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Falling flat

Regulated rent issue heads to human rights court as a group of landlords seeks 50 billion Kč in compensation

By František Bouc
Staff Writer, The Prague Post
February 28th, 2007 issue

Jan Přerovský/THE PRAGUE POST
Due to rent laws, Girolamo Giormani hasn't received the return he expected when he bought this Vinohrady building in 1990.
Italian property investor Girolamo Giormani arrived in Prague in 1990 with hopes of hitting the jackpot on the real estate market.
“Buying a house in Vinohrady will be like taking over a property at London Picadilly, but such an investment in London is already out of the question,” he recalled thinking at the time.
The 56-year-old sold his London properties, moved to Prague and bought six houses and three stores around the Czech Republic. Although his properties were occupied by tenants who paid controlled rents well below the rising market standard, the possibility of deregulation made it likely he could soon expect a good return on his investment.
Seventeen years later, the sure thing has slowly become a money trap. Giormani puts his total losses at 65 million Kč ($3 million), and he still has four tenants who have regulated rents, some of whom pay 30 Kč per square meter per month — a tenth of the current market price.
For Giormani, that’s not just bad business, it’s inhumane. He coordinated with hundreds of other building owners in the Movement for the Protection of Real Estate Owners (HOMR), which filed 217 lawsuits with the European Court of Human Rights in Strasbourg, France, in 2005. The court will hear those cases this spring. But the lengthy fight took an unexpected turn in mid-February, when the Civic Association of House Owners (OSMD), which itself has another 40 lawsuits pending in Strasbourg, said it would withdraw its suits if the government agreed to kill regulated rents and pay building owners 50 billion Kč.
“Rather than waiting for the court’s decision, we will agree to receive quick compensation,” OSMD Chairman Tomislav Šimeček said. He added that 12 billion Kč will go to the 4,500 OSMD landlords and the rest will go to landlords outside OSMD.
Klára Veselá-Samková, an attorney representing the group, said OSMD members would accept government bonds or tax breaks in lieu of cash.
The Regional Development Ministry responded by announcing that any out-of-court settlement is not realistic since it is virtually impossible to agree on particular terms with every single landlord who filed a lawsuit.
It is difficult to determine how many Czechs are paying regulated rent, in which tenants pay low prices for their flats. Regulation applies to tenants who have lived in the same flat since the end of the communist era. The government estimates that 29,000 landlords have lost nearly 175 billion Kč in potential rent.
Lingering effects
Many tenants who pay regulated rent are aging pensioners who have lived in the same flats for decades, but some are wealthy and powerful people.
“Among tenants who enjoy regulated rents in Prague are not only elderly people, but also rich business leaders such as the Czech National Bank’s governor, Zdeněk Tůma, and ČSOB CEO Pavel Kavánek,” Giormani said.
While government representatives, including embattled Regional Development Minister Jiří Čunek, rejected the 50 billion Kč settlement as impossible, they admitted that landlords are harmed by rent regulation and agreed to negotiate introducing fairer conditions on the housing market.
This willingness to negotiate may stem from similar Strasbourg rulings that sided with landlords in Poland and Malta and forced those governments to compensate landlords and amend their laws accordingly.
Still, Čunek said his ministry is hiring top lawyers for the case, and he insisted the government’s odds of success are higher than those of Poland and Malta.
“The Strasbourg court could be lenient toward us because we’ve already started rent deregulation and also work toward immediate improvement of the situation on the housing market,” he said.
The government kicked off deregulation Jan. 1 that includes a 19.2 percent increase in rents per year until 2010. This will affect about 760,000 apartments throughout the country, or roughly one-fifth of all private housing. From 2011, rents will depend on an agreement between landlords and tenants.
Čunek said after the Feb. 22 meeting with OSMD representatives that the Regional Development Ministry also agreed with landlord representatives on provisions that will be incorporated into a new Civil Code currently being developed by the Justice Ministry.
“There will be a bigger emphasis that both landlords and tenants reach mutual agreement on the level of rent,” Čunek said. Should landlords and tenants fail to agree, landlords will be entitled to give tenants two years’ notice.

František Bouc can be reached at fbouc@praguepost.com


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