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09.03.2021 | KPMG Law Insights

Disturbance of the basis of business? – What’s next for hotel operators?

Disturbance of the basis of business? – What’s next for hotel operators?

On January 27, 2020, we had the first Corona infection in Germany. Infection numbers increased and deaths were increasingly recorded, so to contain the COVID-19 pandemic, federal, state, and local governments severely curtailed public life. A nationwide first lock-down applied beginning March 22, 2020. Only from May 4, 2020, there were gradual relaxations – the ban on accommodation for tourist purposes was transformed into an appeal to the population to refrain from tourist travel. In early October 2020, accommodation bans for tourist travel were reintroduced due to rising infection rates and deaths. Since December 16, 2020, Germany has been in the second lock-down.

The hotel industry is immensely affected by this. Due to government-mandated accommodation bans for tourism purposes, as well as changes in travel patterns due to the COVID-19 pandemic, e.g., elimination of business travel and predominant home-working for a large number of business people. What legal options do hotel operators have with regard to their rental or lease relationships? This is a question to which the federal government, district and superior courts, numerous attorneys, hotel operators and owners have been searching for the right answer since the outbreak of the COVID-19 pandemic. We outline below our assessment of the legal situation and possible, balanced and appropriate solutions for both sides (hotel operators and owners).

 

With the Corona Pandemic Mitigation Act. in the Civil, Insolvency and Criminal Procedure Code, which became effective on April 1, 2020, was known to preclude the landlord’s or lessor’s right to terminate the lease if the tenant or lessee fails to pay rent or lease (including service charges and operating expenses in advance) as a result of the effects of the COVID 19 pandemic during the period from April 1, 2020 to June 30, 2020. In principle, however, the agreed rent or lease still remained owed. As a result, the landlord or lessor is entitled to default interest in addition to the agreed rent or lease, which currently amounts to 8.12% p.a., because the statutory default interest rate for entrepreneurs is 9 percentage points above the prime rate and currently the prime rate is -0.88%. Furthermore, the tenant or lessee remains obligated to pay the outstanding rent or lease until June 30, 2022, and may be threatened with the utilization of the rental or lease security provided while the lease or tenancy is still in effect if the claim is undisputed or has been determined by a court. In our opinion, hotel operators have not really gained anything from this legal change.

Therefore, in negotiations and also in contentious proceedings, attempts were made to enforce a reduction in rent or lease on the basis of the existence of a defect in the rented or leased property and an adjustment of the rent or lease on the basis of the principles of disturbance of the basis of the transaction by applying the statutory provisions still in force.

Numerous district court decisions (LG München II, judgment of January 28, 2021, 1 O 2773/20; LG München I, judgment of January 25, 2021, 31 O 7743/20; LG Stuttgart, judgment of November 19, 2020, 11 O 215/20; LG Wiesbaden, November 5, 2020, 5. November 2020, 9 O 852/20; LG Mönchengladbach, November 2, 2020, 12 O 154/20; LG Munich II, judgment of October 6, 2020, 13 O 2044/33; LG Munich I, judgment of October 5, 2020, 34 O 6013/20, LG Frankfurt a.M., Judgment of October 2, 2020, 2-15 O 23/20; LG Zweibrücken, Judgment of September 11, 2020, HK O 17/20; LG Frankfurt a.M., August 7, 2020, 5 O 160/20; LG Heidelberg, Judgment of July 30, 2020, 5 O 66/20, LG Mannheim, July 23, 2020, 23 O 22/20, ) were issued, which, however, largely concerned retail trade and only in a more recent decision of the Regional Court of Munich I (LG Munich I, Judgment of January 25, 2021, 31 O 7743/20) had to assess a hotel business. On February 24, 2021, the first decision of a higher regional court was also issued (OLG Dresden, 5U 1782/29), although this has not yet been published and therefore only a press release exists.

The existence of a defect in the rented or leased item is largely rejected by the courts (with the exception of, for example, Munich Regional Court I, judgment of September 22, 2020, 3 O 4495/20) and also in the literature. Thus, it is generally true that a rented or leased item is defective if its suitability for use in accordance with the contract is nullified or limited. However, according to prevailing opinion, sovereign measures only lead to a defect if there is a direct connection with the quality, condition or location of the rented or leased property (LG München II, judgment of October 6, 2020, 13 O 2044/33). However, this direct connection is likely to be lacking in the case of hotel operations. Thus, no complete hotel closure was regularly ordered, but only the accommodation for tourist purposes was prohibited for a certain period of time. Use by business travelers was and still is possible. Moreover, the COVID-19 pandemic does not affect a specific hotel location, but the entire world. Also, the order of prohibition of accommodation for tourist purposes is not directed against the specific hotel operation. Rather, the decrease in occupancy is an indirect consequence due to the change in customer behavior to refrain from traveling and ultimately protect themselves from the COVID-19 pandemic.

A reduction in rent or lease was therefore, insofar as assumed in the literature, largely based on the principles of the elimination or disruption of the basis of the transaction within the meaning of Section 313 of the German Civil Code (Bürgerliches Gesetzbuch – BGB ). The provision states: “If circumstances that have become the basis of the contract have changed seriously after the conclusion of the contract and if the parties would not have concluded the contract or would have concluded it with changed content if they had foreseen this change, an adjustment of the contract may be demanded insofar as one party cannot reasonably be expected to adhere to the unchanged contract, taking into account all circumstances of the individual case, in particular the contractual or legal distribution of risk.”

