Changes in civil law to mitigate the consequences of COVID-19
On 25 March 2020 the German Federal Parliament (Bundestag) unanimously passed the draft bill to mitigate the consequences of the COVID-19 pandemic (retrievable here). The legislator has made some changes in contractual law with the new act. A moratorium for the fulfilment of contractual claims arising from long-term contracts that serve to ensure that people’s reasonable basic needs are met is now provided for. Affected consumers and microenterprises will be granted a deferment of several months under certain conditions if they can no longer render their contractually owed performance due to the COVID-19 pandemic. In addition, there are special provisions for leases and usufructuary leases as well as for consumer loan agreements.
Moratorium (Article 240, section 1 Introductory Act to the German Civil Code, new version)
In accordance with the strict requirements referred to below, consumers and microenterprises are initially given a general right to refuse performance until 30 June 2020:
- This applies to an affected consumer or microenterprise within the meaning of Commission Recommendation 2003/361/EC of 6 May 2003 (retrievable here);
- this concerns long-term contracts (for consumers: which qualify as a consumer contract) that were concluded before 8 March 2020, but not lease, usufructuary lease, loan or employment agreements;
- the long-term contracts must be regarded as essential, i.e. must serve to ensure that people’s reasonable basic needs are met;
- as a result of circumstances that are attributable to the COVID-19 pandemic,
- if it is not possible for the consumer to render performance without putting his/her reasonable livelihood or a reasonable livelihood of his/her dependent relatives at risk or
- if the microenterprise cannot render performance or it is in any case not possible for it to render performance without putting the economic bases of its business operation at risk; and
- the exercise of the right to refuse performance is not unreasonable for the obligee. Conversely, in this case, too, unreasonableness requires that the economic bases of the business operation or the reasonable livelihood of the obligee must be put at risk. However, if the right to refuse performance is excluded, the obligor has a right to terminate the contract.
Contractual agreements that deviate – to the obligor’s detriment – from the first four requirements specified above are invalid.
In addition, the Federal Government will be authorised, without the Federal Council’s (Bundesrat) consent, to issue ordinances extending the duration of the right to refuse performance until 30 September 2020 (instead of 30 June 2020).
Lease agreements (Article 240, section 2 Introductory Act to the German Civil Code, new version)
Pursuant to section 543(1), (2), sentence 1, no. 3 German Civil Code, leases can be terminated for cause without notice if the lessee is in default, on two successive dates, of payment of the rent or of a portion of the rent that is not insignificant, or in a period of time spanning more than two dates is in default of payment of the rent in an amount that is as much as the amount of rent for two months.. It is expected that the earnings losses of a large number of lessees will on average amount to more than two months’ rent. Therefore, the right of lessors to terminate leases on properties or on rooms will be excluded if the lessee, despite not paying the rent due during the period from 1 April 2020 to 30 June 2020, furnishes prima facie evidence that the non-payment is due to the effects of the COVID-19 pandemic. Other rights of termination will remain unaffected. These special provisions apply mutatis mutandis to usufructuary leases as well and are to be applied until 30 June 2022.
In addition, the Federal Government will also be authorised, without the Federal Council’s consent, to extend the termination prohibition to include payment arrears that arise up until 30 September 2020 (instead of 30 June 2020).
Special provisions for consumer loan agreements and recourse claims between joint and several debtors pursuant to section 426 German Civil Code (Article 240, section 3 Introductory Act to the German Civil Code, new version)
A statutory deferral of the interest and redemption payments for a period of, initially, three months from the payments becoming due is provided for loan agreements in the following scenarios:
- A consumer loan agreement was concluded prior to 15 March 2020;
- as a result of the exceptional conditions caused by the COVID-19 pandemic, the consumer has earnings losses that make it unreasonable for him/her to be expected to make the owed interest and redemption payments that become due during the period from 1 April 2020 to 30 June 2020. This is the case in particular if, as a result, his/her own reasonable livelihood or the reasonable livelihood of his/her relatives would put at risk; and
- the deferral or exclusion of termination is not unreasonable for the lender taking into account all the circumstances of the individual case.
These provisions apply mutatis mutandis to adjustment and recourse between joint and several debtors pursuant to section 426 German Civil Code.
If the consumer continues to make the payments in accordance with the contract, the deferral will be deemed not to have been granted. The parties can also reach divergent agreements, e.g. partial payments, interest rate and redemption adjustments or debt restructuring, with regard to the deferral.
If the parties do not agree on an alternative amicable solution for the time period after 30 June 2020, the term of the contract will be extended by three months; the due date of the contractual performance will be deferred by this period.
Moreover, the lender will not be allowed to terminate the loan agreement on the grounds of late payment, on the grounds of significant deterioration of the consumer’s financial circumstances or the value of collateral furnished for the loan until after the deferral has expired.
Finally, the Federal Government is authorised, with the Federal Parliament’s consent and without the Federal Council’s consent, to issue ordinances to also include microenterprises and medium-sized enterprises under the protection offered by this provision. In addition, the Federal Government is authorised, without the Federal Council’s consent, to exend the relevant time period of the covered interest and redemption payments to the time until 30 September 2020 (instead of 30 June 2020) and to extend the term of the contract by up to twelve months (instead of three months).
The provisions already have a fundamental affect on basic principles of civil law. Moreover, the authorisation to issue ordinances makes it possible for the Federal Government to significantly extend the reach of the provisions not only in terms of time but also in terms of substance, depending on the further course of the COVID-19 pandemic. These provisions are particularly important for lessors, companies with B2C business, joint and several debtors and credit institutions. However, these special provisions must also be borne in mind when assessing the specific contractual situation.
For many of our clients, we are already doing intensive and extensive work in connection with the COVID-19 pandemic and advising in particular on how to deal with existing claims and demands following an adjustment of the agreements or the conclusion of agreements taking into account the current situation. If you have any questions on one of these issues or other questions in connection with the impact of the COVID-19 pandemic, please don’t hesitate to contact our experienced team of experts.