Questions concerning real estate law in times of corona

Our company has decades of experience in real estate law, in particular in (commercial) tenancy law and private building law. Furthermore, we can offer assistance for investors and project developers where interim financing by state and federal development banks is necessary. With our nation-wide presence and our network in politics and economy we are able to provide immediate regional assistance.

On 25 March 2020, the German Bundestag  adopted the "Act on Mitigating the Consequences of the COVID-19 Pandemic" ["Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie"], the german bundesrat approved it on 27 March 2020.

Among other things, this act includes regulations for both rental/lease law and lending regulations which provides for the sudden massive liquidity problems of tenants, lessees and borrowers.

However, the problems the COVID-19 pandemic caused for current construction projects cannot be managed by the new statutory regulations. Both investors and building contractors are required to find good solutions in their mutual interest.

In view of the problem constellations referred to below, it will therefore be decisive that the relevant contracting parties negotiate appropriate amendments to the agreements they have reached, provided that these do not already contain provisions on "force majeure" - which can be assumed in most cases.

We provide legal advice with flexible solutions, conducting mediation in the event of conflicting interests and offering communication between the parties.

Rental / lease agreements

 During the COVID-19 crisis, residential and commercial tenants are facing the problem of having to pay their current rents. Under applicable tenancy law, tenancies may be terminated for good cause if the tenant is in default of rent payments or a substantial part of the rent for two consecutive rent payment dates, or if the tenant is in default of payment of the rent in an amount equal to the rent for two months in a period extending over more than two rent payment dates.

Pursuant to Article 5, section 2 of the Act on Mitigating the Consequences of the COVID-19 Pandemic the landlord's termination right of residential and commercial tenancies is limited insofar as the landlord cannot terminate a tenancy solely on the grounds that the tenant fails to pay the rent in the period from 1 April 2020 to 30 June 2020 despite its being due, if the failure to pay is due to the effects of the COVID-19 pandemic. The tenants are required to demonstrate the connection between the COVID-19 pandemic and non-payment. The tenant's obligation to pay rent remains unaffected. This limitation of termination rights will end on 30 June 2022. If, after the expiry of this regulation, there are still arrears of payments from that period, the general rules shall apply again. These regulations also apply to leases.

Since it is not possible today to foresee the economic consequences of the COVID-19 pandemic, in particular the parties to commercial leases should make adequate amendments to their contracts that take into account the current challenges and at the same time ensure the continuity of the lease with regard to the agreed lease terms.

Legal consequences of the COVID-19 crisis on ongoing construction projects

The maintenance of construction sites in times of the COVID-19 pandemic poses major challenges for both builder-owners and contractors, which can lead to massive delays up to a standstill of the construction site as well as to additional conflicts between builder-owner and contractor:

1) Shortage of materials and ordered quarantine

In the absence of contractual provisions to the contrary, the risk of material procurement generally falls within the contractor's area of risk. Both under the German Civil Code and the German Construction Contract Procedures Part B (VOB/B), the contractor's obligation to pay damages depends on whether the he finally caused this supply bottleneck. Fault is generally excluded in case of force majeure – such as the current COVID-19 pandemic – unless the contractor can be charged with an offence at the same time.

Quarantine ordered for employees of the contractor should constitute cases of force majeure as well; consequently the contractor's fault would be excluded. However, if the reasons for the absence are mere fear of contagion or higher costs of replacement reserves, the contractor cannot rely on the absence of fault.

2) Threatening contractual penalties in case of delays regarding the agreed periods of completion

If the delays are actually and exclusively attributable to the COVID-19 pandemic, contractual penalties/damages are not payable. The parties should then agree relevant extensions of the deadlines.

3) Liquidity problems of the builder-owner

Where a builder-owner gets into liquidity problems as a result of the COVID-19 pandemic and is forced to shut down the building site, he cannot rely on force majeure.

4) Threatening termination for cause of construction contracts

In principle, both parties may terminate a construction contract for good cause. In particular, the German Construction Contract Procedures Part B (VOB/B) provide for a termination right in case of interrupted construction work over a period of more than three months.