To this end, on December 17, 2020, the Bundestag passed an amendment , which entered into force on December 31, 2020 with a time limit until September 30, 2022. In the new Art. 240 § 7 EGBGB it says

“(1) If, as a result of government measures to combat the COVID 19 pandemic, leased land or leased premises that are not residential premises cannot be used for the tenant’s business or can be used only with significant restrictions, it shall be presumed that, in this respect, a circumstance within the meaning of Section 313(1) of the Civil Code that has become the basis of the lease has changed seriously after the conclusion of the contract.

(2) Paragraph (1) shall apply mutatis mutandis to leases.”

The scope of application is also opened in terms of time for facts prior to the entry into force of the new regulation, insofar as these have not yet been legally decided. This also covers cases of the first lock-down.

In factual terms, three elements must be fulfilled: a real, a hypothetical and a normative element .

The real element is fulfilled if a circumstance that has become the basis of the contract changes seriously after the conclusion of the contract. Now, according to the legal introduction of Art. 240 § 7 of the Introductory Act to the German Civil Code (EGBGB ), there is a presumption for the lessee or tenant that the leased or rented object cannot be used or can only be used with considerable restrictions due to governmental Covid 19 pandemic measures. Thus, (unfortunately) the mere fact that the COVID-19 pandemic has changed a material circumstance that has become the business basis of the lease or rental agreement is presumed by law. Counter-evidence by the landlord or lessor remains possible. This applies in particular to cases in which the lease or rental agreement was concluded at a time when the spread of the COVIaD-19 pandemic and the resulting measures were already foreseeable. Under no circumstances does the existence of this circumstance alone cause an adjustment of the rent or lease. In our opinion, this legal regulation does not provide much benefit either. Rather, it remains to examine the existence of the following, further prerequisites for the facts and the determination of a legal consequence in the individual case. Politicians have tried to bring the parties to the negotiating table, and this is explicitly stated in the explanatory memorandum to the law. Indeed, no one today doubts that different arrangements would have been made if an outbreak of such a pandemic had been known. The existence of a change of circumstance and thus of the real element has not been questioned by the district courts so far. This means that landlords or lessors do not have to “tremble”, as has already been read, but tenants or lessees and thus hotel operators cannot rejoice either. Rather, the new rule arguably states only that the legislature believes that the COVID-19 pandemic is not solely the risk sphere of either the landlord/lessor or the tenant/lessee.

Under the further hypothetical element, the question to be assessed is whether the parties would not have entered into the contract, or would have entered into it with modified content, had they anticipated the Covid 19 pandemic-related restrictions. The regulations on rent or lease are decisive for this. If a turnover or fixed rent or lease is owed (with a turnover incentive, if applicable), it is necessary to ask how high the current rent or lease is compared to the market situation, what the coverage ratio through sales revenues is and what the supply/demand ratio on the market and the resulting negotiating positions are.

According to a recent ruling by the Munich I Regional Court (ruling of January 25, 2021, 31 O 7743/20), the last prerequisite, the existence of the normative element, is of decisive importance: According to this, adherence to the unchanged contract must be unreasonable for the tenant or lessee. The Munich Regional Court carried out an exemplary assessment of the individual case, which will also have to be taken into account in all further (contentious) proceedings (if necessary with a different assessment). In principle, it must first be taken into account that the lessee or tenant must bear the risk of use. In the case of commercial rentals or leases, this includes the risk of being able to generate sales and profits. According to the justification of the amendment of the law pursuant to Art. 240 § 7 EGBGB quoted above, restrictions due to Covid 19 pandemic measures shall neither be assigned to the risk sphere of the landlord or lessor nor to the tenant or lessee. As an indication of the severe impairment of the tenant or lessee and thus of the hotel operator, the amount of the decline in sales compared to the previous year, the amount of the decline in sales compared to the previous year as well as the threat to the existence of the tenant or lessee and his efforts to reduce the losses (reserves, application for subsidies, grants, short-time work) are to be taken into account – the list is of course only exemplary.

What is now interesting are the possibilities in assessing the legal consequence, namely which adjustments to the rental or lease agreement are appropriate, taking into account the individual circumstances of the landlord/lessor and tenant/lessee. Possible scenarios include rent or lease reductions, possibly coupled with an extension of the term of the rental or lease agreement and a subsequent increase in the rent or lease, rent or lease deferrals, and even (partial) waivers of the rent or lease. For the assessment, the landlord or lessor must take into account whether he needs the rent or lease to repay his real estate loan, the remaining term of the rental or lease agreement, the solvency of the tenant, corporate governance requirements and, if applicable, the situation of partners, shareholders, shareholders or investors. The lessee or tenant may contrast this with, in particular, the success of its previous management, its solvency and the efforts made to date to reduce its losses.

As shown, all of this is a case-by-case assessment, and each court will also have to make this case-by-case assessment. A general, generally valid statement about “the” appropriate contract adjustment cannot be made.

In our opinion, therefore, all parties should consider whether they want to strain their relationship with their contractual partner through longstanding court proceedings. In all likelihood, the Federal Court of Justice will only have to judge the cases at a later stage of the pandemic or when it has come to an end, with the consequence that it will be able to survey the effects of the COVID 19 pandemic in its entirety in retrospect – and may therefore judge them differently from the courts of instance now called upon to do so. However, an interim insolvency of the tenant or leaseholder may not be ruled out by then, and this may be associated with the search for a suitable successor operator and, if necessary, a re-branding of the hotel – all measures that are unlikely to be pleasant for any of the contracting parties, but rather entail extreme uncertainties over a long period of time and cause the hotel property to suffer in terms of its reputation and valuation. Therefore, in our opinion, all parties involved should already sit down at the negotiating table and remember one thing: -Only those who act wisely now will still have a long-term business relationship ahead of them “after Corona”.

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