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Avoiding Pitfalls with Public Sector Leases

Avoiding Pitfalls with Public Sector Leases

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The public sector should ensure that dealings with public property are transparent and economically beneficial to the public.

For this reason tendering and similar legal requirements normally need to be followed when public sector entities have property dealings with the private sector. One such requirement binding on Czech municipalities and regional governments is the prior disclosure, via an official bulletin board, of an intention to dispose of public property. The Supreme Court has extended this requirement in one of its recent decisions.

The law requires municipalities (and regional governments) to disclose their intention to sell, rent or otherwise dispose of public property for at least 15 days before the relevant transaction is approved (the period for regional governments is 30 days). Authorities are required to do this on an official bulletin board so that potential bidders can comment and/or submit bids.

Compliance is no mere formality. Indeed, if a municipality disposes of property without first publicly disclosing its intention to do, the transaction will be invalid. That means that, in the case of a sale of real estate, the purchaser will not become the property owner and the purchase price received by the seller will form unjust enrichment, which should be returned. All parties involved therefore have an interest in respecting the rules.

In one of its recent decisions, the Czech Supreme Court dealt with a case in which a Prague borough leased real property to a business entity. The intention to do so was disclosed beforehand and other statutory requirements were complied with. However, the lease agreement was subsequently amended so as to change the lessee. The borough’s intention to do this was not publicly disclosed in advance.

While the appellate court held that no disclosure requirement applied in this case, the Supreme Court held otherwise, stating that the amendment actually terminated the original lease agreement and created a new one. The public should therefore have been made aware of this in advance. The Supreme Court held that the borough had acted in a discriminatory manner that prevented potential bidders from submitting bids (perhaps better ones) or at least from commenting on the disposal. The amendment was found to be invalid from the outset (ex tunc).

In summary, then, when a lease amendment involves a change of parties (in the present case, a new lessee of real property), the intention to enter into it must be disclosed on an official bulletin board beforehand. This requirement applies to municipalities and regional governments alike. The Supreme Court’s decision extends its already very extensive case law regarding disposals of public property.

By Christian Blatchford, Counsel, and Josef Kríz, Lawyer, Kocian Solc Balastik

Ukraine Knowledge Partner

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