Higher Regional Courts Tend to Reject Rent Reduction during lockdown

According two recent decisions of the Karlsruhe Higher Regional Court (“Oberlandesgericht”) and the Munich Higher Regional Court, commercial tenants are generally obliged to pay full rent during a lockdown. The Dresden Higher Regional Court, on the other hand, holds that a retailer may regularly reduce its rent payments by half during government closure orders. The courts allowed an appeal to the German Federal Court of Justice (“Bundesgerichtshof”). Will the Federal Court of Justice stick to its pre-Corona lessor-friendly course in the lockdown cases?

Karlsruhe and Munich: Rent adjustment only in exceptional cases that pose an existential threat

The Karlsruhe Higher Regional Court had to rule on the rent payment of a retailer ("KiK" store) who did not pay rent during the first lockdown in March/April 2020 and was sued for payment by the landlord (judgment of February 24, 2021 – 7 U 109/20). The court examines the legal requirements in a scholastic way.

First, the court finds that the government restrictions during the first lockdown did not result in a defect of the leased property. A defect of the leased property would require a specific impact to the condition, state, or location of the rental property. Impairments of use due to government lockdown restrictions do not cause such an impact; they only have an impact on the use of the leased property. The use of the leased property, however, is in the hand of the tenant. In principle, the tenant must bear the risk of use. Thus, the Karlsruhe Higher Regional Court, like the majority of the regional courts dealing with lockdown cases in 2020, follows the case law of the Federal Court of Justice already issued before the Corona crisis (in particular judgment of July 13, 2011 – XII ZR 189/09).

For the same reason the Karlsruhe Higher Regional Court also denies an impossibility that could lead to a release from the rental payment obligation.

Moreover, the Karlsruhe Higher Regional Court rejects an adjustment of the lease agreement due to an interference with the basis of the transaction. In order to successfully claim an adjustment of the lease agreement, the tenant must generally prove the following three prerequisites:

• First, circumstances which became the basis of a contract have significantly changed since the contract was entered into ("real element").
• Second, the parties would not have entered into the contract or would have entered into it with different contents if they had foreseen this change ("hypothetical element").
• Third, it must be unreasonable for the tenant to to uphold the contract without alteration ("normative element").

The court points out that the recently enacted Art. 240 Section 7 of the Introductory Act to the German Civil Code (EGBGB) only overcomes the first and easiest hurdle to jump ("real element"). Neither does the new provision shake the second hurdle ("hypothetical element") nor the third hurdle ("normative element").

According to the court, the claim for an adjustment of the lease agreement sought by the tenant in the individual case fails at the third hurdle. Adhering to the unchanged contract would only be unreasonable for the tenant if the use of the tenant meant the destruction of his existence or at least a severe impairment of his economic progress and if adherence to the contract lead to an unsustainable result that was simply no longer compatible with law (with reference to a judgment of the Federal Court of Justice from December 20, 2004 – VIII ZR 41/04.) Whether or not adherence to the unchanged contract would lead to an unsustainable result that was simply no longer compatible with law does not depend solely on any loss of sales by the tenant during the lockdown – the bigger picture has to be looked at. In the case decided, the court saw no unsustainable result that was simply no longer compatible with law and accordingly the court rejected the claim for an adjustment of the lease agreement.

The Munich Higher Regional Court had already made a specific statement on a lockdown‑case on February 17, 2021 (32 U 6358/20). The court made the same arguments as the Karlsruhe Higher Regional Court and applied a similarly high standard for exceeding the unreasonableness limit. In summary, the following factors were used by the higher regional courts and by some regional courts to assess the “reasonableness limit”:

• loss of sales (store) during the lockdown
• loss of sales (entire group) during the lockdown
• exhaustion of every effort to increase sales (e.g. through voucher or discount campaigns, delivery service, pick-up service)
• development of sales alternatives by changing the business model (e.g. through online sales instead of stationary retail)
• compensation for lost sales through state aid (e.g. short-time work allowance, bridging aid (“Überbrückungshilfe”))
• saved expenses during the lockdown (e.g. short-time work by employees, lower maintenance costs)
• saved expenses after the lockdown (for example because fewer new goods have to be procured, goods not sold during the lockdown are still available in the warehouse and can be sold off later)
• increases in sales after the lockdown (in particular due to catch-up effects)
• possibility to build up reserves before the lockdown (especially based on sales and profits of previous years) 

Dresden: Rent reduction to half for retailer during lockdown

The Dresden Higher Regional Court also ruled on the case of a KiK store that was sued for rental payment during the first lockdown in March/April 2020 (judgment of February 24, 2021 – 5 U 1782/20).

The court does not consider the state-ordered closure of the store during the first lockdown to be a defect that allows a rent reduction. However, the reasoning of the court raises questions. While the court opposes the view that the closure of the branch falls within the scope of the risk of use it then states that the closure order was not to be assigned to the risk sphere of the landlord, who bears the risk of the usability of the rental property. In the view of the court the consequences of the closure order should fall within the sphere of risk neither of the tenant nor the landlord.

However, in the case it decided, the OLG Dresden granted the tenant a claim for rent adjustment due to an interference with the basis of the transaction. According to the court, COVID-19 has led to a systemic crisis causing an interference of the so-called major basis of the transaction ("real element"). In the opinion of the court, the contracting parties would not have decided unilaterally in favor of one contracting party in the case of the risk affecting both contracting parties equally ("hypothetical element")  if they had had this systemic crisis in mind. Finally, the court states, that it was not sustainable for the tenant to adhere to the concluded lease agreement ("normative element"). With regard to reasonableness, the court deliberately sets a low threshold. According to the court, it would already be unreasonable for the tenant if he had to pay the full rent for one month according to the rental agreement without being able to use the rental object in accordance with the purpose of the rental. The court justifies this low threshold by stating that rental agreements are continuing obligations. Whether the tenant's economic existence is even remotely affected as a result of the lockdown is of no relevance to the court. The court does not go into detail on the amount of the loss of sales suffered by the tenant or its parent company during the lockdown, on any revenue alternatives that may have been exhausted, on the possible compensation for lost sales through state aid, or on expenses saved during the lockdown. As a result, the court succinctly states that a reduction of 50 % in the basic rent is justified because neither of the contracting parties had caused the disruption of the basis of the contract.

Outlook: It is the BGH's turn

The next step is the Federal Court of Justice. Both the Karlsruhe Higher Regional Court and the Dresden Higher Regional Court have approved the appeal. It would be surprising if the Federal Court could get used to the decision of the Dresden Higher Regional Court because prior to the Corona crisis, the Federal Court overwhelmingly sided with landlords in legally similar cases. In particular, the Federal Court stated that under the statutory provisions, the tenant bears the risk of use and it is at his expense if subsequent legislative or regulatory measures may impair his commercial operations and his profit expectations are not fulfilled as a result (see BGH, judgment of July 13, 2011 – XII ZR 189/09). In addition, the Federal Court has made it clear on several occasions that it regards claims on account of an interference with the basis of the transaction as the very last straw only in extremely exceptional cases when an unforeseen development with possibly existentially significant consequences for a party occurs (cf. BGH, judgment of February 16, 2000 – XII ZR 279/97).

We will see in which way the Federal Court will ultimately go. It is also unclear how long the Federal Court will take to come to a decision. For tenants and landlords alike, the matter is not over yet. As before, this means that in the event of corona-related payment difficulties on the part of the tenant, talks must be sought and creative legal solutions have to be worked out in order to avoid months of hang-ups. Likewise, when entering into new leases, it is imperative to take precautions and lay a sound legal foundation for dealing with corona-related or other government restrictions.