The Most Important Rules Of Lease Agreements For Office And Business Premises, During The State Of Emergency

In order to prevent the spread of the coronavirus pandemic (COVID 19), a number of restrictive measures have been imposed, which also have a significant impact on tenancies. As a result of the restrictions, the home office has become commonplace, office buildings have become depopulated, a significant number of stores have been open for a limited time, their turnover has decreased significantly, however, leases still exist. The question rightly arises as to what rights and obligations the landlord and the tenant have in the current situation, whether the rent can be reduced and what rules apply to the termination of the tenancy.

Until 30 June 2020, a prohibition on termination will apply to some lease agreements

According to the newly released government decree, from the declaration of a state of emergency there is a prohibition on termination of the lease agreements until 30 June 2020, for the most endangered sectors, such as tourism, catering, entertainment, gambling, film, performing arts, event management and sports services. The prohibition on termination may be extended by the government until the end of the state of emergency.

Does this mean that non of the tenancy can be terminated at all?

No. This means that the leases of business premises belonging to the indicated sectors cannot be terminated by unilateral termination during the prohibited period, which in our opinion applies to all types of termination, thus both the so-called ‘ordinary’ and ‘extraordinary’ (immediate) termination. Of course, it is still possible for the parties to terminate the contract by mutual consent.

What about the lease agreements on office spaces? Does the prohibition on termination apply?

If the office spaces in question do not belong to any of the economic sectors listed in the government decree, so it is typically not a commercial business, the prohibition on termination does not apply to these leases. However, termination of these leases may not be the most economically viable option in the long run, so a temporary amendment to the lease should be considered, in which favourable conditions can be laid down for both landlords and tenants.

Can the tenant demand a reduction or waiver of the rent?

The Civil Code stipulates that no rent is payable for the period during which the tenant may not use the thing for reasons beyond his or her own interest. In view of the restrictive measures introduced due to the coronavirus pandemic, the remission of rent can only occur in a very narrow scope. It can only take place if the restriction imposed directly affects the operation of the rental property and makes it impossible to use it. If the restrictions only indirectly affect the use of the rental property, but do not make it impossible, the tenants are not released from their obligation to pay the rent.

Furthermore, the parties may deviate from the cited provision in the lease agreements with the same will, so it is worth examining the concluded agreements, because if the lease agreement excludes the applicability of this provision, the tenant cannot rely on the cited provision and refuse to pay the rent.

However, a reduction in the rent requires an amendment of the contract based on the mutual agreement of the parties. Under the contract amendment, the parties can agree on a number of provisions that will alleviate their situation (e.g. rent reduction, subsequent rent settlement, extension of the lease term, etc.). Mutually agreed amendments to the contract are in the interests of both the tenant and the landlord. Although it currently appears that a contract amendment will bring more favourable changes to the legal relationship for tenants, a contract amendment by mutual agreement may also be more economical for landlords. If the obligations of the tenant are left unchanged, there is a high risk that the tenants will become economically paralysed and will be liquidated. In such case, the landlord’s claims against the tenant might be enforced up to the amount of the contractual guarantees only.

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.

Fulfilment of contractual obligations and possible consequences

The exceptional circumstances caused by the declaration of the state of emergency as a result of the COVID-19 pandemic have opened up the possibility of applying force majeure and rebus sic stantibus clauses to contractual relations. Being the force majeure the option most easily accepted by the Spanish courts, the implementation of said solutions must fulfil certain requirements based on the good faith of the contracting parties and on the reduction of the damage.

  1. Introduction

Since on 11 March 2020 the World Health Organization declared COVID-19 as an international pandemic, a high uncertainty has arisen in the frame of commercial and civil contracting. This situation became aggravated in Spain as a result of Royal Decree 463/2020, of 14 March, declaring the state of emergency for the management of the health crisis caused by the COVID-19 (the “Royal Decree“),being one of the consequences the appearance of situations that make it impossible (or significantly difficult) to comply with the contractual obligations and which, contrary to the administrative and judicial deadlines, have not been suspended.

