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The COVID-19 pandemic and commercial rent

03.03.2021

The effects of the Covid-19 pandemic are still omnipresent in Germany, so nothing much has changed since our last article from 6 October 2020. Some legal issues have still not been resolved by courts, including the issue of payment of commercial rent. One example is whether franchisees and franchisors as tenants can reduce or even suspend their rent payments due to widespread government-ordered shutdowns. Over 20 court decisions have been handed down on this subject, and the opinions expressed vary widely. Even the German law that entered into effect on 31 December 2020 via an expedited legislative procedure does not provide final, generally applicable clarity on this issue. This article presents a brief summary of the current situation:

Case law up to 31 December 2020

Government-ordered shutdowns do not constitute a defect in leased premises

Munich Regional Court I was the first court to rule (decision dated 22 September 2020 – case no. 3 O 4495/20) that the widespread government-ordered shutdowns in response to the outbreak of the Covid-19 pandemic constituted a defect in the leased premises which entitled tenants to reduce their rent payments. A few courts initially followed this opinion (including Pinneberg Regional Court, decision dated 17 November 2020 – 81 C 18/20; Kempten Regional Court, decision dated 7 December 2020 – 23 O 753/20).

However, most courts by far reject the opinion that the shutdown constitutes a defect in the leased premises (see e.g. Mannheim Regional Court, decision dated 23 July 2020 23 – O 22/20, BeckRS 2020, 26351; Heidelberg Regional Court, decision dated 30 July 2020 – 5 O 66/20, BeckRS 2020, 19165; Frankfurt am Main Regional Court, order dated 7 August 2020 – 2-5 O 160/20; BeckRS 2020, 20149).

The courts’ reasoning for this is that a government-ordered shutdown is a circumstance outside the scope of the rental contract which does not directly effect or alter the leased premises (similar to prevention or restriction of use under public law) that in principle does not constitute a defect. The courts stated that the only exception would be if circumstances effecting the leased premises are directly caused by the specific characteristics, condition or location of the leased premises as set out in the contract. According to the courts, this is not the case with government-ordered shutdowns or other restrictions because these measures serve to protect the public from general health risks and are not related to the specific characteristics of any leased premises.

Lease amendment due to frustration of contract?

Most of the courts believe that amending a lease to reduce the rent would only be possible, if at all, according to the law on frustration of contract (section 313 German Civil Code). So, in their opinion, a lease can only be amended if the fundamental facts on which the contract (lease) was based have subsequently and unexpectedly changed due to the government-ordered shutdown in response to the Covid-19 pandemic.

The initial discussion of this centred around whether the rules that apply to frustration of contract can be applied to the government-ordered shutdowns in response to the Covid-19 pandemic at all. Some courts assumed that the laws passed so far in connection with the Covid-19 pandemic (particularly Art. 240 section 1(4) no. 1, section 2 Introductory Law to the German Civil Code) make it impossible to apply provisions on frustration of contract to such cases (one example: Regional Court Munich II, decision dated 6 October 2020 – 13 O 2044/20). According to these courts, the new provisions stipulate that a tenant’s obligation to pay rent is not suspended during the shutdowns or use restrictions (Art. 240 section 1(4) no. 1 Introductory Law to the German Civil Code). Rather, if a tenant is not able to meet its obligation to pay rent, the landlord is only prevented from terminating the lease (section 2 Introductory Law to the German Civil Code).

Most of the courts rejected subsequent amendment of leases according to the rules of frustration of contract (see e.g. Mannheim Regional Court, decision dated 23 July 2020 23 – O 22/20 , BeckRS 2020, 26351; Heidelberg Regional Court, decision dated 30 July 2020 – 5 O 66/20, BeckRS 2020, 19165).

The reason given is that, taking into consideration all of the circumstances on a case-by-case basis – particularly the contractual or statutory risk distribution –tenants can be reasonably expected to continue to adhere to the contractually fixed (full) lease. The courts believe that, in a lease, the tenant basically bears the risk of all operational circumstances, i.e. in particular risk to exercise its right to use the rented premises while the landlord is subject to an obligation to grant use. While the parties can contractually change this risk distribution or stipulate that the landlord assumes all or part of the tenant’s use risk, the courts observed that most leases do not contain such a clause. Finally, they determined that the Covid-19 pandemic cannot be seen to be grounds for a general reversal of risk distribution (see decisions such as Mannheim Regional Court, decision dated 23 July 2020 – 23O 22/20, BeckRS 2020, 26351).

New legislation

Effective as of 31 December 2020, new legislation on commercial rent entered into effect which assumes that the government-ordered shutdown or restriction of use of leased premises constitutes a serious change in circumstances within the meaning of the frustration of contract rule (section 313 Abs. 1 German Civil Code in conjunction with Art. 240 section 7 Introductory Law to the German Civil Code). The new regulation makes it clear that the shutdowns or other governmental restrictions basically constitute frustration of contract. However, the legislator did not answer the key question, i.e. whether and for what amount and for the benefit of which party (tenant or landlord) the lease is to be amended. Hence, the legislator  left the question open to further debate by the courts.

Impact of the new legislation

More court decisions have been handed down since 31 December 2020 (e.g. Munich I Regional Court, decision dated 25 January 2021 – 31 O 7743/20; Munich II Regional Court, decision dated 28 January 2021 – O 2773/20; Munich I Regional Court, decision dated 12 February 2021 – 31 O 11516/20, BeckRS 2021, 1762). In all of these decisions, the courts assumed that the situation corresponds to frustration of contract, but rejected amendment of the lease in favour of the tenant, with the result that the cost risk rests in full on the tenant’s shoulders alone.

A decision by Munich I Regional Court (decision dated 12 February 2021 – 31 O 11516/20) received a great deal of attention in the German media, not only because the value of the matter was very high at over €1 million (see e.g. FAZ-article), but also because the case concerned a lease for premises in which a well-known German fashion chain operated a retail shop. The tenant had not paid any rent for the month of April 2020. The applicable national and regional Covid-19 regulations at the time included a shutdown of retail shops. According to Munich I Regional Court, the landlord was nevertheless entitled to payment of the full rent for April 2020.

Munich I Regional Court first rejected the assumption of the existence of a defect in the leased premises. It found that the shutdowns due to the coronavirus were the result of neither the condition nor the characteristics of the leased premises in dispute. The court stated that they were caused solely by the risk of employees and customers contributing to the further spread of the novel coronavirus. In the next step, Munich I Regional Court found that there had been a frustration of contract due to the government-ordered shutdown in response to the Coronavirus. However, the court excluded an amendment to the lease in this particular case. The court stated that the sales figures and financial report the tenant had submitted to the court did not justify a rent reduction. On the contrary, the results from the previous three financial years showed that it would have been reasonable to expect the tenant to create reserves in the amount of one month’s rent.

The decision is not yet final.

It has also recently been reported in the media that, in a decision dated 24 February 2021 – 5 U 1782/20, Dresden Higher Regional Court apparently confirmed the necessity of changing the amount of commercial rent during shutdowns. So the differences of opinion among the courts continue unresolvedly.

Conclusion

It remains to be seen what position higher-instance courts (Higher Regional Courts and the German Federal Court of Justice) take on this issue. It is good to see that the legislature has passed a law requiring that courts expedite proceedings on claims to payment of rent for commercial premises related to government-ordered measures to combat the Covid-19 pandemic (section 44 Introductory Law to the German Code of Civil Procedure). Because of the continuing lack of legal certainty, though, it is advisable in practice to direct efforts to resolve disputes between tenants and landlords towards reaching a settlement from the very beginning.