Law and regulation of rental agreements in Croatia during Covid-19

Updated on 10.04.2020

No - in general not. These rights are available to the lessee solely if agreed in the underlying lease agreement.
However, the lessee may request change of the contracted terms - including reduction of the rent amount due to the extraordinary external circumstances, which were not possible to predict in the moment of entering into the lease agreement (clausula rebus sic stantibus). But if the parties do not agree on the rent reduction i.e. the lessor does not accept the lessee's request, the lessee could only request from the court to terminate the agreement.

The lessee may close the leased space on its own initiative, unless he is obliged to operate permanently under the lease agreement. But the lessee would not be entitled to request rent reduction in that case. This answer however assumes that the underlying lease agreement does not envisage otherwise (as already indicated), and/or that the reason for the lessee closing down the premises, does not lie (i) in a defect for which the lessor is liable or (ii) in an event, which is attributable to Force Majeure.

The Croatian Government has not yet (status as of 10. April 2020) adopted special official acts or legislative measure that directly authorise a lessee under a lease btw. commercial subjects (private lease) to (a) reduce/defer or stop rental payments or (b) adjust/terminate the lease agreements, due to the COVID-19 pandemic.

For lease of state-owned properties / premises, the Croatian Government has however adopted a decision for deferral of payment of annual rent for 3 months. As long as deferral is in place, the Republic of Croatia will not claim statutory default interest nor be allowed to declare a cancelation or termination of the underlying lease agreement on the grounds of non-payment of rent. When it comes to lessees under private lease, Croatian Civil law envisages certain legal consequences on the lease relationship btw. the parties in case (i) the principle rebus sic stantibus applies / could apply, i.e. change of circumstances; OR (ii) the lessor is not able meet contractual obligations due to Force Majeure. In the latter case, one of the parties of a lease becomes unable to fulfil its contractual obligations, where the reason (underlying circumstances) for the inability to fulfil the contractual obligations meets the following criteria: (i) the reason is of extraordinary and external nature; (ii) has occurred after the parties entered into the contract itself; (iii) could not have been possible to predict in the moment of entering into the subject contract nor could have been prevented or avoided, and (iv) cannot be attributed to either party.

The legal consequences of this situation, however, depend on whether a complete or a partial inability to fulfil one’s contractual obligations occurs. Regarding the question of rental payment, only a partial inability is of importance. Partial inability: If the lessor is unable to provide the leased object into the lessee's disposal for a short(er) period of time (i.e. the lessor is unable to meet its contractual obligation), the Croatian law gives the lessee the possibility to either terminate the lease (if the partial fulfilment of the lease does not meet the lessee’s needs, whereby a unilateral statement by the lessee will suffice) or keep the lease in place, while asking for a proportional reduction of his obligation (proportional reduction of rent). An additional point that must be addressed: in some cases, the lease agreements include specific clauses regulating the situations when due to certain circumstances, a lessee is not in the position to use the leased object. Such clauses would also have to be reviewed in each subject case – as it is possible that these apply as a priority to the above cited rules.

Bank guarantees are more common in B2B transaction and deposits in B2C transactions - but both (bank guarantees and deposits) regularly apply. Also, lease agreements are regularly concluded in form of enforceable deeds. in such case, the lessor is entitled- if so agreed - to initiate enforcement proceedings for the purpose: (i) of settlement of lessor`s claims and (ii) the repossession to the leased object free from persons and objects, without first initiating proceedings to acknowledge his claim against the lessee..

Based on the rebus sic stantibus principle - if the parties do not agree on changes of the lease agreement (or the lessor does not consent to the changes) and the lessee still wants to terminate the lease, he would be obliged to request the court to terminate the lease . In such a case, the lessee would be obliged to prove before the court that (i) the circumstances at hand make it excessively onerous for him to fulfil his obligations under the agreement, or (ii) he will suffer an excessive loss due to the subject circumstances. Of course, the probability for the court to confirm that one of the mentioned requirements have been met, depends materially on the specific circumstances.

Alternatively, if the lessor is unable to provide the leased premises / property at the lessee's disposal due to Force Majeure, the lease agreement would cease ex lege and the lessee would be released from the obligation to pay the rent for the period it was not able to use the premises. The current legal theory and court practice consider that complete inability has to be of a permanent nature (e.g. fire or flood has destroyed the leased premises / property) and/or jeopardize the purpose of the lease agreement. In case a partial inability to use the leased premises exists due to Force Majeure, please see our answer to question 3. above.

The COVID-19 situation by itself does not entitle the lessee to invoke force majeure i.e. to request one of the legal options which are granted under the force majeure provisions in the Croatian Obligations Act. However, as measures affecting a wide scope of business activities have been imposed, it is not excluded that the lessees may request one of the current options at their disposal – either a proportional reduction of obligations (i.e. rent payment), or termination of the lease agreement (please see our answer under 3 above). It is more likely that these rights can be successfully exercised by a lessee in retail sector (excluding food sales industry), rather than by a lessee renting and office space (at least for as long as full quarantine and ban of all activities has not been imposed). This due to the fact that current and announced COVID-19 measures have smaller impact on office business activities, considering that their employees can temporarily work from home and the regular business activities of such lessees are – in general – less affected.

It remains to be seen if the competent authorities will issue acts / change laws to address the rights of contracting parties to terminate / amend lease agreements due to complete or partial inability to fulfill their contractual obligations (such inability being a consequence of the imposed restrictions).