When acquiring property such as shopping centres and business parks, lenders, investors and developers face the difficulty that the Slovak Civil Code entitles existing tenants to terminate their leases whenever ownership of the property changes. This has obvious implications where the profitability of the transaction depend on keeping existing tenancies. Indeed, banks usually make the continuation of existing leases a condition precedent of lending funds.
Some hold the view that the tenant’s right to terminate does not apply to leases of retail units in shopping centres and the like because they are non-residential premises, which are covered by a special regulation (Act no. 116/1990 Coll). In fact, this does not exempt non-residential premises from the property provisions of the Civil Code.
Under the Civil Code, any agreement by the tenant (in the lease or otherwise) to waive his right to terminate the lease on a change in property ownership is void (provision 574 par. 2). This means that banks should not make it a condition precedent of facility agreements that the buyer secures a waiver of rights from existing tenants, as these too will be void.
Another approach favoured by some is for the would-be purchaser to enter into a new lease with the tenants which is conditional on his acquiring the property. However, there is still dispute whether a party can validly enter into an agreement to dispose of property over which he holds no rights. The Supreme Court of the Slovak Republic has confirmed that it is possible to enter an agreement to sell property owned by a third party but it is not universally accepted that this also applied to lease agreements. There is also the difficulty that the subsequent acquisition of the property on which the lease grant is conditional would still count as a change in property ownership entitling the tenant to terminate the new lease. At the very least, this approach offers plenty of scope for dispute and uncertainty.
A better solution is for the future owner and existing tenant to enter into an agreement to enter into a future lease agreement within a certain period following the change in property ownership. This does not involve the future owner in disposing of property over which he holds no rights; the subsequent change of owner still entitles the tenant to terminate his existing lease; but he remains bound to enter a new the lease agreement. Banks should therefore make the execution of future lease agreements with existing tenants a condition precedent in the facility agreement.
Law: Act no. 40/1964 Coll. Civil Code provision 680 par. 3
