News Alert: German Parliament suspends right of termination due to rent arrears

The German Parliament passed a law on 26 March 2020 that excludes the termination of rental contracts for residential and commercial space until 30 June 2022 if the termination is based on rent arrears that arose between 1 April 2020 and 30 June 2020 and a tenant does not pay the rent due to the effects of the Corona pandemic. The aforementioned period may be extended by decree, initially until 30 September 2020 and then even further, if social life and economic activity continue to be significantly affected by the corona virus.

Any tenant claiming of being incapable to pay the rent, must provide evidence to the landlord that there is a causal link between the Corona pandemic and non-payment of the rent. Tenants may use as appropriate evidence, an affirmation by oath, proof that an application has been filed for state aid or a certificate that state aid has been granted, certificates of loss of earnings, the fact that the company's operations have been prohibited or significantly restricted by statutory order or official decree in the context of combating the corona virus, which is known to apply in particular to restaurants and hotels whose operations are prohibited in many federal states, at least for tourism purposes.

The law imposes only a restriction of the right of termination for rent arrears between April and June 2020 until 30 June 2022 at the latest. If those rent arrears from April to June 2020 have not been settled to a significant extent by then the landlord’s right of termination for cause comes into force again.

From a legal point of view, tenants remain obliged to pay the rent on the respective due date even between 1 April 2020 and 30 June 2020. It is merely the landlord’s statutory right to terminate for cause in case of a default that is suspended until 30 June 2022.

While the latest amendment adopted by the German parliament seems to benefit tenants, it has also some serious downside effects: Firstly, tenants remain obliged to pay default interests on the rent in arrears. With a statutory default interest rate of 9 percentage points above the base rate, the current default interest amounts to 8.17 % p.a.

Further, if the landlord has received a rental security from the tenant, the landlord can, at least according to the wording of the law, hold himself harmless by making use of the rental security. This aspect may have been overlooked in the haste of the legislative process, so that it cannot be completely ruled out that courts will reject the use of a rent deposit with reference to the meaning and purpose of the law. Since in commercial lease agreements rental collaterals are often provided by directly enforceable guarantees on first demand from banks and insurance companies, in which case they cannot object to the exercise of such rental collaterals, banks and insurance companies that have provided such guarantees in the past should be prepared for increased drawdowns. From the tenant's point of view, this has serious consequences as the tenant will then face claims from two sides following such exercise of a bank/insurance guarantee: landlords who have exercised such a bank/insurance guarantee regularly have a contractually agreed claim against the tenant to replenish the guarantee. The guarantor, on the other side, who has paid on the guarantee also has a claim for compensation against the tenant in the amount of the payment made to the lessor. And as long as the tenant will not fulfill his compensation obligation to the guarantor, the latter will certainly not provide him with a further guarantee to fulfil his obligation to replenish the guarantee towards the landlord.

This shows the possible weakness of the law: the restriction of the right of termination only extends to termination for late payment. Other termination rights remain unaffected, for example, if the tenant does not replenish a rental security that has been used by the landlord. The tenant is also threatened with termination if an operating obligation was agreed in a lease agreement and the tenant violates this obligation. Usually, operating obligations are designed as a major obligation of the tenant. A breach of this obligation may in individual cases constitute an important reason for extraordinary termination. Such a termination would have far-reaching consequences because the landlord could also be able to claim damages for breach of the operating obligation. The compensation could, for example, consist of the difference in a lower rent due to a subsequent renting and also includes the continuation of the contractually agreed rent until the normally expected subsequent renting, in the worst case until the end of the contract term. If a tenant wants to avoid this risk, he is obliged to maintain business operations even if this does not make economic sense.

The situation in which tenants and landlords currently find themselves is extremely complicated. Unfortunately, so complicated that even the legislator has not thought through all the facets in the short time available. Tenants are well advised to seek a solution together and not to leave the decision to the courts later. Apart from the fact that it is hard to predict how courts will judge the events from this time of crisis in the future, they are likely to be heavily overloaded so that it will take years before decisions are made. Instead, tenants should make use of available state aid offered during this current crisies and, if possible, reach agreement with their landlords on remaining rent adjustments.

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