Changes to civil law as a result of the planned law to mitigate consequences of the COVID-19 pandemic

Measures to contain the COVID-19 pandemic have brought large areas of economic life to a virtual standstill. Retail businesses, hotels and restaurants, passenger transportation, cultural and educational institutions are directly affected by closures and curfews. From one day to the next, these sectors have lost all income. But other enterprises are also indirectly affected, feeling the reduced demand from consumers and companies. Employees have lost income due to short-time work, the self-employed face a sudden, almost complete loss of their livelihood. This means that on all economic levels, consumers and companies no longer have the means to service liabilities as they fall due.

In this situation, a new article 240 of the Introductory Law to the German Civil Code (Ein­führungsgesetzes zum BGB – EGBGB) imposes a “moratorium” which will allow all consumers within the meaning of the German Civil Code (Bürgerliches Gesetzbuch – BGB) and all micro enterprises to suspend their performance of contracts with a continuing obligation which were concluded before the outbreak of the crisis, if they are unable to perform due to the consequences of the COVID-19 pandemic. The same applies in principle to consumer loans. For rental and lease relationships, regardless of whether the tenant is a consumer or a company, special protection against termination apply. The living conditions of private individuals and the business organisations of companies should be preserved as far as possible in order to be able to continue largely unscathed after the crisis has abated. Such a general “moratorium” is unique in German economic history. 

Moratorium on consumer contracts and contracts concluded by micro enterprises

Article 240 section 1 para. 1 EGBGB sets out the main principle: until 30 June 2020, consumers have the right to refuse services from or in connection with a consumer contract con­cluded before 8 March 2020 which established a continuing obligation being material to the consumer if, as a result of circumstances attributable to the spread of the COVID virus, they are unable to provide the service without jeopardising their livelihood or that of their family (section 1 para. 1).

Section 1 para. 2 extends this right to contracts with a continuing obligation of micro enterprises if, due to the COVID-19 pandemic, they are unable to fulfil their obligations or cannot fulfil them without jeopardising the basis of their operations.

The right to refuse performance reaches its limit in every case where the interests of the other party are unduly impaired. With consumer contracts this is the case if exercising the right to refuse performance would impair the economic basis of the creditor’s business (section 1 para. 1 sentence 2). In the case of micro enterprises, the limit is to be drawn where the livelihood of the creditor and his family is at risk or where the economic basis of the business is at stake (section 1 para. 2 sentence2). Where there is no right to refuse performance for the above reasons, the debtor again has the right to terminate the contract (section 1 para. 3).

The moratorium in section 1 does not apply

  • to employment contracts because those are govern by special regulations;
  • to rental agreements for land and premises (special provision in section 2) or 
  • to loan agreements (special provision in section 3).

Scope and conditions of the Moratorium

Consumer Contracts
On the one hand, the moratorium applies to consumer contracts – i.e. contracts which have been entered into by an individual in his private sphere with an entrepreneur, section 310 para. 3 BGB, provided it is a contract with a continuing obligation which is material to the consumer because it concerns matters central to his daily existence. However, since rental agreements and employment contracts are excluded as the most important kind of contract with a continuing obligation, the practical scope of application is limited. Contracts that are covered are in the area of utilities, insurance, telecommunications or public transport. It remains open to argument whether e.g. agreements with fitness studios or for the purchase of newspapers would also fall within the scope of being material. Consumers within the meaning of the law are also private individuals in their private asset management as shareholders of a limited liability company (GmbH), but with the exception of tax consultancy contracts, for example, few contracts with a continuing obligation are likely to fall in this category.

Where consumers are no longer able to pay amounts owing under these continuing obligations due to the effects of the COVID-19 pandemic, they may refuse to pay unless it would be unreasonable for the company on the other side to continue to provide the service without receiving payment because this would endanger its economic basis. Where the exact line is to be drawn will ultimately have to be clarified by the courts. If, for example, a telecommunications company has to forego a not inconsiderable portion of its revenues because simultaneously many consumers exercise their right to refuse service, the limit of reasonableness may be exceeded. 

