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Obligations to pay rent during the crisis

In response to the COVID-19 pandemic, the German government has taken various measures to support businesses burdened with liquidity shortages. One such measure is the temporary exclusion of the right to terminate a rental contract in the event that the tenant is unable to pay the rent. Besides residential tenants, the government is also providing relief to commercial tenants. While this measure will enhance the tenant’s liquidity, nevertheless, it will be offset by a shortfall in liquidity for the landlord. Withholding rent moreover is an option that also harbours risks tenants.

General obligation to continue paying rent

For many businesses, monthly lease payments constitute a significant share of fixed costs. At the same time, the landlords in turn possibly rely on the monthly incoming payments to cover running costs or to support themselves. The question that arises is whether or not, during the coronavirus crisis, tenants are even still obliged to pay rent.

In principle, the tenant bears the risk of being able to make profitable use of the rented premises. By contrast, the landlord bears the risk that the rented premises are fit for their intended purpose. According to this basic legal decision it will very often be the case that, despite the coronavirus crisis, the tenant will have to continue paying the rent. Some argue that, because of the exceptional situation, tenants are nevertheless entitled to reduce the rent or even withhold it completely.

Protection for tenants against contract termination

While the courts have not yet clarified the legal situation and, in individual cases, particularities will have to be complied with because of specific agreements in rental contracts, nevertheless, in the context of the new rules, the German government appears to have assumed that the obligation to pay rent will continue to exist. In order to protect tenants – including commercial tenants – from losing their rented properties on account of the COVID-19 pandemic, the German government has put in place a temporary suspension of a landlord’s right to contractual termination.

Under the legal rules, the landlord may not terminate the rental contract solely on the grounds that the tenant has not make any rental payments for the months of April to June 2020. However, the precondition for this is that the tenant is experiencing payment difficulties and these have been directly caused by the COVID-19 pandemic. The tenant has to be able to credibly demonstrate these circumstances to the landlord if necessary.

Recommendations: Tenants should therefore clearly document the effects of the pandemic on their businesses. In cases of doubt, landlords should request documentary evidence of the tenant’s payment difficulties and of the effects of the COVID-19 pandemic on the tenant’s business.

The obligation to pay rent can trigger penalty interest on arrears

Furthermore, the parties to a rental agreement should be aware that under the new Act the obligation to pay rent does not cease to apply. Tenants will have to pay the rent to the landlord later on. If the subsequent payment is not made by 30.6.2022 then the landlord could potentially terminate the tenant’s lease.

Another consequence of the still existing obligation to pay is that, despite the suspension of the landlord’s right to contractual termination, the tenant will be deemed to have defaulted on his/her rental payments. In this respect, the landlord would be entitled to penalty interest on arrears in the amount of 8.12% per year.

Recommendation: Against the background of an uncertain legal situation and in the interests of continuing an untroubled tenant-landlord relationship, the contractual parties would be well advised to seek a mutually acceptable solution that takes the interests of both parties into account.

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