This legal note is intended to provide an initial overview of situations arising from the state of emergency and other measures adopted at both national and international level.

In this sense, our starting point is the mandatory nature of contractual obligations or pacta sunt servanda and, secondly, the review of mechanisms for contractual flexibility provided for in our legal system, in order to finalize with an extract of the general principles to be applied.

  1. Contractual obligations: pacta sunt servanda

From the beginning of these lines it should be noted that the general rule is that contracts have the force of law between the parties and bind the contracting partners in all aspects, a principle not modified, annulled or suspended either by the Royal Decree or by the other rules approved in the following weeks.

Spanish case law has traditionally interpreted broadly the application of this general principle in two ways: (i) first, in the event that a specific mechanism is provided for by the contract in question, this will be of preferential application (i.e., force majeure clauses) and (ii) the parties must make their best efforts to fulfil the contractual obligations.

Therefore, in case of exceptional situations that challenge the performance of contractual obligations, our legal system does not provide for automatic mechanisms of contractual modification, suspension or termination and, in view of the specific fact, the first thing to be checked is whether the relevant agreement contains a specific clause regulating the exceptional situation and, otherwise, whether it is possible to comply with the obligations, even with greater effort than usual.

  1. Mechanisms of contractual flexibility: force majeure and rebus sic stantibus

Notwithstanding the above, it is clear that we face an absolutely anomalous and unforeseen situation that leads us to wonder should the declaration of a state of emergency or the pandemic itself would constitute cases of force majeure because of their capacity to affect and alter the fulfilment of contractual commitments.

Here below are some considerations to keep in mind to determine whether we are faced with a situation for which contractual flexibility could be envisaged:

A) Force majeure

The concept of force majeure is specifically provided for by our Civil Code in article 1105: “(…) no one shall be liable for events which could not have been foreseen, or which, if foreseen, were unavoidable“.

As a result of the not very concise wording of said provision, the jurisprudence of the Supreme Court has established the following requirements for the application of force majeure: (i) unforeseeable or unavoidable event in the strict sense; that is to say, it does not apply if it is a remote event. For example, the Supreme Court does not grant this character to economic crises because it considers that they are cyclical in nature; (ii) event without a causal link to the parties, that is to say, that they have not intervened in any way; and (iii) that as a consequence of the event the parties cannot comply with their obligations by any means.

The question is therefore whether the above requirements are met in the case of COVID-19 and the restrictive measures taken in response to the exceptional situation arisen. A priori, without prejudice to the necessary analysis of the specific circumstances of each case, the situation arising from COVID-19 could lead to the application of force majeure.

Example: Contract for the provision of catering services. Requirements (i) and (ii) are met by the very nature of a global pandemic and (iii) also due to the state of emergency that prevents the holding of any type of event.

Thus, once the requirements have been met and being no longer possible to continue with the fulfilment of the contractual obligations, the order of action should be as follows:

  • Check if the contract in question contains a force majeure clause. If so, this will apply on a preferential basis to any other mechanism.
  • In the event that the contract does not contain a force majeure clause, the legal provisions must be complied with. In this regard, Article 1. 105 of the Civil Code mentioned above, stating that “no one shall be liable for events which could not have been foreseen or which, if foreseen, were unavoidable” and Article 1184 of the same legal text, providing that “the debtor shall be released from his obligations when performance is legally or physically impossible”, indicate the guideline to be followed: no one shall be liable if he cannot fulfil the obligations of a contract because he is in front of “events which could not have been foreseen or were unavoidable”, unless the law or the contract itself so provides.
    However, we deem necessary to note that the degree of foresight required with respect to the occurrence of events outside the normal course of events is not the same for a person considered from a personal or individual capacity as it is for a person from a business or professional perspective.
  • To act in good faith in the evaluation of the impossibility and, in the event of persistence, to communicate individually to the other contracting party the impossibility of carrying out the compliance, and evaluating (with diligence, transparency and good faith) the option to agree a modification of the conditions increasing terms, relaxing demands, reviewing alternative channels of compliance, etc.
  • In any case, the Royal Decree and other legislation in force must be complied with, being not offered alternatives in conflict with them.
  • Ultimately in response to the question whether force majeure is applicable to all types of contracts, it is important to highlight that our Supreme Court understands that non-compliance with a pure pecuniary obligation (i.e. regular payment of a price or amount in money) is not susceptible to be covered by force majeure assumption as the event of impossibility does not occur, since money always exists as such, which must be taken into account in those cases where the party’s obligation is exclusively pecuniary.