Contracts of Micro Enterprises

According to the relevant definition in EU law, micro enterprises are companies with fewer than 10 employees and an annual turnover or balance sheet below EUR 2 million. In addition, a right to refuse performance only exists in the case of contracts with a continuing obligation which is material to the business. Since the right to refuse performance is not limited to monetary payment obligations, this covers, for example, small service companies that have concluded cleaning contracts which they are now unable to fulfil or can no longer fulfil in an economically viable manner. Conversely, one can imagine telecommunications, leasing or maintenance contracts which a micro-enterprise can now no longer pay due to loss of revenue. According to the wording, service contracts with freelancers, who are not employees, are also covered.

The right of micro enterprises to refuse to pay is limited to cases where it does not deprive the creditor or his family of its livelihood or affect the economic basis of the business. The latter may be the case with an IT service provider who now has to support numerous micro enterprises for no consideration. Alternatively, the micro enterprise may terminate the contract. Again, this is unlikely to be in the interest of the other party and so in case of doubt, it will be agreed to suspend the contract.

Right to Refuse Performance:

A debtor’s right to refuse performance due to the consequences of the COVID-19 pandemic is formulated as “either/or”. The debtor can refuse performance “if” he actually or economically is unable to perform. This will have to be understood in the sense of an “insofar” and especially a “so long”. If the debtor is able to perform and if his ability to perform is restored, for example due to a relaxation of official measures and a recovery of economic life, then the obligation to perform will (again) exist. The right to refuse performance applies up to 30 June 2020 at the latest, but this date may be postponed until 30 September 2020 by regulation of the German Federal Ministry of Justice.

Rental Agreements

The moratorium pursuant to section 1 does not apply to rental and lease agreements. In this respect, the law contains a special provision which – unlike the moratorium – is not restricted to consumers and micro enterprises, but applies equally to companies of all sizes and private tenants as well as to residential and commercial leases.

Under German law, a landlord can terminate a rental agreement for an extraordinary ­reason in particular if the tenant is in arrears with the payment of rent or a not incon­siderable part of the rent for two consecutive dates or with rent payments which together correspond to the rent for two months (section 543 para. 2 sentence 1 no. 3 BGB). In ­addition, under certain circumstances, ordinary termination is possible in accordance with section 573 para. 2 no. 1 BGB.

The law temporarily limits these termination rights. If a tenant of premises or land fails to make rental payments in the period from 1 April 2020 to 30 June 2020 due to the ­COVID-19 pandemic, the landlord cannot give ordinary or extraordinary notice of termination of the rental agreement due to these arrears (section 2 para. 1 sentence 1).

The law provides that this period may be extended by regulation of the German Federal Government in principle up to 30 September 2020 at the latest, if it is expected that the COVID-19 pandemic will continue to have a significant impact on social life, the economic activities of a large number of companies and the employment of a large number of people (section 4 para. 1 no. 2). In addition, the German Federal Government is generally authorised to extend beyond 30 September 2020 if the adverse effects of the COVID-19 pandemic persist after the entry into force of the first regulation (section 4 para. 2). Such a regulation would have to be submitted to the German Federal Parliament (Bundestag), which can amend or reject the regulation by resolution (section 4 para. 3).

The tenant must provide credible evidence that the rent arrears are due to the COVID-19 pandemic (section 2 para. 1 sentence 2), for example by means of a certificate on the granting of government benefits or proof of reduced income or loss of earnings. According to the law, tenants of commercial properties must be able to prove on a regular basis the connection between the COVID-19 pandemic and non-performance, for example by showing that the operation of their business has been prohibited or considerably restricted due to legal ordinance or official order in the context of combating the SARS CoV-2 virus (according to current status, this applies in particular to non-essential retail, restaurants or hotels).

The exclusion of the right of termination for payment arrears from this period applies until 30 June 2022 (section 2 para. 4). As a consequence, the tenant may withhold the outstanding rent until this date without having to fear termination of the rental agreement. However, if there are still outstanding payments from the aforementioned period as of 1 July 2022, the landlord’s right of termination is revived and effective termination is possible.

It is not possible to deviate from the exclusion of termination to the disadvantage of the tenant (section 2 para. 2). Any conflicting contractual agreements (also in general terms and conditions) shall be invalid according to the law, regardless of the time at which the parties made such agreements. On the other hand, the effectiveness of contractually agreed termination rights remains unaffected according to the law for payment arrears that occurred before 1 April 2020 or will occur after 30 June 2020 (or a period extended accordingly by statutory regulation).

