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A 2014 Revolution in Civil Law – Part 2 What will change in the area of real estate letting?

In the letting of real estate, the New Civil Code (“NCC”) breaks the general rule which says that an obligation, agreement or contract is governed under the law prevailing at the time the agreement in question is made.. From 1 January 2014, all lease arrangements will, as a rule, be governed by the NCC. Former legislation will only be used in relation to governing the creation of a lease and the rights and responsibilities arising at the time the original legislation was in force. Except for housing protection, the new legislation will, as a rule, be non-mandatory.

1. Major changes that the NCC will give rise to in respect of general lease legislation: 

1.1 Lease arrangement will be governed according to the purpose for which the premises being leased are actually used. To date, the legislation applicable to lease arrangements has been primarily directed at the purpose for which the occupancy permit for the premises has been issued. Any inconsistency between the purpose of the leased real estate according to its occupancy permit and the actual use of the leased real estate will, where necessary, be governed under public law while relationships under private law will remain unaffected.
1.2 Leases which are entered into for the purposes of a tenant making a profit in respect of that lease (usufruct type) will take on a special meaning.
1.3 The NCC expressly stipulates that it will also be possible to lease real estate that at the time of creating a lease does not exist provided the real estate in question can be clearly identifiable.
1.4 Under the existing general legislation applicable to leases, the lessee is entitled to terminate a lease if the ownership of the leased real estate changes. Under the new legislation, it will, as a rule, be impossible to terminate a lease on account of a changed owner of the real estate in question. The NCC places the protection of the new owner’s rights in rem above the protection of the lessee’s rights, and therefore puts in place a new rule that, if there was no reason for the new owner to doubt that the new owner bought an item unencumbered by any lease, the new owner is entitled to give notice of termination of an existing lease within three months from the date when the new owner became aware, or ought to have become aware, that the real estate was leased and who was the lessee. The above option of terminating the lease will not apply to residential leases.
1.5 The NCC has created an awkward rule in that if the owner transfers the title to leased real estate, the new owner will not be bound by the arrangements in respect of the lessor’s obligations that are not stipulated by law. An exemption to this only applies if the new owner was aware of the arrangements stipulating the lessor’s obligations that existed and that were beyond the scope of law. This novelty is very inconvenient for lessees, who may consequently lose all of the benefits negotiated with former lessors if the ownership of the real estate changes.
1.6 Lessees are likely to be partly protected from possible abuse on the transfer of ownership of leased real estate in order to invalidate the former lessor’s contractual obligations by the fact that, if the leased real estate is registered in the Property Register, it will be possible, with the owner’s consent, to enter also the existence of the lease into the Property Register.
1.7 The new assumption that, unless the length of lease is defined, the lease is deemed to have been agreed for an indefinite period of time, as the existing legislation only provided for in respect of residential leases and the lease of commercial premises, is set out by the NCC in the general legislation applicable to lease arrangements. The notice period for immovable property is three months.
1.8 A special new rule will apply to any lease agreed for a definite period of time longer than 50 years. In that event, it will be assumed that the lease has been agreed for an indefinite period of time, in accordance with the current case law. In the first fifty years, however, a notice of termination of the lease will only be possible for the reasons agreed upon by the parties and within the contracted notice period. In effect, the impact of the change in these cases will need to be addressed what is likely to be numerous agreements (such as the frequent long-term leases of smaller plots of land or plots of land intended for infrastructure purposes in large projects).
1.9 In the general legislation applicable to leases and subleasing, the principles that govern subletting will be reversed. Under the existing legislation, the lessee may sublease real property unless forbidden to do so under the lease agreement. Under the new legislation, the lessee will only be allowed to sublease real property if the lessor expressly agrees to this in the lease contract. The NCC explicitly provides that the lessee is liable to the lessor for the sublessee’s actions as if the lessee itself used the real property.
1.10 The existing legislation provides that, if the lessee continues to use the real estate after the expiry of the lease, the lease is renewed for up to one year. The lessor may prevent the renewal of the lease by legal proceedings to vacate the real estate, which must be brought within 30 days from the date on which the lease originally expired. Under the NCC, the renewal of the lease can be prevented by the lessor simply by requesting, within one month from the expiry of the lease, that the lessee hand over the leased real property to the lessor. Thus the lessor’s need to apply to the court in such cases comes to an end.
1.11 Under the current general legislation applicable to leases, the lessor is obliged to let the leased item to the lessee in the condition fit for the agreed purpose, i.e. usual use, and to maintain it in such condition at its own cost. The NCC splits the maintenance of the leased real property between the lessee and the lessor: unless the parties agree otherwise, ordinary maintenance shall be carried out by the lessee, the other maintenance shall be carried out by the lessor. It is in the interests of both contracting parties to ensure that their agreement clearly governs who should carry out maintenance and repairs of the leased real property. 