B) Rebus sic stantibus

Unlike the previous case, the rebus sic stantibus clause is a figure of doctrinal and jurisprudential construction, applicable when there is an imbalance or an excessive burden for any of the parties in the performance of the contract and which allows the terms of the contract to be unilaterally modified or even the call for its termination.

This remedy, undoubtedly radical in its effects and of very restricted application by the Spanish courts, is based on such an extreme alteration of the contractual circumstances that the obligations are de facto unbalanced for one of the parties.

Without prejudice to the subjective component that may impregnate the assessment of contractual decompensation, the case law emerged to date allows us to extract the following requirements: (i) the occurrence of a significant alteration with respect to the circumstances existing at the time the contract was signed and that said alteration responds to unforeseeable circumstances, which cannot by any means be attributed to one of the parties; (ii) that as a consequence of the foregoing a situation of major imbalance between the contracting parties occurs; and (iii) that it is impossible to act differently and in a less burdensome manner.

However, the jurisprudence is very restrictive to accept the rebus sic stantibus doctrine as a consequence of the radical nature of its consequences, which could lead to the unilateral termination of the contractual relationship. For this reason, Spanish courts do not admit that there is a simple imbalance between the parties, but require that such an imbalance put one of the parties in an extreme situation.

It is also important to note that this doctrine does not apply when the contract already provides, explicitly or implicitly, for mechanisms to assume risk, or when such assumption is of the essence of the relevant contract.

Example: Spanish courts considered that some financial products offered to consumers caused extreme imbalance at the height of the economic crisis in 2008.

  1. Conclusions

The exceptional circumstances caused by the COVID-19 and the impossibility or difficulty of continuing to fulfil contractual obligations have opened up the possibility of applying force majeure or rebus sic stantibus clauses.

However, after the above analysis, we can draw the following conclusions:

  • The declaration of the state of emergency and the approval of the regulations developing it do not imply the suspension or cancellation of contracts in force, which retain their full validity and effectiveness.
  • Notwithstanding this statement, there are sufficient circumstances to be able to allege force majeure.
  • Given the force of law of contracts between the parties, the first step should always be the complete analysis of the force majeure clause that the parties would have agreed to in the negotiation of the agreement.
  • In the absence of contractual provision, the Civil Code expressly indicates that no one shall be liable for the performance of contractual obligations the observance of which has become impossible because of “events that could not have been foreseen or were unavoidable”.
  • The rebus sic stantibus clause has a very restrictive application and will come into force not for situations of impossibility of compliance but for those of major imbalance for one of the parties, as a consequence of the occurrence of unforeseeable circumstances.
  • The duty of diligence and good faith is maintained in any case and, as a general rule, any action must tend to moderate and minimize damages.

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.

Main recommendations about contract matters

Contracts that are currently in force

A procedure needs to be established to review these contracts, prioritizing those that are more financially significant or are strategically important.

Parties to contracts that present detailed regulations and provisions regarding inevitable or unforeseeable events (such as natural disasters or epidemics) must accept the consequences set forth at the beginning of the contractual relationship.

If the potential scenarios under the contract do not cover procedures or consequences linked to inevitable or unforeseeable events, the parties must refer to the applicable legislation. In this case, the Spanish legal framework allows parties to waive (totally or partially) their contractual obligations under force majeure or fortuitous events. A more detailed definition of these scenarios can be found in article 1105 of the Spanish Civil Code.

We must also mention that force majeure events can also exempt parties from extra-contractual obligations deriving from business relationships.

