Article

COVID-19, short-time work, loss of income, shop closures, curfew

Effects of the COVID-19 pandemic on existing tenancies  

Background

"A little sacrifice saves lives." On 18th March 2020 German Chancellor Angela Merkel clearly emphasized the seriousness of the situation. The prohibition of the operation of commercial enterprises, educational institutions, restaurants and the possible expected curfew are necessary measures in the fight against the new COVID19 ARS-CoV-2.

The Chancellor's clear statements are very welcome, as are the measures taken recently to contain the pandemic. However, they make it clear that the COVID-19 pandemic and the measures adopted to contain it (#flattenthecurve, #wirbleibenzuhause = #westayathome) also represent a major challenge for the entire population in terms of their economic consequences.

The pandemic threatens - in addition to health as the greatest good of every human being - especially entrepreneurs and tradespeople as well as employers and employees, landlords and tenants. High losses and considerable damage have been recorded or are to be feared. In this respect, the Chancellor made one thing clear: "The coming weeks will be even more difficult".

In dealing with the pandemic and its consequences, numerous legal questions arise, the answers to which are not always easy in view of the novelty of the facts and which also cause a certain amount of uncertainty among market participants.

At the same time, much is in flux and the government and legislators are trying to mitigate the economic consequences for market participants with a variety of measures, including legislative measures.

Among the questions regularly raised in the course of dealing with the consequences of the pandemic are those relating to tenancy law.

Residential tenants ask themselves what will happen if, due to the economic consequences of the pandemic, they are no longer able to pay their rent on time, for example because of reduced pay due to short-time work, loss of income for the self-employed or even unemployment. Commercial tenants are faced with a situation in which they could, in principle, continue to use the rented property, but such use makes little business sense - or even orders to prohibit or close down operations. Some commercial tenants are also subject - at least according to the wording of the lease agreement - to a duty to operate, which in principle obliges them to maintain operations.

Landlords have calculated with regular rental income and may make their living from it, have based their profitability calculations, liquidity planning and financing on regularly recurring rental income, see themselves exposed to payment obligations to third parties and ask themselves how they can deal with large-scale loss of rental income in the event of economic difficulties.

The following article attempts to provide a brief overview of the current and possible future legal conditions and opportunities for tenants and landlords - with a focus on commercial leases and an attempt to take into account recent developments in a dynamic environment.

Update 24 March 2020:

Planned amendments to the statutory provisions regulating lease agreements pursuant to the COVID-19 Pandemic Law

On March 23, 2020, the Federal Cabinet passed resolutions to further complete the announced packages of measures to mitigate the consequences of the Pandemic.

The main building blocks are primarily an emergency aid programme for smaller companies, freelancers and the self-employed with a volume of up to Euro 50,000,000,000 and the establishment of an economic stabilisation fund with a volume of up to Euro 600,000,000,000.

Another important building block from a legal point of view is the draft of a law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal procedure law (hereinafter also referred to as the "COVID-19 Pandemic Law").

It is an article law, of which several preliminary drafts had been "leaked" and made public.

The draft law now approved by the Federal Cabinet, which is to be passed in the Bundestag on Wednesday, 25 March 2020, and for which the approval of the Bundesrat is to be obtained for Friday, 27 March 2020, concerns matters of civil law, insolvency law, company law and criminal procedure law.

Although the approval of the Bundestag and Bundesrat is still pending, it is to be expected that the law will be passed essentially in the version of the drafting aid submitted by the Federal Government. Nevertheless, it should be expressly noted that amendments may still be made.

A summary of the legislative amendments in the field of lease can be found in the second part of the present article.

 

Current law (de lege lata)

What are the consequences of the pandemic for payment obligations from rental contracts?

The basic idea that characterizes German civil law is still decisive: pacta sunt servanda - concluded contracts must be observed.

In a lease, the economic risk is shared between the parties. According to the current understanding, the commercial tenant bears the risk of use and thus the risk of being able to generate income and profits with the leased object. The lessor, on the other hand, bears the risk of the continued usability of the leased object.

Therefore, a rental payment obligation is only waived - subject to special contractual provisions or statutory regulations - if the landlord can no longer make the leased property available. Even in times of COVID-19, many, if not most, landlords are, however, easily able to continue to make the premises provided for rent available as agreed in the underlying contract. The tenant is thus still obliged to pay the rent.

