Although the lease of immovable property is an institute of the law of obligations, it has some distinctly rights-in-rem elements, which are manifested, for example, in the case of change of ownership of the leased property. In this respect, the provisions of Section 2221(1) of Act No. 89/2012 Coll., Civil Code, as amended (hereinafter the “CC”) provide that if the owner of the property changes, the rights and obligations under the lease pass to the new owner. The purpose of this provision is clearly to protect the tenant.[1] It is clear from the provisions of Section 2221 CC that it seeks to simulate the situation in relation to the tenant as if the change of the owner of the leased property had not occurred, or to minimize the consequences for the tenant arising from the change thereof. In essence, it can be said that for the tenant, usually only the place of payment or contact details of the landlord change and it does not have to worry about anything else following the change of ownership of the leased property. However, the same certainly does not apply to the new owner – the acquirer of the leased property entering the position of the landlord.
Neither the Civil Code nor any other legal regulation provides in detail for the procedure for a change in the person of the landlord in the event of a transfer of ownership of the immovable property as the subject of lease, nor the established case law of the higher courts provides strong support in this respect. We therefore consider that the practical aspects of the change of ownership of the leased immovable property, namely the collection of rent, the handling of the security and the method of settlement of lease-associated services, should be dealt with in sufficient detail in the contract between the transferor and the acquirer. However, this article will focus on situations where, for some reason, there is no agreement between the former and current landlord on how to deal with the above matters.
Rent
The pitfalls associated with rent in the context of a change in the person of the landlord are primarily based on the period for which rent is paid and whether it is paid in arrears or in advance. In practice, it is possible to encounter cases where rent is paid monthly, quarterly, semi-annually, annually or even prepaid for the entire term of a fixed-term lease.
The law does not contain any provision explicitly regulating how to proceed in a situation where the transfer of the leased property took place during the period for which rent is payable, but the rent for the period when the leased property was no longer owned was collected by the transferor. Such situations may arise quite commonly in practice and from the tenant’s point of view, they are taken into account in legal practice even under the current legislation, which no longer contains an express provision that the tenant is entitled to discharge its obligations towards the former owner of the leased property until the change of ownership is notified to it or proven by the acquirer. In fact, the Supreme Court maintains its interpretation that this earlier conclusion is still applicable, i.e., in simplified terms, the tenant is obliged to pay rent to the acquirer of the leased property only from the moment it learns about the change from the original or the new landlord.[2]
It would seem that this situation can be relatively easily resolved under the provisions of the CC on unjust enrichment, but the Supreme Court’s case law suggests that in the case of a pre-collected rent, the transferor will not be unjustly enriched at the expense of the acquirer of the leased property, where the leased property is transferred during the period for which the rent has been paid, since the change in the person of the landlord cannot be regarded as expiration of legal cause of performance as one of the merits of unjust enrichment referred to in Section 2991(2) CC (formerly Section 451(2) of Act No. 40/1964 Coll, Civil Code).[3] It is true, however, that the CC contains other merits of unjust enrichment, moreover, the list thereof in the CC is demonstrative, thus the possibility for the acquirer of the leased property to claim the rent paid to the transferor for the period when the acquirer was already the owner (and the landlord) of the property, seems to be the right way, although not yet satisfactorily confirmed by case law or legislation.
Security
The deposit of a cash security (often referred to as a “bail” in practice) is typical for most lease contracts for immovable property, not only for the lease contract for an apartment, although this is the only case in which the institution of security is regulated in more detail in the CC. In this case, lease agreements usually also regulate, differently from the provisions of law, the conditions under which the security may be used, typically in such a way that the use of the security may take place not only at the end of the lease. However, it is rarely specifically addressed how to deal with the security in the event of a change of ownership of the leased property.
In the absence of any such contractual arrangement, the rights attached to the security, and therefore logically the security itself, pass to the acquirer of the leased property at the time of the transfer itself.[4] The transferor should not dispose of the funds representing the security in any way and should only ensure that they are promptly handed over to the acquirer, even if it has claims against the tenant at that time, for the payment of which it would have been entitled to use the security as the tenant. Therefore, if the transferor still intends to use the security on the occasion of the transfer of the leased property to redeem the debts of the tenant, it should do so before the transfer takes effect.