It is important to note that employers must meet the contractual obligations they have assumed using any means at their disposal (both ordinary, i.e., those used under normal circumstances, and extraordinary) and exercise the due diligence they are legally obliged to provide.

If the contract concluded does not mention any procedures or consequences linked to a force majeure event that greatly impacts the obligations assumed and agreed upon, we recommend signing an annex that is legally rigorous and details how to proceed in such circumstances.

Contracts that haven’t been signed yet

All contracts to be signed in the following days must contain a clause that expressly refers to force majeure events as situations in which parties cannot be considered liable for unfulfilled obligations. Moreover, force majeure events must be considered a valid reason to call off penalties, delays, etc. This clause will be adapted depending on the sector for which it is intended.

It is of the outmost importance to include COVID 19, or coronavirus, among these force majeure events (together with any mutations the virus may have).

International contracts

The legislation that is applicable to these contracts must be reviewed, since the definition of force majeure varies from country to country and the legal consequences foreseen by our legislation (or the guidelines set by the Spanish authorities) may not necessarily apply to contracts that are not subject to our legal framework.

Public procurement

Article 34 of Royal Decree-Law 8/2020 establishes a series of singular provisions related to the execution of public contracts. The legal solution offered varies depending on the type of contract, but will not be applicable in any of the following cases:

  • Sanitary supply or care provision contracts, be them pharmaceutical or not, related to the health crisis caused by COVID-19.
  • Contracts related to security and cleaning services, as well as the maintenance of IT systems.
  • Supply or service agreements that are necessary to guarantee the mobility and safety of transport services and infrastructures.
  • Contracts granted by public entities listed in official stock markets that do not derive earnings from the General State Budget.

As for all other contracts, some of the novelties introduced are detailed below.

A. The suspension of service and supply agreements that are impossible to execute is agreed upon, granting the contractor the right to claim the following damages from the Administration:

  • The salary costs effectively paid by the contractor, during the suspension period, to the staff that, on 14 March 2020, was employed to perform the contract.
  • The costs of maintaining a definite guarantee during the suspension period.
  • The rental or maintenance costs of machinery, facilities, and equipment during the suspension period, provided they were needed in order to execute the contract and the contractor can prove they were not used for any other purposes during the suspension period.
  • Costs corresponding to the insurance policies set forth in the specifications and linked to the purpose of the contract, provided they were taken out by the contractor and remained in force when the contract was suspended.

Once the impossibility to execute the contract is ascertained, the Administration shall have five natural days to quickly process the contractor’s request. If, during that period, no relevant notice is received, the request shall be deemed dismissed.

B. When it comes to public service and supply agreements that are different from the ones mentioned in the previous section, the execution period is extended (without any penalties for the contractor or the option to terminate the contract). To meet this extension, the contractor shall be entitled to receive any additional salary costs.

C. In the case of works contracts in force that, according to the «development and works plan», were meant to be completed between 14 March (first day) and the end of the state of alarm but that, given the COVID-19 situation or the measures adopted by the Spanish government, may not be delivered, the contractor can ask the contract to be suspended from the moment obligations could not be met because of the situation until works can be resumed. It is noted that the provisions set forth in section 2.a) of article 208 and under article 239 of the Spanish Public Sector Contracts Act (LCSP) will not be applicable to these suspensions.

D. When it comes to the granting of works and services through arrangements that were in force at the time this royal decree-law entered into force, the contractor shall be entitled to restore the contract’s financial balance by (as appropriate) extending its initial duration up to 15% or amending the financial clauses in the contract. However, in order to do so, the contracting body must be certain contract execution is impossible.

Litigation scenarios

Given the foreseeable avalanche of contractual non-compliances, jurisdiction-related clauses need to be revised. At the moment, relying on alternative conflict resolution methods (mediation or arbitration) seems more desirable as they are quicker and more efficient at solving trade disputes.

In any case, all potential evidence should be collected and every attempt to reach an agreement should be well-documented. The same applies to acts of good faith when exercising rights and showing the outmost due diligence when meeting obligations. All of this shall be incredibly valuable in the event arbitral or judicial proceedings are lodged against a counterparty.

Corona pandemic can be classified as force majeure

In a decree issued by the Federal Ministry of Construction on 23.03.2020, the federal government announced that the corona pandemic can be classified as force majeure in individual cases for public buildings. At the same time, however, it intends to continue with its construction projects and only interrupt them when official measures come into force, if these measures make further construction activities impossible, such as the construction of a new building, for example:

– quarantine of most construction workers or

– decree of prohibition to enter.

This is stated in a decree of the Federal Ministry of Building and Construction from Monday. The addressee is the Federal Office for Building and Regional Planning.

Force majeure possible in individual cases

In the letter, which was addressed to the Federal Office for Building and Regional Planning, the ministry gives advice on how to deal with process disturbances in construction. According to this, the Corona pandemic is in principle suitable to trigger the facts of force majeure according to § 6 Para. 2 No. 1 VOB/B (German Construction Contract Procedures). ‘Force majeure usually means an unforeseen event which cannot be averted economically even by exercising the utmost care.’

The ministry does not see these strict requirements as generally given. The Ministry recommends that the subordinate authorities check in each individual case why a company is not efficient. Exemplary reasons are:

– that the authorities have quarantined a large number of employees,

– no replacement can be found,

– Building material is missing or

– that workers can no longer come to the construction site due to travel restrictions.

The Ministry of Construction is thus responding to the demands of the building associations, whose interest is to protect defaulting companies from recourse claims by clients.

In case of doubt for the construction company

Doubts may remain during the examination. The authorities are required to ‘handle the statements required by the contractor in individual cases with a sense of proportion, pragmatism and with a view to the overall situation’. With the letter, the Ministry of Construction also took into account the demand of the construction industry for fee payments and thus for securing liquidity. Invoices are to be checked and paid immediately, the decree warns.

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.



Commercial/Supply Chain:


COVID-19 Pandemic: Action Plan on Insurance, Insolvency Proceedings and Relations with State for Slovak Entities and Foreign Entrepreneurs in Slovakia


  • Administration and thorough documentation will be decisive for the successful enforcement of claims. Know and understand the details of the insurance policies and applicable terms and conditions. Prepare a summary of them – even of those you find marginal or unimportant. Taking into consideration the fact that the COVID-19 pandemic is still unfolding, it is unclear what approach will be taken by the insurance companies when assessing insurance claims. Whether you are a big player or a small company, the only practical approach is to audit all insurance conditions and to set up internal processes aimed at safeguarding their fulfillment.
  • In the case of receivables insurance comply with obligations and deadlines under the insurance conditions. Make mandatory notifications to insurance companies and debtors. 
  • If you are covered by insurance against failed payments or business interruption, it is essential to fulfill all obligations on time, even if they are administrative.
  • Read and study all policy provisions that eliminate coverage for some type of risk. The insurance company will inform you about such exclusions. However, it is important to be active and to communicate with the insurance company to make sure that the existence of a possible exclusion is assessed correctly.