We would recommend negotiating and implementing the necessary amendments to the contract between the parties as soon as possible in order to allow builder-owners to ensure and to plan procedures for the completion of the construction project by the commissioned construction company in case of delays or the actual closure of the construction site and also to enable contractors to perform their duties under agreed contracts.

Amendment of consumer loan agreements

As a result of the deterioration of the borrower's financial circumstances caused by the COVID-19 pandemic, the borrower may be temporarily unable to make interest or principal repayments.

The applicable lending law does not offer sufficient protective procedures for the extraordinary situation which consumers, lenders and finally the entire economy are facing in view of the current COVID-19 pandemic.

The "Act on Mitigating the Consequences of the COVID-19 Pandemic" contains provisions for statutory deferment and amendment of the agreement after expiry of the deferment period, together with the possibility for the contracting parties to find a different contractual solution. These regulations are complemented by statutory protection against dismissal.

Borrowers should now contact their lenders quickly if an amendment of agreements in place is necessary as a result of the significant deterioration in financial circumstances of the lender due to the COVID-19 pandemic.

However, Article 5 section 3 of the Act on Mitigating the Consequences of the COVID-19 Pandemic only applies to consumer loan agreements as defined in German law in section 491 of the Civil Code [Bürgerliches Gesetzbuch - BGB] which were concluded prior to 15 March 2020. This regulation is not applicable to loans in kind, neither does it apply to financial assistance and instalment payment transactions within the meaning of section 506 BGB.

1) Deferment

Claims of lenders against consumers falling due in the period between 1 April and 30 June 2020 are planned to be deferred by operation of law. The deferment relates to claims for repayment of the loan or parts of loan which in case of (partial) bullet loans will fall due in this period and to the interest and principal repayments which are due at regular intervals during the term of the agreement, usually on a monthly basis. The due dates of payments to be made in the period from 1 April to 30 June will be postponed by three months, e.g. if a payment would be due on 2 May 2020, it would be deferred until the expiry of 1 August 2020 and its due date postponed to 2 August 2020.

A condition for deferment is that the borrower incurred a loss of income due to the extraordinary circumstances caused by the COVID-19 pandemic. The borrower is required to provide explanations and supporting evidence thereof. Pursuant to the second sentence, it will be assumed in this case that the loss of income was caused due to the extraordinary circumstances caused by the spread of the virus. Furthermore, the loss of income would make the rendering of the performance owed unreasonable for the borrower under these circumstances without jeopardising his adequate livelihood or that of its dependants. The threshold of the relevant loss of income is therefore not a fixed amount but depends on each individual case. The borrower will be required to submit the supporting evidence required therefor.

Deferred payments will not be due and remain manageable. This is clarified in the fourth sentence of subsection 1. Consumers who are able to make payments in accordance with the agreement are not prevented from doing so. According to the fifth sentence, to the extent that ("if") payments are made the deferral regulated by the first sentence is deemed not to have been granted. That means that a consumer who initially continues to repay the loan but notices after one or two months that he is no longer capable of doing so due to the crisis, would not waive the deferral regulation in general but that he can rely on it for the remaining period.

2) Amendment of agreements

The parties to loan agreements shall continue to be free to agree exceptions from the rule for their legal relationships. Even if there is a loss of income, the lender should have the option of using other assets in order to continue payment of the loan from such funds, possibly with other due dates or other dates than those originally agreed and postponed by the statutory deferment.

Lenders should offer the consumers, who are affected by a loss of income caused by the crisis and whose obligations under a loan were deferred in accordance with Article 5 section 3 (1), a personal discussion. The purpose of the deferment of payments and the corresponding protection against termination is to give the parties time to make use of relief offers and to place their contractual relationship on a solid footing in view of the crisis. The time that is saved should therefore be used in mutual interest. Contractual agreements such as adjustments of interest and principal repayments, extensions of the term of the agreement, rescheduling arrangements or possible support or bridging measures on the part of the lender should be the subject of the discussions.

