New ruling of the Federal Court of Justice on corona-related business closures

Ruling of the Federal Court of Justice dated January 12, 2022 (XII ZR 8/21)

On January 12, 2022, the XII Senate of the Federal Court of Justice (BGH) issued a key decision on the effects of officially ordered store closures on commercial leases.

Of particular importance is the Federal Court of Justice's finding that a general store closure ordered by the authorities due to the COVID 19 pandemic does not regularly constitute a defect in the leased property pursuant to Sec.536 para. 1 sentence 1 of the German Civil Code (“BGB”). According to the Federal Court of Justice, the prerequisite for a reduction of owed rent is that the restriction of use brought about by legislative or official measures is directly related to the specific quality, condition or location of the rental property. According to this decision, a reduction is therefore only possible if the official order relates to the specific rental property, but not generally to business transactions. In the opinion of the Federal Court of Justice, this requirement is not met in the case of a restriction of use resulting from an official restriction of public traffic by means of a general state order. Such an order does not prohibit either the usage of the rented business premises nor the transfer of the specific rented premises. No others conclusion can be drawn from the fact that the parties may had agreed on the usage of the premises as a retail store as the purpose of the lease.

In its new decision, however, the BGH confirms previous rulings according to which a restriction of public traffic caused by the COVID 19 pandemic can lead to an adjustment of the lease agreement due to a loss of basis of the contract pursuant to Sec. 313 para. 1 BGB. This gives the courts the opportunity to ensure appropriate compensation in cases of significant disruption to the economic viability of a contractual relationship. The BGH justifies this by stating that a pandemic-related closure of a business is not the result of entrepreneurial decisions or disappointed expectations on the part of one party, but rather the consequence of extensive government intervention in economic and social life, for which generally neither party bears the risk.

In principle, the BGH thus underlines the right of a tenant to demand an adjustment of the rent in the event of a general and pandemic government-ordered restriction of retail trade in light of a loss of basis of the contract. However, the BGH emphasizes that such an adjustment cannot be demanded schematically. In particular, it would not be possible to make a blanket statement on the amount of any reduction of the rent. The BGH also rejected the blanket reduction of the rent by half made by the Higher Regional Court in this case. Instead, the BGH argued that it always depends on the circumstances of the individual case, which the Higher Regional Court had not sufficiently taken into account.

In this context, the BGH emphasizes that all economic circumstances of the individual case must be considered when adjusting the contract due to a loss of the basis of the contract and, in particular, that this must not lead to overcompensation of any losses incurred by the tenant. Therefore, financial advantages that the tenant receives, for example, from (non-refundable) government benefits to compensate for pandemic-related losses or from business interruption insurance, must also be taken into consideration when assessing the individual case.