Tenancies in Germany during the crisis – contestation risks according to the relief law

Germany

What specific provisions does the new law contain for tenancies?

According to §2 to Article 240 EGBGB (Introductory Act to the German Civil Code), the landlord should not be able to terminate a lease of land or premises if the tenant fails to pay the rent during the period 1 April 2020 to 30 June 2020 despite the fact that rent is due and the failure to pay is due to the effects of the COVID-19 pandemic.

Role of the contestation in COVInsAG

Article 1 of COVInsAG modifies the law on contestation by the insolvency administrator, which is particularly relevant to tenancy law.

The right of contestation at present enables the insolvency administrator to contest the debtor's payments under certain circumstances and to recover it for the insolvency estate without the creditor receiving back his consideration. Transferred to tenancy law, this means that for payments made to the landlord by a tenant who later becomes insolvent, the risk exists that these payments will be contested by the insolvency administrator and must be returned to the insolvency estate.

In accordance with the present law, the risk of contestation by the insolvency administrator is particularly high if it can be proven that the landlord must have been aware of the tenant's impending insolvency at the time of payment. In accordance with case law, such knowledge can be proven on the basis of certain indications such as the tenant's poor payment behaviour.

In accordance with COVInsAG, the payment of rent due up to 30 September 2020 is in principle no longer contestable if the tenant files for insolvency later. This applies not only to rent payments due for the period up to 30 September 2020, but it also applies to grant of payment facilities and payments in lieu of performance during this period.

While under the previous regulation the insolvency administrator could, under certain conditions, contest such agreements or payments for up to four years before the filing of the insolvency application, the new law provides protection against contestation for payments made up to 30 September 2020.

This new regulation is intended to help tenants and landlords find an amicable solution during the crisis regarding how the tenancy can be maintained while still ensuring the enforcement of the landlord's claims.

Under the new legislation, however, contestation is possible in exceptional cases if the landlord knew that the debtor's restructuring and financing efforts were not suitable for eliminating an illiquidity that has occurred. The Act, however, does not clarify when this is the case. This exception occurs where it is known that the tenant has a huge amount of "old debts″, which is already using up much of the state aid.

Landlord and tenant can make different payment agreements

Landlords and tenants who are directly affected by the crisis may be able to enter into payment agreements for the period up to 30 September 2020.

For landlords, there are various possibilities for supporting their tenants. Possible solutions include deferral agreements, temporary rent reductions or the agreement to assign claims to state aid instead of a rent payment (with or without the possibility of recourse against the tenant).

The landlord, however, should ensure that he is not covered by the exception in the draft law, which allows contestation in exceptional circumstances. This is the case if he knew at the time of the tenant's performance that the tenant's restructuring efforts were not suitable to remedy the insolvency. Caution is therefore advised for "problematic tenants″ who have had considerable financial difficulties before the crisis and for whom state aid may not be sufficient.

For more information on tenancy and landlord rights vis-à-vis COVInsAG, contact your regular CMS advisor or local CMS experts Alexandra Schluck-Amend, Anna Schwarzer and Franziska Fuchs.