Real Estate COVID-19 Help Desk in Croatia

Croatian real estate prices continued to rise in the past few years, mainly fueled by a strong demand, coupled with limited supply. Across the whole of Croatia real estate prices increased in value by a nine percent in 2019, when compared with 2018, according to information released by the National Bureau of Statistics. The Croatian capital saw by far the biggest increases in property prices in 2019 with house prices jumping in Zagreb by a 13.2 percent, when compared with 2018. Croatian coastline house prices rose by 6.9 percent last year, whereas other regions of the country saw a 3.8 percent increase. The data from the National Bureau of Statistics stated that new-build properties increased in value by 8.3 percent across the country, whilst existing properties saw a 9.1 percent increase.

With an expected global and domestic recession caused by the COVID-19 pandemic the real estate prices are expected to decrease in 2020. The effects of the current COVID 19 crisis are already being felt. The real estate market, like many other businesses, is in a holding pattern. Even at this stage, it is pretty clear that the tourist season will be weaker than usual, and the reduced number of tourists, in addition to falling occupancy in the daily rent, will reduce the number of potential real estate buyers. The medium- and long-term consequences can hardly be estimated at this time.

Due to the emergency situation caused by the COVID-19 pandemic, the Ministry of State Property issued a decision allowing a deferral of the payment of rent and fees for the use of commercial real estate owned by the Republic of Croatia. The period in which the payment of rent or usage fee is deferred may last for three months, starting from 1 March 2020.

Apart from the deferral of rent payment, default interest on rent or compensation for the use of business real estate for overdue and unpaid receivables will not be calculated in the period of three months (March-June). In addition, commercial lease agreements will not be canceled or terminated during that period by the Ministry of State Property.

In case of commercial lease agreements between private entities, it is up to the parties to define new economic balance between them.

Franchise contracts may include a definition of extraordinary circumstances and the legal effects of those circumstances on a particular contract. If a pandemic is contractually defined as an exceptional circumstance, further contractual provisions on the consequences of the occurrence of such an extraordinary circumstance should be checked. Otherwise, the relevant legal provisions from Civil Obligations Act apply.

Civil Obligations Act recognizes the institute of changed circumstances as a possible reason for the modification or termination of a contract, and states: “If, due to exceptional circumstances arisen after the conclusion of the contract, which could not have been foreseen at the time of the conclusion of the contract, the fulfillment of the obligation by one contracting party would become excessively difficult or cause it excessively large loss, then the party may require the contract to be modified or even terminated.

Thus, if the COVID-19 coronavirus disease pandemic has affected the regular business activities so that because of it the fulfillment of the obligations arising from the specific business relationship becomes difficult, or causes excessive loss to the party, the party is not obliged to bear all the negative consequences of the situation and under certain circumstances is entitled to seek a modification to certain contractual provisions or even seek termination of the contract.

It is important to note that a contracting party who is affected by the changed circumstances, and who plans to consume subjective rights for the occurrence of those circumstances, is obliged to inform the other party of its intention as soon as it becomes aware that such circumstances have occurred. Failure to do so shall result in the counterparty being liable for damage suffered by the other party for failure to notify the claim in a timely manner.

Negotiations preceding the entering into a contract shall not be binding, so the party effected by the COVID-19 may terminate the transaction in case the deal is not closed. Parties should take into a consideration that there is a pre-contractual obligation to negotiate in good faith and that the termination should not have been premeditated.

In case the parties concluded the contract, they are obligated by the contractual provisions unless the provisions of the contracts are not amended by the parties.

No special urgent government measure on this side.

Because of the COVId-19, entities providing services in the tourism have adjusted their booking policies. For example, reservation made for the 2020, can be transferred to any other available date in 2020 or in case the customer is not able to fulfil the reservation in 2020 it can transfer it to the 2021. Some entities allow their customers to cancel the reservation without any penalties. Booking policies vary between the different service providers.

However, due to the fact that Croatian borders have recently been opened for tourists, from the legal perspective we do not perceive COVID-19 as a force majeure event anymore.

Current situation caused by the COVID-19 may cause delays in the ongoing construction projects considering travel restriction, problems in the international transport of goods, services and materials and preventive public health measures taken by the governments.

Party affected by the COVID-19 may use the institute of changed circumstances as a possible reason for the modification of the affected contractual obligations.

From the business point, we see less activity as to the appetite for the new development projects and will see more focus on the financial restructuring of the existing projects.

In case the parties are not able to settle their dispute outside court in a peaceful way, parties may seek protection of their rights from the competent courts in Croatia. In case the dispute is related to the real estate, subject matter jurisdiction depends on the type of the parties. In case the dispute is between legal persons then the commercial courts will adjudicate. Disputes between natural persons regarding real estate will be settled by the municipal courts.

For adjudication in disputes over ownership and other property rights to real estate, in disputes over trespassing on real estate and disputes arising from lease or rent relations, jurisdiction is exclusively with the court on whose territory the property is located. If location of the property extends over the territories of several courts, each of these courts has the jurisdiction to settle the case.

Time frame and costs related to disputes will depend on the complexity of the dispute and its value.

Government in Croatia has implemented series of economic measures related to the COVID 19 to provide support to the economy. For example:

1. All taxpayers whose businesses are suspended or distressed are completely or partially exempt from payment of public charges which are due during April, May and June 2020;
2. Payment of VAT can be postponed until issued invoices are settled.
3. For the preservation of employment employers are entitled to the aid from the Croatian Employment Agency in the amount of HRK 4,000 per employee (approximately EUR 520,00);
4. More favourable interest rates for micro and small loans for rural development, interest rates are lowered from 0.5 – 1.0% to 0.1% – 0.25%.