In connection with the spread of COVID-19, many business owners were required to close their establishments pursuant to measures issued by the Public Health Authority of the Slovak Republic, raising questions about the legal options for reducing rent for the period during which the leased commercial premises were not used by the tenants.
The key piece of legislation in this matter is Act No. 116/1990 Coll. on the Lease and Sublease of Non-Residential Premises (hereinafter also referred to as “ Act No. 116/1990 Coll.”), whose provisions regarding the tenant’s claims in the event of restricted use of the leased property are somewhat less favorable than those applicable to leases under the Civil Code. Section 673 of the Civil Code (hereinafter also referred to as “CC”) establishes the tenant’s right not to pay rent if, due to defects in the property that the tenant did not cause, the tenant cannot use the leased property in the agreed manner or in a manner appropriate to the nature of the property. Subsequently, pursuant to Section 674 of the Civil Code, if the tenant can use the leased property only to a limited extent due to defects in the property, the tenant is entitled to a reasonable reduction in rent.
In contrast, regarding the tenant’s claims in the event of limited use of the leased non-residential space, Act No. 116/1990 Coll. provides in § 8: ,,, If the tenant can use the non-residential space only to a limited extent solely because the landlord fails to fulfill his obligations under the contract or the obligations established by this Act, the tenant is entitled to a proportional reduction in rent; this provision also applies to subleases.” The provision is interpreted to mean that the limitation on the use of the premises must be caused exclusively by a (culpable) breach of the landlord’s contractual obligation. The impact of force majeure, which the COVID-19 pandemic and its associated consequences are considered to be, therefore does not give the tenant the right to a proportional reduction in rent for the lease of non-residential space under Act No. 116/1990 Coll.
This therefore opens the door to consideration of the relationship between the Civil Code and the Act on the Lease and Sublease of Non-Residential Premises regarding the entitlement to a proportional reduction in rent. According to Section 1(2) of the Civil Code: “The Civil Code governs property relations between natural and legal persons, property relations between these persons and the state, as well as relations arising from the right to protection of persons, unless these civil law relations are governed by other laws.”
Section 720 of the Civil Code directly incorporates a reference provision stating: “The lease and sublease of non-residential premises are governed by a special law.” It follows from the above that the Civil Code is, in relation to Act No. 116/1990 Coll., in the relationship of lex generalis to lex specialis, which means that the provisions of the Civil Code regarding lease agreements apply subsidiarily, in a supporting manner when resolving issues arising from lease and sublease agreements for non-residential premises, only if they are not regulated by Act No. 116/1990 Coll. itself.
Since Act No. 116/1990 Coll. itself regulates the issue of limited use of leased non-residential premises and the tenant’s related claims, it may be concluded that in the case described above, where the subject of the lease or sublease is non-residential premises, the provisions of Act No. 116/1990 Coll. take precedence in these legal relationships, which simultaneously exclude the application of the provisions of Section 674 of the Civil Code, and thus the law does not grant the tenant the right to a proportional rent reduction if, due to defects in the property, the leased non-residential space can only be used to a limited extent. This right may arise only from an agreement between the landlord and the tenant (or between the tenant and the subtenant). We recommend that agreements between the contracting parties regarding the provision of a rent reduction or rent waiver be concluded in writing.
But what if the subject of the lease is an entire building that includes non-residential premises?
A different situation arises when the subject of the lease is the building as a whole (i.e., a structure that also includes non-residential premises). The Supreme Court of the Slovak Republic stated in its decision M Cdo 251/02: “However, it is clear from the provisions of Section 1 of Act No. 116/1990 Coll. that the law applies only to non-residential premises and, under certain circumstances, also to apartments; it does not, however, apply to the objects of civil law relationships specified in Section 118(1) of the Civil Code (i.e., things, and, to the extent their nature permits, rights and other property values, author’s note).... Thus, from the provision of Section 1 of Act No. 116/1990 Coll., it cannot under any circumstances be inferred that this Act also applies to real estate lease agreements (for land or buildings), regardless of the fact that such real estate may also include non-residential premises (which is almost always the case).” The application of the provisions of the Civil Code in assessing such a lease relationship was also established by the Supreme Court of the Czech Republic in its decision 31 Cdo 1896/2002: ,,... prior consent of the municipal (city) authority pursuant to Section 3(2) of Act No. 116/1990 Coll. must also have been granted in the event that the building was leased as a whole and contained premises intended for the operation of trade and services, even though the regime of such a lease was not governed by the provisions of Act No. 116/1990 Coll., but rather by the provisions of Section 663 et seq. of the Civil Code.” In assessing this issue, one can observe the established case law of the Supreme Court of the Slovak Republic (e.g., see also the decision of the Supreme Court of the Slovak Republic, file no. 2 Cdo 271/2004), the same legal opinion has also been established by Czech courts in their long-standing decision-making practice (in addition to the above-cited, see, for example, the judgment of the Supreme Court of the Czech Republic, file no. 3 Cdon 1175/96, Supreme Court of the Czech Republic, file no. 20 Cdo 1059/98, the Prague High Court decision, file no. 12 Cmo 244/2008).
