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11.05.2021 | KPMG Law Insights

Tailwinds for tenants in COVID 19 pandemic

Tailwinds for tenants in COVID 19 pandemic

The 2020 COVID-19 pandemic mitigation measures severely affected many real estate segments. Many tenants and lessees experienced significant sales losses due to the often limited opening options. An overview of the case law and, in particular, of the requirements of Sec. 313 para. 1 BGB (Cessation and Disturbance of the Basis of the Contract) had already been given in our client information of March 2021. In the meantime, several case law decisions have been published that address the impact of COVID-19 pandemic mitigation measures with respect to leases and tenancies, and in several cases are likely to strengthen the position of the tenant or lessee in negotiations with the landlord or lessor. In our following article, we would like to present two of these decisions in more detail.

State closure order as disturbance of the basis of the transaction

In its ruling of February 24, 2021 – 5 U 1782/20, the Dresden Higher Regional Court had to decide on a case in which the tenant had not paid the rent for the month of April 2020 for the space he had rented to operate a textile retail business. The tenant justified this by stating that it was not allowed to open its retail space for sale in the period from March 19, 2020 to April 19, 2020, inclusive, due to Corona. The tenant pleaded that there was a defect in the rental object; in the alternative, he pleaded impossibility with regard to the transfer of use and, in the most auxiliary case, an adjustment of the contract with regard to the reduction of the rent due to the discontinuation of the basis of the business. The lower court, the Regional Court of Chemnitz, had ordered the tenant to pay the rent in full.

The Dresden Higher Regional Court (OLG), on the other hand, ruled that the tenant who was affected by the officially ordered corona lockdown only had to pay rent adjusted in accordance with Section 313 of the German Civil Code (BGB) due to disturbance of the basis of the contract. The OLG considered a reduction in the basic rent of 50% to be appropriate for the periods in which the closure of the store in question was ordered as a result of the general injunctions issued due to the Corona crisis.

First of all, the OLG Dresden states that the tenant cannot oppose the landlord’s claim for payment of the rent that, as a result of the state closure order, the transfer of use by the landlord has become impossible, and therefore the tenant’s obligation to pay the rent pursuant to §§ 326 para. 1, 275 par. 1 BGB had been dropped. Also, the OLG Dresden does not consider the state locking order as a defect of the rental object which entitles the tenant to a rent reduction according to § 536 para. 1 BGB (German Civil Code).

In the view of the OLG, it is ultimately irrelevant for the decision in the present case whether the risk of the state closure order was assigned to the landlord or the tenant by the lease agreement. The government closure order considered alone in the contractual risk delimitation was not equivalent to the change in circumstances forming part of the basis of the business embedded in a pandemic event with far-reaching contact restrictions. Thus, it was not a matter of a “normal” risk to the serviceability or use of the rental property, but of far-reaching state intervention in social and economic life due to a pandemic, which, as a systemic crisis, was a disruption of the great business foundation. The risk associated with the occurrence of a disruption of the major basis of business is regularly not covered by the contractual allocation of risk, but is not assigned to any contractual party.

The requirements of § 313 para. 1 BGB were fulfilled in the opinion of the Dresden Higher Regional Court. To fulfill the normative element of § 313 para. 1 BGB, in the opinion of the Senate it is not a question of the extent to which the economic existence of the burdened party is affected. With regard to the decision of the lower court, the OLG stated that the Regional Court had probably not sufficiently taken into account the fact that this was a case of interference with equivalence in a mutual contract, which was also a continuing obligation. The necessary unreasonableness thus refers (only) to the relationship between the surrender of the leased property on the one hand and the payment of rent as compensation for use on the other hand, whereby the rent for the surrender of use is owed in periods of time and the period of time for most leases is one month. According to the monthly consideration to be made from this, a reduction of the cold rent by 50% was appropriate as an adjustment, because neither of the contracting parties had set a cause for the disturbance of the basis of the business or had foreseen this. Accordingly, it was appropriate to share the associated burden equally between the two parties. The Senate left open whether state aid payments had to be taken into account when adjusting the (cold) rent.

An appeal was allowed against the judgment of the Dresden Higher Regional Court.

Other decisions

Many tenants or leaseholders may now see themselves in a good negotiating position on the basis of the ruling of the Dresden Higher Regional Court and approach their landlords or lessors to demand a corresponding adjustment of the rent or lease if they have been ordered to close their respective business operations for a period of one month or longer. This is probably also because the KG Berlin in its judgment of April 1, 2021 – 8 U 1099/20 also came to the conclusion of an adjustment of the rent by 50%. However, only a decision by the Federal Court of Justice is likely to bring final legal certainty. Several other courts, so most recently the OLG Karlsruhe with judgment of February 24, 2021 – 7 U 109/20 have emphasized that the assumption of unreasonableness within the meaning of § 313 GB only in existentially destructive exceptional cases, if necessary already with a serious impairment of the economic progress comes into consideration and a rather schematic half reduction of the rent or lease burden rejected.

