Real Estate COVID-19 Help Desk in Slovakia

As in other countries, the COVID-19 pandemic has adverse effects on the Slovak economy and an economic recession and decrease of GDP in Slovakia are expected. Pursuant to the official information published by the Ministry of Finance of the Slovak Republic in April 2020, we may expect the decrease of GDP by 7.2%.

In the past year, real estate transactions constituted one of the biggest portions of acquisitions and investments in Slovakia. It is difficult to say how significantly this trend will change this year due to the current situation. But it is clear that the economy slowdown will of course affect also the Slovak real estate market. If nothing else, we believe that closings and completions of some of the real estate projects may be postponed compared to the originally anticipated timings. Prevailing opinions of real estate experts are, that currently, retail is the most affected real estate sector (for obvious reasons), and that despite the pandemic, prices of residential properties are not expected to decrease due to the persisting shortage of them.

Many entrepreneurs had to mandatorily close their operations as they were ordered to do so, or they voluntarily closed or limited their operations due to a low demand on their products or services, or disruptions in the respective supplier chains. As a result, they were adversely affected by a significant decrease in their revenues. However, even in cases where the entrepreneurs – as tenants – objectively could not use premises leases for their business operations (as they were ordered to close them), unless very specific clauses had been agreed in the respective leases, in general, pursuant to Slovak law they still had to continue to pay rent and ancillary charges for the leases.

In this connection, a new law was adopted that prevents lessors of real estate, including flats and non-residential properties, to unilaterally terminate leases due to a delay of lessees with the payment of rent, including payments for performance usually associated with the lease, which are due during between 1 April 2020 and 30 June 2020. This protection shall apply only provided that the late payment by a lessee was caused by circumstances resulting from the spread of COVID-19. In particular, a lessor shall not be entitled to unilaterally terminate the lease until 31 December 2020 due to the lessee’s default with the above-mentioned payments if the above-mentioned conditions are met. The reason for the late payment consisting in circumstances, which resulted from the spread of COVID-19, must be sufficiently proven by the lessee. Nevertheless, the lessor is entitled to unilaterally terminate the lease if there are other reasons (other than the lessee’s default with the payments under the lease) – statutory or contractual – entitling the lessor to do so.

Further, the Government of the Slovak Republic also announced a particular financial support scheme in order to mitigate the impact of COVID-19 crisis to mandatorily closed operations. As of the date of preparation of this contribution there was, however, no official approved document on the financial support scheme available yet. Pursuant to the announced conditions of the scheme, the state will pay to lessors a certain amount of rent for the period for which the operations were mandatorily closed. The amount to be paid by the state should be the same as the amount of the discount from the due rent provided by the respective lessor (e.g., if the discount provided by the lessor is 50%, the state would pay to the lessor the remaining 50%; if the discount provided by the lessor is 30%, the state would pay to the lessor 30% of the due rent and the remaining 40% of the rent would be paid by the lessee). Special conditions should apply to the payment of the portion of the rent to be paid by the lessee. The lessee should be entitled to request to pay this portion of rent in 48 installments within next four years and the lessor should not be entitled to increase the agreed rent and to terminate the lease within the said four years. As mentioned, as there is no final formally approved wording of this governmental measure available yet, the outlined financial support scheme is subject to changes.

Similarly, due to the same reasons (significant decrease in revenues, closing of operations, etc.), many franchisees were wondering whether the current situation would release them from some of their contractual obligations (or at least suspend them) or would entitle them to terminate the franchise contract. There is no simple “yes or no response” to this question as this would have to be legally assessed on a case by case basis.

Some of negative consequences of the COVID-19 pandemic could be potentially considered as force majeure events, i.e. (in the Slovak legal terminology), the “circumstances excluding liability”. The circumstances excluding liability are defined as obstacles, which (i) occur regardless of the liable party’s will, and at the same time (ii) prevent this party from fulfilling its obligation, unless it can be reasonably anticipated that the liable party could prevent or overcome the obstacle or its consequences, and unless the (breaching) party had anticipated the obstacle at the time when the obligation (contract) was agreed. As parties to a contract may exclude the general application of the statutory definition of the force majeure event or they may also agree their own force majeure clauses, each case needs to be evaluated individually. The COVID-19 pandemic and the related adopted governmental measures might, in certain circumstances, cause that the contractual obligations will cease to exist due to the “impossibility of performance”. However, in order for the obligation to cease to exist, a number of conditions would have to be met – in particular, its performance must not be possible even under difficult conditions, at higher costs or after the agreed time.

