A number of important questions arise for landlords and tenants following last week’s approval by the German Federal Council of certain planned changes in tenancy and insolvency law as part of the COVID-19 pandemic package of measures. In our FAQ’s we have answered what we consider to be the most important questions.
1. Is the tenant entitled to withhold rental payments due to the COVID-19 pandemic?
No. The “Law to mitigate the consequences of the COVID-19 pandemic” (“Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie“), passed on March 27 2020, does not provide for a moratorium regarding lease agreements.
2. Can the landlord terminate the lease agreement if the tenant does not pay the rent or does not pay it in full due to the COVID-19 pandemic?
At first, no. The landlord’s right of termination for rent arrears occurring in the period of April 1 2020 to June 30 2020 is excluded until June 30 2022 if the rent arrears are due to economic effects of the COVID-19 pandemic. Starting from June 30 2020, tenants have two years to make up any rent arrears. Termination due to any outstanding rent arrears is only possible from July 1 2022. Termination due to arrears of payment from earlier periods or for other reasons is still possible.
3. Can the landlord make use of the rent security provided by the tenant if the tenant does not pay the rent due to the COVID-19 pandemic?
Yes. The legal moratorium does not apply to rental claims, i.e. in general the tenant still has to pay the rent regularly. If the tenant does not pay on time, default interest becomes due and the tenant must compensate the landlord for any damage caused by the default. In the event of late payment, the landlord may also make use of his rent securities (bank guarantee, landlord’s lien et seq.). For entrepreneurs, the statutory default interest rate per year for rental debts is nine percentage points above the base rate, i.e. currently 8.12 % p.a.
4. What regulatory instruments are available to the parties of a lease agreement for temporary adjustments during the Corona crisis?
The economic impact of the COVID-19 pandemic affects both landlords and tenants. From the landlord’s point of view, the main criticism is that there is no legal moratorium on commercial real estate financing. At the same time, tenants are threatened with insolvency. There are various conceivable regulatory instruments to make the effects of the COVID-19 pandemic more manageable for both parties. These include deferral of rent payments, a temporary reduction of rent, possibly combined with graduated or turnover-related rent or the agreement of additional rent securities (e.g. group guarantees).
5. Does a deferral of rent or a reduction of rent require an addendum to the lease agreement or is a simple letter sufficient?
A deferral or reduction of rent should be documented in a formal addendum to the lease agreement in order to exclude any termination risks due to written form defects. A deferral agreement does not only affect the rent payment modalities, which may be adjusted for a short period of time even without a formal addendum, but also temporarily restricts the landlord’s right to terminate the lease agreement for cause. In this respect, an addendum should be concluded in order to comply with the statutory written form requirement.
The McDermott team will be happy to assist you with the preparation and implementation of appropriate addenda to the lease agreement.
6. Can the landlord demand additional rent securities from the tenant in case of a crisis?
In general, no. The landlord may be entitled to a right to refuse performance with regard to the handover of the leased premises if the handover has not yet taken place. However, in order to do so, it must have become apparent after conclusion of the lease agreement that the tenant will not be able to pay the rent. The tenant may avert the landlord’s right to refuse performance by providing a security.
7. Can the tenant demand an adjustment of his lease agreement due to the COVID-19 crisis?
At most, the lease agreement may be adjusted based on the legal institution of the “Disturbance of the basis of the agreement” (“Störung der Geschäftsgrundlage“). In particular, an adjustment would require that the circumstances that have become the basis of the lease agreement and have seriously changed are not attributable to the risk area of one party. Taking into account that the tenant as operator of his business generally bears the risk of use as well as the entrepreneurial risk, and the hitherto rather negative or reserved attitude of the Federal Supreme Court (“Bundesgerichtshof“) towards the application of this legal institution, a corresponding adjustment of the lease agreement should be viewed rather critically. Either way, a case-by-case assessment is necessary. It cannot be ruled out that – at least in the event of a further aggravation of the COVID-19 crisis – the view that an adjustment of the lease agreement is worth considering may prevail.
8. In case of lease agreements that are subject to value added tax (“VAT”): Does the landlord have to pay the VAT to the tax authority even if the rent is not paid?
In principle, the landlord must first pay the VAT to the tax authority even if the tenant does not pay the rent. If the tenant does not pay permanently (e.g. due to insolvency) or if the rent is reduced, the landlord can reclaim the VAT considering certain formalities. It is still unclear whether the (potentially interest-free) partial deferral of tax payments, which are to be granted on application due to the COVID-19 pandemic, also a plies to the landlord’s VAT. The same applies to the deferral of enforcement measures for defaulting VAT.
9. Is the Corona pandemic a case of force majeure?
The case law on travel agreements affirmed cases of force majeure in the event of epidemics. It is therefore likely that the prevailing COVID-19 pandemic may also be classified as force majeure. In its decree of March 23 2020 on issues arising in construction agreements in connection with the COVID-19 pandemic, the Federal Ministry of the Interior (“Bundesinnenministerium“) also states that the COVID-19 pandemic can be considered as a case of force majeure. However, this does not apply in general and should be examined individually. In case of affirmation, force majeure would not automatically lead to, for example, an extension or adjustment of rental time limits or obligations. This would require a corresponding contractual provision.
10. What action can tenants take against the closure orders?
Tenants can lodge appeals against the closure orders of the federal states (“Bundesländer“) and municipalities. However, the lodging of such appeals would not automatically lead to closure orders being temporarily suspended until clarification.
Even in the case of lawful closure orders, tenants may be entitled to certain compensation claims against the public authorities in individual cases and under specific conditions. These compensations may cover, for example, ongoing operating and remuneration costs.
11. Does the tenant have to file for insolvency if they can no longer meet their payment obligations due to the COVID-19 crisis?
The draft of the “Law to mitigate the consequences of the COVID-19 pandemic” provides (in principle) for a suspension of the obligation to file for insolvency until September 30 2020. This does not apply if the insolvency is not due to consequences of the COVID-19 pandemic or there is no chance of eliminating the inability to pay. In these cases, the obligation to file for insolvency and the (criminal) legal consequences of late filing remain in force. The law provides for a (rebuttable) presumption that the insolvency is based on the effects of the COVID-19 pandemic and that there is a chance of eliminating the inability to pay if the company was not illiquid as of December 31 2019.