By Dr. Nico Brunotte and Lennart Elsaß

The German Bundestag passed a law to mitigate the impact of the COVID-19 pandemic on 25 March 2020. It includes numerous temporary adjustments to civil law, insolvency law and criminal procedural law. The law will have significant implications for a large number of business contracts. In this article we describe the ramifications and outline what companies must prepare for.

The background of the new law - the COVID 19 pandemic dominates the world

The new kind of coronavirus SARS-CoV-2 (COVID-19) has turned not only people's everyday lives in Germany and the world upside down, it has also turned economic life upside down. The measures to contain the pandemic are causing losses in turnover and income for companies and private individuals affected by closures of facilities and operations or cancellation of events.

Last but not least, of course, the administration of justice also suffers - courts postpone appointments, hearings are cancelled and proceedings can only be advanced with difficulty.

In response to these developments, as part of a package of measures, the German Bundestag passed the "Act on Mitigating the Consequences" of the COVID 19 pandemic in civil law, insolvency law and criminal procedure law:

  • In particular, the obligation to file for bankruptcy for companies is suspended to make possible and facilitate the continuation of companies that have become insolvent as a result of the COVID 19 pandemic.
  • So that companies can continue to make decisions and remain capable of acting, simplifications are also provided for the holding of general meetings of, among others, the stock corporation (AG), partnership limited by shares (KGaA) and the European Company (SE). In particular, the obligation to attend Annual General Meetings will be reduced and online participation will be made possible even without authorisation by the Articles of Association or rules of procedure.
  • Criminal proceedings can now be interrupted for much longer due to pandemic protection measures without having to suspend and restart the proceedings.
  • Special features finally also arise for contracts and civil law.

Temporary special arrangements for contracts

The central part of the law is relief for pandemic-related payment difficulties with regard to material continuing obligations, rental and lease relationships and loan agreements. In the following, the time-limited modifications of contract law and the consequences for companies will be examined in more detail – Can your company profit from this or are there even risks for your own business operations if contractual partners stop payments with reference to the new law?

The simplifications are contained in the new Article 240 of the Introductory Act to the Civil Code (EGBGB), which contains several paragraphs.

Right to refuse performance in the case of material continuing obligations - what does the law offer companies?

Paragraph 1 provides for a temporary right to refuse performance for continuing obligations. These are contracts that are aimed at recurring services and considerations that are repeated over a longer period of time. These can be, for example, contracts for the provision of telecommunications services or insurance contracts, but also permanent supply contracts.

According to section 1, a customer has the right to refuse any payment to satisfy a claim initially until 30 June 2020 if

  • the claim is related to a customer contract, i.e. a contract between a business and a consumer,
  • the obligation is a continuing obligation,
  • the contract was concluded before 8 March 2020,
  • the customer, due to circumstances resulting from the spread of infection with the SARS-CoV-2 virus, would not be able to provide the service without risking his or her reasonable subsistence or that of his or her dependants, and
  • it is an essential continuing obligation which is necessary to be covered by services of general economic interest.

But also some companies are granted such a right of refusal. According to section 2 of the law, even micro businesses with fewer than ten employees and an annual turnover or balance sheet of less than two million euros have the right to refuse payments until 30 June 2020 if

  • the claim is connected with a continuing obligation,
  • the contract was concluded before 8 March 2020,
  • due to circumstances resulting from the COVID 19 pandemic, either the company cannot provide the service or the company would not be able to provide the service without risking the economic basis of its commercial operations, and
  • it is an essential continuing obligation which is necessary to cover with benefits for the appropriate continuation of their business.

Thus, not all continuous obligations are covered, but only those that are "essential". The explanatory memorandum to the law gives the following examples

  • Compulsory insurance,
  • contracts for the supply of electricity and gas or for telecommunications services,
  • and civil law contracts for water supply and disposal

Which other contracts can be included under this heading can only be decided on a case-by-case basis.

Since the claim only has to be "in connection" with the continuing obligation, not only claims for remuneration can be included, but also claims for restitution, damages and reimbursement of expenses.

