CORONAVIRUS - Effect of Emergency Measures on relations between Landlords and Tenants
UPDATE, 9 APRIL 2020
We comment below on the government's proposal of certain measures to mitigate the economic effects of the SARS CoV-2 coronavirus epidemic on tenants of commercial premises, which was passed by the Chamber of Deputies on 8 April 2020, as modified by certain amendments. The respective act will be now submitted to the Senate which means that it could come into effect in a matter of days.
The law in brief
The essence of the law lies in introducing a ban on landlords being able to unilaterally terminate leases, lettings or subleases of commercial premises for defaulting on rent payments from 12 March 2020 to 30 June 2020. The tenant is thus protected from having the lease terminated for non-payment of rent as a consequence of the government's emergency measures to address the epidemic, which made conducting business activities impossible or considerably difficult, provided that the tenant notifies the landlord about it. The law does not apply to any other payments under lease agreements, such as service charges paid in connection with use of the leased premises or common premises, marketing contributions or any other stipulated payments which the tenant is obliged to pay by a due date under the lease agreement.
The law thus does not provide for a waiver or discount on the rent payments but limitation of the consequences of default with due payments; the landlord continues to issue invoices to the tenant in accordance with the lease agreement. The tenant has until 31 December 2020 to pay all such rent in arrears (this time period was significantly shortened by the deputies' amendment) and, if not duly paid, the landlord may lawfully terminate the lease agreement. The tenant is, however, in default during the entire period and the landlord is entitled to exercise any rights arising therefrom under the law or lease agreement. The amount of applicable late payment interests is, however, limited up to the amount of statutory late payment interests (see another act "Lex Covid"). Furthermore, the law does not restrict the landlord from unilaterally terminating the lease for any other reasons stipulated by law or the lease agreement. Should the lease expire by 31 December 2020, the tenant is obliged to pay all rent in arrears from the period between 12 March 2020 and 30 June 2020 within 30 days following the lease expiry.
With respect to payments with which the tenant was in default prior 12 March 2020, we tend toward the opinion that the tenant is obliged to pay them in accordance with the lease agreement and no protection under the discussed law will apply; therefore, any such delay can lead to the lease termination.
What has not changed/remained unclear
VAT: Unfortunately, the law as passed by the Chamber of Deputies does not deal with VAT payments invoiced together with the rent (assuming that rent is subject to VAT, as is the case with the vast majority of commercial leases). Although the deputies proposed abolishing the obligation of landlords to pay the VAT from unpaid invoices on rent, they failed to obtain sufficient support to pass this measure. It was mentioned during the discussion that landlords could request deferrals on VAT payments from the Tax Authorities due to the pandemic. The law does not change the landlord's obligation to pay VAT on issued invoices (regardless of whether the tenant pays it), nor does it affect the tenant's right to claim invoiced (but not necessarily paid to the landlord) VAT from the state.
Obligation to submit documents: The tenant has to submit to the landlord documents evidencing that the tenant's default with payments of rent results from the restrictions imposed by the government's emergency measures to address the epidemic, which made conducting business activities impossible or considerably difficult. This must be done within 15 days following the first day of the tenant's default with payment of the rent. The kind of documents the tenant should submit to the landlord remains unclear. Furthermore, the law does not specify what happens if the tenant fails to duly notify the landlord – whether the tenant will lose its protection under the law or whether it will be merely a breach of its statutory duty to the landlord, but the protection of the tenant will remain unchanged.
Prohibition of derogation by agreement: The law stipulates that any arrangement that deviates from its provisions to the detriment of the tenant cannot be taken into account. This provision significantly complicates ongoing negotiations between landlords and tenants on crisis resolution. In this already rapidly changing and unclear situation, it brings another element of uncertainty to the possibility of arranging repayment schedules, rent discounts and other potential solutions because the landlord cannot be certain of their observance by the tenant.
We are following the legislative process and will inform you soon about further developments.
We are, of course, fully at your disposal for questions concerning the application of the law to your specific contractual relations and for resolving other issues arising from the current situation.