C&A Must Pay Rent in Full - Payments of Rent Arrears are Reasonable Under Section 313 German Civil Code
Regional Court Munich I , judgement of 12 February 2021 - case 31 O 11516/20
In its judgement of 12 February 2021, the Regional Court Munich I states that it was reasonable for the department stores' chain C&A "in general and also on the basis of the profits from the previous three financial years" to set up reserves. C&A is therefore obliged to pay full rent despite coronavirus-related closure orders.
The court denied the lessee's right to rent reduction on the grounds that there is no defect removing the suitability of the leased object for the contractually agreed use pursuant to section 536 (1) sentence 1 of the German Civil Code (BGB). A case of impossibility was also denied. Furthermore, the suitability of the leased object has not ceased to exist during the disputed period. The court also found that there is, in fact, an interference of the basis of the transaction according to section 313 BGB. Nevertheless, the court declares that the circumstances of this individual case result in a continued obligation to pay rent.
As in its ruling of 25 January 2021 - case 31 O 7743/20 (see our post of 4 February 2021), the Regional Court Munich I again justifies its decision also in its most recent ruling of 12 February 2021 with the lessee's obligation to create reserves to an appropriate and reasonable extent in order to be able to compensate for drops in sales.
With regard to branches, the court further stated that an examination of reasonableness within the meaning of section 313 (1) BGB must be directed at the specific branch. The turnover of other branches of the lessee is not relevant. In addition, state aid ‑ such as short-time allowance ‑ must be considered for the distribution of risk. The turnover from the online shop is also to be taken into account for the distribution of risk.
The fashion chain C&A (hereinafter referred to as "Lessee") operates several shops in Munich. When the retail chain had to close due to the lockdown in 2020 and the associated official restrictions (general order in the German State of Bavaria), C&A withheld rent for April 2020 in one of its Munich branches. C&A also did not pay rent for other branches. C&A argued that it had suffered a 30 percent turnover loss from the lockdown. The lessor demanded that C&A pay the full rent for the month of April 2020. The action was successful.
Again, the Regional Court Munich I ordered the Lessee to pay the rent in the full amount. The reasoning of the ruling of the Regional Court Munich I on department stores and retail establishments has many similarities to the one we already presented in our post of 4 February 2021 regarding the obligation to pay rent in hotel establishments during the coronavirus pandemic.
The court again established that section 313 BGB does apply. Article 240 section 7 Introductory Act to the German Civil Code (EGBGB) only has a clarifying function. Also, Article 240 section 2 EGBGB (moratorium) is not to be regarded as an exhaustive provision. Instead, the Lessee ‑ C&A ‑ is in principle entitled to amend the agreement pursuant to section 313 BGB. For such an amendment, a threat to the Lessee's existence is not mandatory. However, also in this decision, the court recognised an exceptional case due to the special circumstances of this individual case, which resulted in the consequence that C&A is obliged to pay rent in full. In the court's opinion, the figures submitted by C&A do not justify a reduction of the rent.
Innovations can be found in the most recent decision in the justification of the question of whether the distribution of risk should be limited to the specific department stores' branch or relate to the turnover of all branches. The court further discusses the limitation of the consideration of state benefits (here: short-time allowance).
2.1 Setting up reserves ‑ the Lessee's risk
In the court's opinion, the Lessee is generally liable for the Lessee's own solvency, irrespective of fault. It follows from this that the Lessee, as the debtor, must set up reserves to an appropriate and reasonable extent in order to be able to cushion a drop in turnover. The objection that reserves are quickly used up in a pandemic cannot be used to deny the obligation to build up reserves.
Many lessees often argue that they receive less or no state benefits because of their reserves. The court also discussed this circumstance, stating that the objection that enterprises with reserves receive less state benefits would still not explain why enterprises with sufficient reserves should be entitled to state benefits.
The objection that in times of negative interest rates reserves would lead to an uneconomic destruction of capital and that investments would be more profitable also ignores the fact that entrepreneurial decisions are solely within the entrepreneur's sphere of risk.
2.2 Distribution of risks in department stores ‑ Usability, turnover and online shops
Furthermore, with regard to the distribution of risks, the court again stated that in order to avoid overcompensation of the Lessee, a ratio of 50:50 is appropriate as a starting point because the economic risk of usability is borne by both parties (see our post of 4 February 2021). However, even if the 50:50 ratio established an appropriate starting point on the basis of the general valuations, the determination of the ratio had to be specifically justified on the basis of the circumstances of the individual case. It is necessary to balance the interests of both parties.
Applying these principles to the individual case at hand, the Regional Court Munich I ruled that C&A owed the full amount of rent for the month of April 2020. The court deducted 10 percent due to the Lessee's unrestricted usability and possession of the department stores' premises and limited the distribution of risk to the now remaining share of the monthly rent amounting to 90 percent.
Also the submitted details on the development of turnover led to a limitation of the distribution of risk. In this regard, the court explained that in the case of branches, first it must be determined whether the distribution of risk is to be limited to the specific branch, i.e. the department stores' at issue. The Lessee was not allowed to invoke losses from other branches against the lessor, and vice versa, the lessor may not invoke profits of the Lessee from other branches. It is further necessary to take into account that an overall consideration of the group result could lead to a significant disadvantage for one of the parties.
In April 2020, C&A had not achieved any turnover with the shop in dispute. Furthermore, C&A submitted that it had suffered a drop in turnover of between 30 percent and 100 percent. However, C&A was still able to operate an online shop. The court assumed a drop in turnover of 80 percent and stated that it seemed reasonable that one fifth of the turnover was generated by the online shop. The distribution of risk was therefore excluded in an amount of further 20 percent for the month of April 2020, and was now to be limited to 70 percent of the monthly rent.
2.3 Consideration of state benefits
Taking into account C&A's profits in the last three business years, which have not been published so far in the decision, C&A should, according to the court, have set up reserves in the amount of one month's rent. In addition, the short-time allowance paid to C&A is to be taken into account. The short-time allowance is to be deducted from the remaining distribution amount before the quota allocation. The subject of the distribution of risk in the present case is the rent for the month of April 2020 to an extent of 70 percent. The share of the short-time allowance to be taken into account must be deducted, resulting in an amount of 66.5 percent. Since the court had already declared at the beginning that it is reasonable to set up a reserve amounting to one month's rent, this applies "all the more" to setting up a reserve of two thirds of one month's rent. In the court's opinion, an amendment of the agreement in favour of C&A was therefore ruled out.
3. Legal Assessment
For section 313 BGB in conjunction with Article 240 section 7 EGBGB to apply, certain conditions must be met in an individual case, which the lessee must demonstrate and prove. The question of what an appropriate amendment of an agreement might look like in a specific case still requires balancing the mutual interests of the contractual parties.
The new regulation in Article 240 section 7 EGBGB in conjunction with section 313 BGB does not provide for an automatic amendment of the agreement. Also in this decision, the court states that "only that legal consequence can be sought which brings the interests of both contractual parties worthy of protection into an appropriate balance". Overcompensation is not granted.
The decision in dispute is interesting for department stores and retailers in that the court addresses the question of whether the distribution of risk must be limited to the specific shop, i.e. the department store in dispute, or to all of the Lessee's branches. The court explained that the Lessee may not invoke losses from other branches against the lessor, and vice versa, the lessor may not invoke profits of the Lessee from other branches. An examination of reasonableness within the meaning of section 313 (1) BGB must be directed at the specific branch. It is also a new development that the court takes into account state benefits, explaining that a crediting of the short-time allowance in the full amount is not justified, only up to a share corresponding to the quotient of rent and total liabilities. The short-time allowance is therefore to be deducted from the remaining distribution amount before the quota allocation.
It remains to be said that the ruling of the Regional Court Munich I provides initial guidance for a future handling of the rent of department stores and retail chains. In any case, it depends on the circumstances of the individual case with respect to an amendment of the agreement under section 313 BGB.
Lawyer, Notary - registered office Frankfurt
Dr Angela Kogan