On 17 December 2020, the German parliament (Bundestag) passed the Law on the Further Shortening of the Residual Debt Relief Procedure and on the Adjustment of Pandemic-Related Provisions in Company, Cooperative, Association and Foundation Law as well as in Rental and Lease Law (BT-Drucks. 761/20) (the Law). The Law is based on the resolution recommendation and report of the Committee on Legal Affairs and Consumer Protection (Ausschuss für Recht und Verbraucherschutz) (BT-Drucks. 19/25251, 19/25322) – following the resolution of the telephone conference of the Federal Chancellor with the heads of government of the federal states on 13 December 2020. The German council (Bundesrat) approved the Law on 17 December 2020 (see BR-Drucks. 761/20) and it will enter into force the day after its proclamation.
The Law contains the provision that in principle the disturbance of the basis of the contract (Doctrine of Frustration) is applicable in the special situation of the COVID-19 pandemic (article 10 of the Law). If government measures to combat the COVID-19 pandemic lead to significant restrictions on the operations of the commercial tenant/lessee, the Law will in future presume this to be a circumstance that can lead to an adjustment of the rental/lease agreement on the grounds of disturbance of the basis of the contract (section 313 of the German Civil Code (BGB)). However, this does not per se entail the legal consequence of an adjustment of the contract. This remains a consideration in each individual case.
The Law also contains a priority and acceleration requirement for proceedings on the adjustment of rent or lease due to such state measures affecting commercial tenants and lessees (article 1 of the Law).
Commercial tenants/lessees are likely to see the Law as a ‘backing’ and demand that landlords/lessors enter into negotiations with the aim of adjusting the contract (such as reducing and/or deferring the rent or lease). If landlords/lessors do not face up to these contract negotiations, it can be assumed that tenants and lessees will increasingly have their legal disputes reviewed by courts due to the new priority and acceleration requirement adopted in the Law. However, whether or not tenants’/lessees’ contract adjustment requests are justified is still subject to assessment in each individual case, as outlined above. In order to avoid legal disputes, it is generally recommended that landlords/lessors negotiate individual provisions with their tenants/lessees in good time. The following considerations can be used to support arguments in such negotiations.
Strengthening of the negotiating position of commercial tenants and lessees through presumption of conformity rules
The principle, which was also reflected in the predominant previous case law on state COVID-19 measures, according to which tenants/lessees shall bear the risk of the profitable use of the rented/leased property, is mitigated by the Law. Primarily, the Law’s intention is to enable tenants/lessees to apply the principles of disturbance of the basis of the contract (section 313 of the BGB) on the basis of the statutory presumption, that is, not only in case their existence is threatened (as was partly required in previous case law, see AG Düsseldorf, judgment of 10 November 2020 ¬– 45 C 245/20, BeckRS 2020, 31652, No. 35; AG Köln, judgement of 4 November 2020 – 206 C 76/20, BeckRS 2020, 32288, No. 32; LG Frankfurt a.M., Judgment of 5 October 2020 – 2-15 O 23/20, BeckRS 2020, 26613), but also in the event of significant restrictions on the usability of the rented/leased property for their business. The Law regulates this as follows (new version of article 240 EGBGB):
Section 7: Disturbance of the Basis of Rental and Lease Agreements
(1) If, as a result of government measures to combat the COVID-19 pandemic, rented land or rented premises that are not residential premises cannot be used for the tenant's business or can be used only with significant restrictions, it shall be presumed that, in this respect, a circumstance within the meaning of section 313 (1) of the German Civil Code, which has become the basis of the rental agreement, has changed significantly after the conclusion of the contract.
(2) Paragraph 1 shall apply mutatis mutandis to lease agreements.
The Law clarifies that the Doctrine of Frustration (section 313 of the BGB) shall apply. It seeks to strengthen the position of commercial tenants/lessees by facilitating evidence (statutory presumption) and to enable and facilitate commercial tenants/lessees to adjust the contract (such as reducing and/or deferring the rent) (Section 313 (1) of the BGB). The following considerations are to be made in this regard:
- The legal presumption can be rebutted by the landlord/lessor, for example, in the case where the rental/lease agreement was concluded at a time when a pandemic-like spread of the SARS-CoV-2 coronavirus was already foreseeable in the general public. Beyond such cases, however, it is likely to be difficult for landlords/lessors to rebut the presumption if they do not have insight into the business rationale and decision-making of the tenants/lessees.
