Controversy on the Legal Consequences of the COVID-19 Crisis

Controversy on the Legal Consequences of the COVID-19 Crisis

Reduced payments for commercial tenants?

The coronavirus affects not only the human organism – it also radically impacts economic processes. The COVID-19 crisis, described as a “natural disaster in slow motion”, has affected all areas of economic life and therefore poses major challenges in a number of legal areas. In the realm of contract law, there is an ongoing and intense dispute as to whether commercial tenants are entitled to make reduced payments to their landlords as a result of foregone revenue.

The economic upheavals of the past few months have caused many companies and private individuals to experience financial difficulties. At the same time, contracts have been disrupted by the breaking-down of supply chains and the frustration of purposes pursued by the transaction. The “Act to Mitigate the Consequences of the COVID-19 Pandemic in Civil, Insolvency and Criminal Procedure Law”, which was hurriedly passed in March 2020, aimed primarily at alleviating liquidity bottlenecks and granted tenants and borrowers extensions of payment time and protection against the termination of the contract due to non-performance.

A question of risk allocation

However, the “COVID-19 Act” does not expressly address other contractual remedies. This explains why there has been intense debate for months over the question of whether commercial tenants who have suffered massive losses in revenue as a result of official closure or protection measures – or simply because of the general decline in consumer confidence – should enjoy additional rights. Can they assert that the value in the use of the leased property has been reduced so significantly that the agreed rent is no longer due in full? Leaving aside the legal and doctrinal subtleties, the issue here is one of allocation of risk, i.e. the question of who will ultimately have to absorb the distortions resulting from the pandemic.

In his post-doctoral presentation (Habilitationsvortrag) held on 30 July 2020 at the University of Regensburg, Jan Peter Schmidt, senior research fellow at the Institute, outlined the debate and, making reference to earlier German court cases, argued that commercial tenants should be able to invoke the doctrine of Störung der Geschäftsgrundlage (disruption of the basis of the transaction), as set out in § 313 BGB, in order shift part of their losses onto their contractual partner. The “basis of the transaction-doctrine” was generally developed for cases in which the legal, economic or political circumstances have so seriously changed after the conclusion of the contract that at least one of the parties cannot reasonably be expected to uphold the contract without alteration.

Solution approach and law comparison

If this is generally accepted for the situation of Corona-damaged commercial tenants, the difficult follow-up question remains as to the degree to which they can demand an adjustment of their payment obligations. “In my opinion, the 'Solomonic solution' often advocated in legal literature of reducing the rent by 50% contradicts the general principles of the German Civil Code”, says Schmidt. Instead, he calls for an adjustment based on the presumed will of the parties and the equilibrium of the contract, taking into account the remaining usage and income possibilities for the tenant.

Schmidt, who also heads the Centre on the Application of Foreign Law at the Institute, also looks to support his results with comparative legal findings. “Experiences made in other European countries suggest that there is at least a consensus on the fundamental policy issue: the risk that a rental property will no longer be able to generate the earnings forecast by the parties due to a fundamental change in the economic and legal framework is not to be borne by the tenant alone.”

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