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Czech Republic

Law and regulation of Covid-19 loan moratoriums in the Czech Republic

Table of contents
  1.  Description of the legislation
    1.  Is there a moratorium on loans legislation implemented in your jurisdiction?
    2. If no: Are there any ongoing discussions regarding a potential introduction of such measures?
    3.  What is the name of the relevant legislation (the “Relevant Act”)?
    4.  What is the duration of the measures (period of moratorium)?
    5. Does the legislation provide for an extension of the period of moratorium?
    6. Is the moratorium mandatory, or can each borrower opt out should they wish to simply continue payments, or opt in if they want to be protected by the moratorium?
  2. Parties and agreements affected by the Relevant Act
    1. Is the moratorium available for both corporate and consumer loans?
    2. Who are the affected Lenders?
    3.  Does it make a difference whether loans are granted by a foreign entity and governed by foreign law?
  3. Impact on the loan agreements
    1.  Is there a cut-off date with respect to loan agreements to which the Relevant Act will apply (e.g. not applicable to loan agreements entered into after the cut-off date)?
    2.  Does the moratorium apply to principal only, or also to interest and/or fees?
    3. Will the maturity of the loan automatically be extended by the moratorium period?
    4.  Are repayments and interest which have become due and payable under the contract before the Relevant Act has come into force covered by the moratorium?
    5. Will lenders be able to terminate a loan due to an event of default other than non-payment (e.g. breach of financial covenants)?
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1. Description of the legislation

1.1 Is there a moratorium on loans legislation implemented in your jurisdiction?

Yes.

1.2 If no: Are there any ongoing discussions regarding a potential introduction of such measures?

Not applicable.

1.3 What is the name of the relevant legislation (the “Relevant Act”)?

Act No. 177/2020 Coll., on Certain Measures regarding the Repayment of Loans during the COVID-19 pandemic (the “New Legislation”).

1.4 What is the duration of the measures (period of moratorium)?

The protection provided by the moratorium may last until 31 October 2020 at the latest. Please see below for further details.

1.5 Does the legislation provide for an extension of the period of moratorium?

No.

1.6 Is the moratorium mandatory, or can each borrower opt out should they wish to simply continue payments, or opt in if they want to be protected by the moratorium?

According to the New Legislation, the measures are not mandatory. They only apply if the borrower chooses to opt in by sending a notice to the lender (the “Notice”) in which it states that it chooses to be protected by the moratorium (suspension of loan repayments).

In the Notice, the borrower must state that it chooses to be protected by the moratorium due to the negative economic impact of the COVID-19 pandemic on it and must choose whether the moratorium will apply to it until: (i) 31 July 2019; or (ii) 31 October 2020. The moratorium will then be effective from the first day of the month following the month in which the Notice is delivered to the lender.

2. Parties and agreements affected by the Relevant Act

2.1 Is the moratorium available for both corporate and consumer loans?

Yes. The moratorium is available for both commercial and consumer loans.

The New Legislation provides a number of exclusions from the moratorium’s applicability, e.g. the moratorium is not available to (demonstrative overview only): 

  1. loans under which the borrower was as of 26 March 2020 in a delay with payments for more than 30 days;
  2. loans granted for trading with financial instruments;
  3. financial instruments and related instruments;
  4. revolving/overdraft loans;
  5. operating lease and
  6. financial guarantee.

2.2 Who are the affected Lenders?

The New Legislation applies to banks and financial institutions as well as non-banking loan providers, including consumer loan providers. It also applies to entities that acquired receivables from a provided loan.

2.3 Does it make a difference whether loans are granted by a foreign entity and governed by foreign law?

The New Legislation does not explicitly deal with this issue. However, according to the explanatory official reasoning of the New Legislation it is intended that the New Legislation shall follow a territorial principle, i.e. that it shall apply to any loans granted in the territory of the Czech Republic irrespective of the governing law and the fact whether the lender is a Czech or foreign entity.

3. Impact on the loan agreements

3.1 Is there a cut-off date with respect to loan agreements to which the Relevant Act will apply (e.g. not applicable to loan agreements entered into after the cut-off date)?

Yes. The moratorium is available for the commercial and consumer loans granted and utilised before 26 March 2020, although certain exceptions apply to loans secured by a mortgage and loans for housing purposes, which do not need to be utilised before 26 March 2020.

3.2 Does the moratorium apply to principal only, or also to interest and/or fees?

The moratorium (suspension of payments) applies primarily to repayments of the principal. 

Interest remains payable during the moratorium. For business loans, the interest rate remains the same as agreed in the loan agreement. For consumer loans, the interest rate corresponds to the repo rate announced by the Czech National Bank increased by 8%, unless a lower interest rate is agreed in the loan agreement.

Other fees and payments are not suspended, unless the borrower is an individual person.

3.3 Will the maturity of the loan automatically be extended by the moratorium period?

Will the maturity of the loan automatically be extended by the moratorium period?    Given the nature of the measures (i.e. the postponement of repayments) and according to the explanatory official reasoning of the New Legislation, the principal repayment dates and thus the maturity of the loan will be postponed by the moratorium. In other words, the scheduled repayment dates of the principal will be postponed automatically by the moratorium period. The postponement shall not apply to payments which are not affected by the moratorium (such as interest payments).

The New Legislation explicitly states that the duration of any security securing the loan will be extended by the moratorium (repayment suspension) period.

3.4 Are repayments and interest which have become due and payable under the contract before the Relevant Act has come into force covered by the moratorium?

No.

3.5 Will lenders be able to terminate a loan due to an event of default other than non-payment (e.g. breach of financial covenants)?

The New Legislation does not prohibit the lender from terminating a loan due to an event of default other than non-payment. It is however questionable whether the lender would be able to immediately accelerate a loan and require full repayment if the borrower opted in and chose to use the protection introduced by the New Legislation. In such case, it seems likely that the borrower could argue that the accelerated loan was not due and payable before the expiry of the moratorium (suspension period).

Authors

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Portrait ofPavel Srb
Pavel Srb
Senior Associate
Prague