However, it follows from the case law that even in these cases, the application of the provisions of Act No. 116/1990 Coll. is not entirely ruled out. Its application manifests itself in the assessment of the valid formation of a lease agreement without the prior consent of the municipality, as required by the older wording of Section 3(2) of Act No. 116/1990 Coll. In the cited decision M Cdo 251/02 regarding the application of the relevant provision, the Supreme Court of the Slovak Republic stated: ,, ... the aforementioned statutory provision must be interpreted to mean that the prior consent of the municipality is required only for the lease of those non-residential premisesthat are structurally (and not otherwise) designated for the operation of trade and services.
Only this intended use, as evidenced by the content of the building permit documentation and the decisions of the competent authorities, is legally relevant for assessing whether prior consent is required or not. Other facts, such as the agreement between the parties to the lease regarding the purpose of the lease as expressed in the contract, are legally irrelevant from this perspective. Thus, it is not the contractual but the building-related purpose that is decisive for assessing the need for prior consent from the municipality regarding the lease of non-residential space pursuant to Section 3(2) of Act No. 116/1990 Coll.”(see also the Supreme Court of the Slovak Republic decision, file no. 5 Cdo 104/95).
The aforementioned decisions thus concur on the point that a lease relationship whose subject matter is a building as a whole (even if it includes non-residential premises) should be assessed pursuant to the provisions of Section 663 et seq. of the Civil Code. Although the application of the provisions of Act No. 116/1990 Coll. is not entirely excluded in the relevant legal relationship, it may be assumed that tenants in such contractual relationships may claim a reasonable reduction in rent within the meaning of Section 674 of the Civil Code, since their lease relationship is primarily governed by the Civil Code and not by the regime under Act No. 116/1990 Coll.
If the subject of the lease is a building as a whole (even though it includes non-residential premises), it can be concluded that the tenant is entitled to a reduction in rent if, due to defects in the property, they can use the leased property only to a limited extent; this entitlement arises directly from the law and can be enforced through the courts. However, what is the situation if the subject of the lease is only non-residential space? Is the claim for a rent reduction also enforceable in court directly by law in such a case, without the parties having expressly agreed to such a claim in the contract?
To begin with, it should be noted that the legal system of the Slovak Republic generally does not grant the court the authority to supplement or amend the content of a contract, as the principle of contractual freedom applies. The court may thus act only in limited cases. For example, pursuant to Section 269(3) of the Commercial Code, if the parties agree that the court may subsequently supplement the contract with non-essential provisions (which is not the case here), or pursuant to Section 301 of the Commercial Code, the court is authorized, by exercising its moderating power, to reduce a contractual penalty;
and finally, pursuant to the relevant provisions, the court is authorized to rule on the invalidity of certain contractual provisions, thereby essentially altering the content of the contract. Unlike in other legal systems, under Slovak law, the contracting parties do not have the option of applying to the court to request that the agreed contractual terms be fairly adjusted in light of current extraordinary circumstances.
Unless the contracting parties have expressly agreed in the lease or sublease agreement to reduce or waive the rent in the event that, due to force majeure, it is not possible to use the leased non-residential space to the agreed extent, the possibility of judicial enforcement of a claim for such a rent reduction represents a rather arduous path with no guarantee of success. The only option that could be considered would be to apply analogia iuris, arguing that the landlord’s claim for the full amount of rent is, given the circumstances associated with the extraordinary situation, contrary to the principle of good faith in commercial relations or contrary to public policy. However, the court may not agree with such an argument, since one of the fundamental principles of commercial law is the principle of “pacta sunt servanda,” under which a contracting party is obligated to perform and fulfill the obligation to which it has committed.
