The commercial real estate rental market is under pressure like never before. We provide you with important practical tips on how to recognize rent defaults at an early stage, act in accordance with the law and minimize financial losses
The risk of loss of rent is dramatic. Deutsche Pfandverwertung shows how landlords can protect themselves against non-payment — especially in the event of tenant insolvency.
The commercial real estate rental market is under pressure like never before. The risk of rent losses is dramatic. Deutsche Pfandverwertung shows how landlords can protect themselves against non-payment. The primary backbone of the German economy is its industrial clusters: the automotive industry, the electrical industry and the chemical industry. These sectors are now increasingly relocating their production facilities to locations that offer better conditions for their production. In second place in terms of economic importance are the so-called “hidden champions”; however, many of them are sitting on packed suitcases and are preparing to turn their backs on Germany as a production location. This means that Germany is likely to lose well-paid jobs, which can no longer be compensated for.
This is accompanied by a significant loss of purchasing power and tax revenue. The consequences of de-industrialization are now really becoming apparent and the economy has been shaken by numerous insolvencies in recent months. New insolvencies are constantly being reported in almost all sectors. Hopes of a significant upturn in the near future have dimmed. The German economy is stuck in crisis, said the President of the Institute for Economic Research at the University of Munich, Clemens Fühst, back in 2024. His gloomy forecast for Germany is: “The trend in insolvencies will continue”. Experts assume that this situation will not change for the time being. The trend towards rising insolvency figures will continue. In an interview in the Augsburger Allgemeine, Patrik-Ludwig Hantzsch, Head of Economic Research at Kredit-Reform, notes that larger companies are increasingly affected. Many companies are closing because they cannot find a successor or their business has become unprofitable due to the deteriorating economic conditions, the newspaper reports.
The primary backbone of the German economy is its industrial clusters: the automotive industry, the electrical industry and the chemical industry. These sectors are now increasingly relocating their production facilities to locations that offer better conditions for their production. In second place in terms of economic importance are the so-called “hidden champions”; however, many of them are sitting on packed suitcases and are preparing to turn their backs on Germany as a production location.
This means that Germany will foreseeably lose well-paid jobs, which can no longer be compensated for. This will be accompanied by a significant loss of purchasing power and tax revenue. The consequences of de-industrialization are now really becoming apparent.
The Federal Statistical Office recently announced that the German economy continued to shrink in the second quarter of 2024. It has been shaken by numerous insolvencies in recent months. New insolvencies are constantly being reported in almost all sectors. Hopes of an upturn in the second half of the year have dimmed. The Ifo Business Climate Index, the most important leading indicator for Europe’s largest economy, fell for the third month in a row in July. The German economy is stuck in crisis, said Ifo President Clemens Fuest. His gloomy forecast for Germany is: “The trend in insolvencies will continue”.
Experts assume that this situation will not change for the time being. The trend towards increasing insolvencies will continue. Patrik-Ludwig Hantzsch, Head of Economic Research at Creditreform, states in an interview in the “Augsburger Allgemeine” that larger and larger companies are currently being affected. Many companies are closing because they cannot find a successor or their business has become unprofitable, the newspaper reports. According to the Center for European Economic Research in Mannheim and Creditreform, around 176,000 companies will close in Germany in 2023 alone, which corresponds to a further increase in company closures of 2.3 percent.
The economic “dexit” has already occurred.
Companies are voting with their feet. More than 20 percent of companies are closing or are in the process of leaving Germany. As early as November 2023, Deloitte determined in a study that two-thirds of German companies had already relocated at least parts of their production abroad. In autumn 2024, a study by Ernst and Jang found that 45% of 115 industrial companies are considering expanding abroad, while only 13% are planning new locations in Germany. Around 37% are considering cutting production or relocating abroad altogether. The result is that when companies relocate production, R&D or headquarters, the proportion of industrial value added in Germany decreases. However, industry accounts for around 23 percent of GDP and generates high tax revenues, which are then lost and purchasing power disappears like snow in the sun. A clear indication of the fatal situation for commercial tenants is the 47 percent drop in trade tax from the automotive industry in Stuttgart. Stuttgart is heavily dependent on the automotive industry. A decline there has a direct impact on the revenue structure and local employment. Medium-sized suppliers are particularly vulnerable, and any further burden poses a real threat to the existence of local companies.
