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COVID 19 - Legislator decides in favor of commercial tenants/lessees and adopts statutory presumption

Corona pandemic may give rise to disturbance of the basis of the contract (Section 313 BGB)

The pandemic continues to keep the world on tenterhooks. High infection rates, nationwide store closures - the second lockdown is hitting us all. Now the legislator is attempting to re-regulate the consequences for commercial tenants by referring to the principles of frustration of contract.

Commercial tenants and leaseholders in particular are affected by the new lockdown. Many see their existence threatened because of the renewed and increased restrictions on the usage of commercial rental space.

This brings back memories of the first lockdown: At that time, the legislator felt compelled to intervene and order the landlord termination moratorium as a remedy. As a result, landlords were (and still are) prevented from terminating the lease on the grounds of non-payment of rent for the period from April to June 2020. This measure was intended to give tenants some space to breathe.

For many commercial tenants, however, this breathing space is likely to be exhausted by the second lockdown at the latest. Nevertheless, the legislator decided to not extend the restrictions on termination. This does, however, not mean that the government was or is not aware of the potential dangers - it just wanted to deal with them differently.

On December 13, 2020, the federal government and the prime ministers had agreed on the following further Pandemic-related measure:

"15. For commercial leases and tenancies affected by government COVID-19 measures, there is a statutory presumption that significant (use) restrictions as a result of the COVID-19 pandemic may constitute a serious disturbance in the basis of a contract. This will facilitate negotiations between commercial tenants or lessees and property owners."

This new political program set was then implemented through amendments to the Introductory Act to the Civil Code (Einführungsgesetz zum Bürgerlichen Gesetzbuch, EGBGB), which came into force on December 31, 2020:

Article 240 § 7 Introductory Act to the German Civil Code (EGBGB) Disturbance of the Basis of Tenancy and Lease Agreements.

(1) If, as a result of government measures to combat the COVID 19 pandemic, leased land or leased premises that are not residential premises cannot be used for the tenant's business or can be used only with considerable restrictions, it shall be presumed that a circumstance within the meaning of Section 313 (1) of the Civil Code, which has become the basis of the lease, has changed seriously in this respect after the conclusion of the contract.

(2) Paragraph 1 shall apply mutatis mutandis to lease agreements.

The regulation is valid for a limited period in time, namely from December 31, 2020 to September 30, 2022.

In addition, in order to expedite related litigation between the tenant and the landlord concerning the adjustment of the rent, the legislator has introduced a procedural expediting requirement (“need of speed”) in Section 44 of the Act Concerning the Introduction of the Code of Civil Procedure (EGZPO). Under this provision, proceedings concerning rent adjustments due to pandemic-related government restrictions are to be given priority and expedited treatment. Moreover, an early first hearing is to be held no later than one month after service of the statement of claim.

A ray of hope for commercial tenants and leaseholders?

Already at the beginning of the pandemic, we examined the possible recourse to the legal doctrine of the lapse or disturbance of the basis of the contract (clausula rebus sic stantibus, frustration of contract(Payment of rent in times of the COVID-19 PandemicDuty to operate and protection against competition in commercial lease agreements) and also elaborated on the associated prerequisites and potential difficulties.

The result: Whether a claim for adjustment of the rent based on Section 313 of the German Civil Code (BGB) exists cannot be answered in general terms, but requires - as is so often the case - an examination of the circumstances of the individual case.

Background: Section 313 BGB regulates a balance between the interest in performance on the one hand and the interest in adjustment or even termination on the other. Section 313 BGB, as an expression of the concept of good faith, can thus be a tool for adjusting existing contractual relationships in the sense of a "fair balance" or even bringing them to an end.

Section 313 BGB - The Three Elements

For an application, it is crucial whether – in a concrete individual case –

(i) circumstances that have become the basis of the contract have changed seriously after the conclusion of the contract (real/factual element),

(ii) the parties, had they foreseen the outbreak and the effects of the current virus, would have made a deviating contractual arrangement (hypothetical element)

and

(iii) one of the parties cannot reasonably be expected to adhere to the unchanged contract (normative element).

In the examination to be carried out in that context - at least according to the hitherto prevailing opinion - the distribution of risk originally intended by the parties must always be taken into account. In the case of commercial leases, the traditional understanding is that the commercial tenant bears the risk of use and thus the risk of being able to generate income and profits with the leased property. The landlord, on the other hand, bears the risk of the continued usability of the leased property.

The legislator and the first element

With the new pandemic-driven regulation, the legislator thus creates clarity (only) insofar as the existence of the first requirement is presumed. In the future, the parties (and the courts) will no longer have to argue about this requirement. Presumably, they would have not argued about this anyway - as first decisions show.

The other prerequisites, and thus the questions stirring most of the legal dispute, on the other hand, remain open.

In addition, the question (still) arises as to whether the more specific law on breach of contract under tenancy law (Sections 535 et seq. BGB) takes precedence over the application of Section 313 BGB. If not, this would run counter to the fundamental exceptional character of the legal institution enshrined in Section 313 BGB.  