Advance payments for services and their settlement
If the landlord provides the tenant with lease-related services (i.e. energy and utility supplies, cleaning of common areas, waste collection, etc.) and the tenant pays the landlord advance payments therefor, special care should be taken when transferring the property to ensure the continuity of the services provided and, in particular, to ensure that the advance payments are properly settled.
Advance payments for services collected from the tenant by the transferor until the date of the change of ownership of the leased property (in the capacity of landlord) which for some reason have not been used to pay for the ongoing supply of lease-related services, should be subject to a regime similar to the security, i.e. they should be handed over to the new owner without delay if they are not settled on the occasion of a change of ownership of the leased property, which is not a situation envisaged and regulated by the legislation, although it is a very practical procedure. The settlement of advance payments for services is an obligation that falls on the landlord only after the end of the so-called settlement period, which is usually one calendar year. It is therefore not legally possible for the landlord to settle the advance payments of services in a completely arbitrary manner.
In the absence of an agreement between the landlord and the tenant on the possibility of settling the advance payments on the occasion of the transfer of the leased property to another person, or even generally not only after the end of the settlement period, the settlement of advance payments by the transferor at that time (unless it coincides with the end of the settlement period) is in fact even legally impermissible.
In the case of a lease of an apartment, the settlement period of one calendar year is expressly provided for by the Act No. 67/2013 Coll., regulating certain issues related to the provision of services related to the use of apartments and non-residential premises in an apartment building, as amended, and the Act also regulates a specific limited period of time in which the landlord is obliged to settle the advance payments for services. According to Section 7(1) of this Act, the landlord is obliged to settle the actual amount of the costs of services paid in the form of advance payments for each settlement period and to deliver the settlement to the tenant no later than 4 months after the end thereof, i.e. always by 30 April of the calendar year following the settlement period.
Crucially, the legislation explicitly links the obligation to settle the advance payments to the landlord. It should therefore be the landlord who, in principle, will perform the settlement and, on its basis, reimburse the tenant for the overpayment or collect the underpayment from the tenant. Therefore, if there is a change in the person of the landlord during the settlement period as a result of a change in the ownership of the leased property and the advance payments are not settled on that occasion (typically due to the absence of such a provision in the lease agreement), the obligation to settle the advance payments of services will be borne by the acquirer of the leased property, even for the part of the settlement period when it was not yet the owner thereof. Conversely, the transferor will not be obliged or entitled to be directly involved in the settlement of advance payments for services, even if it relates in part to the period when it was still in the position of the landlord, although it may have a relatively pressing interest in the settlement (typically in the case of an expected arrears). Here, however, it is important to bear in mind that there is no longer any legal relationship between the tenant and the transferor in relation to the lease in question, and therefore no legal title to settle any overpayments and underpayments between them.
It cannot be argued that this is a claim of the transferor, as the original owner of the leased property, against the tenant. Section 2221(1) CC must be interpreted as meaning that (all) rights and obligations under the lease are transferred to the new landlord, except only those which arose before the transfer took effect. The obligation to settle any overpayments or underpayments clearly arises for the landlord only after the end of the settlement period. The transferor, as the previous owner of the leased property and the original landlord, is thus generally not entitled to make any settlement, and thus logically cannot have any claim against the tenant for payment of arrears or an obligation to repay the overpayment to the tenant. This obligation is incumbent exclusively to the acquirer of the leased property as the new (current) landlord, who is also solely responsible for the financial settlement with the tenant, completely irrespective of whether or not he has performed the related financial settlement with the transferor of the leased property. From the tenant’s perspective, any problems with the settlement itself, e.g. content discrepancies, are to be resolved by the tenant exclusively with the current landlord, even if the period concerned is when the original owner of the leased property was still in the position of the landlord. The tenant no longer has any legal relationship therewith.
