BGH extends duty of disclosure of real estate sellers

In a highly relevant ruling for transaction practice, the German Federal Supreme Court (BGH) on September 15, 2023 (Az. V ZR 77/22) strengthened the rights of real estate buyers: sellers must provide pre-contractual information about circumstances that are of significant importance to buyers. Putting documents in a virtual data room for a short period of time is not enough.

A buyer acquired several commercial units in a building complex for a total purchase price of approximately 1.5 million euros The seller had provided the buyer with documents in a virtual data room. In the purchase agreement, the seller assured that no special apportionment with economic effects had been decided and that he had no knowledge of extraordinary costs not covered by the existing maintenance reserve. Shortly before the notarization date, the seller posted an earlier resolution of the owners’ meeting in the data room, by which a special allocation for upcoming renovation work in the amount of 50 million euros had been rejected. The purchaser was not informed of any ongoing legal proceedings to enforce the special levy. When the purchaser was held liable under a court settlement of the lawsuit, he declared the rescission of the purchase contract on the grounds of fraudulent misrepresentation and, as a precautionary measure, the withdrawal from the contract.

BGH: Sellers must provide information in good time

The BGH ruled that the seller had an obligation to provide information regarding the legal proceedings and the scope of costs for the pending remediation measures and that he had breached this obligation. The seller should have recognized that the scope of costs for the upcoming renovation measures was already of considerable importance for the buyer in economic terms. As long as the structural measure had not been implemented and decided, there was a risk that these costs would have to be borne (proportionately) by the purchaser.

In the opinion of the Federal Court of Justice, posting the record of the owner’s declaration in the virtual data room was not sufficient to provide clarification. Rather, a seller must post the documents in the data room in a timely manner and ensure that a buyer can perceive the information provided and incorporate it into his or her purchase decision. Only then is a separate explanation by the seller unnecessary. The seller must take into account the scope of the buyer’s due diligence, the structuring and the organization of the data room.

A seller cannot expect that a buyer would find out at short notice on the basis of the posted minutes of the meeting that a special levy would be due, especially since in the case decided upon there was only the weekend between the posting of the minutes in the data room and the notarization of the purchase agreement.

Claims for damages are also possible

According to the BGH, a claim for damages due to an incorrect declaration by the seller can also be considered. The seller’s declaration of no knowledge of extraordinary measures could be incomplete in this respect.

BGH: Pre-contractual duty of disclosure of the seller

With this decision, the BGH has considerably expanded the rights of buyers in the context of real estate transactions. In practice, it is certainly the rule that sellers seek to exclude liability for material defects and defects of title as far as possible in a purchase agreement for an existing property. The consequence of an effective exclusion of liability used to be that defects in the property only entitled the buyer to rescind the contract and claim damages if the buyer had been fraudulently deceived. In its ruling of September 15, 2023, the BGH emphasized that sellers have a pre-contractual duty of disclosure. This exists even if the seller disclaims liability. The court extended the duty of disclosure to the effect that insufficient information or information provided too late can lead to a liability for damages, as can incorrect answers to buyer questions. This interpretation of the law should also apply to the sale of shares in companies, not only in real estate companies.

Sellers should carefully prepare the due diligence process

In the future, sellers should not rely on the fact that the buyer will take note of all documents and search the data room as part of a due diligence review. Instead, sellers are encouraged to carefully prepare the due diligence process on the buyer side, post the documents in a structured manner in a data room and designate them there. They should handle questions in a Q&A process with the utmost accuracy. Best practice is likely to be to provide the prospective buyer and, if applicable. to disclose to its technical, tax and legal advisors in advance any information that may be relevant to the purchase decision.