24 March 2020
The spread of the novel SARS-CoV-2 virus (COVID-19 pandemic) has resulted in considerable restrictions in all areas of private and business life in Germany. The measures adopted by the authorities to contain the virus (closure of a large number of recreational and cultural facilities, childcare facilities, catering industry and retail shops) will result in considerable losses in income for those affected. Nearly everyone involved in economic life has already been affected by the measures taken by policymakers and, without having sufficient reserves, they will not be able to meet current liabilities, or only to a limited extent.
Therefore, the Federal government plans to introduce a “moratorium” on the fulfilment of contractual claims for a transitional period under Article 240 of the Introductory Act to the German Civil Code (EGBGB), which will entail fundamental amendments to contract law. We would like to briefly present the intended contractual amendments under contract law in the following. Please bear in mind that this has so far only been a cabinet decision, which still has to go through the legislative procedure. According to the current state of planning, the German Bundestag (federal parliament) is scheduled to meet on 25 March 2020:
With respect to contracts concluded before 8 March 2020, the defaulting party may in principle be granted a temporary right to refuse performance of the contract (Leistungsverweigerungsrecht) until 30 June 2020 if the defaulting party can no longer fulfil its contractual obligations as a result of the pandemic, without jeopardising its livelihood or the economic basis of its business (Article 240 Section 1(1) of the EGBGB). This right to refuse performance of the contract shall, however, only be granted to consumers, very small businesses, small businesses and medium-sized companies, i.e., to companies with fewer than 250 employees and a turnover of less than EUR 50 million or with an annual balance sheet below EUR 43 million. On the other hand, the defaulting party shall not be entitled to said right if the refusal of performance is unreasonable for the creditor, i.e., the contracting party, taking into account all circumstances of the individual case (Article 240 Section 1 Sub-section 2 No. 1 of the EGBGB). It remains unclear, however, as to which cases are covered thereby and, thus, this could have considerable potential for conflict. In this case, however, the defaulting party shall be entitled to rescind or terminate the contract. Moreover, the general right to refuse performance of the contract does not apply either to rental and lease agreements and to loan agreements or to employment contracts, contracts for package tours and contracts of carriage (by plane or train).
The general right to refuse performance of the contract must be asserted by way of a defence, i.e., the defaulting party that may be unable to provide services due to the pandemic must expressly stand on its right and, in principle, must also provide appropriate documents that verify its inability to provide services as a result of the corona pandemic. Against this background - even if this may seem obvious - the consequences of the pandemic on one's own business or on one’s personal income should be documented as best as possible.
The question of whether the contracting party is still obliged to execute consideration in the case of mutual contracts remains open and has not yet been reflected in the draft legislation, provided the defaulting party stands on its general right to refuse performance of the contract under Article 240 Section 1(1) of the EGBGB. It would be conceivable that in such a case the contracting party would raise the defence of non-performance of the contract on its part pursuant to Section 320 Sub-section 1 Sentence 1 of the German Civil Code (Bürgerliches Gesetzbuch, BGB).
According to this, the party obligated under a mutual contract may refuse relevant performance until the consideration has been executed, unless said party is obligated to an advance performance. The law provides for such duty to advance performance, for instance, in the law governing contracts for work and services for contractors (Section 641 of the BGB). This could also include that the defaulting party's performance becomes impossible due to a pandemic pursuant to Section 275 of the BGB. In this case, however, the obligation to consideration also ceases to apply pursuant to Section 326(1) of the BGB.
The draft legislation does not yet contain a reference to the provision as defined in Section 320 of the BGB or Section 346(1) of the BGB. It remains to be seen whether an appropriate provision will be incorporated in the legislative procedure. In any case, however, preserving the obligation to render consideration may be unfair.
Rental payment obligations for both residential and commercial space will continue. This applies even if, for instance, a shop may not be open due to measures ordered by the authorities. As a general principle, pursuant to Section 543 Sub-section 2 No. 3 of the BGB, the landlord may terminate the tenant's lease without notice if the tenant does not meet its obligation to pay the rent for two consecutive dates to a considerable extent.