Bankruptcy and restructuring proceedings, court and administrative proceedings

  • Monitor your business partners and other relevant entities concerning any ongoing insolvency proceedings, especially the ones you provided collateral for. We can expect a rapid increase in such proceedings in the next months. The process of early identifying the commencement of insolvency proceedings will be essential not only for the assertion of claims but also for the legal possibility to terminate the contract or enforcement of collaterals or securities. Do not miss the opportunity to claim your receivables by not making the effort to monitor bankruptcy and restructuring proceedings.  
  •  Use re-negotiations of contractual relationships with business partners under the risk of insolvency as a tool to targeted contractual changes or to improve your contractual position. Combine agreements on extensions of the maturity of receivables with changes of other outstanding issues such as acknowledgment of debt, the set-up of set-off mechanisms, tightening of supplier’s liability, collateral security, etc. Take hold of the situation and try to turn the existing negatives into an improvement of your contractual position.
  • Introduce internal monitoring of indicators pointing to insolvency to avoid applications for bankruptcy filed by your creditors against your company or the liability of statutory bodies for (not) filing for bankruptcy.
  • Also, the judiciary has been affected by the COVID-19 pandemic. However, court hearings were not yet adjourned by a measure or regulation. Bear in mind that periods still run in proceedings. Actively communicate with the courts. Submit requests for adjournment of the court hearing or for extensions of procedural deadlines set for submitting briefs. The consequence of neglecting the communication with the court may be significant (e.g. judgment in default). Apply these principles also in proceedings before other public authorities (administrative proceedings, etc.).
  • Pay special attention to such legal acts where the legislation explicitly precludes parties to the proceedings to request the remission of a deadline (time period) or its extension. Such legal acts are e.g. statement to the protocol of tax control or administrative actions against the decision of public authorities. Foresee and plan such legal acts.

Relations with a state

  • Monitor support measures and tools adopted by the State. Government officials repeatedly announce that there will be packages of support measures to companies and entrepreneurs suffering the COVID-19 pandemic consequences.  However, not all of them will be effective en bloc. Carefully monitor which measures will be agreed and when. Pay attention to whether they will be applied to all without distinction, or whether they will be granted only to entities requesting or applying for them in some administrative proceedings. Ensure that all documents and evidence is properly collected at all times, do not forget to track by evidence the negative impact of COVID-19 pandemic on you.
  • The “Anti-Letterbox Act” legislation does not allow for exceptions, not even in emergencies. If you enter into contractual relations with the State, e.g. when selling medical supplies, the registration into Register of Public Sector Partners is still mandatory. Begin this process on time as the current situation is slowing down the decision-making process of the courts.
  • Monitor the possibility of claiming compensation for damages caused by emergency measures adopted by the State. One cannot rely on the assumption that the State will compensate for the negative economic impact everyone and everything. Monitor the web pages of public authorities and the Collection of Laws, do not rely only on the information coming from media.  

COVID-19 Pandemic: Action Plan on Contracts and Contractual Relations for Slovak Entities and Foreign Entrepreneurs in Slovakia

