The Federal Court of Justice ruled in its judgment of 12 January 2022 – Az. XII ZR 8/21 (“Decision”) on whether tenants of commercial premises have a claim for rent adjustment in the event of pandemic-related business closures.

KFR – Kanzlei für Real Estate explains the decision and its practical consequences for landlords and tenants.

Background of the decision

The background to the decision was that the tenant KiK Textilien und Non-Food GmbH (“KiK”), which had rented premises in the Chemnitz area, did not want to pay rent for the period of a state-ordered business closure from 19 March to 19 April 2020 due to the COVID-19 pandemic. The landlord, however, insisted on payment of the full amount. The legal dispute ultimately reached the Federal Court of Justice, as both KiK and the landlord maintained their positions.

The BGH’s decision

The highest judges decided as follows:

• Commercial tenants may in principle have a claim for rent adjustment (§ 313 para. 1 BGB) in the event of a pandemic-related business closure.
• However, it always depends on the individual case, i.e. there is no universally applicable rule for the rent payment obligation in the event of a closure of commercial premises.
• State closure orders do not give rise to a right of the tenant to rent reduction (§ 536 BGB). The closure of a retail business due to the COVID-19 pandemic does not constitute a defect of the leased property. This does not make it wholly or partially impossible for the landlord to provide the contractually owed service of making the leased property available and maintaining it in a condition suitable for contractual use.
• The claim for rent adjustment requires, in addition to the frustration of the contractual basis, that adherence to the unchanged contract cannot reasonably be expected of the tenant. A blanket approach is not permissible here.
• The circumstances of the individual case are always decisive. The type of commercial tenant is irrelevant; what is decisive is solely the subject matter of the lease. When weighing up the circumstances, not only the disadvantages (loss of revenue) are to be taken into account, but also the financial benefits that the tenant has obtained through state payments to compensate for pandemic-related disadvantages.
• An actual threat to the tenant’s economic existence is not required for the claim for contract adjustment.

Our conclusion

While the decision is understandable, it will give rise to a series of further questions and variables when it comes to determining the amount or percentage by which the rent should be adjusted in individual cases.

Larger tenants with multiple branches throughout Germany and a functioning online retail operation (e.g. H&M) will be problematic, as they at least partially compensate for their losses through online retail, which cannot be attributed to the individual leased properties and therefore these advantages – according to the above decision – are not taken into account in the balancing exercise, since only the specific leased property is to be considered.

This does not appear correct, but was also not addressed in the decision. A further question is how the state aid granted is to be allocated to the individual leased properties.

Implications for smaller tenants

For smaller tenants (e.g. individual bookshops), the decision does not answer what measures – in addition to applying for state aid – must be taken to reduce impending losses or can be expected of tenants (e.g. setting up online shops, doorstep sales for pre-ordered items, as observed at some smaller businesses here in Germany) and what success they would have.

We therefore assume that in most cases the parties will need to reach an amicable settlement on the basis of losses and profits, which in many cases can only be estimated.

OLG Frankfurt a.M., Judgment of 18.02.2022 – 2 U 138/21

The Higher Regional Court Frankfurt am Main ruled on 18 February 2022 that not only direct state measures to contain and combat the COVID-19 pandemic can constitute a frustration of the contractual basis giving rise to a claim for rent adjustment.

KFR – Kanzlei für Real Estate explains the decision and its significance for landlords and tenants.

Facts of the case

The defendant rented commercial premises from the plaintiff for the purpose of operating a dry cleaning collection point. Due to the COVID-19 pandemic, a large number of retail businesses as well as schools and childcare facilities were closed nationwide on 13 March 2020 by order of the authorities. Companies and public administrations reduced their attendance requirements. During this period, fewer customers also had their clothing cleaned by the defendant, a circumstance that led to a significant drop in the defendant’s revenue.

During the period from April to July 2020, the defendant therefore paid no rent, but only the advance payments for operating costs. The plaintiff now sought payment of the outstanding rents.

The Regional Court Frankfurt am Main had upheld the plaintiff’s action and ordered the defendant to make payment.

The defendant filed an appeal against this, which however proved unsuccessful.

Decision of the OLG Frankfurt

The admissible appeal ultimately remained unsuccessful. The plaintiff continues to have a claim for payment of the rents.

The OLG initially affirms that the contractual basis of the lease agreement has been severely disrupted by the consequences of the natural disaster of the COVID-19 pandemic.

The absence of the pandemic had become a shared assumption of the parties at the time of conclusion of the contract, which had not become part of the contract but upon which the contractual intent of both parties had been built. The OLG further assumed that the official orders had also affected the defendant’s business operations even though they were not directly subject to state closure measures. The court proceeds on the basis that the parties would have concluded a contract with different content (reduction of rent or temporary deferral).

Nevertheless, the defendant could not demand adjustment of the contract, as based on their submissions it could not be established that adherence to the unchanged contract was unreasonable.

The OLG emphasizes that a contract adjustment may also be considered when only indirect consequences of the COVID-19 pandemic and the state measures based thereon come into play. The effects of the pandemic would not be limited solely to state measures. Rather, the pandemic would also manifest in a significant change in the behavior of the population, which was warranted for the protection of their own health but was merely prompted by official or scientific behavioral recommendations. A distinction between voluntary and compelled behavior of the population was not, however, required.

No rent adjustment in the specific case

Rather, all circumstances of the individual case are decisive for the assessment of a disruption of the contractual basis. However, the defendant’s submissions were not sufficient for this purpose. Submissions were lacking regarding relevant circumstances, in particular:

• the cost structure of the business operations and its development,
• the general financial and economic circumstances of the defendant, as well as
• whether and if so to what amount state aid was received or a claim to it existed.

Significance of the decision

Even in the case of only indirect impairment of the tenant’s business operations, a claim for adjustment of the lease agreement due to frustration or disruption of the contractual basis is possible. However, it must be ensured that sufficiently detailed submissions are also made here regarding the criteria established by the Federal Court of Justice for assessing the unreasonableness of adherence to the unchanged lease agreement.

KFR – Kanzlei für Real Estate advises landlords and tenants on the legal consequences of the COVID-19 pandemic and on contract drafting in commercial tenancy law.