Slovakia & COVID-19 & Temporary Legal Protection of Entrepreneurs and New Rental Conditions

By Katarína Pfeffer, Robert Čuperka

05-2020

Across Europe and beyond, governments have been implementing measures to mitigate the impact of the COVID-19 crisis. In this regard, on 22 April 2020, the Slovak parliament adopted a new regulation on temporary protection of entrepreneurs and rental relationships. From the legal perspective, this has been achieved by means of an amendment to Act No. 62/2020 Coll. on certain emergency measures in connection with the spread of the dangerous contagious human disease COVID-19 and in justice.

Temporary Protection of Entrepreneurs

In a rather significant way, the provisions of temporary protection of entrepreneurs aim to provide a certain time-limited protection to those entrepreneurs who have had their registered office or place of business in the Slovak Republic (before 12 March 2020), and have been affected by the negative economic effects of the spread of COVID-19.

Nonetheless, please note that some entities have been excluded from the protection, for example, banks, electronic money institutions, insurance companies, reinsurance undertaking, insurance companies, etc.

The temporary protection measures include the following:

  • Protection against bankruptcy petitions,

  • The possibility of postponing the obligation to file for bankruptcy,

  • Suspension of executions started after 12 March 2020 (in the case of commitments arising from business activities),

  • A ban on commencing the exercise of a pledge relating to the enterprise, property (assets), right or other assets belonging to the enterprise,

  • A ban on the set-off of a claim of related receivables,

  • A ban on the termination of contracts by contractors due to a delay in performance by the entrepreneur under temporary protection related to COVID-19 and non-threatening contractors,

  • Extension of time limits for claims from contradictory legal actions and for the exercise of the rights (claims) against an entrepreneur under temporary protection,

  • The possibility to give priority to liabilities related to the maintenance of the company's operations, i.e. prioritising the repayment of more junior debt, which is related to the maintenance of business over senior debt,

  • Support for fresh capital financing.

The temporary protection is not granted automatically. Entrepreneurs have to submit an application and its assessment to the competent court based on their registered office at the time of the application. The competent courts for this protection will be the district courts in Trnava, Žilina, Banská Bystrica, and Prešov.

Information about an entrepreneur under temporary protection is published in the Business Journal of the Commercial Register, in the section "Temporary protection". Temporary protection is deemed to have been granted on the day following the date of publication of this information.

Temporary protection should generally last until 1 October 2020. The duration of temporary protection may be extended by the Slovak Government, but for not longer than 31 December 2020. However, the court may revoke the temporary protection “ex officio” (by virtue of the office), if it concludes that there were no preconditions for temporary protection, the preconditions for its provision have ceased, or the entrepreneur under temporary protection has breached the obligations arising under temporary protection.

An entrepreneur applying for temporary protection must meet several preconditions for its provision, in particular:

  • A significant increase in the number of overdue receivables or a significant decrease in its revenues compared to the same period in 2019, which significantly jeopardises the company’s operations. If the applicant did not operate during that period, the comparable period shall be February 2020.

  • The entrepreneur has not been in bankruptcy as of 12 March 2020, and as of 12 March 2020, there was no enforcement proceeding in respect of the company in order to satisfy its claim from its business activities.

  • On the date on which the application is submitted, there are no grounds for winding up, and the effects of the declaration of bankruptcy or restructuring authorisation do not apply to it.

  • In relation to the entrepreneur’s enterprise, property (assets), right or other assets belonging to the company, the exercise of a pledge has not been commenced as of 12 March 2020.

  • In the calendar year 2020, the entrepreneur did not distribute profit or other own resources, or eliminated the consequences of such acts.

  • In the calendar year 2020, beside measures aimed at mitigating the consequences of the spread of COVID-19, the entrepreneur did not take any other measure threatening its financial stability or eliminated its consequences.

  • The entrepreneur maintains appropriate accounts and does not violate the obligation under § 40 para. 2 of the Commercial Code.

Rental protection

Under the new rental protection provisions, the lessor may not unilaterally terminate the lease of the property, including the lease of an apartment or non-residential space, for the lessee's delay in paying the rent, including payments for services normally associated with the lease, which are due in the period from 1 April 2020 to 30 June 2020.

The lessee's delay must be directly related to the COVID-19 pandemic and they shall be prepared to prove such a connection (in case of a dispute). Other reasons for termination of the lease are not affected. Also, the law does not remove the lessor‘s right to rent or cancel rent payments.
Some commentators have already been arguing that this provision is not balanced and is more in favour of the lessees.

In our view, this is also a significant change in the relationship between the lessor and the lessee. We expect that it may cause several unclear situations with the lessee’s ability to prove the link between COVID-19 and the non-payment, and its acceptance from the side of lessors.

The law also rises several questions, for example it does not deal with the lessor's obligation to pay VAT. Also, the application of sanctions for late payment is not addressed. Therefore, we assume that in the case of non-payment of rent and related payments, the statutory (or contractual) interest on arrears will generally arise together with the possible application of contractual sanctions. Additionally, the lessor should still be entitled to use the security deposit or the bank guarantee provided to pay the rent.

Summary

In general, we consider the above mentioned new regulations to be a positive step towards mitigating the impact of COVID-19 (in line with trends in several other countries). However, only time will show the real effects on business in practice.

Also, the situation is changing very rapidly and it is important to stay up-to-date with the new rules as they may have a significant impact on contractual obligations. Although the COVID-19 crisis must end at some point, it seems that COVID-19 will likely have an impact on business for some time to come.

Therefore, it is prudent to act dynamically in regard to contractual relationships, and not only keep up with the new regulations, but also set up the legal and business aspects – such as invoicing/pricing, securities and guarantees, dealing with non-performance (postponed performance), force majeure, and overall flexibility of certain obligations (milestones, deadlines, key personnel deputies), i.e. reviewing contracts for continued relevance. It is also worthwhile thinking about the contractual set-up post-COVID-19 as it is likely that this will not be the same as it was before.