Keywords: real estate, termination, lease agreement
The termination of a lease agreement by the acquirer for the reason of non-compliance with written form requirement is permissible despite existence of a remedial written form clause.
BGH [Federal Supreme Court], judgment of January 22, 2014 – XII ZR 68/10 and BGH, judgment of April 30, 2014 – XII ZR [civil law] 146 /12
By Dr. Jörg Michael Lang
1. BGH XII ZR 68/10 of January 22, 2014 A so-called remedial written form clause in the lease agreement does not in itself prevent the acquirer from terminating a lease agreement which he entered into pursuant to Section 566 Para 1 BGB by citing lack of the requirement of the written form, without first requiring the tenant to remedy the deficiency.
2. BGH XII ZR 146/12 of January 30, 2014 The beneficial owner ("Nießbrauchsberechtigter") is not acting in bad faith if, despite a clause to remedy the contractually required written form, he terminates a lease agreement which he entered into pursuant to Sections 566 Para 1, 567 sentence 1 BGB citing lack of the written form.
Both decisions concern termination of commercial leases by an acquirer or beneficial owner due to violation of the written form requirement, stemming respectively from the time before the change of ownership. In both cases, the leases contained so-called remedial clauses under which the parties undertook to, in the event of non-compliance of the written form, induce this subsequently and not to terminate before that date on the grounds of lack of form.
Content and subject of the decision
There has thus far not been a ruling by the Supreme Court as to whether a standard remedial written form clause would also have a binding effect upon the acquirer of the property. Lower court case law and the legal literature have had differing views on the matter (see our Newsletter Summer 2013). The Supreme Court has now in these two decisions ruled on this controversial issue and finally resolved it. According to these rulings, the acquirer of a property who has assumed the rights and obligations arising from the lease agreement pursuant to Section 566 BGB is not acting in bad faith if he terminates the lease citing lack of the written form, despite the lease containing a remedial written form clause. This applies regardless of whether the remedial clause has been agreed in individual contracts or is part of a standard contract. The Supreme Court justifies its view with the protective purpose of Section 550 BGB. This provision is intended to ensure that a subsequent acquirer of a property, who by law on the part of the landlord enters a lease agreement concluded for more than one year, can ascertain its terms from the written lease agreement. The acquirer shall be protected against entering a lease agreement of which the economic conditions are different than expected, for instance as a result of an agreed reduction of rent. If this is nevertheless the case due to irregular agreements, for example only verbal agreements, then he can withdraw from the contract. The acquirer should also be entitled to this right. The Supreme Court does not consider the argument thus far commonly used – that a potential acquirer could become aware of the remedial clause by inspecting the lease agreement and should therefore be aware that he must take part in restitution of the required form in the event of a lack of the written form – to be convincing. The point is that the acquirer obtains knowledge of the essential rights and obligations which he enters into upon acquisition only through insight into the document of the lease agreement. This protection purpose has not been observed if the acquirer would have had to investigate any possible further agreements with the original parties. In the view of the BGH, the fact that concealment of such information would entitle him to compensation claims can also not be accepted.
This is because the provision of Section 550 BGB does not intend to point the acquirer towards claims for damages, but give him a right of termination. Since in general opinion the provisions of Section 550 BGB represent binding law, it also does not matter whether the remedial clause in question constitutes an individual agreement or a standard clause.
Impact on day-to-day business
These two Supreme Court decisions are of considerable importance because they decided the thus far unresolved legal question of the effects of remedial clauses on the acquirer of a property. According to these decisions, in the event of the sale of a property there is for the tenant of the property a risk of termination due to lack of the written form by the acquirer. However, there are two other issues that play a large role in the context of remedial written clauses that the Supreme Court did not address:
a) Can remedial written clauses be concluded effectively at all by individual contracts or standard contracts?
b) How important is the sale of the rental property with regard to possible termination rights of the tenant if there is a remedial written form clause?
