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08.07.2021 | KPMG Law Insights

Leases with the non-owner

Leases with the non-owner

The application of Section 566 of the German Civil Code (BGB), which elaborates on the legal principle that “purchase does not break rent”, always causes problems when a rental agreement has not been concluded with the owner as landlord. In a new ruling, the Federal Court of Justice comments on the practice-relevant question of when a tenancy can nevertheless be effectively transferred from the previous landlord to a property purchaser in this case.

Leases with the non-owner

“Purchase does not break rent” is the title of Section 566 of the German Civil Code (BGB), which governs the conditions for the transfer of an existing lease from the seller of a property to its purchaser. This provision causes problems in particular if the lease was not concluded with the transferor as landlord. In a new ruling, the Federal Court of Justice comments on the practice-relevant question of when a tenancy can be effectively transferred in this case.

No direct applicability of § 566 BGB

If rented residential space is sold by the landlord to a third party after it has been transferred to the tenant, the purchaser shall, pursuant to Section 566 para. (1) BGB into the tenancy. According to the prevailing opinion, at the moment of acquisition of ownership, a new lease agreement is concluded between the acquirer as the new landlord and the tenant, the content of which is similar to the previous lease agreement with the selling owner and continues that lease relationship. By way of references in Section 578 of the German Civil Code, Section 566 of the German Civil Code also applies to land and commercial premises as rental objects. For the legal transfer of the tenancy, however, the identity of the landlord and the owner is mandatory; according to a widespread opinion, this identity must already exist when the tenancy is established and not only occur later. Direct application of the standard is therefore ruled out as soon as the owner and landlord are not identical, for example because the rental is carried out by a separate rental company within the owner’s corporate group. The acquirer in such a situation would not automatically become a landlord as part of the acquisition. Whether and under what conditions this is to be achieved by way of a corresponding application of Section 566 of the German Civil Code (BGB) has so far been answered inconsistently in the case law of the higher regional courts.

BGH affirms analogous application

In a recent ruling of July 12, 2017 (XII ZR 26/16), the Federal Court of Justice now affirms the analogous application of Section 566 of the German Civil Code (BGB), but ties it to narrow conditions. In the underlying facts, the plaintiff demanded that the defendant vacate and surrender rented commercial premises. The defendant had rented the commercial premises from E. Grundbesitz und Handels GmbH. However, the owner of the property and the commercial premises was E. Grundstücks GmbH, which for reasons not known in detail, possibly due to carelessness, did not act itself in the letting, so that E. Grundbesitz und Handels GmbH became the contractual partner of the defendant and fulfilled the landlord obligations. The latter subsequently sold the property with the commercial premises located thereon to the plaintiff, according to which a transfer of the tenancy pursuant to Sec. 566 BGB had not taken place. The plaintiff then demanded that the defendant surrender the commercial premises due to the lack of an effective lease agreement with it.

Analogy under special conditions

Since the identity between landlord and owner required by Section 566 of the German Civil Code does not exist in such constellations, direct entry of the purchaser into the tenancy is ruled out. The possible existence of a legal relationship between the two companies is not sufficient to establish identity. Therefore, an effective transfer of the tenancy to the acquirer by operation of law can only be achieved by analogous application of the provision. The Federal Court of Justice (BGH) has now for the first time commented on the question in which cases a corresponding application of § 566 BGB

is possible. In doing so, it imposes two requirements: First, the lease of the sold property must be made with the consent of the owner in his sole economic interest. Secondly, the actual landlord must not have any interest of his own in the continuation of the tenancy. According to the Federal Court of Justice, the landlord does not regularly have an interest of his own if he concludes rental agreements in his own name, but his activity does not differ from the activity of an administrator who otherwise concludes a rental agreement in the name of the property owner he represents. In this case, there is no own interest in the conclusion and execution of the lease agreement beyond the administrator’s activity. This may be different, for example, if the manager is a tenant and subtenant for his part or pursues other interests with the rental. If both prerequisites are met, the BGH is of the opinion that there is an unplanned regulatory gap necessary for an analogy and that the facts of the case are comparable to Section 566 of the German Civil Code. The highest German civil court was obviously guided here by the idea of tenant protection, because unfortunately all too often tenants do not check the ownership position of their landlord by inspecting the land register when concluding a rental agreement; they would then – perhaps despite their own irreproachable performance of the contract over a longer rental period – suddenly lose their right of possession as a result of a sale of their rental object and would have to vacate their apartment or business premises.

Practice note

If the landlord and the owner are not identical from the outset in real estate transactions whose objective is the acquisition or sale of leased real estate, there is a risk that the lease will not be transferred to the acquirer as desired. The Federal Court of Justice (BGH) has now specified the specific cases in which a transfer to the purchaser can also take place by operation of law. In these constellations, a careful examination of the individual case is required in order to be able to ensure that a tenancy relationship (which may have been agreed by the seller as a condition of the object of purchase or even guaranteed to the purchaser with its term and income) also exists and is transferred to the purchaser. The requirements according to the judgment of July 12, 2017 are very narrow; a corresponding application of Section 566 of the German Civil Code (BGB) already always fails if the selling landlord has rented the rental object himself and subleases it. If it is established after examination that the selling landlord was not the owner at the time the lease was concluded, there are various, far more legally secure ways to choose from instead of applying Section 566 of the German Civil Code accordingly. In particular, both a tripartite contractual transfer between the lessor, the lessee and the acquirer at the time of the economic transfer of the property and (in addition to the acquisition of the property from the owner) a share deal acquisition by the leasing company are possible.

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