"Pandemic Jurisdiction" on Commercial Leases - Another Higher Regional Court Speaks Out (Reference Decision of the Munich Higher Regional Court of 17 February 2021

Only yesterday we gave you an update on the current decisions in our blog post in our blog post "One Year of Commercial Lease Law in the Pandemic - an Overview". For the first time, we were also able to report on two decisions of the courts of instance, namely the Higher Regional Courts of Karlsruhe and Dresden, which, however, ruled with different results.

In the meantime, the Munich Higher Regional Court has also given its opinion, although not with a judgement, but with a reference order (Hinweisbeschluss), which means that a corresponding judgment with the same wording can be expected soon, at least if the proceedings are continued. The Munich Higher Regional Court - in conclusion, following the case law of the Karlsruhe Higher Regional Court - is of the opinion that a pandemic-related operating ban neither constitutes a defect of the rental object nor, in the specific case, a claim to a reduction of the rent or deferment. The reference decision is astounding and noteworthy because of the detailed reasoning, which thoroughly and convincingly addresses the arguments previously discussed in case law and literature.

In essence, the Munich Higher Regional Court substantiates its reference decision as follows:

1. No defect of the leased property and thus no rent reduction according to Section 536 of the German Civil Code (BGB)

• Although restrictions on use imposed by the authorities can also constitute a defect within the meaning of Section 536 BGB, the prerequisite for this is that the restriction on use is directly related to the specific quality, condition or location of the leased property. The prohibition ordered by the authorities is not related in such a way, as the corresponding general order is not tied to the nature of one or certain leased properties or their condition. Since the general order applied to the whole of Bavaria, the location of the leased property is also of no relevance.
• And the agreed lease purpose is also irrelevant. In case of doubt, an honest lessee may not understand his lessor's promise of performance in relation to the agreed purpose of the lease as meaning that the lessor intends to guarantee the lessee the agreed use under all conceivable circumstances. Thus, in the present case, the lessee could not understand the agreement of the purpose of the lease "for use as sales and storage premises of a retail shop" as meaning that the lessor had intended to assume an unconditional obligation to indemnify in the event of a pandemic-related prohibition of opening.

2. No impossibility of the transfer of use and no lapse of the obligation to pay rent pursuant to Sections 275, 326 BGB

• A lessee cannot take the agreement of a specific lease purpose to mean that the lessor assumes the procurement risk for the upkeep of a general legal situation which has no connection with the nature of the leased property.
• Moreover, the lease agreement does not create a duty on the part of the lessor to prevent or remove a pandemic-related ban on opening in order to enable the lessee to operate business. The lessor only assumes the risk of changes in the legal conditions affecting the specific nature of the leased property.

3. No claim for adjustment pursuant to Section 313 BGB in the specific individual case at hand here

• After preliminary deliberation, the OLG Munich tends to hold that the scope of application of Section 313 BGB can in principle be applied. This is substantiated by the fact that the risk of being able to operate a business in the leased property with the rental purpose agreed in the rental agreement at all, does not fall exclusively within the lessee's sphere of risk, since the prohibition of opening, which deprives the lessee of the possibility of making profits for a limited period of time, is in no way related to entrepreneurial decisions of the lessee.
• According to the Munich Higher Regional Court, the pandemic-related opening prohibitions have substantially changed circumstances within the meaning of Section 313 (1) BGB, which have become the basis of the lease. The parties would have concluded the agreement with a different content if they had foreseen this change. As a rule, the remaining use of the leased property (e.g. use as storage space and in certain individual cases as advertising with the brand) in no way justifies the agreed rent. If the closure lasts 5 weeks, this change of circumstances is substantial. Furthermore, the factual presumption in Article 240 Section 7 (1) German Introductory Act to the Civil Code (EGBGB) also speaks in favour of the assumption of a substantial change.
• In the specific case, however, it is not unreasonable for the lessee to adhere to the unchanged agreement for the following reasons:

(i) The mere fact that the basis of the transaction has ceased to exist does not entitle the parties to adjust the agreement pursuant to Section 313 (1) BGB. The application must be limited to exceptional cases in which adherence to the agreed provision would lead to an intolerable result that is simply incompatible with law and justice.

(ii) What is required is a comprehensive balancing of interests, taking into account all circumstances, in particular also the advantages that have been gained by the affected party in addition to the disadvantages resulting from the changes that have occurred.

(iii) A reduction of the rent cannot be made according to an objective scheme such as, for instance, a half reduction taking into account auxiliary services that have actually been rendered or were only possible. Rather, a consideration of all concrete circumstances of the individual case also requires the consideration of the economic situation of the lessee and also of the lessor. In this context, it may be relevant to consider the turnover and profit of the last few years and whether there was a way to set aside reserves. Since the economic situation of the lessee has to be taken into account, in the case of a group of companies it may even depend on the parent company of the group.

(iii) Ascertaining unreasonableness does not necessarily lead to a claim for a reduction of the rent. Rather, the claim can also be directed targeted at a deferral of the rent.

(iv) According to the Munich Higher Regional Court, a claim for a reduction of the rent cannot depend solely on the decline in turnover - contrary to what is sometimes asserted in literature. Applicability is limited to the exceptional cases in which the rent payment is unbearable for the lessee for economic reasons.

(v) In conclusion, the OLG Munich states that the legislator has in principle created the framework for support payments also for companies such as that of the lessee (around 2600 branches in Germany and 26,000 employees; the parent company also operates supermarkets and DIY stores). Hence, it is not evident that the obligation to pay the rent for April 2020 would lead to an intolerable result that is simply incompatible with law and justice. The lessee has not claimed that its case is an exception and that the special economic situation of the lessee makes it necessary to adjust or defer the rent despite the fact that a framework for assistance is available in principle.

According to the rulings of the Higher Regional Courts issued so far, taking into account the reference decision of the OLG Munich and thus also taking into account the argument that a schematic view is prohibited, the tendency utlined in our blog post of 5 February 2021 remains. In cases of pandemic-related restrictions, there is no defect in the leased property, a reduction in rent is thus ruled out; furthermore, a claim for adjustment of the agreement pursuant to Section 313 BGB will only be given in exceptional cases. In addition, there is the realisation that a claim for adjustment of the agreement in exceptional cases can "only" justify a deferral of the rent; the reduction of the rent is consequently not automatic under Section 313 BGB. However, it remains the understanding that the last word will not be spoken until the Federal Supreme Court has ruled on this. We will of course keep you updated on this.

Florian Baumann

Annalena Benz