- The tenant/lessee shall have the burden of proof for the causality that there is a cancellation or significant restriction of the usability of the rented/leased property ‘as a result of government measures’. The government measures must restrict the usability of the tenant's/lessee’s business and relate to the rented/leased property itself or the tenant's/lessee’s business carried out in the rented/leased property. Operation is understood to mean actual use within the scope of the contractual purpose (cf. p. 20 BT DruckS 19/25332). Not included are, for example, quarantine orders relating to the tenant/lessee and/or its employees.
- The circumstances under which a significant restriction should exist are not defined. The explanatory memorandum to the Law notes that the restriction of usability must not be based solely on the fact that, in case of a business open to the public, customers are not coming simply because of a decline in willingness to consume (cf. p. 20 DruckS 19/25322). As a rule, however, this is unlikely to be a insignificant factor in declining sales or the considerable restriction of usability. A significant restriction is regularly deemed to be the official requirement that only a certain part of the store area may be used for public traffic or that the number of people who may be present in a certain area must be restricted (cf. p. 21 BT DruckS 19/25332).
Under which circumstances this statutory presumption in favour of the tenants/lessees should take effect remains an issue of considering the individual case. Therefore, this may lead to considerable legal uncertainty, which will need to be further specified by case law.
No statutory contractual adjustment right
Irrespective of the statutory presumption that the Law establishes in favour of commercial tenants/lessees, this does not automatically lead to an applicability of the disturbance of the basis of the contract with the consequence of a claim to a contractual adjustment (e.g. in the form of a right to reduce or defer rent). The presumption that the Law establishes initially only applies to the so-called factual element of the prerequisites of the change in the basis of the contract (section 313 (1) of the BGB). The adjustment of the contract (section 313 (1) of the BGB), however, requires not only the change in the basis of the contract (actual element), but also (i) the hypothesis that if the parties had known about this change, they would not have concluded the contract or would not have concluded it in the same way (hypothetical element), and (ii) that one party cannot reasonably be expected to adhere to the unchanged contract, taking into account all circumstances of the individual case, in particular the contractual or statutory distribution of risk (normative element). These other elements (the hypothetical and normative elements) remain unaffected by the Law. The burden of proof remains with the tenant/lessee.
Hypothetical element: Whether the parties would not have concluded the contract or would have concluded it with different content if they had foreseen the COVID-19 government measures is an interpretation of the parties' intent. It is true that, in principle, it can be assumed that the parties would have made other regulatory provisions in the contract for such government measures. However, the circumstances of the individual case again are decisive.
Normative element: The normative element will continue to be of decisive importance in the future. The reasonableness of adhering to the unchanged contract, taking into account all circumstances of the individual case, in particular the contractual or statutory distribution of risk, was predominantly affirmed in the case of state COVID-19 measures in previous case law with regard to the risk of profitable use of the rental object being with the tenant/lessee (LG Heidelberg, judgement of 30 July 2020 – 5 O 66/20, COVuR 2020, 541). According to the explanatory memorandum, there shall be no fixed allocation of the risk of use in the case of official COVID-19 measures; these cannot regularly be allocated to the sphere of the landlord or to the sphere of the tenant (p. 21 BT DruckS 19/25332). However, it remains uncertain whether this redistribution will be applied by the courts, as this goes beyond the wording of the newly introduced presumption, which, according to the wording, only applies to the aforementioned actual element. Irrespective of this, the completion of this characteristic remains to be specified by case law and represents an assessment of the individual circumstances in each specific case. In the context of reasonableness, the following will have to be taken into account (see also, in particular, LG Zweibrücken, judgment of 11 September, 2020 – HK O 17/20, COVuR 2020, 693):
- How strongly do the government restrictions affect the tenant's business? An indication of severe impairments may lie in significantly reduced sales, for example, compared to the same period of the previous year, whereby the sales tax relevant for commercial leases has already been temporarily reduced in favour of the tenants/lessees.
- To what extent is the landlord affected by the consequences of the regulatory restrictions? Does the landlord have to provide ongoing financing and maintenance measure costs?
- The time period of the restrictions due to the COVID-19 pandemic.
- Contractual indications for specific risk allocation (i.e. force majeure provision, turnover rent, minimum rent, etc.).
- Has the tenant received public or other subsidies with which it can at least partially compensate for the loss of sales as a result of government restrictions (prohibition on so called ‘double dipping’)? Has the tenant saved expenses, for example, because it has registered short-time work or the purchase of goods has been omitted or consumption-related ancillary costs have been saved?
- Has the tenant minimised the risk by taking out private business interruption insurance in advance?
- Can the leased premises be used as a warehouse, office and distribution facility for a potential online retailer?
