In business relationships, it is typical to require the other party to provide some form of guarantee that they will fulfil their part of the obligation. One such guarantee, though not very common in Czechia, is a letter of comfort (LOC). This is usually a statement from the parent company to a creditor ensuring that the subsidiary company will meet its obligation. Unlike, for example, a guarantee, the parent company does not commit itself to fulfil the obligation on behalf of the subsidiary. Conversely, a letter of comfort may merely express the parent company's support for the transaction.
In the Czech Republic, it is common practice for a municipality to issue a letter of comfort for a company in which the municipality holds a stake, typically in favor of a lending bank. The reason is that, with few exceptions, the law prohibits municipalities from guaranteeing the obligations of other entities. Sometimes, however, a letter of comfort is worded in such a way that it effectively acts as a guarantee. This can be problematic because the Municipal Act stipulates that such guarantees are invalid.
When drafting a letter of comfort from a municipality, careful attention must be paid to the wording. This also applies to other forms of guarantees, where it is advisable to consult in advance about the available options and their advantages and disadvantages. Many of these guarantees are not mentioned in the law at all, or it may not be immediately clear in which situations they can be used.
Our law firm regularly helps clients select the appropriate security instrument for their specific case and ensures that it is set up efficiently and in compliance with legal regulations. If you are interested in consulting on your case, please do not hesitate to contact us.
