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27.03.2020 | KPMG Law Insights

Protection of leases and tenancies during the COVID 19 pandemic.

Wondering what the federal government plans to do to protect tenants and leases during the COVID 19 pandemic?

Since the March 24, 2020, a bill by the CDU/CSU and SPD parliamentary groups in the Bundestag to mitigate the consequences of the COVID 19 pandemic in civil, insolvency and criminal procedure law is available (BT-Drs. 19/18110), which will be passed on the March 25, 2020 was adopted in the Bundestag. Following the referral to the Bundesrat, the upper house of the German parliament, scheduled for March 27, 2020, the law is expected to enter into force in the short term. With respect to tenancies and leases, the bill provides that tenants who are currently unable to meet their payment obligations as a result of the effects of the COVID 19 pandemic during the period from April 1, 2020, through June 30, 2020, may not be terminated by landlords and lessors for that reason. The rent and lease arrears that have only been deferred in this way must be paid in arrears by June 30, 2022, otherwise the protection against termination will lapse.

Temporary restriction on the termination of tenancies and leases

According to the draft law now published and already intensively discussed with various interest groups in the previous days in the version of a formulation aid, there is to be no rent moratorium in the sense of a general, temporary right to refuse performance for tenants and leaseholders. Instead, it is planned to introduce special provisions in the Introductory Act to the Civil Code in a new Article 240 § 2 to protect tenants and lessees who are unable to fulfill their rental or lease payment obligations due to the COVID 19 pandemic from adverse legal consequences. For both residential and commercial leases, termination options are limited for the period of approximately two years. Leases of land or of premises, and all leases, may not be terminated on the ground that the lessee or tenant failed to pay rent or lease during the period from April 1, 2020, to June 30, 2020, despite the fact that it was due, if the failure was due to the consequences of the COVID 19 pandemic. In the final version of the draft, it was added that the aforementioned three-month period may be extended to six months, or in extreme cases even beyond, by statutory order of the Federal Government.

The restriction on the possibility of termination is intended to prevent the anticipated negative economic effects of the pandemic from causing private tenants to lose their housing and tradespeople to lose their livelihoods. In this regard, it is incumbent upon the respective lessee or tenant to establish a credible connection between the Covid 19 pandemic and the failure to perform in the event of a dispute. Consequently, the tenant must present facts and prove them in the context of a court dispute that show an overwhelming probability that the non-performance is due to the COVID 19 pandemic. A presumption in favor of tenants and lessees that was initially envisaged was thus amended at this point. Other rights of termination shall remain unaffected, so that termination shall not be excluded in the event of non-performance by the tenant for other reasons. Further, the landlord may continue to terminate for breaches of contract of other types that exist independently of the COVID-19 pandemic.

According to Article 240 § 2 para. (2), para. (3) of the bill, it should not be possible to deviate from the regulations to the detriment of a tenant or lessee. It is important to note that the tenant’s or lessee’s obligation to pay the rent or lease according to the general principles will remain unchanged in the period from April 1, 2020 to June 30, 2020 (or beyond in case of extension)! The special provision concerning the termination restriction thus merely represents a temporary exception to the principle that an inability to perform due to economic difficulties does not regularly exempt the debtor from the consequences of failure to perform on time. If the lessee or tenant is in default, he shall owe default interest and damages for default. It is significant that the statutory default interest rate is significant (vis-à-vis consumers 5 percentage points above the prime rate, otherwise 9 percentage points above the prime rate; currently the prime rate is -0.88%). Obviously, tenants and leaseholders are to be encouraged by this arrangement to check very carefully whether and to what extent rent and lease payments can be made in order not to allow the mountain of debt to their landlords and lessors, including interest, to swell too much. With the repayment period until June 30, 2022 pursuant to Art. 240 § 2 par. (4) of the bill, only 24 months are available by law to make good a default. In what are likely to be difficult economic times for many, this means an increase in monthly rent or lease of roughly 12.5%. The proposal to extend this to five years has not yet been implemented. The parties to a rental or lease agreement are, of course, free to agree on other deferral, suspension, installment payment or recovery arrangements, taking into account the new legal situation.

Outlook

At present, it is not possible to predict when the peak of the pandemic will be reached and the economy in Germany will pick up again. It is to be hoped that the notified relief will sufficiently protect the livelihood of tenants and lessees, as well as landlords and lessors, in the COVID 19 pandemic. The dismissal protection regulations initially apply until June 30, 2022. However, if it turns out that – also in view of other government support for residential tenants, traders and companies in the crisis – more far-reaching measures are necessary to avoid creating a domino effect on real estate financiers and the financial sector as a whole, extensions and more far-reaching legal interventions in rental and lease agreements appear conceivable.

We will keep you informed about further developments in a timely manner.

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Contact

Dr. Rainer Algermissen

Partner
Head of Construction and Real Estate Law

Fuhlentwiete 5
20355 Hamburg

tel: +49 40 3609945331
ralgermissen@kpmg-law.com

Petra Swai

Senior Manager

Fuhlentwiete 5
20355 Hamburg

tel: +49 40 3609945523
pswai@kpmg-law.com

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