The Corona Crisis and its Impact on Rental Obligations

Stephan ZuberBlog

Hardly any other topic is currently more predominant than the continuing spread of the Coronavirus in Germany and worldwide. Increasingly drastic measures by the German federal and the federal states’ governments in order to contain COVID-19 are causing a standstill in large parts of public life and the economy. Shops and restaurants are closed; customers stay away due to the curfews; hotels are empty; many companies are also facing staff shortages and short-time work or are sending their employees to their home offices as a precautionary measure. What remains are vacant commercial properties. In the meantime, the German parliament has reacted and has adopted a law in order to mitigate the Corona pandemic’s effects; such law provides inter alia for relieves for tenants who are no longer able to meet their payment obligations due to the Corona crisis. 

Below we would like to summarize the most frequently asked questions and answers regarding the Corona crisis and its impact on rental obligations. 

Is the tenant still obliged to pay the rent?
In principle, landlord and tenant are bound by their obligations under the lease agreement even in times of the Corona crisis. The landlord still owes the transfer of the leased property’s use and the tenant the payment of the agreed rent.
German tenancy law assumes that the tenant remains obliged to pay the rent even if he cannot use the rented property or cannot use it as intended for reasons within his person or within his sphere of risk, although the landlord has granted him the possibility of use as contractually owed. The tenant's sphere of risk includes, among other things, official orders prohibiting or restricting the use of the leased property. Specifically related to the Corona pandemic, these include, for example quarantine measures against the tenant and his employees, curfews, area closures, as well as event and operating bans. 
This does, however, not apply if the landlord cannot provide the leased property to the tenant or cannot provide it as owed pursuant to the rental agreement. This is the case, for example, if the personnel necessary for the property’s operation is absent due to infection with COVID-19 or is quarantined. In such case, the tenant is not obliged to pay the rent. If, in contrast hereto, only the leased property’s use is impaired, the tenant is only entitled to a rent reduction (see below).

Is the landlord entitled to terminate the tenancy if the tenant, due to the Corona pandemic, does not meet his payment obligations?
The recently adopted law in order to mitigate the Corona pandemic’s effects provides for a temporary restriction of the landlord’s termination rights. According to such law, the landlord must not terminate the tenancy due to the tenant’s arrears from the period between April 1, 2020 and June 30, 2020 if the arrears are due to the COVID-19 pandemic’s effects. The tenant’s general obligation to pay the rent in due time, however, remains in effect also during such period. The regulation equally applies to both residential and commercial rental agreements as well as lease contracts. 
The tenant must substantiate that the non-payment is connected with the COVID-19 pandemic. To that end, the tenant may use corresponding evidence, an affidavit or other suitable measures, such as proof of the application or certificate on the granting of state subsidies, employer’s certificate or other evidence as to the loss of earnings. Commercial tenants may substantiate such connection by submitting the official order prohibiting or substantially restricting the operation of their business. 
The landlord continues to be entitled to termination for other reasons (e.g., arrears from earlier periods, personal use, or due to tenant’s misbehavior in relation to the landlord) or a termination without cause to the extent permitted by law. 
The aforementioned termination restriction shall initially apply until June 30, 2022 and can be extended subject to certain conditions. Consequently, after such date, the landlord can terminate the tenancy due to the tenant’s arrears occurred between April 1, 2020 and June 30, 2020 which have not been settled by June 30, 2022. Therefore, as of June 30, 2020, the tenant has two years in order to settle arrears entitling the landlord to terminate the tenancy. 

Can the tenant reduce the rent?
If the rented property has a defect which considerably reduces its suitability for use in accordance with the contract, the tenant is only required to pay an appropriately reduced rent. The decisive factor is that the rented property itself has a defect. For this reason, case law only very restrictively recognizes so-called environmental defects, such as the lack of access to or accessibility of the leased property, as defects of the leased property, even if these affect the leased property’ use.
If the tenant is prevented from using the leased property for reasons that lie within his person or his sphere of risk (e.g., quarantine, curfew, etc.), there is no specific link to the leased property itself, which is why there is no defect. The order of an operating ban should generally be deemed to constitute an operating risk lying within the tenant's sphere of risk and therefore does not entitle to a rent reduction. On the other hand, a different interpretation, taking into account the rental agreement’s provisions as well as the official operating ban’s content and substantiation, could lead to the result that the landlord is no longer able to provide the tenant with the leased property for the agreed rental purpose. In such case the tenant would be entitled to a rent reduction.
Whether or not the tenant is entitled to a rent reduction must therefore be examined in each individual case.

Can the tenant request an adjustment of the rental agreement due to force majeure? 
In individual cases, an adjustment of the agreed rent or a temporary deferment of the rent in accordance with the frustration of contract principle (“Störung der Geschäftsgrundlage”, Art. 313 BGB – German Civil Code) due to force majeure is also possible. According to such principle, an adjustment of the rental agreement can be demanded if the basis of the contract has changed substantially after its conclusion or if it has ceased to exist completely and the parties would not have concluded the rental agreement or would have concluded it with a different content if they had foreseen the change and if it is unreasonable for either party to adhere to the unchanged rental agreement.
However, such an adjustment of the rental agreement is not possible if the changed circumstances fall within the tenant’s area of risk according to the statutory or contractual distribution of risk. As shown above, most official directives issued by the authorities in the fight against the coronavirus which affect the rented property are likely to fall within the tenant's area of risk. In addition, case law has so far refused to compensate a general emergency’s economic consequences in accordance with the frustration of contract principle.

What other obligations do the parties to the rental agreement have due to the coronavirus?
In addition to the landlord's obligation to transfer the property’s use and the tenant's obligation to pay the rent, numerous other secondary obligations may arise for the parties from statute or the rental agreement itself. These include, for example, mutual duties of information as well as duties of care and protection. In the present context, these are particularly relevant if Corona cases become known in the rented property and if there is a concrete risk of infection with COVID-19 for the tenant, his customers and service providers as well as other users of the building.

It can be assumed that tenants will still be obliged to pay the rent despite all the restrictions resulting from the current Corona crisis. Whether a rent reduction is possible due to the rented property’s limited usability must be examined in each individual case.
If a tenant is experiencing difficulties in paying his rent,  he is well advised to first seek dialog with the landlord in order to discuss a possible deferral or temporary reduction of the rent. Despite the landlord’s limited termination options in case of the tenant’s default of payment, it is not advisable to simply suspend or reduce rent payments without prior notice as, in case of a dispute, the tenant is obliged to prove that he is not able to pay the rent due to the Corona pandemic.
If you still have specific questions on this subject, please feel free to contact us at any time.