Updated on 01.04.2020.

1. Is a lessee eligible for rent reduction due to a significant decline in footfall and consequently its turnover as a result of COVID-19?

No, in principle not (unless in case of special circumstances or a special contractual agreement). In general, a mere decline in revenue as such due to the corona crisis does not qualify as a reason for rent reductions (for the outbreak of COVID-19 as a “extraordinary coincidence” see below under point 2).

However, in case of a revenue-based lease, the rent reduction may be reduced in proportion to the loss of revenue, taking into account the extent and duration of the unusability. For the assessment of the rent reduction, it may be relevant whether the adverse effects on business operations are irretrievable or whether the current situation merely leads to sales being postponed to a later date and thus, at the end of the day, the income of the business is not diminished.

Moreover, in the event of a substantial decline in sales as a result of the general COVID-19 measures, the lessee's claims could also be based on the legal principle of “frustration of contract” (see below under point 5).

2. Is a lessee eligible to temporarily close its leased space - on its own initiative – and opt for rent reduction as a result of COVID-19?

No, in principle not.

3. Is a lessee eligible for rent reduction in the event its leased space is closed following an order by the Government as a result of COVID-19?

According to Sec. 1104, 1105 of the Austrian Civil Code (“ABGB”), the owner of the property bears the risk for all circumstances based on extraordinary coincidences which result in the loss or a substantial limitation of the use of such property. The Austrian Supreme Court defines “extraordinary coincidences” in the sense of Sec. 1104 ABGB as “such elementary events which cannot be controlled by humans, so that in general no one can be expected to compensate for their consequences”. In Sec. 1104 ABGB an “epidemic” (besides fire, war or great floods etc.) is explicitly mentioned as such an “extraordinary coincidence”. Hence, the outbreak of COVID-19 clearly falls under this provision. In case of an “extraordinary coincidence” such as an epidemic, the lessee is released from the obligation to pay the rent (for the period of uselessness) if the property is completely unusable. In addition, the lessor bears the burden of proof for the existence of such an extraordinary coincidence regarding rent reduction.

However, with regards to rent reduction, a distinction must be made between mere space lease ("Mietverträge") and company lease ("Pachtverträge"): Whereas the first refers to the granting of property for use in return for payment, the second is the compensated grant of property for use and exploitation of the benefits ("Pacht").

With regard to Pacht, a merely partial unusability (but not the complete unitability) due to an extraordinary coincidence only triggers legal consequences for one-year or shorter leases: In this case, according to the wording of Sec. 1105 ABGB, the lessee is only exempted from the rent in proportion to the extent of the loss of income, if the usability of the property has fallen by more than half of the usual income. In the present case, this “loss of income” could be a result from a decline in turnover due to the closure of businesses. In the case of long-term leases or in the event of a loss of income of no more than half, the lessee bears the risk for all circumstances based on extraordinary coincidence.

4. What kind of security is generally provided by a tenant in connection with a lease, a bank guarantee, a deposit or otherwise?

In Austria, securities are common in any case - particularly often as bank guarantees (usually for office and commercial premises) or as cash payments (usually for residential properties).

Apart from the rent reduction, the lessee may also have the right to terminate the lease in accordance with Sec. 1117 ABGB due to total or partial uselessness of the existing property as a result of an “extraordinary coincidence”. However, it is set out in Sec. 1117 ABGB that the property must be unusable for a longer period. Although there is - as far as can be seen - no case law that specifically deals with the definition of a “longer period of time” in the sense of Sec. 1117 ABGB, in most cases, the unusability of the respective property is likely to have lasted longer than in the present case (for now). For this reason, we would (still) rather rule out a claim to terminate a lease on the basis of Sec. 1117 ABGB at the present time; however, this may change in the case of longer periods of unitability.

Instead, in case of unforeseen events, claims for termination of lease agreements might also be based on the legal principle of “frustration of contract”, which is based on an analogy of various provisions of the ABGB (Sec. 901, 936, 1052, 1170 a para 2 ABGB). According to case law, such an unforeseeable event exists, for example, if the economic development of an existing property is disappointing (i.e., if an existing property use does not generate anticipated income). However, the principle of “frustration of contract” is generally only subsidiarily applicable to the above provisions for claims for both rent reductions and termination of contract. Accordingly, the Austrian Supreme Court (OGH) has already excluded the application of this legal principle for the termination of lease agreements in case Sec. 1117 ABGB applies. Since we consider the application of Sec. 1117 ABGB – at least currently due to the term of the restrictions - to be rather unlikely, it might be possible to base claims for termination on “frustration of contract”. However, as there is no case law on rent reductions due to “frustration of contract”, it cannot be predicted with certainty whether such claims will be successful or not.

In case the lessee suspends payment of the rent in whole or in part, the lessor is entitled to terminate the rent or lease agreement and file an action for rent and eviction in case the rent reduction claim is not admissible. Thus, it is advisable for lessees to pay the rent only under reservation, otherwise an unconditional further payment can be considered as waiver of a rent reduction.

Further, it should be noted that § 1104 ABGB is non-mandatory and can therefore be waived or regulated differently by the contracting parties. Before rent payments are suspended too hastily, it is therefore advisable to check whether and how cases of impossibility of use of the existing property have been regulated in the specific rental or lease agreement.

Picture of Nikolaus Weselik
Nikolaus Weselik
Picture of Gregor Famira
Gregor Famira
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Johannes Hysek
Picture of Mariella Kapoun
Mariella Kapoun
Attorney-at-law for real estate law