Exceptions are conceivable, but should not be the rule. For example, the case is being discussed in which the contractually owed provision of the building which is the object of the lease requires the use of personnel to be provided by the landlord and the landlord is no longer able to meet this obligation due to the effects of the pandemic. In this case, there could be a defect in the leased property and thus the obligation to pay rent no longer applicable or a right to reduce rent.

A lack of turnover - for example due to the overall economic situation, restrictions on exit, or a zoning agreement - thus falls within the sphere of risk of the tenant as an entrepreneur and does not lead to the lapse or limitation of his obligation to pay rent.

The situation may be different if the landlord has assumed the tenant's business risk in whole or in part, for example on the basis of a turnover-based rent. Where turnover-based rent has been agreed, the underlying contractual relationships have to be examined to determine the distribution of risk in each specific case.

The risk allocation described above also applies - at least in principle - where a tenant has subjected himself to an obligation to operate, i.e. where he has not only obtained the right to use the leased property through the lease, but has also undertaken to operate and maintain a shop or otherwise run a business. Unless otherwise agreed with the landlord, the tenant who is subject to an obligation to operate is thus not released from his obligation to operate even in times of crisis.

Current law (de lege lata): Lockdown! - What applies if I am no longer allowed to use the rented premises?

For the duty to operate, an objective impossibility in accordance with § 275 BGB (German Civil Code) must be assumed in the case of ordinances issued by the authority to close a respective trade even under current law. This means: It is impossible for the commercial tenant to fulfil his duty to operate as stipulated in the rental agreement and he is released from this duty to operate for the duration of the closure order.

Beyond this, however, official closure orders do not justify the assumption of the existence of a defect in the rented property. A reduction of rent is therefore not possible under current law (de lege lata). This is because the government measures relate to specific industries or activities, but not to a specific type or quality of rented space or property. If the landlord makes the leased property available in accordance with the contract, the tenant is generally obliged under tenancy law to pay the rent.

Something else may possibly result from contractual provisions made in the specific individual case. Often the purpose of the lease and use are specified in detail in the contract. In such cases, the landlord may be obliged to hand over the rented property to the tenant in such a way that it is suitable for the agreed use. If a lockdown occurs and the lessee cannot use the leased property as intended for by means of the purpose of lease and use, as stipulated in the lease agreement, the lessor may be considered temporarily unable to fulfil his obligation, namely to hand over the leased property for the agreed purpose. The landlord would then for the duration of the impossibility be released from his obligation and the tenant from its reciprocal obligation to pay rent. In view of the standard wording frequently found in (boilerplate) commercial leases, however, a landlord's obligation to assume responsibility for the possibility of a certain use of the premises by the tenant would probably be the clear exception.

Furthermore, does the applicable law not provide for the possibility of a "fair balance" and a distribution of risks for which neither party is responsible?

Yes, under certain circumstances. Section 313 of the German Civil Code ("lapse of the basis of the transaction", clausula rebus sic stantibus, material changes clause) regulates a balance between the interest in performance on the one hand and the interest in adjustment or even termination on the other. Thus, § 313 BGB, as an expression of the concept of good faith, can be a tool to adapt existing contractual relationships or even to bring about their termination.

These principles can also be applied in commercial tenancy law. For an application in a specific individual case, it is decisive whether the parties, had they foreseen the outbreak and the effects of the current pandemic, would have made a deviating contractual arrangement and whether each of the parties could reasonably be expected to adhere to the unchanged contract. The examination to be carried out in this respect must always take into account the distribution of risk originally intended by the parties.

Accordingly, the decisive factor for the assumption of an adjustment obligation is whether the pandemic exceeds the basic economic risk of the tenant to such an extent that the parties would have reached a deviating regulation in tenancies despite the basic risk distribution in tenancies described above if they had foreseen the pandemic. Generally valid answers are not possible here - what is required is an examination of the individual case taking into account all circumstances, in particular the form of the respective provisions in the lease agreement taking into account the intentions of the parties. As a result, the assumption that the parties - in particular the landlord in this case - would have agreed to a deviating regulation can only rarely be justified.

Current law (de lege lata): Claims for compensation?

Now that numerous measures have already been ordered to limit the effects and spread of the COVID-19-virus, such as the closure of retail shops that do not serve the basic supply of the population, it is increasingly being discussed whether ordered closures of shops can result in compensation claims.

In the case of lawful action by the public authorities, however, such claims can only exist in exceptional cases, namely in the form of claims arising from an expropriating intervention or so-called claims for sacrifice. This is particularly the case if a person affected is treated unequally compared to others and thus a special sacrifice is demanded of him. However, since the plant closures regularly affect all companies in the respective affected sector, or the unequal treatment is objectively justified - for example, by the presence of proven infections in the (workforce working in the) respective plant - the conditions for compensation in the case of lawful action are likely to exist only very rarely.