This right of landlords to terminate rental agreements is to be considerably restricted. With regard to arrears of rent existing for the period from 1 April 2020 through 30 June 2020, landlords may not terminate the lease if the arrears exist due to a pandemic (Article 240 Section 2 Sub-section 1 of the EGBGB). In contrast to the general right to refuse performance of the contract, it is presumed here that the failure to pay the rent is related to the COVID-19 pandemic. In cases of doubt, the landlord would therefore have to prove that its tenant was able to pay the rent on time despite the crisis.
The tenant's obligation to pay the rent shall nevertheless remain in force. A right to refuse performance of the contract is not related thereto. The landlord may still terminate the lease on the basis of other termination rights.
The exclusion of termination pursuant to Article 240 Section 2 Sub-section 1 of the EGBGB due to rent arrears as a result of a pandemic shall apply until 30 June 2022. This means that rental payments not made within the period from 1 April 2020 through 30 June 2020 must be settled by 30 June 2022.
After this date, the landlord may also terminate the contract due to pandemic-related payment arrears, provided that the requirements of Section 543 Sub-section 2 No. 3 of the BGB are met.
It remains to be seen if and to what extent the exclusion of termination according to Article 240 Section 2, Subsection 1 of the EGBGB will also apply to lease agreements. Although this is supported by the fact that the provision on termination without notice pursuant to Section 543 Sub-section 2 No. 3 of the BGB also applies to lease agreements pursuant to Section 581 Sub-section 2 of the BGB. However, this is not explicitly provided for in the draft legislation.
With regard to consumer loan agreements concluded before 15 March 2020, a statutory deferral arrangement is expected to be introduced, with the possibility for the contracting parties to find a different contractual solution. This will be accompanied by a temporary protection against dismissal and a provision for adjusting the contract after the deferral period has expired.
For such consumer loan agreements, the lender's claims for repayment, interest or redemption of a loan falling due between 1 April 2020 and 30 June 2020 are therefore deferred for a period of three months by operation of law from the date on which they fall due. This shall apply to the extent that the borrower suffers a loss of income due to the crisis, which makes it unreasonable to expect the borrower to provide the services owed, whereby a connection between the loss of income and the pandemic is also presumed by law.
In addition, the termination on the part of the lender due to a default in payment and a deterioration of the borrower’s financial situation will be excluded until the end of the deferral. In addition, the lender shall negotiate with the borrower about an adjustment of the agreement. In cases in which no agreement will be reached on an amendment of the agreement, the agreement is to be extended (including deferral) by three months.
However, the lender may again object that the deferral and the exclusion of termination as well as the extension of the agreement are unacceptable for the lender - even under the general living conditions that have changed as a result of the pandemic.
If it turns out that the period from April through June 2020 is not sufficient to cushion against the economic consequences of the crisis, the possibility is granted, (i) to extend the duration of the right to refuse performance of the contract until 30 September 2020 at the latest, (ii) to extend the restriction on termination to payment arrears which have arisen in the period from 1 July 2020 until 30 September 2020 at the latest, (iii) to extend the deferral period until 30 September 2020 and to extend the extension of the contract term to a period of up to twelve months.
These regulations are to be put to the vote in the German Bundestag (federal parliament) this week and are expected to enter into force on 1 April 2020.
Since the Federal government's project may have far-reaching consequences for you and your company, we would like to provide you with this pre-information notice. As soon as the final text of the amendment of the law is known, we will provide a follow-up with recommendations for action.
If you have any further questions concerning the legal issues raised above or on any other legal issues related to the coronavirus pandemic, please feel free to reach out to your contact person of our Corona Task Force at any time.
We have compiled on our website comprehensive information and recommendations for action in response to the legal implications arising from the coronavirus pandemic: Coronavirus - legal issues
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by multiple authors