The COVID-19 epidemic and consequent restrictive measures strongly affected Slovenia’s economy, including the country’s rental market. The COVID-19 epidemic impacted all commercial leases, with tourism, hospitality, and to an extent retail among the sectors suffering most. Commercial properties with strong tenants such as IT & Life Science companies and public sector entities proved to be much more resilient than commercial properties dependent on tenants from distressed sectors.
But every crisis is an opportunity in disguise. This article provides a short overview of the (temporary) legislation adopted in response to COVID-19’s impact on commercial leases.
State Intervention Measures Adopted to Mitigate the Consequences
Tenants under Slovenian law are in general not entitled to postpone or withhold rent payments during epidemics, unless explicitly allowed to by the lease agreement. Except for an exemption from rent available to tenants of state and municipality-owned commercial real estate, there were no state intervention measures adopted to help tenants who were banned from performing their business activities during the first lockdown in 2020. Many tenants finding themselves in a difficult financial situation tried to agree on a deferral or reduction of rent with their landlords, but only some succeeded. Many companies that implemented remote work have been negotiating rental incentives, rent-free periods, and earlier lease terminations.
Only in December 2020 were certain measures adopted to help the tenants of privately-owned commercial real estate. As of December 31, 2020, tenants who are prevented or significantly restricted from carrying out economic activities and cannot use leased premises in whole or in part for the agreed-upon purpose due to state-adopted intervention measures can now terminate those lease agreements with eight-days’ notice. This measure represents a deviation from the Commercial Buildings and Business Premises Act, which provides that lease agreements concluded for an indefinite period must be terminated through the court and with a minimum of one-year’s notice. If termination of lease is not in a tenant’s interest, he can request a deferral of payments under the lease agreement or an extension of the lease from the landlord if the agreement has been concluded for a definite period. These measures are currently valid until June 30, 2021, but the government may extend them for an additional six months.
Under certain conditions, tenants and landlords can also benefit from the partial reimbursement of uncovered fixed costs. This measure is targeted at legal entities from economic sectors that were prohibited by governmental decree from offering goods and services to customers, and which consequently saw revenues fall sharply during the eligible period. The measure was originally adopted for the period from October 1 to December 31, 2020, but the government has already extended it until March 31, 2021.
In practice tenants have mainly requested a deferral of financial lease obligations and/or partial reimbursement of uncovered fixed costs, with lease terminations based on adopted measures rarely attempted.
Looking to the Future
The temporary nature of the state’s intervention measures raises the question of whether these measures should be permanently enacted for situations like epidemics. The Commercial Buildings and Business Premises Act is already outdated and in desperate need of reform. As the current law has proved to be insufficient in addressing situations such as this epidemic, we believe it would be worth considering amending it in this respect.
So far, the new measures have not had much impact on the rental market. Most tenants have not yet used their right to terminate leases, and therefore, despite a slight decline in demand due to the COVID-19 epidemic, we do not expect a flood of free office space. Average rents for business premises are expected to remain stable, as there is a shortage of quality premises. Even though remote working is currently on the increase, it will probably represent only an occasional way of working in the long-term. Therefore, downsizing of leased office space is unlikely. Average rents for industrial space are expected to remain stable for modern premises, while downward rent pressure will continue for outdated industrial space. Due to the continuous growth of e-commerce, increased real estate development in the logistics sector is expected in coming years.
By Dunja Jandl, Partner, and Vesna Tisler, Attorney-at-Law, CMS Reich-Rohrwig Hainz Slovenia