In our opinion, the decision as to whether a tenant or lessee within the meaning of Section 313 para. 1 BGB is unreasonable to adhere to the existing contract, a case-by-case consideration must be made. It is true that neither the landlord or lessor nor the tenant or lessee is responsible for the pandemic or its effects. However, a contract adjustment should only take place if one of the parties is actually in an economically difficult situation. For example, should the tenant or lessee be able to compensate for the limited opening options through state Corona fixed cost assistance, there is no justification for applying Section 313(a). 1 of the German Civil Code (BGB), which has the recognizable objective of creating individual justice in quite extraordinary, unforeseen situations, and does not merely have an imbalance of performance and consideration as a prerequisite for the facts of the case.

It will therefore be interesting to see what the Federal Court of Justice decides in this matter. If you as a party to a rental or lease agreement do not want to or cannot wait for this, you should urgently seek an amicable solution with your contractual partner.

 

Right of termination despite agreement of a fixed contract term

In another case, the Kaiserslautern Regional Court had to decide whether the termination of a tenant due to the COVID 19 pandemic was effective or whether the landlord had a claim against him for payment of the lease. The lease agreement was for a restaurant. The lessor resisted the termination declared by the lessee, arguing that there was no lease defect that would entitle it to terminate or adjust the contract because, among other things, the lessee had the opportunity to sell on the street or apply for state Corona aid.

In this regard, the Kaiserslautern Regional Court ruled that the lessor has no claim to payment of the lease, since the lessee effectively terminated the lease in accordance with Section 581 para. 2, 543 para. 2 S.1 No. 1 and para. 3 BGB could terminate.

In the opinion of the court, good cause for termination exists if, taking into account all the circumstances of the individual case, in particular any fault on the part of the contracting parties, and weighing up the interests of both parties, the party giving notice of termination cannot reasonably be expected to continue the lease until the expiry of the notice period or until the lease is otherwise terminated. Examples of important reasons are given in § 543 para. 2 of the German Civil Code (Bürgerliches Gesetzbuch – BGB), which, however, do not require the weighing of interests. Good cause shall be deemed to exist in particular if the lessee is not granted the contractual use of the leased property in whole or in part in due time or is deprived thereof again. The yardstick for this is solely the use to which the lessee is entitled on the basis of the lease agreement and the perception of the market. Any failure of the landlord’s performance to meet this standard would justify termination. Fault on the part of the lessor was not required. Likewise, it is not important whether the defect can be remedied. The applicability of § 543 para.2 No. 1 BGB in favor of the lessee is justified by the breach of the duty incumbent on the lessor alone, if the lessee is not provided with the leased property owed under the contract.

Apart from pure quality defects of the leased object, official obstacles and restrictions to use can also constitute a defect, the Kaiserslautern Regional Court went on to say. However, a defect only exists if the lessee is actually restricted in his contractual use by the restriction under public law. This requirement is regularly met only if the competent authority has already prohibited the use of the leased property by means of a legally effective and incontestable prohibition. A possible material defect in an individual case could also be seen in the fact that a long-lasting uncertainty about the permissibility of an official prohibition of use causes the justified concern that the leased property cannot be used in accordance with the contract.

Despite the possibility of pick-up, delivery and drop-off services as well as street vending, the Kaiserslautern Regional Court considered the suitability of the leased property for use in accordance with the contract to be at least partially nullified. This also applies irrespective of the possibility of claiming any state Corona aid, as this would not remove the restrictions on the use of the leased property in accordance with the contract, but would at best represent financial compensation.

The judgment is not final.

Deprivation of contractual use?

With regard to the decision of the Kaiserslautern Regional Court, it also remains to be seen whether the ruling will stand up in the next instance. The possibility of extraordinary termination confirmed by the Kaiserlautern Regional Court would transfer the risk of the effects of the COVID 19 pandemic and of governmental operating bans to the lessor alone, although there should be no doubt about the lessors’ intention to let the leased property without restrictions and to support their partners in their economic activities.

Outlook

The two rulings of the Dresden Higher Regional Court and the Kaiserslautern Regional Court discussed in more detail here should give tenants and leaseholders a tailwind in their negotiating position with their landlords or lessors. The threat of extraordinary termination may weigh heavily if it is not obvious that termination of the contract is not even an option for the tenant or lessee. In our view, it should now become increasingly difficult for landlords and lessors to flatly refuse to enter into negotiations on a rent or lease adjustment, as is still happening in some cases. As always, however, it is important to consider the individual case: If, for example, the tenant or lessee was able to generate sales through partial opening options or from an online trade, or if the tenant or lessee could at least have done so but failed to do so, he should hardly be able to prevail with a demanded rent or lease adjustment in the amount of 50% in our estimation. The same applies in the case of government assistance received to at least partially cover fixed costs. Until there is a supreme court decision on the right to terminate the contract, which is in any case legally binding, the termination of the contract cannot be considered as a safe option for action for tenants or lessees.

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