Rent Reduction Due to Lockdown – Justified or Not?

May commercial tenants reduce their rent payments during Corona-related state restrictions? Tenants and landlords were already asking this question during the first lockdown in spring 2020, and this question has become more explosive again due to the current second lockdown.

One thing is certain: If the lease agreement does not contain any special provisions on the distribution of risks, such as a limitation of liability clause or a force majeure clause, the right to claim rent reductions is governed by the general statutory regulations. Several regional courts have expressed their views on this issue in the meantime.

No Right to Claim Rent Reduction Due to Corona-related State Restrictions

According to the opinion expressed by the Heidelberg Regional Court in a decision dated July 30, 2020 (5 O 66/20), commercial tenants were generally obliged to pay the agreed rent in spring 2020 despite the Corona-related state restrictions at that time. Accordingly, only government measures directly related to the specific nature, condition or location of the specific rental object may cause a defect in the leased property that entitles the tenant to a rent reduction. Measures, however, which merely impair the business success of the tenant and thus concern the risk of use, must be borne by the tenant. The Frankfurt Regional Court (2-15 O 23/20) endorsed this view in a decision dated October 2, 2020, and the Zweibrücken Regional Court also confirmed this in a decision dated September 11, 2020 (HK O 17/20). For the same reasons, the Regional Courts in Heidelberg, Frankfurt and Zweibrücken refuse to waive the obligation to pay the rent due to a potential impossibility of use.

The Regional Courts are thus following thepath of the German Federal Court of Justice (“Bundesgerichtshof”), which in a number of rulings has generally assigned the risk of use to the tenant (BGH, judgment of February 16, 2000 - XII ZR 279/97; also on the usufructuary lease agreement, judgment of July 13, 2011 - XII ZR 189/09). It is at the tenant's discretion how he develops his business and what kind of premises he uses for this purpose. Consequently, he must also bear the risk that subsequent legislative or authority measures may impair his business operations and his profit expectations (see BGH, judgment of July 13, 2011 - XII ZR 189/09). Exactly this risk to be borne by the tenant has been realized due to the Corona-related state restrictions.

The Munich I Regional Court sees this differently in a decision of September 22, 2020 (3 O 4495/20) and argues that there is a defect in the leased property entitling the tenant to a reduction if the rental object cannot be used at all or can only be used to a limited extent due to Corona-related state restrictions. The Munich I Regional Court refers to ancient case law of the Imperial Court (“Reichsgericht”) (RG, judgment of November 9, 1915 - Rep. VIII 145/15; similarly RG, judgment of February 20, 1917 - Rep. III 384/16). The Munich I Regional Court does not deal with the requirements of the Federal Court of Justice regarding the risk of use to be borne by the tenant.

Likewise, the Munich I Regional Court - whether consciously or unconsciously - does not take position to the intention of the legislature when issuing the law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal procedure law (COVFAG). Only the right of the landlord to terminate the contract due to late payment was limited by the COVFAG for a moderate period of time (COVFAG-E statement, BT-Drs. 19/18110 regarding Section 2 para. 1, p. 35 f.) – the obligation to pay rent should not be affected by the COVFAG. According to the official justification of the COVFAG draft, even during a lockdown tenants remain obliged to pay their rent in accordance with the general legal principles and they can fall into arrears with the rent payment.

Following the path of the Federal Court of Justice and the will of the legislature, the commercial tenant’s obligation to pay the rent will not be waived during Corona-related state restrictions, neither due to a defect in the leased property nor due to impossibility. Hence, in principle, the tenant has no right to claim a rent reduction.

Possible Back Door: Interference With the Basis of the Transaction

Will tenants still find ways for rent reduction or even early termination if, due to Corona-related state restrictions, their business premises cannot be used at all or can only be used to a limited extent and thus the profit expectations are not fulfilled? Not only does this question concern club operators who have been prohibited from using their rented premises for months for an unforeseeable period of time. Also tenants who can in principle use their rented rooms for the intended business purpose but who suffer losses in turnover due to indirect effects of the Corona-related state restrictions will wonder to what extent they can reduce the rent or terminate the contract prematurely.

Tenants may seek a justification for a reduction or early termination by invoking an interference with the basis of the transaction. An interference with the basis of the transaction can be assumed if circumstances which became the basis of a contract have significantly changed since the contract was entered into and if the parties would not have entered into the contract or would have entered into it with different contents if they had foreseen this change. The hurdles for an interference with the basis of the transaction are high. If a risk is realized which, according to the general rules, must be borne by the one party, this party may generally not invoke an interference with the basis of the transaction. Such is the case with the Corona-related state restrictions: Through these restrictions, the risk of use to be borne by the tenant according to the case law of the Federal Court of Justice is realized. Thus, the tenant may generally not invoke an interference with the basis of the transaction when this risk to be borne by him is realized. Only in extremely exceptional cases, i.e. when Corona-related state restrictions lead to existentially important consequences for the tenant, there may be room at all for an interference with the basis of the transaction (see on this fundamental topic Federal Court of Justice, judgment of February 16, 2000 - XII ZR 279/97). In this case, the tenant must demonstrate that the Corona-related state restrictions lead to existentially significant consequences which are not compensated by state catch-all measures (e.g. payment of short-time work compensation). In addition, he must also demonstrate that he has unsuccessfully tried to find alternative means of generating turnover (in the case of a store tenant, for example, the switch from stationary trade to online trade, see Heidelberg Regional Court, judgment dated July 30, 2020 - 5 O 66/20).

Outlook

In conclusion, the better arguments suggest that commercial tenants are in principle obliged to pay their rent during a lockdown period. They can only assert rights due to Corona-related state restrictions in exceptional cases if their company is at stake despite government measures and the exhaustion of possible sales alternatives. Landlords therefore have a good chance to defend themselves against commercial tenants who reduce their rental payments by invoking Corona-related state restrictions. However, this is not certain, as the divergent decisions of the individual regional courts show. Uncertainty will remain until the issue is resolved by the higher courts. Therefore, it might be advisable for landlords not to object to rent reductions across the board, but to proactively seek solutions together with their tenants.