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02.09.2016 | KPMG Law Insights

Written form healing clauses in commercial tenancy law – contract drafting and case law

Written form healing clauses in commercial tenancy law – contract drafting and case law

The terminability of a long-term commercial lease agreement due to a breach of the statutory written form has always been a focal point in the practice of landlord and tenant law. In this context, the use of so-called written form healing clauses has gained in importance. Two recent rulings by the German Federal Court of Justice provide further legal certainty and suggestions for clear contract drafting.

Many leases attempt to counter written form violations with written form cure clauses. This is intended to preserve the term agreement and prevent premature termination due to a lack of written form in accordance with sections 578 and 550 of the German Civil Code (BGB).

The effectiveness of so-called written form healing clauses has not yet been conclusively clarified.

Effectiveness and state of dispute

In some cases, it is assumed that a written form healing clause is generally invalid. In particular, the Rostock Higher Regional Court (judgment of July 10, 2008, Case No. 3 U 108/07) took the view that they violated mandatory law. The statutory requirement of the written form cannot be generally overridden by a contractual provision.

However, written form cure clauses are usually considered effective, including in general terms and conditions. The argument: The provision is neither surprising nor is it recognizable what an unreasonable disadvantage should be. According to the Düsseldorf Higher Regional Court (ruling of May 11, 2004, Case No. 24 U 24603), such a clause merely regulates the obligation to comply with the written form requirement at the request of the other contracting party. This merely reinforces the principle that the contracting parties must adhere to concluded contracts (“pacta sunt servanda”).

In case law and in the literature, there has also been no uniform answer to date as to whether a clause can only prevent the original contracting parties from terminating the lease agreement by invoking a deficiency in the written form or whether it also has legal effect vis-à-vis the purchaser of the property.

No binding of the purchaser of the real estate to a written form healing clause

The Federal Court of Justice has now ruled on this issue in a judgment dated January 22, 2014, Ref. XII ZR 68/10, and April 30, 2014, Ref. XII ZR 146/12, ruled that a right of termination on the part of the purchaser of the property cannot be excluded by means of a written form healing clause. The statutory written form requirement under Section 550 of the German Civil Code (BGB) is intended to ensure that the purchaser can, in principle, see the conditions under which he enters into a rental relationship from the rental agreement document.

If this is not the case as a result of invalid, for example merely oral, agreements, the tenant may prematurely terminate the lease agreement by giving ordinary notice of termination. This possibility may not be taken away from him and may not be circumvented by a written form healing clause. The purchaser’s invocation of a deficiency in the written form can therefore – apart from special exceptions – not be contrary to good faith despite a cure clause.

Contract drafting and due diligence

In connection with the conclusion and amendment of long-term commercial leases, the greatest care should always be taken to ensure compliance with the written form required by law. § Section 550 of the German Civil Code (BGB) requires that the agreements essential to the contract concerning the subject matter of the lease, the amount of the rent, etc. be set down in writing in a complete and unambiguous manner. This also applies to agreements from which unilateral powers to amend the contract may arise for one party.

However, practice shows that the necessary strictness of form is often lost sight of, especially in the case of very long existing tenancies as well as changes of owner and manager.

From the point of view of the landlord

In view of his position as a “new landlord”, every purchaser of a property should therefore make sure in the context of the purchase examination that the lease agreement in question contains such a written form healing clause that expressly excludes it from the scope of application. It is then open to him to demand from the tenant, with reference to the effectiveness of the obligation to cure, the conclusion of a rental agreement supplement that eliminates formal defects by oral agreements.

It is then also possible to terminate the contract with reference to an established deficiency in the written form without first having to comply with an obligation to work towards curing the deficiency in form. The latter will be recommended if, for example, the tenant can prove the existence of an oral agreement with the “previous landlord” that is detrimental to the acquirer, such as a permanent rent reduction.

From the point of view of the tenant

A tenant interested in a long-term commitment and term of the lease should inquire about any pending change of ownership before signing the lease. If there are indications that the property is to be sold, the tenant is strongly advised to do everything possible on his own initiative to help conclude a lease agreement that complies with the written form and to avoid subsequent violations of the written form.

Conclusion

It should be noted that the statutory written form requirement with its warning and proof function cannot counter all conceivable risks and that the protection of Section 550 of the German Civil Code cannot be comprehensive.

In view of the economic importance of long-term leases in the commercial sector, every such lease agreement should be carefully bound into one document with all its components for signature and contain a written form healing clause that explicitly addresses the acquirer issue.

Even in the course of a tenancy, a regular review of the correctness of form and, if necessary, adjustment of the provisions of the tenancy agreement is recommended. Written form healing clauses do not make a legal examination of the lease situation superfluous.

According to the most recent case law of the German Federal Court of Justice, purchasers are in the comfortable situation of being able to take an established deficiency in the written form as the starting point for terminating a long-term lease, if desired, without the purchaser having to be accused of acting in bad faith.

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