Office real estate & coronavirus

Our questions to Dr. Palm on the topic of office leasing:

Question: Dear Dr. Palm, thank you very much for your time—are you currently busier than ever before?

Answer: The coronavirus crisis is affecting the entire population. We are in a state of emergency, including in legal terms. I am happy to take the time to discuss legal issues with you. To answer your question specifically: Yes, we are currently very busy. The phone is ringing almost constantly.

Question: What are the most frequently asked questions from landlords and tenants among your clients at the moment?

Answer: There are numerous questions that I cannot list here in their entirety. However, the most frequently asked questions can be summarized as follows:

Questions from landlords:
- Do the measures ordered by the government to contain the coronavirus pandemic, such as quarantine orders and business closures, affect my rental agreement?
- Does the law to mitigate the consequences of the COVID-19 pandemic, which has been widely discussed in the press, conclusively regulate the legal relationship between landlords and tenants during the coronavirus crisis? Who does this law help? What needs to be considered?
- If rent payments are missed, do I still have to continue paying interest and repayments on the loan I took out to finance the property?

Tenant questions:
- Can I suspend rent payments if I am unable to pay them due to coronavirus?
- What does it actually mean that I am unable to pay rent due to coronavirus? Do I have to dip into my savings, or is a reduction in my income sufficient?
- Do I have to pay the rent in arrears if I don't pay it now?
- Can I be terminated for other reasons?
- Do I have to pay interest on unpaid rent? Does this pose any further risks to my tenancy?

You can already see from this excerpt that the questions are varied.

Question: The law to mitigate the consequences of the COVID-19 pandemic sounds interesting. What is your advice/assessment of the law to mitigate the consequences of the COVID-19 pandemic?

Answer: On March 25, 2020, the German Bundestag passed the law to mitigate the consequences of the Covid-19 pandemic in civil, insolvency, and criminal procedure law. The law was passed by the Bundesrat on March 27, 2020. Tenants (also applies to leaseholders) are not subject to extraordinary termination by the landlord due to late payment if they withhold rent payments that are due because they are unable to pay due to the effects of the COVID-19 pandemic. However, there are important restrictions and conditions for the exclusion of the landlord's right of termination:

The law provides for an exclusion of the landlord's right to terminate the lease due to rent arrears in the period from April 1 to June 30, 2020, if the non-payment is due to the coronavirus. Termination is excluded for these rents until June 30, 2022. The tenant has until then to make up the rent arrears. The obligation to pay rent therefore does not lapse. Only the right to terminate the contract is excluded. The protection against termination is limited until June 30, 2022. The rent arrears for April, May, and June 2020 must then be paid at the latest.

Legally, this means that the new regulation does not release the tenant from their obligation to pay rent. If the tenant does not pay, they are still legally in default. In addition to the rent, they will then also owe interest on arrears. The landlord can even take legal action or issue a reminder to collect unpaid rent, or use any rent deposit or rent guarantee that may have been provided, offset any claims the tenant may have against the landlord, or exercise their landlord's right of lien.

The landlord also retains the right to terminate the tenancy for reasons other than rent arrears.

Furthermore, the exclusion of termination only applies if the non-payment of rent is actually due to the effects of the COVID-19 pandemic. It is probably not sufficient that the tenant is still able to pay but wishes to retain existing liquidity as a precautionary measure in view of the uncertain future development. The situation would be different if the funds were still sufficient to pay the rent, but the level of liquidity had fallen so sharply that other payment obligations could no longer be met if the rent were paid.

The law ultimately raises many questions. Non-payment of rent entails the above-mentioned risks for the tenant. If the landlord terminates the tenancy for other reasons or even disputes that the rent payment is not being made due to the coronavirus, such action also entails considerable risks for the landlord. If tenants wish not only to prevent possible termination but also to temporarily change their payment obligations, contractual deferral agreements with the landlord remain essential. In the current situation, I therefore advise the parties to seek dialogue.

Question: Various companies are currently having to downsize and reduce their office space. If the economic situation does not improve, this situation is likely to increase. Alternatives are therefore needed: how do you assess subletting office space and what other alternatives do you see for optimizing space?

Answer: That is a really good question, which is difficult to answer at present. From a legal point of view, all that can be said is that if the tenant requests subletting, it must be checked whether the tenant is entitled to do so. Rental agreements often stipulate that subletting is only permitted with the landlord's consent and that the landlord may only refuse to give this consent for a valid reason. If such a provision exists, there will certainly have to be a balancing of interests at this point. If the tenant is unable to operate their business or suffers significant losses in turnover, the interests of the tenant will probably carry greater weight in a balancing of interests. This question can therefore only be answered on a case-by-case basis.

In practice, however, the problem will often arise that premises are suitable for a specific purpose. A shop is currently closed because it is a shop. It will be difficult to sublet it for other purposes.

Question: Other tenants may also have the option of extending their lease at this time, as this is time-limited. In your opinion, how should such a task/opportunity be handled at present? Many landlords are certainly interested in your answer.

Answer: If the lease provides for an option that the tenant can exercise, tenants affected by the coronavirus crisis are currently in a predicament because they cannot assess their future prospects. At present, no one knows when the crisis will end and what form the recovery will take. If the tenant nevertheless decides to exercise the option, they have extended the contract. In case of doubt, they will then have to accept that they were aware of the crisis situation and still exercised the extension option. If they later find themselves in financial difficulties, they are likely to be less deserving of protection. On the other hand, the tenant knows that he will lose his rental space if he does not exercise the option. There is no legal solution to this problem. In these situations, too, I advise the tenant to approach the landlord and seek a discussion. One possibility, for example, would be to extend the lease for a foreseeable period of time, such as six months or one year, and to postpone the exercise period for the option right.

Question: Let's imagine the following situation: The landlord and tenant agreed to extend the lease in February. This involves adjustments to the premises, which the landlord is responsible for. Due to the current situation, the adjustments cannot be carried out. What now?

Answer: In the next question, I assume that the landlord is responsible for the fact that the measures cannot be carried out. If the landlord is obliged to carry out the measures, they are not providing the rented property as contractually agreed. This constitutes a defect in the rented property, which generally entitles the tenant to a rent reduction or even termination of the lease. At this point, however, it must also be asked whether the landlord's bottleneck is due to the coronavirus, for example because the landlord himself is experiencing financial difficulties due to the coronavirus or because the necessary tradesmen are currently not available. In such cases, it may be worth considering whether this constitutes a discontinuance of the basis of the contract and whether the contract needs to be amended.

Even if I am repeating myself, the same applies here: the parties should talk to each other. One solution could be to temporarily reduce the rent without renovating, carry out the renovation later, and also negotiate an extension of the fixed rental period or a rent increase after the end of the crisis and after the renovation. This is often attractive to institutional landlords because it increases the value of the property to extend fixed terms or increase the total contractual rent for a property.

 

The interview was conducted with Dr. Palm, partner at the law firm Busse & Miessen, Friedensplatz 1, 53111 Bonn.

Attorney Dr. Vanessa Palm is a specialist lawyer for construction and architectural law and primarily advises and represents investors, landlords, tenants, building contractors, architects, and engineers in and out of court on all matters relating to real estate.