  • Force majeure (vis major) is not a universal answer to all complications brought by the ongoing COVID-19 pandemic. If you are considering applying force majeure, analyze the applicable contractual provisions in the context of the factual situation. Assess, whether there is a real and immediate causal link between the existing situation and the crisis caused by COVID-19. An incorrect (mostly subjective) assessment may have significant consequences. Consider all your steps from the perspective which you will be able to defend also in possible litigation cases. There is the same clear answer for both – the creditor who objects the application of force majeure and also the debtor claims protection under force majeure and this answer lies in an individual and thorough assessment of the contractual and factual aspects of the matter. Please note that without having a special provision (force majeure clause) agreed between the parties, an event of force majeure will not exempt parties from their duty to pay contractual penalties.
  • Pay attention to liability arising from the failure to fulfill contractual obligations and other related claims. Be prepared to assess questions regarding the failure to fulfill contractual obligations, liability for damage, contractual penalties, and other possible sanction procedures in the upcoming weeks. There is no one general answer, but you should follow the next three basic rules. Firstly, treat the contracts individually and assess whether the statutory provisions or contractually agreed provisions apply. Secondly, the impossibility of fulfilling a particular obligation does not necessarily mean that other obligations cannot and should not be fulfilled. Thirdly, individual communication is crucial, for both – the creditor and the debtor. Keep in mind that too harsh enforcement, even from the creditor’s side may be in contradiction with the principle of fair trade and the debtor may, therefore, claim a certain degree of legal protection.
  • Mitigation is key. With some contracts, the “legal perspective” can play only a secondary role. Sometimes, the most crucial step will be a timely notification made to the business partner about the impossibility to (further) fulfill a contractual obligation. Take steps that eliminate or reduce claims against you. Do not disregard or neglect any mitigation and prevention measures, even if you are in the position of a creditor. It is expected that a substantial amount of litigation cases in the future will be arising from non-compliance with the obligation to prevent imminent damage and related legal issues.
  • Assess if you can request the change of the contract due to a substantial change in circumstances. The current situation does not constitute a basis for a generally accepted reason to claim price amendments or changes of contractual provisions per se. Identify remuneration provisions or so-called material adverse change clauses in contracts and make such claims only after analyzing them.
  • Prepare for the fact that you will have to handle issues arising from contracts. The COVID-19 pandemic complicates the (timely) fulfillment of contractual obligations. Here, the solution lies in the details and specific parameters laid down in the relevant contract. Audit contracts and their wording so that you are ready to respond flexibly to emerging issues.
  • Analyze the impacts of the COVID-19 pandemic on related contracts and relationships. Identify risky cross-default clauses and collaterals. From the perspective of entities offering collaterals, it is essential now to check if obligations are being fulfilled on time. Also, make sure to follow notification obligations and to keep all deadlines that are stipulated for debtors or entities offering collaterals. Such an administration process may be ultimately the key to the successful enforcement of collaterals.
  • No one will be spared from re-negotiations of existing contracts. Make re-negotiations your tool for targeted changes or for achieving a better contractual position. Combine agreements on extensions of the maturity of receivables with changes of other outstanding issues such as acknowledgment of debt, the set-up of set-off mechanisms, tightening of supplier’s liability, collateral security, etc. Take hold of the situation and try to turn the existing negatives into an improvement of your contractual position. If some of the contractual relationships are affected by the COVID-19 pandemic in a way that causes them to lose their economic sense, make sure you identify them early on and choose the best procedure for their most cost-effective and timely termination. Do not act negligently when it comes to the form of the contract. Regardless of informal agreements made amid the COVID-19 pandemic, it always makes sense to come back to their formalization in the form of written amendments. The reality is that correctly or incorrectly agreed amendments will be the subject of many disputes following the aftermath of the COVID-19 pandemic.
  • Learn from the situation and use your experience when drawing up new contracts. Evaluate the impacts of the COVID-19 pandemic, use to your benefit information on your business partners and information from your subcontractors. Actively communicate new issues with them. Adjust the issues that are currently under discussion in new contracts. Draft carefully and in detail liability clauses, consequences of unforeseen events and other questions to which it is difficult to find an answer to in your contracts or where you are not satisfied with the existing wording.

Corona crisis special features of lending law from the banks’ perspective

On the occasion of the drastic restrictions imposed by the corona virus, the German government today passed the law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal proceedings, which is to be passed by the Bundestag this week.

Changes by law

In addition to other temporary special provisions, the Act also contains a provision on a deferral of payment of at least three months for consumer loan agreements. Customers who are consumers and have concluded a consumer loan agreement with you before 15 March 2020 may suspend interest or repayment of principal amounts due between 1 April 2020 and 30 June 2020 for a period of three months. This is subject to the condition that the borrower suffers a loss of income due to the Corona crisis, which means that ‘it is unreasonable to expect the borrower to perform its payments. After this three-month period has expired, the payment obligation resumes. The deferral of the repayment obligation thus leads to a postponement of the contractual end of the loan term.

What do you need to do?

We recommend that you carefully examine the reasons given by customers to justify a suspension of repayment. In addition, you should set out in writing the agreement with the customer on the deferral of payment and document it in a comprehensible manner, including the customer’s evidence provided.

To whom do these provisions apply?

So far, the above provision only applies to consumer loan agreements. The law also provides for the possibility of extending the regulations to micro enterprises (up to ten employees and annual turnover or annual balance sheet total of less than EUR 2 million each) in the short term. We will keep you informed of current developments in this regard and will be happy to assist you with individual questions.

No termination of loan agreements without compensation

Some resourceful borrowers in the area of real estate loans have already announced that they will extraordinarily terminate their interest-linked loans with reference to the Corona crisis and that they do not intend to pay an early repayment fee for this.
We would be pleased to support you in enforcing your claims against such customers that are not justified.