Since it is a right to refuse performance, it must be exercised by the customer or business concerned, i.e. it must be invoked against the contractual partner. The customer or company then bears the burden of proof, i.e. it must prove to its contractual partner that it is indeed unable as a result of the pandemic. The exercise of the right to refuse performance ensures that the claim to performance in the privileged period cannot be enforced, the debtor does not fall into arrears and no claims for damages arise due to non-performance. However, the primary obligation to perform remains in force and must be fulfilled after the law has expired.

The right to refuse performance is excluded if the exercise of such right is unreasonable for the creditor. In the case of the right to refuse performance for micro-businesses pursuant to Paragraph 1(2), this should be assumed, for example, if failure to perform would endanger the creditor's reasonable subsistence or the reasonable subsistence of his dependants or the economic basis of his business. In this case, however, the debtor is entitled to terminate the contract.

Furthermore, the right to refuse performance shall not apply in connection with rental and lease agreements for land or premises, loan agreements and claims under labour law. While the reason for not applying to claims under labor law is that this already contains sufficiently differentiated regulations, the reason for the exemption of rental, lease and loan agreements is that the law itself contains more specific provisions.

Restriction on the termination of rental and lease agreements - also includes commercial leases

For example, § 2 of the new Article 240 EGBGB contains restrictions on the possibility of terminating rental and lease agreements. The background to this is that rental relationships can be terminated for good cause if the tenant is either in default with the payment of the rent or a not inconsiderable part of the rent for two consecutive dates or, in a period extending over more than two dates, is in default with the payment of the rent in an amount equal to the rent for two months (§ 543 para 1, para 2 sentence 1 1 no. 3 of the German Civil Code (BGB)).

In order to prevent the contract from being terminated before the end of the restrictions on economic activity or at least the granting of financial support from the state as a result of a financial shortage caused by the pandemic, the new provision stipulates that the landlord cannot terminate a lease of land or premises solely on the grounds that the tenant fails to pay the rent in the period from 1 April 2020 to 30 June 2020 despite the fact that it is due - but only if the failure is due to the effects of the COVID 19 pandemic and the tenant provides credible evidence of this

This applies not only to residential but also to commercial rental contracts. The connection between the pandemic and non-performance must be substantiated by the tenant, which in the case of commercial properties can regularly be done by referring to a public law prohibition or significant restriction of operations. However, the possibility of termination for another reason, such as another breach of contract, remains unaffected.

This applies accordingly to lease agreements.

Deferral of claims from loan agreements

Finally, Paragraph 3 (1) provides that for customer loan agreements concluded before 15 March 2020, claims of the lender for repayment, interest or principal payments due between 1 April 2020 and 30 June 2020 shall be deferred for a period of three months from the due date. However, this only applies on condition that the customer has lost income as a result of the exceptional circumstances caused by the spread of the COVID 19 pandemic, which make it unreasonable to expect him to provide the service owed. In particular, it should not be reasonable for him to provide the benefit if his reasonable subsistence or the reasonable subsistence of his dependants is at risk.

Under Paragraph 3 (3), termination by the lender on account of late payment, a significant deterioration in the financial circumstances of the customer or the value of collateral provided for the loan is also excluded in this case until expiry of the deferral.

Currently, this provision applies only to customers. However, § 3 (8) authorises the Federal Government to extend the scope of application. According to this, there is the possibility of including micro businesses in particular in the scope of application. The word "in particular" indicates that, if a need for protection is assumed, larger companies may also be included in the scope.

Forward-looking - can the validity of the measures be extended?

The explanatory memorandum to the law states that the Federal Government assumes that the restrictions on economic life caused by the pandemic can be gradually lifted in the foreseeable future and that the associated consequences will then be gradually mitigated. In this respect, the law is based on the assumption that debtors will again be in a position to meet their contractual obligations by the middle of the year, which is why the provisions initially only refer to payment obligations up to 30 June 2020.

However, Art. 240 EGBGB § 4 already contains the authorisation of the Federal Government to extend the duration of the measures by statutory order if it is to be expected that social life, the economic activity of a large number of companies or the employment of a large number of people will continue to be significantly affected by the COVID 19 pandemic.

It therefore remains to be seen when the situation will ease again and legal transactions can return to normality.