Germany | COVID-19 and Leases Pertaining to Logistics Warehouses March 31, 2020 Summary In view of the impact of the COVID-19 pandemic on the economy, landlords are increasingly concerned about the legal consequences of the current situation with regard to leases, in particular where buildings are still under construction and due to be handed over to tenants in the near future. What applies between parties to such a lease if, for example, travel restrictions or cross-border traffic jams lead to the loss of workers who have been sent from abroad or supply bottlenecks for building materials result in a standstill on the construction site? Below you will find some key answers in the style of a Q&A session. Introduction: The current situation in Germany The Robert Koch Institute (RKI), the German federal government’s central scientific institution in the field of biomedicine, is publishing a daily situation report (available in German and English) pertaining to the status of the COVID-19 pandemic in Germany. According to the RKI’s report as at 25 March 2020, since 27 January 2020, a total of 31,554 laboratory-confirmed cases of coronavirus disease 2019 (COVID-19) have been electronically reported to and validated at the RKI, including 149 deaths. All 16 federal states are affected. In addition, diagnosis is ongoing for suspected cases in several federal states. Giving a general outline of the applicable legal framework in Germany is rendered difficult by the federal system, which entails a sophisticated allocation of legislative and executive powers both to the federal government and the federal states. On both levels, a set of governmental activities is going on. All federal states have implemented extensive Page 1 of 8 measures to enforce social distancing as well as school and day-care closures or suspension of compulsory school attendance from the week commencing 16 March 2020. As of 23 March 2020, gatherings of more than two persons (with the exception of families and household members) were banned in all federal states. Restaurants and businesses concerned with body care were closed. Access to furniture stores, shopping centres and factory outlets has been restricted in North Rhine Westphalia, for instance, for more than a week and is only permitted under strict conditions to purchase products for urgent needs. The Federal Ministry of the Interior, Building and Community has decided, in coordination with the neighbouring states and the affected federal states, to introduce temporary border controls to further reduce the risk of infection by the corona virus. The controls at the EU internal borders with Austria, Switzerland, France, Luxembourg and Denmark will initially remain in force until 26 March 2020. The cross-border movement of goods as well as the cross-border movement of commuters will remain guaranteed. Travellers without an urgent reason for travelling are no longer allowed to enter or leave the country at the designated borders. On a federal level, the German parliament is currently working on new legislation to mitigate COVID-19, including interim provisions under civil, insolvency and criminal proceedings law (please find a summary prepared by BCLP in English here), partially pertaining to leases, too. Q&A Question Answer Page 2 of 8 Question Answer 1. What is the The starting point of all considerations is first of all the potential impact on lease landlord's main obligation under a lease to make the leased agreements? premises available to the tenant for its use in accordance with the contract, Sec. 535 para. 1 sentence 1 of the German Civil Code (Bürgerliches Gesetzbuch, “BGB”). This obligation may be impaired in several respects, in particular by the failure to hand over the leased premises on time for lack of timely completion of construction or, in the case of completed premises already delivered to the tenant, by an official order prohibiting their use. It should be noted that at present the outcome of any potential legal proceedings regarding disruptions in a lease relationship in connection with the COVID-19 pandemic cannot be predicted with certainty in view of the unprecedented novel situation. There are no comparable precedents under the applicable law as amended, and there may also be legal changes as a result of future new legislation. Furthermore, each analysis must be tailored to the individual case and take into account the distribution of opportunities and risks between the parties to the specific lease in accordance with the provisions of the lease agreement. In the area of logistics properties, we are not aware of any official closure orders or prohibitions of use as a result of the COVID-19 pandemic so far, unlike properties open to the public such as retail stores (see above). However, here again, it cannot be ruled out that this may still change. Page 3 of 8 Question Answer (a) How does delayed As far as the pertinent lease agreement contains provisions handover/delivery of the stipulating the time of performance (e.g. detailed handover leased premises affect the regime in the case of “letting from the drawing board”), these parties? provisions must be given priority as far as the timeliness of performance is concerned. Page 4 of 8 Question Answer (i) Can tenants If ‑ in the case of lease agreements concluded in the past ‑ the terminate their leases? landlord can prove that the delayed completion and handover of the leased premises is exclusively connected with the COVID-19 pandemic – and is not partly due to a circumstance for which the landlord is responsible, e.g. insufficient pursuit of the building permit procedure – it may be arguable that that this will be regarded as a case of force majeure and, thus, as temporary impossibility of performance. According to the definition of the case law of Germany’s highest courts, an event is regarded as force majeure if it is an external event which has no operational connection and cannot be averted even by the utmost reasonably expected care, and which is neither to be imputed to nor has to be anticipated by the debtor because of its frequency. While this should protect the landlord against lawful damage claims for the benefit of the tenant, the tenant is not obliged to pay rent prior to handover. As to an extraordinary termination right of the tenant based on Sec. 543 para. 2 sentence 1 no. 1 of the BGB, it needs to be noted that the handover at a contractually agreed time is not conditional upon an element of the landlord’s fault, so that ‑ depending on the circumstances of the individual case ‑ there may be good reasons for and against an extraordinary termination right for the benefit of the tenant. Page 5 of 8 Question Answer (ii) Are tenants entitled As long as the leased premises have not been handed over to to demand rent the tenant, pursuant to Sec. 320 of the BGB the tenant is not holidays/reductions? obliged to pay rent. As the statutory notion of rent includes service charges and ancillary costs, this applies to these costs as well. (b) Does German law The concept of rebus sic stantibus is underlying Sec. 313 et acknowledge the principle seq. of the BGB. However, in principle, the special regulations of rebus sic stantibus and, of lease law take precedence over these provisions, i.e. if so, what role does it play Sec. 543 of the BGB supersedes Sec. 314, 313 of the BGB to here? the extent that extraordinary termination of a lease agreement is concerned. Notwithstanding the above, Sec. 313 para. 1 of the BGB can also justify a claim to amend a contract. What is required first is a serious change in the circumstances that have become the basis of the contract. An amendment is serious if it is not seriously doubtful that at least one of the parties would not have concluded the contract or would have concluded it only with a different content if they had known about the amendment. The allocation of risk and what is reasonable for the parties to the contract also play a decisive role in the amendment of a given lease agreement. The benchmark for the amendment is the “fair”" distribution of the new risk between the two contracting parties with a view to finding the agreement which the parties would have agreed upon when the contract was concluded in order to take into consideration the new risk if they had anticipated it. The possibilities for adaptation are manifold. Among other things, both an adjustment of the rent Page 6 of 8 Question Answer and a reduction of the lease term can be considered. The extent to which a corresponding amendment is reasonable for the parties depends on the respective individual case. The following factors may play a role: · Length of the pandemic-related measures · Lease term · Agreed rent Finally, there is also the possibility that one party offers to assume the risks of the changed circumstances. In such a case, it would be contrary to good faith for the other party to reject an adjustment to the contract that would only be advantageous for the said party. 2. Are the parties to a Possibly. The parties’ business insurance policies may include lease covered by their insurance cover for damage and loss of earnings related to the insurance? protection against infections. In the event of official site closures and other orders in connection with COVID-19, property insurance (including multi-risk and all-risk insurance) is of particular interest, although insurance components relating to the protection against infections may also be included in liability insurances. Insurance policies need to be checked in each individual case, and particular attention should be paid to the usual responsibilities of notifications to the insurer, cooperation and minimising damage.