Contractual penalty in lease

The current wording of Act No. 89/2012 Coll., The Civil Code, as amended (hereinafter the "Civil Code") does not allow the lessor to negotiate a contractual penalty with the lessee in lease contracts for an apartment and a house. If such provisions were contained in the lease, it would only be putative in accordance with Section 2239 of the Civil Code and would not be taken into account. The lessor can demand rent, advances or costs for services, legal default interest or damages and the deposit of a financial security according to Section 2254 of the Civil Code can be negotiated. The financial security ensures that the lessee pays the rent and fulfills other obligations arising from the lease, while its amount may not exceed the treble of the monthly rent.

Previous Act No. 40/1964 Coll. (the “old” Civil Code) allowed the parties to negotiate a contractual penalty for leases. The legislator drew inspiration for the change from foreign legislation, for example from Germany, specifically the provision of Section 555 BGB that prohibits the negotiation of a contractual penalty in a rental relationship, or from the Netherlands. [1] As the lease is always governed by the current Civil Code in accordance with Section 3074 of the Civil Code, the lessee of an apartment or house cannot be required to pay a contractual penalty, even if it was agreed in the lease under the old Civil Code [2].

In the planned amendment to the Civil Code, the legislators again plan to allow the lessor to negotiate a contractual penalty with the lessee in the lease agreement. Specifically, the part prohibiting the negotiation of the obligation to pay a contractual penalty by the lessee in the provisions of Section 2239 of the Civil Code is to be deleted and Section 2254 will read as follows: “If the parties stipulate that the lessee will give the lessor a pecuniary security guaranteeing his payment of the rent, and that he will fulfil other duties arising from the lease, or if the parties stipulate a contractual penalty in case of breaching these duties, the security and the right to a contractual penalty may not be more than treble of the monthly rent.” The above-mentioned draft amendment to the law was approved by the government on 4 February 2019, it is Parliamentary Press No. 411. The Guarantee Constitutional Legal Committee last commented on it, after discussing the bill, and issued amendments thereto on 13 December 2019. The second reading of the amendment in the Chamber of Deputies will now follow.

Due to the high rent, especially in Prague, the pecuniary security can be a significant complication for potential lessees. Not everyone can afford to pay, in addition to rent, an amount of tens of thousands of crowns. On the other hand, the lessor must keep in mind that at the end of the lease, he must have enough resources to return the pecuniary security, together with default interest, to which the lessees are entitled by law. Since the forthcoming amendment, the legislator promises greater affordability of rental housing and the strengthening of the preventive function that the contractual penalty is to fulfill [3].

The precondition for the lessor's right to set-off the amount due against the pecuniary security is non-payment of rent or damage that must occur in a causal link with the breach of obligations arising from the lease. It can currently be difficult for lessors to prove the right to compensation and the amount of damages, which should alleviate the re-establishment of a contractual penalty. The contractual penalty fulfills the function of a generalized compensation of damage, which should lead to the prevention of disputes about the amount of damage caused and save the parties the costs of quantification and proving of such damage.

The submitted draft amendment to the law further reflects the interests of the state budget. The pecuniary security can be considered as a justified cost of housing in accordance with the provisions of Section 34 of Act No. 111/2006 Coll., On Assistance in Material Need, and such a cost may justify the granting of extraordinary immediate assistance. Negotiating a contractual penalty instead of the obligation to provide a pecuniary security could thus make it easier for the state budget.

The maximum amount up to which they can agree on a pecuniary security and / or a contractual penalty, i.e. treble of the monthly rent, will remain unaffected. The combination of pecuniary security and contractual penalty will be possible; the contracting parties may set their mutual rights variously, e.g. the deposit of a monthly rent and a limit for a contractual penalty of double of the monthly rent. Here, in my opinion, also lies a ground for a possible practical pitfall of the applicability of the contractual penalty. How big will be the motivation of lessors to negotiate the contractual penalty with the lessee instead of pecuniary security? If there is a sufficient demand for rental housing, the lessor will not be interested in waiving the requirement to lodge a security. As a model situation, we can imagine that the lessee will not pay the rent in two months. If a pecuniary security has been provided, the lessor will simply set-off the receivable of the double of monthly rent. If the parties agree on a contractual penalty (and not on a pecuniary security), the lessor's right to the rent due is not guaranteed in any way and the contractual penalty will not help him in terms of enforceability.

I do not perceive the reintroduction of the possibility of negotiating a contractual penalty for renting flats and houses negatively, but I am skeptical about its practical impact. I assume that most lessors will still prefer pecuniary security, which has a reimbursement function in the most common rent violations.

 Author: Dominik Beran

This article was published on © EPRAVO.CZ and can be found here (in Czech):

 [1] Explanatory memorandum to the Civil Code is available >>> here.

[2] Compare with the decision of the Regional Court in Hradec Kralove – branch office Pardubice from 3.8.2017, file no. 22 Co 121/2017.

[3] Explanatory memorandum to the draft of proposal to the change of the Civil Code, Parliamentary press no. 411/0, part no. ¼, amendment to the Civil Code, available >>> here.