by Johannes Ungerer*
The Coronavirus pandemic poses unprecedented challenges to private legal relations. These challenges demand that States provide measures that go beyond traditional private law responses such as force majeure, material adverse change or frustration. Enacting moratoria is among the steps which have been undertaken by the United Kingdom and Germany to provide necessary ‘breathing space’, and is the subject of this comparative paper.
The paper will begin by looking at the general modifications in private law that have been made in response to the Coronavirus pandemic. This will be followed by an analysis of tenancies, which have been given special protection by legislators. Finally, the consequences for borrowers are addressed. The purpose of this paper is to inform about the recent legislative actions taken. This might not only be instructive for their evaluation and future amendment, but also for questions arising in cross-border settings.
1. Moratoria for debts and other obligations
Understandably, neither the UK nor Germany has enacted a universal moratorium for private debts and other obligations. Such a universal measure would suspend and probably exterminate private trade and business, leading to an economic meltdown. In principle, private parties have to stick to their contractually agreed obligations, unless they can rely on a force majeure clause or renegotiate contract terms against the background of the Coronavirus situation and the potential disruption of an entire transaction.
However, for particularly vulnerable groups, certain modifications have been introduced. In Germany, these can be seen in particular in the Act to Mitigate the Consequences of the Coronavirus Pandemic under Civil, Insolvency, and Criminal Procedural Law. The Act established a moratorium for the benefit of consumers and microenterprises (enterprises with fewer than ten employees and an annual turnover of not more than two million euros). Accordingly, consumers are exempted until 30 June 2020 from an obligation under a business-to-consumer contract, which stipulates continuous obligations and was concluded before 8 March 2020, if they are unable to meet their obligation without jeopardising their reasonable livelihood or that of their dependants due to circumstances arising from the Coronavirus pandemic. The right to refuse performance exists in respect of all continuous obligations that qualify as ‘essential’. Here, ‘essential’ relates to goods and services which are necessary to adequately provide for one’s life. Similarly, for microenterprises, a moratorium is granted for essential continuous obligations which cannot be fulfilled at all, or at least not without endangering the economic basis of the business. In this respect, ‘essential’ obligations are those that are necessary to adequately provide for business continuity.
In the UK, Parliament adopted the Coronavirus Act 2020. The British legislation does not provide for moratoria, or anything similar, for consumers or small businesses on a general level, but rather makes special provision for tenancies, which will be addressed in the subsequent section. Some relief has been brought to consumers by non-legally-binding governmental and administrative guidance to financial institutions. The British Financial Conduct Authority (FCA) has proposed a range of temporary measures to banks. The proposals include that banks provide support to customers who are struggling with payments due to the Coronavirus pandemic. Most importantly, the implemented measures comprise a three-month payment freeze on personal loans and credit cards. From a socio-functional perspective, considering how consumers pay for purchases for their daily lives, this moratorium may be of comparable effect to that enacted in Germany, albeit limited to payments to financial intermediaries and not to the immediate creditors.
2. Special protection for tenants
Special protection is now granted for tenants by law both in Germany and the UK. As it will emerge from the comparison, the legislative measures are quite similar and only differ as to whether or not they distinguish between commercial and residential lettings. The common ground seems to be that maintaining one’s rented dwelling and business premises in these times of crisis is of paramount importance for every individual, and therefore the State, and this has led to the adoption of moratoria for tenants. However, protecting the tenant as one of the parties to a bilateral contract shifts the financial impact onto the landlord. This consequence will be addressed further below.
In the UK, the Coronavirus Act 2020 stipulates a bifurcated regime. A forfeiture moratorium was introduced for commercial tenants in financial difficulties. Businesses are given blanket protection against forfeiture for non-payment of rent to their landlords during the approximately three-month period from 26 March to 30 June 2020, regardless of the reason. This applies to all commercial tenancies under the Landlord and Tenant Act 1954 of more than six months. As forfeiture (termination of the tenant’s lease) is the most serious of the remedies available to a landlord, the moratorium is a meaningful measure. Nevertheless, deferring only one of the remedies landlords may impose might prove insufficient for many businesses. For example, landlords maintain the options of withdrawing outstanding amounts from a rent deposit or initiating a commercial rent arrears recovery process (CRAR). Most importantly, tenants drawing on the moratorium will need to be prepared to pay their arrears in addition to their ongoing rent in July, when the currently provided period expires, unless the moratorium is extended. This could be the straw that breaks the camel’s back. In addition, winding up proceedings can still be commenced against tenants who are in arrears at any time, as such proceedings have not been suspended.
