Corona virus as a force majeure event in hotel lease agreements

Rent payment and business interruption insurance

Since the hotel industry is severely affected by the current situation due to the new corona virus and already several official operating restrictions have been issued and official bans on operation are a possible threat, the question arises whether this constitutes an event of force majeure and what consequences this could mean for hotel lease agreements. The statements apply analogously for hotel lease agreements.

What constitutes a force majeure event?

There is no legal definition of force majeure in German law. If the parties to a hotel lease agreement have agreed on a definition of force majeure, or have regulated cases that are not to constitute a case of force majeure, this definition is decisive. However, most German lease agreements lack this definition, as a static definition can hardly do justice to all conceivable scenarios that could occur in the context of hotel lease agreements concluded for a long period of time. The parties therefore gladly leave the definition to case law that adapts to current events. Due to a lack of a legal definition the BGH (Bundesgerichtshof, i.e. German Federal Court of Justice) has developed such a definition in settled case law (cf. i.a. BGH, ruling of 16. May 2017 – X ZR 142/15). Therefore, force majeure means: "an external event introduced from the outside by elemental forces or by actions of third parties that is unforeseeable by human judgement and experience, cannot be prevented or rendered harmless with economically bearable means even with the utmost care that can be reasonably expected according to the circumstances, and which must not be accepted by the company because of its frequency.

"In summary, force majeure occurs when an event is caused by an external influence that is exceptional, unforeseeable and realistically unavoidable.

With regard to the corona pandemic, force majeure might well be affirmed. The WHO declaring the corona virus outbreak a pandemic can be seen as an indicative effect for the affirmation of force majeure. In application of the above definition, it is also well defendable that any official ban on hotel operations is itself a case of force majeure.

Consequences of force majeure for lease payment duties

The primary duty of the lessee in a lease agreement is the obligation to pay rent, whereas the primary obligation of the lessor is to grant use of the leased property.

Even in times of crisis, the general principle "pacta sunt servanda", according to which the contracting parties remain obliged to meet their contractual obligations, applies. This also applies to the obligation to grant use of the leased property and the obligation to pay rent. A complete suspension or reduction of rent shall thus only be considered if the leased property is defective.

A defect usually lies in the leased property itself, but can to a very limited extent also be assumed in the case of environmental defects. However, it cannot be assumed that the corona virus is such a defect as the use of the leased property is not restricted by any defect or any other aspects falling into the responsibility of the lessor. The restricted or non-usage is a consequence of a lack of demand for which the lessor cannot be held responsible. A suspension or reduction of rent due to the corona virus as such - even if classified as a case of force majeure - is therefore not possible.

In case of official operating restrictions and bans, above all it is relevant who is imposed by such restrictions / bans. Should it be imposed to lessors, e.g. with the content that owners of hotel real estate properties must provide their properties as makeshift emergency medical wards, the lessor would have to withdraw the leased property from the lessee. In that case, the lessee would no longer be obliged to pay rent. According to the current status, however, the restrictions issued by the state governments and cities/local authorities within the framework of ordinances and general rulings are directed at the operators and prohibit them from continuing to keep their operations open without restriction (in particular by restricting operations to necessary purposes and refusing overnight accommodation offers for tourism purposes). In the event of a complete ban of operation (as has been the case in Cologne, for example, due to a general ruling issued there) - the leased property would continue to be available for the contractually agreed use, but the lessee himself could no longer operate it. This would probably have to be classified as the realisation of an operating risk, which originates from the nature of the lessee's business and therefore is part of his sphere of risks. In this case, the lessee would still be obliged to pay the contractually agreed rent - even if an official operating ban is classified as a force majeure event. For further details on possible reductions of rent see our blog entry "Hotel Lease Agreements – Reduction of rent – Force majeure?"

Does the business interruption insurance help?

Most hotel operators have business interruption insurance. These typically cover exactly the risks operators are currently facing: loss of revenue due to business interruption with simultaneously high fixed cost burden.

However, a requirement for payments under business interruption insurance is that the business interruption is due to property damage caused by an insured risk. Which specific risks are covered by the policy has to be assessed on basis of the individual insurance conditions. In general, such insurances cover risks resulting from fire, lightning (sometimes also overvoltage damage resulting from such), explosion or aircrafts. Pandemics, diseases or consequential authority measures (such as shut down of operations) are usually not covered. In those cases, the business interruption insurance does not apply.

So-called "all-risk" insurance policies are also unlikely to cover for the currently incurred losses. Although it would be possible for pandemics or diseases to be part of the insured risk in the specific insurance policy, these insurances usually only cover property damage (i.e. damage to property of the lessee), but not pecuniary losses as such currently occurring.

Other topics

In addition to the question of the classification of the corona virus as "force majeure", other legal issues for hotel operators and owners also arise in connection with the corona virus, such as the possibility of suspending and deferring rent and possible risks of lessee insolvency, effects on the obligation to pay rent or the possibility of a reduction and the right to discontinue operations. If you are interested, take a look at our other blog posts and the FAQs from our webinars dated 24 and 25 March 2020.

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