The practical aspect of the above legal conclusion can be very complicated, especially if the acquirer does not receive from the transferor all the necessary documents and information for the settlement of the advance payments, or any collected but not consumed advance payments. Neither the legislation nor the case law provides a clear answer as to how the new landlord should proceed in such a situation, although it may face unpleasant sanctions for failing to comply with its obligations to perform the settlement of advance payments for services, especially when applying the provisions of Section 13 of the aforementioned Act 67/2013 Coll.[5], while the lack of cooperation of the transferor in obtaining the necessary documents is not something that is unusual in practice.
However, the transferor, i.e. the previous owner of the leased property and the original landlord, may find themselves in a similarly unenviable situation in the absence of sufficient contractual treatment of rights and obligations concerning advance payments for lease-associated services. If the tenant incurs a significant underpayment of services which is not settled on the occasion of a change of ownership of the leased property, the transferor is in a situation where it is essentially dependent on the acquirer of the leased property subsequently performing a proper settlement the advance payments and collecting the underpayment from the tenant, which it will divide proportionately with the transferor.
In our opinion, the above conclusions concerning rent are applicable to the distribution of any overpayments and underpayments, or the related rights and obligations, between the transferor and the acquirer, i.e. any disproportion between the actual and the desired state of the proportional distribution of the overpayment or underpayment should be resolvable in accordance with the provisions of the Civil Code on the unjust enrichment. However, in relation to the tenant, the obligation to repay the overpayment or the right to collect the underpayment will always be on the part of the acquirer in the position of the current landlord.
Conclusion and main recommendations
The most general conclusion of our article is that it is not advisable to rely on the statutory regulation and its interpretation shaped by case law in relation to practical issues with changing the ownership of the leased property. Our article is therefore essentially a call on both landlords of immovable property as potential transferors and those interested in acquiring immovable property that is leased to keep in mind the related practical issues and take them into due consideration in the contractual documentation. In addition, current landlords, presuming the accord with tenants, may already incorporate appropriate measures into the lease agreements for the event of a change of ownership of the leased property. The lack of consensus and synergy between the acquirer and the transferor of the property is very difficult to resolve in practice without previous contractual treatment, especially as regards the issue of advance payments for lease-associated services and their settlement.
Our law firm is experienced in dealing with similar situations and is ready to help its clients both with preventing the problems described herein and with solving problems that have already arisen.
[1] See the judgment of the Supreme Court of 30 August 2006, Case No. 26 Cdo 906/2005: “The purpose of the above provision is to ensure the continuity of the lease relationship on the part of the landlord in the event of the legal fact envisaged here – a change of ownership of the leased property. It thus provides the tenant with legal protection in a situation which he could not influence (by his expression of will) and preserves his right to rent.”
[2] Cf. the judgment of the Supreme Court of 2 April 2019, Case No. 28 Cdo 270/2019.
[3] See the judgment of the Supreme Court of 18 January 2010, Case No. 28 Cdo 4735/2009: “The legal basis (in the present case, the lease agreement), in the event of a change on the part of the landlord in accordance with Section 680(2) of the Civil Code, is not a legal basis for the lease. The legal status of the landlord does not cease, but continues, and the acquirer enters the legal position of the landlord. Thus, if the lease agreement of 22 December 1993 was validly concluded, as the appellant expressly states, the original owners were paid on the basis of a proper legal basis and not on the basis of a legal basis which has lapsed. The defendants could not therefore have been unjustly enriched.”
[4] Cf. e.g. DEJLOVÁ, Hana. § 2221 [Change of ownership of the property]. In: KABELKOVÁ, E., DEJLOVÁ, H. Tenancy and usufructuary lease in the new Civil Code. 1st edition. Prague: C. H. Beck, 2013, p. 75, marg. no. 4.
[5] The said provision provides for a penalty in the form of a fine of up to CZK 50,- for each day of delay in fulfilling the obligation given by this Act.
PhDr. Mgr. Jan Ptáčník, Senior Attorney – ptacnik@plegal.cz
Mgr. Nikola Tomíčková, Junior Lawyer – tomickova@plegal.cz
19. 9. 2024