Real Estate COVID-19 Help Desk in Czech Republic

The Czech real estate market has undergone significant changes in the years after the “Velvet Revolution” in 1989 (the downfall of the Communist Regime). New legislation, restitution, privatization, the emergence of the mortgage loans market, the arrival of development and real estate companies, and other factors that influenced its development came gradually until it reached today’s vibrant and relatively well-functioning market.

The American “mortgage loans” crisis that came about in 2007 caused a global financial crisis, and also impacted the Czech real estate market. It took a few years for a recovery, but since 2014 we have enjoyed near continuous growth, with many transactions and investments in the Czech Republic with great focus on the capital city – Prague. Prague is also a very interesting place to invest for many foreigners.

There has been a continuous rise in prices of flats in Prague. Today, the average price of a flat in Prague hit 100 000 CZK per m2 (4760 EUR per m2), which is a very high price for Czech citizens when compared to the average wage in the Czech Republic (34 835 CZK= 1659 EUR per month). Since 2013/2014, the price of the real estate in general has risen continuously – the prices of flats, houses, offices and commercial buildings, and also agricultural land.

The economic crisis and decline in economic performance caused by the COVID19 crisis will cause mortgage repayment problems. This can force them to sell their property. The volume of housing loans in the Czech Republic is currently CZK 1,336 billion (figure as of 31 January 2020). Source: Czech National Bank (CNB). The size of average household debt has more than doubled in the last 10 years. People are thus more vulnerable now than during the last crisis between 2009 and 2012.

The question now is whether the government and the CNB will prepare a rescue plan for people who find themselves in a difficult financial situation. Some measures have already been adopted – e.g. moratorium of 6 months for payment of loans was enacted for debtors (natural and legal persons).

In the short term, the real estate market shows the rigidity of supply and demand. People are waiting and it may take several months for the real estate market to take a new direction. Sellers are not willing to reduce property prices in the short term because they believe that life will get back to normal. Buyers are not willing to make purchasing decisions in the short term because they believe that prices will fall.

We assume that the situation will be similar to what it was during the last economic recession. People who want to sell or buy, and are not forced by circumstances to sell or buy will choose a waiting strategy in the first months. Therefore, the market is expected to slow down significantly, and we cannot expect any significant fluctuations in real estate prices in the following months.

The Czech Republic has adopted a new Act No. 210/2020 Coll. that guarantees protection of commercial lease agreements.

Under the act, until 31^st December 2020, a landlord would not be entitled to give notice of termination to the tenant of a commercial premises due to non-payment of rent, if the tenant:

– is in arrears with the payment of rent for the period from 12 March 2020 until 30^th June 2020

– is in default of payment of the rent, largely as a result of the restrictions resulting from the emergency measures in the event of an epidemic, which have prevented or substantially hindered the proper payment of the rent,

– the lessee must prove this without undue delay, and with certainty corresponding to the facts available.

The lessee must pay the rent due by 31^st December 2020. It is not a waiver of the obligation to pay rent. The measure does not concern monthly payments for services/utilities.

The lessor may, in the situation where the lessee is unable to pay the rent due to the state of emergency during the epidemic (but no sooner than after the end of the state of emergency), require the lease contract to be cancelled if, as a result of a restriction, the lessor stands to suffer such a crisis that is not just for him/ her to suffer from lessee´s failure to pay rent.

Please note that the enactment of this Act has caused a controversial reaction in the public. The government is only deferring the burden of financial problems from the lessee to the lessor. Therefore, we recommend negotiating a change in commercial lease contracts amongst lessors and lessees.

With respect of the Franchise contracts, franchisees may use the clause rebus sic stantibus– section 1765 of the Czech Civil code to defer payment of royalties to the franchisor during the COVID 19 crisis.

– If, after the conclusion of the contract, there have been significant changes in circumstances that could not reasonably have been anticipated previously, and the changes in circumstances created a particularly gross disproportion in the rights and obligations of the parties, you can claim to be a disadvantaged party and seek legal protection.

– Should the parties fail to agree on a contract amendment within a reasonable period of time, the court may, at the request of either party, decide to change or cancel the obligation.

– The law does not stipulate the conditions- basic legal principles shall be applied- equity, good manners, fair trade.

– Please note: Some of the contracts exclude the application of this clause.

This clause is still not commonly employed in Czech law (it is a new Civil Code legislation), and we don´t have relevant case law on this topic yet.

There are currently no official measures for real estate sale and purchase transactions. The parties may use the clause rebus sic stantibus, or demand an extension of the period for fulfilment of their contractual obligations using the Force Majeure concept in the Czech Law:

Hardship

Czech contract law is based on the general theorem of “pacta sunt servanda”. Any deviations and changes to the contract due to force majeure events need to be regarded as an exception, and therefore interpreted restrictively. Hardship is defined as ‘performance that is more difficult than expected’. However, the difficulty cannot be extreme, otherwise either clausula rebus sic stantibus, or subsequent impossibility of performance shall apply. According to § 1764 Civil Code, a hardship does not affect the duty to perform in accordance with the contract.

