Member Article

The government approved a legislative bill to help mitigate the effects of the coronavirus epidemic on lessees of business premises. The proposal will be discussed at the 44th session of the Chamber of Deputies of the Parliament of the Czech Republic, which will be held on 7 April 2020.

The Act shall apply to the lease or sublease of premises or rooms, the purpose of which is to carry on business activities, or if the premises or rooms serve at least mainly business and additionally for leasehold, if a substantial part of the subject of the lease is business premises.

The main principle of the proposal is that the lessor must not unilaterally terminate the lease during theprotection periodsolely on the grounds that the lessee is in delay with the payment of the lease or services if this delay occurred at thematerial timeand mainly as a result of the emergency measures implemented during the pandemic which significantly hinder business, whereby:

(a) the protection period means the period from the effective date of the Act until 31 March 2022;

(b) the material time means the period from 12 March 2020 to 30 June 2020.

The obvious purpose of the law is to protect the lessee. For this reason, the law stipulates that there can be no deviation from the rules in the law (i.e. in particular the abovementioned prohibition of termination) that would be to the lessee's disadvantage. The relevance and impact of this general rule is highly questionable and may be the subject of further discussions. In this respect, for example, it is not clear at all whether it is possible to agree on a reduction in rent (or a discount on rent) in exchange for the landlord being able to terminate the rent due to delay in paying the lower rent.

Similarly, it is not entirely clear whether the landlord will be able to assert its collateral claims (deposits, advance payments and corporate guarantees) in respect of non-payment of rent at the relevant time. In this regard, we believe that the law is currently designed in such a way that it is not possible to give notice to the lessee during the protection period (under the conditions above), which however does not mean that the lessee is not in default in the given period as otherwise arises from section 3(2) of the bill. This implies that the lessor retains the claims arising from the lessee's delay (i.e. inter alia entitlement to secured claims ).

The lessee's protection is not unlimited. If the lessee fails to pay all the receivables due at the relevant time within the protection period (i.e. until 31 March 2022), the lessor may terminate the lease after 5 days' notice.

Beware of VAT and income tax

Given the method chosen by the government, landlords must also take into account the impact of the measures on their tax obligations. Regardless of the lessee's payment, landlords who are subject to VAT must pay VAT within the statutory deadlines, i.e. mostly according to the payment schedule or according to the terms agreed in the contract. Later payment of the rent by the lessee does not affect the obligation to pay VAT.

The problem of the payment of VAT could be solved by a possible agreement between the landlord and the lessee regarding the invoicing of rent payments. Unfortunately, at the moment, it is not clear whether such an agreement would be possible at all, as it could be perceived as an agreement to the detriment of the lessee. The lessee could, on the one hand, benefit from the postponement of the due date for payments, but on the other hand, by shifting the term of the due dates for payment until the end of the decisive period, the lessee would lose the benefits that the bill provides.

Landlords who keep accounts must also bear in mind that rental income must be taken into account in the period to which such accounts relate. In this case too, the payment of rent is not decisive. Landlords will therefore have to pay income tax from rent payments which will be paid later. We would like to draw your attention to this fact because, due to the protection period lasting until 31 March 2022, the payment may occur in another accounting, respectively taxation period.