The consequences are catastrophic
More and more stores are having to close, leading to increased vacancy rates in city centers. There is a threat of further escalation in the near and medium term if the situation does not improve significantly. More and more empty stores can be seen in the shopping streets of German city centers. According to estimates by the German Retail Association HDE, around 9,000 stores will have closed their doors for good by the end of 2024. And according to the HDE’s forecast, a further 4,500 stores in the retail sector will close by 2025. So far, some of the vacant retail space has been replaced by letting it to care service providers, insurance providers, state-subsidized language schools for immigrants, barbershops or private daycare centres and the like. But even this is finite and does not really contribute to economic recovery. The office real estate market does not look much better. The renowned real estate consultancy Colliers reports in the specialist magazine for risk and capital management AssCompact that the office vacancy rate in the top 7 cities is expected to peak in 2026. However, the crisis in the German economy is already having a full impact on the commercial real estate market. And there is no light at the end of the tunnel.
The rental industry is capital-intensive.
Rent losses have fatal consequences.
Nevertheless, many landlords, especially small and medium-sized landlords, are still reluctant to insist on strict compliance with the agreed payment terms. In suppression of the unpleasant topic, many ignore the threat to their existence against their better judgment, although they secretly at least suspect that payment delays and even more so payment defaults can quickly lead to the financial ruin of their own company.
Many landlords do not realize that they have no leeway to prolong their debt with defaulting tenants.
The frequently raised objection by the rent debtor that his company’s jobs are at risk if the rent claim is enforced is a pretext out of necessity. However, according to current business management theory, it is possible to determine exactly why a particular business model no longer works. However, it is the rent debtor’s responsibility to seek advice on this in good time. Rent debts are at the end of a long-term crisis situation.
In the rental industry, a return on sales of between 4% and 6% is normally achieved. The return on sales of 4 % means that 4 % of the turnover remains as profit for each tenancy. However, the loss due to a payment default of 100 % also means that the company’s equity is reduced by 96 % of the receivable amount at the expense of scoring. This simple calculation example shows how many similar rental agreements the commercial landlord would have to conclude with a return on sales of 4 % in order to fully compensate for a 100 % payment default in a timely manner. With a return on sales of 4 %, this is 25 similar leases. In a nutshell: a non-performing rental requires 25 good rental agreements to fully compensate for this loss. This is impossible in the real estate industry.
Insolvency law is another driver of this situation.
o put it simply: Since the 2000s, interested parties, flanked by massive lobbying at EU and federal level, have pushed through their particular interests by establishing a so-called reform of insolvency law. This erosion of creditors’ property rights initiated by the legislator is being driven forward step by step. If creditors do not know how to protect their rights in good time, they are unintentionally called upon to reorganize and restructure their defaulting debtors with the help of StaRUG, ESUG and the Insolvency Code. Companies in payment difficulties use this extended scope of action to evade their payment obligations. Furthermore, these restructuring procedures are disproportionately expensive and lengthy in Germany compared to other countries. After administrators and advisors have helped themselves to the debtor’s remaining assets with their fees and adequate charges, creditors are usually left with a payout that can only be described as pitiful at the end of years of proceedings. In conclusion, it should be noted: The amendments to debt law create economic disincentives that are counterproductive to a free and therefore social market economy. The tried and tested legal principle of good faith, under which the debtor was held liable for his payment obligations, has now been replaced by the quasi-expropriation of receivables in order to finance the restructuring of his debtor with the remaining assets. Fair compensation by distributing the debtor’s assets to its creditors no longer takes place.
The interests of the individual company do not necessarily have to be in line with the politically desired interests. We do not have to criticize the legislator at this point. Our task is to deal with the possibilities offered by case law.
