Czech Republic

Updated on 24.04.2020

1. Is a lessee eligible for rent reduction due to a significant decline in footfall and consequently its turnover as a result of COVID-19?

No, in principle not, but final determination would have to be made after review of the particular lease agreement.

2. Is a lessee eligible to temporarily close its leased space - on its own initiative – and opt for rent reduction as a result of COVID-19?

No, in principle not, but final determination would have to be made after review of the particular lease agreement.

3. Is a lessee eligible for rent reduction in the event its leased space is closed following an order by the Government as a result of COVID-19?

In general, the lessee is entitled to claim a rent reduction if the premises do not have the agreed or usual attributes, including eligibility for the agreed or usual use, unless caused by the lessee. The lessee's right to rent reduction will therefore depend on the nature of the Governmental order: 1) if the restriction arises from the nature of the lessee's business, it will likely be perceived as a business risk of the lessee and there will be no right to rent reduction; 2) if the restriction arises from the nature of the premises or the building in which they are located, it will likely be considered a legal defect of the premises and the lessee may have a right to rent reduction. Final determination would have to be made after considering the particular case and also reviewing the particular lease agreement.

Notwithstanding the above, a new law has been passed recently, prohibiting termination of lease agreements by lessors due to non-payment of rent by lessees in a particular time period affected by the COVID-19 outbreak, with the obligation of the lessees to repay the rent in the future. The key terms of the new law are as follows:

  • Until 31 December 2020 the lessor cannot unilaterally terminate the lease for non-payment of rent that occurred between 12 March 2020 and 30 June 2020;
  • The non-payment must be caused by restrictions resulting from the measures related to the epidemic situation that prohibited or substantially hindered lessee’s business;
  • The lessee needs to present the lessor with documents evidencing the cause of the delay with payment within 15 days of the beginning of such delay;
  • If the lessee does not repay the rent by 31 December 2020 the lessor may terminate the lease with 5 days’ notice; the lessor may also terminate the lease with 5 days’ notice if the lessee declares that it will not be able to repay the outstanding debt until 31 December 2020; and
  • The lessor’s right to terminate the lease for other reasons, as well as other rights of the lessor arising from the lessee's non-payment (such as a right to claim late payment interest) are preserved.

4. What kind of security is generally provided by a lessee in connection with a lease, a bank guarantee, a deposit or otherwise?

Bank guarantees and cash deposits are most common in the market, with some strong lessees providing parent company guarantees as a security under the lease agreement.

The answer depends on whether the situation around COVID-19 qualifies as a defect of the premises/building. If it does (which could be the case if the Government ordered closure of premises larger than a certain size or if the lessor could not fulfil its cleaning obligations because of shortage of disinfection supplies and had to close down the premises as a result), the lessee can in principle suspend rent payments and terminate the lease. If it does not qualify as a defect of the premises (which could be the case where there is reduced foot fall or employees working from home), the lessee in principle does not have any such rights; the lessee could however claim that the pandemic is an unforeseeable material change in circumstances, establishing gross disproportion between the parties and demand a renegotiation of the lease agreement in court. Final determination would have to be made however after review of the particular lease agreement.

The lessee could also benefit from the new law prohibiting termination of lease agreements by lessors due to non-payment of rent by lessees described under section 3 above.

6. Does the outbreak of COVID-19 justifies invoking force majeure by lessee?

Under statutory law, the force majeure provision is triggered if the defaulting party proves that it was temporarily or permanently prevented from fulfilling its contractual obligation due to an extraordinary, unforeseeable and insurmountable obstacle, which occurred independently of its will. The force majeure provision will however not be triggered if the breach arises from personal circumstances of the defaulting party, if the default had already existed before the obstacle occurred, or if the liable party was contractually required to overcome the obstacle.

If the force majeure provision under the statutory law is triggered, the defaulting party is released from its obligation to compensate damage resulting from its breach. However, it is still obliged to perform the breached obligation once it can. Other rights and obligations of the parties arising from the breach or the rest of the contract are also not affected.

The lease agreements can contain a different force majeure definition and consequences than the statutory law and so should be reviewed in order to assess each individual case. 

Authors

Picture of Lukas Hejduk
Lukáš Hejduk
Head of Real Estate, CEE
Libor Prokes
Libor Prokeš