In particular, the amendment of the agreement should also include regulations regarding the form in which the deferred payments shall be made. In principle, the deferred claims would be due again at the end of the deferment period to be agreed as from the agreed date. At the same time, the scheduled instalments would have to be paid, too. This would mean a temporary double burden for the borrower, which is to be avoided. Depending on each individual case, it should be agreed that the deferred payments will be made in the course of the original term of the agreement or the contractual relationship should be extended in correspondence with the deferment period and that the agreement will be continued as originally agreed when the deferral period has expired.

3) Exclusion of termination

In addition to the deferment of payments Article 5 section 3 of the Act provides a temporary exclusion of the lender's termination rights on the grounds of late payment and (threatening) significant deterioration in financial circumstances of the borrower. The purpose of this regulation is to clarify that a termination generally does not come into consideration in the aforementioned period. This would be questionable, for example, in the case that the conditions of termination on account of the default in payment under section 498 were partially satisfied before the due date 1 April 2020, but the period to be given pursuant to section 498 expires only after 1 April 2020 or notice of termination is given only after that date. Also in this case termination shall be excluded, as it is to be assumed that the loss of income caused by the crisis makes it difficult for the borrower to make the payments in the given additional period of time and to avert termination.

4) Statutory extension of the loan agreement

At the expiry of the deferment period under Article 5 section 3 (1) the payments which are due by 30 June 2020 but legally deferred and which would be due according to schedule after that date would have to made at the same time. After the statutory three months' deferral the agreement shall be continued as originally agreed, only the payment due dates are deferred by three months. This effect has already occurred for the payments deferred for the period in subsection 1, it is now planned to be applied to the entire agreement. That means that the entire term of the agreement will be extended by three months. Also the due dates of the individual interest and principal repayments are postponed by three months in total. Consequently, the original contractual structure remains the same, only the due dates are postponed by three months.

5) Unreasonableness for the lender

On the part of credit institutions, positions protected by fundamental rights are also affected, and their freedom of economic activity may be considerably impaired. However, the draft law assumes that, due to the great need for protection of consumers, their interest in a deferral of payment will generally prevail. Nevertheless, there may be exceptional case constellations which make a continuation of the contractual relationship during the deferment period appear unreasonable for the lender in individual cases. Serious or protracted culpable breaches of duty by the consumer, such as fraudulent statements or sales of securities in breach of contract before or during the emergency situation caused by the pandemic, which significantly affect the creditor's interest in security, may come into consideration here.

Home ownership law

Due to the situation caused by the COVID 19 pandemic, hardly any meetings of property owners can be held currently. The applicable Act on the Ownership of Apartments and the Right of Permanent Residency [Wohnungseigentumsgesetz - WEG] permits property managers to take other necessary steps as may be required in urgent cases to preserve the jointly owned property (Sec. 27 (1) No. 3 WEG).

On the basis of applicable law, property managers may therefore take any steps that cannot be postponed without a prior resolution of the owners (Sec. 27 (3) sentence 1 No. 2 WEG), in particular in order to avert an imminent threat of damage to the jointly owned property. On this basis, property managers can arrange necessary repairs and the community remains capable of acting in relation to the steps that cannot be postponed if no meeting of homeowners can be held. Decisions on any other steps may be made as soon as a meeting of owners can be held.

If the term of office of the appointed property manager ends during the period in which it is not possible to hold a meeting of owners, the "Act on Mitigating the Consequences of the COVID-19 Pandemic" provides that the most recently appointed property manager shall remain in office until he is removed or a new one is appointed. As a result, the limitations on the term of office set forth by the appointment resolution and the maximum periods of section 26 (1) sentence 2 WEG are temporarily suspended. This provision applies both in the case that the property manager's term of office has already expired at the time when the provision enters into force and in the case that it only expires thereafter.

Additionally, Article 2, section 5 (2) of this Act provides that the most recent budget plan adopted by the homeowners remains valid and in place until a new budget plan is adopted. This ensures the financing by the community even in cases where the continued validity of the budget plan has not been decided.