Changes to leases due to the law to mitigate consequences of the COVID-19 pandemic

As expected, the German Parliament and Federal Council have passed a law to mitigate the consequences of the COVID-19 pandemic. The law applies to both entrepreneurs and consumers as well as to commercial and residential tenants.

In general, landlords can terminate leases, if tenants are in arrears with their rents for two consecutive dates. Another reason for terminating leases is when the tenants are arrear with their rent in an amount equal to the total of the rent for two months during a period extending over more than two months.

What has changed?

The new law to mitigate consequences of the COVID-19 pandemic is limiting these termination rights temporarily as follows: if tenants are not able to pay their rent between 1 April 2020 and 30 June 2020 due to the COVID-19 pandemic, landlords cannot terminate leases. This period will possibly be extended until 30 September 2020, depending on whether the COVID-19 pandemic will continue to have a significant impact on social life or not.

What are tenants required to do?

In the event of a dispute, tenants must prove that their arrears are based on the COVID-19 pandemic. This can be done, for example, by means of a certificate of state aid or a certificate of reduced income or loss of earnings. Commercial tenants must indicate that the operation of their businesses has been prohibited or significantly restricted due to the COVID-19 pandemic.

For how long are the termination rights excluded?

The ban on termination for arrears from this period is valid until 30 June 2022. This means that tenants can remedy their arrears until 30 June 2022. Therefore, the law does not affect the tenants’ obligation to pay, but only allows them to fulfil their obligation later.

The right to terminate leases due to other reasons than the COVID-19 pandemic remains unaffected.

Update | Rights for debtors to refuse performance in the Corona crisis – creditors can take countermeasures

What is at issue here?

The German Bundestag has passed the act to mitigate the effects of the Covid 19 pandemic. Among other things, this provides for rights of refusal of performance for consumers and small enterprises (fewer than 10 employees and annual turnover totalling a maximum of EUR 2 million). These are to be given the right to refuse the fulfilment of the obligation to satisfy a claim in connection with a continuing obligation until 30 June 2020 if the obligation cannot be fulfilled as a result of the corona crisis or if the fulfilment leads to a threat to the existence of the debtor. The prerequisite is that the relevant contract was concluded before 8 March 2020. Generally, all agreements with continuing obligations are affected, except for rental, lease, loan and employment contracts.

What is to be done from the creditor’s perspective?

In practice, especially medium and large enterprises that have entered into continuing obligations with consumers and micro-enterprises before 8 March 2020 must therefore be prepared for defaults. Since the act does not differentiate according to which side the debtor is on, both payment defaults and default on performance can threaten companies. From the creditor’s perspective, there are now two options. Either the creditor accepts this fact and trusts that the debtor will fulfil its obligations properly. Or the creditor prefers an active approach. For example, it may make sense to renegotiate contracts that were concluded before 8 March 2020. In this way, one can evade the scope of application of the draft law. Especially as long as the debtor is still well off, he might be accept such renegotiation. After all, the parties are only renegotiating what both parties currently want.

Implications of COVID-19 on M&A Transactions

We face an unprecedented business environment, given the scale and speed with which the coronavirus situation is developing.

Our clients face various challenges – from protecting and supporting employees and customers, facing material supply chain challenges, to preserving liquidity and adapting to new and to a large extent unknown operating conditions. Also, pending transactions that were signed pre-crisis and that now may or may not be closed, need to be efficiently handled. And despite the background of these current market conditions, we expect that both strategic investors and financial sponsors will, for various reasons, consider and pursue new transactions in the coming months.

To assist clients in navigating the M&A process in this unprecedented environment, here are the key points for the near future from our perspective:

MAC Clauses

Material adverse effect or material adverse change (MAE or MAC) clauses have only been seen very rarely prior to the hit of the Corona crisis in Germany. And even if a purchase agreement contains such an MAE/MAC clause, it might not cover a pandemic such as COVID-19. Therefore, most buyers may not be able to invoke the termination of a transaction based on a MAE/MAC clause at the moment.

As a consequence going forward, the parties of an M&A transaction need to negotiate explicit language to address COVID-19 risk-allocation in the context of an MAE/MAC provision. We have seen this practice followed in response to past crises.

Termination rights

Parties should pay extra attention to the seemingly routine “outside date” termination provisions since government approvals, particularly mandatory merger clearances, and further closing conditions might get delayed under the current conditions. The risks of delay need to balanced between the parties, and so do potential changes in the target’s financial results if the period prior to closing is particularly long. 

