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Second judgment by a German Higher Regional Court on rental payments during pandemic-related closures – adjustments only possible in exceptional cases

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03 March 2021

On the same day as the Higher Regional Court of Dresden (judgment of 24 February 2021, case no. 5 U 1782/20), the Higher Regional Court (Oberlandesgericht; OLG) of Karlsruhe (judgment of 24 February 2021, case no. 7 U 109/20) passed its judgment on the effects of official closures orders on the duty to pay rent incumbent on commercial tenants.  In their decision, the judges in Karlsruhe arrived at an overall different conclusion than their colleagues in Dresden.

Like in the Dresden judgment, the case before the OLG Karlsruhe revolved around the duty to pay rent of the fashion retailer KiK which was forced to close its shops to customers from 18 March 2020 to 19 April 2020 due to the Covid-19 ordinance in effect at the time in the Federal State of Baden-Württemberg.  The retailer then decided to discontinue rental payments for the month of April, prompting the landlord to take legal action.  In the first-instance proceedings, the defendant was ordered to pay the full amount of the retained rent.  This decision was now confirmed by the OLG in appeal proceedings initiated by the defendant.

Just as the court of lower instance, the OLG Karlsruhe found the closure order implemented by way of legal ordinance to constitute neither a defect of the leased property nor an impediment to performance in the sense of an impossibility to perform and thus confirmed the line of rulings passed by a multitude of regional courts (Landgerichte) and local courts (Amtsgerichte) which in turn were based on the judgment passed by the previous instance, the Regional Court of Heidelberg.

In contrast to the OLG Dresden, however, the OLG Karlsruhe rejected any adjustment of the rent amount based on the principles of frustration of contract (Wegfall der Geschäftsgrundlage) pursuant to section 313 (1) of the German Civil Code (Bürgerliches Gesetzbuch; BGB).  Although the Court ceded that the newly introduced article 240 section 7 of the Introductory Act to the German Civil Code (Einführungsgesetz zum Bürgerlichen Gesetzbuche) creates a factual presumption of a severe change in circumstances, the Court went on to state that such presumption only refers to the "real element" of section 313 (1) BGB and is moreover refutable.  The reconciliation of interests and decisive allocation of risk which would also have to be performed in the context of the contractual adjustment, however, is not covered by this presumption.  In this respect, the OLG expressly highlights that the closure order falls within the sphere of the tenant's risk of use.  When reviewing the facts in terms of reasonableness, it also has to be considered to what extent lost profits will be compensated by state aid such as short-term work allowance (Kurzarbeitergeld) and other savings.  According to the Court, the facts of the individual case continue to be of superior relevance.  In the proceedings, the defendant failed to substantiate that an insistence on their duty to pay rent in the full amount would have placed an unreasonable burden on the defendant.  A different assessment may be required where the economic basis threatens to be destroyed, potentially even where the economic progress is seriously impaired.  The Court held that the defendant, however, failed to substantiate the existence of such a clearly no longer tolerable result, in particular the existence of a threat to its existence.  In addition, no evidence of was furnished to the effect that the decline in sales was exclusively the result of the closure orders.  Instead, an overall change in consumer behaviour had occurred in the context of the Covid-19 pandemic which was completely in the tenant's sphere of risk.

The Court moreover confirmed in this context, contrary to the Regional Court of Munich  (judgment of 12 February 2021, case no. 31 O 11516/20), that in the context of such assessment the overall economic situation of the relevant group of companies and not only individual branches must come under review, without losing sight of the specific interests.

In addition, the OLG ruled out any general 50/50 sharing of risk due to the unique situation caused by the pandemic.  The Court argued that such a view would run counter to the review of the individual case which is to be performed in every case pursuant to section 313 (1) BGB.

Owing to the legal issues which remain disputed as regards the effects of closure orders on the duty to pay rent, the OLG Karlsruhe granted leave to appeal on points of law for the purpose of developing the law.  As shown by the entirely different judgment on issues of risk-sharing passed by the OLG Dresden on the same day, there will not be any legal certainty before the court of highest instance passes its ruling.