Corona: In the North nothing new – Higher Regional Court of Schleswig to rent default of hotel operator

Consequences for the hotel industry

Article 240 Section 2 of the Introductory Act to the German Civil Code (EGBGB), which was introduced due to the COVID-19 pandemic in April 2020, neither establishes a statutory deferral of the rent nor a right to withhold performance (Leistungsverweigerungsrecht). The landlord may still sue the tenant for payment of rent. Likewise, the tenant could still be in arrears with its rent payment; damage caused by delay or interest on arrears are also not excluded.

In its decision of 16.06.2021 – 12 U 148/20, the Higher Regional Court of Schleswig ruled on the appeal of a hotel tenant who had been ordered in the first instance to pay the full (remaining) rent payment for the period from April to June 2020. The defendant had partially suspended its rent payments for this period, invoking a liquidity shortage caused by COVID-19. The defendant based its argument for not having to pay on Art. 240 Sec. 2 EGBGB, which, in its opinion, according to the meaning and purpose of the provision, establishes a right to defer the rent payment that goes beyond a simple protection against termination. In its view, it is contradictory if, although there was no termination, there was a threat of a lawsuit about the rent payment with associated costs and subsequent enforcement which indirectly also threatened the existence of the tenant.

Background of the court decision 

In the course of 2020, in order to mitigate the COVID-19 consequences, the legislator introduced some new regulations on contract law by means of the implementation of Article 240 EBGBB, which should provide a reasonable level of legal clarity to the affected parties, especially with regard to lease agreements.

Since the first decisions were issued in connection with the contractual obligation of commercial tenants affected by COVID-19 to pay rent, there has been general agreement in case law that government measures taken to contain the pandemic in the form of closure orders or other restrictions on operations generally do not constitute a defect in the leased property. Nor is there regularly a case of impossibility of performance which would release the tenant from its obligation to pay rent pursuant to Sections 326 para 1, 275 para 1 of the German Civil Code (BGB).
In contrast, the case law has not been entirely homogeneous with regard to the application of Section 313 BGB (frustration of contract – Wegfall der Geschäftsgrundlage).
In the past, individual courts had affirmed the tenant’s full rent payment obligation despite the existence of a situation of frustration of contract (such as the Higher Regional Court of Karlsruhe decision of February 24, 2021 – 7 U 109/20), while other courts generally assumed a half reduction of the rent owed (such as the Regional Court of Munich of October 5, 2020 – 34 O 6013/20). In our blog posts last from 05.03.2021 and 01.02.2021, we had already reported extensively on the development and current status of the case law.

Now the OLG Schleswig had to focus on the legal consequences of Art. 240 Section 2 EGBGB. The present decision leads to more clarity in terms of tenants’ and landlords’ rights with regard to further questions concerning the payment of rent.

The court’s decision

As a result, the Higher Regional Court of Schleswig dismissed the defendant’s appeal against the first-instance ruling to pay the rent in full as being unfounded. The defendant owes the full rent for the period in question.

The Regional Court had correctly assumed that Art. 240 Sec. 2 EGBGB does not effect a deferral of the rent and that only consumers and microentrepreneurs are entitled to withhold performance within the scope of application of Art. 240 Sec. 1 EGBGB – which, according to para. 4, is explicitly not applicable with regard to lease agreements. The rent for the period in question was still enforceable. This was essentially apparent from the legislator’s unambiguous justification. Sec. 2 was a special provision that reflected the special characteristics of lease agreements and which gives priority to the interest in the continuation of the lease relationship. Therefore the regulation interferes less intensively in the landlord’s rights by merely restricting its secondary right to terminate due to default than an exclusion of the rent payment obligation or a deferral would have done. In its further reasoning, the court also refers in particular to the reasoning of the Higher Regional Court of Dresden, according to which Art. 240 Sec. 2 EGBGB does not have a barrier effect with regard to the effects of government measures to combat the COVID-19 pandemic on the existence or scope of the obligation to pay rent. Rather, the provision directly limited only the right to terminate due to default payment; in contrast, Sec. 2 did not provide any statement on the effects of the COVID-19 pandemic upon the amount of rent. This view was also endorsed by Art. 240 Sec. 7 EGBGB.

The Regional Court had also justifiable rejected a defect entitling a reduction on the grounds that the official measure was not directly based on the specific nature of the leased property and merely affected the business success of the defendant. Although the defendant had not argued on the defectiveness in the appeal proceedings, the retention of the rent was to be interpretated as both an implicit exercise of a right of retention and a reduction of the rent, which is why the court carried out a review of its own motion in this respect. According to the court, a defectiveness was ruled out because the contractual provisions were not to be understood as meaning that the landlord wanted to guarantee the agreed use under all conceivable circumstances. Rather, in the event of subsequent changes in the law, the tenant should also expressly bear the cost risk for any changes and the risk of usage being restricted by external circumstances.

Likewise, the Regional Court had correctly rejected a discharge of the rent payment obligation due to the impossibility of performance arguing that the officially ordered closure only concerned the risk of use.

The statements of the Regional Court on a possible frustration of contract also held up to legal review, although the court refrained from the necessity of a renewed review of the legal statements of the Regional Court. This was because the defendant had not invoked such a claim in the first instance and had based its appeal exclusively on the alleged misapplication of Art. 240 Sec. 2 EGBGB; there was no appeal of the further considerations of Regional Court that justified the dismissal of the action, which is why a renewed examination was unnecessary.

According to the reasons given by the Regional Court for its ruling, there has not been a frustration of contract. Firstly, it could not be clarified whether the parties would not have concluded the lease agreement, or would have concluded it only with different content, even in the knowledge of an official closure of retail shops for a period of one month. Secondly, it was in any case not unreasonable for the defendant to adhere to the lease agreement as it is. The defendant had only submitted liquidity shortfalls, which were sufficiently taken into account by the provision of Art. 240 Sec. 2 EGBGB. In addition, the submitted revenue shortfall could not be verified due to a lack of supporting documents or evidence from a tax advisor. Moreover, the fact that the landlord has to provide financing and maintenance measures and may be called upon by a bank must also be taken into account within the assessment of the individual case. It was not justifiable to impose the full risk on the landlord in this respect. This also applied, above all, against the background that the government had made compensation claims possible for tenants with the extension of the reduced hours compensation of emergency aid.

Future outlook

Although the Higher Regional Court of Schleswig made it more than clear in its decision, with little surprise, that the due date of the rent payment remains unaffected also in the scope of the application of Art. 240 Sec. 2 EGBGB, the legal consequences in connection with Sec. 313 BGB continue to be subject to a concrete case-by-case examination. Within the scope of this assessment of interests, the obligation and scope of presentation to justify such a rent adjustment remains significant for the hotel operator concerned - the mere reference to liquidity shortfalls is not sufficient. Rather, this court decision also shows that the landlord’s interests and thus the interests of the hotel owners are of decisive importance in the context of assessing individual cases.

 

Authored by Marc P. Werner and Katrin Pilgram
 

 

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