Finally, even more uncertain would be an attempt to apply analogia legis by referring to the provision of Section 674 of the Civil Code, pointing out that legal defects prevented the use of the leased premises in the agreed manner and that the Act on Lease and Sublease itself does not regulate such a case. The Measures of the Public Health Authority of the Slovak Republic, which impose an obligation on shopping center operators to close the establishments to which the Measures apply, could be considered precisely the legal defects that prevented use. It should be noted, however, that the interpretation of which entity is obligated under the Public Health Authority’s Measures to ensure the closure of establishments is not uniform, as, for example, Measure No. 2595 of the Public Health Authority of the Slovak Republic, in Section C, imposes an obligation on shopping center operators not to close the establishments listed in Section A, and does not explicitly impose an obligation to close establishments not listed in Section A. Finally, we again note that invoking the application of analogia legis may not be accepted by the courts.
We therefore recommend that tenants first and foremost carefully review their lease or sublease agreement. Pay particular attention to the provision specifying under which law the agreement is concluded (the Civil Code or the Act on the Lease and Sublease of Non-Residential Premises), how the subject of the lease is defined (building or non-residential premises), and whether the agreement contains provisions regarding the right to a reduction, or waiver of rent, which, depending on the parties’ agreement, may grant such a claim or, conversely, exclude the existence of a statutory claim. This may give rise to the following situation: i) the contract is governed by the Civil Code, the contract does not exclude the right to a rent reduction, in which case the claim arises and is enforceable in court to the extent provided by law, or ii) the contract is governed by the Civil Code, but the contract expressly excludes or limits the claim for a rent reduction; in such a case, the claim either does not arise or arises and is enforceable only within the scope of the contract, further, situation iii) may arise: the contract is governed by Act No. 116/1990 Coll. and simultaneously contains an agreement granting the right to a rent reduction; in such a case, the claim arises and is enforceable in court within the scope of the contract; or finally, situation iv) applies: the contract is governed by Act No. 116/1990 Coll. and does not contain an agreement regarding the right to a rent reduction; in such a case, in principle, the right does not arise directly from the law, and therefore the possibility of its judicial enforcement is not guaranteed.
How, then, should one proceed in the case of a lease agreement governed by Act No. 116/1990 Coll. that does not contain an agreement regarding the right to a rent reduction?
If the lease agreement does not contain a force majeure provision or another similar clause that would entitle the tenant to demand a rent reduction in the event of limited use of the leased non-residential space, the contracting parties may, pursuant to Section 516 of the Civil Code, agree to modify the scope of performance. This would thus constitute a standard agreement modifying mutual rights and obligations. In this regard, a cooperative approach can be observed among several landlords of spaces in larger shopping centers, who are waiving rent or reducing it appropriately in light of the extent of actual use of the leased non-residential spaces during the emergency situation. Similarly, the Association of Towns and Municipalities of Slovakia has recommended that cities reduce rent for municipal non-residential spaces by half in March and waive rent entirely in the following months until further notice.
We would like to add that an amendment to Act No. 62/ 2020 Z. z. on certain extraordinary measures in connection with the spread of the dangerous infectious human disease COVID-19 and in the judiciary, which established a prohibition on landlords unilaterally terminating a lease of real estate, including non-residential premises, due to the tenant’s delay in paying rent, including payments for services usually associated with the lease and due in the period from April 1, 2020, to June 30, 2020, provided that the tenant’s delay arose precisely as a result of circumstances stemming from the spread of COVID-19. The reason for the delay within the meaning of the cited Section 3b must be sufficiently substantiated by the tenant. Other grounds for terminating the lease under this provision remain unaffected. It follows from the above that the tenant’s obligation to pay the contractually agreed rent does not cease to exist; however, a delay in payment arising from extraordinary measures precludes the landlord’s right to terminate the lease agreement.
The long-awaited state subsidies to help tenants bear the often substantial costs of rent were finally adopted in early June 2020 (so-called rent subsidies).
