Law on the mitigation of Covid 19 effects - An overview


On 23 March 2020, the Federal Ministry of Justice and Consumer Protection in Germany submitted a draft law to the Federal Cabinet, that aims to mitigate the economic, social and legal effects of the corona pandemic as far as possible. The Law to Mitigate the Consequences of the Covid 19 Pandemic in Civil, Insolvency and Criminal Proceedings (Printed Matter 19/18110) ("the Law") was adopted by the Bundestag on Wednesday, 25 March 2020 and approved by the Bundesrat on Friday, 27 March 2020. The following is an overview of the most serious regulations.

1. Contract law - Temporary right to refuse performance until 30 June 2020

The Law introduces a temporary extraordinary right to refuse performancefor consumers and micro-entrepreneurs arising from continuing obligations. In order to secure their livelihoods, consumers are entitled to refuse their obligations arising from continuing contracts for necessary services of general economic interes and which were concluded before 8 March 2020, prospectively until 30 June 2020. This only applies if the livelihood of the consumers or their dependant relatives would otherwise be threatened due to circumstances caused by the Corona pandemic,. This also applies to micro-entrepreneurs (up to 9 employees and 2 million euros annual turnover or balance sheet total), if the business would otherwise be jeopardised due to the crisis. The above right to refuse performance shall not apply if its application would jeopardise the economic basis of the creditor's business or his reasonable livelihood. In this case the debtor shall have a right of termination. Rental and lease agreements as well as loan agreements are excluded from this general regulation, as are employment contracts.

Rental and lease agreements are, however, subject to special regulations which apply to all tenancies (residential and commercial), even if the tenant is not a consumer or micro-entrepreneur. According to this provision, landlords may not terminate lease agreements until 30 June 2022 for default in rent during the period from 1 April 2020 to 30 June 2020, if the default is caused by the effects of the Corona pandemic. The law does not establish a right of the tenant to refuse payment. The payment obligation as such remains in force; with regard to due date and default, the general provisions of the German Civil Code (BGB) remain applicable.

Special rules also apply to consumer loan agreements concluded before 15 March 2020. The interest and redemption payments due in each case will be deferred for three months for the period from 1 April 2020 to 30 June 2020. That is if the consumer suffers a loss of income due to the Corona pandemic, which makes it economically unreasonable to pay the instalments. Termination by the creditor due to default of payment and deterioration of financial circumstances is excluded during the deferment period.

2. Regulations on insolvency law

If a limited liability company is over-indebted and cannot meet its payment obligations and loans in the foreseeable future, the managing director is obliged to submit an application for insolvency to the competent local court within three weeks. Section 1 of article 1 of the Law suspends the obligation to file an insolvency petition pursuant to Section 15a InsO and Section 42 BGB until 30 September 2020. This provision does notapply if the insolvency maturity is not due to the Corona- pandemic (whereby the burden of proof does not lie with the company, but with the party claiming the obligation to file for insolvency) or if there is no prospect of eliminating an inability to pay.

In the event of insolvency, there is a fundamental risk that contractual partners of the debtor will have to disable services and payments as a result of subsequent insolvency challenges by the insolvency administrator. This could deter business partners from making payments and, in particular, from making payments or facilitating payments, thus posing an additional threat to the companies concerned. For this reason legal acts which have granted or enabled the other party to secure or satisfy claims which the other party could rightfully claim are not contestable in subsequent insolvency proceedings, if the contractual partner was not aware that the debtor's restructuring efforts were not suitable for eliminating an insolvency that had occurred.

We will keep you informed about further developments and are happy to answer any questions you may have in this context.