“Real estate slump in commercial real estate” is the title of a recent article in the Frankfurter Allgemeine Zeitung. If landlords allow themselves to be pressured into unfavorable rental agreements due to a lack of demand, this can end up backfiring on them.
Deutsche Pfandverwertung has been conducting public auctions based on pledge of rights for the commercial real estate industry for many years.
Practice has shown that for landlords with good contractual security, the loss of rent and any insolvency damage can be limited.
The landlord’s pledge is a so-called non-possessory pledge of rights. The landlord does not actually have access to the lien until he has been restored to possession of his property by the bailiff following legal proceedings. Successful landlords compensate for this disadvantage by drafting their commercial leases with foresight.
The most important principle for commercial landlords is to get ahead of the situation quickly. It is important to assess the situation prospectively, make a new assessment of the available options and apply these in such a way that resilience is already in place before the loss event occurs. In the event of a crisis, a prepared “toolbox” can be used to react immediately. The potential ticking time bomb (“loose cannon”) must be kept under control. The unintentionally passive role must be reversed immediately and an active role must be taken immediately to control the situation. In addition to the possibility of contractual security through contractually agreed pledges, the real estate industry has the proactive use of the statutory pledge of rights under Section 562 of the German Civil Code (BGB), the landlord’s pledge, at its disposal for this purpose, provided it is applied strategically and correctly.
What many people do not know: The landlord’s lien pursuant to Section 562 BGB arises automatically as soon as items are brought into the rented premises with the tenant’s consent.
It secures existing rent claims. In accordance with Section 242 BGB, the claim for access to the premises can be asserted in order to be able to concretely determine and secure the pledge of rights. This is particularly necessary if the tenant can no longer be reached or, in the event of the tenant’s insolvency, if the insolvency administrator has control over the premises. If the insolvency administrator refuses access without good reason, he risks a breach of duty if the person entitled to separate satisfaction — i.e. the landlord — loses or cannot assert his pledge of rights as a result. The landlord should also inform the insolvency administrator that the tenancy agreement will be terminated at the earliest possible date and that there is no interest in extending the contractual relationship with the tenant debtor or his successor.
There is no need for lengthy and expensive dunning and court proceedings with subsequent enforcement in order to apply the landlord’s lien.
As a rule, the landlord’s lien is stipulated in commercial leases. In the case of commercial tenancy agreements, the right of enforcement in accordance with the German Commercial Code (HGB) takes effect after just one week. Only the period of seven days in accordance with the HGB must be observed for the lien to become legally effective. When applying this, it is important that the proverbial cart is not put before the horse. This means first exercising the pledge of rights, then writing to a lawyer and initiating eviction proceedings. The strategically correct sequence of the individual steps is the necessary prerequisite for achieving the goal of the greatest possible realization of the claim.
If the proceeds from the sale of the seized items are not quite sufficient to cover the outstanding claims, this at least reduces the amount in dispute when collecting the remaining amount. Another advantage is that blocked rental space becomes available again at short notice.
The following measures can speed up the reduction of rent claims and the removal of items brought into the rented property:
Always claim the landlord’s lien first when the first payment is due. Experience has shown that goodwill in the event of rent arrears is rarely rewarded. This also creates legal advantages in the event that the tenant becomes insolvent. In order to rule out legal disadvantages from the outset, the landlord’s lien should always be asserted immediately when rent arrears become due, if only to protect the continued existence of your own company. The necessity of these measures can be explained to the defaulting rent debtor in a friendly manner. The assertion of the landlord’s lien and the action for eviction are two different legal acts that do not necessarily have to be carried out together.
The landlord’s lien remains in place even after termination if amounts from the rent or other claims are still outstanding. The landlord of a commercial property may use his landlord’s lien even if the rental agreement has already been terminated. Tenants sometimes avert the assertion of the landlord’s pledge of rights by depositing further security. The tenant can release each individual item from the pledge of rights by providing corresponding security in the amount of its value.
