Interference with the Basis of the Transaction Due to the Covid-19 Pandemic?

Amendment of Article 240 Section 7 Introductory Act to the German Civil Code (EGBGB)

In our blog posts of 21 October 2020 and 13 November 2020, we presented the first court decisions on the obligation to pay rent in the event of operational closure orders during the Covid-19 pandemic. According to the predominant opinion of case law, any coronavirus-related closure orders do not constitute a defect of the rented property, nor do they establish a right to reduce the rent or a case of impossibility (section 275 German Civil Code (BGB)). The interference with the basis of the transaction within the meaning of section 313 BGB has also been predominantly rejected so far.

In this regard, the legislator has now become active. On 17 December 2020, the German Parliament passed new legislation on rent adjustment for commercial lessees. This followed a decision by the Federal Chancellor and the heads of government of the German States on 13 December 2020 on which we reported in our post of 17 December 2020.

The new regulation under Article 240 section 7 EGBGB now stipulates that during the special situation of the Covid-19 pandemic, the provisions on an interference with the basis of the transaction (section 313 BGB) may be applied.
This is based on the "presumption rule". A presumption is being established that the real basis ‑ i.e. a circumstance that has become the basis of a lease agreement pursuant to section 313 BGB ‑ has changed seriously after the conclusion of the contract as a result of government measures to combat the Covid-19 pandemic. However, the new regulation does not provide a conclusive solution to the coronavirus-related conflict of interests of the contracting parties. In the following, we discuss requirements to apply the new regulation and consequences:

Article 240 Section 7 EGBGB ‑ Interference with the Basis of the Transaction of Lease Agreements

The following is required for a fulfilment of the presumption rule:

• The presumption is linked to government measures (operational closure orders, general orders, administrative acts) which significantly restrict the usability of the leased property for the lessee's business.
• The government measures must relate to the business conducted by the lessee in the leased property and significantly restrict the usability of the leased property for the lessee's business.
• The presumption only covers commercial lease agreements. Residential lease agreements are excluded.
• Presumptions only apply to the real element under section
  
  313 BGB, meaning that it is now presumed that a circumstance within the terms of section 313 (1) BGB ‑ which has become the basis of the lease agreement ‑ has changed seriously after the conclusion of the agreement. However, the presumption does not apply, for example, in cases where the lease agreement was concluded at a time when the spread of the Covid-19 pandemic was already foreseeable.
• The presumption does not apply to the other elements of section 313 (1) BGB.

If the requirements for the presumption rule are met, it can be assumed that the real basis of the lease agreement has changed seriously. Nevertheless, the lessee must fulfil the other requirements of section 313 (1) BGB, as these remain unaffected by the new regulation.

The following is required for a fulfilment of section 313 (1) BGB:

• It is further presumed that the parties would not have concluded the agreement or would have concluded it with different content had they foreseen this change. Also, adherence to the unchanged agreement would have to be unreasonable for the contracting party invoking section 313 (1) BGB. It is necessary that adherence to the agreed regulation leads to a result for the lessee that is no longer tolerable. In the context of reasonableness it is also relevant whether the lessee has already received public or other subsidies with which the lessee can compensate for the losses. Section 313 BGB does not allow for overcompensation.
• The previous distribution of the burden of explanation and proof continues to apply, i.e. it regularly lies with the lessee.

The legal consequence of section 313 BGB, that a contractual adjustment can only be demanded to a reasonable extent, remains unaffected by the new regulations.

The consequence:

With the new regulation, the federal legislator wants to clarify that section 313 BGB can generally be applied to commercial leases of businesses affected by the effects of the Covid-19 pandemic. Nevertheless, certain requirements must be met for the applicability of section 313 BGB, which the lessee must explain and maybe prove. The question of what an appropriate adjustment of the contract might look like in a specific case still requires balancing the mutual interests of the contracting parties. Of course, only that legal consequence can be sought which brings the interests of both contracting parties worthy of protection into an appropriate balance. Further, it ignores the fact that the legislator has already included individual provisions on lease agreements in Article 240 section 2 EGBGB. This is a special legal norm which primarily regulates the consequences of the pandemic for lease agreements and in principle displaces conflicting norms in lease agreements.

As a result, the new regulation is unlikely to contribute to designating a favourable negotiating position or even a clear consequence as well as a fair solution for all contracting parties. The contracting parties remain on their own, even with the new regulation. It remains undisputed that the previous wording of section 313 BGB is quite suitable for achieving solutions that satisfy both interests and facts.

In any case, it is certain that the new provision does not provide sufficient support and security for companies that get into payment difficulties through no fault of their own. The assumption of an interference with the basis of the transaction does not directly lead to a reduction of rent or termination of the lease agreement. On the contrary, it can be assumed that the new presumption provision creates the risk of a flood of lawsuits. Lessees may now recognise favourable rights in this provision and feel encouraged to enforce contractual adjustments without considering that interests from both sides must be accommodated.

The primary objective of the contracting parties should continue to be a speedy achievement of out-of-court solutions. Whether and to what extent an adjustment of an agreement can be made under the principles of interference with the basis of the transaction thus remains to be answered for each individual case, which ‑ if the contracting parties cannot reach an out-of-court agreement ‑ must be decided by the courts. Legal clarity can thus still only be achieved by contractual agreements or by the decision of a supreme court.

Klaus Beine
Dr Angela Kogan