This article covers legal questions for landlords and tenants in connection with the novel coronavirus (2019-nCoV), of which the world and Germany has had a pandemic number of documented cases in recent weeks. This virus, which originated in China, can cause COVID-19, a potentially fatal lung disease. In times of uncertainty with regard to public health and the state of the economy, legal certainty is of particular importance for all contracting parties.
Selected Rights and Duties of the Lease Parties in Light of the Spread of Coronavirus
The current pandemic raises the question as to which specific rights landlords and tenants have in the context of their lease relationship and which duties they must satisfy. The interregional and potentially deadly threat from coronavirus may trigger measures by the authorities as well as involving legal consequences in landlord and tenant law.
Duties of the Lease Parties in Accordance with the Protection against Infection Act (Infektionsschutzgesetz)
The German Protection against Infection Act defines the procedures which are to be followed in case of infectious diseases which are potentially fatal to hu-mans. The Act specifies which compulsory measures can be taken by the authorities and the duties which apply for every citizen. As a result, certain duties apply for landlords and tenants as well.
In accordance with § 6 of the Protection against Infection Act, every case or suspected case of infection with certain infectious diseases, such as cholera or measles, and every death from such diseases, must be reported to the authorities. Coronavirus is still so new that the Act does not yet expressly define rules for the handling of this virus. However, the potential danger to human health posed by the disease which the coronavirus causes, COVID-19, is comparable to that of the infectious diseases covered by the Act. As a result, a separate Ordinance was issued on 30 January 2020 (2019-nCoVMeldVO), which extends the possible measures based on the Act to coronavirus as well.
In accordance with the German Infection Protection Act (IfSG), the competent authorities can order extensive measures to combat the spread of the disease even if only suspected cases have been reported.Thus, the reporting duties have been extended accordingly (Sec. 6 IfSG i.c.w. CoronaVMeldeV). Therefore, every treating physician and the respective laboratories have to report (suspected cases of) infections with the Coronavirus to the competent authorities. Further measures by the authorities will only be taken in connection with actual suspected cases and therefore depend on the circumstances of the individual case.
These measures could affect owners and occupiers of land and buildings. This category includes landlords and tenants, who may be required under §§ 16 et seq. of the Protection against Infection Act to tolerate entry into the property by competent specialists, e.g. to disinfect the premises or execute lockdowns. In particularly urgent cases, the authorities may even order closure of the premises or of entire buildings or prohibit use of certain buildings. Landlords and tenants should keep in mind that, pursuant to § 16 of the Protection against Infection Act, records and other documents may be inspected and copied for the purpose of identifying suspected cases. Business secrets and other important documents should therefore be stored at a separate location in case of doubt. In addition, special duties apply for operators of lodging, day care, educational and nursing facilities, shall as the duty to prepare hygiene plans to combat infection.
It is vitally important for everyone to obey orders from the authorities. This is especially true in light of the fact that, in accordance with §§ 73 et seq. of the Protection against Infection Act, those who violate such orders could face heavy fines and, in extreme cases, even prison sentences. The specific adverse effects of all government actions should be carefully documented due to the fact that, under the Protection against Infection Act, the government may have a duty to compensate citizens for the losses they suffer in any individual case. Adverse effects may include e.g. the destruction of objects in the course of disinfection or possible loss of rent following closure of a building.
Duties of the Landlord in Accordance with Landlord and Tenant Law
The relationship between landlord and tenant in case of a pandemic is determined by the provisions of the lease agreement and the German Civil Code (BGB). This means that, in principle, a specific agreement between the parties in the lease, e.g. with regard to rights of termination or which party bears certain risks, will take precedence over statutory provisions in each specific case. This requires an individual examination for each lease agreement. However, unless the lease expressly provides otherwise, § 535 and subsequent Sections of the Civil Code apply, including the rights and duties described below.
Cleaning of the building's common areas
The landlord is generally responsible for cleaning the building's common areas. This includes the building's lobbies, stairwells, garages, ventilation system, etc. The contractual agreement between the parties may specify that the property's tenants are to share the cost of these actions, provided that such actions are within the bounds of general property management and that their cost is not atypical given market conditions.
However, the landlord typically has no legal duty to conduct such cleaning measures except where necessary in order to enable the tenant to use the leased property in accordance with the lease. If the virus is already present in the building, to be sure, this means that the landlord is responsible for removing the virus by taking suitable disinfection measures. But there is likely no duty to take measures which are merely prophylactic in nature. After all, the landlord is typically required only to make a building available in which the tenant can operate its business in accordance with the purpose of the lease, not to provide its tenants with a completely sterile environment.
