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The immense challenges with which citizens, businesses—indeed, entire markets—are faced as a consequence of COVID-19 and the responses of central, regional and local governments to that threat are epochal, and the situation is febrile and fast-moving.
White & Case Prague is dedicated to helping its clients come to terms with and respond appropriately to this crisis, and we have rapidly adapted to the practical challenges presented by restrictions on movement and the consequent need to move to remote working and remote deal management.
In addition to our continuing day-to-day management of ongoing client matters and matters directly related to the crisis itself, White & Case Prague has established a COVID-19 Task Force responsible for monitoring and contributing to governmental and private responses to our new reality. In addition to advising our clients, our lawyers are involved in several working groups providing industry-specific recommendations related to the implementation of potential governmental support measures, and changes to the Czech Insolvency Act that would provide businesses with breathing space until such government support is implemented.
The goal of the Prague COVID-19 Task Force is to regularly update our clients on actual and prospective developments in their markets consequent on the pandemic, primarily from a Czech perspective but also across the region. With this goal in mind, this client note summarizes key developments in administrative law, finance, insolvency, labour law, commercial real estate and general contract law.
1. State Measures and State Liability
On 12 March 2020, the Czech government declared a state of emergency throughout the entire country. Since then, the Czech government as well as individual ministries have continually issued so-called crisis measures under the Crisis Act (“Crisis Measures”).
These Crisis Measures have, directly or indirectly, affected most of the country’s population, including visitors from abroad. The immediate impact on both small and large businesses has been huge, with the economy slowing substantially in the first week. Crisis Measures have ordered thousands of retailers and service providers to close their businesses along with theaters, sport facilities, schools and many other public institutions. Cross-border traffic has been shut down with very few exceptions.
On 23 March 2020, the Czech government decided that Crisis Measures would from that date be issued solely by the Ministry of Public Health (“MPH”), under the purview of the Act on Protection of Public Health (the “Health Act”).
Under the Crisis Act, businesses and others may claim damages caused by Crisis Measures adopted under that act. Claims should be raised with the competent government body within six months. Conversely, under the Health Act, no such right to claim damages arises.
2. Finance – Czech-Moravian Guarantee and Development Bank Support for Small Businesses
The Ministry of Industry and Commerce of the Czech Republic, together with the state-owned Czech-Moravian Guarantee and Development Bank (the “CMZRB”) has introduced a loan financing program to support the working capital needs of Czech-incorporated SMEs whose businesses have been affected by the pandemic and associated public health measures taken by the Czech government.
CMZRB commenced processing applications on 16 March 2020 for small interest-free, no-fees loans to finance up to 90 per cent of working capital costs with terms of up to two years and a payment holiday of up to one year. Applications for the first round of the program were suspended on 20 March 2020 as CMZRB received an overwhelming volume of applications totaling approximately CZK 10,000,000,000 (approximately EUR 371,000,000). A second round is planned to support SMEs and the self-employed via guarantees of up to 80% of commercial loans and minor financial support for interest service.
Further information can be found online on the website of the CMZRB (www.cmzrb.cz, section Podnikatelé/Úvěry/ÚVĚR COVID).
Further rounds of state support are currently under discussion. One of these is to be available to entrepreneurs affected by the pandemic measures in the form of guarantees – to be provided by the EGAP, the Czech export credit agency – for working capital loans, capex loans, innovation loans and loans for the purposes of preservation of the ongoing business. Though provided by EGAP, this produce will not be treated as “export credit insurance”. Details including the conditions of the guarantees will be set forth in a governmental decree which is currently being prepared.
Amendments are expected to the Czech Insolvency Act such that a Czech company’s obligation to file for insolvency will be suspended for six months, and any creditors’ filings for insolvency are inoperative until 31 August 2020. Companies will be able to file for an extraordinary moratorium lasting three months (extendable by another three months) during which no insolvency will be declared and no debt enforcement against their assets will be pursued. At the same time, companies will have to abide by more stringent duties in relation to asset-stripping and the preferential treatment of creditors (the equivalent of fraudulent preference).
Under discussion is a deferment of scheduled repayments of Czech loans. The parameters of this measure are as yet unclear, but in general, corporate and individual borrowers would be able to defer their loan obligations until 31 July 2020 or 31 October 2020 (depending on their choice). During the deferment period, consumers will be fully relieved of debt service obligations whereas corporate borrowers will continue to pay interest and fees but enjoy a holiday on scheduled principal instalments for the duration of the deferment.
4. Employment/Labour Relations
The Czech government has established a program called “Antivirus” designed to help employers bear the costs of continuing the employment of their staff in the face of the stringent limitations on businesses currently in effect.
Under Czech employment law, employees benefit from income protection which varies based on four general categories of obstacles to business operation, with the government having adopted compensatory measures in relation to three such categories:
- Operational challenges (lack of supplies, non-functioning machinery etc.) – employees have a right to 80% of their average earnings, of which the government will reimburse 60% (up to the amount of CZK 29,000 per employee and month).
