According to judgment 26 Cdo 2177/2021 of the Supreme Court of the Czech Republic of 4 April 2022, one may refuse to take over non-residential rental premises due to defects that would preclude their proper use and to withdraw from the lease agreement as well. The Civil Code only foresees the cancellation of the lease as one of the possible ways of terminating the lease agreement.
In April this year, the Supreme Court dealt with an interesting case in which a tenant had claimed that they were not required to pay rent for let premises being used for business which they had not taken over from the landlord due to their completely inadequate condition. Having discovered that the non-residential rental premises were not in a condition that would allow them to exercise their rights without interference (this being known as the ‘peaceful and undisturbed use and enjoyment’ of non-residential rental premises) as at the date of handover, the tenant sent the landlord a letter of withdrawal from the contract the very next day (2 June 2015). It should be noted that the parties had not agreed on this option for termination of the lease agreement, and that the Civil Code also does not provide for withdrawal as an option for terminating lease agreements. However, the Civil Code only provides for cancellation of the lease as one of the possible ways for terminating a lease. Subsequently, the tenant sent the landlord a notice of immediate cancellation of the lease of the apartment due to serious defects which prevent the use of the property for the storage of IT equipment. This termination letter was delivered to the landlord on 1 August 2015.
After the landlord refused to return the tenant’s security deposit of 2 months’ rent (i.e. CZK 290,359 with accessories), as they did not consider the termination of the lease relationship by way of withdrawal to be valid, the whole matter went to court. The court of first instance ordered the defendant (i.e., the landlord) to pay the claimant the amount sought and denied the defendant’s counterclaim for a declaratory judgment to the effect that the applicant’s termination of the lease of the business premises was invalid. The appellate court, however, adjudicated the matter in the opposite way and found the withdrawal from the lease to be invalid because, among other reasons, the parties had not agreed on withdrawal as a method for termination of the lease, and this particular method of termination is not provided for by statutory law, as mentioned above.
The entire case thus came before the Supreme Court, which had to answer two issues of substantive law that have not yet been settled, namely:
1) Whether it is possible to withdraw from a lease of business premises under the general provisions of Section 1977 of the Civil Code;
2) Whether the tenant is obligated to pay rent if the object of lease is not taken over due to defects preventing the agreed purpose of use.
In its decision regarding the first question, the Supreme Court based its reasoning on the fact that lease relations are also contractual relations and are thus subject to the general provisions on obligations (Sec. 1721 – Sec. 2054 of the Civil Code), unless the provisions on leases (Sec. 2201 – Sec. 2331 of the Civil Code) contain special provisions to the contrary. The Supreme Court also stated that, while a statutory right to terminate a lease by withdrawal is not explicitly provided for in the provisions on the lease, this does not preclude the parties from agreeing on the possibility of withdrawal in their lease agreement relating to the business premises. Furthermore, the Supreme Court reasoned that where the default of one party results in the breach of a contractual obligation in a material manner, the court sees no reason not to allow statutory rescission of the lease under the general provisions of Section 1977 of the Civil Code (even if the parties did not agree on such an option in the lease agreement). According to the Supreme Court, failure to hand over the property at the agreed time and in a condition corresponding to the agreed purpose of the lease is undoubtedly a significant material breach of contract within the meaning of Section 2002(1) of the Civil Code.
Regarding the second question – whether the tenant is obliged to pay rent for the period during which the rental premises were not handed over and not used due to defects – the court stated that if the tenant is entitled to a waiver of rent in cases where defects prevent them from using a thing that has already been taken over, it is fair to conclude that if the thing in question has not even been taken over, the tenant is not obliged to pay rent.
In the light of the above, it is therefore advisable to carefully design the terms and conditions relating to the beginning of the lease relationship and the takeover of the rental property in lease agreements, especially if the premises in question are used for business purposes, where rent and security deposits tend to be higher. Only thus can one avoid potential damages in the event that the non-residential premises are not taken over by the tenant due to defects alleged by the tenant, even though the landlord has already spent a significant amount of money to prepare the premises for the lease.