COVID-19 – New Higher Regional Court rulings on the obligation to pay rent during the first lockdown

At district court level, a number of rulings have been issued since the beginning of the COVID-19 pandemic that address the tenant's entitlement to a rent adjustment based on economic impairments suffered during the first lockdown. We have already reported on these rulings in our blog posts from 30.10.2020 and 01.02.2021.

Now, on appeal, the Higher Regional Courts of Karlsruhe, Dresden and Munich also had to deal with the question under which conditions and on which legal basis an adjustment of the agreed rent can be made with regard to the first lockdown. Thereby, the Higher Regional Courts of Karlsruhe and Munich have both confirmed the legal opinions of the district courts of Heidelberg (Judg. of 30.7.2020, 5 O 66/20), Zweibrücken (Judg. of 11.9.2020, HK O 17/20) and Frankfurt am Main (Judg. of 02.10.2020, 2-15 O 23/20). The Higher Regional Court of Dresden, on the other hand, takes a different legal view.

Higher Regional Court of Karlsruhe (Judg. of 24.02.2021, 7 U 109/20) and Higher Regional Court of Munich (Advisory opinion of 17.02.2021, 32 U 6358/20)

As already decided in the previous instances, according to the most recent rulings of the Higher Regional Courts of Karlsruhe and Munich, the official closure orders do not establish a defect of the leased property within the meaning of Section 536 of the German Civil Code (“Bürgerliches Gesetzbuch”, BGB) and thus also do not establish a right to reduce the rent, since the official orders were not linked to the specific quality, location or condition of the leased property but only impaired the commercial success of the tenant.

Moreover, the Higher Regional Courts do not consider the official closure orders to constitute a case of impossibility that would result in a lapse of the obligation to pay rent pursuant to Section 326 para. 1 of the German Civil Code. The reason for this is that the suitability of the leased property for the contractually agreed use had been continuously given during the closure period. The fact that such use was not possible due to the official closure orders is the risk of use of the tenant.

In considering a claim for adjustment based on the doctrine of frustration of contract pursuant to Section 313 of the German Civil Code, the Higher Regional Courts of Karlsruhe and Munich emphasize the need for a decision on a case-by-case basis. In this regard, the courts dismiss a lump-sum 50/50 sharing of the risk without considering the actual financial impact of the lockdown. They point out instead, that the tenant must in any case prove a severe impairment of its economic situation by disclosing its sales figures in order to justify its request for adjustment. Hereby, any received state aid, saved expenses during the closure period, as well as the tenant's stocks of goods are to be taken into account. Although the latter tie up the tenant's liquidity, they must nevertheless be included in the calculation as assets of the tenant. Finally, the "catch-up effect" resulting from increased sales figures after the reopening of the business must be considered in determining the amount of the tenant's actual losses. The Higher Regional Court of Munich addresses, in addition, the criterion of the formation of reserves for unforeseen sales losses to be expected on the part of the tenant, which was recently established by the district court of Munich I (Judg. of 25.01.2021, 31 O 7743/20, see our blog post of 01.02.2021). However, the decision does not comment on the amount of these reserves, as it was not relevant to the decision in the underlying case.

Higher Regional Court of Dresden (Judg. of 24.02.2021, 5 U 1782/20)

The Higher Regional Court of Dresden does also not consider the official closure orders to be a case of impossibility or a rental defect within the meaning of Section 536 para. 1 of the German Civil Code. However, the court's reasoning deviates from the above cited rulings to the extent that, in the court's view, the official closure orders constitute a circumstance that lies outside the rental object but is linked to its location within an area affected by the infectious event. This would in principle establish a defect within the meaning of Section 536 para. 1 of the German Civil Code. Nevertheless, under the given circumstances, this general defect does not result in the tenant's right to reduce the rent, since the official closure orders are beyond the landlord's sphere of responsibility.

In the assessment of a claim for adjustment in accordance with the doctrine of frustration of contract  (Section 313 of the German Civil Code), the court orders in this case that the rent owed during the period of the ordered closure is to be reduced by a lump sum of 50%. The tenant's loss of sales was not determined separately since – with regard to the leased property – it was impossible to operate any part of the business in this case. The court left aside whether any state aid would have had to be taken into account since the parties' submissions did not indicate that the parties had received such financial support.

The court justified its decision in this case by stating that the unreasonableness of adhering to the unmodified lease agreement within the framework of Section 313 of the German Civil Code - just like the right to reduce the rent and the right to extraordinary termination due to payment delays pursuant to Section 543 para. 2 No. 3 of the German Civil Code - must be based exclusively on the ratio between performance and counterperformance during the period of time affected by the frustration. Thereby, the threshold of unreasonableness should be set relatively low in relation to the relevant period of time, since the lease agreement in question concerns a continuing obligation where an adjustment of the contract can anyways only ever be made for the period of time affected by the frustration. A fundamental change of the essential basis of the contract, however, does not take place in the context of an adjustment pursuant to Section 313 of the German Civil Code. Thus, in case of a closure period of more than one rent payment interval during the first lockdown, the extent of the tenant`s economic existence being affected by the closure orders was immaterial for a temporary adjustment of the contract.

The court justified the lump-sum reduction of the rent by 50% on the grounds that neither party had caused the frustration of the contract and that it also could not have been foreseen by either party. The decisive factor for the lump sum reduction of half of the rent was that the corresponding risk was not predominantly to be borne by either of the parties. The court did not decide how certain circumstances, such as the receipt of state aid, or the use of other revenue opportunities, affect the risk allocation. It appears that such circumstances simply did not exist or were not presented in the underlying case. However, the reference to such circumstances shows that the lump sum quota of 50% is at best a starting point and cannot be applied across the board.

Outlook

The aforementioned decisions of the respective Higher Regional Courts show that, based on the current state of case law, neither a rental defect nor an impossibility of performance on the part of the landlord will have to be assumed; instead, for future claims for rent adjustments in connection with official closure orders, only the rule on the frustration of contract will be decisive.

However, it remains to be seen whether and to what extent the adjustment of rent under Section 313 of the German Civil Code will in future be – in line with the Higher Regional Court of Munich – the result of an extensive, differentiated consideration of the loss of revenue suffered by the tenant, received state aid, saved expenses and other factors that have influenced the economic situation of the tenant or the landlord as a whole during the closure period and possibly beyond, or whether the case law will rather – in line with the Higher Regional Court of Dresden – focus on the temporary disruption of the ratio between performance and counterperformance in the specific rental relationship. The Judgments of the Higher Regional Court of Karlsruhe and of the Higher Regional Court of Dresden have both been allowed to be appealed to the Federal Court of Justice (“Bundesgerichtshof”, BGH). Therefore, the topic remains exciting!

Authored by Tamara Achtermann