Commercial Lease
Regulation in the Czech Republic
By Michaela VONDRAKOVA
Attorney at Law, PETERKA & PARTNERS Law Offices
Definition of a commercial lease
A commercial lease, that is, a lease of
non-residential premises for business activity, arises on the basis of a
written lease contract by which a landlord grants to a tenant certain
non-residential premises for use and the tenant pays the landlord an agreed
rent and related charges. Commercial leases in the Czech Republic are governed
by Act No. 116/1990, on the Lease and Sublease of Non-residential Premises, as
amended (“Act”).
Under the Act, non-residential premises are
defined as a room or a complex of rooms
that are, according to a decision by the building office, used for purposes
other than residence. Such premises include premises for manufacturing,
trading, providing services, research, administrative activity, art and
educational activity, archives, garages, stockrooms and the public areas in
buildings.
Mandatory requirements of leases
A lease contract for non-residential premises must
be in writing and contain the following elements: subject of the lease; purpose
of the lease (the purpose must correspond to the constructional and technical determination of the
premises); business activity, if
an establishment of the tenant is situated in the premises; rent; the amount of
service charges (payments for services provided in relation to using the
non-residential premises);
length, if the lease is for a determined period.
Tenant’s obligations
A tenant is obliged to pay the agreed rent and
the payment for services provided in relation to the use of the non-residential
premises. The landlord is entitled to delay interest if any payment is delayed,
in the amount either stipulated in the contract or prescribed by law. The
tenant is obliged to use the non-residential premises in accordance with the
lease, within the extent agreed in the lease and for the purpose agreed in the
lease. The tenant is also obliged to notify the landlord of the need for repairs,
which the landlord should effectuate, and enable the execution of these
repairs. Otherwise, the tenant is responsible for any damage caused by a breach
of this obligation.
If a tenant intends to change the business
activity carried out in the premises and this change will affect the use of the
premises, they are obliged to acquire written approval. Other obligations or
restrictions incumbent on the tenant are subject to agreement between the
parties, for example, to contribute to the maintenance of the non-residential
premises, not to sublease the premises, and so on.
Operating expenses of the
premises
Under the Act, a landlord is obliged to keep
the non-residential premises in good repair. However, the parties can agree
that the tenant is obliged to contribute to expenses related to the maintenance
of non-residential premises or to participate in the performance of some
services. For example, a tenant
may be obliged to pay charges related to cleaning the premises. It is a common
practice for the parties to stipulate in a lease an obligation on the tenant to
pay, besides the rent and services charges, other expenses, such as management
fees (for managing, operating and repairing the premises) and marketing fees
(for promotion or for holding special events). The parties may also agree in
the lease that the tenant is obliged, at its own expense, to obtain and
maintain liability insurance for damage which is caused in connection with activities carried out in
the premises, and property insurance for both the premises and movable property
within them.
Payment of rent and service
charges
The tenant is obliged to pay to the landlord
rent and service charges (payment for services provided in relation to the use
of the non-residential premises such as the supply of energy and water, waste
disposal, cleaning and security services). As mentioned above, the parties can
agree that the tenant will pay the landlord certain other fees (a management
fee or a marketing fee).
Rent is determined by agreement between the landlord
and the tenant. The landlord has no right to unilaterally increase the rent.
However, the parties may agree, and often do so in practice, that the rent will
automatically be modified
every year according to the inflation rate determined by the Consumer Price
Index for the previous calendar year.
Rent, service charges and other fees are paid
monthly in advance on the first day of the respective calendar month, unless
the parties agree otherwise. As mentioned above, if the tenant is in delay with
any payment, the landlord is entitled to delay interest, in the amount either
stipulated in the contract or prescribed by law. If the tenant can use the
non-residential premises only in a limited extent because the landlord is not
fulfilling their obligations, the tenant has the right to a proportional
discount on the rent.
Lease term and conditions of
termination
A lease may be concluded for a definite or
indefinite time. A lease for a definite time terminates after the expiry of the
period for which it was concluded. A lease may be terminated by notice. The
notice period is three months and starts on the first day of the month
following the month in which the notice was given, if the parties have not
agreed otherwise.
a) Termination of a lease
concluded for a definite period by a notice of termination
By law there are several grounds on the basis
of which a landlord can terminate a lease contract before the expiration of the
agreed term. The parties can, however, agree in the lease to exclude these
grounds or agree other grounds which are not mentioned in the legislation.
The parties can also exclude the requirement that
notice must be in writing. A landlord can terminate a lease concluded for a
definite period before it expires if the tenant uses the premises in a manner
contrary to the lease or is in default with the payment of the rent or of the
payment of service charges; if the tenant should, on the basis of a lease,
provide certain services to the landlord as a counterpart for rent and does not
do so; if the tenant or persons who use the premises jointly with them, grossly
disturbs the peace and order despite a written notification to desist; if the
use of the premises is connected with the use of an apartment and the tenant is
required to vacate the apartment; if there is a decision on the demolition of
the premises or on changes to the premises that restrict their use; if the
tenant sublets the premises or part of them without the landlord’s approval; if
the lease is in a building restituted to an entitled person under a certain act
(for example, the Act on Mitigating the Consequences of Some Possessory Injustices);
or the tenant has changed the purpose of business activity without the landlord’s
prior approval.
A tenant can terminate a lease concluded for a
definite period before it expires, if they lose the capacity to exercise the
activity for which they leased the premises or if the premises have become, through
no fault of the tenant, unfit for the agreed use or if the landlord grossly
violates their obligations.
b) Termination of a lease
concluded for an indefinite period by a notice of termination
A lease concluded for an indefinite period can
be terminated by a written notice of termination by either the landlord or the
tenant without the need to give reasons for the notice.
c) Other ways of terminating a lease of non-residential premises
If the parties do not agree otherwise, a lease
expires on the death of the tenant, if the heirs of the tenant do not notify
the landlord that they will continue the lease or on termination of the
existence of the legal entity of the tenant without successor. The parties can also
terminate a lease for non-residential premises under the general provisions of
civil law, for example, by withdrawal.
Sublease
A tenant is entitled, with the landlord’s prior
written consent, to sublease the non-residential premises or part of them. A sublease
may only be agreed for a definite time, and must be in writing. The subtenant
has all the rights and obligations that the tenant has. The landlord and tenant
may, however, exclude the tenant’s right to sublease the premises.
Tax issues
A
landlord and a tenant can agree that the value of the tenant's works in the
premises (technical improvements) will be depreciated by the tenant and the
landlord will not increase the input price of the landlord's own tangible
assets by the amount of the costs related to the tenant's works. Upon terminating the lease the technical
improvements will be transferred to the landlord for consideration. The parties
can stipulate in the lease that the value of the consideration paid by the
landlord to the tenant for the technical improvements must be at the level of
the residual value of the technical improvements. Otherwise, if the
consideration is lower than (or the technical improvements are transferred
without consideration) the residual value of the respective technical
improvements, the difference is considered as a tax non-deductible expense of
the tenant.
Generally,
the lease of real estate is VAT exempt and a landlord is not entitled to claim an
input VAT deduction from related inputs (the services received related to the
real estate or its purchase price). However, if the tenant is a VAT payer and the
building is used for business activity only, the landlord may decide to impose
VAT on the lease.
This article is for
information purposes only and under no account can it be considered a legal
opinion. Should you need any further information on the issues addressed in
this article, please contact PETERKA & PARTNERS Law Offices.
