Of interest.

Moratorium on rents or just prohibition on termination of lease of flats and non-residential premises for business purposes? (COVID-19)

On 2 April 2020, the Government of the Czech Republic submitted to the Chamber of Deputies of the Parliament of the Czech Republic a draft bill on certain measures to mitigate the effects of the SARS-CoV-2 coronavirus epidemic on tenants of premises used for housing needs, on beneficiaries of loan provided by State Housing Development Fund and in connection with provision of services related to the use of flats and non-residential premises in a house with flats; and a draft bill on certain measures to mitigate the effects of the SARS CoV-2 coronavirus epidemic on tenants of business premises (hereinafter the “draft bills”). The draft bills should be discussed by the Chamber of Deputies on 7 April 2020.

The declared purpose of the draft bills is to mitigate the negative economic and social impacts of the crisis measures taken against the spread of the epidemic, in particular the possible payment problems of tenants of housing and business premises and the related threat of termination of lease contracts. The basic vision of the draft bills is therefore to prevent unilateral termination of lease contracts by landlords due to non-payment of rent caused by tenants´ loss of income as a result of crisis measures. Both draft bills are therefore very similar in content. In this article, we will analyse the basic content of the draft bills, highlight their weaknesses and discuss the potential consequences.

Prohibition on contract termination, not deferral of rent maturity

First, we consider it necessary to point out that both of the draft bills do not contain a general moratorium on rent, as was unfortunately inaccurately presented in the media. The moratorium is a settled legal term for deferring the maturity of debts due to extraordinary circumstances.

However, the draft bills are intended to not provide for a general deferral of rent maturity (although it cannot be overlooked that this alleged effect is mentioned in the explanatory memorandum to the draft bill on the rental of premises for housing), but only the prohibition for landlords to terminate a lease agreement unilaterally, solely because of non-payment at the decisive period from 12 March 2020 until the day following the end of the emergency measure due to the epidemic, but no later than 30 September 2020.

This prohibition should apply during the so-called protective period, i.e. from the date of entry into force of the law until the date specified in the relevant draft bill as the end of the protective period, i.e. 31 May 2021 for the lease of flats, houses or parts thereof, if these are used to satisfy the tenant’s housing needs, respectively 31 March 2022 for the lease of non-residential premises actually used for business, regardless of the contractually agreed purpose of the subject of the lease.

We consider the misleading presentation of the above rules to be very unfortunate, as many tenants could misunderstand the intention of the Government of the Czech Republic as a deferral of maturity or even a temporary waiver of rent. The draft bills not only do not stipulate a cessation of the obligation to pay rent in full, but also generally do not defer the maturity of rent and thus do not prevent the landlord, for example, to demand statutory interest on late payment, to recover debts (through judicial enforcement) or even exercise the right of retention of the tenant’s property to secure debts.

The draft bills also allow the landlord to seek cancellation of lease contract by the court if the restrictions imposed by the proposed bills cannot be fairly demanded, after at least the circumstances that made the proper payment of the rent impossible or substantially hindered, but not earlier than after the end of the declared emergency state. In the case of leases of premises for housing, this should be in particular a threat of landlord’s own emergency which will prevent him from having the necessary nutrition for himself or those to whom he has a nutritional obligation. In the case of commercial leases, it is enough to fulfil the condition of unfairness (in particular) if the lease of business premises is the only source of the landlord’s livelihood.

Although the draft bills do indeed contain provisions on deferral (or extension) of maturity, it only applies to the landlords’ receivables under fixed-term lease agreements which expired during the decisive period. In this case, the maturity should be extended until the end of the protective period.

Not only protection, but also tenant’s obligations

Although this is not explicitly set out in the draft bill (and in our opinion it should be, for the avoidance of doubt), we are convinced that the prohibition on unilateral termination of the lease contract by the landlord is subject to the fulfilment of the tenant’s obligation to notify the landlord that on his or her part there are circumstances of delay in rent payment with which the draft bill links the prohibition of termination of lease contract.

However, we see a potential interpretation problem as to whether the tenant’s obligation to notify the landlord must be fulfilled before the termination notice given by the landlord or possibly even thereafter, respectively whether late fulfilment of the notification obligation results in the prohibition of the unilateral termination of the lease contract by the landlord or not. The relevant provisions in the draft bills on the notification obligation of the tenant without undue delay do not contain any explicit sanction for non-compliance.

If we do accept the interpretation in favour of the tenants, unfortunately, purpose-built objections can be expected by tenants against justified terminations of lease contracts with reference to the prohibition of unilateral termination, accompanied by a clearly delayed fulfilment of the notification obligation. Therefore, as advocates of the vigilantibus iura principle, we would prefer the opposite interpretation, i.e. the failure to timely meet the tenant’s obligation to notify the landlord of the circumstances of his delay in rent payment will render the prohibition of unilateral contract termination inapplicable in such case.

Benevolence towards the tenants is further compensated to some extent in the draft bills by strengthening the landlords’ right to terminate the lease contracts if all due amounts from the decisive period are not paid by the tenant until the end of the protection period. In this case, the landlord would have the possibility to terminate the lease agreement without a notice period in the case of residential premises, and in the case of renting a business premises with a five-day notice period. The admissibility of the notice of termination by the landlord should apply to both types of leases also if the tenant declares that the amounts due at the decisive period will not be paid even until the end of the protection period or if this fact is otherwise beyond doubt.

Conclusion

Unfortunately, we are forced to state that regardless of whether it is fair to protect tenants at the expense of landlords, the submitted draft bills have visible technical shortcomings.

Along with the apparently inevitably provoked believes of some tenants that “nothing can happen to them” after the adoption of the draft bills, unfortunately, in our opinion, the draft bills, if approved by the legislature in their unaltered form, would create large potential for considerable legal disputes.

If you have any questions about this topic, please feel free to contact us at any time.

 

PhDr. Mgr. Jan Ptáčník, attorney – ptacnik@plegal.cz

 

www.peytonlegal.cz

 

06. 04. 2020

 

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