Such a duty typically is not derived from the duty of mutual assistance, which is part of every lease. All tenants who fear such a risk to their own health and that of their employees are free to protect their exclusive lease areas by taking appropriate preventive measures. But the generally present risk of infection by viruses or bacteria is a general life risk which exists even outside the building, and not only for coronavirus specifically, but for all viruses and bacteria.
If necessary cleaning measures interfere with the tenants' ability to use the building's common areas (such as temporary closure of stairwells) to a degree which is not immaterial, tenants may have a right to reduction of the rent for the specific duration of the impediment. Tenants may also be entitled to damage claims if the landlord negligently breaches its cleaning duty and this results in demonstrable damages for the tenant.
No duty for the landlord to clean exclusively leased areas
On the other hand, tenants are themselves responsible for cleaning and maintaining the premises which they are leasing exclusively. Accordingly, all tenants are themselves responsible for preventing and eliminating virus infections in their exclusive lease area by taking suitable disinfection measures.
Claims and rights of the tenant against the landlord based on inability to use the leased space or the limited usability of this space are excluded in this case unless the landlord is responsible for the tenant's inability to use the exclusively leased space.
Duty to provide the leased premises
The landlord is required to provide the leased premises for the agreed-upon purpose. If the landlord is unable to do so because of orders issued by the government based on the Protection against Infection Act, or if its ability to do so is limited, the tenant is entitled to a (partial) reduction in rent.
Compensation claims against the government for loss of rent and damage claims against tenants, etc. are possible. As things currently stand, such claims cannot be derived from the Protection against Infection Act but rather require recourse to general compensation law. The specific claims will have to be examined in each individual case. In particular, it should be kept in mind that, although a compensation claim is generally possible even in connection with lawful measures by the authorities, full compensation for damages is not generally provided. Moreover, general compensation claims are interpreted narrowly by the courts, so that they could be very difficult to enforce in any individual case.
Aside from possible compensation claims, there have already been specific announcements of (at least indirect) immediate government aid. Taxpayers can possibly defer (input) tax payments without a problem, citing coronavirus, and duties in connection with filing for insolvency will be suspended as well. KfW will also be extending its funding programs in the very near future (e.g. higher assumption of risk by the government); tenants can apply for this aid at their commercial bank. In addition, the state governments are launching their own programs to provide immediate aid, especially for small and mid-sized businesses. The requirements for these programs will likely be published in the coming days.
However, damage claims for the tenant against the landlord are typically excluded in the absence of negligence on the landlord's part for the virus infection, if the landlord is unable to provide the leased premises because of an order from the authorities.
Legal Consequences of the Landlord's Failure to Provide a Leased Premises due to an Order from the Authorities
In accordance with § 535(1) Sentence 1 of the Civil Code, the landlord is required to enable the tenant to use the leased premises during the term of the lease. If the circumstances of the case require, the competent authorities may order a building owner or landlord to take necessary measures to avert imminent dangers based on the Protection against Infection Act (§§ 16 and 28 of the Protection against Infection Act; hereinafter, an order from the authorities). This may include e.g. the closure of individual premises or whole buildings as a measure to reduce coronavirus infections. The following specific legal consequences must also be heeded in the event use of a property is prohibited by order of the competent authorities:
- If the order is issued prior to delivery of the leased premises, the landlord has no duty to provide the leased premises due to incapacity. The landlord does lose its claim to the rent in such a case. In addition, the tenant may be entitled to damage claims, although such claims are typically excluded in the absence of negligence on the part of the landlord.
- If the order is issued after delivery of the leased premises and the landlord is no longer able to provide the leased premises as a result of the order, tenants may invoke their statutory rights. Unless otherwise specified in the lease agreement, those rights are as follows:
No duty to pay rent
If the landlord is not required to provide the lease premises for use due to incapacity in the wake of an order from the authorities, the tenant's duty to pay rent also ceases to apply in accordance with § 326(1) Sentence 1 of the Civil Code. An exception applies only if the tenant was responsible for the order from the authorities, which is difficult to imagine. However, if the tenant alone is infected with coronavirus and is unable to use the leased premises for this reason, this falls within the tenant's personal sphere of risk. As a result, § 537(1) of the Civil Code specifies that the tenant is required to continue paying rent in this case.
Reduction in rent
The tenant is entitled to a reduction in rent if a material defect arises over the course of the lease term. The order from the authorities entails a prohibition tied to the usability or, in case of a lockdown, to the location of the leased property. This official prohibition directly interferes with the suitability of the leased premises for the contractual use and the tenant's ability to use the premises is restricted. As a result, such a use restriction in public law qualifies as a not unsubstantial material defect which entitles the tenant to a reduction in rent.
