Tenancy agreements are determined by the landlord handing over the rented property to the tenant – and the tenant paying rent for it. If the tenant is in arrears with the equivalent to at least 2 months’ rent, the landlord is entitled to terminate the tenancy (section 543 para. 2 no. 3 of the German Civil Code (BGB)). The law is designed to help tenants who are having difficulty paying rent due to their shops and practices being closed under COVID-19 lockdowns.

The March Law

On March 25, 2020, the German parliament (Bundestag) passed the Law to Mitigate the Consequences of the COVID 19 Pandemic in Civil, Insolvency and Criminal Proceedings (BT DruckS 19/18110). The law with the complicated name restricts the landlords’ right to terminate tenancies. This applies to both residential and commercial tenancies as well as property leases. Accordingly, the regulations cover leases. Landlords may not terminate the tenancy due to rent arrears arising from the period April 1 to June 30, 2020 (revised version of Art. 240 of the Introductory Act to the German Civil Code (EGBGB) if tenants can credibly demonstrate that the non-payment of rent was caused by the COVID-19 pandemic. Some consider this provision to be inadequate. Indeed, restrictions on termination rights apply to rent arrears accrued in only three months: April, May and June 2020; and the grace period lasts only until June 30, 2022 (Art. 240, section 2 para. 4 EGBGB). After this period, landlords regain their termination rights. This means that landlords may terminate lease agreements for legitimate payment arrears from April 1, 2020 to June 30, 2020 if the arrears are not settled by June 30, 2022. The rent will therefore only be deferred until June 30, 2022.

Landlords have pointed to the regulation’s insufficiency. While tenants are allowed to withhold rent from landlords, landlords do not have the same right vis-à-vis their credit financing banks, but may be forced to continue paying instalments to the credit financing banks without rental income, they have argued. Finally, there was legal uncertainty about the conditions under which non-payment of rent is based on the COVID-19 pandemic and how tenants can credibly demonstrate these conditions (visit the link for further details).

Original Reed Smith publication: Law to mitigate the consequences of the COVID 19 pandemic in civil, insolvency and criminal law – implications for the real estate industry

The December Law

On Dec. 17, 2020, the German parliament (Bundestag) passed the Law on the Further Shortening of the Residual Debt Relief Procedure and on the Adjustment of Pandemic-Related Provisions in Company, Cooperative, Association and Foundation Law as well as in Tenancy and Lease Law (BT-Drucks. 761/20). One of the central regulations of this law with the even more complicated name is the following: 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 only be used with considerable restrictions, it is presumed that in this respect a circumstance within the meaning of section 313 para. 1 of the German Civil Code (BGB), which has become the basis of the lease, has significantly changed after the conclusion of the contract (Art. 140, section 7 para. 1 EGBGB). The regulation is applicable to lease agreements. The presumption rule shall also apply to past facts and shall expire on Sept. 20, 2022. With this provision, the legislator intends to help commercial tenants and leaseholders. The legal consequence of section 313 para. 1 BGB is that if the basis of a contract is disturbed, the adjustment of the contract can be demanded, or if this is not possible, the contract can be terminated. The fact that COVID-19-related restrictions on the use of commercial rental space disrupt the basis of the contract (factual element) is now legally presumed. This aims at giving commercial tenants and lessees the right to demand an adjustment of the tenancy due to COVID-19-related restrictions on use and turnover decrease. However, this does not occur automatically. The adjustment of the contract according to section 313 para. 1 BGB requires not only the disturbance of the basis of the contract (factual element), but also the hypothesis that if the parties had foreseen these changes they would not have concluded the contract or would not have concluded it with this content (hypothetical element) and that 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 (normative element). These further elements (hypothetical and normative element) are not the subject of the law. The burden of proof remains on the tenant/lessee. In principle, the tenant still bears the risk of the usability of the leased property. In this respect, it will largely depend on the extent to which the state restrictions affect the tenant’s business, whether the tenant has taken precautions, whether the tenant has received subsidies, whether rented premises can be used in connection with online trade (click and collect, click and meet). These circumstances are naturally subject to case-by-case evaluation. Contractual adjustment (for example, in the form of rent reduction) is not automatic. It is advisable that landlord and tenant reach an agreement on the distribution of burdens. The law at least provides indications for this (visit the link for further details).

Original Reed Smith publication: Law on the Further Shortening of Residual Debt Relief Proceedings and on the Adjustment of Pandemic-Related Provisions in Company, Cooperative, Association and Foundation Law and in Rental and Lease Law*