2. Changes to the lease of commercial premises (the new terminology of “premises used for business”): 

2.1 One of the 183 regulations repealed by the NCC is the Act on the Lease and Sublease of Commercial Premises, which currently includes the requirement for the lease of premises to be designated by their respective occupancy permits as commercial premises (irrespective of the purpose of the lease). Unlike the existing legislation, the NCC fails to lay down the types of real estate deemed to be commercial; it regards the purpose of use of the premises as primary. Hence special provisions of the NCC on the lease of premises used for business will apply to the lease of premises where the purpose of the lease is the pursuit of a business activity in such premises and where the premises are, at least predominantly, used for business. What is more, the purpose of the lease will not even need to be expressly stated in the lease agreement. Issues not governed by special legislation will be governed by general legislation applicable to a lease.
2.2 Less formalism – lease agreements will need to include fewer mandatory provisions. A lease agreement will not have to specify explicitly the purpose of the lease. Unless the agreement specifies the amount and due date of the rent, the lessee will have to pay the rent usual for similar leased real property as applicable at the time of entering into the lease agreement, and to do so by the end of the relevant calendar month. Unless the parties agree on the lease period, the lease will be presumed to have been agreed for an indefinite period of time, with a notice period as set out in section 2.4 below, i.e. six months as a rule. A lease agreement applicable to premises used for business will not need to be made in writing, but of course an orally concluded lease agreement is not appropriate in a serious business context.
2.3 As concerns the reasons for early notice of termination of a lease by the lessee, the NCC basically duplicates the existing legislation. However, the reasons for an early notice of termination by the lessor have been largely narrowed and generalised. The current list of ten explicit reasons for the notice of termination is reduced in the NCC to the situation when “the lessee grossly breaches its obligations to the lessor” (with the relevant provision only specifying two examples of such a breach) and the situation when the leased building needs to be demolished or reconstructed and the lessor was not obliged to and could not foresee this at the time of conclusion of the agreement.
2.4 The length of notice period in the event of an early termination of a lease agreed for a definite period of time has been maintained at the current level of three months. However, the notice period in the event of a lease agreed for an indefinite period of time has been extended to a double, i.e. to six months. The current three-month notice period will only be applicable if the terminating party has a serious reason for giving notice of termination and, upon the notice of termination, the lease has not existed for longer than five years.
2.5 The NCC puts in place the principle of objection to a notice of termination. The party whose relationship is being terminated (whether the lessee or the lessor) will be entitled, within one month from receiving the notice of termination, to challenge the notice of termination with the terminating party, and this will be the precondition of the creation of the right to challenge the notice of termination with a court. Unless the terminated party raises its objections in time, the right to apply to the court to review the justification of the notice of termination will expire.
2.6 The NCC now puts in place the principle of compensation from the lessor or the new lessee for acquiring a customer base. If the lease ceases to exist by reason of the lessor’s notice of termination for a reason other than gross breach of the lessee’s obligations, the lessee will be entitled to compensation for the benefit of the lessor, or of the new lessee, that they have gained by taking over the customer base built up by the original lessee. However, the NCC fails to set out the procedure for the potential determination of the amount of such compensation. The provision on the compensation for taking over the customer base is non-mandatory, and quite clearly this needs to be addressed in current lease agreements.

