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The Covid-19 Pandemic has so far been an extraordinary challenge to commercial leases. Early on, the German legislator reacted with a rent moratorium to protect tenants against terminations and evictions, due to late payment of rent. As of 31 December 2020, new regulation in sec. 7 of Art. 240 of the Introductory Act to the German Civil Code (“EGBGB”) makes the legal presumption that significant restrictions (on use) in respect of leased commercial premises, as a result of governmental measures to combat the Covid-19 pandemic, constitute a fundamentally change to the basis of the contractual relationship between the tenant and its landlord. This opens up the possibility for tenants to claim an adjustment of the rent based on the legal doctrine of frustration of contract.
During the beginning of the Covid-19 Pandemic, the German legislator reacted to the economic implications of the lockdown measures regarding commercial leases with a rent moratorium to protect the tenants against terminations and evictions, due to late payment of rent. These measures gave commercial tenants some (temporary) financial security and burdened landlords with the temporary financing of outstanding rent. To the benefit of the landlords, the rent remains due, see further information hereto in our previous newsletter.
The intention of the legislator was to promote the parties’ willingness to negotiate and thereby to have the market regulate the economic implications for commercial leases resulting from Covid-19 measures. In the perception of the legislator, the landlords, however, lacked the willingness to negotiate to some extent.
In December 2020, the legislator in Germany therefore adopted two new provisions on commercial leases to strengthen the negotiation position of the commercial tenants.
The new regulation in sec. 7 of Art. 240 of EGBGB makes the legal presumption that, if leased premises cannot be used for the tenant’s business or can only be used with considerable restrictions as a result of governmental measures, the basis for the contractual relationship between the tenant and its landlord has fundamentally changed within the meaning of sec. 313 of the German Civil Code (“BGB”). This opens up the opportunity for commercial tenants to claim an adjustment of the lease agreement (such as a (temporary) reduction of rent, a deferment of rent, and up until the option to extraordinary terminate the lease agreement) within the framework of sec. 313 of BGB.
Under the framework of sec. 313 of BGB an adjustment of the content of a contract is possible in the event of frustration of contract (“Störung der Geschäftsgrundlage”).
A frustration of contract exists, if
It is an additional condition for an adjustment that one of the parties cannot reasonably be expected to uphold the contract without such alterations.
Moreover, the legislator adopted accommodating procedural rules to secure priority and expedited treatment of court proceedings, in sec. 44 of the Introduction of the Code of Civil Procedure (“EGZPO”). The new procedural rule stipulates that civil courts must treat all cases relating to rent adjustments with priority and expeditiously. The first court hearing must be held no longer than one month after the statement of complaint is served.
With the introduction of the legal presumption in sec. 7 of Art. 240 of EGBGB, that Covid-19-related measures constitute a substantial change in the circumstances forming the basis of the contract, it is now clarified that the legal doctrine of frustration of contract is generally applicable to Covid-19-related restrictions imposed by the government. It was previously uncertain in practice, whether sec. 313 of BGB was applicable to Covid-19-related restrictions.
However, it should be stressed that the new legislation does not give the tenant an automatic right of adjustment of the lease agreement. The legal presumption only fulfils one of the requirements of sec. 313 of BGB. The question, whether the other requirements under sec. 313 of BGB are fulfilled, has to be evaluated on a case-by-cases basis. The tenants still have to prove the other prerequisites of sec. 313 of BGB, in particular that the current terms of the lease agreement are unreasonable because of the lockdown measures, and that the tenant therefore cannot reasonably be expected to uphold the lease agreement with the current terms without an alteration.
In addition, the contractual agreements (for instance specific contractual provisions on the allocation of risk between the parties) as well as more specific rules on the breach of contract under tenancy law takes precedence of the application of sec. 313 of BGB.
So far, it can be said that the negotiation position for tenants has improved. Even though the new regulation does not give the tenant an automatic right of adjustment of the lease agreement, the new regulation might be enough to force property owners to the table. Furthermore, the requirement for priority and expedited treatment of court proceedings, which was introduced alongside, might motivate the parties to reach an agreement on an adjustment rather quickly.
Initial judgments citing the new regulation give an inconclusive picture of the situation. Adjustments, including reductions of up to 50% of the agreed rent as well as dismissals of claims, have been seen in first instance decisions so far. The initial judgements demonstrate that a case-by-case evaluation is required, taking into consideration the individual circumstances.
With the new regulation, the tenants’ position to renegotiate lease agreements is strengthened. On the other hand, landlords still have several points of attack to mitigate claims under the new regulation. It is going to be interesting to see how the courts will rule in the future.
Landlords should prepare for being confronted with negotiation requests from the commercial tenants with the intention of amending the lease agreements, and tenants have new arguments on their side.
Gorrissen Federspiel, together with our network of leading law firms in Germany, stand ready to assist you.