On 1 April 2020, the Act to Mitigate the Consequences of the COVID-19 Pandemic in Civil, Criminal and Insolvency Law (Corona Mitigation Act) came into force.
The Act accompanies measures already adopted in the areas of financing, labour law and tax law. Fundamental principles of civil, insolvency and corporate laws will be temporarily suspended or modified.
In addition to a large number of other changes, the following topics should be highlighted, which may have consequences for franchisors, franchisees and franchise agreements:
1. Right to refuse payments based on continuing obligations
Micro-entreprises may refuse to pay until 30 June 2020 for "essential continuing obligations" which they have entered into before 8 March 2020. Micro-entreprises are defined as enterprises with up to 9 employees and up to EUR 2 million turnover per year or up to EUR 2 million balance sheet total. This includes many franchisees in various industries but also young franchisors. Accordingly, micro-enterprises are granted the right to refuse payments, in particular, if
the micro-enterprise is unable to provide the payment due to circumstances arising from the pandemic, or
the micro-enterprise would not be able to provide the payment without jeopardizing the economic basis of its business.
Essential continuing obligations
The right to refuse payments shall exclusively concern essential continuous obligations which are necessary for the appropriate continuation of the business. This ensures that micro-entrepreneurs are not cut off from basic services (electricity, gas, water, telecommunications, compulsory insurance) because they cannot meet their payment obligations.
The franchise agreement is also a continuing obligation. In so far as the services provided by the system are considered essential for the franchisee's business, franchisees, if they are micro-enterprises, would have the option of refusing to pay any royalties, fees etc. due for the time being. Unfortunately, the legislator has not made a clear statement in this regard. However, it is doubtful whether the legislator actually intended to put franchisors in particular on the same level as companies providing general and basic services to the public.
The right to refuse payments does not apply if is unreasonable for the franchisor because it would endanger the economic basis of his business or if the non-payment would endanger the franchisor's reasonable livelihood.
The Federal Government has the option of extending the right to refuse performance by statutory order until 30.9.2020.
Since interpretation risks arise on both sides and the partnership is to continue as undisturbed as possible after the moratorium expires, it is advisable in any case to reach an amicable agreement that is reasonable for both sides.
2. No termination for rent arrears from the period from 1 April to 30 June 2020
In their role as tenants, franchisors and franchisees may benefit from restrictions on their landlords' right of termination: Landlords are not allowed to terminate the lease due to rent debts from the period from April 1, 2020 to June 30, 2020, if the non-payment is caused by the effects of the COVID-19 pandemic.
Continued existence of other tenancy law provisions
This limitation of the right of termination does not extend to other grounds for termination. Landlords are at liberty, in the event of corresponding termination rights, to terminate the tenancies on the basis of rent arrears which have accumulated in an earlier period or which will result from a later period or any other legal basis for termination outside the pandemic’s reach.
The rules of civil law on maturity and default are also not affected by this. As a result, tenants must continue to make their payments on time and may be in arrears if they do not make them on time, and must pay interest on arrears.
Credible evidence that the loss of rental payments is due to the effects of the COVID-19 pandemic
The Corona Mitigation Act requires the tenant to provide credible evidence that COVID-19 pandemic is the cause of the non-payment. In order to substantiate this, the tenant can use appropriate evidence, an affidavit in lieu of oath or other suitable means. This may be possible by
the proof of application or the certificate on the granting of state benefits,
other proof of income or loss of earnings.
Franchisees or franchisors as tenants of commercial property can also substantiate this by presenting the official order prohibiting or significantly restricting their operations. This currently affects e.g. restaurants or hotels, for example, whose operation is prohibited in many States, at least for tourism purposes.
Duration of the scheme
This restriction on termination ends at the end of 30 September 2022 (Art. 240, Section 2 para. 4 Corona Mitigation Act). Subsequently, the contract can be terminated again because of these payment arrears, provided that they still exist.
The Federal Government has the option of extending the restriction on termination by statutory instrument to payment arrears that have arisen in the period 1 July 2020 to 30 September 2020 at the latest.
In any case, direct contact with the landlord should be sought in order to reach an amicable agreement (e.g. on deferral, payment by instalments, interest, etc.). Independent of this, any payments should currently always be made subject to reservation and should be marked as such. This can be particularly advantageous in retrospect if courts should come to the conclusion in future that tenants of properties that are tied to a specific purpose (particularly widespread in hospitality industr) were entitled to a reduction in price during the closure order.
3. Fewer formalities for corporations
Due to the restrictions on gatherings and personal contact, personal participation of the shareholders in any corporations’ shareholders' meetings is currently not easily possible. The Corona Mitigation Act allows for the entire year 2020 to pass shareholder resolutions without a personal meeting merely by voting in text form with the required majorities.
In addition, the new Act has shortened the periods for convening general meetings. Furthermore, stock corporations can pay an advance dividend even without authorization in the articles of association.
4. Obligation to file for insolvency is suspended
Under German insolvency law, a corporation has a maximum of three weeks to file an application for insolvency proceedings from the time the reason for insolvency (inability to pay or over-indebtedness) arises.
The obligation to file for insolvency is suspended until 30 September 2020. However, this is subject to the condition that insolvency maturity has occurred as a result of the Corona crisis and that there is a reasonable prospect of restructuring. In this context, debtors who were not insolvent on 31 December 2019 may benefit from a presumption under which the suspension applies.
This scheme shall enter into force retroactively from 1 March 2020 and may be extended until 31 March 2021.
It needs to been seen how the Corona Mitigation Act affects franchise systems in Germany. General observations show that the large majority of systems and their respective network members, including system suppliers, are currently working together closely and in a spirit of partnership in order to create amicably acceptable solutions to overcome the situation in the best possible way.
An English version of the Corona Mitigation Act can be downloaded from the following link of the Federal Ministry of Justice and Consumer Protection and the Federal Office of Justice:
Marco Hero, IDI country expert for franchising in Germany