In our March and May 2021 posts, we had reported on the disparity in superior court jurisprudence related to tenants’ and lessees’ lease payment obligations during the COVID 19 pandemic. Now, for the first time, the Federal Court of Justice has ruled today, January 12, 2022, on a commercial tenant’s obligation to pay rent during an officially ordered closure. As expected, it appears to the court that an adjustment under the principles of disturbance of the basis of the transaction is possible. In determining what is reasonable for the tenant, all circumstances of the individual case must be taken into account. Negotiations between landlord and tenant on the amount of rent are therefore still the right way to solve the problem.
The defendant leased premises from the plaintiff for the operation of a retail store for textiles of all kinds as well as other goods. Due to the spreading COVID-19 pandemic, the Saxon State Ministry of Social Affairs and Social Cohesion issued general orders on March 18 and 20, 2020, requiring the defendant to close its retail textile store in the rental property from March 19 to April 19, 2020, inclusive. As a result of the officially ordered closure of the plant, the defendant did not pay any rent for the month of April 2020.
Process to date
The Regional Court ordered the defendant to pay rent for the month of April 2020 in the amount of €7,854.00. On appeal by the defendant, the Higher Regional Court reversed the first-instance decision and ordered the defendant to pay only €3,720.09, dismissing the remainder of the action. As a result of the occurrence of the COVID-19 pandemic and the state closure order based on the general orders, a disturbance of the basis of the lease agreement within the meaning of § 313 para. 1 BGB (German Civil Code), which requires an adjustment of the agreement to the effect that the cold rent is reduced by half for the duration of the ordered closure.
On appeal by the plaintiff, who continues to demand the full rent, and by the defendant, who continues to pursue its motion to dismiss the action, the Federal Court of Justice reversed the judgment of the Higher Regional Court and referred the case back to it.
The German Federal Court of Justice (Bundesgerichtshof) has ruled that in the event of a business closure due to a sovereign measure to combat the COVID 19 pandemic, a claim by the tenant of commercially used premises for adjustment of the rent due to disturbance of the basis of the business may in principle be considered. According to the BGH, Art. 240 § 2 EGBGB, which regulates a temporary exclusion of termination in the event of unpaid rent, does not preclude this because the provision enacted in 2020 says nothing about the amount of the rent.
The closure of the business based on the general orders of the Saxon State Ministry did not result in a defect in the leased property. If, due to legislative measures, impairments of the contractual use arise during an ongoing tenancy, this may constitute a defect within the meaning of Section 536 (1) of the German Civil Code. 1 sentence 1 BGB. However, the prerequisite for this is that the restriction on use brought about by the legislative measure is directly related to the specific nature, condition or location of the rental property. Defendants’ use restriction associated with the Closure Order does not meet this requirement. The closure of the business ordered by the authorities is linked solely to the type of use and the resulting public traffic, which favors the risk of increased spread of the SARS-CoV-2 virus and which should be prohibited for reasons of protection against infection. However, the general order does not prohibit the defendant from using the rented business premises in other respects, nor does it actually or legally prohibit the plaintiff from letting the rented premises. The rental property therefore continued to be available for the agreed rental purpose despite the closure order.
However, the tenant of commercially used premises may, in the event of a business closure due to a sovereign measure to combat the COVID 19 pandemic, in principle be entitled to an adjustment of the rent due to disturbance of the basis of the business pursuant to Section 313 (1) of the German Civil Code. 1 BGB are entitled to. The Court of Appeal had recognized this correctly in principle; however, in the opinion of the Federal Court of Justice, its considerations regarding a possible adjustment of the contract are not free of legal errors. The court argues that the newly created provision of Art. 240 § 7 EGBGB speaks in favor of the applicability of the BGB standard on the disturbance of the basis of the contract, because according to this it is to be assumed that a circumstance within the meaning of § 313 para. 1 BGB (German Civil Code), which has become the basis of the rental agreement, has changed seriously after the conclusion of the agreement if rented property or rented premises that are not residential premises cannot be used for the tenant’s business or can only be used with considerable restrictions as a result of government measures to combat the COVID 19 pandemic.
The mere discontinuation of the basis of the business pursuant to § 313 para. 1 BGB, however, does not yet entitle the customer to adjust the contract. Rather, the provision requires as a further prerequisite that the affected contractual partner cannot reasonably be expected to adhere to the unchanged contract, taking into account all circumstances of the individual case, in particular the contractual or statutory distribution of risk. The COVID 19 pandemic ultimately resulted in the realization of a general risk of life that is not covered by the distribution of risk under the lease agreement without a corresponding contractual provision. The associated risk can regularly not be assigned to any contracting party alone.
This does not mean, however, that the tenant can always demand an adjustment of the rent for the period of closure. Whether it is unreasonable for the tenant to adhere to the unchanged contract also requires a comprehensive assessment in this case, in which all circumstances of the individual case must be taken into account. A blanket approach does not meet the requirements for this normative element of the provision. Therefore, in the opinion of Germany’s highest civil court, the flat-rate reduction in rent applied by the Higher Regional Court cannot be considered. Rather, a comprehensive assessment based on the individual case is required, in which it is first of all important which disadvantages the tenant has suffered as a result of the closure of the business and its duration. In the case of a commercial tenant, these will primarily consist of a concrete drop in sales for the period of closure, although interestingly enough, according to the BGH, only the concrete rental property and not a possible group turnover is to be taken into account. Also to be considered may be what measures the tenant took or could have taken to mitigate the impending losses during the store closure.
However, since an adjustment of the contract in accordance with the principles of disturbance of the basis of the contract may not lead to an overcompensation of the losses incurred, the financial benefits that the tenant has obtained from state benefits to compensate for the pandemic-related disadvantages must also be taken into account in principle when examining the unreasonableness. In this context, benefits of a possibly liable business insurance of the tenant may also have to be taken into account. Furthermore, it is extremely exciting that state support measures that were only granted on the basis of a loan must be disregarded in the required weighing, because the tenant does not achieve any final compensation for the loss of revenue suffered through them. An actual threat to the economic existence of the tenant is not required.
While the BGH’s decision, eagerly awaited by many real estate companies, does not offer a simple solution for dealing with rent and lease payment obligations during Corona-related closure orders, it does offer a solution for dealing with the issue of the payment of rent and lease payments during Corona-related closure orders. Rather, it was clarified that a case-by-case assessment is still required. However, many starting points for the evaluation of the respective individual case can be taken from the decision, which then enable justice in the individual case – for example, the view only on the sales in the respective rental object concerned and the consideration of insurance benefits, but not state aid in the form of loans. Initial comments from real estate associations welcome the decision.
Since even after the ruling of the Federal Court of Justice it is still necessary to consider each individual case, we believe that landlords and tenants should continue to strive to find an amicable solution. Insofar as rental and lease agreements already contain Corona provisions that a possible decision of the Federal Court of Justice should have an influence with regard to rental and lease payment obligations, the effects of the decision now issued should be reviewed. We will be happy to support you in this.
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