The written form requirement for changes in the amount of rent – New case law on the written form requirement for changes in the amount of rent in long-term rental and lease agreements

In a recent ruling, the German Federal Court of Justice (BGH) clearly emphasized that a change in the amount of rent always constitutes a material change to the contract and thus, in the case of long-term contracts, is subject to the formal requirement of Section 550 sentence 1 of the German Civil Code (BGB) (ruling of November 25, 2015, XII ZR 114/14). Does this mean that every change in the amount of rent, including changes due to a value adjustment clause or a graduated rent agreement, must be documented in an addendum to the rental agreement in order to comply with the written form requirement?

The written form requirement

Under German law, rental agreements with a fixed term of more than one year are subject to the requirement of written form pursuant to Sections 550 and 126 of the German Civil Code (BGB). Accordingly, the essential elements of the lease agreement (such as contracting parties, subject matter of the lease, rent, term) must be recorded in writing. The background to this is that a purchaser of the property on which the rental property is located enters into the rental agreement by operation of law and assumes the rights and obligations arising from the rental agreement (principle of “purchase does not break rent” – Section 566 (1) of the German Civil Code).

The verdict

In its ruling of November 25, 2015, the Federal Court of Justice (BGH) clearly commented on the question, which had not yet been clarified by the highest courts, of whether a subsequent change in the rent is always material, irrespective of its amount, or whether it is additionally necessary for a materiality threshold to be exceeded in order for this change in the rental agreement to be recorded in a separate addendum. In the opinion of the BGH, a permanent change in the amount of rent is always material to the contract and must therefore always be agreed in writing in accordance with § 550 BGB. As exceptions, the BGH mentions only cases in which changes in the amount of rent for no more than one year or can be revoked at any time by the landlord.
As justification, the BGH states that the rent is not only a per se essential point of the contract, which is of particular interest to potential purchasers of real estate protected by §§ 550, 126 BGB, but that changes in the rent can directly affect the landlord’s possibility to terminate the contract without notice due to the tenant’s default in payment. The non-payment of a comparatively small increase amount can, on the one hand, add up in the case of a long-term rental agreement and, if necessary, lead to a termination under Section 543 (1) of the German Civil Code (Bürgerliches Gesetzbuch). 2 Sentence 1 No. 3 lit. b) BGB lead to sufficient arrears. On the other hand, the delay with an only minor increase amount in conjunction with other payment arrears of the tenant can lead to “the barrel overflows” and an important reason for a termination within the meaning of § 543 para. 2 sentence 1 no. 3 BGB is to be affirmed.
Against the background of the aforementioned reasoning, the BGH also regarded a rent increase of €20.00 per month as a contractual amendment subject to the formal requirement of Sections 550, 126 of the German Civil Code (BGB) and in this respect rejected the contrary opinion of the Court of Appeal (OLG Stuttgart, judgment of September 22, 2014).

Supplements for rent increases due to index adjustments or graduated rent agreements?

Does this now mean that even in the case of rent increases due to index adjustments and on the basis of graduated rent agreements, an addendum to the rental agreement must always be concluded in order to satisfy the written form requirement of §§ 550, 126 BGB? The BGH has commented on this in another decision. In a ruling dated February 5, 2014 (XIII ZR 65/13), the court expressed the view that a rent increase based on a rental agreement value protection clause does not need to comply with the written form requirements of Sections 550 and 126 of the German Civil Code. In justification, the BGH pointed out that in the case of an automatic rent adjustment on a certain date, the corresponding contractual agreement on the rent increase was already included in the original rental agreement. If the rental agreement otherwise complies with the written form requirement, no addendum is required to document the rent increase due to the index clause. This applies even if the index clause provides for a written notification of the landlord to the tenant about the rent change, if this notification is only declaratory in nature – and is not decisive for the reason and amount of the rent change. The question of whether an “automatic amendment” has actually been agreed must therefore be examined in each case where rent increases or reductions have occurred as a result of index changes and the compliance with the written form of a long-running rental or lease relationship is to be examined, such as in an acquisition due diligence.
The same principles can be applied to graduated rent agreements: A rent increase based on a graduated rent agreement does not require an addendum in order to comply with the written form requirement of §§ 550,126 BGB if the agreement regarding the graduated rent is included in the original rental agreement and the increase automatically takes place on a certain key date. The original lease agreement must satisfy the written form requirement in this respect.
We will keep you informed about the further development of case law on the – still exciting – topic of the written form requirement in long-term rental and lease agreements. Please do not hesitate to contact us if you have any questions.