CMS Expert Guide on Private Rented Sector leases in Slovakia

In Slovakia, the PRS sector is still developing and PRS transactions are rare.

It is more common to have PRS transactions structured as share deals, in particular where large portfolios or entire residential projects are concerned. The deals can also be structured as asset deals; usually this concerns smaller transactions or deals when only a limited number of individual housing units is being transferred. Use of either structure can also depend on the phase of the PRS project, and the risks identified during the due diligence or tax aspects.

Institutional investors usually seek a direct purchase or forward purchase structure.

The most typical condition precedent is the completion of the construction process: the handover of the property and issuance of the use permit.

As in other real estate projects, financing for PRS projects is secured by mortgage and other customary security instruments such as a pledge of SPV receivables. PRS developers usually provide security either in the form of a bank guarantee or a retention.

No special permitting rules apply specifically to PRS projects After the assessment, a decision on the building plan will be issued for the building.

It is a regular procedure to obtain a zoning permit (územné rozhodnutie), followed by a construction permit (stavebné povolenie) and a use permit (kolaudačné rozhodnutie).

A “joint permit” can be issued in one proceeding instead of separate zoning and construction permits. 

PRS projects should be located on areas designated for “residential use” or “mixed residential use” (which includes services and commerce that do not interfere with the use of surrounding buildings and facilities and do not reduce environmental standards) within a “built-up area”.

There are no specific characteristics or requirements regarding permitting PRS projects compared to commercial projects (offices, hotels and retail). 

The parameters and characteristics of PRS and other residential projects are set out in technical decrees and cover many key aspects that need to be taken into consideration, such as the minimum area of the premises, requirements regarding layout, sunlight, number of parking spaces and fire safety requirements. 

The PRS sector is still developing in Slovakia, but the periods of guarantee and statutory warranty usually reflect the market standard for commercial construction and do not substantially differ from rest of the market. There are usually no material differences in construction contracts used for PRS projects. The typical guarantee period on structures and roof is ten years. 

The special type of leases tailored for rental housing supported by the state can be found in recent Slovak legislation, which provides various specifications compared to the standard lease agreement, e.g. different termination reasons, notice periods, and maximum amounts of rent, as well as describes a complex regulatory framework and conditions of cooperation between the state and private sector in order to develop residential houses. A reduced rate of value added tax (i.e. 5 %) will apply to the construction, renovation and reconstruction of an apartment building or part of it intended for living, including land, which can facilitate the construction of rental housing supported by  the state.

However, standard residential lease can be also used in the PRS projects. Residential leases are more regulated than commercial leases and offer a higher level of protection to tenants; however, the regulation is still relatively flexible. 

Both definite and indefinite term leases can be used in PRS projects. It is standard on Slovak residential housing market to enter into one-year or two-year agreements, which can be repeatedly extended.

In case of the leases supported by the state, the tenant can use the apartment for a fixed or indefinite period, although usually for one year. Such lease can be repeatedly extended based on the agreement of the contracting parties. However, if concluded for longer than five years, including the extension of its duration by concluding an amendment or a new lease agreement, it is considered to be a lease agreement concluded for an indefinite period after the expiration of five years, subject to the condition that the tenant did not meet any of the reasons for the unilateral termination of the lease agreement during the first five-years. 

As far as residential leases are concerned, the market standard is a security deposit and a contractual penalty. 
In general, the law does not prohibit the use of other types of collaterals (e.g. bank guarantee) on the parties’ agreement, although it is not customary to use other types in Slovakia. In the case of the rental housing supported by the state, the legislation only allows the use of a deposit. 

The maximum amount of deposit is regulated only in the case of the rental housing supported by the state, where the maximum amount is three times the amount of: i) monthly rent; ii) monthly payment for the services provided with the use of the apartment; and iii) the cost of operation, maintenance and repairs of the apartment building (in exceptional circumstances set out by Government decree, the limit can be six times the amounts mentioned above). 

If the lease is terminated and the tenant is not willing to leave the apartment, the landlord can seek protection through a court decision on eviction. The eviction process is regulated and follows a detailed statutory procedure. The eviction procedure cannot be simplified through the use of the directly enforceable notarial deeds as only court decisions represent the legal title how to evict a tenant if the tenant is reluctant to comply.

In general, a residential lease agreement should be fair and balanced as “materially unreasonable obligations” on the tenant and restrictions of the tenant’s statutory rights are not enforceable. 

If no rent increase mechanism is stipulated, the landlord can request a reasonable rent increase, i.e. up to comparable customary rent, provided that the proposed increase, together with any increases already made in the previous three years, does not exceed 20%. Should the parties disagree, the landlord can request a court to determine the rent. Similarly, the tenant may request a reasonable decrease in the rent.

The parties to the lease agreement may also mutually agree that the rent will be subject to indexation. In the case of rental housing supported by the state, the legislation provides caps on the rent amount, which are reevaluated each year depending on the inflation rate. 

Tenants are provided with a certain additional level of protection compared with standard leases for non-residential premises. These include, e.g. caps on rent increases, caps on the amount of security deposits and contractual penalties or certain limitations on the landlord’s termination rights. In general, any lease stipulations that would impose on tenants an obligation which, given the circumstances, would be seen as evidently excessive, can be disregarded under Slovak law.

Yes. The lease agreement should stipulate which services associated with the use of the apartment are to be provided by the landlord. If no such services are stipulated, the landlord provides necessary services such as water and waste management, lighting and cleaning of the common areas.

The service charges constitute payments that are separate from the rent. Therefore, it is not possible to indicate only the total amount that includes the rent and service charges. The amount of the service charges must be clearly stated in the agreement.

There is no obligation to undertake the legal separation of the premises (apartments) in a building under Slovak law, and it is possible to operate a PRS project without separated premises. However, the owner is entitled to separate the premises if, e.g. the owner intends to transfer or encumber individual units. For separation, a respective separation document must be filed with the real estate register so that units in the building can be legally created. 

A rental housing project supported by the state must be submitted to the appropriate governmental agency for approval before its implementation. A rental housing project supported by the state must always include a residential house(s) with at least 20 apartments. The requirements for residential houses and apartments supported by the state are set out in law. At least half of the floor area of the residential houses supported by the state must be intended for permanent housing.

There is no such obligation unless there are at least five units in the building with at least four different owners. In such case, the housing association is formed by the approval of the articles of association and registration of the association. The housing association is a legal entity established to manage the building and cannot pursue any other business. Membership in the association is directly connected to the ownership of a unit and each member is liable for the debts of the housing association in proportion to the percentage of his/her share in the common areas. 

The housing association may have an impact on the operation of the project as it manages the operation and management of the building. Each unit owner exercises his/her rights through the general meeting of the housing association which, most importantly, elects members of the housing association board, approves the budget, decides on management charges and their settlement, the repair and maintenance of common areas, and appoints a person in charge of property management.