One measure to mitigate the effects of the Covid-19 pandemic is the government’s ban on terminating the lease due to non-payment of rent in cases where the tenant is unable to pay rent due to an epidemic. This problematic government bill has already been approved by the Chamber of Deputies and will be dealt with by the Senate after the Easter hollidays. If the law actually comes into effect, it will cause a noticeable stir within private relationships between landlords and tenants. What are the pitfalls for both sides to avoid and what does the future of the application practice of this law look like?
First of all, it must be pointed out that the law thus proposed is clearly at the very edge of what is constitutionally acceptable, since it significantly affects the property rights of landlords, without there being a clearly defined public interest or compensation within the meaning of paragraphs 3 and 10 of the Expropriation Act. Furthermore, a number of formal shortcomings, including a wholly lacking analysis of economic, financial and social impacts, accompanied the passing of the law in an “accelerated legislative process” in the context of a legislative emergency. For these reasons, the law can be challenged before the Constitutional Court, which can eventually lead to its annulment.
Although it may not seem so at first glance, the law also presents some dangers to tenants it purports to protect. Tenants can mistakenly understand the law as a mandatory forfeiture of rent, although it is de facto only a postponement of the time when the rent is due (until the end of 2020). It can therefore be expected that many landlords will require all such deferred rent after the new year and many tenants can suddenly find themselves in a debt trap. Another problem is that according to a number of lease contracts, the landlord can use the deposited security to offset the rent and subsequently demand its repayment under the threat of termination of the lease due to failure to fulfill contractual obligation. The possibility of penalizing such deferred rent by default interest rate also remains a separate question.
Many comments from the professional community have been pointing to these shortcomings and pitfalls for a long time and it is questionable whether these criticisms will be taken into account in the approval process by the upper house of parliament. If not, and the law will enter into force and effect in its current wording, then the number of disputes between tenants and landlords can be expected to increase, resulting in the necessary interpretation of the law by the courts. In the current situation, we can recommend the following:
- Negotiate with the counterparty about the deferral or forfeiture of rent – have the agreement confirmed in writing
- Consider alternative solutions under existing instruments, such as the housing emergency allowance, or agreeing a repayment schedule
- Assess the risks associated with insolvency