I.Overview of the legislative amendment
On 31 December 2020, the Act on the Further Shortening of Residual Debt Relief Proceedings and the Adjustment of Pandemic-Related Provisions in Company, Cooperative, Association and Foundation Law as well as in Tenancy and Lease Law (Gesetz zur weiteren Verkürzung des Restschuldbefreiungsverfahrens und zur Anpassung pandemiebedingter Vorschriften im Gesellschafts-, Genossenschafts-, Vereins- und Stiftungsrecht sowie im Miet- und Pachtrecht) came into force. This Act inserted a new Article 240 sec. 7 into the Introductory Act to the Civil Code (Einführungsgesetz zum Bürgerlichen Gesetzbuch – EGBGB). This provision applies to leased property or space that is not residential property and that is or was not usable for the tenant’s business or was usable only with significant limitations as a result of governmental actions to address the COVID-19 pandemic. For such cases, the new provision creates a legal presumption that a circumstance within the meaning of sec. 313 para. 1 German Civil Code (Bürgerliches Gesetzbuch – BGB), which has become the basis of the tenancy agreement, has changed considerably after the conclusion of the agreement. Sec. 313 para. 1 BGB grants a party a right to adjust the agreement under certain circumstances. The amendment applies accordingly to lease agreements. For better readability, we will only refer to rental agreements in the following and include lease agreements in the same way.
II. Analysis of the new legal regulation
Sec. 313 para. 1 BGB, to which Art. 240 § 7 EGBGB refers, standardizes a party’s claim to amendment of the agreement due to a so-called disturbance of the basis of the agreement. In the event that
(1) circumstances that have become the basis of the agreement have changed severely after the conclusion of the agreement; and
(2) the parties would not have concluded the agreement or would have concluded it with different content if they had foreseen this change, adjustment of the agreement may be demanded,
(3) to the extent that one party cannot be expected to adhere to the unchanged agreement, taking into account all circumstances of the individual case, in particular the contractual or statutory distribution of risk.
A contractual adjustment can, for example, be a reduction of the rent.
The provision thus has three prerequisites. The effect of the new provision in the EGBGB is that it is legally presumed that the first of the three requirements (change in circumstances that have become the basis of the agreement) has been met if the commercial tenant can no longer use the leased space or can only use it to a limited extent as a result of government measures taken in the wake of the Corona pandemic. By restricted use, the legislature specifically means limiting the number of persons allowed per square meter.
The existence of this first prerequisite, that fundamental circumstances have changed seriously, has already been affirmed by some courts in recent months in the case of a state-mandated closure of stores due to the pandemic. What the courts have sometimes denied, however, and what has always been the most difficult of all prerequisites for a claim to adjust an agreement, is the third prerequisite, namely the distribution of risk. There is still no presumption of conformity in this regard. In the explanatory memorandum, the legislator merely states that burdens resulting from government measures to combat the COVID-19 pandemic are regularly attributable neither to the sphere of the tenant nor to the sphere of the landlord. In this case, too, the contractual provisions are decisive.
As a result, from the tenant’s point of view, the given uncertainties in the application of sec. 313 para. 1 BGB are likely to persist. This has already been demonstrated in a recent ruling that addresses the legislative clarification. According to the explanatory memorandum, the legislator wanted to appeal to the willingness of the contracting parties to negotiate, in particular the landlords, by stipulating that sec. 313 BGB shall apply in principle. The tenant can certainly adopt this for negotiations, but a claim cannot be derived from it.
Finally, the explanatory memorandum states that the statutory law on breach of contract, in particular rent reduction, applies and that this takes precedence over sec. 313 BGB. This statement by the legislator can also be adopted by tenants under certain circumstances, as some courts have so far denied the possibility of a rent reduction if stores were not allowed to open due to public law regulations.
An institution such as the “Mietenmoratorium (rent moratorium)”, which was in place during the period April to June 2020, was not re-established at the end of 2020. During the “Mietenmoratorium (rent moratorium)”, tenants could suspend their rent payments due to the pandemic without the landlord being able to terminate the contract because of it. This did not affect the payment obligation as such, and unpaid rents are payable no later than 30 June 2022.
On a procedural level, the legislator introduced a provision in late 2020 that would require courts to expedite proceedings on commercial lease adjustments resulting from state actions due to the COVID-19 pandemic.
III. Brief overview of the case law
In recent months, a number of first-instance decisions on commercial lease law have already been published as a result of the government’s “first wave” pandemic response measures starting in mid-March 2020. As far as can be seen, however, no second instance court has yet ruled on such questions, and the informative value of the various predominantly district court decisions is limited in the absence of uniform higher court case law.
Case law held that the general law on defective performance pursuant to sec. 536 et seq. BGB, which also includes the right to reduce rent, was in principle applicable in the case of government-ordered closures. It also did not see this as limited by the rent moratorium described earlier. However, the vast majority of the district and local courts of first instance dealing with this issue rejected the existence of a defect, which is a prerequisite for the intervention of the law on disturbance of performance.
A defect is always given if the actual condition of the rental object deviates from the contractually required condition. Impediments to use and restrictions under public law may also reduce the suitability for the contractual use and thus constitute a material defect. This may apply in particular to the rental of commercial premises. The prerequisite is that the restrictions for the specific rental object have their cause precisely in its nature and relationship to the environment, and not, for example, in the personal or operational circumstances of the tenant.
Some courts did not consider this prerequisite to be met because the restrictions were not linked to the condition of the leased property or its environment, but to the business conducted in the leased property, i.e. the type of use. Those courts saw the obligation to bear the risk of being able to use the leased property for the intended purpose as resting with the tenant and not with the landlord.
However, there were also courts that ruled differently and recognized the tenant’s right to reduce the rent. The rent in these cases reduced itself automatically in an appropriate amount. The amount of the reduction is subject to judicial review.
Similar arguments have also been followed by some courts in the context of the applicability of sec. 313 para. 1 BGB. The so-called risk of use (Verwendungsrisiko) lies in this case with the tenant and therefore the tenant cannot derive a claim to an adjustment of the agreement. The entrepreneur could use the rented rooms for his online trade and/or as storage rooms. The tenant would also have to switch to e-commerce in the short term. Sometimes, presentation and proof of the existence of a situation endangering the tenant’s existence was required. This has sometimes not been followed by the courts because the tenants benefited from short-time work, state subsidies, savings on purchases, etc.
However, there have also been decisions on sec. 313 BGB in favor of the tenant. The risk associated with the operating ban was neither in the sphere of risk of the tenant nor of the landlord and therefore reduction by the half of the rent for the period of the “lockdown” was appropriate, according to the decision of one regional court, for example.
As a result, there were already certain prospects of success for commercial tenants for a rent reduction or a claim for adjustment of the agreement under the previous legal situation. It should also be noted that the contractually agreed provisions and the circumstances of the individual case are of primary importance. The individual agreement in the lease may require an entirely different assessment. For the future, it remains to be seen to what extent the change in the law will influence the case law on sec. 313 BGB. After all, the change in the law has strengthened tenants’ backs for negotiations with landlords and eliminated some uncertainties, although from the tenant’s point of view more far-reaching regulations would definitely have been desirable. Nevertheless, tenants can bring up the legislator’s positioning in negotiations with their landlord. In view of the discussions about the desolation of the city centers, landlords will also have an interest in ensuring that their commercial tenants come through the current crisis in such a way that a functioning tenancy relationship, possibly with a minimum term, continues in the future.