Practice Group Construction and Real Estate Industry: Written form error notices are still a danger!

The written form requirement for long-term rental agreements has repeatedly led to legal disputes between tenants and landlords in the past. Despite the standard use today of so-called written form precautionary clauses in lease agreements for commercial premises, the topic has not lost any of its topicality. This is shown by two recent decisions.

Each change of tenant must be documented in a lease addendum

In a case decided by the Federal Court of Justice on January 30, 2013, a part of the business of the commercial tenant had been transferred to another company. In the purchase and transfer agreement, the long-term lease at issue was merely listed as the “Hamburg location” and by naming the lessor as the object of purchase and transfer.

Over a period of eight years, the purchaser then paid the agreed monthly rent to the landlord, who accepted the payments without objection. In addition, the landlord also accepted a rental guarantee issued to the purchaser and always addressed the service charge statements and rent increase requests to the purchaser. The latter finally terminated the lease agreement with due notice, citing a violation of Section 550 of the German Civil Code (BGB).

Replacement of the tenant is a material change to the contract

In its ruling, the BGH both affirmed a change of tenant and confirmed the purchaser’s termination as proper.

Any change of tenant that is settled solely between the previous tenant and the new tenant generally requires the landlord’s approval. However, it is settled case law that consent to the assumption of the contract may also be given conclusively. Based on the circumstances of the case, the BGH had no doubts that the landlord had given his implied consent.

However, he clarified: from this must be distinguished the need for form of the replacement of the tenant. Since the specification of the contracting parties in the commercial lease agreement constituted an essential contractual condition, the change of tenant should have been documented in compliance with the statutory requirement of written form. In the opinion of the BGH, the individual documents of the parties which were communicated following the implementation of the takeover of the business operations were not sufficient to comply with the written form requirement.

Invocation of lack of written form not generally contrary to good faith

In the opinion of the BGH, the new tenant’s invocation of the lack of written form was also not contrary to good faith. In principle, either contracting party may invoke a deficiency in the written form and terminate the lease agreement without notice, even if the sole motive for doing so is economic.

However, the prevailing opinion in case law and literature assumes that the termination is contrary to good faith if the parties have undertaken in a so-called written form precautionary clause to comply with all necessary formal requirements in the event of defects. In the case to be judged by the BGH, a particularly serious breach of fiduciary duty was not conclusively proven.

In any case, the fact that the purchaser had been paying rent for more than eight years was not considered to be a circumstance that could have justified the landlord’s trust that the purchaser would not exercise its statutory right to terminate the lease.

Written form clauses may not oblige real estate purchasers to cure defects

If a written form provision clause becomes the content of the lease agreement, it must be formulated correctly. This is indicated by a decision of the Düsseldorf Higher Regional Court dated November 29, 2012. The court ruled: A contractual cure clause intended to remedy a deficiency in the written form of a long-term lease is invalid pursuant to Section 307 of the German Civil Code (BGB) if it imposes a blanket obligation not only on the original lease parties but also on a real estate purchaser who, pursuant to Section 566 of the German Civil Code (BGB), assumes the landlord’s position by operation of law upon transfer of ownership.

In the case decided, the purchaser had to establish that the former landlord and the tenant had not sufficiently described the areas of the leased property either in the lease agreement or in its appendices. The tenant objected to a termination and eviction action by the purchaser.

However, he was unsuccessful before the Düsseldorf Higher Regional Court despite a written form clause in the lease agreement: the protective purpose of Section 550 of the German Civil Code (BGB) is primarily to ensure that a purchaser of real estate can recognize the terms of the lease agreement from the written contract. A catch-up clause should have the exact opposite effect. It forces the acquirer to cooperate in curing a deficiency in the written form. This was intended to bind the customer to a contract for the long term, which had not been effectively agreed at the outset.

In practice, this means that third parties, namely purchasers, should be expressly excluded from the scope of application of a clause requiring written form when drafting the contract.

An appeal against the decision has been lodged with the Federal Court of Justice. If the OLG Düsseldorf is followed, the formulations chosen in many model contracts are likely to be invalid – with far-reaching consequences. Not only purchasers, but also the original parties to the lease agreement cannot be regarded as obliged to perform all actions and make all declarations in the event of a breach of form in order to comply with the statutory written form requirement and, until then, not to terminate the lease agreement prematurely with reference to the lack of written form.