1. Introduction

1.1 In recent weeks, the Austrian federal government has adopted extensive, temporary measures in response to the COVID-19 pandemic, which have had a considerable negative impact on the entire economy. At the regional level, these measures have been extended by individual provinces. The following measures affect the tourism industry in general, and the hotel industry in particular.

(a) Initially, all tourist accommodations in the provinces of Salzburg, Vorarlberg, Tyrol, and Carinthia were ordered closed, effective as of mid-March 2020.[1] Individual exceptions could be made on a case-by-case basis. At the end of March, these measures were partially lifted, and have been replaced by new ordinances banning tourists.

(b) There is a nationwide ban on entering public places with a few exceptions, such as access for professional purposes. People must maintain a distance of one meter from each other, unless the risk of infection can be minimized by other protective measures.[2]

(c) As of 4 April 2020, there is a nationwide ban on entering accommodations for the purpose of recreation and leisure. There are exceptions for: (i) guests who were already in the accommodation on 4 April 2020 (for the duration of the stay, agreed in advance), (ii) the care/assistance of persons in need of support, (iii) professional reasons, and (iv) urgent necessity. According to a press conference held by the Austrian Chancellor on 6 April 2020, this measure is expected to remain in place until at least mid-May 2020.

(d) Passenger aircraft are completely banned from landing, persons from many countries are banned from entering,[3] and passenger rail services from Italy, Switzerland, and Liechtenstein have been suspended.[4]

1.2 The trend of these measures is that they are shifting from the federal level to the provinces, and that they are already easing. A complete shutdown of tourist accommodations was only ordered for the provinces of Salzburg, Vorarlberg, Tyrol, and Carinthia, and only for a limited period of time. These orders were lifted at the end of March, and replaced by new regional measures banning tourists from entering places of accommodation. The nationwide ban on entering accommodations for the purpose of recreation and leisure, effective as of 4 April 2020, does not represent a complete shutdown. The employees of these establishments are still allowed to do their jobs, as long as they stay one meter apart (from each other, and from hotel guests), or take other protective measures to minimize the risk of infection.[5]

Unfortunately, the volume of business is likely to remain low because of the other restrictions on entering public places and entering the country. Because public events are prohibited, the guests who normally would have come for conferences, trade fairs, etc. will have no occasion to travel for work.

1.3 In some ways, the lack of an official nationwide shutdown for tourist accommodations (and the fact that some regional closures have now been lifted) could have significant consequences for individual businesses. For example, without an official closure, a hotel operator may not be able to demand a reduction of their rent (see point 2.2), claim insurance benefits (see point 3), or request state aid (see point 4).

2. Obligation to pay rent

2.1 Contractual agreements take precedence

Many hotel owners are asking whether they are entitled to make reduced payments on their property leases based on the COVID-19 pandemic. Because parties are allowed to contract around the default provisions in the law concerning rent reduction (see point 2.2), it is important to review each contract closely and consider the individual circumstances. In practice, many lease contracts do not expressly address how risk will be borne in the event of an epidemic. If the amount of the rent is not strictly set, but is contractually linked to the turnover generated by the property, it may potentially be reduced on this basis. The extent to which the property cannot fulfill the scope and type of use defined in the contract, could lead to a rent reduction (see point 2.2.2).

2.2 Default legal provisions

2.2.1 In general, §§ 1104 and 1105 of the Civil Code of Austria (ABGB) regulate the reduction of, or exemption from, rent obligations in a situation such as the current CoViD-19 pandemic. Section 1104 states that the rent may be reduced if extraordinary events (such as the COVID-19 pandemic, or officially ordered closures) prevent the property from being used to the agreed extent, or for the agreed purpose.

2.2.2 If there is a complete loss of use, the rent is reduced to zero during that time (rent exemption). This applies to both Rentals and Leases. [Austrian law has two kinds of tenancies, called “Rental” (Miete) and “Lease” (Pacht) in this document.]

For a partial loss of use (depending primarily on how the use was defined in the contract), the law differentiates between Rentals and Leases. For a Rental, the tenant is entitled to a proportionate reduction in rent. For a Lease, only agreements with a term of one year or less qualify for a rent reduction, under the law and the legal literature.[6] Additionally, the loss of use must be at least 50%.[7] In practice, many agreements that are titled as “Leases” would actually be classified as Rental agreements under the law, and the incorrect title of the document does not affect the tenant’s legal rights.

2.2.3 The prevailing view is that a reduction of the rent covers all of its components, including government fees and operating costs (öffentliche Abgaben und Betriebskosten).

2.2.4 The tenant has the right to terminate the contract prematurely, under § 1117 ABGB, if the loss of use caused by extraordinary events continues over a long period of time, regardless of whether the loss of use is complete or partial.