In addition, it is now even more important to synchronize termination rights under the financing commitments on the one hand and the purchase agreement on the other hand.

Due diligence and reps & warranties

Extensive due diligence investigations to determine legal and financial risks and vulnerabilities become even more important – from reviewing supply chains to understand dependencies and potential shortfalls, analyzing key contracts to assess, inter alia, termination rights and force majeure provisions, to reviewing liquidity shortages and potential insolvency risks.

Moreover, specific representations (for example as to contingency planning, protocols, etc.) regarding the crisis may become more common in M&A deals in the coming months.

W&I insurance

As COVID-19 is a known risk, insurers will most likely specifically exclude coronavirus-related losses from their policy coverage. In addition, an insured’s “knowledge” of a situation typically excludes that situation from policy coverage. For that reason, the scope of specific diligence regarding COVID-19, which would also apply to post-signing “updates” from a seller, and their effect on the insured party’s knowledge should be carefully addressed with legal counsel in the context of W&I insurances.

Interim operating covenants

In the interim period until closing, sellers normally operate the target’s business in the “ordinary course” to protect its value. However, given the current economic situation, ordinary course might very likely be counterproductive and might actually be the last thing a buyer wants a seller to do – the parties will therefore need to discuss and tailor “emergency” measures to put the seller, without obtaining prior consent of the buyer, in a position to preserve the target’s business in this time of crisis. This applies particularly to liquidity maintenance, debt refinancing and working capital management, but also to exceptions for changes required by law or regulation.

Insolvency protection

Now even more than before, transactions need to be structured insolvency proof, avoiding unpleasant surprises and later disputes with an insolvency administrator or the authorities in the interests of all parties. This relates to analyzing and mitigating the risks for (a) the seller in case of an insolvency of the target and/or the buyer and (b) the buyer in case of an insolvency of the seller.

Employment reorganisation

Potential employment reorganisation features following closing should be addressed in the course of the transaction already – from adhering to essential employment-law procedures to negotiating the effects of potential post-closing reorganization issues on the purchase price.

Purchase price adjustments

Regarding the current uncertainties, we expect locked box mechanics will be rarely seen in the near future – in particular as the net debt and working capital of a target might significantly change in the interim period until closing. A balanced purchase price adjustment mechanism can therefore play an important role to provide for deal certainty.

Act to mitigate the consequences of the COVID-19 pandemic

The German Bundestag today unanimously adopted the act to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal proceedings in expedited legislative action. With this, the extensive protective measures for companies and private individuals, which the Federal Government already recommended on Monday, will enter into force soon. The law now only has to be approved by the Bundesrat and executed by the Federal President, which is generally regarded as a formality.

If you want to know more about the detailed contents of the passed legislation make sure to check out our detailed reports.

Insolvency: https://blog.actlegal.com/the-planned-changes-by-the-act-to-mitigate-the-consequences-of-the-covid-19-pandemic-in-insolvency-law/

Corporate: https://blog.actlegal.com/the-planned-innovations-in-company-law-resulting-from-the-act-to-mitigate-the-consequences-of-the-covid-19-pandemic/

Commercial/Supply Chain: http://blog.actlegal.com/rights-to-refuse-performance-for-debtors-in-the-corona-crisis-planned-creditors-can-take-countermeasures/

Banking/Finance: http://blog.actlegal.com/corona-crisis-special-features-of-lending-law-from-the-banks-perspective/

The planned innovations in company law resulting from the ‘Act to mitigate the consequences of the COVID 19 pandemic’.

The protective measures for the avoidance of the further spread of the COVID-19 pandemic do restrict the freedom to hold meetings; this also affects general / shareholder meetings of listed and private companies. This could have a significant negative effect as it will delay resolutions on important matters, such as approving annual accounts, capital measures, appointment of new boards.

The draft legislation for the law to mitigate the impact of the COVID 19 pandemic in civil-, insolvency and criminal procedural law provides for various simplifications for calling and holding such meetings and taking resolutions if such meetings are held still in 2020.

In case of stock corporations (AktiengesellschaftAG) and Societas Europaea (SE), for example,

  • the board of directors (Vorstand) can decide on the possibility to cast votes in the general meeting via electronic means even if this is not provided for in the articles of association;
  • the convening period can be reduced to below 21 days; and
  • the board of directors can decide to hold the general meeting within the business year (i.e. after the first 8 months)

The above changes are ‘safeguarded’ by a limitation of the possibilities of shareholders to challenge resolutions by the general meeting.

In  case of a company with limited liability (GmbH) there will the possibility to take resolutions in writing even if not all shareholders agree are extended (currently this is only possible if all shareholders agree to this). Also, the law will introduce some provisions regarding cooperative (Genossenschaft), associations (Vereine) and foundations (Stiftungen) which will make it easier to hold meetings and pass resolutions and to keep the board of directors in office even though ordinary period of their office might have been terminated automatically due to time limiations.

And last but not least, in case of a merger, the German transformation act requires to submit a balance sheet of the company which transfers its assets to another entity, and that the effective date of such balance sheet is not older than 8 months. This period will be extended to 12 months in order to account for the fact that due to the Coronacrisis, the taking of the shareholder resolutions required for the merger might take longer than 8 months.

Rights for debtors to refuse performance in the Corona crisis planned – creditors can take countermeasures

What is at issue here?

The German government plans to introduce a law temporarily suspending the obligation to file for insolvency and limiting the liability of organs in the event of insolvency caused by the COVID 19 pandemic. The law is to be passed in the short term and provides, among other things, for rights of refusal of performance for consumers and small enterprises (fewer than 10 employees and annual turnover totalling a maximum of EUR 2 million). These are to be given the right to refuse the fulfilment of the obligation to satisfy a claim in connection with a continuing obligation until 30 June 2020 if the obligation cannot be fulfilled as a result of the corona crisis or if the fulfilment leads to a threat to the existence of the debtor. The prerequisite is that the relevant contract was concluded before 8 March 2020. Generally, all agreements with continuing obligations are affected, except for rental, lease, loan and employment contracts.

What is to be done from the creditor’s perspective when the law comes into force?

In practice, especially medium and large enterprises that have entered into continuing obligations with consumers and micro-enterprises before 8 March 2020 must therefore be prepared for defaults. Since the draft law does not differentiate according to which side the debtor is on, both payment defaults and default on performance can threaten companies. From the creditor’s perspective, there are now two options. Either the creditor accepts this fact and trusts that the debtor will fulfil its obligations properly. Or the creditor prefers an active approach. For example, it may make sense to renegotiate contracts that were concluded before 8 March 2020. In this way, one can evade the scope of application of the draft law. Especially as long as the debtor is still well off, he might be accept such renegotiation. After all, the parties are only renegotiating what both parties currently want.

Commercial property rental – The 10 most important questions from landlords and tenants

It is becoming increasingly apparent that the effects of the corona crisis will continue to preoccupy us for a long time to come and that commercial leases will therefore come under increasing pressure. Landlords must prepare themselves for the fact that their tenants will find themselves in a severe liquidity crisis as a result of collapsing sales, closures or quarantine orders ordered by the state or authorities, as well as general assembly bans or curfews, and that they will no longer be able to pay their rents now or in the foreseeable future.

According to the information available to us, the German government is currently examining options for protecting tenants who are experiencing payment difficulties as a result of the coronavirus crisis. Apparently, this applies to both commercial and residential tenants. In this context, a ban on termination in the event of payment defaults caused by the coronavirus pandemic is being discussed. This would mean that although the obligation to pay rent would not cease to apply, rents would be temporarily deferred. As a result, the deferred rents would have to be paid later. In the case of housing, the alternative
However, a special housing benefit is also being discussed as a possible solution, which should take effect when tenants of residential accommodation suffer considerable losses of income as a result of the coronavirus crisis and have no possibility of compensation through transfer payments. In this case the tenants of commercial space would be excluded. Until it is clear whether and to what extent the Federal Government is helping tenants in the current situation and whether this legal “protective shield”, which is currently emerging, will also cover tenants of commercial space, landlords of commercial space should take a few things into account.

You will find answers to these and other urgent questions in our act news (in German): https://act-newsletter.com/Coronakrise_Gewerberaummiete_die_zehn_wichtigsten_Fragen_von_Vermietern_und_Mietern.pdf

COVID-19 – answers to burning labour law issues

Can employees stay at home for fear of infection?

The answer is NO!

Employees are not entitled to refuse their work only for fear of being infected with the corona virus.