If the leased premises is inaccessible as a result of a lockdown ordered by the authorities based on the Protection against Infection Act, a material defect is assumed in this case as well, because unfettered access to a leased commercial premises is a factor which is regarded as directly determining its suitability for the intended use. If the operator of a shopping or factory outlet center would receive a lockdown order this may also fall under this category. In this case as well, the tenant is entitled to a reduction in rent.
However, there is likely no defect if the tenant is prevented from operating its business by order of the authorities because the tenant's business is not considered systemically relevant (such as e.g. pharmacies or grocery stores). In this case, the landlord has provided the leased property but the tenant is unable to use it due to the nature of its business. A different assessment may only result from the principle of frustration of contract (see below).
Tenants are typically not entitled to a damage claim in case of an order from the authorities based on the Protection against Infection Act in the absence of negligence on the part of the landlord. An exception could only apply if the landlord was responsible for the order, e.g. by deliberately making the building available to infected persons.
In accordance with § 543(2) Sentence 1 No. 1 of the Civil Code, the tenant is entitled to exercise extraordinary termination of the lease without notice for good cause if the leased premises is not provided for the contractual use or if the tenant is deprived of such use, in whole or in part. Negligence on the part of the landlord is not required for this purpose. Closure by order of the authorities may be regarded as deprivation of use. Termination does not require expiration of a grace period if the landlord is unable to restore the contractual condition in the foreseeable future or through suitable measures. The decisive question in this regard is whether the tenant can be reasonably expected to wait any longer, which requires assessment of the tenant's financial and operational interests. Absent a specific provision to this effect in the lease agreement, the landlord receives no compensation for financial losses sustained as a result of the tenant's termination of the lease unless the landlord obtained insurance against loss of rent in advance.
Aspects of insurance law
Financial losses to the tenant or landlord may be covered by business interruption insurance. However, this would typically require the materialization of a hazard which is specifically defined in the insurance policy, such as fire, theft, cyberattack, storm or other natural risks. A pandemic would be covered only in the rarest of cases. Whether loss of rent suffered by the landlord as a result of a pandemic would be covered under the landlord's loss of rent insurance policy also depends on the specific terms of the policy. However, policies which cover such losses are not common.
Legal Consequences of the Closure of Stores and Business by Order of the Authorities
On 16 March 2020, the German government adopted guidelines on a uniform approach to further limit social contacts in the public sphere in an effort to combat the spread of coronavirus. The agreement between the federal and state authorities includes the closure of retail points of sale. Successively the German federal states have enacted further limited curfews and prohibitions of public and private gatherings.
The closure of stores by order of the authorities raises the question of the legal consequences of this action. Unlike the situation described above, the landlord is capable of providing the leased premises and has therefore satisfied its duty to enable use of the premises in accordance with § 535(1) Sentence 1 of the Civil Code by enabling the tenant to exercise its right of use during the term of the lease. However, the order from the authorities prevents the tenant from opening its store or business, or restricts its ability to do so, for a certain period of time. Unless otherwise specified in the lease agreement, the tenant may invoke the following rights:
Reduction in rent
In accordance with § 536(1) of the Civil Code, the tenant is entitled to reduction of the rent if a material defect arises over the course of the lease term. In accordance with § 535(1) Sentence 2 of the Civil Code, the landlord is required to provide and preserve the leased premises in the contractual condition throughout the term of the lease.
Use restrictions in public law may be regarded as material defects if they are based on the condition or location of the leased property or its relationship to the environment. If the use restriction in public law is based on the tenant's personal circumstances or business situation, it is not a material defect. In addition, a use restriction in public law is only a material defect if it actually interferes with contractual use of the premises.
In the case of a store closure ordered by the authorities to slow the spread of coronavirus, the purpose of the closure does not relate to the specific condition or location of the leased premises, but rather to the tenant's business. After all, opening the store enables social contact, which may lead to the rapid spread of coronavirus. Accordingly, this risk may be ascribed to the tenant's sphere of risk. A different conclusion would only be reached if the parties included a clause in the lease agreement specifying that risk is to be allocated in this manner. The stipulation of rent as a percentage of the tenant's revenues is not sufficient for such an assumption. Accordingly, closure of the store by order of the authorities in order to slow the spread of coronavirus would typically not be regarded as a material defect after the fact. As a result, the tenant is not entitled to exercise its right to reduction of the rent in accordance with § 536(1) of the Civil Code or to assert a damage claim in accordance with § 536a(1) of the Civil Code.