On June 9, 2020, the National Council of the Slovak Republic approved an amendment to Act No. 71/2013 Coll. on the Provision of Subsidies under the jurisdiction of the Ministry of Economy of the Slovak Republic. The amendment incorporated Section 13c into the Act, the subject of which is the legal regulation of the provision of subsidies for rent payments. Several legal conditions must be met for a subsidy to be granted, namely:
- a subsidy may be granted to cover rent, which is a monetary payment to which the landlord is entitled under a lease agreement or similar agreement under the legal system of another country establishing a legal relationship whose content is the tenant’s right to use the leased property,
- the tenant’s right to use the leased property must have existed no later than February 1, 2020, while at the same time, changes to the lease agreement or a similar agreement under the legal system of another country that occurred after March 12, 2020, shall not be taken into account for the purposes of the rent subsidy,
- the use of the leased property for the agreed purpose was prevented or significantly restricted in connection with measures taken by state administrative authorities to mitigate the consequences of the spread of the dangerous infectious human disease COVID-19 and other circumstances specified by law.
An exception to the rent subsidy applies to providers of outpatient healthcare, who receive reimbursement for the healthcare provided, and thus are not eligible for the rent subsidy.
For the purposes of subsidies, the subject of the lease is understood to mean:
- a room/part of a room/set of rooms not intended for residential use and in which the tenant sells goods or provides services to end consumers, including related service areas and storage areas,
- a market stall.
The grant application is submitted electronically via a form available on the website of the Ministry of Economy of the Slovak Republic. The expected start date for accepting applications is set for June 24, 2020, via the Central Public Administration Portal Slovensko.sk. The Ministry of Economy of the Slovak Republic states on its website that, given the expected high demand for the grant, it will propose a schedule for submitting applications for individual regions.
The subsidy applies only to the payment of rent; therefore, the subsidy cannot be obtained for expenses related to the use of the leased property (e.g., payments for utilities, internet, or cleaning, etc.). The application for a rent subsidy is submitted by the landlord on behalf of the tenant, at the landlord’s own expense, while the tenant is legally obligated to provide the landlord with the necessary cooperation.
The first step toward obtaining a subsidy from the state is a mutual agreement between the landlord and the tenant; therefore, the parties to the lease must communicate with each other on this matter and reach a mutual consensus.
The amount of the subsidy corresponds to the amount of the discount provided to the tenant by the landlord, but may not exceed 50% of the rent. The rent is thus reduced by the discount provided and the amount of the subsidy, and the tenant may pay the remaining rent in up to 48 equal monthly installments. Tenants who were not granted a rent discount may also pay the rent over the same 48-month period. During the payment period, the landlord or their legal successor is not entitled to unilaterally increase the rent.
If the tenant has already paid the entire rent or a portion thereof, they may apply for a subsidy based on an agreement between the landlord and the tenant regarding a future rent reduction, i.e., for a period equal to the duration of the impeded use, in the amount of the rent discount provided under the agreement between the landlord and the tenant, but not exceeding 50% of the rent. The amendment also applies mutatis mutandis to the sublease relationship between the tenant and the subtenant.
In the event that the landlord and tenant have not agreed on a rent discount, the tenant may pay the landlord the full amount of unpaid rent for the period of restricted use in up to 48 equal monthly installments, each due on the 15th day of the relevant calendar month, beginning on the 15th day of the calendar month following the calendar month in which the emergency situation related to the spread of the dangerous infectious human disease COVID-19 ended, unless the landlord and tenant agree on a different due date. If the tenant has already paid the rent, they may pay the rent for a period equal to the duration of the impeded use, in up to 48 equal monthly installments, each due on the 15th day of the relevant calendar month, starting on the 15th day of the calendar month following the calendar month in which the extraordinary situation related to the spread of the dangerous infectious human disease COVID-19 ended, unless the landlord and tenant agree on a different payment schedule. During the repayment period, the landlord or its legal successor is not entitled to unilaterally increase the rent unless the right to unilaterally increase the rent was agreed upon before February 1, 2020.
Further information will also be provided to affected parties on the website of the Ministry of Economy of the Slovak Republic najmy.mhsr.sk and shared on podnikame.mhsr.sk
In the event of any problems or questions regarding the assessment of claims under a lease or sublease agreement, our law firm is ready to assist you and provide professional and legal services.
