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Coronavirus – relieving cashflow through rent deferrals – Germany

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Liquidity relief through rent deferral

Besides personnel costs, rents are the largest cost factor for most businesses. For this reason, agreements on rent payment deferrals lead to immediate and significant relief and considerably increase the liquidity of the company. By deferring rent payments, companies have more cash left to secure and continue their business in the crisis. The landlords' contribution to the financial survival of the companies is extremely important from a macroeconomic perspective. Contrary to the expectations of the legislator - who wanted to protect the tenants from termination due to non-payment of rent - there is currently a great willingness on the part of landlords to find a solution together with the tenants. But before a well-intentioned rent deferral is agreed upon, both the landlord and the tenant should get an overview of which aspects can be important over and above tenancy law. In the following we have summarised the most important points for you.

Tenancy law – COVID-19 does not suspend payment of rents

As long as the landlord supplies the leased property to the tenant, the tenant is obliged to pay the agreed rent. The fact that the tenant cannot use the premises during the coronavirus crisis, or can only use them to a limited extent (e.g. closing/restricted opening of restaurants, shutdown of hotels for touristic purposes, sales area restrictions in the area of retail) due to official orders does not principally suspend the tenant's obligation to pay the rent. Although the COVID-19 legislation makes it easier for the tenant, because the landlord must not terminate the lease agreement if the tenant can credibly prove that the non-payment of the rent is connected to the COVID-19 pandemic, the due date of the rent remains basically the same (please see our COVID-19 briefing for landlords/tenants in German).

The non-payment of the rent can even increase the financial burdens, because the tenant has to pay interest on arrears of 5 percentage points above the respective basic interest rate, or 9 percentage points above the basic interest rate in case of commercial leases between entrepreneurs, as well as related legal prosecution costs of the landlord.

| For this reason, consensual solutions between landlord and tenant are likely to be the preferred option to improve the tenant's liquidity situation, e.g. by (partial) deferral of the rent payments or the agreement of a turnover-related rent.

| The deferral agreement must usually be in writing. This is important because a breach of a written form requirement agreed in the lease agreement constitutes a potential risk for termination.

Agreement on turnover-based rents

There may be regulatory restrictions for landlords in the regulated sector, in particular investment funds under the German Alternative Investment Fund Manager Directive ("Kapital-anlagegesetzbuch" or "KAGB"), when agreeing turnover-based rents. In the view of the German Federal Financial Supervisory Authority ("BaFin"), turnover-related rents constitute an entrepreneurial risk that goes beyond the rental risk. However, there are no precise limits available. Only in case of shopping centres BaFin considers a pure turnover-based rent of no more than 10% of the total income to be permitted under regulatory provisions. This limit, which has been heavily criticised in literature, is not supposed to be transferable to other properties, such as hotels.

| Where it is considered to agree turnover-based rents, it should be clarified if and to which extent these may be restricted or limited under the applicable regulatory provisions or fund rules of an investment fund.

| From a German Investment Fund Tax perspective, turnover-based rents, are considered admissible.

VAT risks

In principle, the landlord has to calculate the VAT on the agreed rent (so-called debit taxation), i.e. in the case of a lease agreement and invoicing based on this agreement, VAT becomes due for the respective leasing period, i.e. typically monthly - irrespective of the actual payment of the rent. However, he can also choose to calculate and pay the VAT at the time of rent payment (so-called actual taxation).

If the landlord has chosen actual taxation regime, it is currently legally unclear when the tenant is entitled to deduct input VAT, i.e. either for the respective leasing period or when he actually pays the rent.

The Hamburg Finance Court (decision of 10.12. 2019, 1 K 337/17) has recently referred this question to the European Court of Justice (ECJ, Ref: C-9/20): In the case at hand both tenant and landlord had opted to subject the rents to VAT and both had chosen the actual taxation. In the years 2009 to 2012, the tenant had received partial rent deferrals, which he paid in the following years 2013 to 2016. He deducted the VAT included in the rents as input VAT when paying the deferred rents in the years 2013 to 2016. However, in line with the applicable German law, the tax office denied him to deduct input VAT because the input VAT should have been deducted when the rental revenues had originally been payable in the years 2009 to 2012 - which, however, failed because these years were already settled.

In the view of the Hamburg Finance Court, there are doubts as to the compatibility of the German VAT rules with EU VAT law, because the latter have not fully been implemented into German VAT law: According to EU law, in this case input VAT could have been deducted when paying the rent if the landlord had included a corresponding note on the invoice.

When agreeing on rent deferrals, it is recommended from a VAT point of view for

| landlords switching to actual taxation to save liquidity by paying VAT on actual payment of rent

| tenants continuing the deduction of input VAT on the entire rent at the time of the contractually agreed due date of the rent as well as on presentation of a proper invoice until the decision of the EJC will be published, or

| tenants with actual taxation, ensuring that the years in which rent deferrals are granted the corresponding tax assessments will be kept open with reference to the ongoing ECJ case to ensure full input VAT deduction.

Insolvency law

From the point of view of insolvency law, the landlord generally documents by agreeing to a rent payment deferral that he is aware of the tenant's current liquidity problems. This knowledge can possibly lead to the fact that any subsequent payments - i.e. after expiry of the rent payment deferral - can be contested in the event of insolvency.

In principle, under the applicable law there is a presumption that if a payment facilitation, e.g. a deferral, was agreed, the creditor is deemed of not having been aware of a potential insolvency of the debtor.

If the temporary illiquidity of the tenant is a consequence of the COVID 19 pandemic, payments made by the tenant at least until 30 September 2020 are in principle not contestable if they are executed as contractually agreed and not before they fall due.

If, however, the landlord as creditor has been aware that the tenant's restructuring and financing measures were not sufficient to remedy an insolvency, this COVID-exception does not apply.

Against this background, the deferral agreement should, if applicable, contain a statement that the deferral is made purely as a preventive measure to secure the company or tenant becoming temporarily illiquid and that the tenant was solvent at the time of the deferral agreement.

Collateralisation risks

Landlords face the problem, especially in the case of longer-term rent losses, that they are unable to service their existing loans and the banks are unlikely to make further funds available to him due to the deterioration in the creditworthiness situation.

Legislation has introduced protection against termination for tenants affected by the coronavirus crisis. Unlike banks, however, landlords currently do not receive any protection from the state or the state-owned development bank KfW ("Kreditanstalt für Wiederaufbau"). The only security they have is the rent deposit, which usually comprises only 2 to 3 months' rent.

However, where the rent payment deferral agreement provides additional collateral which has not been included in the original rental agreement, this can lead to problems in the event of the tenant's insolvency, because the insolvency administrator or trustee can reclaim the collateral.

To protect the landlord, we take the view that KfW guarantees for rent deferrals should be provided, which the landlord can use for rent deferrals exceeding the available rent deposits. Corresponding entries for changes in the law by the associations have already been made on our initiative.


To accommodate the tenant’s needs during the current coronavirus crisis, agreements on rent payment deferrals should be reviewed thoroughly from a legal and tax perspective for both parties. Also, it may be worth waiting for further clarification by either legislator or jurisdiction to ensure a proper assessment of potential risks inherent to the deferral.