Summary
In case of commercial leases, landlords may also not terminate the lease on the grounds that the tenants cannot pay the rent for the period from 1 April 2020 to 30 June 2020 as a result of the COVID 19 pandemic. But commercial landlords, for their part, do not have the same right to suspend the repayment of loans to credit financing banks.
It is required that tenants substantiate that the non-payment of rent is based on the COVID 19 pandemic. The proof of causation between the COVID 19 pandemic and non-payment of rent, as well as the requirement of substantiating, can lead to legal uncertainty in individual cases. This legal uncertainty can affect landlords and tenants alike. It is therefore advisable that landlords and tenants conclude individual agreements on deferral of rent if the landlord is willing to grant such deferral. In case of deferral agreements deviations from the requirements of the law in favour of tenants are possible. In this context, it is important to conclude only such agreements with the tenants that are recorded in a written addendum to the lease agreement. Therefore, it is particularly important to avoid simple letters to the tenant requesting a countersignature, which then carry the risk of violating the written form requirement (sections 550, 126 German Civil Code (“BGB”) and can lead to the rental agreement being terminable at any time, as the fixed terms of the lease would by law turn into indefinite lease agreements.
If the tenant does not pay rent because of COVID-19, the landlord cannot terminate the contract
For tenancies of land or premises, the right of the landlord to terminate tenancies is restricted. This applies to both residential and commercial leases. These regulations are also extended accordingly to leases.
Generally, landlords are entitled to terminate tenancies if tenants are in arrears with the payment of rent in the amount corresponding to at least 2 months' rent (section 543 para. 2 No. 3 of the BGB). This right of the landlord shall be limited. Landlords may not terminate the tenancy for rent arrears arising from the period 1 April 2020 to 30 June 2020 if the rent arrears are based on the effects of the COVID 19 pandemic. The law regulates this as follows (revised version of Art. 240 of the Introductory Act to the German Civil Code (“EGBGB”)):
Section 2 Restriction on the termination of rental and lease agreements
- The landlord may not terminate a lease of land or premises solely on the grounds that the tenant fails to pay the rent in the period from 1 April 2020 to 30 June 2020 despite the fact that it is due, if the failure to pay is based on the effects of the COVID 19 pandemic. The connection between the COVID 19 pandemic and non-payment must be substantiated. Other termination rights remain unaffected.
- Paragraph 1 may not be deviated from to the detriment of the tenant.
- Paragraphs 1 and 2 shall apply mutatis mutandis to leases.
- Paragraphs 1 to 3 shall apply only until 30 June 2022.
Thus, the law allows tenants to withhold rent without landlords being entitled to terminate the lease. Rent arrears from the period from 1 April 2020 to 30 June 2020 neither constitute a good cause for extraordinary termination without notice (section 543 BGB) nor do they give rise to a legitimate interest in ordinary termination of residential leases concluded for an indefinite period (section 573 BGB). The termination of a residential tenancy solely due to such arrears of rent is thereby excluded. The same applies to the extraordinary termination without notice of a tenancy on land or on premises that are not residential premises.
However, these restrictions on termination apply only under certain conditions.
Rent debts for the period from 1 April 2020 to 30 June 2020
Only rental debts from the specified period limit the landlord’s right to terminate. This period is defined as from 1 April 2020 to 30 June 2020 (Art. 240, section 2 para. 1 sentence 1). These provisions may not be deviated from to the detriment of tenants. The Federal Government (Bundesregierung) is authorized to extend this period to arrears of payment from 1 July 2020 up to 30 September 2020 at the latest (Art. 240, section 4 para. 1 no. 2).
The limitation of the right of termination shall not extend to other grounds for termination. Landlords are at liberty, in the event of respective termination rights, to terminate the tenancies on the basis of rent arrears which have accumulated in an earlier period or which will result from a later period. Landlords may also give notice of termination for other reasons, such as breaches of contract of any other kind, for example unauthorised transfer of the rental object to third parties (section 543 para. 2 sentence 1 no. 2 BGB) or for personal use (section 573 para. 2 sentence 1 no. 3 BGB). As far as the law allows the termination of a tenancy without reasons, for example in case of indefinite tenancies for land and for premises that are not residential premises (section 580a paras. 1 and 2 BGB), this possibility of termination also remains unaffected.
Loss of rent payment based on the effect of the COVID 19 pandemic
Only if the non-payment of the rent is based on the COVID 19 pandemic the landlord's right of termination is excluded (Art. 240, section 2 para. 1 sentence 1). On the other hand, the landlord's right to terminate the contract remains in force if the non-payment of the rent is due to other reasons, such as unwillingness to pay.
