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Protection against termination of residential and business premises

23/03/2020

The German government has presented a draft law to mitigate the consequences of the COVID 19 pandemic, which is to be adopted in the near future.

The German government expects considerable loss of income for individuals and businesses as a result of the measures adopted to limit the COVID 19 pandemic, in particular the ordering of quarantine and the closure of a large number of facilities and businesses.

Moratorium for consumers and micro-entrepreneurs

The draft law provides, among other things, for a right of refusal of performance for consumers and micro-entrepreneurs until 30 June 2020 for all material continuing obligations that were concluded by 8 March 2020 and cannot be fulfilled due to the consequences of the COVID 19 pandemic.

Exclusion of termination for residential and business premises

In contrast, a special rule applies to leases, according to which the landlord is not entitled to terminate the lease - whether residential or commercial - for the sole reason that the tenant does not pay the rent in the period from 1 April to 30 June 2020 despite the fact that it is due, if the non-payment is caused by the effects of the COVID 19 pandemic.

Does the tenant have a right to refuse performance?

No. The tenant's payment obligations are not affected. If he does not pay, he is therefore in default and also owes default interest. This means that the landlord can also generally access the rental bond. It may therefore be advisable for the parties of the lease agreement to conclude a separate agreement on the question of rent payments.

How long does the exclusion of termination apply?

The exclusion of the right of termination is valid until June 30, 2022. Therefore, any rent arrears must be settled by June 30, 2022 at the latest, otherwise the landlord is entitled to the right of termination again.

Can the landlord terminate the lease for other reasons?

Yes. Other termination rights remain unaffected. The landlord can therefore terminate the lease, in particular due to any other breach of contract by the tenant. Likewise, the landlord can terminate unlimited business premises lease agreements in compliance with the regular notice periods. 

Does the tenant have to prove that he cannot pay because of the COVID 19 pandemic?

Yes. However, it is sufficient if the tenant can prove the connection. Tenants are therefore advised to document their economic situation and its causes in detail. If a tenant can prove that his business has collapsed in close temporal connection with the COVID-19 pandemic and that his liquidity has been used up by the running costs, the landlord will hardly be able to disprove this. However, this will be different for tenants who are able to continue their business despite the COVID 19 pandemic, such as in food retailing, or who have high liquidity reserves. The draft law is not a free ticket for tenants who are unwilling to pay.

Can the parties deviate from the legal regulation?

No. However, it must be taken into account that the draft law only refers to the exclusion of the landlord's right of termination due to non-payment of rent. In particular, the parties may conclude agreements on the temporary suspension of the rent. 

Does the law also apply to lease agreements? 

Yes. The regulations also apply to lease agreements. 

Does the law also regulate the consequences of plant closures?

No. The draft law refers solely to the consequences of an expected loss or decline in income. However, the draft law assumes in principle that the tenant is not entitled to reduce the rent due to the COVID 19 pandemic on the basis of the general provisions of tenancy law

Can tenants reduce the rent in the event of plant closures?

This question will probably occupy the courts to a greater extent. 
So far, case law has only ruled that closures of plants which are linked to special characteristics of the leased property, e.g. fire protection defects or lack of a building permit, constitute a defect and thus entitle the tenant to a rent reduction. Conversely, plant closures which are linked to the person or the business of the tenant do not regularly constitute a defect in the leased property and therefore do not affect the tenant's obligation to pay rent. 

The current situation that the closure of business premises is ordered in order to limit the effects of a pandemic has not yet occurred. This is a risk that was not foreseen by either side. It therefore does not seem impossible to enable the tenant to adjust the rent via the legal institution of the "fundamental change of circumstances". 

Can tenants give notice in the event of plant closures?

This question, too, will probably still be a matter for the courts. However, with very few exceptions, such as when the existence of the tenant is otherwise threatened, the termination of a long-term lease due to a temporary closure of the plant should be excluded.

Conclusion

The draft law is to be welcomed in principle, as it gives top priority to securing residential and business premises. However, a large proportion of landlords would certainly have been prepared to grant their tenants deferral of payments even without state intervention in contractual autonomy. Whether the legal regulation will suffice will be seen in the coming weeks and months. It is to be feared that the mere suspension of the possibility of termination in the event of non-payment of rent by 30 June 2020 will not be sufficient to compensate for the consequences of the current restrictions on business life. Thus, the law already provides for the possibility of extending the period until 30 September 2020 if it is to be expected that the social life and employment of a large number of people will continue to be significantly affected by the COVID 19 pandemic.

Unlike the preliminary draft of the law, the current draft no longer provides for the general deferral of payment obligations under loan agreements. Rather, this option now only applies to consumers. Professional landlords therefore remain obliged under loan agreements concluded by them, even if they themselves no longer generate rental income. This is likely to cause financial difficulties for some landlords. It remains to be seen whether the legislator will react to this after all.

Authors

Philipp Schönnenbeck
Philipp Schönnenbeck, LL.M.
Partner
Duesseldorf