On March 27, 2020, the German parliament passed the Act to Mitigate the Consequences of the COVID-19 Pandemic under Civil, Insolvency and Criminal Procedure Law (also referred to as the Act to Mitigate the Consequences of COVID-19). Article 5(2) of the Act stipulates that landlords are not permitted to terminate leases merely on the ground of non-payment of rent in the period from April 1, 2020 to June 30, 2020 if such non-payment is due to the effects of the COVID-19 pandemic.
Contrary to widely held opinions, the new law does not exempt tenants from the obligation to pay, but only keeps them from being terminated if rent is not paid due to the pandemic in this short period.
With this provision, the legislator consciously shifted the liquidity risk of non-payment of rent from tenants to landlords. According to the legislator’s intent, landlords receive assistance through the additional provision of Article 5(3) Act to Mitigate the Consequences of COVID-19, in that landlords, for instance in cases where they have financed their real estate property by means of a loan and are dependent on the rents to service the loan interest, may also suspend loan payments if such payments cannot be serviced, likewise due to the pandemic, thus due to the lack of rents.
Closer inspection reveals a gaping regulatory hole, however, because at best only those landlords are protected hand in hand with tenant protection, who have financed their rented property by means of a loan.
The situation is different, though, if landlords’ properties are not (or no longer) financed and landlords therefore do not have to service a property-related loan from the rents:
The following example illustrates the situation:
A self-employed master craftsman has been told by politicians over the last few years and decades that he should primarily make his own arrangements for retirement and not (solely) rely on state pensions. In line with this reasoning, he paid less into his retirement account and instead bought two properties, which would be paid off at the time of retirement and whose rental income he would be able to use for his retirement needs. In fact, the properties are now paid off and the master craftsman is retired.
If he does not receive rental payments due to the pandemic, the master craftsman used as an example will now not be able to compensate for the loss by suspending his loan repayments within the meaning of Article 5(3) Act to Mitigate the Consequences of COVID-19. Strictly speaking, he will fall through the cracks if the law is rigorously applied.
In addition the example with the retired master craftsman, there are numerous other constellations in which landlords ultimately bear the risk of loss of rent all alone.
For instance, landlords, who are only renting out a single property that has also already been paid off, could possibly invoke substantial loss of basic income and thus file an application for emergency aid. Whether it will actually be granted and how quickly, cannot be answered for certain at present. It should also be borne in mind that while all 16 German states have similar application procedures, they are ultimately different and it certainly will not be possible to implement them equally effectively and expeditiously.
Whether landlords will be able to claim emergency aid granted to self-employed individuals will likely depend on whether they actually live off of the rental income or whether it only represents (negligible) supplementary income for them.
As a result, in the event of a loss of rent in the relevant period, landlords should in any case obtain proof that the non-payment of rent is actually due to the pandemic, in accordance with the Act to Mitigate the Consequences of COVID-19. While this may be evident in the case of commercially used retail space, such as a boutique that is currently closed, it may well be questionable in the case of other businesses that continues to operate with few restrictions, or units rented out for residential purposes.
As in the case of closed boutiques, where pandemic-related restrictions are obvious, it may be equally obvious that the non-payment of rent is not due to the pandemic in the case of tenants who are already retired and continue to receive state pension without restriction.
There are numerous cases in between, however, that may not be assessed as clearly.
Landlords should therefore ask the following questions to approach the issue:
- Are commercial or residential tenants involved?
- Are rent payments really not made due to the pandemic? Have tenants made this sufficiently credible?
- Are residential tenant able and supposed to file an application for state housing benefits in the event of difficulties in paying rent so as not to unnecessarily transfer the liquidity risk to landlords?
- Have commercial tenants applied for subsidies, for example from emergency funds for small and medium-sized enterprises, to allow them to pay rent?