Despite the above two decisions, the Supreme Court has not yet addressed the question of whether remedial written form clauses can be effectively agreed between the original contracting parties. The majority opinion in literature and documentation is that this is possible. To avoid any risk, it seems advisable to conclude an addendum to the lease agreement if the respective party has an interest in the continued existence of the rental agreement, in order to remedy the lack of the written form.
Another issue that remains unresolved is the question of whether the tenant can terminate the lease agreement with the acquirer despite remedial written form clause, citing the lack of the written form. If one takes the argument of the Supreme Court as a basis – that the provision of Section 550 BGB is intended to protect the acquirer against unfamiliar agreements between the parties to the lease agreement – this implies that the tenant must be held to the obligation ensuing from the remedial written form clause that states he may not invoke any lack of written form against the new owner. Otherwise the acquirer would be confronted by the tenant with various cases of absence of the written form that he would not be able to see from the lease agreement he has in his possession. It is exactly this situation that the Supreme Court wanted to avoid with the two judgments. It is unfortunate that the Supreme Court did not make use of the opportunity to take a definitive position on these issues. The topic of the written form thus continues to be one of the most important problems in commercial leases.
The authorization of the real property buyer to exercise landlord's rights
Federal High Court, judgment of March 19, 2014 – VIII ZR 203/13
By Dr. Jürgen Streng
It is generally known that on sale of a property the lease only passes to the purchaser on transfer of title (Art. 566 Para I BGB [Civil Code]). As the date when the transfer is recorded in the Land Register (transfer of title) cannot be predicted and it is economically undesirable for the purchaser to await registration of the transfer in the Land Register before acquiring the rights under the lease, it is customarily agreed in property sale agreements that all rights and obligations under the leases pass to the purchaser on payment in full of the sale price, i.e. independently of the transfer of title (money for goods).
In its decision dated March 19, 2004, the Federal High Court reinforced this common practice in the property sector and also refrained from increasing the formal requirements in residential tenancy law applicable to legally relevant acts by the purchaser in the period between payment of the sale price and transfer of title.
In the case presented for ruling to the Federal High Court, the purchaser was authorized in the deed of sale to issue all notices under tenancy law to the tenants. The purchaser did so, requesting several increases in rent and additional demands for ancillary costs, to which the tenant had also agreed and indeed paid. The tenant subsequently found that the purchaser had at that time not yet become the owner and demanded to refund the payments (in the case at issue several years elapsed between payment of the sale price and transfer of title!). The Federal High Court dismissed the claim for refund.
Content and Subject of Decision
In the case at issue, the Federal High Court held that the purchaser of a leased apartment may be authorized by the vendor to issue e.g. a demand for rent increase pursuant to Art. 558 a BGB in his own name even prior to transfer of title. The Federal High Court further held that the effectiveness of the rent increase demand did not depend on the authorization (agreed in the deed of sale) also being disclosed. The Federal High Court considered as follows: The basis for the case was that the deed of sale at issue included an authorization for the purchaser to assert the rights under the lease in his own name even prior to the transfer of title. The Federal High Court thus confirmed its established practice in commercial tenancy law and held that it was also permitted under residential tenancy law for the owner to authorize a third party to assert in his own name a non-independent right to alter the legal relationship. Such authorization was also not opposed by Art. 566 BGB (purchase does not interrupt tenancy), as the previous landlord is entitled to assign his rights under the lease at an earlier time or to authorize a purchaser to assert such rights in his own name.
The Federal High Court also dismissed the view occasionally taken that a unilateral legal transaction undertaken by a person duly authorized by the landlord is only effective if the authorization is disclosed (cf Berlin Regional Court GE 2009; Sternel, Mietrecht Aktuell 4 4th edition Marginal No. 81; Schmidt-Futtere/Streyl, Mietrecht 11th edition, § 566 BGB Marginal No. 46), since in the view of the Federal High Court and contrary to that of counsel, the authorization permits the authorized person to act in his own name and there is thus in particular no requirement for any reference to the actual rights owner. The tenant is protected in this regard in that in the event of doubt he may request evidence of the authorization.
