Lease of business premises during the lockdown – who bears the lockdown risk?

The lockdown enacted to fight the COVID-19 pandemic inflicted heavy turnover losses on many corporations and businesses. Most of the recurring costs however, such as rents, are still to be paid. Given the context that neither tenants nor lessors have set the cause for the fact that the leased property can not be used during the lockdown, all involved parties wonder who bears the risk in such circumstances.

Lessors take the position that they are in full compliance with their obligations under the lease contract. They argue that alone by providing the leased property in a sound condition they are fulfilling their contractual obligations. Tenants on the other hand counterargue, that during the lockdown this very performance is of no value as usage of the leased property is prohibited, even though the premisses are surrendered with no defects whatsoever. When the pandemic kicked in, lawyers as well as courts were not prepared for cases like these. Hence, several paths to a legal solution were discussed since the first severe pandemic measures came into force (defective leased property, impossibility of performance, etc.). Within the course of the legal dispute an advancing position argued that basis of a lease contract eventually is that the leased property can be used at all. Several courts joined this path and referred to sec. 313 para. 1 German Civil Code in which it is regulated:

"If circumstances which became the basis of a contract have significantly changed since the contract was entered into and if the parties would not have entered into the contract or would have entered into it with different contents if they had foreseen this change, adaptation of the contract may be demanded to the extent that, taking account of all the circumstances of the specific case, in particular the contractual or statutory distribution of risk, one of the parties cannot reasonably be expected to uphold the contract without alteration."

In December 2020 the German legislator in alignment with the conclusion that the usability of a leased business property generally is basis of a lease contract adopted a statutory amendment saying:

"In the event that leased plots or leased premisses that are not residential premisses become unusable or only usable with severe restrictions for the business of the tenant due to state measures countering the COVID-19 pandemic it is presumed that therefore a circumstance in the light of sec. 313 para. 1 German Civil Code that became the basis of the lease contract, significantly changed since the contract was entered into."

This amendment asserts that a closure of commercially used leased property due to the lockdown affects the basis of the lease contract and that an alteration of the contract may be demanded. However, the German legislator did not and can not say in which respect that conclusion affects each individual case. Eventually, the peculiarities of the specific case will be significant to determine based on which ratio the usage risk of the leased property will be spread between the contractual parties. Such peculiarities may be individual clauses within the contract itself or the amount of state support the tenant may have received. In most cases however, the parties of a lease contracts did not include contractual clauses covering lockdowns or similar catastrophes and in most cases, neither one nor the other party did set the ground that eventually lead to the lack of usability. In such cases, according to a recent decision of the Regional Appeal Court of Saxony in Dresden,

“a reduction of the basis rent by 50% is justified”

in order to spread the risk equally between the parties.

Such distribution of the usage risk of a leased property should be adequate in general. As mentioned, however, the individual circumstances of each and every case could demand an altering settlement. Tenants as well as lessors dealing with the subject matter should carefully assemble all factors and aspects determining if a 50 - 50 arrangement or an alternative distribution is appropriate. The legal threshold upheld by the law will be if a party - based on facts - will be able to present cause that an altering clause would have been included in the contract if the parties had thought of a potential pandemic when entering into the contract, see sec. 313 para. 1 German Civil Code. Such a retrospective speculation however will be difficult to substantiate. Only in a few cases the parties will be able to present and substantiate factors plausibly arguing an alternative contract wording if the parties actually had considered the risk of a lockdown or a similar situation at contract closure.

Hence, it should be appropriate to take the 50 - 50 rule as a general scale, while always bearing in mind that there might be facts justifying a different allocation of the usage risk or at least give path to fine tuning the respective quotas. In case the parties of a contract produce varying assessments of the underlying facts however, legal advice or support will presumably be essential.

Do you have any questions relating to rent losses due to the COVID-19 pandemic or do you face issues with your tenant or lessor? We will be happy to give you advice! Please contact us by phone at +49 351 44753 0, by email at central@schaffrathlaw.de, or visit our website www.schaffrathlaw.de.

 

By your side

Schaffrath & Metzmacher Team

04 March, 2021