Effects of COVID-19 on commercial lease
Almost all commercial lease are at present affected by the impact of the COVID-19 pandemic. In the following, we will answer selected questions concerning the potential legal effects from a landlord’s point of view. Contractual arrangements must always be examined in each individual case as a matter of priority though.
Key statements are as follows:
- The tenant is, as a basic principle, obliged to continue to pay rent and ancillary costs even if he is only able to continue his business operations in an unprofitable manner as a result of a slump in revenue or must cease his business operations due to an operating ban imposed by the authorities.
- Short-term mutual agreements with tenants to reduce rent should be avoided. This can be communicated to tenants with reference to the German Federal Government's ongoing measures to maintain the liquidity of companies. These measures are also intended to enable companies to continue to pay their current rent sums. In addition, any agreements must be coordinated with the landlord’s financiers and the tenant’s surety.
- Insofar as the tenant has not been officially prohibited from continuing his business operations, there also continues to exist – from a purely legal point of view – a contractually agreed obligation to operate which, in practice, one should however preferably not enforce or, at most, only do so with a sense of proportion.
- If the landlord bears the obligation to implement measures for public safety in respect of communal areas, he must also take the measures necessary to protect against the spread of infections.
- Whether the landlord is able to use the argument of force majeure to counter a tenant’s claims for damages due to a delayed handover of the lease object depends upon the definition of liability in the lease agreement and upon the circumstances in the individual case. Such argumentation can however certainly prove successful.
I. Does the tenant’s obligation to pay rent and ancillary costs no longer apply as a result of the COVD-19 pandemic?
The tenant’s obligation to pay rent and ancillary costs continues to exist. A reduction in rent and ancillary costs only comes into question in the event that the lease object has a defect. A slump in the revenue of the tenant’s business operations does not constitute a defect. The risk of the economic use is borne by the tenant. The same also applies, in principle, in the event of a disruption to business operations due to general prohibitions of events or business operations imposed by the authorities as a result of the COVID-19 pandemic. The risk of a serious drop in the general rent level is also borne by the tenant.
A different position can however apply if, for example, the competent authorities introduce specific rules – such as for visiting shopping centres. In this case, the official prohibition does not relate to the tenant’s business operations per se, but rather to a circumstance of the lease object made available by the landlord (= the location within a shopping centre). Such a prohibition of use could be seen as a defect in the lease object entitling the tenant to a reduction in rent and therefore to withhold payment of rent and ancillary costs. Naturally, this has not yet been clarified before a court. The exact definition of the official prohibition of business operations in the individual case is also crucial here.
An entitlement to an adjustment of the contract due to interference with the (large) basis of the agreement (section 313 of the German Civil Code) will probably need to be discussed in extreme situations at most and/or in the event of “unprecedented upheaval of all conditions”. In this respect, both the further developments and legislative developments remain to be seen.
II. How should the landlord respond to requests from tenants for short-term adjustments of the rent?
As a rule, short-term mutual agreements with tenants regarding definite rent reductions should be avoided whilst nobody is able to foresee the extent and effects of the current crisis. This can be justified to tenants with reference to the German Federal Government's ongoing support measures to maintain the liquidity of companies. These measures by the federal government are also intended to enable companies to continue to pay their current rent sums. The exact design of these measures remains to be seen. Announcements have been made about tax deferrals and loans, in particular. If the landlord were to immediately grant reductions to tenants in advance, he cannot assume that these already-granted reductions will be credited to him or otherwise taken into consideration within the framework of the government support.
A concession could (if the landlord’s own liquidity is adequate) be made, where appropriate, in the form of parts of the rent being deferred for tenants in the event of significant liquidity problems. Here, the deferral should always be clearly limited in time and laid down in an addendum to the lease agreement which complies with the written form (i.e. not by means of emails or orally, in particular).
Any understandings must be coordinated in advance with the landlord’s financiers, given that, where the obligation to pay rent is concerned, their approval will likely be routinely required. This also concerns deferrals, first and foremost. In the event of agreements upon rent payments, the consent of the tenant’s sureties is also often required so that corresponding agreements are also binding vis-à-vis these sureties.