2.3 Can the rent be reduced based on loss of business?

Hotels that are not officially closed by regional ordinances may not be considered to be legally unusable (see point 2.2.2), even though the income may be essentially zero because of the other restrictive ordinances. The tenant would therefore still be legally obligated to pay the full rent. However, beyond the provisions of landlord/tenant law, there may be an argument that the rent should be lowered because a fundamental expectation pertaining to the contract has been upset (Wegfall der Geschäftsgrundlage). Naturally, the individual contract and circumstances must be reviewed to see whether this is an option. Decisions from the Austrian Supreme Court on this point of law have differed widely, and been very specific to the factual circumstances, creating great uncertainty in how it can be properly invoked.

3. Side note: business interruption insurance

Hotel operators usually have business interruption insurance. However, the insurance may not cover the COVID-19 pandemic, because the terms and conditions of such policies often explicitly exclude business interruption caused by an epidemic. Even if there is coverage, the policy may not be triggered unless the business was closed by official order, which was only the case in some provinces.

4. Side note: state aid for the tourism industry

4.1 If the hotel closure was governed by the Epidemic Law of 1950, the hotel operator may be entitled to compensation, but it must be claimed within 6 weeks after the measures have been lifted. Hotels in Salzburg, Vorarlberg, Tyrol, and Carinthia may be eligible for this relief.

4.2 If the hotel is closed because of the COVID-19 Act restrictions on gatherings and travel, the primary source of relief is currently the government crisis fund. The federal government has allocated EUR 15 billion, primarily to guarantee loans and issue grants where revenue loss exceeds 40%. Further details are still forthcoming. The government has also created a support package for the tourism industry. More information is available [in German] on the website of the Federal Ministry: https://www.bmlrt.gv.at/tourismus/corona-tourismus/corona-ma%C3%9Fnahmenpaket.html.

5. Conclusion and practical suggestions

5.1 As discussed in point 2, the question of a tenant’s obligation to pay full rent during the COVID-19 pandemic depends on many variables, including the contract language and the individual circumstances. Because this legal territory is not fully charted, we cannot make concrete recommendations until the courts provide further guidance.

5.2 If there is a complete loss of use of the property, or the hotel is officially ordered to close, there is no obligation to pay rent during that time, under § 1104 of the Austrian Civil Code (ABGB), unless the parties have legally contracted otherwise (see point 2.1).

If the loss of use only applies to part of the property, and other parts can still be used, the determination of whether the rent can be reduced proportionately depends on whether the contract is for Rental or Lease, in the absence of any other specific contractual language (see point 2.2.2). Other than as officially restricted or ordered closed, hotels may continue to operate. However, the ability to operate may be actually affected by the COVID-19 pandemic, directly affected by the ban on entering places of accommodation for tourist purposes, or indirectly affected by other ordinances that restrict gatherings and travel, which could reduce income to practically zero. Although the government has not ordered a complete closure, there may be some relief available. In some cases, a tenant may be able to argue that a fundamental expectation pertaining to the contract has been upset, and advocate for a rent reduction (see point 2.3).

5.3 If a hotel has sufficient liquidity, and does not have an agreement with the landlord concerning rent reduction, they may consider paying the full rent with a reservation of the right to claim a reduction of the payment, in order to avoid termination. If a tenant knows they have a right to demand a reduction in rent, and they pay the full rent without reserving their rights, they may lose the ability to dispute the payment later.

5.4 Hotels in Salzburg, Vorarlberg, Tyrol, and Carinthia that were ordered closed may be eligible for relief under the Epidemic Law of 1950 once the measures are lifted. However, these claims must be filed very quickly with the district administrative authority.

5.5 The website of the Austrian Chamber of Commerce (WKO) has other helpful information.

 

Disclaimer: This document contains only general information, and in no way constitutes legal advice from Eisenberger & Herzog Rechtsanwalts GmbH. This document cannot replace individual legal advice. Eisenberger & Herzog Rechtsanwalts GmbH does not assume any liability for the content or correctness of this document.

 

[1] Links to the regional ordinances can be found on the homepage of the WKO (Austrian Chamber of Commerce), and the Federal Ministry of Agriculture, Regions, and Tourism.
[2] BGBl II Nr 98/2020 idF BGBl II Nr 108/2020.
[3] BGBl II Nr 83/2020 idF BGBl II Nr 109/2020; BGBl II Nr 87/2020 idF BGBl II Nr 129/2020 und BGBl II Nr 105/2020.
[4] BGBl II Nr 86/2020 idF BGBl II Nr 124/2020.
[5] In the hotel industry, the practicality of working from home is limited, because of the nature of the work. There are few tasks that can be effectively accomplished remotely.
[6] Since hotels usually enter into lease agreements for periods longer than one year, this is generally inapplicable.
[7] The legislature assumed that for longer terms, reduced income from one year would be offset by increased income from subsequent years.