Employees are also not entitled to work in home or mobile office from now on. However, this may soon be in the employer`s urgent interest, e.g. in the event of a closure of the company. Therefore, it is essential that a mutually agreed employment in a mobile office is contractually agreed. Please contact us for more information.   

Kindergarten and schools are closed. Are employees now allowed to stay at home if they have no other caregiver for their children requiring care?

The answer is still NO!

Employees are obliged to organize replacement care for their healthy child.

However, if the case is such that it can be proven that no other caregiver is available, employee may under certain circumstances have the right to refuse his or her performance, with the legal consequences that the obligation to pay remuneration also does not apply (principle: “no remuneration without work”) There is in exception to the principle “no remuneration without work” (Sec. 616 BGB), which obliges the employer to continue to pay for a relatively insignificant period of time. A guideline of 5 days applies here. However, this only applies if the employment agreement does not exclude the application of this provision, which must be examined in each individual case.

Employer and the work council can exclude Sec. 616 BGB in a works agreement in order to secure the existence of the employer.

Employer and employee should regulate in the employment agreement how the “release from work” should take place:

  • Reducing overtime,
  • Build minus hours to a certain limit if a working time account exists,
  • Holiday reduction,
  • Possible a few days Sec. 616 BGB,
  • Unpaid garden leave.

What is the legal situation if my employees do not show up for work due to a public transport stop?

In this case, the employer is not obliged to any renumeration because the travel risk is assigned to the employee’s sphere of risk.

Can the employer unilaterally close his or her business and in doing so unilaterally order holiday or instruct the employees to reduce time credits or company holidays?

Basically: A clear YES!

If the employer closes the business based on his own decision, for example in order to protect his employees, he bears the renumeration risk in accordance with the principle of the so-called business risk theory (Sec. 615 sent. 3 BGB). This also applies if the disturbance – as in the case of the coronavirus- does not originate from a sphere of danger that can be influenced by the employer.

In order to minimize the damage, it is recommended that employees first agree to work from home (please use our mobile-office-agreement – request them), apply for short-time work, unilaterally grant employees any remaining leave entitlements or reduce overtime accounts. A unilateral granting of holiday by the employer is exceptionally excluded only if the employee has already applied for and been granted his entire leave entitlement or if the granting of leave is contrary to other leave wishes of the employee.

What happens if there is a suspicious case in our company? 

If there is a suspected case of the coronavirus in the company, the employer must inform the rest of the employees about this case in order to identify and clarify possible contact persons as quickly as possible.

The employer, on the other hand, has no obligation to report to the health authorities, as the obligation to report is directed to the diagnosing doctor, but not to the employer, in accordance with Sec. 8 IfSG.

What happens if an employee has been tested positive for Covid19/coronavirus?

If the suspicion of an infection with Covid19 is confirmed, the first thing that applies to the affected employee is that he or she is incapable of work and therefore has a claim against the employer for continuation of regular pay for a period of up to 6 weeks in accordance with Sec. 3 para 1, 4 EFZG.

The legal situation is different if one or more employees are affected by the order of quarantine within the meaning of Sec. 30 IfSG by the health authority.

In this case, the provisions of Sec. 616 para 1 BGB in conjunction with Sec. 30 IfSG secures the renumeration of the affected employees. An employee does not lose his or her right of renumeration against his employer if he or she is prevented from performing his or her work for a relatively insignificant period of time through no fault of his or her own. Such prevention and thus a claim for continued payment of remuneration against the employer applies in the case of a prohibition of activity due to official measures according to the IfSG according to the highest judicial jurisdiction.

In addition, the IfSG stipulates that the employer is obliged under Sec. 56 para 1, 2, IfSG to pay compensation in the amount of the net loss of earnings to the employees concerned for a period of up to 6 weeks instead of the health authority, i.e. as paying agent.

At the beginning of the seventh week, the renumeration is granted directly by the state in the amount of the sickness benefit.

As in all cases, it is advisable to first discuss with the employee the reduction of vacation and overtime as well as comparable instruments or to order them unilaterally.

What can the employer do against an official closure order?

In principle, the authorities have very far-reaching rights of intervention within the legal framework of the Infection Protection Act (IfSG). This includes in particular the right of the health authorities to close down entire businesses. Individual cases of infection among employees are sufficient for this.

Initially, the employer has no possibility to take action against the closure order. The employer only has the right to subsequently assert any claims for damages against the authorities.

Under which conditions can the employer assert a claim for reimbursement? Which deadlines apply?