At the same time, it cannot be ruled out that ordered plant closures may be disproportionate and thus illegal, at least in individual cases. In such cases, claims for compensation are conceivable, but they will only come into effect if there are no overriding special legal provisions. With regard to plant closures, claims for compensation under the Infection Protection Act (IfSG) are discussed here in particular. However, these claims are unlikely to be affirmed as a rule. Although § 65 IfSG regulates compensation for not only insignificant pecuniary disadvantages, these must, however, have been effected by measures taken by the authorities in accordance with §§ 16, 17 IfSG and thus for the purpose of preventing transmittable diseases. The decisions currently taken by the authorities, on the other hand, are likely to find their basis primarily in 28 para. 1 IfSG and are thus protective measures to combat transmittable diseases, i.e. they relate to the case that the disease has broken out in humans or if there is even a suspicion of disease or infection.

As the law is clear in this respect and also systematically distinguishes between measures for the prevention and control of contagious diseases, a possibility of compensation for the measures currently in force is probably not to be assumed. The same applies to compensation for loss of earnings according to § 56 IfSG - this provision only applies to the individuals concerned.

Current law (de lege lata): Claims under insurance policies?

Whether recourse to the respective insurer is possible requires a case-by-case analysis of the respective damage-causing events, damage that has occurred and insurance contracts including associated conditions. Temporal aspects can also play a role here.

Current law (de lege lata): Exceptional situations entail exceptional obligations

In addition to the agreed essential contractual obligations, care and protection obligations apply between the parties to the rental agreement - even without express agreement. In the current situation, this may result in mutual information obligations in particular. If, for example, a case of COVID-19 occurs in a "multi-tenant" property with regard to the staff of a tenant and a resulting risk to other tenants, visitors or customers of the property cannot be ruled out, the tenant concerned must inform the landlord so that the landlord in turn can inform the other tenants accordingly. In contrast, the general risk of infection of other tenants in the property, their visitors or customers, is to be assigned to the general life risk.

In the event of concrete risks, even more extensive protection obligations may arise, such as an obligation to intensify cleaning and disinfection of common areas.

 

Planned special regulations (de lege ferenda)

The German government and legislators are attempting to cushion the consequences of the pandemic through a variety of measures. The most prominent of these are the measures announced as part of the protective shield for workers and companies affected by the effects of the COVID-19 pandemic. The underlying programme is based on 4 pillars, namely (i) facilitation of short-time working, (ii) tax-related liquidity support for companies, (iii) a so-called "multi-billion dollar protective shield" for companies, and (iv) attempts to strengthen European cohesion. Other measures include planned changes to the obligation to file for insolvency.

An important building block from a legal point of view is the draft of a law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal procedure law" (hereinafter also referred to as the "COVID-19 Pandemic Law"). It is an article law, of which several preliminary drafts had been "leaked" and made public.

The aim of the announced legislative project is to relieve tenants during the pandemic.

According to the current status, a regulation is planned according to which tenants may not be terminated solely due to rent debts from the period from April 1 to June 30, 2020, if the tenant can credibly demonstrate that the delay is due to the effects of the Corona pandemic. Termination for other reasons remains possible.

However, the tenants' obligation to pay rent shall in principle remain in place.

The exclusion of termination is valid until June 30, 2022. According to a preliminary assessment, this is to be interpreted as meaning that if rent arrears from the period April 1 to June 30, 2020 have not been settled by then, termination may be effected again as of July 2022 due to these arrears.

The Federal Government is authorized to extend the regulations by statutory order to rent arrears for the period from 1 July 2020 to 30 September 2020 if social life, economic activity and employment continue to be significantly impaired by the COVID 19 pandemic.

The most relevant lease-related provisions fo Article 5 of the COVID-19 Pandemic Act (con-cerns amendments to the Introductory Act to the Civil Code and matters of contract and civil law that are essential to it) can therefore be summarized as follows:

  • Limitation of the right of termination due to late payment: The landlord or lessor is not entitled to terminate the lease solely due to late payment by the tenant or tenant in the period from 1 April to 30 June 2020, if the tenant can credibly demonstrate that the delay is due to the effects of the Corona pandemic. Termination for other reasons remains possible.
  • Time component: The exclusion of termination is valid until June 30, 2022. According to a preliminary assessment, this is to be interpreted as meaning that if rent arrears from the period April 1 to June 30, 2020 have not been settled by then, termination may be effected again as of July 2022 due to these arrears.
  • Ordinance authorisation and temporal scope of application: The Federal Government is authorised to extend the regulations by statutory order to rent arrears for the period from 1 July 2020 to 30 September 2020 if social life, economic activity and employment continue to be significantly impaired by the COVID 19 pandemic.

