The law to mitigate the consequences of the Covid 19 pandemic – No right to withhold rental payments

Christoph StoyeStephan Bauch-Caspari

Covid 19 pandemic and its (economic) consequences

The Covid 19 pandemic (SARS-CoV 2 virus pandemic) presents unprecedented challenges for Germany in all areas of private and commercial life. When the peak of the corona pandemic will be reached and thus a stabilization of economic life can be expected, is currently not foreseeable (see German parliament, 19th legislative period, printed doc. 19/18110, p. 4). A study by the German parliament in 2012, in which an epidemic was simulated using a new type of virus modeled after the SARS virus, assumed three waves of infection over a period of 3 years. In this simulation, the peak of the first wave of infection was reached after about 300 days, provided that the anti-epidemic protective measures were maintained from day 48 to 408 (see German parliament, 17th legislative period, printed doc. Annex 4, p. 61 et seq.).

While anti-epidemic protective measures are in effect, in particular a closing of operations and companies, many people and companies are suffering great loss of income and turnover that threatens their existence. For tenants and lessees amongst those affected, considerable payment difficulties may occur, in particular if the protective measures are actually maintained over a period of one year as in the simulation. The expected payment difficulties will result in tenants or lessees being unable to pay their rent or lease for residential or commercial premises at all, or in time at least.

Despite the Corona pandemic, the landlord may terminate the tenancy agreement, if the tenant is in arrears with (i.) payment of the rent or considerable parts of the rent on two consecutive occasions, or (ii.) an amount equal to the rent for two months, in case the period of arrears extends over more than two payment dates (§ 543 para. 1, para. 2 S. 1 No. 3 German Civil Code – “BGB”). Moreover, arrears of payment may also entitle the landlord to terminate the contract in due time (§ 573 BGB) and to claim damages, in particular interest on arrears and legal costs (§§ 280 para. 1, para. 2, 286 BGB). The foregoing applies to mutatis mutandis lessees (§ 581 para. 2 BGB). To make matters worse, under the current law, tenants and lessees with financial problems resulting from the Corona virus have no means of protection against claims by their landlord or lessor, in particular, no right to a reduction of the rent or lease, despite the uselessness of the rented or leased premises due to the anti-pandemic protective measures (for a differing opinion, cf. Drygala; however, he misunderstands the case law of the Federal Court of Justice, according to which a sovereign measure may render a right to reduction of rent, if such measures “are based on the concrete condition of the leased property and are not caused by the personal or business circumstances of the lessee“, see BGH NJW 2011, 3151, No. 8).

Protective measures of the legislator for tenants and lessees

With the law to mitigate the consequences of the Covid 19 pandemic in civil, insolvency and criminal procedure law (“Covid 19 Act”) announced on 27 March 2020, the legislator is trying to mitigate the economic and legal consequences of the pandemic for consumers and small enterprises as well as tenants and lessees, among others. For significant continuous obligations, consumers are “entitled to refuse payments […] until 30 June 2020, if, due to circumstances arising from the spread of infection with the SARS CoV-2 virus (COVID 19 pandemic), it would not be possible for the consumer to pay the rent without jeopardizing his or her adequate means of subsistence or that of his or her dependents” (Art. 5 § 1 para. 1 sentence 1 Covid-19 Act). For small enterprises this applies only if “the enterprise cannot render the service or if rendering the service would not be possible without endangering the economic basis of its commercial operations” (Art. 5 § 1 para. 2 sentence 1 Covid-19 Act). The legislator lists compulsory insurances, contracts for the supply of electricity and gas or for telecommunication services and, as far as regulated by civil law, also contracts for water supply and disposal (BT-Drs. 19/18110, p. 34), as examples of such significant continuous obligations.

However, such right to refuse payment is not granted to tenants and lessees within the scope of their tenancy or lease agreements; on the contrary, they are expressly excluded from the scope of application of this protective regulation (Art. 5 Sec. 1 para. 4 Covid-19 Act). As a result, tenants and lessees may not refuse payment of the rent or lease, even if such payment would endanger their adequate means of subsistence or the economic basis of their businesses.

Instead, with regard to tenancies and leases, the legislator merely excluded the right of extraordinary termination by the landlord or lessor with immediate effect as well as in due time until June 30th 2022 (§§ 543 para. 2 No. 3, 573 para. 1, 581 para. 2 BGB), provided “the tenant does not pay the due rent in the period from 1 April 2020 to 30 June 2020, and the non-payment is a result of the effects of the COVID-19 pandemic” (Art. 5 § 2 para. 1 sentence 1 of the Covid-19 Act). The connection between the Corona pandemic and the non-payment must be substantiated, meaning that facts must be presented by the tenant or lessee, which show an overwhelming probability that the non-payment is a result of the Covid-19 pandemic (Art. 5 § 2 para. 1 sentence 2 Covid-19 Act). However, the Covid-19 Act does not stipulate at what point in time this substantiation must take place nor whether this substantiation is a necessary condition for the exclusion of termination. But the legislator seems to assume – without expressing it in the Covid-19 Act – that tenants or lessees have to substantiate the connection between the Corona pandemic and the non-payment of the rent “in the event of a dispute“, i.e. after a corresponding request by the landlord or lessor (German parliament printed doc. 19/18110, p. 36).