- Business stoppage (such as temporary lockdown due to public health measures) – employees have a right to 100% of their average earnings, with the government offering to reimburse 80% of such cost (up to the amount of CZK 39,000 per employee and month).
- Partial unemployment – depending on an agreement between the employer and the trade union (if any), if the employer’s business suffers a slowdown resulting in a decreased need for labour, employees will work fewer hours, with the unworked hours being compensated at 60% of average earnings. In the absence of a trade union, the regime may be imposed unilaterally by the employer provided that employees are not thereby put out of work entirely. In this category, the government has agreed to reimburse 60% of the amounts paid to employees for the unworked hours (up to the amount of CZK 29,000 per employee and month).
In circumstances where the inability of an employee to work is not a consequence of business interruption, but instead due to limitations on the part of the employee himself or herself (such as quarantine), the applicable regime is comparable to sick leave, i.e. the employee has the right to salary compensation in the amount of 60 % of his/her average reduced earning during the first 14 days of the quarantine. In these circumstances, the government will reimburse to the employer 80% of the salary compensation paid to the employee (up to the amount of CZK 39,000 per employee and month).
The duration of these measures is currently limited to the period between March 12 and April 30, 2020, but is expected to be extended until May 31, 2020. Each employee’s circumstances will be considered on a case-by-case basis, and compensatory amounts will be paid out of the Labour Office. The employer may apply for the reimbursement after the end of the calendar month for which the reimbursement is due; applications may be filed starting on April 6 2020.
This is a brief summary of the applicable measures. The available information regarding the new measures has been lifted from press releases, as no final versions or interpretations of the measures are as yet available.
5. Commercial Real Estate
The Czech government is considering submitting a bill before Parliament which would prohibit landlords from unilaterally terminating commercial leases solely on the grounds of lease and service charge payment default, where the non-payment occurs between 12 March and 30 June 2020 (the “Reference Period”) and is caused mainly by restrictions on business imposed by public authorities in connection with the COVID-19 pandemic which have prevented or substantially hampered the tenant’s business activities. The prohibition on lease termination is expected to apply until 31 March 2022 (the “Termination Date”).
The bill does not provide for any mandatory rent-free periods or rent abatements, nor does it extend due dates for rent or service charges. The payment obligations of tenants under commercial leases will fall due irrespective of the bill. Furthermore, all other termination rights and other rights of the landlord (such as the right to default interest or contractual penalties (if agreed) or the right to draw upon security deposits or guarantees) would remain unaffected.
The practical risk represented by adoption of the bill is a reduction of cash-flow corresponding (depending on agreed payment terms) to approximately three (3) months’ rent and service charges for each eligible tenant, which may last until the Termination Date unless the landlord is in a position to recover such dropout from a security deposit or guarantee.
If the situation caused by the pandemic lasts longer than currently expected, the government may extend the Reference Period, which would in turn aggravate cash-flow pressures on landlords.
Notwithstanding the protections afforded to tenants by the bill, landlords would still be entitled to terminate a lease (i) as a result of default with payments which occurred within the Reference Period if these are not made by the Termination Date or if the tenant declares (or it becomes otherwise self-evident) that it will not pay within this deadline, or (ii) for any payment default which occurred before or after the Reference Period, or (iii) for other agreed or statutory termination grounds.
Importantly, if the landlord terminates a lease, it falls to the tenant to show a causal link between the measures adopted by public authorities in the Czech Republic and the material negative effect on their business. A tenant’s ability to do so would vary from case to case, but we are of the view that the mere fact of a slump in the global economy without a clear causal link to Czech public health measures would not be sufficient under the bill as currently drafted.
Czech contract law does not imply a general force majeure provision – it is up to the parties to agree on such provisions in their contracts, and so the applicability of such contractual protection to the COVID-19 situation must be assessed on an individual basis.
If, however, the party in breach could prove that its non-performance was due to force majeure (defined as an exceptional, unforeseeable and insurmountable obstacle which has arisen outside of the will of the party in breach), it would not be liable for damages caused by such a breach.
The COVID-19 situation may give rise to statutory hardship. In the event of a significant change of circumstances resulting in a gross disproportion between the rights and obligations of the parties to the disadvantage of one of them (e.g. in the form of a disproportionate increase of costs or a disproportionate reduction of the value of the other party’s performance), the affected party may request a renegotiation of the contract. The affected party must however be able to show that it could not have reasonably anticipated or avoided the effects of the change, and that the change occurred or became known to that party after execution of the contract.
If the parties do not to agree on changes to the contract within a reasonable period, each party may request that the court (i) restore the balance of rights and obligations between the parties by changing the terms of the contract or (ii) cancel the contract. The hardship clause does not apply if one or both parties expressly assumed a risk of change of circumstances in their contract.
Impossibility of performance
A contract or any contractual obligation will terminate if it cannot be performed. Performance is not impossible if the obligation can be fulfilled at a higher cost, with the assistance of another person, or only after the agreed period. Circumstances of impossible performance are therefore rare, since the performance must be objectively and permanently impossible.
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