Moratorium in lending law due to the Covid-19 pandemic
Outstanding legal issues and recommendations to lenders for practical implementation
The Act on mitigating the consequences of the Covid-19 pandemic in civil, insolvency and criminal procedural law (cf. also Explanatory Note No. 19/18110), announced on 27 March 2020 contains in Article 240(3) Introductory Act to the German Civil Code (EGBGB), significant interferences into existing contractual relationships between lenders and consumers. Below, we provide an overview of the scope of these interferences, taking into account unsolved legal issues, and provide suggestions as to how lenders can react quickly to the new rules in order to keep the legal and practical consequences of the burdens imposed by the law to a minimum.
1. Deferral of claims, exclusion of termination, discussions and contract extensions are essential instruments for mitigating the consequences of the pandemic
The core element of the new provisions is the deferral of the lender’s claims which are due before 1 July 2020 in order to ‘give the debtor some breathing space’ (according to Explanatory Note No. 19/18110, p. 37 verbatim). If the lender and the consumer do not agree on a course of action with regard to claims due after 30 June 2020 in a discussion offered by the lender, the deferral effect is extended to the entire contractual relationship and the term of the contract is extended by (currently) three months. In addition, a limited protection against termination in favour of the debtor always applies (Article 240(3)(3) EGBGB). As a result, the legislator is burdening the banking industry with a three-month liquidity shortfall and considerable additional organisational work and expense as a result of the new provisions.
a) Special requirements regarding the debtor
The deferral effect will only benefit consumers who can demonstrate, first of all, that they have lost revenue due to the exceptional circumstances resulting from the spread of the Covid-19 pandemic. Second, it is also necessary for consumers to be able to prove that they can no longer reasonably be expected to honour their contractual commitments as a result of this loss of income. In assessing such reasonableness, the legislator has in mind a case-by-case consideration, which is intended to ensure that the consumer has the necessary financial resources to cover their living costs and those of their dependants (Article 240(3)(1) EGBGB) The scope of application of the law may be extended by statutory order to other groups of debtors, including in particular micro-enterprises (Article 240(3)(8) EGBGB).
b) Subject and period of deferral
Only claims from consumer loan agreements within the meaning of section 491 German Civil Code in the version of 10 June 2017 that were concluded be-fore 15 March 2020 are covered by the deferral effect (Explanatory Note No. 19/18110, p. 38). It is not clear as yet whether the legislator also intended to include special forms such as overdraft facilities or credit cards. Moreover, the deferral only refers to repayment obligations and obligations to make interest and principal payments (Article 240(3)(1) 1st sentence EGBGB). Thus the wording does not cover, for example, obligations to pay a prepayment penalty, to pay a compensation for not using the loan or obligations arising from a withdrawal.
The deferral effect covers obligations due between 1 April 2020 and 30 June 2020, but can be extended by statutory order to obligations due by 30 September 2020 (Article 240(4)(1)(3) EGBGB). If the consumer has honoured the obligations in whole or in part, the deferral effect shall also cease to apply in this respect (Article 240(3)(1) 4th sentence EGBGB).
c) Lender’s offer of talks and extension of contract in the absence of agreement on the period after 30 June 2020
The lender is also expected to offer the consumer an opportunity to discuss the possibility of a mutual agreement and possible support measures. Due to the current situation, this conversation can be conducted by telephone, Skype or other means of distance communication (Article 240(3)(4) EGBGB). The aim of the conversation is to find a way to put the contractual relationship on a sustainable basis in view of the crisis (Explanatory Note No. 19/18110, p. 39).
If the talks do not lead to an agreement for the period after 30 June 2020, the obligations due after 30 June 2020 will also be deferred for three months (in each case) and the contractual relationship extended by three months (Article 240(3)(5) 1st sentence EGBGB). The extension of the contractual term can be up to 12 months by statutory order (Article 240(4) (1)(3) EGBGB).
d.) ,Free’ provision of capital for three months due to deferral and extension of contract?
The three-month deferral provided for in Article 240(3) EGBGB, in conjunction with the three-month extension of the contract, effectively means that the consumer must be provided with the capital for a longer period than originally agreed. Particularly in bulk business with consumers and even more so in the case of an extension of the deferral period and contract term by statutory order, the financially important question arises as to whether the lender is entitled to interest for this additional time or whether the capital must be made available to the debtor ‘free of charge’.
