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Law Proposals Concerning Loan Repayments and Lease of the Business Premises

On April 1, 2020, the government of the Czech Republic has approved two law proposals with major impact on business sphere, i.e:

a) proposal of new act on specific measures in the field of loans repayment in relation to the pandemic of COVID 19; and

b) proposal of new act on the mitigation of impacts of the pandemics of coronavirus SARS CoV-2 on the tenants of the business premises.

Both proposals should be on the way to the parliament of the Czech Republic (it can be assumed that proposals will be discussed and approved at the next session of the Chamber of Deputies on April 7, 2020).

Today, the governmental library has published the wording of both proposals as of April 2, 2020, the basic concepts of new proposals are summarized below for clarity.

Proposal of new act on specific measures in the field of loans repayment in relation to the pandemic of COVID 19

The proposal is based on delay/ deferment of the time for fulfilment of financial debt of a debtor for a period which is called the “protective period”. The protective period can be three or six months based on the choice of the debtor. We presume that the way it is structured, it means that also payments that are due already in April but after the effective date of the law should be deferred.

The above deferment does not apply to interests payable and in case of legal entities it does not apply either to other payable amounts.

The proposal is based on so-called opt-in regime. It means that the debtor has to apply in written form (or other form specified by the creditor) for the application of the deferment by the protective period. This requires active approach of the financed debtors towards their financing institutions. In order to gain the longest possible protective period of six months these applications have to be filed in the course of April otherwise the protective period would be shortened by a number of months based on the date of application.

Unless the debtor expressly stipulates the shorter protective period in the opt-in notice, the protective period would be six months.

Substantial problem is that for legal entities the deferment applies only to the payments of principal but it does not apply to the payment of interest and other dues under the loan such as administration fees and so on.

Moreover, legal entities are not excluded from their obligation to pay default interest, not even for the duration of the protective period.

Default interest shall not apply on the non-paid principles which are deferred on the basis of the proposal but it shall apply to all other payments depending on the wording of the loan agreement. Based on the Czech law standards - without other provisions in the contract - default interest would not apply on regular interest at least until their possible capitalization. Unfortunately, in the LMA standard, the default interest applies to any overdue amounts (i.e. it applies also to interest and default interest). In the Czech Bank Association standard default interest applies to regular interest but it does not accrue on the already charged default interest.

The wording of the proposal can be reached on this link.

Proposal of new act on the mitigation of impacts of the pandemics of coronavirus SARS CoV-2 on the tenants of the business premises

In the new proposal, the “deferment of the rent payment" is structured in a similar way to the law proposal concerning the lease of residential premises, i. e. by limiting the option of unilateral termination of the lease by the landlord in case the tenant is in delay with payment of the rent and service charges in the period commencing on March, 12 2020 and expiring on June,30 2020. The protection period shall expire on March 31, 2022. This means that the tenant is obliged to pay these payments no later than on March 31, 2022.

For the purpose of the above-mentioned limitation of unilateral termination, the default of the tenant within the period from March, 12 2020 to June 30, 2020 must be the result of restrictions determined by the emergency measures against the epidemic, provided that such measures have made it impossible or substantially difficult to carry on the business.

The wording of the proposal implies that the premises in question are not only the premises where the business activity has been banned by the government, but also offices and other operations, etc.

The wording of the proposal can be reached on this link.

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