Background to the decision
As of 22nd of December 2020 (BGBL. 2020 Part I No. 67, p. 3332), the German legislator added Section 7 to Art. 240 of the German Introductory Act to the Civil Code (EGBGB), thus clarifying that in the event of restrictions of commercial tenants’ businesses as a result of government measures to combat the COVID-19 pandemic, it is presumed that a circumstance which has become the basis of the lease within the meaning of § 313 para. 1 BGB has fundamentally changed after the conclusion of the contract.
Courts have already had to deal with the question of how the pandemic and any government measures in this respect are to be assessed in legal terms with regard to possible rent reductions. In the process, it has predominantly emerged that government-ordered closures and other restrictive measures in connection with COVID-19 do not constitute a defectiveness of the leased object that would entitle tenants to a rent reduction. In general, a case of impossibility shall not be applicable either.
However, even before the legal clarification in Section 7 of Article 240 EGBGB, some courts already assumed a case of severe change in the implicit basis of contract, which led to a reduction of the rent owed by 50% in some cases (e.g. Munich Regional Court, judgement of 5th October 2020 - 34 O 6013/20). In our blog posts dated 30th of October 2020 and 14th of December 2020, we already reported on the relevant developments in jurisdiction.
The Munich Regional Court essentially awarded the landlord’s payment claim in its entirety with regard to the outstanding monthly rents for the months of April up to and including June 2020.
On the assumption that COVID-19 may constitute a severe change in the implicit basis of the contract, in principle, a 50/50 distribution of the risk of use shall be assumed, since the economic risk of usability would ultimately affect both parties equally - the tenant who could only generate profits to a limited extent and the landlord, who would be less likely to lease the hotel to a third party at the contractually agreed price. The determination of such a distribution quote, however, shall always be based on the examination of the circumstances in the individual case. In addition, the assessment of unreasonableness (Unzumutbarkeit) would have to be linked to the standard of risk distribution through a clear distinction as to whether declines in turnover were causally based on any state closures and / or restrictions of use rather than presenting the mere, indirect consequence of change in customer behaviour.
One the one hand, the tenant would have been able to generate an average occupancy rate of up to 22% with business travellers in the months of April to November 2020 despite the ban on accommodation for tourist purposes. Therefore, the court found that the tenant's closure of business in the months April to June 2020 (that was justified by stating that higher losses would have been incurred with an occupancy rate of less than 14% than with a closure) was based solely on the tenant’s business decision. As the tenant was also still in possession of the leased object during the relevant period allowing him to carry out any improvements or other measures - which may prove more difficult under regular business operations –, the distribution of risk would have to be adjusted by a further 5% (calculated on a period of about 1.5 days per month or 1.5 hours per day). Consequently, the COVID-19 risk was only to be distributed with respect to the remaining 73% of the rent owed.
On the other hand, the tenant, as the debtor, shall be generally responsible for his own solvency irrespective of fault. In principle, it shall therefore be reasonable for the tenant to build up reserves to an appropriate and reasonable extent in order to be able to cushion slumps in turnover accordingly. Specifically, the court held that it was reasonable to set up such reserves in the amount of 20% of the sum of the EBITDA of the last three years in order to use this amount in the event of a decline in demand or turnover. The entrepreneurial risk and advantages would have to be adequately considered in relation to the other contracting party. In the present case, the reserves that could reasonably be expected of the tenant according to this provision exceeded the remaining 73% quote of the rent owed, which is why a reduction of the rent via § 313 BGB for the months at issue would ultimately not be equitable.
Incidentally, the positive development of the location, which was initially not foreseeable by the parties when the contract was concluded about 20 years ago, led to an agreed rent being significantly below the rent customary in the locality today.
The present judgement impressively shows that the legal consequences when applying § 313 para. 1 BGB are left to a case-by-case consideration. We assume that the principles explained above apply equally to leasehold contracts because of the rule in Section 7 of Article 240 EGBGB. Despite the result of the latest ruling of the Munich Regional Court, it is not to be expected that in the vast majority of cases an adjustment of rent in favour of the hotel operator will completely fail to occur due to the generally advocated, joint sharing of the risk of use in case of a severe change in the implicit basis of contract. However, numerous factors can play a role here. Ultimately, the best solution for both hotel operators and owners remains an amicable agreement in order to resolve legal uncertainties.
Authored by Marc Werner and Angelika Tafelmaier