Out-Law News | 27 Mar 2020 | 10:40 am | 3 min. read
A new law passed in Germany offers residential and commercial tenants protection but requires companies to continue to pay off loans.
Residential tenants who go into arrears on rent in the next three months in Germany cannot have their tenancies terminated after new laws were passed by the German parliament to deal with the coronavirus, or Covid-19, pandemic.
Companies will have to keep paying off their loans. Landlords should take precautions and arrange smart deferral agreements, an expert has said.
The new German law, designed to reduce the economic impact of the coronavirus pandemic, still requires the approval of the German federal council on Friday. It gives protection to residential renters and loan-repayment protection to individuals and small businesses, but not to larger businesses.
Real estate expert Katharina von Hermanni of Pinsent Masons, the law firm behind Out-Law, said: "Real estate companies will have to keep paying off their loans while their incomes are shrinking.” An earlier draft of the new legislation had intended to also allow large companies to defer their repayment of loans.
“The cat is out of the bag: in contrast to last week’s draft, the government and the parliament have made a decision that is pro-bank. Landlords and real estate owners must now make preparations, arranging smart deferral agreements both with their tenants and their banks," von Hermanni said. She said that in order to protect themselves companies should arrange deferral agreements with their tenants in good time. These should contain a binding period for the deferral, the amount of the deferral and obligate the tenant to apply for state aid, if he is entitled to it. In addition to this, landlords and real estate owners should get in touch with their banks.
The new draft law does not change the fact that rents have to be paid, von Hermanni said. Instead, rental contracts for living and commercial spaces must not be terminated when tenants cannot effort to pay their rents between 1 April and 30 June due to the effects of the coronavirus-crisis. The rental debts must be paid by June 2022. The tenant must make clear that he is not able to pay his rent due to the coronavirus pandemic and its effects. Nevertheless, the landlord can still make use of rental deposits, rental guarantees or the landlord’s lien.
Many German companies had to reduce their business activity or shut down completely due to the measures taken to fight Covid-19. A survey of the German Ifo Institute underlined the impact on German economy: The institute based in Munich currently estimates costs amounting to hundreds of billions of euros. While the costs for rent, loans and insurance will continue, the companies affected will not receive their full income. "What matters now is to avoid the termination of tenants' contracts. That is why we will restrict the possibilities of termination," said Christine Lambrecht, federal minister of justice and consumer protection.
The draft law contains a similar regulation in relation to loans: payments for loan agreements which were closed before 15 March are to be deferred until the end of June. This applies for the repayment of the loan as well as for interests and amortisation payments. A precondition is that the consumer had losses of revenues due to coronavirus crisis that make it impossible to repay the debt, especially when a person's livelihood or that of their dependents is endangered. In this case, the loan must not be cancelled due to late payment or deterioration in the financial situation.
This regulation only applies to consumer loans. The German government also is entitled by the draft law to expand the new regulation onto small businesses.
The draft law also provides for a withdrawal if the above-mentioned deferral is unreasonable for the lender due to its personal circumstances. In this case it has a right of termination.
The new regulation will suspend the obligation to file for bankruptcy until 30 September this year for all companies that are facing economic difficulties in Germany as a result of the coronavirus crisis. The new measure is to prevent companies affected by the coronavirus crisis from having to file for insolvency just because the aid being provided by the federal government does not reach them in time.
Von Hermanni said: “The fact that, according to the law, there can be no insolvencies until 30 September causes zombie tenants to emerge: the debts of many companies that have rented commercial space will accumulate until the end of September, while their petition for insolvency proceedings is postponed. One can be curious about what will happen from October onwards.”