Covid-related business closures

By Dr. Torsten Volkholz, Otto-Philipp von Gruben, and Sven Nickel

This week, the Federal Court of Justice (BGH) issued its eagerly awaited judgment on rent payment obligations during COVID-related business closures. The judgment eases, at least in part, landlords and tenants’ uncertainty about who bears the risk of official restrictions on use — namely, not one lease party alone.

The judgment[i]  is of particular importance for all commercial leases, as the BGH sets out guidelines for COVID-related rent reductions that can be applied to all industries affected by government closures during the pandemic. The BGH determined that — consistent with legislative intent (Art. 240 § 7 of the Introductory Act to the German Civil Code (EGBGB)) — COVID-related business closures were a disruption of the business basis (Störung der Geschäftsgrundlage) pursuant to § 313 German Civil Code (BGB). This disruption could lead to a rent adjustment, but this depends on a case-by-case examination of all circumstances and facts as well as the contractual and legal distribution of risk as to whether it is reasonable (zumutbar) for the tenant to adhere to the unchanged lease payments falling due whilst the lease property is closed. In any case, the BGH states that the risk of disappointed profit expectations of the tenant based on COVID-related business closures goes beyond the tenant´s ordinary risk of use, since the pandemic has resulted in the realisation of a general risk of life that cannot be assigned to one contracting party alone.

The BGH alleviated tenants and landlords’ uncertainty about the distribution of risk from the parties to the lease. However, despite the judgment, assessing whether tenants can actually demand rent adjustments is not altogether easier, because, ultimately, each case must be examined on its own merit.