Czech Republic: Commercial Leases under the New Civil Code

On 1 January 2014, the New Civil Code No. 89/2012 Coll. (the "New Civil Code") shall become effective in the Czech Republic. The New Civil Code will replace Act No. 40/1964 Coll., Civil Code, Act No. 116/1990 Coll., On the Lease and Sublease of Non-Residential Premises and Act No. 513/1991 Coll., Commercial Code and will apply to both general and business leases.

Amongst the changes that will be introduced, certain major changes are planned regarding the regulation of commercial leases. These changes are particularly important for both tenants and landlords as they shall apply to (i) new lease agreements entered into post 1 January 2014; and (ii) lease agreements concluded and existing prior to 1 January 2014 (NB: the provisions of the New Civil Code do not apply to rights and obligations originated prior to 1 January 2014).

The landlords and tenants should be aware of the following key changes that will be introduced by the New Civil Code with respect to the Commercial Leases:

1. Change of the owner of the leased property

The New Civil Code introduces a new rule relating to a change of ownership of leased property which applies to leases of both general and business premises. If a landlord transfers its ownership right to a property, the new owner is not bound by the contractual obligations of any original lease agreements unless they had specific knowledge of the contractual obligations. The new owner is bound only by statutory regulation. Whilst this new provision protects a purchaser against any disadvantageous conditions in the contract which they are unaware of, it does not protect the tenant in the same situation.

A change of the ownership of leased property is not a reason to terminate a lease agreement. Only if the new owner reasonably believes that the purchased property is not leased may they terminate the lease within three months after having learned (or should have learnt) that the property was subject to a lease and the identity of the tenant. The tenant's rights against the original landlord are not affected.

2. Termination of the lease of business premises

The New Civil Code sets out the circumstances in which a lease of business premises granted for a definite period of time may be terminated prior to the expiry of the agreed lease term. These include e.g.:

• The immediate termination of the lease in the event of a gross violation of one party’s duties where significant damage is caused to the other party.
• Where the circumstances under which the lease agreement was concluded have changed to the extent that the relevant party cannot reasonably be required to continue the lease.
• By providing a termination notice if the activities for which the business premises are designated may no longer be carried out as the tenant has lost the capability to perform such activities or the premises are no longer appropriate for accommodating the activities (i.e. following their reconstruction or removal by the landlord).

The question remains whether this provision will also automatically apply after 1 January 2014, and if so, to what extent it will apply to current lease agreements where the current statutory provisions on terminating a contract have been excluded.

3. Objections to the notice of termination

The new law introduces a significant change to the process of delivering a notice of termination (in Czech: "výpověď") in relation to a lease of business premises. Regarding such leases, the recipient of a notice of termination is entitled to raise objections in writing against the notice within one month of its receipt. According to current academic opinions, if the party does not raise an objection on time, the party cannot seek a judicial review of notice’s legitimacy. This seems to be one of the most problematic provisions of the New Civil Code due to its uncertainty in respect of (i) terminating leases; (ii) whether the objections have been correctly submitted; and (iii) the time during which the termination notice can be challenged at court.

4. Compensation for takeovers of a "customer base"

The New Civil Code recognises the value of a "customer base" (in Czech: "Zákaznická základna"). There are situations where, following the termination of a lease of business premises, a new tenant may benefit from taking over the "customer base" created by the former tenant. If the landlord terminates the lease, the former tenant will be entitled to compensation for such new tenant and establishing the "customer base".

The New Civil Code is unclear as to who shall pay the compensation and how the compensation shall be determined. Nevertheless, this rule is not applicable where the tenant receives a notice of termination as a result of a gross violation of the tenant's obligations.

5. Other important changes

The following further changes will be introduced in the New Civil Code:

• It will be possible to register a lease in the Real Estate Register however it is not yet clear the extent of such a registration.
• In case of a dispute on the amount of the rent a tenant will be entitled to pay rent to a notary instead to the landlord. If the tenant pays rent to a notary, the landlord will not be entitled to terminate the lease due to a late payment.
• It will be possible to lease premises which do not exist as at the date of concluding the lease agreement provided that the premises can be sufficiently described.
• A move away from a formalistic approach to leases. If a lease is missing a requirement, the lease will no longer be automatically rendered invalid.
• The ability to transfer a whole lease agreement to a third party.

Recommendation

As most of the New Civil Code's provisions are of a dispositive nature, we recommended that parties agree amendments to current lease agreements which disapply the above new rules which are unsuitable for the parties or which are ambiguous. It is also recommended that parties begin to consider the provisions of the New Civil Code during negotiations on new lease agreements. This should decrease any risks that may arise after 1 January 2014.