- Generally, the respective tradesman is required, as an entrepreneur, to create compensatory measures (online store, voucher models, discount campaigns, etc.) before an adjustment of the contract can be demanded.
Legal consequences: The Law also does not change the legal consequences of the disturbance of the basis of the contract (section 313 of the BGB). There is no automatism for an adjustment of the contract. This can only be requested to an appropriate extent and must bring the interests of both parties to the contract that are worthy of protection into an appropriate balance. The form of such an adjustment of the contract (e.g. in the form of a reduction, deferral or other measure) remains an assessment of the individual case and is initially left to the parties.
The presumption rule shall enter into force on the day following its proclamation (article 14, paragraphs 1 and 2 of the Law). It is also applicable to matters that have already been concluded at the time of the entry into force of the Law, but which have not yet been finally decided. In addition, the provision expires on 20 September 2022. (cf. p. 24, BT DruckS 19/25332). Furthermore, it can be inferred from the explanatory memorandum to the Law that the general and specific laws on breach of contract (e.g. rental/lease defect law according to section 536 of the BGB) shall remain applicable – including for the period from April 2020 to June 2020, in which special protection against dismissal temporarily applied due to the Law to Mitigate the Consequences of the COVID-19 pandemic. This should therefore at least put an end to the argumentation of the case law that the rent moratorium in the Law to Mitigate the Consequences of the COVID-19 pandemic will have priority (see argumentation of LG München II, judgment of 22 September 2020 – 13 O 1657/20, BeckRS 2020, 34250, No. 18; judgment of 6 October 2020 – 13 O 2044/20, BeckRS 2020, 34263, No. 22).
Priority and acceleration requirement
In order to quickly ensure legal certainty, the legislator has, in the same course, introduced a priority and acceleration requirement for proceedings on the adjustment of rent/lease for land or premises other than residential premises due to state measures to combat the COVID-19 pandemic. Thereafter, the following was newly regulated (EGZPO):
Section 44: EGZPO Priority and Acceleration Requirement
(1) Proceedings on the adjustment of rent or lease for land or premises other than residential premises due to state measures to combat the COVID-19 pandemic shall be given priority and expedited treatment.
(2) In proceedings under paragraph 1, an early first hearing shall be held not later than one month after service of the statement of claim.
The acceleration rule will also apply to such legal disputes in which tenants/lessees raise the adjustment of rent/lease as a defence against the landlord's/lessor’s action for payment. In these proceedings, an early first hearing should take place no later than one month after service of the statement of claim, and short time limits should also be set in principle.
The supposedly quick achievement of legal certainty could subsequently tempt tenants/lessees to prematurely assert claims in court if landlords/lessors do not show any concession to a joint solution in contract negotiations. This is particularly true with regard to the newly introduced statutory presumption in their favour to facilitate asserting contract adjustment claims (section 313 (1) of the BGB) and the express possibility of classifying public-law restrictions as a rental defect (section 536 (1) of the BGB).
It remains to be noted that a possible adjustment of the contract is not automatic, despite the statutory presumption provision, but a matter of negotiation in each individual case. The linchpin for the prerequisites of a contract adjustment (section 313 of the BGB) will be the presentation of the normative element by the tenant/lessee, which requires a consideration and valuation of all circumstances of the individual case. Even if, with the new Law, landlords/lessors can no longer merely decline commercial tenants’/lessees’ demands with regard to the profitable use risk of the rented/leased property, there are still good reasons to argue against adjustment requests. In particular, landlords/lessors should not prematurely agree on rent/lease reductions and may rather focus on rent/lease deferrals first. Thus, legal uncertainties remain that will have to be addressed by case law. It remains to be seen whether the position of tenants and lessees has been strengthened sustainably by the Law.
In addition, it can be assumed that commercial tenants/lessees will take advantage of the acceleration and priority requirement in order to quickly achieve legal certainty regarding their adjustment requests. In order to avoid resource-intensive legal proceedings, landlords/lessors are advised to enter into negotiations with tenants in good time and to agree on individual contractual provisions that regulate the distribution of risk regarding state COVID-19 measures. Whether and, if so, to what extent landlords/lessors then agree to contractual adjustments remains a matter of negotiating tactics and skills in individual cases.
In any case, it may be important to conclude only those agreements that are recorded in a written addendum to the rental or lease agreement. In this respect, simple letters to the tenant/lessee with a request for countersignature should be avoided in particular. Such letters bear the risk of violating the statutory written form requirement (section 550 and section 126 of the BGB) and may lead to the rental/lease agreement being terminable at any time.