A comparable extension of (at least) three months was made with regard to notice periods for practically all residential tenancies in the UK. The extension applies to a notice served during the period from 26 March to 30 September 2020 – i.e. already two months longer than for businesses – and further extension is possible. This moratorium is a significant modification compared to the ordinary requirements of the Housing Act 1988, under which a claim for recovery of possession based on outstanding rent can be commenced just two weeks after serving a notice. However, for the current most common form of residential tenancy – the assured shorthold tenancy – this means only an increase of one month in addition to the two months which are ordinarily required on expiry or termination (and a longer notice period may anyway be required when terminating a periodic tenancy). Further extension of the notice period to six months would be permissible by way of secondary legislation, but this power has not yet been exercised by the Secretary of State.
Germany enacted a universal protection of tenancies, which does not distinguish between commercial or residential purpose and could therefore be seen as somewhat more straightforward. The restriction on the termination of tenancies, which effectively resembles the British approach in substance, was introduced by the above mentioned Act to Mitigate the Consequences of the Coronavirus Pandemic. The landlord may not terminate a tenancy on the sole ground that the tenant cannot pay rent, which is due in the three-month period from 1 April to 30 June 2020 (similar to businesses in the UK), if the non-performance results from the pandemic. As a special requirement set out by the Act, the tenant must, for instance by an affirmation in lieu of an oath, substantiate the connection between the pandemic and non-performance in order to claim protection. In terms of time, the application of the exclusion of termination is limited to two years until 30 June 2022. Notably, a right of termination for any other reason is not affected by the newly introduced restriction.
3. Resulting issues for borrowers
Cash-flow and other financial problems, which consumers or tenants are experiencing, are pushed up the chain to their creditors, such as retailers or banks in general and, in the case of protection for tenants, landlords in particular. Their financial obligations, for instance paying off their loans and mortgages, have not received general protection in turn. Such general protection would, as initially stated, be undesirable in terms of policy, if not impossible in practice, because it would result in a general collapse of the economy.
The UK and Germany have, to slightly varying extents, addressed specific issues that affect borrowers as a result of the moratorium legislation and the recommendations. Among the temporary measures, which have been suggested to and have been implemented by banks in the UK, is a three-month payment holiday on mortgage payments. This corresponds conveniently to the three-month moratorium granted to tenants, and it provides for equal protection of homeowners against their monthly repayment obligations.
The German legislator grants relief only to consumer borrowers. For consumer loan agreements concluded before 15 March 2020, claims of the lender for repayment or interest due from 1 April to 30 June 2020 are deferred for a period of three months if the consumer has lost income as a result of the exceptional circumstances caused by the Coronavirus pandemic, which make it unreasonable to expect the consumer to pay. Similar to the Act’s moratorium discussed above, it is not reasonable to expect consumers to pay if their reasonable livelihood or the reasonable livelihood of their dependants is at risk.
Besides all of the above issues of substantive law, it has to be borne in mind that courts might not be in the position to hear claims, especially where the parties or lawyers would be required to attend in person. This might not be an intentional measure of relief but could essentially achieve a similar effect.
The UK and Germany have adopted largely similar measures to respond to the challenges posed by the Coronavirus pandemic to private legal relations. While shunning an unviable general amnesty for debts and other obligations, legislation and policy advice has established moratoria for consumers and, in Germany, microenterprises, with both jurisdictions also granting special protection to commercial and residential tenants. The financial distress passed on to borrowers, such as landlords, has been alleviated somewhat by corresponding moratoria with regard to their repayment obligations.
* Erich Brost Lecturer in German Law and EU Law, Faculty of Law and St Hilda’s College, University of Oxford.↑
- See British Institute of International and Comparative Law, concept note of a meeting on 7 April 2020, https://www.biicl.org/breathing-space↑
- Article 5 Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht vom 27.3.2020, English translation available at https://www.bmjv.de/SharedDocs/Gesetzgebungsverfahren/Dokumente/Bgbl_Corona-Pandemie_EN.pdf↑
- Article 240 § 1 EGBGB (Einführungsgesetz zum Bürgerlichen Gesetzbuche = Introductory Act to the Civil Code), with reference to the European Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises (OJ L124/36). ↑
- Coronavirus Act 2020 of 25 March 2020, http://www.legislation.gov.uk/ukpga/2020/7/contents/enacted↑
- See https://www.fca.org.uk/consumers/coronavirus-information-personal-loans-credit-cards-overdrafts↑
- Section 82 Coronavirus Act ↑
- Section 81 and Schedule 29 Coronavirus Act ↑
- Para 1 Schedule 29 Coronavirus Act 2020. ↑
- Section 8 Housing Act 1988 (Grounds 8, 10 and 11) ↑
- Section 21 Housing Act 1988 ↑
- Para 13 Schedule 29 Coronavirus Act 2020 ↑
- Supra (n 2) ↑
- Article 240 § 2 EGBGB ↑
- § 294 ZPO (Zivilprozessordnung = Code of Civil Procedure), English translation available at https://www.gesetze-im-internet.de/englisch_zpo/index.html↑
- See https://www.fca.org.uk/consumers/mortgages-coronavirus-consumers↑
- Article 240 § 3 EGBGB ↑