3. Changes to residential property letting: 

3.1 The existing legislation only protects the lease of a flat, i.e. premises approved as a flat in its respective occupancy permit. However, the NCC will provide housing protection rules notwithstanding the purpose for which the leased premises have been built. Thus it will protect the lease of any premises leased for the purposes of meeting the lessee’s housing needs (a flat, a house, as well as premises other than residential). The NCC expressly stipulates that the fact that the leased premises are not intended for housing purposes shall not be detrimental to the lessee.
3.2 The housing protection legislation breaks the general non-mandatory nature of the NCC, i.e. of lease-related issues. The NCC provides that arrangements curtailing lessee’s rights shall be disregarded, as shall any clearly disproportionate obligations imposed on the lessee and arrangements on the lessee’s obligation to pay a contractual penalty.
3.3 Just as in the legislation applicable to premises used for business, the NCC limits the requirements for the content of housing lease agreements. The lease agreement will no longer need to include mandatory information such as the exact specification of the dwelling, its contents, scope of use of the dwelling, method to calculate the rent and the payments for services associated with the use of the dwelling. It will be sufficient if the parties clearly specify the leased real property and agree on the lessor being entitled to remuneration for the use thereof. Thus the lease of a dwelling will allow for entering into a lease agreement without the specification of the amount of rent; in that event, the lessor will be entitled to a rent in the amount usual for a lease of a similar dwelling in the location concerned on the date of entering into the agreement.
3.4 However, the NCC lays down a list of services the lessor is obliged to take care of, unless the lessor and the lessee agree otherwise. This includes water supply, wastewater disposal, including the septic tank cleaning where relevant, utility supplies, municipal waste disposal, lighting and cleaning of the common parts of the building, provision of the reception of radio and television broadcasting, chimney operation and cleaning and, where applicable, lift operation.
3.5 While the NCC requires a written form of an agreement on the lease of a dwelling, the lessor will not be allowed to object to a lease agreement concluded orally.
3.6 In addition, the NCC puts in place the option of lease prescription: if the lessee has been using a dwelling for three years, and in good faith that the lease is rightful, a lease agreement will be deemed to have been duly concluded.
3.7 The NCC provides that the lessor cannot terminate the lease without a serious reason. The NCC contains a list of reasons for which the lessor may give notice of termination of the lease agreement. Unlike the existing legislation, where the enumeration of such reasons is exhaustive, the list included in the NCC is demonstrative. Unlike the existing legislation, the fact that the lessee has two dwellings no longer constitutes a reason for giving a notice of termination under the NCC.
3.8 According to the NCC, a court will no longer need to authorise any reason of the lessor to give notice of termination of the lease of a dwelling. Nonetheless, the lessee will be entitled to apply to a court for reviewing the justifiability of the notice of termination within two months from the date when it received the notice of termination. If the lessor fails to make the lessee expressly aware of such right in the notice of termination, the notice of termination will be null and void.
3.9 Naturally, under the NCC, the lessee of a dwelling will continue to be entitled to terminate a lease agreement agreed for an indefinite period of time without giving a reason. Under the NCC, the lessee will be allowed to give notice of termination of a lease agreement agreed for a definite period of time in the event of a change in the circumstances relevant to the parties when they were entering into the agreement to the extent that the lessee cannot be reasonably required to continue the lease.
3.10 The notice period under the NCC is, as a rule, three months. However, if the lessee breaches its obligation in a particularly serious manner (such as by failing to pay the rent and the costs of services for at least 3 months or by seriously damaging the leased real property), the lessor is entitled (after prior request for remedy) to give notice of termination of the lease without a notice period and to demand that the lessee hand over the dwelling to the lessor within a month.
3.11 The NCC no longer provides for housing compensation (a compensatory dwelling, accommodation, shelter) which, under the existing legislation, the lessor is obliged to provide to the lessee in certain events of termination of the lease of a dwelling.
3.12 The NCC puts in place lease renewal, which the existing legislation only allows in respect of the lease of a dwelling, under the express arrangement of the parties. If the lessee continues to use the dwelling for at least three months after the lease ought to end while the lessor fails to request, within that period, that the lessee vacate the dwelling, the NCC provides that the lease has been renewed for the same period for which it was agreed before, but for no longer than two years.
3.13 The NCC maintains the options of transferring the lease of a dwelling to members of the lessee’s household (unless it is a common lease of a dwelling) as well as the two-year period for which such lease exists. However, the new legislation provides that the transfer of a lease to a person other than one closely related to the original lessee requires the lessor’s consent (under the existing legislation, the lease may be transferred to such a person if the lessor has approved that person’s prior living in the dwelling). Another novelty is that, unless the lease passes to members of the household of the original lessee (i.e. particularly if the lessee lived in the household alone), the lease will pass to the lessee’s heirs. Naturally, the persons to which the lease of the dwelling has passed may terminate the lease but within no later than six months from the lessee’s death. If the lease passes to the lessee’s heirs, the lessor will also be entitled to give notice of termination of the lease agreement (with a two-month notice period and within three months after becoming aware of the lessee’s death and of the fact that the lease has not passed to members of the lessee’s household).
3.14 The NCC explicitly provides that the parties may agree on rent indexation. In the event that the rent indexation is not agreed but is not explicitly ruled out either, the NCC provides a procedure, which is based on the existing legislation, whereby, on an annual basis, the lessor may seek a rent increase while the lessee may seek a rent decrease to the rent level usual in the location concerned. There is a newly introduced limit for the maximum change in the rent, which is set at 20% of the rent in 3 years. However, if the lessee refuses to accept an increase allowed by law, the lessor may apply to a court, which will no longer be bound by the 20% limit, and may increase the rent up to the locally usual level, as far back as the date of submitting the application to the court. In that event, the lessee would have to pay the difference in the rent for the months elapsed since the application. The NCC puts in place a special provision on rent increase in the event that the lessor improves the housing quality of the lessee or carries out modifications for permanent energy and water savings. In that event, the lessor may agree with the lessees on a rent increase by up to 10% of the reasonably spent costs a year (if at least the lessees of two thirds of dwellings in the building agree with such an increase, the increase will apply to all lessees). Nevertheless, if the agreement is not reached, the lessor may only increase the rent by 3.5% of the reasonably spent costs a year.
3.15 The NCC raises the level of security deposit that the lessor may demand from the lessee to meet the obligations arising from the lease of the dwelling to six times the rent (no longer including service fees). Under the existing legislation, the maximum security deposit is equal to three times the rent and advance payments for services.
3.16 The NCC will also change the rules of subleasing a dwelling. Under the existing legislation, a dwelling or a portion of a dwelling may only be subleased with the lessor’s written consent. Under the new legislation, the lessee will be allowed to sublease a portion of a dwelling to a third party even without the lessor’s consent if the lessee lives in the dwelling permanently but the lessee must notify this to the lessor, otherwise the lessee would seriously breach obligations arising from the lease. 

We hope you have found our brief overview useful. If you have any questions, please feel free to contact us at the address below. 

bpv BRAUN PARTNERS
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Ovocný trh 8
CZ-110 00 Prague 1

Tel.: (+420) 224 490 000
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