The City of Prague and Copa Retail, the owner of Škoda Palace where Prague’s City Hall resides, have agreed on a reduction of payments for Škoda Palace by 33% until the end of the lease agreement. The proposed arrangement is subject to the approval of the Prague City Council planned for 7 June and to a subsequent discussion at the June session of the Prague Municipal Assembly.
“The settlement of the Škoda Palace lease agreement was one of the priorities that I set for myself when assuming my office, and I am happy that we have completed the task successfully. We never disputed the quality of the building. The only viable option was discussing a potential discount because the City had not achieved anything in litigation and Prague just kept on losing tens of millions of crowns every year,” said Mayor of Prague Adriana Krnáčová.
“I have always said that a reasonable dialogue could lead to major savings, which is what the current top City officials have achieved. While we had a markedly stronger legal position, our chief priority and pursuit was to reach an agreement even though we were not pressed to do so. The arrangement represents an adequate, reasonable and both legally and financially solid compromise for either party,” said Abigail Schaeffer, member of the Board of Directors of Guyana Holding, the company that owns the majority of Škoda Palace through Copa Retail.
The parties were involved in litigation for almost four years. Under the arrangement, all disputes will be discontinued including Prague withdrawing the appeal it filed with the Supreme Court. The deal resulted from the effort of a team of negotiators that included Councillors Jan Wolf and Radek Lacko, Director of the Prague City Hall Martina Děvěrová and the legal team of the Císař, Češka, Smutný law firm on behalf of Prague.
“At first, both parties had prejudices stemming from the unsuccessful discussions of the previous years, and Prague was now in a disadvantageous position. Eventually, a compromise was found, giving the City enough time to look for new city administration headquarters, with staying in the Škoda Palace building being one of the alternatives. After the Council and Assembly approve this, the City Hall could obtain a discount of CZK 860 million. In addition, these savings would grow over the next ten years due to inflation. In effect, the agreement would bring the City savings of almost one billion crowns,” added Councillor Jan Wolf.
“We have been through seven months of long discussions that both parties undertook with their respective ideas of the result. We can be satisfied with the agreed discount of 33%, which approaches one billion crowns. Under the arrangement, the lease term will be extended by one and half years and the agreement will end in the spring of 2028. Despite concessions on either side, this arrangement is very advantageous for the City,” said Councillor Radek Lacko.
The arrangement will normalise the business relationship between both parties and turn a somewhat non-standard agreement into a balanced deal, protecting both parties’ rights better. The saving of almost one billion is the biggest benefit for the City. The arrangement was made under conditions that were difficult primarily on the part of the City, as its position had been made complicated notably by losing the previous trials before courts of both instances, including final rulings on appeals.
Details of the proposed arrangement:
Financial aspects: If the agreement is signed by 30 June 2016, the discount will apply retroactively from 1 April 2016 and will amount to CZK 860 million, which means a 33% reduction of the current amount of payments until the discharge of the agreement.
Purchase option: The City waived the purchase option the necessity of which had been subject to considerable doubt, choosing the saving of almost one billion crowns instead. If Prague chooses to buy the building it can approach the owner at any time. The discharge of the option poses no obstacle to this possibility. Since the former agreement from 2006 was full of non-standard and unclearly worded provisions, the application of the option by the City would most likely result in a dispute over price.
Change of currency: Both parties agreed to change the contractual currency from CZK to EUR. This makes contract financing easier for Copa Retail. The City will hedge itself against currency risks, which will represent no additional costs. In fact, since the Czech crown is expected to strengthen vis-à-vis the euro, Prague will ultimately save as a result of the switch to the euro.
Extension of lease: The parties agreed an extension of the lease agreement by an additional 18 months, i.e. in principle until Q1 2028. Copa Retail requested the lease extension to secure its return on investment. On the City’s part, it will provide more time to prepare the potential alternatives for the City’s residence after 2028, which include staying in Škoda Palace because of the building’s convenient location in the city centre.
Discontinuing pending litigation: The City of Prague has decided to discontinue all litigation instead of continuing to take its chances in court. While the City lost both in the first and second instances, it eventually achieved its goal – reducing the payments – and prevented further losses thanks to negotiations.