The draft law now approved by the Federal Cabinet is to be passed in the Bundestag on Wednesday, 25 March 2020. The approval of the Bundesrat is to be obtained for Friday, 27 March 2020.

Critical voices have been voiced against the plans, pointing out that this "solution" would only postpone the problem and that it would not be to the benefit of landlords and tenants if a considerable amount of rent arrears piled up at the end of the period provided for in the draft law. Instead, the introduction of a special housing benefit is suggested, at least for residential tenancies.

The owners' association Haus & Grund at least initially also feared major disadvantages from the planned change in the law. "According to the currently known plans, the state wants to disengage itself from the almost four million renting private individuals in Germany in an unprecedented way", complained association president Kai Warnecke. The measure is suitable to "drive millions of private owners into insolvency". The association demanded, among other things, that a dismissal exclusion be linked to "the tenant's ongoing efforts to apply for housing benefits or the costs of accommodation". At the same time, landlords should be entitled to support from a "housing and rent fund".

In an initial statement, ZIA Zentraler Immobilien Ausschuss, the central association of the real estate industry, welcomed the proposals of the federal government to protect tenants and landlords in the wake of the economic effects of the Corona crisis. "The measures proposed by the Federal Government are a good and important first step, but will probably not be sufficient to sufficiently mitigate the consequences of the COVID-19 crisis. Therefore, further, more far-reaching measures will have to be investigated next week", explained ZIA President Dr. Andreas Mattner. He added that not everything fits together yet in terms of design, in particular with such a massive intervention, the deadline for such measures must first be set at three months in order to then reassess the situation. For the area of residential rent, the ZIA demands that the legal package be thought through to the end and not to leave it at aid packages for needy tenants, but to enable tenants to pay the rent again promptly, as otherwise the system of the entire housing industry would be endangered. With regard to commercial leases, the ZIA points out that although it is expedient to rescue ongoing projects, a solution based on an intersection of fundamental civil law principles of service and consideration can only work if tenants are obliged to make use of the federal government's support measures. The ZIA welcomes rapid action to avoid unnecessary insolvencies, but stresses that it must be ensured that largely all contracts are covered and that there are no unilateral gaps in contractual chains. "It's about the needy", says ZIA President Dr. Andreas Mattner: "The claim [to take advantage of the new legal regulations] must be linked to the economic or actual situation of the tenant, so that the claim does not exist if the rent can be paid by economically sound companies or tenants without loss of turnover".

All market participants are advised to observe further developments carefully and to address any need for action immediately. Depending on the structure, this may mean for tenants that they have to maintain the causality of the pandemic for payment difficulties and make use of subsidies, for landlords that they have to adjust their liquidity planning, review existing loan agreements, ensure compliance with financial covenants and, if necessary, review and implement measures to secure liquidity - as far as these appear possible - and again make use of public subsidies.

We will keep you informed about further legislative developments - in view of the current dynamics, interactions with other measures will certainly have to be given priority, such as the obligation to file for insolvency, developments with regard to the KfW programmes, etc.

 

Joint management of the unprecedented situation

Even if in the end the concrete individual case and the recorded agreements will be the deciding factor - In times of COVID-19 and the current pandemic phase, it is advisable to join forces with the contractual partner against the background and with the intention of a consensual, interests-balancing and yet problem-solving agreement. There is a common interest to keep the respective opposite party as a contractual partner.

The loss of the premises and possibly of the operation is counterbalanced by the loss of rent and ultimately the re-letting, which is difficult to realise in the pandemic phase. Corresponding negotiations should therefore be well prepared on both sides, taking into account and referring to the possibilities discussed here.

 

"Historical task" with a perspective

The COIVD-19-induced crisis is an exceptional situation. An exceptional situation that must be dealt with. An exceptional situation that will characterize and be characterized by legislation, courts and cases to be decided in the future. It remains to be seen how, in particular, the distribution of risk will be handled - something that cannot be answered with certainty at present.

However, in view of the uniqueness of the situation and taking into account the principle of good faith, it is conceivable that adjustments and novel, contemporary decisions will be made, and in some cases this is already apparent.

 

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