The text of the law and the explanatory notes do not provide a direct answer to this rather obvious question. In particular, taking into account the interference (which is in any case already associated with the deferral effect, but not explicitly addressed in the explanatory memorandum) with lender’s constitutionally guaranteed freedom of ownership (Article 14(1) 1st sentence German Constitution) (see Federal Court of Justice (BGH), XI ZR 227/12, para. 19), and the deepening of this interference by the extension of the contract term, there are good arguments in favour of interpreting Article 240(3)(5) 1st sentence EGBGB to the effect that the three-month extension of the term of the contract means that all rights and obligations of the contracting parties and thus also the obligation to pay interest for the capital will continue for a further three months. Moreover, the legislator’s stated aim was primarily to support consumers in the event of a financial shortfall in order to ensure the continuation of the loan. Granting a pecuniary advantage free of charge is not covered by this purpose. Alternatively, however, the obligation to pay interest is likely to result from a supplementary interpretation of the contract. If one wanted to view this differently, the question would arise as to whether the special sacrifice associated with the statutory recourse to the lender can actually be made without compensation.
2. Practical implementation of the new regulations and risk management – advantages of an individual agreement
As a result of the new regulations, the lender and the credit industry as a whole are confronted both with considerable practical problems and considerable costs, the extent of which even the legislator does not believe it is capable of assessing (see Explanatory Note No. 19/18110, p. 6). This concerns, for example, (i) the examination of whether consumers meet the requirements for a deferral, (ii) talks with consumers required by the Act, (iii) sending copies with the changed contract content (iv) and how the deferral arrangement and contract extension is to be reflected in the accounts.
The aim of the law is clear, though: Individual agreements between lender and consumer are desired which help the consumer in their short-term distress. From the legislator’s point of view, it is therefore logical that the burden should be on the lender if an individual agreement is not reached. In view of these burdens, it is advisable that the internal processes on the lender’s side are geared towards concluding an individual agreement in as many cases as possible.
In this context, the talk between the lender and the consumer required by the new law can serve, by means of appropriate organisational measures, to simultaneously examine the requirements of Article 240(3)(1) EGBGB and prepare for the conclusion of an individual agreement. According to the legislator’s idea, the initiative is generally to be taken by the consumer, who will contact the lender in order to demonstrate that he meets the requirements for a deferral (see Explanatory Note No. 19/18110, p. 39; FAQ list of the Federal Ministry of Justice and Consumer Protection, no. 6). This contact can be the organisational starting point for the legally required discussion.
The conclusion of an individual agreement has considerable organisational and economic advantages compared to the legal consequences of Article 240(3)(1) and (5) EGBGB:
- Firstly, the individual agreement may specify that the deferral is deemed not to have been granted pursuant to Article 240(3)(1) 1st EGBGB and that subsequent payments are deemed to be payments at the contractually agreed time. Such an agreement, coupled with the avoidance of the legally required extension of the contract, has the decisive advantage that the deferral effect and the extension of the contract do not have to be reflected in the accounts.
- Secondly, a dispute can be avoided as to whether the debtor has to pay interest for the additional use of the capital resulting from the extension of the contract (as explained above, it there are good arguments that such an obligation derives from Article 240(3)(5) 1st sentence EGBGB or at least from a supplementary interpretation of the contract).
- Thirdly, an additional passage may be included in the individual agreement in which the consumer waives the right to be provided with a copy of the loan agreement which takes into account the agreed changes to the contract, as provided for in Article 240(3)(5) 3rd sentence EGBGB. That such a waiver is possible, is supported by the fact that the law does not prohibit an individual contractual waiver, unlike Article 240(3)(3) 2nd sentence EGBGB regarding the protection against termination in favour of the debtor. This approach would mean a considerable organisational relief for the lender.
Finally, it should be noted that the legislator has not provided for any simplifications of the individual agreements, so the general requirements which also apply in other respects, in particular those of consumer loan law, must be observed (see Explanatory Note No. 19/18110, p. 39).
If you have any further questions regarding the legal issues addressed here or other legal issues in connection with Article 240(3) EGBGB or if we can support you in implementing our recommendation, please do not hesitate to contact us.
Practice group: Litigation, Arbitration & ADR