Covid 19 - Effects on the obligation to pay rent under commercial lease agreements and bill of the German Government on temporary relief for tenants
Who bears the economic risk of making profits or suffering losses with the premises (the "Risk")?
Under German commercial lease agreements the tenant bears the Risk as long as the premises itself are not defective. The principle "pacta sunt servanda" - contracts must be fulfilled - applies also in the current situation.
Are tenants under commercial lease agreements obliged to pay the rent even if declining turnover result from measures against the corona epidemic that are beyond the tenants' control? Are tenants entitled to claim for a suspension or a deferral of payments?
Tenants under commercial lease agreements have no statutory right to unilaterally suspend rental payments or to claim for a deferral. This generally applies in the current situation, in which business activity has collapsed in many areas due to external factors beyond the tenants' control and liability, too. Therefore, tenants are still obliged to pay the rent.
The Bill provides only that lease agreements with tenants who are in arrears with their rent pay-ments due to the corona epidemic may not be terminated for this reason in the period from 1 April 2020 to initially 30 June 2020 (the "Period"). Other reasons for termination and, in particular, the right to terminate the agreement due to rent arrears for other reasons not caused by the corona epidemic remain unaffected. It is currently planned that tenants are obliged to pay rent arrears accrued in the Period due to the corona epidemic must by 30 June 2022 at the latest. After 30 June 2022, landlords shall have the right to terminate lease agreements also on the basis of rent arrears during the Period, which were caused by the corona epidemic.
Do commercial tenants in Germany have a right to reduce the rent due to the corona epidemic (Mietminderung)?
Under German law tenants have a right to reduce the rent if there is a defect in the premises and if this right is not restricted or excluded by the lease agreement. The decisive factor, in determining whether the rent in a commercial lease agreement can be reduced due to the corona epidemic is whether the general restrictions due to the corona epidemic (the "Restrictions") constitute a defect in the premises. In most cases the Restrictions will not be related to or caused by the premises themselves. The closure of day-care centres, bars and retail stores is based on the fact that many people meet on such premises on an enclosed area where the virus can spread quickly. This has nothing to do with the premises themselves. The respective premises are still suitable for the intend-ed purpose. The Restrictions are solely based on aspects related to the tenant's use of the premises, similar to a smoking ban. According to settled case law, restrictions on use do not constitute a defect in the premises. Therefore, in most cases tenants do not have a right to reduce the rent during the time the Restrictions are in place.
Do commercial tenants have a right to rent adjustment due to the principle of frustration (Wegfall der Geschäftsgrundlage)?
An adjustment of rent due to the Restrictions or the associated loss of sales with reference to the principle of frustration is only possible if the disruption goes beyond the risk allocated by law. According to the statutory distribution of risk the Risk is generally borne by the tenant. Therefore, even in the current situation tenants are probably not entitled to claim for rent adjustments based on the principle of frustration.
This view is also supported by the Bill. The Bill temporarily excludes the landlords' right of termination due to rent arrears caused by the corona epidemic. The legislator provides some relief for tenants for a limited period in time, but leaves the general statutory allocation of risk unchanged.
How should tenants affected by the effects of the Corona epidemic act with regard to their commercial lease agreements?
In most cases tenants will for the time being still be obliged to pay the full rent. This may be different if the parties have agreed otherwise in the lease agreement (assumption of the Risk by the landlord, tenant's turnover as a reference value for rent, etc.). Therefore, tenants should carefully review their lease agreements before taking any further action. Temporary suspension of rental payments will currently not result in a termination of the lease agreement in exceptional cases during the period 1 April - 30 June 2020, if tenants can prove that they cannot pay the rent due to the corona epidemic. Reductions or suspensions of rent payments should not be made unilaterally. In addition to the risk of becoming liable for damages, tenants are at risk that landlords may terminate lease agreements in case of rent arrears. However, landlords are also affected by the Restrictions in the long run if insolvencies of tenants on a large scale threaten their rental income. The parties should therefore get into contact at an early stage to try to find custom-made solutions.
For all questions arising in this context, please reach out to your usual kallan contact persons or contact us at firstname.lastname@example.org.
The situation resulting from the effects of coronavirus is changing rapidly. The above information reflects the situation on 25 March 2020 which may have changed since then.