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Commercial leasing law

A glance at the legal history and the legal principle of "major transaction basis"

As reaction to the corona crisis all State Governments - primarily in March 2020 - did take measures for slowing down the spread of the new corona virus on the basis of the Infection Protection Law. In Berlin, for example, numerous regulations are entered into force for this reason from mid-2020. Up to date is the Regulation on Required Measures for the Containment of the Spread of the Corona Virus SARS-CoV-2 (SARS-Cov-2 EindmaßnV) issued on 22 March 2020 and as last amended on 9 April 2020. § 3 (1) of the Berlin Regulation orders the closing of all "outlets/points of sale within the meaning of the Berlin Shop Opening Law of 14 November 2006 and in § 2 excludes, in particular, the retail trade for beverages and food. Since mid-March 2020 therefore, inter alia, all retail shops had to close unless they are covered by the exception rule.

The current case law sees the operating risk exlcusively on the part of the commercial lessee. Thus, for example, the commercial lessee bears the risk of vacancies in his neighbourhood, realignment of roads, wrong sales expectations and also the risk for official orders, which have consequences for the leased object. Case law does not give the commercial lessee the right of reduction and, at present, he is also not entitled to adjustment due to frustration of contract. Only a termination of the lease could be considered in the event of impossibility to let.

Due to the official closing order for shops some well-known major lessees of business premises in Germany publicly announced to suspend the payment of rent for closed-down shops now in whole or in part. The legal principle and doctrine of frustration of contract, which has been codified in section 313 German Civil Code (BGB) since 2002, is now regularly discussed with regard to the impact of the corona crisis on contracts between enterprises. Also upon announcing the suspension of rental payments the doctrine of frustration of contract was stated as legal reason in addition to force majeure. What is meant here is always the "small" transaction basis where the circumstances relating to the respective, i.e. singular contract, are concerned.

Upon the verification of rights arising under the legal principle of frustration of contract it is asked whether a circumstance has become a transaction basis and whether insofar a serious change did occur which justifies an adjustment of the contract. A change is serious if, at least, one party had not concluded this contract or had not concluded the contract with such contents if it had been aware of the change. If only a risk is realised which has to be borne by one party, then the application of section 313 BGB is excluded. This can be the case in the event of a contractual assumption of risk or in the event of a normative risk allocation. As a rule, the risk of usability of the purchased objects rests with the purchaser. As already described, the lessee of business premises regularly bears the operating risk. In principle, rights based on frustration of contract only exist if the unchanged performance of the contract is unreasonable and unacceptable for the other party. According to a common phrase of case law unreasonableness is given if adherence to the contract ensues intolerable results which cannot be reconciled with the idea of justice and law. This requires a comprehensive weighing of interests taking into account all circumstances, also advantages accruing to a party besides the disadvantages.

The question is whether the principle of the "small transaction basis" is appropriate to find legal consequences reasonable in the corona crisis for a great number of contracts between commercial lessors and lessees. If the parties had known that the corona crisis is coming and, along with it, numerous official shop and business closures (how long will they last?), what would have been agreed upon by the parties? This question can hardly be answered. Questions of general distress and hardship can hardly be answered properly by making reference to civil law and current case law. In view of the rapid development of the corona virus and the constantly new counter-measures of the legislator and the authorities and their unforeseeable duration, cascade effects may occur even at short notice, which are interrupting supply chains, triggering off a great number of insolvencies and incurring viability problems for the banks.

Therefore, the principle of the "major transaction basis" comes into consideration. This means the expectation that the fundamental political, economic and social framework conditions will not be changed by revolution, war, expulsion or a (natural) catastrophe and that the social existence and livelihood will not be weakened. However, such a natural catastrophe might be given with the corona crisis. The global spread of COVID-19 was declared a pandemic on 11 March 2020 by the WHO. The German legislator determined the existence of a pandemic with the Law on the Mitigation of the Consequences of the COVID-19-Pandemic passed on 27 March 2020. The official measures, such as the closure of shops, are aimed at averting the pandemic risks.

What applies in the case of frustration of the "major transaction basis" (frustration of contract)? Primarily, the law applies. In the post-war period the contract assistance law was enacted for the protection of debtors and for the avoidance of corporate collapses. Today, the Law on the Mitigation of the Consequences of the COVID-19-Pandemic is applicable. The suspension of rental payments without replacement cannot be justified by this Law, since, presently, it allows only the temporary respite of rental payments (Article 240, section 2 Introductory Law to German Civil Code (EGBGB); moratorium).

Thus, the "major transaction basis" becomes relevant. In the post-war period the courts had chosen a rather pragmatic approach for the settlement of legal disputes and, in so doing, had taken the circumstance into account that the risk of the occurrence of such events cannot be attributed to none of the parties. Thus, according to a judgment of the Federal Supreme Court of 26 February 1957 the lessor had no complete maintenance obligation in case of exorbitant war damages. Pursuant to a judgment of the Regional Appeal Court of Hamburg of 24 June 1947 each party had to bear half of the damages caused by a destruction of leased premises by an air raid although the lessee had to bear the risk of the loss of the object by contract. These case law examples show a way how the question of commercial rental payments in case of the officially ordered closure of shops due to the COVID-19-pandemic could be handled. If there are no special circumstances advocating a transfer of the risk to one part, the risk will, in principle, be shared.

Dr Thomas Jilg

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Dr Thomas Jilg T   +49 30 26471-150 E   Thomas.Jilg@advant-beiten.com