Law and regulation of Covid-19 loan moratoriums in Germany

1. Description of the legislation

1.1 Is there a moratorium on loans legislation implemented in your jurisdiction?

Yes.

1.2 If no: Are there any ongoing discussions regarding a potential introduction of such measures?

Not applicable.

1.3 What is the name of the relevant legislation (the “Relevant Act”)?

Legislation to mitigate the consequences of the COVID-19 pandemic in civil law, insolvency law and criminal procedural law of 27 March 2020 (Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht vom 27 März 2020)

1.4 What is the duration of the measures (period of moratorium)?

The statutory payment moratorium applies to claims of consumer loan lenders due between 1 April and 30 June 2020. The statutory payment moratorium does not apply in highly exceptional cases if, taking into account all the circumstances of the individual case, the moratorium would be unreasonable for the lender (e.g. cases of serious culpable defaults by the consumer, such as fraudulent statements or disposal of security contrary to the agreed terms, before or during the pandemic-related exceptional situation).

1.5 Does the legislation provide for an extension of the period of moratorium?

The Relevant Act provides an option for prolongation of the payment moratorium until 30 September 2020. However, to our knowledge, the Federal Government currently has no plans to extent the duration of the payment moratorium.

1.6 Is the moratorium mandatory, or can each borrower opt out should they wish to simply continue payments, or opt in if they want to be protected by the moratorium?

The borrower is entitled to continue payments. In case the borrower continues payments, the payment moratorium shall be deemed not to have been affected. Further, the lender and the borrower may agree on a derogation from the statutory payment moratorium, e.g. by agreeing on partial payments, interest or repayment adjustments or debt restructurings.

2. Parties and agreements affected by the Relevant Act

2.1 Is the moratorium available for both corporate and consumer loans?

The provisions of the Relevant Act apply only to consumer loan agreements and are not applicable to commercial loan agreements. 

The Relevant Act provides that the Federal Government with the consent of the Federal Parliament (Bundestag) may extend the scope of application to other borrower groups, in particular to micro-, small- and medium-sized enterprises. However this option has not yet been exercised and there are currently no indications that the Federal Government plans to extend the scope to commercial loan agreements.

2.2 Who are the affected Lenders?

If the loan agreement is governed by German law, the Relevant Act directly applies and any consumer loan lenders are affected, including consumer loan lenders domiciled abroad. 

2.3 Does it make a difference whether loans are granted by a foreign entity and governed by foreign law?

The Relevant Act does not provide provisions on international private law, so the general rules of international private law apply.

If the consumer loan agreement is lawfully governed by foreign law, such a choice of foreign law may not, however, have the result of depriving the consumer of the protection afforded to him by mandatory consumer protecting provisions of the country where the consumer has his habitual residence (Art. 6 para. 2 Rome I Regulation). The exclusion of the lender's right to terminate the consumer loan due to a significant deterioration of the financial circumstances of the consumer or the value of a security (see below section “Impact on the loan agreements”) is such a mandatory provision and therefore also applies to loans to German consumers lawfully governed by foreign law. 

On the other hand, the statutory payment moratorium is non-mandatory as the borrower may continue its payments and the parties may agree otherwise (see above section “Description of the legislation”). So Art. 6 para. 2 Rome I Regulation does most likely not apply. On the other hand, although this is not clear yet, the Relevant Act in its entirety could be considered an overriding mandatory provision (Eingriffsnorm) in the meaning of Art. 9 Rome I Regulation as it pursuits public interests. If this is true, a foreign court may (not: must) apply the provisions of the German statutory payment moratorium also to a loan agreement with a German consumer that is lawfully governed by such foreign law (Art. 9 para. 3 Rome I Regulation). 

Of course, if in each case the chosen law is more favourable to the consumer, the consumer may also choose to exercise the rights afforded to him or her under the chosen law.

3. Impact on the loan agreements

3.1 Is there a cut-off date with respect to loan agreements to which the Relevant Act will apply (e.g. not applicable to loan agreements entered into after the cut-off date)?

The payment moratorium applies to consumer loan agreements concluded before 15 March 2020. The Relevant Act provides that such claims are covered which have become due between 1 April and 30 June 2020. Claims defaulted prior to 1 April 2020 or which have become due after 30 June 2020 are not covered by the statutory payment moratorium. 

Furthermore, the payment moratorium is conditional on the borrower’s loss of income due to the exceptional circumstances caused by the appearance of Coronavirus. The borrower bears the burden of proof for this precondition. In addition, the loss of income must result in a situation making it unreasonable for the borrower to perform his or her obligations. 

3.2 Does the moratorium apply to principal only, or also to interest and/or fees?

The payment moratorium applies to both fee and interest payments.

3.3 Will the maturity of the loan automatically be extended by the moratorium period?

The lender is to offer the consumer a conversation about the possibility of an amicable arrangement and possible support measures; if an amicable arrangement is not reached for the period after 30 June 2020, the term of the contract is extended by 3 months and the respective due date of the loan is postponed by this period.

3.4 Are repayments and interest which have become due and payable under the contract before the Relevant Act has come into force covered by the moratorium?

No. The Relevant Act entered into force on 1 April 2020 and covers claims on repayment, interest or principal payments due between 1 April and 30 June 2020. 

3.5 Will lenders be able to terminate a loan due to an event of default other than non-payment (e.g. breach of financial covenants)?

Terminations by the lender due to late payment, significant deterioration of the financial circumstances of the consumer or the value of a security provided for the loan are excluded until the expiry of the payment moratorium. This provision is mandatory and applies also to consumer loans that are lawfully governed by foreign law (Art. 6 para. 2 Rome I Regulation). The exclusion of the termination right does not apply in highly exceptional cases if, taking into account all the circumstances of the individual case, the exclusion of the termination would be unreasonable for the lender (e.g. cases of serious culpable defaults by the consumer, such as fraudulent statements or disposal of security contrary to the agreed terms, before or during the pandemic-related exceptional situation). 

To what extent the exclusion of termination rights extends to breaches of (financial) covenants is somewhat unclear. There is, however, much to suggest that termination rights triggered by breaches of (financial) covenants related to late payment, significant deterioration of financial circumstances or the value of a security, are meant to be suspended as well.

Portrait of Axel Dippmann
Axel Dippmann
Partner
Berlin
Portrait of Anna-Maja Schaefer
Dr. Anna-Maja Schaefer, LL.M.
Counsel
Berlin