Category: English

A possible suspension of commercial and professional rents during the state of crisis

Luxembourg, 2020-06-01

Government measures taken in order to fight COVID-19 have forced many businesses to either reduce or entirely stop their activities. As these businesses now face serious cash flow problems, more and more voices are calling for a suspension of contractual obligations in commercial and professional leases.

Lessors remain free to terminate the lease on the ground of non-payment of rent (Art. 1762-11, Luxembourg Civil Code). However, evictions are suspended until the end of the state of crisis (Art. 5 (1), amended Grand-Ducal Regulation of 25 March 2020).

Thus, a Bill No. 7551 on rent suspension for commercial and professional leases during the state of crisis and amending the Law of 4 December 1967 on income tax has been submitted to the Chamber of Deputies on 6 April 2020.

The key points of this bill, which has not yet been adopted, are:

• The suspension of the obligation to pay rent and the suspension of the lessor’s right to terminate a lease for non-payment of rent during the state of crisis;
• The lessee’s obligation to pay rent arrears until 30 June 2021;
• An incentive fiscal mechanism allowing the lessor, who reduces or waives rent during the state of crisis, to fiscally deduct the financial concessions which are being assimilated to expenses (amount limited to EUR 10.000).

There is also a public petition N° 1581 launched on 8 May 2020, with already over 580 signatures, advocating for an adaption of commercial rents according to turnover in case of extraordinary events such as the COVID-19 crisis and the possibility for the lessor to claim compensation from the government for the lost rent.

In our opinion, the lessee’s obligation to pay rent is already suspended.

Art. 1719 3° of the Luxembourg Civil Code provides that the lessor has to ensure the lessee’s quiet possession of the leased premises during the term of the lease.

Whilst lockdown restrictions apply, a lessee could argue that the lessor cannot fulfil the aforementioned duty anymore because the activity agreed by contract at the beginning of the lease can no longer be executed.

The lessee could invoke the exception of non-execution on the basis of Article 1134-2 of the Luxembourg Civil Code which provides that each party can suspend the execution of his obligation if the other party has not executed his own obligation.

However, the lessor could justify his failure to assure the lessee’s peaceful enjoyment of the leased premises by invoking that government action during COVID-19 crisis constitutes a force majeure (an external cause which cannot be attributed to the parties of the lease contract) and that he is therefore exonerated of his contractual liability (Art. 1147 and 1148, Luxembourg Civil Code).

According to Luxembourg case law in case of temporary unforeseen events, the debtor’s obligation is only suspended until the end of the obstacle.

The government action during the state of crises could be considered a temporary unforeseen event.

Thus, the suspension of the lessee’s obligation to pay rent ends as soon as his business can resume the activity.

Author: Anne-Marie Schmit, attorney at law

ETUDE ANNE-MARIE SCHMIT

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New ruling on the scope of the provision on presumption

After the Federal Court of Justice (BGH) had already dealt with the statutory presumption of fact in Section 133 (1) sentence 2 of the German Insolvency Code InsO in its decisions of 3 March 2022 (IX ZR 78/20) and 23 June 2022 (IX ZR 75/21), it took up this aspect again in a decision of 26 October 2023 (IX ZR 112/22) published only now in January 2024.

This confirms our assessment published at the time, according to which the Federal Court of Justice wishes to give the presumption of Section 133 (1) sentence 2 of the German Insolvency Code (InsO) more significance again. It can be assumed that the successive changes in the chairmanship of the IX. Civil Senate responsible for bankruptcy proceedings in the last three years are responsible for this change in case law to the detriment of creditors affected by avoidance actions.

Knowledge of the intention to disadvantage creditors

According to the provision in section 133 (1) sentence 2 of the German Insolvency Code (InsO), the presumption is that the opposing party is aware of the insolvency debtor’s intention to disadvantage creditors if he knew that the insolvency debtor was insolvent. On the other hand, knowledge of the impending insolvency can only be considered in cases in which the opposing party has not provided any direct consideration for the contested legal act. In this respect, the reform of avoidance law of 5 April 2017 has fortunately slightly improved the legal position of suppliers and service providers.

Following the decision of the Federal Court of Justice of 6 May 2021 (IX ZR 72/20), many creditors had assumed that the scope of statutory presumption of Section 133 (1) sentence 2 of the German Insolvency Code (InsO) is now only limited to exceptional cases.

Although the two decisions of 3 March 2022 and 23 June 2022 had brought a little more legal certainty for those creditors who received payments on the basis of a conclusive restructuring concept, but at the same time already clearly emphasised that the scope of Section 133 (1) sentence 2 of the German Insolvency Code (InsO) should not be restricted.

Key points of the BGH ruling IX ZR 112/22

In the now published decision of 26 October 2023, the Federal Court of Justice is once again giving particular attention to the scope of provision on presumption of Section 133 (1) sentence 2 of the German Insolvency Code (InsO).

The key points of this decision are clear: if the opposing party is aware of the insolvency of the subsequent insolvency debtor, the factual presumption of fact of Section 133 (1) sentence 2 of the German Insolvency Code (InsO) argues for the contesting insolvency administrator, i.e. they have provided evidence that the opposing party was aware of the debtor’s intention to disadvantage creditors.

For his part, he must now refute the legal presumption and provide full proof that he was not aware of the insolvency debtor’s intention to disadvantage creditors. To this end, he has to demonstrate to the conviction of the court that he can assume that the debtor will be able to fully satisfy his other existing and foreseeable additional creditors in the time available for this purpose. This alone puts huge obstacles in the way for an outside creditor who, from experience, does not know the economic situation of his debtor. However, the Federal Court of Justice has added another obstacle that is unlikely to be overcome: the opposing party may only make this forecast on a sufficiently reliable basis for assessment. So, in other words, he cannot trust vague information from the debtor, and mere hope that the other creditors will also be satisfied is not enough for the Federal Court of Justice. Rather, a sufficiently reliable basis for assessment is required; when this is given, the Federal Court of Justice will then leave it to the courts of lower instances to decide when this is the case.law.

As a result, this means that – once the presumption of Section 133 (1) sentence 2 of the German Insolvency Code (InsO) intervenes in favour of the insolvency administrator – the opposing party will only be able to refute this presumption in exceptional cases, for example if a reliable restructuring concept is available (for its requirements: see the Federal Court of Justice ruling of 3 March 2022 – IX ZR 78/20 and of 23 June 2022, IX ZR 75/21).

Conclusion

The Federal Court of Justice has not yet ruled on whether the assumption laid down in Section 133 (3) sentence 2 of the German Insolvency Code (InsO) in favour of the opposing party intervenes with regard to the opposing party not being aware of the insolvency of the debtor when concluding a payment agreement or granting payment facilitation. The Federal Court of Justice also leaves open the period of time it wants to use as a basis for the complete satisfaction of all creditors with the wording “in the available time”. The legal uncertainty for creditors will thus significantly increase again.

What does this mean for business partners of companies that are experiencing payment difficulties?

They should try to comply with the requirements of Section 133 (3) sentence 2 of the German Insolvency Code (InsO) in order to be able to claim at least this legal presumption of fact in favour of the opposing party.

In general, it is advisable to switch to the so-called cash transactions (Section 142 InsO) to continue the business relationship if a business partner has payment difficulties and to transfer any arrears to a payment agreement. However, this must be designed in a legally secure manner in order to actually be able to make use of the desired granting of privilege in the event of a contestation. Our insolvency law experts will be happy to help you with this.