Contract breach and damages

In certain situations, a force majeure incident causes a contract to be performed with defects. It is a situation where the debtor’s performance is delayed or only partially possible. As stated in item (a) above, the existence of force majeure as a hardship does not change the duty to perform. However, according to § 2913 para 2 of the Civil Code, a debtor can be released from paying damages if the breach of the contract was caused by a force majeure event. This exemption from paying damages is expected to be invoked in various supply chain business relationships, unless the respective provision of the Civil Code was excluded from the contract.

Rental prices will fall this year. Tourism in the Czech Republic “is dead” for this year, and it has caused cancellations of short-term rentals via Booking.com, Airbnb.com, etc. The tourism industry employs 237,000 people, and accounts for 2.8% of GDP of the Czech Republic. Tourism will certainly suffer a severe blow.

Many landlords who make a living from short-term rentals to tourists have mortgages, and they cannot afford to have their flats vacant. They will likely offer their apartments for short term rentals (4 months) for a very low price in order to overcome the COVID 19, and hope that tourists will come back in the autumn 2020.

Many of them will try to abandon the short term lease platforms and try to lease their apartments for long term rentals. This fact will lead to an increase in the supply of rental housing, and a higher supply will cause a significant drop in rental housing prices.

We expect that the market of long-term rentals will increase by an additional 6000 to 10,000 apartments, which are currently rented to tourists. To a large extent, these are apartments in the center and the wider center of Prague. These apartments will enter the long-term rental market and will remain there for a year or two, depending on when tourism begins to recover.

Deepening pandemic measures are also beginning to affect the construction sector. Companies operating in construction have to deal with challenges in the form of delays or complete cessations of supplies of materials and protective equipment, the increasing shortage of manual workers from Eastern Europe, or the cancellation of trade fairs. All this during the beginning of the season.

Construction is a very flexible field, and perhaps this also makes it better able to cope with the limitations of quarantine. Nevertheless, as for the most high risk segments, the construction sector has been hit hard by the crisis before the main season. For some time, companies can still draw on stocks and negotiated projects, but if the measures last for a long time, it will significantly affect them as well.

Contracts for Work (Construction): Force majeure events can have special consequences in specifically regulated contract types. For e.g., a contract for a piece of work where, under the § 2620 subs. 2, if an extraordinary and unforeseeable circumstance occurs that makes the completion of the work difficult, the court can, in its discretion, decide on a fair increase in price of the work, or the cancellation of the contract on the settlement of the parties. This does not apply if one of the parties had assumed the risk of a change in circumstances, or if it is a circumstance that either of parties has previously stated will not occur.

The Czech Law does not draw a distinction based on “public law” and “private law” contracts. The Civil courts are competent to deal with real estate disputes through either the District courts or the Regional courts, according to the sum of money involved.

The expected trial times can vary from 6 months for simple “non-payment” cases, to up to 5-8 years for complicated cases (e.g. defective performance in big construction contracts where expert opinions are needed, complicated legal cases etc.).

In real estate litigation cases, fast and effective resolution might be a big bonus – it can be achieved through Arbitration Proceedings in the Czech Republic. To use the arbitration proceedings, the parties must have agreed to an arbitration clause in the existing contract, or they can agree an ad-hoc arbitration clause for the relevant dispute. Ad-hoc arbitration clauses might be helpful in order to solve disputes arising out of the COVID 19 crisis.

Litigations and enforcement of debt during COVID19, and following “protective” period is governed by a special bill of law, already in force – LEX COVID:

• Suspension of executions where nothing has been recovered in the last 3 years,
• Forgiveness of missed court deadlines due to the extraordinary measures, applies to deadlines according to civil court proceedings, criminal proceedings, execution, insolvency and administrative justice
• Special measures in relation to the debtor’s obligation to file an insolvency petition
• The debtor is not obliged to file an insolvency petition for the period starting from the date of this Act coming into force until 6 months after the termination or cancellation of the state of emergency caused by the epidemic. This shall not apply if the insolvency proceedings were initiated before the adoption of the emergency measure. This measure can be applied for only until 31 December 2020.
• Special measures in relation to insolvency petitions by creditors – The insolvency petition filed by the creditor between the date of this Act coming into force and 31 August 2020 shall not be taken into account.
• Other proposed changes concern debt instalments of bankrupted natural persons and reorganizations.
• Debtors can apply for extraordinary moratorium due to COVID 19 in the insolvency

In the Czech Republic, we have the following measures to mitigate the financial impact of the COVID 19 crisis:

• Antivirus plan- government adopted measures for businesses. Compensation under two regimes (regimes A and B) provide wage contributions to the employer -up to 60% or 80% of wage compensation paid, including social and health insurance; the limit per one employee is 39 000 CZK, according to type of restriction on work,
• Interest free loans to entrepreneurs may be granted by commercial banks, the state guarantees the repayment of the loans,
• Liberal tax packages:

– Taxpayers don´t have to file tax returns by 1st April 2020. They can choose to file them within the extended period until 1st June 2020,

– Removal of sanctions for delayed tax return for applications filed until 31st July 2020.

– Removal of sanctions for delayed filings of control statement for VAT (however, there are no vacations for payment of VAT)

– Removal of June payments of tax advances (but you still have to pay the taxes at the end of tax period),

– Removal of sanctions for delayed tax return for the transfer of real property tax, it can be filed no later than on 31. 8. 2020.

• Moratorium for payment of any loans, concluded before 26th March 2020 for natural and legal persons