Overview of retail lease agreements in Croatia

Leases are regulated by the Lease and Sale of Business Premises Act (Lease Act). What is not covered by the Lease Act is regulated by the Civil Obligations Act (the Obligations Act).

The rules apply in the following order:

• provisions of specific retail lease agreements (provided that such provisions are not contrary to the mandatory provisions of the Lease Act and the Obligation Act);
• provisions of the Lease Act;
• provisions of the Obligations Act.

There is no mandatory minimum or maximum duration.

Retail lease agreements can be concluded for a definite or an indefinite term, the latter being terminated by serving a period of notice usually agreed by the parties. In the absence of such an agreement, the Lease Act provides for a 30-day notice period.
 
In addition, the Lease Act prohibits any party from terminating indefinite lease agreements within one year of the date of conclusion of the lease agreement, unless otherwise agreed by the parties.

In practice, the duration of retail lease agreements commonly varies from one to five years (and from ten to fifteen years for anchor tenants in shopping centres).

In order to establish a long-term relationship between a landlord and a tenant beyond the initial lease term, a future option for extension of the lease is usually agreed between the parties.

The landlord has the right to terminate the lease agreement at any time if:

• the tenant, even after a written notice from the landlord, uses the premises in a manner contrary to what was set out in the lease agreement or causes considerable damage to the premises;
• the tenant does not pay due rent within a period of 15 days as from the date of a written notice;
• the landlord, due to reasons for which he cannot be held liable, cannot use the premises in which he used to perform his activities and, therefore, intends to use the premises occupied by the tenant;
• if the tenant makes alterations of the construction, layout, surface, use or the exterior of the leased premises without the landlord’s consent.

In addition, the retail lease agreement, whether concluded for an indefinite or a definite term, can be terminated by either party at any time if the other party does not fulfil its obligations.

Finally, the lease agreement may be terminated (i) for reasons which the parties have determined themselves in the underlying lease agreement and (ii) by mutual agreement between the parties.

The tenant has the right to terminate the lease agreement at any time if the landlord, within a reasonable period of time determined by the tenant, does not bring the premises up to the condition in which they should be handed over or maintained.

If the landlord does not perform the necessary repairs he must perform within a reasonable deadline, the tenant has the right to terminate the lease agreement. 

In addition, a retail lease agreement, which was concluded for an indefinite or a definite term, can be terminated by either party at any time if the other party does not fulfil its obligations.

Finally, the lease agreement may be terminated (i) for reasons which the parties have determined themselves in the underlying lease agreement and (ii) by mutual agreement between the parties.

There is neither a right of renewal nor an eviction indemnity payable by the landlord unless otherwise agreed in the lease agreement.

If the lease agreement has a definite term, it terminates upon the expiration of the said term. The fact that the tenant would continue to use the leased premises after the expiry, would therefore not automatically extend the agreed lease term, even though for years, it was considered that a lease should be seen as renewed for an indefinite period of time, if the landlord does not oppose the tenant’s continued use of the premises after the expiry of the original definite period of the lease term. 

The Supreme Court has confirmed that this automatic renewal does not apply to retail premises. 

There is no rent revision procedure unless otherwise agreed in the lease agreement.

However, under certain circumstances, the Lease Act provides for the possibility of modification of the rent:

• The tenant may demand a proportionate reduction of the rent if the ability to use the premises has been limited.
• The tenant may demand a proportionate reduction of the rent if the landlord does not hand over the premises in the condition as set out in the lease agreement or as set out under the Lease Act. 

The landlord is entitled to modify the rent in order to perform repairs to retail premises for the purpose of decoration or reduction of energy and maintenance costs, provided that the landlord notifies the tenant in writing two months in advance of the type of works to be performed, the duration of works and the new amount of the rent. In that event, the tenant is entitled to terminate the lease agreement within one month after receiving the notification from the landlord.

There are no mandatory provisions regarding fitting-out works.

Usually, the parties use the underlying lease agreement to agree on the terms and manner for fitting-out works as well as the way in which the fitting-out costs are to be divided/settled.

The tenant is obliged to maintain the premises in the condition they were in at the beginning of the lease, unless otherwise agreed by the parties. However, the tenant cannot be held liable for deterioration of the state of the retail premises, devices  and the equipment resulting from their regular use.

The tenant is only entitled to sublease the whole premises or parts thereof provided that the parties stipulated accordingly in the lease agreement.

Subleasing is otherwise prohibited.

The lease agreement can be transferred to a new tenant only with the landlord’s consent, which has to be explicit    and in writing.

When subleasing, the tenant has to guarantee that the premises will be used in a manner agreed in the lease agreement. In addition, the Obligations Act provides that the landlord is entitled to settle the receivables he is owed by the tenant (usually unpaid rent) by claiming those amounts from the subtenant.

If the premises are sold, all rights and obligations towards the tenant are automatically transferred to the new owner.

If an enforcement procedure is initiated to sell the property in order to pay off one or more creditors, the lease will not be binding on the new owner, unless it has been registered with the Land Registry. The tenant can register the lease agreement with the Land Registry if such a provision is included in the lease agreement.

The tenant has no pre-emption right in the event of the sale of the premises unless otherwise agreed in the lease agreement.

There are no mandatory rules regarding the form and/or duration of a rental guarantee. Usually, the landlord requires a security for the payment of rent in the form of a security deposit, debenture note (in Croatian: zadužnica) or a bank guarantee equivalent to three to six months’ rent.

The tenant is obliged to bear the costs of normal maintenance such as cleaning, painting of walls, small installation repairs and the like, unless otherwise agreed.

The tenant cannot be held liable for deterioration of the state of business premises, devices and equipment resulting from their regular use.

The tenant is obliged to settle the cost of repairing damage to the premises that was caused by it or by other persons using the premises.

The tenant has the right to perform works that would change the construction, arrangement, surface, purpose or outer appearance of the premises only upon the express written consent of the landlord.

The landlord is obliged to maintain the premises in such a condition that the tenant can perform the activities stipulated in the lease agreement. The landlord is also obliged to make any repairs necessary to that end.

When a need for such repairs arises, the tenant must immediately notify the landlord in writing, otherwise it could be liable for possible damage. The costs of major repairs (structure, heating systems and the like) are also, in principle, borne by the landlord.

The rent is subject to 25% VAT only if the landlord is registered as VAT taxpayer. The registration in the VAT system is obligatory if the value of total annual taxable supplies of goods and services provided by the entrepreneur exceed HRK 300,000 (as of 1 January 2023, the subject threshold will amount to EUR 39,816.84). Service charges are subject to VAT under the same conditions. Service charges are not included in the rent unless the parties explicitly agree accordingly.

The lease agreement must be drawn up in writing; otherwise, it will be null and void.

Also, it is common practice for the parties to draw up a lease agreement in the form of a notarial deed containing a so-called "enforcement clause", which gives the landlord the right to evict the tenant and collect any unpaid claims faster and more efficiently.