OLG Dresden – Commercial rent reduction a legitimate response to COVID-19
A retailer is allowed to lower the net rent (exclusive of heating, lighting and other service costs) by 50 percent on account of its store having to close due to COVID-19. That was the verdict of the Oberlandesgericht (OLG) Dresden – the Higher Regional Court of Dresden – in a ruling from February 24, 2021 (Az.: 5 U 1782/20).
Retailers and other businesses are being hit hard by the lockdown during the ongoing pandemic, with those affected experiencing a drop in income but no such change in terms of costs such as rent. For this reason, Germany’s federal government sought to clarify at the end of 2020 that the mandatory closure of a store due to the coronavirus pandemic may amount to frustration of contract based on an undermining of its commercial basis, and that commercial rents can potentially be lowered. We at the commercial law firm MTR Rechtsanwälte can report that the relevant regulations came into force on December 31, 2020.
It is these revised arrangements that informed the OLG Dresden’s decision. The case in question concerned a retailer that was forced to close its textile shop due to the lockdown measures in place from March 19 to April 19 of 2020. The company refused to pay its commercial rent for the month of April, reasoning that the rented property was defective because of the compulsory closure of the store. The retailer submitted, in the alternative, that a transfer of use was impossible, also arguing for a reduction in rent due to frustration of contract based on an undermining of its commercial basis.
The regional court did not follow this line of reasoning, ruling instead that the retailer was required to pay the entirety of the outstanding rent. The OLG Dresden, on the other hand, came to a different conclusion after hearing the case on appeal, partially overturning the lower court’s judgment. It held that the government-mandated closure of the store in response to the coronavirus pandemic had resulted in a frustration of contract within the meaning of section 313(1) of the German Civil Code (Bürgerliches Gesetzbuch, BGB). Accordingly, the rent was due an adjustment and could be lowered.
The OLG considered a 50 percent reduction in the net rent for the duration of the closure to be justified. Since neither party was responsible for – nor could they have foreseen – the frustration of the contract’s commercial basis, the court deemed it fair and proportionate for both parties to bear an equal share of the burden.
While the bargaining position of commercial tenants has improved thanks to the regulations introduced by Germany’s federal government, whether and to what extent commercial rents can be lowered in response to a compulsory closure depends on the facts and circumstances of a given case. Experienced attorneys can provide counsel on legal issues relating to the coronavirus pandemic.