Risks for tenants and lessees

In addition to not granting a right to refuse payment, the Covid-19 Act does not provide for a right to reduce the rent due to the uselessness of the rented or leased premises, meaning that the full rent is still owed. The legislator also seems to assume that the relevant regulations of the BGB (§ 536 BGB) do not provide for such right to reduction of rent either. Moreover, the legislator refrains from granting a temporary deferral of the due date of the rent or lease, as provided for in Article 5 § 3 of the Covid-19 Act to the benefit of debtors of loan agreements (provided they are consumers). The legislator expressly declares that he wishes to leave “the civil law provisions of the Civil Code regarding due date and default” unaffected, so that “tenants and lessees must continue to pay their claims on time and may be in default if they do not pay on time” (see BT-Drucks. 19/18110, pp. 18, 36).

The following consequences must be considered:

If tenants or lessees do not pay the rent due for the period from 1 April 2020 to 30 June 2020 at all, or on time, due to payment difficulties caused by the Covid-19 pandemic, they do not need to be afraid of an (extraordinary or ordinary) termination of their rental or lease agreements. However, their landlord or lessor may claim payment of the rent or lease, payment of default interest (§ 288 BGB) and compensation for other damages (e.g. legal costs) both extrajudicially and in court (§§ 535 para. 2, 581 para. 1 sentence 2, 280 para. 1, para. 2, 286 para. 1 BGB). The resulting costs of legal prosecution and litigation would regularly have to be borne by the tenant or lessee.

In addition, the tenant or lessee may also face (potentially) existence-threatening consequences under enforcement of claims / repossession law due to the arrears. The landlord or lessor may obtain a court order and carry out numerous enforcement measures on the assets of the tenant or lessee (§ 704 ZPO), e.g. a seizure of the private account(s) or the compulsory auction of objects of the tenant or lessee which are subject to the lien of the landlord or lessor (§§ 562, 583 BGB). The landlord or lessor may obtain such court order in no-time, for he or she can use the (time saving) “documentary process” (Urkundenprozess) (§ 592 ZPO). In conclusion, the belief of tenants and lessees that they do not have to fulfil their payment obligations for the period 1 April 2020 to 30 June 2020 due to the new Covid-19 Act is wrong and may lead to a rude awakening in the form of court proceedings and a compulsory enforcement measure, in which – in addition to the loss of the source of income – the loss of the (remaining) assets is threatened, as well.

Conclusion and recommendations

The Covid-19 Act has serious gaps in protection for tenants and lessees. The legislator’s objective, the protection of those affected by anti-epidemic protective measures from threats to their existence, is not achieved with regard to tenants and lessees. Only minimal protection is achieved by a (temporary) exclusion of termination. Moreover, since the Covid-19 Act is the implementation of a deliberate decision by the legislator, the aforementioned gaps in protection cannot be closed or remedied by applying the provisions on the right to refuse payment for continuous obligations (Art. 5 § 1 Covid 19 Act) or the provisions on deferral of payment in consumer loan agreements (Art. 5 § 3 Covid 19 Act) mutatis mutandis. These gaps in protection remain. And it remains to be seen whether German civil courts will correct these results in favor of tenants or lessees by applying the principle of good faith (§ 242 BGB) at least, but this seems to be unlikely.

In case of payment difficulties due to the Corona pandemic, we recommend an early commencement of negotiations with the landlords or lessors in order to find a solution that is economically viable for both parties, e.g. a (temporary) deferment of payments. Ideally, these negotiations should be concluded before the tenant or lessee is facing economic difficulties. If such negotiations are not possible or fail, however, tenants and lessees should pay the rent or lease on time, to avoid even more severe economic disadvantages due to legal proceedings or enforcement measures. Tenants and lessees should only rely on the (new) exclusion of terminations (under the Covid-19 Act) as a last resort and even then, only in strict compliance with the legal requirements stipulated in the Covid-19 Act (i.e. the substantiation of the connection between the Covid 19 pandemic and non-payment of rent). The utmost caution is required, especially with regard to the numerous articles, “recommendations” and “advices” in social networks, blogs, magazines or on television, which suggest to tenants or lessees that the cessation of payments owed for the period from 1 April 2020 to 30 June 2020 is possible without risk due to the new Covid-19 Act. The exact opposite is the case.

We are happy to advise tenants and landlords, as well as lessees and lessors, on this complex of topics and are at your disposal at any time.