Several German media outlets (Handelsblatt of 1 December 2020; Frankfurter Allgemeine Zeitung of 7 December 2020) report that the country’s Federal Minister of Justice Christine Lambrecht has revealed plans to introduce a legal clarification confirming that restrictions due to the COVID-19 pandemic are generally to be deemed frustration of contract [Störung der Geschäftsgrundlage]. The resolution the German federal government and the Minister Presidents of the 16 German Länder adopted on 13 December 2020 to impose a second lockdown proposed creating a legal presumption “that severe restrictions (on the use of premises) necessitated by the COVID-19 pandemic may constitute substantial change in the circumstances forming the basis of the contract.” The new Act was passed on 17 December 2020.

Background

Government-imposed business closures, floor area reductions and other safety measures to curb the pandemic have caused significant revenue losses for some commercial tenants. Now the second lockdown has begun and Christmas shopping has essentially been cancelled. The resulting loss of revenue makes it even more difficult for tenants to pay their rent. Some lower courts, including the District Court [Landgericht – LG] of Frankfurt am Main and the District Court of Heidelberg, have denied that in this kind of situations a right under the German Civil Code [Bürgerliches Gesetzbuch – BGB] to reduce the rent on the ground of defects (Sec. 536 BGB) or a right to adapt the contract on the ground of frustration of contract (Sec. 313 BGB) applies. The District Court Munich I, on the other hand, found in September that if a shop is completely banned from opening by official order or otherwise restricted from opening due to the pandemic, this constitutes a defect of the leased property [Mietmangel] within the meaning of Sec. 536 BGB entitling the tenant to reduce the rent. Other judgments, including one of the District Court Munich I and one of the District Court of Mönchengladbach, also established that this constitutes frustration of contract within the meaning of Sec. 313 BGB.

The new Act

The German Federal Ministry of Justice drafted a bill entitled “Act to Regulate Leases During the COVID-19 Pandemic” and submitted the same to the Christian Democrats’ [CDU] and Social Democrats’ [SPD] parliamentary groups as “draft language”, who then introduced it to the Bundestag. The Bundestag’s legal committee examined the bill on 16 December 2020. On 17 December 2020, the bill was adopted into law. The new Act will come into force on 31 December 2020.

Presumption of substantial change in the circumstances forming the basis of the contract

A new Section 7 is added at the end of Article 240 of the Introductory Act to the German Civil Code [Einführungsgesetz zum Bürgerlichen Gesetzbuch – EGBGB] to read as follows:

“Section 7

Frustration of contract for leases
(1) If land or non-residential premises leased for use only [vermietet] cannot be used at all, or only to a very limited extent, for the operation of the tenant’s business as a result of government actions to combat the COVID-19 pandemic, this shall be presumed to constitute a substantial change in circumstances forming the basis of the contract for the lease within the meaning of Sec. 313 Para. 1 of the German Civil Code that occurred after the contract was entered into.

(2) The provision of Para. 1 shall apply to leases for use and profit [Pachtverträge] mutatis mutandis.”

In its Explanatory Memorandum to the Draft Bill, the legislator clarified that not only the legal provisions governing default in performance [Leistungsstörung] in general (specifically the right to reduce the rent on the ground of defects pursuant to Sec. 536 BGB) but also the principles of German law on frustration of contract (Sec. 313 BGB) are applicable, and may allow the tenant in certain circumstances to demand that the rent be (temporarily) adjusted. Nevertheless, more specific provisions contained in the lease such as valid force majeure or pandemic clauses continue to prevail. Whether Sec. 313 BGB is applicable was previously a matter of debate. The intention of the legislator in introducing the legal presumption is to bring the parties to a lease to the negotiating table. The Explanatory Memorandum to the Draft Bill “appeals to the willingness of the parties to negotiate”.

However, this change in law does not give the tenant an automatic right of adaptation of the contract. Neither does it determine the amount, if any, by which the rent is to be adjusted. Rather, the tenant continues to have the burden of statement and proof for the other prerequisites of Sec. 313 BGB, in particular with regard to the fact that the tenant cannot be reasonably expected to adhere to the unamended contract.

Requirement for priority and expedited treatment of court proceedings

Moreover, a new Section 44 is added to the German Act concerning the Introduction of the Code of Civil Procedure [Gesetz betreffend die Einführung der Zivilprozessordnung – EGZPO], stipulating that civil courts must treat all cases relating to rent adjustments (whether the tenant sues for adjustment of the rent or argues – in a lawsuit filed by the landlord seeking payment of rent – that the amount of the rent has to be adjusted) with priority and expeditiously and that a first court hearing must be held no longer than one month after the statement of complaint is served.

Response from interest groups

Unsurprisingly, the response to the new legislation has been divided: The German Retail Federation [Handelverband Deutschland – HDE] and the German Tenants' Association [Deutscher Mieterbund – DMB] welcome the new legislation. The German Property Federation [Zentraler Immobilien Ausschuss – ZIA], the leading professional association of Germany’s real estate industry, considers this an encroachment by the government on the systematic structure of contractual relationships and takes the view that bilateral and tailored adaptations to a contract can be better negotiated by the parties themselves than imposed by way of legal order.

Our view

This legislative change brings less clarity than expected. It merely clarifies that the legal doctrine of frustration of contract (Sec. 313 BGB) is not excluded. The facts arguing for or against an adjustment of the rent still have to be examined very thoroughly and need to be demonstrated in each individual case. Nevertheless, thanks to the new requirement for priority and expedited treatment, a judicial decision can now be obtained much more quickly than before.

Our service offering

Since the beginning of the pandemic, our tenancy law team has closely monitored the legal situation as it evolves. We are familiar with all relevant case law (including unpublished recent rulings) and publications in the legal literature. We have successfully conducted many litigations and negotiations on leases and lease amendments. We have observed the current legislative process from an early stage and know the history of the Act very well, which is of significant advantage when it comes to interpreting it.

Katharina Lanio, Lawyer
Frankfurt a.M.

Wolfram Müller, Lawyer
Hamburg