Further, a new legal regulation was adopted that creates a legal framework for provision of a temporary protection (including a standstill of bankruptcy, restrictions regarding termination of contracts due to defaults, restrictions regarding set-off of receivables, restrictions regarding foreclosure of the entrepreneurs’ assets, etc.) to businesses that, as a result of the spread of the COVID-19 pandemic, have found themselves in a very serious financial situation that jeopardizes their current or future operations. The idea behind the provision of a temporary protection was to create conditions for viability and proper operation of businesses once the measures that have dampened several areas of the economy will be removed.

This really depends on various factors, such as the industry concerned, the stage (phase) of the transaction, the type of the seller or target, whether the seller or target had been in a distressed situation already prior to the COVID-19 pandemic or not, etc. In many cases, the transactions have been put on hold, and in many cases, the transactions continue but the processes are much slower. On the other hand, we also have cases where the transactions start only now or where the transactions were closed during the crisis situations or are scheduled to be closed in next weeks.

General governmental measures (outlined in this contribution) apply to the sale and purchase transactions as well. The sale and purchase transactions were also affected by various COVID-19 related restrictions, such as closure of borders, restrictions regarding physical meetings, ordered quarantines or isolations, difficulties or restrictions to convene general meetings in case of man shares, etc.

Accommodation facilities were mandatorily closed for quite a long period and in general, customers were entitled to request a return of all payments made in advance (if service was not provided due to the closure of the accommodation facility). Cases when the services were not provided due to other reasons – e.g. the customer was not able to enter Slovakia due to closed borders – need to be evaluated on a case by case basis (as some reasons can be considered as vis majeure, or objective “impossibility of performance”). Special regulation applies to holiday packages (i.e. combinations of number of tourist services, e.g. transport + accommodation) ordered at tour operators. In such cases, pursuant to the recently adopted legal regulations, the tour operator is not obliged to return the paid amounts for the expected services to the customers, but a “voucher” valid until end of august 2021 can be provided instead (except for special cases stipulated by law when the customer can request a return of the full paid amount).

There are several construction projects, which are in delay as a result of the current situation. Hence, delays with completion and hand-over of the projects can be expected. However, it seems that now, after a short break or slowdown in some cases, the construction projects continue to proceed (despite there are still problems with deliveries and some works need to be reorganized). Initial problems were mainly caused by a lack of workers (partially also due to closure of borders), lack of disinfection and protection equipment (to be mandatorily provided to the workers), disruptions in supplier chains, and delays in the construction proceedings. This situation seems to be improving slowly. Delays and slowdowns are caused mainly by the continuing lack of workers and delayed deliveries. No special legal regulation or measurements regulating very specifically this particular area was adopted but many of the recently adopted governmental measures (as outlined in this contribution) apply also to construction and real estate development contracts.

There is no major difference between private and public contract litigation. A petition must be filed with the competent court – generally the court in the district where the defendant has its/her/his registered seat (or permanent address). If the dispute concerns in rem rights to real properties, a court in the district of which the real property is situated has the jurisdiction. The average length of the court proceedings depends on a number of factors (as complexity of the case, workload of competent court and attitude of the parties), but generally is rather long. It is not unusual that the court proceedings take some five years. The court proceedings are also usually accompanied with significant costs, partially caused by the length of most proceedings. The costs of legal representation in the court proceedings are not compensated in the actual real amount (even in case of a full success), but in an amount calculated based on a formula stipulated by law. This is usually a much lower amount compared to legal fees charged based on hourly rates, unless the value of the subject-matter of the dispute is very high.

A number of governmental measures containing financial packages and schemes were adopted in order to mitigate the financial impact of the current crisis situation. These include, for example:

• Financial aid to employers or business to maintain employment or jobs (e.g. compensation – by the state – of up to 80% of the average employees’ earnings to the employer during the employees are on a garden leave due to a lack of work; or payment to the employer – by the state – of fixed contributions from EUR 180 to EUR 540 per month per employee depending on the decrease of the employer’s sales);
• State guarantees for bank loans or loan interest bonifications and interest rate subsidies to businesses;
• Postponements of certain tax duties;
• Postponements, on in some cases even a release from duties to pay public (social and health) insurance contributions; etc.