Can unsatisfactory economic performance be used as grounds for terminating a fixed-term lease?

With effect from 1 January 2014, the Civil Code introduced the possibility to terminate the fixed-term lease of an apartment in the event of a change in the circumstances on which the parties evidently based the decision to enter into the contract to such an extent that the tenant cannot be reasonably required to continue with the lease.

This provision not only applies for the lease of apartments, but also for the lease of premises for business purposes in accordance with Section 2311 of the Civil Code.

However, the Act does not specify what circumstances are considered serious enough that their change could justify the termination of a fixed-term lease. The Act thus leaves a wide margin for interpretation by the parties. However, the interpretation of the lessee and the lessor may differ diametrically, in which case the court must decide.

The Supreme Court recently dealt with a case where a lessee terminated the lease of business premises due to a substantial change in circumstances, which it saw in a failure to achieve the economic results it had expected.

The lessee, the operator of a canteen, rented a canteen on the lessor’s premises. The previous operator had entered into catering contracts with the other tenants on the premises, whose employees had frequented the canteen for lunch. The lessor had provided the lessee with information on the number of these employees, as well as the prices for which the previous operator had provided lunches.

Although the lessor did not guarantee that the lessee would operate the canteen under the same terms, the lessee based its decision to enter into the contract on the assumption that the number of employees coming for lunch would remain the same.

Other tenants (employers), however, terminated their catering contracts with the lessee over time, or they offered their employees a different form of catering, particularly in the form of meal vouchers, and their employees stopped attending the canteen for lunch.

The lessee therefore gave the lessor notice of termination on the lease of the premises with reference to the change in the circumstances on which the lessee based its decision to enter into the contract.

The lessee argued that when concluding the lease agreement, it had assumed the current situation would remain unchanged, as the staff canteen had been operated on the lessor’s premises for decades before the lessee entered into the contract, so the lessee expected to continue operating the canteen for decades to come.

The lessee’s notice was therefore basically justified by the fact that the lessee was not doing as well in its business as it had expected in the light of the previous tenant’s results.

So how did the courts tackle the question of whether unsuccessful business can be grounds for terminating a fixed-term lease?

The Supreme Court concluded that it was necessary to differentiate between objectively existing circumstances (conditions, situation) and assumptions that the parties create based on these circumstances.

The fact that the parties entered into a lease agreement in a situation where catering services had been provided by the previous canteen operator, who had concluded catering contracts with individual employers on the premises, could not lead the lessee to legitimately assume that the number of employees coming for lunch would remain the same.

The possibility that employers would not conclude catering contracts with the plaintiff or terminate their contracts during the lease relationship, or that the preferences of employees would change, can be classified as business risks. According to the Supreme Court, however, the provisions of Section 2287 of the Civil Code are not intended to protect against business risks.

Thus, the Supreme Court concluded that the mere fact an entrepreneur does not achieve the economic results it anticipated (or that it initially achieved) is not a change in circumstances permitting the termination of a fixed-term lease.

According to the Supreme Court, notice on the grounds of a substantial change in circumstances allows tenants to respond to exceptional and unforeseen situations in cases where it would be unfair to require them to continue with the lease.

Although there is still insufficient case-law to sufficiently define these circumstances, it is conceivable that notice of termination by a restaurant (canteen) operator would be justified due to a ban on smoking in all restaurants and the associated outflow of customers, or a ban on raising animals for fur for a fur farmer and the like. In such cases, there is no doubt that this is an exceptional and unforeseeable situation, where legislators fundamentally change (or even forbid) conditions for the operation of such a business.

Thus, when a lease is terminated due to a substantial change in circumstances, it is always vital to carefully assess whether the grounds in question are indeed sufficiently serious to justify such termination. Otherwise, the lessee exposes itself to the risk of wrongful termination, as in the case of the aforementioned canteen operator.

Consequently, it is always advisable to seek professional legal advice to assess the legitimacy of termination before giving notice due to a substantial change in circumstances.

For more information, please contact our office’s partner, Mgr. Jiří Kučera, e-mail: jkucera@kuceralegal.cz ; tel.: +420604242241.

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