Federal Court of Justice: Retailers are allowed to cut rents in the event of lockdown – but not by half as a flat rate

Düsseldorf, Frankfurt The Federal Court of Justice has ruled: If shops have to be closed due to a state-ordered lockdown, traders can be entitled to a reduction in rent. Since tenants and landlords are affected by the corona measures, neither side is solely responsible.

Many dealers, however, will be disappointed because the judgment is not a good decision in principle. The BGH also emphasized that the specific amount of rent reduction can only be decided on a case-by-case basis. A reduction in rent by half, as the Dresden Higher Regional Court had decided in a previous instance, was too flat.

The textile discounter Kik, who had hoped in vain for a model decision, had sued. In the specific case, it was about the rent for a Kik branch in the Chemnitz area in the amount of 7,854 euros in April 2020. The landlord had refused to reduce the rent. The BGH has now referred the case back to the Dresden Higher Regional Court.

Even if a comparatively small amount is involved in individual cases: The question of whether retailers are allowed to reduce rent in the event of a state-imposed lockdown is of central importance for the industry. Because in total it is likely to be billions of euros in payments – especially if you include other affected businesses such as restaurants or fitness studios.

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The textile discounter Kik alone has monthly rental expenses of 13.5 million euros, as Kik boss Patrick Zahn emphasized in an interview with Handelsblatt in the second lockdown phase in February 2021. At the time, he complained that he felt abandoned by politics and referred to the example of Poland: There it is legally regulated that a lockdown dealer only has to pay half the rent.

Each individual case must be decided in court

In Germany, on the other hand, every individual case has to be decided by the courts – and there is no uniform legal opinion there as to whether a state-ordered closure justifies a rent reduction. In numerous decisions there was a whole range of possible assessments – from a fundamental rejection of the rent reduction to a flat reduction by half.

This was also evident in the case of the Kik branch, which the BGH has now decided. There, in the first instance, the regional court sentenced the dealer to pay the full rent for the month of April 2020. The Dresden Higher Regional Court, on the other hand, decided in the next instance that only half the rent had to be paid.

Closed shops

During the lockdown, like here in Oldenburg, only a few people were out and about in the pedestrian zones of German inner cities.

(Photo: dpa)

For many traders, the lockdown was an existential threat. While almost all of the income was lost in one fell swoop, most of the costs continued unabated. The biggest item here is the rental cost.

Therefore, a relatively large number of landlords had shown themselves to be accommodating and either deferred rents or waived part of the payment without any major dispute. For example, the shopping center operator ECE reduced the rent by half. Calculated over the two lockdown phases, he has waived significantly more than 150 million euros in rental payments.

Numerous landlords of retail properties have shown themselves to be accommodating, reports retail expert Dirk Wichner from real estate service provider JLL. “90 percent of the landlords have realized that they have to make concessions,” he says, which is why many of the tenants were more or less forced to accommodate them.

Property value could be reduced by rent reductions

In many cases, however, the dealers were unsuccessful in asking for a rent reduction. Fund companies in particular, which own a large number of larger properties in the best inner-city locations, would have the problem that if the rent was reduced, they would run the risk of reducing the value of their property, which would have a direct impact on the fund’s assets.

“One tries to avoid rent reductions until the end and instead grants deferrals or grants, for example when renovating the shop space,” reports Wichner. “This does not run the risk of the property being devalued”.

As a result, in many statistics, rents have not fallen – in contrast to the landlords’ profit. In addition, the demand for retail space in the city centers is surprisingly high: “Some companies that initially seemed to be struggling with the competition from online retail have mastered the change unexpectedly well and now want to expand”.

But especially in an international comparison, the ownership structure in major German cities is special: Although many large properties in inner-city locations and almost all shopping centers are owned by fund companies, there are also many private landlords. In most cases, they also made concessions, says Wichner. “Many of the private property owners have or had a business who know what the situation is like.”

But of course there were other cases as well: property owners who emerged from a community of heirs and were unable to agree on a course of action because of deep-seated disputes within the family. Or landlords who have lived abroad for decades and let the rental run through a lawyer who has no interest in advocating for the tenant with his client.

Closures due to lack of concessions

That happened, for example, to a former shopkeeper in downtown Frankfurt, whose landlord, according to his stories, is a very old woman of German descent who lives in New York. You have not made any concessions, he complained. The result: he had to close his shop. “There were simply too few customers,” he reports, “and the rent was tens of thousands of euros. At some point I couldn’t do that anymore ”.

Another shopkeeper was luckier: the property outside of the city center in which her small business is located is owned by a Frankfurt banking family, she says. “The landlady called me one day and offered a rent reduction. I really got tears ”.

For Maximilian Clostermeyer, partner at the law firm McDermott Will & Emery, the BGH ruling brought at least a little more clarity. “It is now clear to landlords that – depending on the circumstances of the individual case – there are cases in which they have to agree to a temporary reduction or deferral of the rent for the duration of a lockdown,” explains the real estate law expert. “You can no longer reject such demands from tenants in general.”

But he too emphasizes that the ruling did not bring about the final clarification of the question that many had hoped for on the basis of a blanket solution. “The bottom line is that many questions remain unanswered,” he says.

More: You can find the current developments in the pandemic in our Corona news blog

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