Draft legislation to mitigate COVID-19 pandemic

1. Background

The Federal Ministry of Justice and Consumer Protection has published a draft legislation to mitigate the consequences of the COVID-19 crisis on 23 March 2020 which shall presumably become effective as of 1 April 2020. The purpose of such legislation is to mitigate the economic impact of COVID-19 and to support all sizes of companies, credit institutions, but also individuals (eg tenants, borrowers) to overcome the crisis. The full text can be found here.

The draft legislation includes measures in relation to civil law, insolvency and criminal procedure law. We have summarised the most important aspects (with a focus on civil law and insolvency law) below.

Please note that this summary does not include an exhaustive overview of all matters covered by the draft legislation. Further, as certain matters are still debated, it cannot be excluded that the final law might look different and include different/additional provisions (in particular with respect to scope of application and time periods/end dates).

2. Civil law

2.1 Loan Agreements

The most important implications with respect to consumer loan agreements are the deferral of payments for a certain period and the restriction of termination rights as set out in more detail below.

In case that a borrower cannot make (re)payments under a consumer loan agreement because it suffers a loss of income due to exceptional circumstances caused by the spread of the COVID-19 pandemic which make it unreasonable (unzumutbar) to expect him to make the payments, the claims of the lender for payment of capital and interest is deferred for 3 months. This shall apply to loan agreements which have been entered into prior to 15 March and to payments under the loan agreement which become due between 1 April 2020 and 30 June 2020. The termination right of the lender due to a default of payment, significant deterioration of the financial situation of the borrower or the value of a security granted are excluded during the deferral period. The parties may negotiate different contractual solutions, but if no solution is found for the period after 30 June 2020 the term of the loan agreement will be extended for 3 months and payment will not become due during this extended period. A deferral and/or the restriction of the termination right shall not apply, if these restrictions are unreasonable (unzumutbar) for the lender. As of now, these rules only apply to consumers, but the draft legislation includes an authorisation to extend the application of these rules to other persons/companies (eg micro companies (Kleinstunternehmen) and other contracts.

According to the draft legislation the date 15 March 2020 has been chosen as target date as from that date the crisis was not unforeseeable anymore.

Please note that a previous draft of the relevant legislation did not restrict the relevant rule to consumers, but also included other loan agreements (eg with companies). Further, the relevant deferral period was 6 months instead of 3 months.

2.2 Lease Agreements

According to the draft legislation a lessor may not terminate a lease agreement (residential or commercial use), if the tenant is not able to pay the rent which becomes due during the period from 1 April 2020 until 30 June 2020 in case that such non-payment is based on the impact of the COVID-19 pandemic. This also applies to leasehold agreements (Pachtvertrag).

In case of dispute whether the non-payment is based on the impact of the COVID-19 pandemic or not, the tenant needs to substantiate (glaubhaft machen) that the tenant’s non-payment is caused by the COVID-19 pandemic. Tenants of commercial real estate such as restaurants, hotels etc. which have been closed due to the COVID-19 pandemic have a good argument that such restrictions/closure of their business have led to the non-payment of the rent.

The restriction of the termination right shall apply until 30 June 2022. As a consequence, the tenant is able to pay the rent (not paid during the period from 1 April 2020 until 30 June 2020) until 30 June 2022 to avoid a termination. However, as of 1 July 2022 the lessor may terminate the lease agreement because of the non-payment according to the general statutory provisions. Other termination rights of the lessor remain unaffected, eg if there is another breach of the lease agreement.

The restriction of the termination right may be extended by way of an ordinance (Rechtsverordnung) in relation to non-payment of rents during the period from 1 July 2020 until 30 September 2020.

These provisions might result into an unfavourable cash flow interplay between the suspension of the termination rights of a lessor, who in turn is obliged to make payments under the connected financing arrangements (as no suspension of termination applies to commercial loans). In addition, the lessor might also be prevented to file for insolvency as a creditor as set out in more detail below.

2.3 General right to refuse performance (Allgemeines Leistungsverweigerungsrecht)

Consumers may refuse to perform their obligations under a consumer continuing contract (Dauerschuldverhältnis) entered into prior to 8 March 2020 until 30 June 2020, if, as a result of circumstances arising from the COVID-19 pandemic, the consumer would not be able to perform its obligations without jeopardising his or her reasonable subsistence or that of his or her dependants. This right of refusal relates to all material consumer continuing contracts that are necessary to cover services of appropriate general interest (Eindeckung mit Leistungen der angemessenen Daseinsvorsorge). The general right of refusal shall not apply if such right is unreasonable (unzumutbar) for the creditor, in particular if the economic basis of the creditor’s business would be jeopardised. In addition micro companies (Kleinstunternehmen) may also refuse to perform their obligations under consumer continuing contract under certain circumstances.

This general right of refusal does not apply to lease agreements and loan agreements which are already covered by other provisions (see above) and employment contracts

3. Insolvency law

3.1 Suspension of the obligation to file for insolvency

The obligation to file for insolvency shall be suspended until 30 September 2020. The suspension of the obligation to file for insolvency should not apply if the insolvency is not caused by the effects of the COVID-19 pandemic or if there is no prospect to eliminate the cause of illiquidity (Zahlungsunfähigkeit) that has already occurred. The law assumes that if the debtor was not illiquid on 31 December 2019, the insolvency maturity (Insolvenzreife) is based on the COVID-19 pandemic and that there is a prospect to eliminate the illiquidity. The suspension of the obligation to file for insolvency shall have retroactive effect and shall apply as of 1 March 2020.

3.2 Consequences of the suspension

As a consequence of the suspension, inter alia;
(a) payments made in the ordinary cause of business, in particular payments which serve to maintain or resume business operations or to implement a reorganisation concept shall be allowed (i.e. restricting liability of managing directors);
(b) the repayment of a new loan (prolongations/novations and similar acts are not covered) granted during the suspension period until 30 September 2023 and the provision of collateral to secure such loans during the suspension period shall not be deemed to be detrimental to creditors and
(c) the granting of loans and collateral during the suspension period shall not be regarded as an contribution to delaying insolvency (sittenwidriger Beitrag zur Insolvenzverschleppung).

Paragraphs (b) and (c) shall in particular protect credit institutions which are willing to grant new loans and shall prevent the usual issues of “lender liability” and “equitable subordination” in such scenarios.

Paragraphs (b) and (c) shall also apply to loans granted by the Kreditanstalt für Wiederaufbau (KfW) and its financing partners or to loans granted by other institutions under governmental aid programmes in connection with the COVID-19 pandemic, even if such loan is granted or secured after the end of the suspension period, and for an unlimited period of time for their repayment.

3.3 Petition for filing of insolvency by creditors

A petition for filing of insolvency by a creditor of a debtor shall also be restricted during a three months period. Such application is only valid, if the reason for opening insolvency proceedings already existed as of 1 March 2020.

4. Other provisions

The draft legislation also includes provisions in order to facilitate holding of general meetings of stock corporations and other legal forms without physical meetings. In addition, the period of time pursuant to § 17 sub-section 2 sentence 4 Transformation Act (Umwandlungsgesetz) is extended to twelve months in order to prevent the failure of conversion measures due to the lack of a possible meeting.

Further, the usual periods of interruption should be additionally suspended for a maximum period of two months in relation to criminal trials that cannot be properly conducted due to measures to prevent the spread of the COVID-19 pandemic.

Please do not hesitate to contact us or your usual contact at Simmons & Simmons in case you have any questions in relation to the above.

See our Coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.