Duty to pay rent
In accordance with § 537(1) Sentence 1 of the Civil Code, tenants are required to pay rent even if they are unable to exercise their right to use the leased premises in cases where the reason for the use hindrance lies in the tenant's person. The question of whether the reason lies in the person of the tenant is to be determined primarily based on the provisions of the lease agreement relating specifically to the allocation of risk. The tenant's medical condition, including whether the tenant has been infected with coronavirus and the tenant's ability to earn income from the leased premises (use risk), is typically ascribed to the tenant's sphere of risk.
The argument could be made that the closure of stores due to coronavirus could be viewed as force majeure. In addition to disasters, strikes, breakdowns in public transportation and circumstances arising from the landlord's sphere of risk, disruptions whose reason does not lie in the person of the tenant are regarded as force majeure. This assumption would lead to the conclusion that the tenant is not required to pay rent due to incapacity or frustration of contract. Such use hindrances would have to be tied to the leased premises itself, and would therefore make it impossible for any possible tenant to exercise its right of use. But not every tenant would be prevented from using the premises if a store closure is ordered by the authorities. A pharmacy, for example, would still be able to exercise its right of use. Rather, the business or store closures affect the tenant specifically, in terms of its ability to exercise its business or trade. Accordingly, the closure is ordered for a reason lying in the person of the tenant, so that the tenant is generally required to pay rent in accordance with § 537(1) Sentence 1 of the Civil Code.
However, the tenant could exercise extraordinary termination without notice for good cause in accordance with § 543(2) Sentence 1 No. 1 of the Civil Code citing deprivation of contractual use. Deprivation of contractual use is assumed if the landlord deprives the tenant of use of the leased premises after first providing it. In the present case, the landlord is not depriving the tenant of contractual use, but the tenant is unable to use the leased premises by order of the authorities. In case of restrictions in public law, termination without notice can only be made if a defect exists which is attributable to the landlord. A store closure ordered by the authorities to slow the spread of coronavirus qualifies as a restriction in public law, but typically does not constitute a material defect, as we have already established. The risk of store closure is attached to the exercise of the tenant's trade and is therefore not attributable to the landlord's sphere of risk. Accordingly, extraordinary termination for good cause in accordance with § 543(2) Sentence 1 No. 1 of the Civil Code is excluded.
Adjustment or cessation of the lease for frustration of contract
An order from the authorities prohibiting or restricting the tenant's operation of its business for a significant period of time, so that the tenant’s business comes to a complete stop, could raise the possibility of termination of the lease for frustration of contract.
When the landlord and tenant conclude the lease, their agreement is typically contingent upon circumstances which the parties regard as selfevident and are therefore not specified. A possible example could be the lease of premises near certain retailers in a firstclass location, factory outlet centers or the fact that borders are open so that tourists can enter and stay on holiday resorts.
A good rule of thumb is that this category includes all unspoken aspects which justify a certain rent (e.g. the property's location in a firstclass area, a certain mix of clientele or long business hours).
These circumstances represent the basis of the contract which is tacitly assumed by both parties, or the implicit basis of the contract. This is to be distinguished from explicit agreements between the parties about the equipment or features of the leased premises. Those are express agreements as to quality which, unlike the implicit basis, are cited by name in the contract, so that their absence may trigger warranty rights.
In case of “serious” changes in the underlying circumstances, each party may request adjustment or cessation of the lease for frustration of contract in accordance with § 313(1) and (3) of the Civil Code. Allowing the parties to adjust the contractual agreement in this manner serves a purpose which was already acknowledged by the Reich Court after World War I: keeping parties from having to endure completely intolerable situations due to a complete change in economic and other conditions. If § 313 of the Civil Code applies, the main performances stipulated in the contract, such as rent, will be adjusted to account for the change in circumstances. Only if there is no conceivable way to adjust the terms of the contract in a way which is reasonable for both parties would cessation of the agreement be an option. The change in circumstances is considered “serious” in terms of § 313 of the Civil Code if at least one of the parties would not have concluded the agreement in the first place if the altered circumstances had been known. In that case, the party cannot be reasonably expected to continue adhering to the contract with no change. But it is necessary to make a precise distinction here: if a risk is to be borne by one of the parties alone based on the contractual agreement or the statutory risk allocation, the materialization of this risk generally does not establish frustration of contract. This category includes e.g. the tenant's risk that it will earn no income from its offerings, that the leased property will not be accepted by customers or that the tenant will be unable to use the property personally. Accordingly, frustration of contract only exists if no party is required to bear the risk alone and if the altered circumstances could potentially affect both parties. In accordance with the Civil Code's provisions relating to landlord and tenant law, the landlord is generally required only to actually deliver the leased space and preserve it throughout the term of the lease. Whether the tenant is able to operate its business in that space is the tenant's own risk.