In practice, it will be important whether the tenant can provide evidence that the COVID 19 pandemic is the cause of non-payment of rent. There may be clearer cases. For example, if shops are closed because of governmental measures due to the COVID 19 pandemic and therefore tenants do not generate the revenues that would be necessary to pay the rent, it can be assumed that the non-payment of rent is based on the COVID 19 pandemic. This applies, for example, to clothing shops and restaurants. Something else may apply if tenants can still use the rented premises but wish to maintain liquidity out of business prudence and therefore do not pay the rent. This may apply particularly in the area of office letting. In these cases, it is not clear whether the COVID 19 pandemic is the cause of the non-payment. In case of doubt, the law requires proof that the COVID 19 pandemic is the cause of non-payment, without specifying how this proof is to be furnished. Relief could be provided, if the contributory causation were recognised, and therefore COVID 19 pandemic could be at least one of several causes on which the non-payment is based. This is likely how the provision should be understood. However, there is no legal regulation or even established case law on this.
Tenant substantiates that COVID-19 pandemic is cause for retal loss
Rather, the law tries to resolve this uncertainty by requiring tenants to demonstrate the correlation between the COVID 19 pandemic and non-payment of rent (Art. 240, section 2 para. 1 sentence 2). But that this will solve the uncertainty must be doubted. Substantiation is a procedural possibility of providing evidence (section 294 of the Code of Civil Procedure (“ZPO”)) and would require tenants to present facts which make it predominantly probable (see BGH, decision of 21 December 2006, IX ZB 60/06, NJW-RR, 2007, 776 [777], para. 11) that their non-payment of rent is based on the COVID 19 pandemic. Thus, substantiation refers to the (procedural) way of proof, but not the actual facts to be proven (under civil law). The assessment of whether COVID 19 pandemic is the (contributory) cause of the non-payment is also based on an assessment and evaluation in the context of the substantiation. This creates legal uncertainty. Such legal uncertainty can be to the detriment of both landlords and tenants.
It is to be expected that landlords and tenants will come to a mutual agreement, particularly against the background of this legal uncertainty. It is to be remembered to take the wording of the law as a guide and to make individual agreements on deferrals, part payments, interest on arrears etc. Especially in cases where it is not clear that the COVID 19 pandemic is the cause of non-payment, such an amicable solution is advisable. It should be noted that the agreements between landlord and tenant must comply with the written form requirement insofar as rental agreements require this.
In any other cases where the COVID 19 pandemic is clearly the cause of non-payment, substantiation can be established by affirmation in lieu of oath or other appropriate means. Appropriate means may include, for example, the submission of the official decree to close the sales outlet, the certificate on the granting of state benefits, the employer's certificates or other proof of income or loss of earnings.
Rent is still due and payable no later than 30 June 2022
The restrictions on the right of termination apply until 30 June 2022 (Art. 240, section 2 para. 4). After this period, the landlord's right of termination shall be restored. This means that landlords may nevertheless terminate the lease agreements for legitimate payment arrears from 1 April 2020 to 30 June 2020 if the arrears are not settled by 30 June 2022. This gives tenants two years from June 30, 2020 to settle any rent arrears that entitle them to terminate the lease.
In any case, the law does not grant tenants the right to refuse performance. Only the landlords’ rights to give notice are limited. The tenants remain obliged to perform according to general principles. In particular, the general civil law provisions of the BGB on maturity and default remain unaffected. As a result, the tenants may be in default if they do not perform within the specified period (section 286 BGB). In the event of default, the tenants would then have to pay the rent arrears from the period from 1 April 2020 to 30 June 2020 as well as the default interest due thereon (section 288 BGB). In principle, the landlord is also free to demand payment of the rent for the period from 1 April to 30 June 2020 and, if necessary, to take legal action, even before 30 June 2022.
Loans
It would be in the interest of commercial landlords to be allowed to suspend payments to the same extent to the credit financing banks.
Although the law generally contains similar provisions on loans (Art. 240, section 3), these currently cover consumer loans only (section 491 BGB), which are loans concluded between an entrepreneur (section 14 BGB) as lender and a consumer (section 13 BGB) as borrower. These regulations are therefore not applicable to commercial landlords. Commercial landlords whose tenants do not pay the rent for the period between 1 April 2020 and 30 June 2020 therefore cannot suspend payments to the banks.
It is envisaged that the Federal Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und für Verbraucherschutz) will be authorised to extend the scope of application to other borrower groups, in particular to micro-enterprises, by means of a statutory instrument in agreement with the Federal Ministry of Finance (Bundesministerium der Finanzen) and the Federal Ministry of Economics and Labour (Bundesministerium für Wirtschaft und Arbeit) (Art. 240, section 3 para. 8). However, such a regulation has not yet been issued.
Our Reed Smith Coronavirus team includes multidisciplinary lawyers from Asia, EME and the United States who stand ready to advise you on the issues above or others you may face related to COVID-19.
For more information on the legal and business implications of COVID-19, visit the Reed Smith Coronavirus (COVID-19) Resource Center or contact us at COVID-19@reedsmith.com.
Client Alert 2020-158