Impact on day-today business
In comparison with the powers of attorney for the purchaser frequently provided for in sale agreements, an authorization for the purchaser to act in his own name, particularly when undertaking unilateral legal transactions, offers legal advantages, as there is no potential for formal rejection pursuant to Art. 174 BGB (although the possibility of requesting formal evidence of the authorization without the formal restrictions of Art. 174 BGB remains). It is not necessary to disclose the authorization (although it may be advisable where appropriate). The decision of the Federal High Court should now also serve to remove previous uncertaincies with regard to the effectiveness in residential tenancy law (cf. references cited above).
It is therefore advisable to include in sale agreements a comprehensive authorization for the purchaser to act in his own name in the period between payment of the sale price and the transfer of title to the purchaser.
On the disproportionate nature of the costs of remediation and the restriction of claims for compensation in property sales contracts
BGH (Federal Court of Justice), judgment of April 4, 2014 – V ZR 275/12
By Elmar Günther
The decision on compensation under the statutory warranty right concerns a – to institutional investors – somewhat exotic-looking infestation with genuine dry rot. In sales contracts, a warranty for defects is often excluded and independent guarantees and liability limitations are resorted to – as happened in this case! The decision reminds us that the statutory warranty right applies where a warranty exclusion – and often a liability limitation – is not effective. Nevertheless, the decision brings clarity to how an excessive liability for remediation costs is restricted.
Should the costs required to remedy the defect appear disproportionate, the purchaser may demand from the vendor only compensation for the loss in value of the object caused by the defect.
Whether the costs are disproportionate has to be determined on the basis of an assessment of the circumstances of the individual case, taking into account the criteria in § 439 para. 3 BGB (Civil Code).
For property sales contracts, as an initial guideline, it can be assumed that the costs of remedying defects are disproportionate if they either exceed the market value of the property in a defect-free state or 200 percent of the loss in value of the object caused by the defect.
An assessment of whether the costs are disproportionate shall be made at the beginning of the remediation process by the purchaser. Should it emerge during the remediation that the costs are higher than expected, this precludes the duty to compensate only if a prudent purchaser were not to carry out or would have carried out the works even taking into account the costs already accrued.
In simplified terms, the plaintiff acquired from the defendant for EUR 260 000.00 a plot of land with an existing building for letting. The defendant, as vendor, had guaranteed that the property was free of wood ticks and guaranteed a maximum amount for the removal of furniture beetles from load-bearing wooden structural elements. For the rest, all warranty was excluded. Subsequently, a massive infestation of dry rot was discovered affecting all the wooden components on all floors, including the cellar. A partjudgment established the duty to compensate for the further damage due to the infestation with dry rot and the renovation works which had to be carried out as a result. In the legally-binding decisions, almost EUR 90 000.00 were awarded to cover renovation costs and EUR 45 000.00 for the remaining loss in value. Subsequently, the plaintiff is seeking further renovation costs of over EUR 500 000.00 incurred in the course of the renovation or expected to be incurred. The value of the property with dry rot was said to be about EUR 500 000.00 and without dry rot it was said to be at least EUR 600 000.00. The lower courts ruled in the plaintiff's favour but the BGH rejected the case on the basis that this was an error in law and referred the case to the court of appeal for a new trial.
Content and subject of the decision
The BGH criticises the failure to consider plaintiff's savings in expenditure or the deduction of "new for old" in terms of damage calculation. The calculation of damages in terms of remediation costs must take into account whether the purchaser might make any savings in expenditure as a result of the remediation; such savings which would have to be deducted. In particular, other planned renovation work (e.g. renovation of bathrooms which had to be demolished in order to reach the infested components) must be taken into account here. In this context, a deduction must be made if there was an increase in value as a result of extensive renovation work.
