The COVID-19 pandemic - effects on commercial lease agreements after the introduction of Article 240 § 2 of the German Introductory Act to the German Civil Code (EGBGB) (as at: 25/03/2020)

According to the new Article 240 § 2 of the German Introductory Act to the Civil Code (EGBGB), termination of the lease by the landlord is excluded if the tenant does not pay rent due in the period from 1 April 2020 to 30 June 2020, provided that the payment default is due to the effects of the COVID-19 pandemic. This applies to residential and commercial leases as well as to leases of land. Other reasons for termination, e.g. due to the breach of material contractual obligations or lease payments already outstanding before 1 April 2020, remain unaffected by this, so that the landlord can still terminate the lease for such reasons.

The burden of production and substantiating the causal link between the COVID-19 pandemic and non-performance lies with the tenant. According to the explanatory memorandum on the Act, the tenant should usually be able to substantiate this causality by referring to the prohibition or significant restriction of business operations ordered by statutory decree or public order.

In order to avert termination due to non-payment of rent in the period from 1 April to 30 June 2020, the tenant must make the payments by 30 June 2022 (24 months after the end of the exclusion period) at the latest. From this date on, the landlord may again terminate the lease due to non-payment of rent for the period from 1 April to 30 June 2020.

According to the explanatory memorandum on the Act, the tenant shall remain obliged to pay the rent, provided that the rent is due and payable according to general principles. The new provision in Article 240 § 2 EGBGB therefore does not order a statutory deferment. Theoretically, it shall be possible for the tenant to be in default with the entire rent in case of non-payment.

With regard to the statutory exclusion of the legal consequence of termination by the landlord, no deviation to the detriment of the tenant is possible. However, the parties to the lease remain free to make contractual arrangements for the payment of the rent. Such agreements are not affected by the adopted amendment to the EGBGB.

Irrespective of any "pandemic clauses" or other provisions on the purpose of the lease and risk distribution that may be contained in the respective lease agreement and which take precedence, the legislator assumes in its explanatory memorandum that the COVID-19 pandemic will in principle probably not trigger any right of reduction of rent for the tenant.

The legislator thus refers to the principles according to which a lack of guests and customers and the resulting loss of income does not normally entitle a tenant to reduce the rent or to terminate an "onerous" lease agreement. In case of doubt, the so-called ‘risk of fitness for use and success’ lies with the tenant.

In individual cases, however, the impossibility (Section 275 of the German Civil Code (Bürgerliches Gesetzbuch, BGB) of the landlord to make the lease object available for the agreed rental purpose is also conceivable on the basis of the respective statutory decree or general decree. The legal consequence in the event of the assumption of impossibility would be that the tenant is no longer obliged to counterperform (in this case to pay the rent). This question has to be assessed on a case by case basis.

Ultimately, a claim of the tenant for contract adjustment due to an interference with the basis of transaction (Störung der Geschäftsgrundlage) (Section 313 BGB) also comes into question. This may be the case in the event of a significant change in the circumstances that have become the basis of the contract, which may include circumstances of ‘force majeure’. Also in this respect, however, the assessment can only be made on a case by case basis. It is conceivable, that courts could assume a mutual claim for contractual adjustment under the aspect that landlord and tenant form a community being exposed to the same type of risk (Gefahrengemeinschaft) in the current exceptional situation. It is recommended that the parties to the lease agree this among themselves as far as possible.

The risk of a delayed handover due to a construction site where work has slowed down or has come to a standstill as a result of the COVID-19 pandemic shall be borne by the landlord, unless otherwise contractually agreed. In the event of a delayed handover, the landlord may therefore be obliged to pay damages to the tenant and the tenant may be entitled to terminate the lease. Claims for contractual penalties may also become relevant here. Most of the time, however, there will be a lack of fault on the part of the landlord.

For future lease agreements, we recommend the inclusion of provisions whereby both parties can postpone the handover date until a certain point in time. It is also possible to agree on handover corridors (so-called "earliest/latest date") with short notification periods, as well as to agree on grace periods.

At present, future developments and the duration of the restrictions on public life are not foreseeable. This concerns the future of the tenants as well as the dates for reconstruction measures, frequency and turnover forecasts, etc. If contract negotiations have started before the outbreak of the COVID-19 pandemic, they could therefore often be terminated for good cause. To avoid this, the negotiations can either be suspended and continued or ended at a later date, or a special unrestricted right of termination is included in the agreement, that could e.g. Be valid until the end of the year 2020. The parties could then decide at the end of the year, whether they wish to continue the lease or terminate it with the defined consequences. Such decisions, however, should be made calmly and without haste, always bearing in mind the "time after the crisis".

For viewing appointments and contract negotiations the general rules apply.

A tenant is temporarily released from contractual operating obligations if operations are officially prohibited. The situation is different if the business continues to be permitted but does not appear to be economically viable. Here the operating obligation continues to exist, but at the same time there is a need for an appropriate arrangement with the landlord or asset manager.

It is not very likely, that business interruption insurance will cover this event since a pandemic is not a standard insured event.

In view of the further spread of the COVID-19 pandemic, the question arises as to whether a landlord is obliged to protect the tenant or its employees from infection. However, the obligations of the landlord always relate only to the prevention of and precautions against disturbances emanating from the lease object. However, the effects of the COVID-19 pandemic are part of the general risk of life (allgemeines Lebensrisiko) and therefore do not fall under the general duty of a landlord to maintain safety (Verkehrssicherungspflicht).

Irrespective of this, it is advisable here, from the point of view of risk minimisation and a uniform approach in a building or larger property, to contact the respective tenants/tenants' association and agree on a joint concept of measures, which may include more frequent and more intensive cleaning and disinfection or the installation of disinfectant dispensers. This arrangement should also contain a regulation on the allocation of the associated costs, e.g. allocation as part of operating and ancillary costs on a pro rata basis to the individual tenants.

Landlords will usually not leave their tenants alone in the current exceptional situation. In order to alleviate the burden on tenants, agreements on deferral of rent, "rent break" with corresponding extension of the lease and value retention of the rent can also be agreed, as well as, if necessary, contract extensions with the granting of rent-free periods and premature contract terminations, which allow a reorientation of tenant and the development of a new strategy for the property.

In view of the factual and legal uncertainties that still exist in dealing with the COVID-19 pandemic, it is recommended not to take any one-sided action. The order of the day is the appropriate coordination between the contracting parties with the aim of achieving a solution that is economically viable for both sides.

Once the parties have come to terms, it is imperative that their arrangement be fixed in writing. The legal requirement of written form according to Section 550 BGB (according to which agreements disregarding the written form may lead to an ordinary termination of the lease) is not suspended in times of a pandemic. To avoid a bad ending, the written form must be adhered to. The legislative project to abolish the "statutory written form requirement" for lease agreements is currently on hold, so that one still has to act with the utmost care in this regard.