Current trends in case law

The courts called to decide on the relevant constellations dealt with the issue of a right to reduce the purchase price (Section 536 BGB) for retail spaces during the first lockdown and rejected it (Heidelberg Regional Courts - judgment dated July 30, 2020, 5 O 66/20; Zweibrücken - judgment dated September 11, 2020, HK O 17/20; Frankfurt a.M.- judgment dated October 2, 2020, 2-15 O 23/20; Stuttgart - judgment dated November 19, 2020, 11 O 215/20). In the opinion of the aforementioned courts, the obligation to pay rent - also in terms of amount - remained and continued unchanged. The existence of a defect in the leased property due to the government-imposed closure of retail outlets was denied. According to the general line of argumentation of the rulings, the limitations of the specifically rented object must have their cause precisely in its nature and relationship to the environment and not in the personal or operational circumstances of the tenant. Thus, there is no link between the Corona-induced restrictions and the condition of the leased property; landlords act in accordance with the contract and fulfill their obligations under the lease agreement by leaving the leased premises in a condition suitable for use in accordance with the contract - their obligation does not extend any further.

Although the application of Section 313 of the German Civil Code (BGB) had already been discussed in the course of the proceedings, a claim for adjustment of the underlying lease agreements on the basis of disturbance of the basis of the contract pursuant to Section 313 of the German Civil Code was furthermore only considered to exist if there were severe consequences for the commercial tenant due to the restrictions, endangering its possibility to continue its business. In contrast, the question of the factual element now taken up by the legislator - as the first prerequisite of § 313 BGB - was not an issue of too much debate.

Other than the courts referred to hereinabove, in its ruling of September 22, 2020 (Case No. 3 O 4495/20), the Munich I Regional Court assumed a defect in the rental object and finally - as did the Mönchengladbach Regional Court in its ruling of November 2, 2020 (Case No. 12 O 154/20) - a right, at the side of the tenant, to reduce lease payments on the basis of a disturbance of the basis of the contract. The commercial tenants were granted a right to reduce the rent or respectively a claim for adjustment of the contract. In the opinion of the Munich Regional Court I, the tenant was entitled to demand reducing reduction of the rent by 80% (order for complete cessation of operations), 50% (restrictions with regard to the usable store space) or 15% (general decline in sales due to hygiene measures and distance rules).

As before: It all depends on the circumstances of the individual case

Partly because of the deviating opinions expressed by the competent courts and the expected but currently still missing ruling by the German Federal Supreme Court, at the end of 2020 first the government, then the legislator intervened with its proclaimed main goal of promoting the parties' willingness to negotiate by amending the law and thereby creating support for negotiated solutions.

Whether the legislative goal was a sensible one, however, is just as questionable as the meaningfulness of the regulation and its actual effects.

The legislator's intention is honorable - it wants to protect tenants. At the same time, however, the explanatory memorandum shows that the legislator has worked on the basis of a paradigm that does not always apply - here the solvent and potent landlord, there the economically inferior tenant who needs to be helped. Obviously, this is a somewhat one-sided view, because just as an obligation to pay the rent in the event of a ban on maintaining business operations entails considerable economic risks for the tenant, a partial or complete loss of rental income can put the landlord in distress - and the landlord does not always have greater financial capacity, as it were God-given.

Against this background, it is - at least from the landlord's point of view - welcome that the amendment to the law only relates to the actual element and that the circumstances of the individual case are to be further examined for an actual adjustment.

Even under the new regulation, it can still not be said with certainty or with general validity whether a commercial tenant or lessee is entitled to an adjustment of his rental payment obligation under Section 313 BGB. As before, a case-by-case examination is required, in which particular attention needs to be paid to the hypothetical element - would the parties (not only the tenant!) have concluded a different lease agreement? - and the (un)reasonableness for the tenant (normative element). In this context, in particular the following aspects will need to be taken into account:

  • duration of the restrictions
  • economic situation of the tenant‘s business 
  • extent of the loss of turnover at the side of the tenant
  • financing costs of the landlord
  • potential adaptions/changes to the tenant’s business model (e.g., to online or delivery services)
  • amount, timing, and possible extensions of government assistance/financial aid
  • savings through short-time work 
  • tenant's termination rights in the foreseeable future

In general, it is likely to be necessary to consider whether the lease agreement was concluded before or after the outbreak of the pandemic or before or after the first lock-down when examining the reasonableness or the distribution of risk that the parties to lease agreements had on mind. If the lease was concluded after the first lock-down and does not provide for any (at least partial) transfer of the risk of use of the leased property to the tenant, there is a strong case to be made that the parties, aware of the pandemic and a possible further lock-down, deliberately did not want to deviate from the previous understanding of the distribution of risk in commercial lease agreements. However, the same may also apply to contracts concluded before the first lockdown - it all depends on the circumstances of the given individual case and the examination of all relevant elements.

A joint approach to solutions

In essence, the legislative changes have not brought about too much impact for the issue of the treatment of the consequences of Pandemic-induced restrictions: In the final analysis, the circumstances of the specific individual case and the agreements concluded are decisive. Although the initial situation for the tenant has clearly not worsened, it would still seem advisable for both the tenant and the landlord to come to an amicable, balanced and problem-solving agreement.

In case no agreement can be reached, however, with the new regulation in place, tenants can be (even more) well advised to seek to enforce their alleged claims for adaption of the lease agreement in court - or at least to have the prospects of success carefully examined in the individual case.

For rental or lease agreements to be concluded in the future, corresponding loopholes should also be contractually closed as a precaution in order to avoid possible legal disputes, but also consequences that could endanger the existence of either the landlord’s or the tendons businesses.

After all, there is still a common interest in maintaining the respective other party as a contractual partner. This applies all the more in the pandemic, as sooner or later, the virus will go away, but we will remain.

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