All future commercial leases should stipulate that the tenant is obliged to proactively support the enforcement of a lien. It should be stipulated that the tenant must allow the landlord immediate access to the rented premises in the event of overdue rent and must prepare documentation of the items it has brought into the rented property. It could be agreed that suitable items of value are to be deposited with a sworn custodian. This could, for example, be a publicly appointed, sworn auctioneer.
Because most tenants are not aware of the criminal offense of returning a deposit, the legal consequences of a violation should be pointed out in the rental agreement.
In the case of high rents, a contractual lien agreement should be established by pledging the commercial tenant’s company shares — at least temporarily.
This puts the landlord in a much stronger position as a subordinated creditor when payment is due. From this more advantageous starting position, fewer compromises and disadvantages need to be accepted in negotiations with tenants or insolvency administrators. In the event of imminent default, a professionally prepared negotiating position is crucial for the survival of your own company.
Quick action is also imperative because the items taken into pledge by the landlord, and not just perishable goods, generally lose value on an ongoing basis.
The worst-case scenario for landlords is the insolvency of the tenant. The decisive factor is the time at which the lien arises. Rent arrears up to the time of filing for insolvency can only be asserted as simple insolvency claims. In the period between filing for insolvency and the opening of insolvency proceedings, the tenant continues to owe the rent. However, no payment is regularly made. Although it is possible to terminate the lease at this stage, this may be contested by the insolvency administrator. Once insolvency proceedings have been opened, the landlord usually has valuable claims again. This is because, according to Section 55 of the Insolvency Code, the insolvency estate is then liable for the liabilities with priority, insofar as this is sufficient.
If the insolvency administrator is in possession of the pledged items, he has the right of realization. He does not have to sell to the highest bidder, but can sell to anyone on the open market. Insolvency administrators sometimes operate their own liquidation companies or are involved in such companies. The business of these companies also lies in advantageous purchasing. Sometimes the liquidation is also geared towards restructuring and the attractive transfer of the insolvent company to a new investor.
For this reason alone, the landlord should assert the pledge of rights for outstanding claims at an early stage. In this way, the landlord retains his privileges as the person entitled to separate satisfaction. In addition, the administrator must inform the landlord when, where and how he intends to realize in accordance with section 168 of the Insolvency Code. The insolvency administrator must give the landlord the opportunity for the landlord — i.e. the creditor — to point out a more favorable realization option himself. The administrator must then take advantage of the realization option indicated by the landlord or place the landlord in the same position as if he had taken advantage of it. This is often possible in cooperation with publicly appointed, sworn auctioneers. We have many contacts with purchasers of goods of all kinds. In practice, the insolvency administrator then usually releases the items seized in insolvency.
After termination of the rental agreement by the insolvency administrator, special rules apply with regard to the clearance of items that are no longer required. Depending on the date of termination by the insolvency administrator, the latter is entitled to release the items without being obliged to pay the corresponding costs for the eviction from the insolvency estate. Claims of the landlord due to rent arrears that arose before the opening of insolvency proceedings are so-called insolvency claims pursuant to Section 38 of the Insolvency Code. These claims are therefore pro rata claims. Overdue operating costs must be apportioned to the period up to the day preceding the opening of insolvency proceedings and for the period from the opening of insolvency proceedings. The operating costs incurred up to the opening of insolvency proceedings can also only be registered in the insolvency table. After the opening of insolvency proceedings, the insolvency administrator is obliged to pay these operating costs, provided that sufficient assets are available. Even if the insolvency administrator is obliged to pay the rent after the opening of insolvency proceedings until the end of the notice period, it is not uncommon for there to be insufficient insolvency assets to do so.
Please contact us if you have a specific case for a public auction: To the contact form
We have provided an explanatory video to provide information about the assignment: To the explanatory video for clients
Information on the auction process: To the explanatory video for bidders
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Time bomb of insolvency avoidance
Loss of receivables imminent! Act before it’s too late
