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End of contractual penalties for leases in the Czech Republic

End of contractual penalties for leases in the Czech Republic

18.3.2013 13:18
Autor: Petra Mirovská, KSB

The changes, which will also apply to agreements concluded prior to 2014, originate from the unassuming Section 2239 of the new Civil Code.

The deputy and long-term chairman of the Association of Tenants of the Czech Republic Stanislav Křeček may well be jumping for joy. In parliament he voted to reject the Communist proposal to delay the effectiveness of the new Civil Code which will among other things bring fundamental changes to the area of leased housing.

Cherchez Québec

To date, a lessor and a tenant could agree that the tenant will be subject to a contractual penalty if he breaches certain obligations. This has been a practical solution in cases where, for example, the tenant fails to pay the rent or damages the apartment or house. Starting next January, however, contractual penalty covenants will not be permitted. And if an agreement contains one, it will not apply. But beware! This rule will also apply to old lease agreements.

These so-called prohibited covenants concerning leased apartments or houses were inspired by a number of foreign laws, including German and Dutch law and the laws of Québec. The explanatory memo to the new Civil Code explains that this new provision is necessary as penalties in such cases are already set forth by law. This also applies to the tenant’s obligation to provide compensation for damage. As such, agreements that would place a greater burden on the tenant than the law itself will be considered invalid. Traditionally, a contractual penalty has in fact been understood as lump sum compensation for damage arising from the breach of the obligation to which the contractual penalty relates. For those reasons, contractual penalty clauses concerning leased apartments and houses will no longer be permitted.

Tough luck for the lessor

Starting in 2014, the new provision will also apply to lease agreements that were concluded earlier, which will certainly not please lessors. In other words, if an existing lease agreement contains a provision requiring the tenant to pay a contractual penalty in certain cases, the provision be disregarded if the lessee breaches the obligation after 1 January 2014. The obligation to pay a contractual penalty will be included in the category of “prohibited covenants”. This should prevent the prohibited covenant from being circumvented to the detriment of the lessee. Although agreeable for lessees, this is bad news for lessors.

The new Civil Code goes even further, however. Besides forbidding contractual penalties in respect of leased apartments and houses, it also prohibits covenants imposing an obligation on the tenant that “in view of the circumstances is clearly unfair”. For agreements concluded before 2014, a clearly unfair obligation imposed on a tenant of an apartment or house will not be enforceable after 2014. The explanatory memo to the new Civil Code does not include any examples of such prohibited obligations, which is logical as long as the law expressly sets forth that the apparent inadequacy of an obligation should be assessed with regard to the actual parties involved and other circumstances. As such, a tenant’s obligation that is found inadmissible by the court in one case may not necessarily be inappropriate in another. In any event, a specific decision by the court will undoubtedly be a certain guideline.

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