If the employer is called upon to pay compensation under the IfSG, he or she can apply to the competent authority within three months for reimbursement of the amounts paid. Pursuant to Sec. 56, para 12 IfSG, the employer may also apply to the competent authority for an advance payment of the anticipated amount to be reimbursed in accordance with sec. 56 para 12 IfSG. Further compensation benefits may, for example, be granted to self-employed persons under certain circumstances (see Sec. 56, para 4 IfSG).

How do I as a company introduce short-time work?

With the “Act on the temporary crisis-related improvement of the regulations for short-time work compensation”, the Bundestag has greatly simplified the access of companies to receive short-time work compensation. The requirements are now as follows:

  1. If orders are missing due to difficult economic developments, a company can apply for short-time work if at least 10 percent of the employees could be affected by the loss of work. This threshold was previously 30 percent of the workforce in accordance with Sec. 96 SGB III.
  2. It has also changed that, by way of derogation from Section 96 para 4 sent. 2, point 3, the structure of negative working time balances can be dispensed in whole or in part before payment of the short-time work allowance. The current law has so far required that companies where agreements on fluctuations in working hours are used, these should also be used to avoid short-time work and be reduced.
  3. Temporary workers will also be able to receive short-time work compensation in the future.
  4. The social security contributions that employers normally have to pay for their employees will in future be fully reimbursed by the Federal Labour Office. This is intented to create an incentive to make greater use of periods of short-time work for the further training of employees.

Notification to the Federal Labour Office must be in writing or electronically. Locally, the Federal Labour Office in whose district the business is located is responsible. The employer itself or the works council is entitled to file an application. Within the scope of the notification, the company must provide credible evidence of the requirements by submitting documents. These documents include: Documents showing the cause of the loss of working hours; comparative figures showing under-utilisation; information on the temporary nature of the loss of working hours; statement by the works council on short-time working; agreement on the introduction of short-time work and agreements on working time accounts, if available. 

Question relating to co-determination

In principle, the co-determination rights of the works council remain in full. In particular, the works council must be involved in a transfer in accordance with Section 99 of the BetrVG. A transfer is also generally available in the case of temporary employment in the mobile office. We recommend the following procedure:

  • Employers announce to the works council that the (local) transfer to the home or mobile office will initially only be for a maximum of 4 weeks. With it, it can be argued that still no participation-obligatory transfer in the sense § 95 para. 3 BetrVG would exist. It remains to be considered that the circumstances of the work change seriously and consequently already with the first day of the transfer also obligation of codetermination exists.
  • Just do it with references to the exceptional situation. If the works council should nevertheless take legal action after Sec. 101 BetrVG, employers could initially justify the local transfer by means of § 100 BetrVG and, if necessary, file a court application for a substitution of consent themselves. In this context, it is also questionable whether the functionality of the courts can be guaranteed if the quarantine orders, which can no longer be ruled out, are issued.

Co-determination rights also exist in connection with health protection, Sec. 87 para 1, No. 7, BetrVG, as well as in the case of a possible vacation order and/or unilateral ordering of company vacations.

The co-determination of the work council is however excluded if the employer only fulfills official instructions.

Data Protection: Legitimate measures

In the light of the events that have taken place, the constant re-infection and the lack of uniform lines of the European Data Protection Authorities, the following measures are not exhaustive and definitive. In our opinion, the following measures are currently compatible with data protection law:

  1. Employer’s right to interview: The employer is entitled at any time to require his employees to state whether he/she was in a risk area or had direct contact with infected persons. In principle, the employer is only entitled to negative information from the employee, but in our opinion the employee is also obliged to answer truthfully in order to avert damage to third parties.
  2. Voluntary self-disclosure – or questionnaires on whereabouts and symptoms: Information can also be obtained in the form of a questionnaire. Here however a right of codetermination of the work council exists. It would be preferable if the employee gave his or her consent before filling out the self-disclosure form. This consent has the following conditions:
  • Written consent before the measure,
  • Informative consent, i.e. the purpose of the information is clearly defined,
  • Voluntarily, i.e. without pressure,
  • Instruction about the right of revocation,
  • Instruction about no adverse consequences in case of refusal.

The consent of the employees is legally mandatory in case of:

  • Taking the temperature and
  • collecting the current private mobile phone numbers or other contact details of employees for information purposes in the event of closure of the business or similar cases.