A wide range of state policies, from payments to compensate for losses in revenues to subsidies for fixed costs, aims to mitigate the losses suffered from measures related to covid-19. Landlords who miss out on rental payments due to closed operations want to get a share of their tenants' support payments from the state.

Rentals for the premises make up a substantial part of a business's costs. When the use of the property is impossible or extremely limited, the question of whether any rental needs to be paid becomes an issue.

Which party bears the risk of unusability?

Landlords argue that the pandemic and government-ordered closures are part and parcel of the entrepreneur's risk and that for this reason the rental must be paid. Tenants, on the other hand, invoke Section 1104 of the Civil Code, according to which no rental is due when the property cannot be used due to extraordinary accidents such as war or pestilence. According to this argument, there is no obligation to pay the rental when the property cannot be used due to extraordinary accidents such as war or pestilence. According to this argument, there is no obligation to pay the rental when the property cannot be used due to government restrictions linked to covid-19. The “risk of reality” is thus borne by the landlord.

In this connection, arguments reach back to age-old supreme court decisions: already in the context of World War I, the Supreme Court made it clear that a governmental order to flee from the enemy constitutes an extraordinary accident, the effect of which is borne by the landlord. Based on this, the first (first-instance) court decisions since the outbreak of the covid-19 pandemic find that the burden of government closures is to be borne by the landlord. When a property becomes unusable due to an extraordinary accident, the landlord therefore loses its entitlement to rental. If the property can be used only to a limited extent, the rental needs to be reduced pro rata.

State support payments

The question is whether support payments made by the government during the lockdown periods will change this assessment.

Fixed-cost grants are paid only for specified fixed costs. If such a grant is paid specifically to cover the rental of the business premises, this points at a corresponding obligation to pay the rental. However, the beneficiary's obligation to reduce the damage needs to be considered: when there is an entitlement for reduction of the rental, the beneficiary expecting the fixed-cost grant must not simply pay the entire rental but needs to come to a reasonable arrangement with the landlord.

The compensation paid by the government for lost revenues is differently structured: the entrepreneur is not compensated for any specific costs but gets a lump sum for revenues lost. Landlords argue that, under the principle of the “substitute commodum”, the compensation for lost revenues establishes an obligation to pay the rental. The possibility to use the business premises is substituted by the compensation so that the tenant needs to hand over the compensation to the landlord. This argument has since been rejected by a majority of legal academia who argue that the compensation covers only part of the revenues (before covid-19) and does not affect the unusability of the premises.

At present, many landlords and tenants are arriving at mutual agreements on the rentals. Each case requires its individual analysis because the specific contract, the properties of the premises, and the sector involved all impinge on the legal situation. The first judgments made known are – to the extent they are reviewable – mostly in favour of the tenant. It remains to be seen which way the courts will move in the coming months.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.