Hotels: Consequences of COVID-19 on tenancies and leases

In view of the dramatic effects of the COVID-19 crisis on everyday life, the Bundestag and the Bundesrat (German parliament) adopted the "Act on Mitigating the Consequences of the COVID-19 Pandemic". Pursuant to Article 5 section 2 of the Act, the right to terminate tenancies and leases is restricted for a limited period, which is relevant in particular for rented or leased hotel properties.

The purpose of this Act is to protect tenants/leaseholders if they are temporarily unable to pay their rents due within the specified time limit as a result of the COVID-19 pandemic and could therefore lose the hotel property as the basis for their business operation.

Under the new legal provisions, landlords/lessors do not have the right to terminate the tenancy or lease if the tenant/leaseholder fails to pay the rent in the period from 1 April 2020 to 30 June 2020 despite its being due and if the failure to pay is due to the effects of the COVID-19 pandemic.

The connection between the COVID-19 pandemic and non-payment is to be demonstrated.

Other termination rights remain unaffected.

This statutory limitation of termination rights will end on 30 June 2022.

I) The following legal conditions and statements can be derived directly and indirectly from the legal regulation:

  • The statutory limitation of termination rights only relates to those rent payments which fall due in the period from 1 April 2020 to 30 June 2020 and are not paid within the prescribed time limit. It does not relate to arrears of payment from the time until and including 31 March 2020 and from the time as from 1 July 2020.
  • Since the further development of the COVID-19 pandemic is not foreseeable at the moment, the Federal Government can extend the limitation of termination rights, by way of a legislative decree, to include those payment arrears that arise in the period from 1 July 2020 to 30 September 2020 at the latest.
  • Not only must a causal link exist between the COVID-19 pandemic and the unpaid rents, but tenants/leaseholders are also required to demonstrate this causal link.
  • The termination right of the landlords/lessors is not restricted if the non-payment of the tenants/leaseholders has other reasons, such as unwillingness to pay, or if their "inability to pay" has other causes than the COVID 19 pandemic.
  • Despite the limitation of termination rights, the tenants'/leaseholders' obligation to pay the rent as such continues to exist, i.e. the rent is neither deferred nor abated by operation of law.
  • As a general rule, the landlord/lessor may still realise the rental collateral (e.g. cash rent deposits, guarantees and letters of comfort) or claim the landlord's lien due to payment arrears despite the limitation of termination rights. Furthermore, the landlord/lessor could also take legal action against the tenant/leaseholder for payment arrears and enforce them, as the case may be.
  • This limitation of termination rights will end on 30 June 2022. If the arrears of payment which arose between 1 April 2020 and 30 June 2020 are not settled in the following two years until 30 June 2022, it is possible to terminate tenancies/leases due to arrears of payment thereafter.
  • The statutory limitation of termination rights can neither be superseded by general terms and conditions nor by individual agreement to the detriment of the tenant/leaseholder.
  • The general regulations of civil law relating to due dates and payment default continue to apply. Arrears of payment arising between 1 April 2020 and 30 June 2020 are therefore subject to interest at the statutory default interest rate of nine percentage points above the basic rate of interest applicable for the time being, i.e. currently 8.12% annually.
  • As a general principle, the statutory limitation of termination rights does not apply to other agreements under the law of obligations (such as management and franchise agreements) or to real rights of use (such as leasehold).
  • Any contractually agreed operating obligations are not suspended by the restriction of termination rights. The shutdown of the hotel business can therefore lead to a breach of this operating obligation and, depending on the individual case, not only trigger damage claims but may also constitute a reason for termination.

II) In addition, the following tax issues may arise:

  • Where a hotel property is let/leased with an option to VAT and the landlord/lessors are taxed on agreed receipts, their obligation to pay VAT on the rent continues, even if they are not paid this VAT by the tenants/leaseholders. The tenants/lessors keep their entitlement to refund of the input VAT on the agreed rent, as their obligation to pay is continuing.
  • In terms of income tax, landlords/lessors drawing up balance sheets also need to subject rents not paid to taxation, while the tenant/leaseholder carries the related expense item.
  • Although the statutory limitation of termination rights certainly means at least a short-term support to many tenants/leaseholders in economically very difficult times, many aspects of rents not paid still require regulation. Not only do they concern the legal framework, but above all the economic consequences both for the tenants/leaseholders and for the landlords/lessors and their payment obligations in relation to third parties (such as financing banks).

Practice note

So as to manage the effects of the "COVID-19 crisis" in the best way possible, it will be essential in the end that all parties involved analyse the current situation precisely and develop an amicable solution for the payment of the rent. In particular with regard to the long terms of tenancies/leases for hotel properties, open and transparent communication must have priority in order to negotiate adequate alterations of existing agreements.

We will gladly advise the parties by offering flexible solutions custom-tailored to your individual requirements.

Contact us and stay healthy.