Update Real Estate & Construction | Special newsletter coronavirus
Corona and commercial leases
Current status: March, 26, 2020
The joint guidelines of the federal government and the German states of March 16, 2020 also provide for the closure of retail and wholesale stores and the partial closure of restaurants and food outlets. It is now at the latest that it becomes apparent how the COVID-19 pandemic will also have a direct impact on commercial lease law. On March 25, 2020, the legislator adopted the “Act to Mitigate the Consequences of the COVID-19 pandemic in Civil Law, Insolvency Law, and Criminal Procedure Law,” which also includes interim provisions on tenancy and lease law, to mitigate the economic consequences of the COVID-19 pandemic. The provisions of the Act applicable to tenancy and lease law will enter into force on April 1, 2020. For use in practice, however, the law only answers some of the current questions.
The Act to Mitigate the Consequences of the COVID-19 pandemic, which will enter into force on April 1, 2020, provides for a time-limited exclusion of termination of rental and lease contracts in cases of late payment. Accordingly, landlords may not terminate leases solely on the grounds that tenants failed to pay rent due in the period from April 1, 2020 to June 30, 2020, if the non-payment is due to the effects of the COVID-19 pandemic. The connection between non-payment and the COVID-19 pandemic must be made credible by tenants. The period may be extended by decree until September 30, 2020. In any event, the statutory exclusion of termination will end on June 30, 2022, by which date any rent in arrears (including interest on arrears) must be paid to avoid termination. Other termination rights, such as the ordinary termination right for unlimited rental agreements as well as extraordinary termination, will remain unaffected.
The law does not provide for rent reductions or deferrals for the period of the pandemic; the obligation to pay rent will continue to exist.
The law only stipulates the exclusion of terminations by landlords due to default of payment. The question as to whether tenants may be entitled to terminate leases early remains unanswered.
Early terminations of fixed-term leases, however, require “cause.” While official bans of use may, in principle, constitute such cause, a ban of use issued by authorities will have to be based specifically on the structural condition of the leased property. Measures taken on the basis of lessees’ personal circumstances or on account of the type of business operations are fundamentally ruled out as cause for early termination. In addition, lessors must be responsible specifically for the circumstances to which the official measure relates.
These requirements are unlikely to be met in cases of bans of use. The same applies all the more if no official ban of use has (yet) been issued and lessees have closed or had to close their business due to precautionary measures taken on their own, for example because corona cases occurred among their employees.
It is very difficult to conclusively assess whether the aspect of “force majeure” may justify dismissals in these situations due to its special nature and the necessary assessment of the individual case.
Rent reductions, including due to “force majeure”
Where official bans of use lead to lessees no longer being able to use the leased property for the agreed purpose, reductions in rent may be considered under certain circumstances. In this context, it should be examined in particular whether the corona problem may legally be classified as force majeure.
Rent reduction was affirmed by a supreme court judgement in the case of a dance hall that was prohibited from holding dance events due to a police ban. It cannot be answered in general terms whether this may also be applied to the current ban of use. To a large extent, this depends on the respective form of the lease agreement, especially if it contains provisions on risk distribution.
In cases where closure orders have not (yet) been issued by the authorities and lessees nonetheless proceeded to close their business in whole or in part (for example due to corona cases among their employees), a rent reduction with reference to force majeure is likely to be difficult to justify, since an external (i.e., external to the business), unforeseeable, and unavoidable event is required for force majeure.
In particular, because the issue of force majeure must always be assessed on a case-by-case basis, if only because of the criterion of exceptional circumstances, thus involving significant imponderables, it seems advisable that the parties to the lease should primarily seek to discuss the matter with the objective of reaching an agreement.
The draft law does not contain provisions on rent reductions or adjustments of the obligation to pay rent for the period of the pandemic.
Interference with the basis of the transaction
In principle, it would also be conceivable to adjust the lease agreement due to “interference with the basis of the transaction” in accordance with Section 313 Civil Code.
This would require that
- the circumstances that became the basis of the contract have changed significantly and permanently after the conclusion of the contract;
- the change is serious;
- the risk realized by the disruption of the basis of the transaction is not to be borne by one of the parties; and
- the affected party cannot reasonably be expected to continue the contract unchanged.
If these conditions are met, each party is entitled to demand that the other party adjust the contract. Under this aspect, a party may only terminate the contract if an adjustment is not possible or unreasonable for one of the parties.
Whether a lease can be adjusted or terminated due to the COVID-19 pandemic ultimately depends on the circumstances of the individual case. If interference of the basis for the transaction in accordance with the aforementioned conditions is even considered at all, however, this should only lead to an adjustment of the rent for the duration of an ordered closure at the latest.
Whether and to what extent a rent reduction can be considered in the current situation depends primarily on the individual case and the structure of the respective lease. Classifying the situation as force majeure with the possible consequences seems conceivable, but is also dependent on the individual case. Thus, the problem continues to exist as to whether tenants may demand rent reductions or adjustments with reference to a defect (failure to allow use of the rental property in the event of official closure), the existence of force majeure, or due to interference with the basis of the transaction.
The Act to Mitigate the Consequences of the Pandemic will not affect the obligation to pay rent. Where tenants are in default of payment, which is relevant for termination, the law only requires tenants to substantiate a connection between the COVID-19 pandemic and the default of payment that has occurred to avert termination by landlords that would be based solely on default of payment. This makes it easier for tenants to provide evidence, which may make it more difficult or even impossible for landlords to give notice of termination based on late payment alone.
Against this backdrop, it does not seem advisable for lessees, however, to simply stop paying rent, either unannounced or without prior agreement. From the point of view of both parties to the lease, the better solution would appear to be to discuss the problem with each other and to solve it amicably.
It should also be noted that the written form requirement of Section 550 Civil Code is to be observed in any communication. This applies also and in particular if the parties agree on any financial adjustment of the lease. The statutory written form requirement continues to apply and is not superseded even in the special constellation of the corona problem. The legislative project to abolish the statutory written form requirement for leases is currently on hold, so that compliance with the written form requirement continues to be required.
On our website you will find additional information on the corona crisis, updated daily.