However, the spread of coronavirus may be regarded as a risk which is to be borne by both parties, so that frustration of contract would apply. It could be argued that both parties tacitly assumed, upon concluding the lease, that public life would not be largely paralyzed by the coronavirus pandemic, resulting in closures. In this case, the absence of coronavirus would be regarded as an implicit basis of the lease. This case is especially relevant for retail tenants, hotels, restaurants, tourism companies and other sectors which rely on contact with customers and which would be compelled to suspend operations if closures are ordered by the authorities. This would also affect landlords in the aforementioned properties, who would be required to close the whole building.
The landlord is required to provide the leased premises for use, and would be unable to do so if the whole building were closed. The tenant, on the other hand, generally bears the risk that it will be unable to use the leased premises, as we have seen above. But since the tenant and the landlord were both unable to foresee the outbreak of the coronavirus pandemic or to weigh its consequences, the pandemic is to be regarded as a common risk. The closures ordered by the authorities as a result of the spread of the coronavirus have the effect of hindering provision and use of the leased premises through a complete and unforeseeable change in economic and social conditions. In such cases, such as in case of an epidemic or natural disaster, the risk is generally borne by both parties. Whether the spread of coronavirus would fall into this category cannot be predicted with certainty at this time because the courts have yet to rule on this subject. As an expression of the duty of good faith, the consequences of § 313 of the Civil Code are heavily dependent on the specifications made by the courts in each individual case. However, there are strong arguments in favor of the view that frustration of contract has occurred. As we have seen, the spread of coronavirus and the mass closure of businesses extend beyond the general risks to the landlord or tenant. Unlike the risk of lost profit as a result of business decisions, coronavirus cannot be ascribed solely to one party's sphere of risk. As a result, frustration of contract would typically apply and the parties would be entitled to adapt or terminate the contract if the entire building is closed by the authorities and the landlord is no longer able to provide the leased space. It remains to be seen how the courts will rule in this regard. However, the courts have been very reluctant to utilize this means of terminating the contract and have done so only rarely, e.g. even in financial crises. As a result, frustration of contract should be regarded as a secondary legal remedy which should be used only as a “last resort.”
Duty to Operate the Premises Despite the Risk of Infection
Clauses in the lease stipulating a duty for the tenant to operate the premises reflect the landlord's interest in ensuring that the property, e.g. a shopping mall, remains interesting and attractive to potential customers. If the tenant breaches its duty to operate the premises, the landlord is entitled to claims to performance and damages. The landlord may also be able to terminate the lease (by exercising extraordinary termination).
During the coronavirus pandemic, one might ask whether the tenant is required to continue to operate the premises even if the tenant is just losing money by keeping it open, or if the building is closed by order of the authorities. The ability to earn income generally lies within the tenant's sphere of risk alone. Rather, the duty to operate the premises reaches its limit if such operation is impossible, e.g. if operation of the premises by the tenant has been prohibited by the authorities. Accordingly, an official use prohibition based on the Protection against Infection Act would establish a legal incapacity which would release the tenant from its duty to operate the premises for the duration of the use prohibition. On the other hand, loss of customers due to fear of infection would be ascribed to the tenant's sphere of risk alone unless the lease specifically provides otherwise.
Given the store closures recently ordered by the authorities, legal incapacity may be assumed. Accordingly, the tenant is generally released from its duty to operate the premises in accordance with § 275(1) of the Civil Code
The Protection against Infection Act and the Civil Code require landlords and tenants to take certain actions in response to (the threat of) a coronavirus infection. The landlord is required to obey instructions from the authorities and otherwise to make the building and common areas available free of infection. Tenants are also required to obey official instructions, and to clean their exclusive lease areas. Tenants are required to continue paying rent as long as the landlord is able to provide the leased space to the tenants. Damage claims for both parties are typically excluded in the absence of negligence. However, a right of termination may exist in cases where closure of buildings is ordered by the authorities. Future court rulings will show whether the courts will follow this fundamentally clear distribution of risk. In the absence of comparable cases relating to coronavirus, it is hardly possible to make a confident prediction. As a result, hasty actions should be avoided in these uncertain times.
In addition, the German legislator is currently (22 March 2020) planning a change of legislation to minimize the results of the Covid-19 pandemic with the goal to avoid unbalanced legal results, to protect tenants from termination of lease contracts and to secure landlords from undue financial burdens. We will keep you posted on these developments.