III. Is the tenant obliged to keep his business operations running?
In principle, the tenant only has an obligation to continue to operate if this has been contractually agreed. If this has been agreed, then this obligation shall also continue to exist if the tenant incurs losses; for instance, if customers stay away and staff become sick. However, the obligation to operate expires in the event of official prohibitions being imposed and should not, in our view, be enforced in practice against the tenant in the current situation for public health reasons and for reasons of social responsibility or should only be enforced in exceptional cases.
IV. Which special obligations does the landlord have to implement measures for public safety?
The landlord bears the responsibility for public safety in the communal areas of the lease object. Within the context of public safety, the landlord is obliged to check the premises, including all spaces and areas including in the lease, for sources of danger and to take such measures to avert dangers which are reasonable in light of the overall circumstances. The landlord is liable for breaches of this obligation under civil and criminal law. With regard to the COVID-19 pandemic, the landlord is also obliged to take measures which appear sound and adequate. These measures should be guided by the respective current hygiene recommendations. It is obligatory to facilitate the correct washing of hands by sufficiently providing and refilling handwash soap and single-use paper towels. The regular disinfecting of surfaces which are very regularly touched (e.g. door handles, lift buttons) should also be considered. In addition, it is recommended that the hygiene rules that need to be complied with (such as keeping one’s distance from others) are clearly displayed so that the attention of visitors in the communal areas is drawn to them. Further sources of danger must be identified and secured on site in coordination with the facility management.
Should gatherings or other crowds of people become prohibited by the authorities (e.g. by way of a general ruling issued by city authorities), the landlord is, in our view, probably also obliged to ensure compliance with these obligations in respect to the communal areas accessible to the public (e.g. the mall of a shopping centre) within reasonable bounds (e.g. by issuing bans from premises, controls at the entrance area).
If the landlord transfers his obligation to implement measures for public safety to his facility management, he remains obliged to effectively monitor the due and proper implementation of the duties assigned.
At the same time, landlords should see to it that their tenants take measures for public safety in the exclusive leased areas and should also specify compliance with hygiene recommendations in this respect and request confirmation of their compliance as well.
V. Is the landlord liable to a tenant if, in the case of a new letting, the handover of leased areas is delayed due to the COVID-19 pandemic?
The landlord’s liability for a delay in the handover notably depends upon the wording of the lease agreement. If the landlord only bears liability for delays for which he is culpable, then, in light of the current dynamics of the situation, he can, in our assessment, invoke the force majeure if the handover of leased areas is delayed due to the COVID-19 pandemic (e.g. as a result of disruption to supply chains in the construction industry or official prohibitions). According to the case-law of the German Federal Court of Justice, a case of force majeure exists if an event occurs that cannot be attributed to a sphere of one of the parties to an agreement, but which instead externally impacts upon the living conditions of an indefinite number of people and which is objectively unavoidable and unforeseeable. The WHO’s classification of the Corona crisis as a pandemic on 11 March 2020 likely brings clarity in this respect. In this question, particular importance is placed on the particularities of the individual case, with consideration being given to the specific reasons for the delay. What is even more important than usual in this respect is to require in the event of any impediments due to the COVID-19 pandemic that the main contractor or any other contractors provide concrete evidence of the reasons for / duration of the impediment.
Landlords should in each case also communicate impending delays in good time so that tenants are able to initiate measures to minimise losses. In addition to the potential initial informing of affected construction projects and agreements, a specific detailing of the impediment – as soon as possible – is always necessary in each case as well.
If concluding a new lease agreement, it is strongly recommended that explicit provisions and/or extended deadlines for cases of delays due to the COVID-19 pandemic be incorporated relating to the obligations of handover. Since the particular circumstances of the COVID-19 pandemic are now known at time of concluding of a new agreement, the negative effects which are to potentially be expected need to be factored in by the landlord without a separate provision.