Tenancy law with a Ki(c)K – Now it is up to the Federal Court of Justice to decide

Since the beginning of the COVID 19 pandemic and the first official closure orders, lessors and lessees have been discussing who bears the risk for pandemic-related loss of profits for operators of stores, hotels and other premises. The constellation is as follows: A commercial lessee refuses to pay the (full) lease, referring to the official use restriction. The lessor then brings an action. After a large number of regional courts have already dealt with the cases, the lessors continue to climb the ladder of appeal. For the first time, two higher regional courts have now ruled on the issue – they decided quite differently.

In both cases the defendant was the textile discounter KiK, which refused to pay the rent for April 2020 with reference to official closure orders. KiK argued with the well-known triad: the official restriction on use constitutes a defect of the leased property resulting in a lease reduction (Sec 536 German Civil Code - BGB), alternatively there is a case of impossibility of transfer of use (Sec. 326 BGB) and, in the further alternative, the lease is to be reduced in accordance with the principles of interference with the basis of the transaction (Sec. 313 BGB). 

The courts agree that the official restriction on the use of the leased property does neither constitute a defect nor a case of impossibility. The general risk of use, i.e. the risk of actually being able to use the leased property, lies with the lessee. The lessor is only obliged to maintain the leased property in a condition suitable for use in conformity with the contract.

However, the courts have different answers to the question of the extent to which the official prohibition or restriction of use triggers an adjustment of the lease on the basis of an interference with the basis of the transaction within the meaning of Sec. 313 para. 1 BGB.

The Higher Regional Court in Dresden (judgment of 24 February 2021, ref. no. 5 U 1782/20 – full text not yet available) upheld the lessee’s claim and ruled that the basis of the contract had been interfered with. The lease agreement was to be amended to the effect that the basic rent was to be reduced by 50% across the board for the duration of the imposed closure. The reasoning is conceivably pragmatic: neither of the parties had caused the interference or foreseen it. It is therefore appropriate to allocate the burden equally between lessor and lessee.

On the same day, the Higher Regional Court in Karlsruhe (judgment of 24 February 2021, ref. no.: 7 U 109/20) ruled in favour of the lessor. It stated that an unreasonableness of the complete lease payment under the aspect of the business basis having ceased comes, in principle, into consideration. However, the Court rejected a blanket division of the pandemic risk. Rather, the assumption of unreasonableness within the meaning of Sec. 313 BGB required an assessment of the circumstances of each individual case. In this context, the decline in sales of the specific store, a possible compensation through online trade and public services as well as saved expenses (e.g. through short-time work or assets through unsold and still saleable goods) had to be taken into account. The Court found that KiK had not presented such special circumstances.

Since both courts have allowed the appeal to the Federal Court of Justice (Bundesgerichtshof – BGH), it is now the federal judge’s turn to decide. They face the challenge of allocating the pandemic risk fairly between lessors and lessees, leaving sufficient room for individual fairness on the one hand and establishing practicable criteria for assessing unreasonableness on the other. In this context, it will also be exciting to see whether the BGH will comment on the scope of Art. 240 § 7 Introductory Act to the German Civil Code, which was introduced on 31 December 2020. Recently, it was claimed that beyond the wording of the provision the presumption of a subsequent serious change in a circumstance – the so-called real element of Sec. 313 para. 1 BGB – should apply to all requirements of Sec. 313 para. 1 BGB. The responsibility of the BGH could hardly be greater. Its decision will affect millions of commercial leases.