However, rent receivables from this period continues to exist per se and they neither expire nor are they legally deferred. Therefore, the landlord may continue to effectively enforce the outstanding rental payments from the specified period. Likewise, statutory interest on arrears in accordance with section 288 BGB will be incurred unless the parties have made an effective alternative arrangement.

While the law does not comment on this, it should be possible in general for the landlord to draw on the rental deposit provided by the tenant. In addition, the landlord should also be able to claim the outstanding rent payments from any guarantor under the rental agreement.
The exclusion of the right of termination is explicitly limited to terminations due to rent arrears caused by the COVID-19 pandemic. Other terminations (e.g. due to late payment for reasons other than the COVID-19 pandemic or before or after the specified time period, other breaches of contract, own use) should remain possible (section 2 para. 1 sentence 3)

The above regulations apply accordingly to leases (section 2 para. 3).

Consumer loan agreements

The amendments to credit law in section 3 initially only affect consumer loan agreements. However, the German Federal Government is authorised by way of regulation without the consent of the German Federal Council (Bundesrat), to extend the amendments to other borrowers, in particular to micro enterprises (as defined above). However, this would likely only happen if there is a further intensification of the crisis.

These provisions apply equally to recourse between jointly and severally liable consumers. However, whether they also apply to third parties to whom the original lender has assigned his claims remains open.

Three-month deferral of payment by law

With regard to consumer loans, a legal deferral of payment arrangement is introduced. The deferral covers all the lender’s claims for repayment, interest or principal payments due between 1 April 2020 and 30 June 2020.

The due date of claims to be paid in the period from 1 April to 30 June 2020 is postponed by three months. The effect of the deferral must be assessed individually for each claim. A claim that would fall due on 2 May 2020 would thus be deferred until the end of 1 August 2020, meaning that its due date would be postponed to 2 August 2020. A claim that according to the contractual agreement would be due on 2 June 2020 would therefore only become due on 2 September 2020. However, the consumer is entitled to continue to make his contractual payments during this period on the originally agreed dates. In this case, the statutory deferral of payment is deemed not to have been granted.

Protection against dismissal

Accompanying the deferral is the exclusion until the expiry of the deferral of the lender’s termination rights due to default of payment and due to a (threatening) deterioration of the consumer’s financial situation or the value of a security provided for the loan.

Conditions and exceptions to deferral and protection against dismissal

The deferral is conditional on the consumer suffering a loss of income due to the exceptional circumstances caused by the appearance of the SARS CoV-2 virus. The consumer must demonstrate and, if necessary, prove this. However, it is presumed that the loss of income is due to the exceptional situation caused by the spread of the virus. Finally, due to the loss of income caused by the pandemic, the performance of the service owed must be unreasonable. This will in particular be the case if it jeopardises the reasonable livelihood of the consumer or his dependants. The legislator does not set a flat-rate threshold for the relevant loss of income. Rather, it will depend on the individual case. The consumer must provide the necessary evidence in this respect.

However, the regulations in favour of the consumer do not apply if the lender is thereby adversely affected in a way that endangers his existence. The lender must assert reasons for  this.

Contract adjustment by law for the period from 1 July 2020

At the end of the deferral period described above, claims that are due until 30 June 2020 but have been deferred by law and those claims that become due again regularly after this date would have to be settled in parallel. For a transitional period, consumers would therefore be burdened twice. In this case, the law provides for the following regulation: after the statutory deferral of three months, the contract is to continue as originally agreed except that the due date of the services is postponed by three months, i.e. the effect of the deferral is transferred to the entire contract. As a result, the contract period is extended by three months. Interest on arrears, charges or claims for damages cannot be demanded for this reason.

Deviating contractual regulations

In addition, the parties to the loan agreement are at liberty to make deviating arrangements. Consumers may have an interest in fulfilling the contractual claims as previously agreed and not delaying the contractual obligations, but they are not obliged to do so. However, the exclusion of the right of termination due to payment default or deterioration of assets can expressly not be waived.

Lender to offer to discuss

The new legislation provides that the lender should offer the consumer the opportunity to have a discussion. The subject of the discussion should include possible assistance or bridging measures on the part of the lender. Assistance possibilities from third parties (for example, incentive loans from the Kreditanstalt für Wiederaufbau) should also be raised.

Possibility of extension

The German Federal Government is authorised by way of regulation and without consent of the German Federal Council (Bundesrat) to extend the deferral period to 30 September 2020 and to extend the contractual period to a maximum of twelve months.