Germany: Commercial Lease Agreements – A remedial-written-form-clause does not bind the acquirer of a rented property

29 October 2014

Dr Roland Borsdorff

The German Federal High Court of Justice (Bundesgerichtshof, BGH) ruled in two decisions (VII ZR 68/10 – 22 January 2014 and VII ZR 146/12 – 30 April 2014) that the acquirer of a property is free to terminate a long-term lease agreement on the grounds of violating the statutory written form requirement despite of the existence of an explicit clause remedying such violation.

I. Statutory written form requirement, remedial-written-form-clause

The statutory legal form requirement for lease agreements under sec. 550 German Civil Code (Bürgerliches Gesetzbuch, BGB) requires for a lease agreement with a proposed fixed period of more than one year that all material terms of such lease agreement, in particular regarding the property, the rent and the parties to the agreement must be in writing. If the lease agreement does not comply with such written form requirement, it applies for an indefinite period of time, with the result that each party is free to terminate the agreement within the short statutory termination period. To avoid such risk of an early termination, the parties to a lease agreement often conclude to undertake all measures to cure the written form violation and not to terminate the lease agreement on the grounds of violation of the statutory written form requirement (remedial-written-form-clause). The BGH has now ruled that a remedial-written-form-clause has no binding effect on the acquirer of a rented property, who assumes the rights and obligations arising of the lease agreement pursuant to sec. 566 para. 1 BGB.

II. Facts

Both decisions dealt with the termination of long-term commercial lease agreements by the acquirer of the rented property on the grounds of violation of the statutory written form requirement, where the violation has taken place before the property was acquired. In both cases, the lease agreement contained a remedial-written-form-clause providing that the parties shall undertake all measures to cure the written form violation and not to terminate the lease agreement on the grounds of violation of the statutory written form requirement. Despite of such clause, the respective acquirer of the rented property has terminated its lease agreement on the grounds of violation of the statutory written form requirement.

III. Content of the decisions

In both decisions the BGH has ruled, the acquirer of a rented property does not violate the German good faith principle (sec. 242 BGB), if he terminates the lease agreement on the grounds of violation of the statutory written form requirement within the statutory termination period. This applies irrespectively whether the remedial-written-form-clause has been agreed in individual contracts or is part of a standard contract. The BGH stated that the provision regarding the statutory legal form (sec. 550 BGB) is mandatory German law. The reasoning behind such provision is that the acquirer of a property, who assumes the position of the landlord by way of statutory transfer of the lease agreement, which was concluded for period longer than one year, should recognise the terms of the lease from the written lease agreement. Moreover, the provision has the aim to ensure that the terms of a long-term lease is evidenced by the original parties to the agreement and to protect them not to enter hasty into a long-term lease agreement. The statutory approach is that the acquirer does not need to claim for damages against the seller of the rented property but has the statutory right to terminate the lease agreement if not all material terms of the lease are evidenced in the written lease agreement. The protective purpose of the provision of sec. 550 BGB would not be achieved, if the remedial-written-form-clause would bar the acquirer to execute statutory termination rights.

IV. Guidance

The BGH has now decided that a remedial-written-form-clause does not bar the acquirer of a rented property, who assumed the rights and obligations arising under the lease, to terminate the assumed lease. However, the BGH has left open the question, whether a remedial-written-form-clause can be effectively concluded between the original parties to the lease agreement.

With regard to the two decisions it is advisable to phrase a remedial-written-form-clause in a way that only the original parties to the lease agreement are bound by the clause. Otherwise, especially with regard to standard contracts, there would be further risks of invalidity. Since the BGH held, that a too broadly phrased remedial-written-form-clause covering the acquirer of a rented property is not compatible with the statutory written form requirement (sec. 550 BGB).