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Comment on judgement no. XII ZR 8/21 of the German Federal Court of Justice on the obligation to pay rent in the event of a COVID-19 related shop closure

24 January 2022

Almost two years after the first nationwide lockdown in March 2020, the German Federal Court of Justice (Bundesgerichtshof - BGH) on January 12th  took up position on the question of whether the tenant operating a retail shop has to pay the commercial rent in full despite the closure of the shops ordered by general order due to the COVID 19 pandemic.

A problem shared is a problem halved – or is it?

In the case, the Regional Court of Chemnitz ordered the defendant tenant to pay the commercial rent for the month of April 2020 after she had withheld the amount from the landlord due to the closure order. The closure would not entitle the tenant to a rent reduction pursuant to sec. 536 (1) of the German Civil Code (Bürgerliches Gesetzbuch - BGB), because it was not directly related to the specific quality, condition or location of the rental property. Furthermore, the defendant would not be exempt from paying the rent pursuant to sec. 326 (1) German Civil Code because the transfer of use had not become impossible within the meaning of sec. 275 German Civil Code.  

In the appeal procedure, the Dresden Higher Regional Court at least tried to compromise. It ordered the defendant to pay only half of the rent, partially overturning the first instance decision, because the COVID 19 pandemic and the resulting state-regulated closure lasting more than a month constituted a disturbance of the basis of the rental agreement (Störung der Geschäftsgrundlage) within the meaning of sec. 313 (1) German Civil Code. Fifty-fifty sounds good at first, at least neither the tenant nor the landlord can do anything about the situation. Fair, right? Well, the judges at the German Federal Court do not agree and send the case back to Dresden with the following arguments. 

Following the dismissing statements of the preceding courts on sec. 536 (1) German Civil Code and sec. 275 German Civil Code, according to the German Federal Court also an adjustment of the commercial rent according to sec. 313 (1) German Civil Code would principally apply to the present case. The so-called major basis of the contract (große Geschäftsgrundlage) was severely affected by the closure, i.e. the parties' expectation that the fundamental political, economic and social framework conditions of a contract would not change and that their social existence would not get unsettled. After all, the defendant - like so many entrepreneurs during these times - could not run her business for almost a month. This may well be perceived by everyone as a serious change in the economic framework. The judges of the German Federal Court also feel vindicated in their reasoning by art. 240 sec. 7 of the Introductory Act to the German Civil Code (EGBGB – Einführungsgesetz BGB), one of the German contract law regulations in the wake of the COVID 19 pandemic. The provision establishes a statutory presumption that a change within the meaning of sec. 313 (1) German Civil Code exists if commercial rental property is not or only partially usable for the tenant's business as a result of government measures to combat the COVID 19 pandemic. 

However, in order to be entitled to adjust the contract, the unreasonableness criterion of section 313 (1) German Civil Code would have to be considered as well as a normative case-by-case analysis to be made. In this respect, the German Federal Court acknowledges that disadvantages resulting from the state regulations of the retail trade, which have until now been unseen in our recent history, go beyond the usual risks of a commercial tenant. Instead, the COVID 19 pandemic as a general life risk had affected the contractual relationship, which could neither be imposed on one of the contracting parties nor could it simply be halved across the board. 

Rather, a comprehensive analysis of each individual case is indicated, in which all circumstances are to be taken into account, as expressly stipulated in sec. 313 (1) German Civil Code.

Therefore, the question to be asked is, what disadvantages the tenant suffered as a result of the closure of the business and its duration, for example whether an actual decline in turnover could be recorded and to what extent. Could the tenant even have reduced such a decline? It is also understandable that state aids or insurance payments in favour of the tenant should play a role in the assessment process.

As a consequence of today's verdict, commercial tenants and landlords from now on have to demonstrate exactly which factors they want to refer to in regard to a COVID-19 -related adjustment of the rent amount within the scope of sec. 313 (1) German Civil Code. This may be tricky to translate into action. 

Nevertheless, we welcome the German Federal Code's differentiating decision and look forward to a hopefully truly fair reconciliation of interests in a large number of cases. From a doctrinal point of view, it is only right to implement a normative case-by-case-assessment. Sec. 313 (1) German Civil Code explicitly states us to do so. Both commercial tenants and landlords are equally affected by state measures and are set back in their economic interests, so that overcompensation of one with publicly financed aids and at the expense of the other is hardly justified. Another positive aspect of the decision is that the Federal Supreme Court seems to burden entrepreneurs with some kind of duty to mitigate losses. This acknowledges that despite everything, many entrepreneurs have shown business acumen and have been able to maintain their business through spontaneous and often crazy ideas. Finally, the German Federal Court simply reflects the intuition of many readers of the verdict: As far as citizens are called upon to show solidarity in the ongoing COVID-19 crisis, this should - in our opinion - naturally also apply to the business sector.

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