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Do Companies still have to pay rent? A interview with Professor Alexander Schall

2020-04-06 What are the legal changes in commercial leases? Some large companies such as Adidas, Deichmann or H&M have already announced that they no longer wish to pay rent for their stores. In his latest research work, legal expert Prof. Dr. Alexander Schall shows what the legal situation is.

Will companies have to pay rent for their shops during the pandemic?
The answer is complex, but in short: Usually no! It is true that under the recently passed Covid 19 law, economic difficulties do not give the right to reduce the rent, but only to postpone it. However, according to the general rules of the BGB, the following also applies: no consideration without performance. During the officially ordered closures the contractual use is legally impossible (§ 275 Abs. 1 BGB). This means that in turn, the obligation to pay rent ceases according to § 326 para. 1 BGB. In the case of partial closures, if, for example, street sales are still possible, the rent is to be reduced proportionately according to the ratio between the possible and impossible use (§ 326 Para. 1 in conjunction with § 441 Para. 3 BGB).
Some of the city centres were, of course, already empty before the closures, and will possibly still be empty afterwards. In these cases, a temporary rent reduction could be considered according to the principles concerning the loss of the basis of the contract (§ 313 BGB).
Is there a difference between small businesses - such as ice-cream parlours - and large businesses - such as clothing chains?
The principle "no consideration without performance" according to §§ 275 para. 1, 326 para. 1 BGB applies without exception to everyone, private individuals as well as entrepreneurs, small businesses as well as large corporations. In the case of the loss of the basis of the contract according to § 313 BGB as well as in the case of corona-conditioned protection against dismissal according to Art. 240 § 2 EGBGB, on the other hand, remedial relieve depends on the individual ability to perform. This has a different effect on smaller companies than on powerful large corporations.
What does " loss of the basis of the business" mean?
This has been defined expressly in § 313 BGB since 2002. In short, it means that a contract has become meaningless or unreasonable for one party due to changed circumstances. The textbook example is the renting of a window from which you want to watch the carnival procession in Cologne, but which is then cancelled (as happened, for example, in 1991 because of the first Gulf War). Of course, you could still come into the apartment on the agreed day and look out the window. But it would be pointless, and therefore you would not have to pay for it anymore. In that case, "pacta sunt servanda" does not apply. My argument is: renting a shop in a depopulated ghost town is just as pointless as renting a window at a cancelled carnival procession.
But please do not misunderstand. § 313 BGB is a very narrowly limited exception. It by no means always applies if any expectations are not fulfilled. The jeweller does not have to take back the wedding ring if your partner jilts you at the altar.
Is there a precedent for this? Has this ever happened before?
The corona pandemic is unique in its nature and effect on the globalized world. But in general, of course, economic crises, natural disasters and wars are nothing new. The loss of the basis of business was recognised by the Reichsgerichtin the period of hyperinflation in 1922/23 to adjust payment obligations with the "revaluation jurisdiction". In another case a tenant was protected who, during the Berlin crisis after the war, lost the catchment area for the milk his cheese production needed and was therefore unable to earn the rent.
How does the situation differ for private leases?
In the case of private tenants (as well as other commercial tenants who rent offices, warehouses or production facilities), the rent might become too expensive due to Corona, but that does not make the use of the rented property "pointless". The legislator has chosen to respond to this only with the extended protection against dismissal under Article 240 § 2 EGBGB, but not with rent reductions. Behind this is the regulatory idea that the fight against poverty is the task of social law, but not of civil law.
Adidas responded to the widespread accusation of lack of solidarity and announced that it would continue to pay rent after all. Will other companies follow suit?
That remains to be seen. It would not necessarily be a good idea. Those who pay rent when they don't have to are giving money away. Board members who manage the shareholders' money might even make themselves liable to prosecution for embezzlement under § 266 StGB.
What would you advise entrepreneurs to do?
Seek a conversation with the landlord, but do also seek legal advice. The legal situation is complex. In particular the executive boards of large commercial groups must carefully weigh up between the exercise of their rights under §§ 275, 326 BGB and/or § 313 BGB against the obligation to pay rent and possible losses of reputation. Large amounts in the millions are at stake.

Thank you very much!

Alexander Schall is Professor of German, European and International Private and Corporate Law and Comparative Law at Leuphana Law School. ©Leuphana/Brinkhoff/Mögenburg
Alexander Schall is Professor of German, European and International Private and Corporate Law and Comparative Law at Leuphana Law School.

The publication "Corona-Krise: Unmöglichkeit und Wegfall der Geschäftsgrundlage bei gewerblichen Miet- und Pachtverträgen" will appear in mid-April in Juristenzeitung (JZ) 2020, issue 8, on p. 388 ff.