A new law in Germany aims to benefit consumers and microenterprises by protecting the loss of essential services in the form of temporary deferrals of contractual obligations and loans during the coronavirus (COVID-19) pandemic.

The German Federal Cabinet approved special legislative measures in response to the COVID-19 pandemic on March 23. Two days later, an act to mitigate the consequences of the COVID-19 pandemic in civil, insolvency, and criminal procedure law, dated March 24, 2020, passed the Federal Parliament (Bundestag), and on March 27, the Federal Council (Bundesrat), the Second Chamber of the German Parliament, adopted the act.

The new rules will be in force for a limited time period and are aimed at financial relief for consumers and microenterprises. As large businesses often deal with small enterprises as their customers, the temporary rules in the new act may supersede existing German civil law rules, and even individual contractual obligations, with a potentially significant impact on the cash flow of larger businesses.

Deferral of Contractual Obligations (Moratorium)

Pursuant to the act, a moratorium (i.e., the right to refuse performance; in particular, payment) for “essential” services will apply, but it will only benefit consumers and microenterprises until June 30, 2020. Microenterprises are those with fewer than 10 employees and less than 2 million euros ($2.2 million) in annual turnover.

Only claims relating to a continuing obligation relationship concluded before March 8, 2020, are covered and the creditor must not be ”unreasonably affected” by the moratorium. The moratorium does not apply to employment contracts, rental agreements, and loan agreements.

Deferral of Loans (Payment Holidays)

The regulation on deferral of loans provided for in an earlier draft of the act will only benefit consumers and not borrowers in general. The duration of the deferral (April to June) was reduced against the first draft from six months to three months. However, there is a possibility in the law to extend the scope of application to include microenterprises in particular, by means of a legal regulation. The proposed regulation in the act will apply to consumer loans concluded before March 15 (instead of March 8).

Impact

• The aim of the legislative measure is to protect consumers and microenterprises from the loss of essential services of general interest (electricity, gas, water, telephone, and internet) or from essential business services, but some of its provisions could raise issues later. For example, while a right to withhold services solves the problem of the acute liquidity bottleneck, it only postpones the financial consequences of the COVID-19 pandemic until the moratorium expires. The consumer or microbusiness will then be hit even harder as on that target day all outstanding debts that have accumulated will immediately become due in full. This may lead to a tsunami of service cancellations by the affected creditors, unless the consumers or microbusinesses are able to build up sufficient liquidity reserves to service the arrears on that target day.
• The conditions under which debtors can invoke the moratorium are peppered with vague legal terms, which will make it very difficult to execute them in a legally secure manner, especially in light of the short time available.
• The distinction between essential services with continuous obligations (covered) and one-off purchase contracts (not covered) is questionable: Whether a mobile telephone service, for instance, is based in the prepaid model or on longer contract by a subscription is unlikely to change anything about the consumer's worthiness of protection. In both cases, access to telephone and internet is crucial for the consumer or business, especially in times of a domestic quarantine.

Coronavirus COVID-19 Task Force

For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold.