of Economy, Energy and Affairs will issue emergency situation certificates based on supporting documents upon request of the economic operators whose activity is affected because of COVID-19;
  2. In relation to public authorities:
    • the validity of the documents issued by the public authorities which were to expire during the state of emergency shall be maintained;
    • during the state of emergency, the legal terms for the public authorities’ responding to requests submitted based on free access to public interest information, as well as those related to petitions, are doubled.
  3. State authorities may gradually adopt measures such as temporary closing of restaurants, hotels, coffee shops, clubs, casinos, associations’ headquarters or other public places;
  4. Thus, authorities have already ordered the temporary closing of shopping centers (except for sale of food, pharmaceutical or veterinary products or cleaning services) and suspension of activities such as food or beverage serving within restaurants or other public places, as well as cultural, sports, entertainment or gambling activities within enclosed spaces.

  5. The Government may adopt measures for supporting companies and other entities affected by COVID-19 crisis, as well as for supporting the employers and employees.
  6. Statutes of limitations and time bars do not begin to run and, if already commenced, are suspended for the duration of the state of emergency.

Anti-Crisis Shield – key changes for the real estate sector

Statutory reduction of rent in retail complexes with sales area of over 2,000 sqm
– Statutory rent reduction of 90%, applicable to retail developments with a sales area exceeding 2,000 m2, covering the period over which the Tenant’s operations are prevented/hindered (unless the Lease Agreement offers a better solution for the Tenant, in which case such solution will apply).
– The Lessor and the Tenant may apply to a court for modification of the reduction rate, subject to the principles of fairness/equity.
– No contractual penalties, interest, compensation for Tenant’s non-performance of obligations (based on the statement of reasons to the draft bill, this shall apply if non-performance results from restrictions on business operations; however, the provision is too vague and might be misinterpreted).

Perpetual usufruct fee deferred for 3 months
Deferral of the payment date for perpetual usufruct fee from March 31, 2020 to June 30, 2020.

Exemption from tax on civil-law transactions on loans
The tax on civil-law transactions will not apply to loans, yet only in case the borrower is a business entity whose liquidity has deteriorated as a result of the negative economic consequences related to COVID-19.

Suspension of retail sales tax
Further suspension of the application of the Retail Sales Tax Act. Taxpayers will not have to pay this tax between July and December 2020.

Tax on revenue from buildings deferred until July 20, 2020
Applies to the period of March-May 2020. Available to taxpayers that have suffered negative economic consequences due to COVID-19, and whose revenue in a given month is at least 50% lower than in the corresponding month of the previous fiscal year, or – in case of taxpayers that embarked on business operations in 2019 – than the average monthly revenue in that year.

Please feel free to contact us for any questions.

Commercial property rental – The 10 most important questions from landlords and tenants

It is becoming increasingly apparent that the effects of the corona crisis will continue to preoccupy us for a long time to come and that commercial leases will therefore come under increasing pressure. Landlords must prepare themselves for the fact that their tenants will find themselves in a severe liquidity crisis as a result of collapsing sales, closures or quarantine orders ordered by the state or authorities, as well as general assembly bans or curfews, and that they will no longer be able to pay their rents now or in the foreseeable future.

According to the information available to us, the German government is currently examining options for protecting tenants who are experiencing payment difficulties as a result of the coronavirus crisis. Apparently, this applies to both commercial and residential tenants. In this context, a ban on termination in the event of payment defaults caused by the coronavirus pandemic is being discussed. This would mean that although the obligation to pay rent would not cease to apply, rents would be temporarily deferred. As a result, the deferred rents would have to be paid later. In the case of housing, the alternative
However, a special housing benefit is also being discussed as a possible solution, which should take effect when tenants of residential accommodation suffer considerable losses of income as a result of the coronavirus crisis and have no possibility of compensation through transfer payments. In this case the tenants of commercial space would be excluded. Until it is clear whether and to what extent the Federal Government is helping tenants in the current situation and whether this legal „protective shield“, which is currently emerging, will also cover tenants of commercial space, landlords of commercial space should take a few things into account.

You will find answers to these and other urgent questions in our act news (in German): https://act-newsletter.com/Coronakrise_Gewerberaummiete_die_zehn_wichtigsten_Fragen_von_Vermietern_und_Mietern.pdf

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

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.

Lessees‘ claims against lessors as a result of governmental measures

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.