However, the BGH is critical of the fact that a possible case of disproportionate remediation costs was not investigated. Fundamentally, the damaged party has a claim under the law of warranty for supplementary performance in the form of (i) remediation of the defect or (ii) delivery of a defect-free object. For real property, normally this only involves supplementary performance through remediation of defects. If this is not done and the injured party has a claim for damages, he may demand either (i) the compensation of the loss in value caused by the defects or (ii) compensation for the remediation costs. If the remediation costs are disproportionately high, the vendor may legitimately refuse the supplementary performance. However, the duty to compensate damages is not cancelled if the vendor is at fault for the defect, i.e. if he caused it or knew about it or should have known about it. Nevertheless, in accordance with the law's protective logic, the vendor, who may legitimately refuse the supplementary performance, should not be obliged to bear disproportionately high costs of the damages claim. Thus the BGH – as already decided for works contract law – has clarified, that where remediation costs of defects are disproportionate, only compensation of the loss in value caused by the defect as damages is applicable. The BGH bases its adjudication of a disproportionate claim for compensation on the same principles as for the justified refusal of the supplementary performance. In the investigation of whether the remediation costs of the defect are regarded as disproportionate, it does not depend on the sale price but only on the value of the defect-free object and the significance of the defect. The BGH rejects the absolute limits for disproportionality discussed hitherto in the literature and emphasises the necessity of assessing matters on a case-by-case basis. As a rule of thumb for disproportionality, the BGH considers compensation being in excess of (i) the market value in defect-free condition and (ii) 200 percent of the loss in value caused by the defect. In addition, in the investigation of the disproportionate compensation, the extent of the vendor's fault needs to be taken into account. Thus in cases of intent or serious fault, otherwise disproportionate expenditure could have to be borne by the vendor. By the same token, a special interest of the purchaser in supplementary performance can be taken into account.
In the case in question, the BGH has, in the absence of other, conflicting circumstances (especially no specific degree of vendor's fault), due to the excess of 200 percent of the loss in value caused by the defect, considered this as a possible case of disproportionate compensation. In referring the case, the BGH has further emphasised that the assessment of whether costs are disproportionate should be done at the start of the remediation of the defect – in this case, the renovation works. This means that, if the remediation costs increase at a later point, the vendor must settle them in full. The duty to compensate could only be cancelled if "a prudent purchaser were not to carry out the works even taking into account the costs already accrued."
Impact on day-to-day business
To begin with, it is regrettable that the available documents do not tell us why in earlier judgments the vendor's duty to compensate was confirmed, despite a warranty exclusion. The only thing we can derive from the decision is that there was no fraudulent concealment. In any case, it is clear that the common exclusion of a warranty for defects in this liability arrangement only waives a warranty superficially – i.e. only if and to the extent that the exclusion is also effective. For this reason alone, as the vendor, it is worth preparing the sale process carefully. This includes avoiding untested confirmations – "shots in the dark" – of seemingly remedied deficient information as well as disclosing known deficiencies as much as possible. This prevents a charge not only of bad faith but also of a negligent breach of duty. In both cases, the agreed exclusion may be ineffective and the vendor's becomes liable under the right of warranty.
Furthermore, the BGH has made extensive comments on the calculation of damages and on specifying the disproportionality of defect remediation costs as well as remedying existing legal uncertainties. The indicative thresholds for specifying disproportionality in the field of real property and the liability relief aspect – only the loss in value caused by the defect can be compensated for – initially help the vendor. On the other hand, the purchaser is not unprotected: The specification remains an individual case evaluation whereby in particular the extent of the vendor's fault influences the assessment. On the other hand, the liability relief only has an effect if the costs are already disproportionate in the prognosis. Where expenditure increases at a later point, the vendor again becomes fully liable, unless the continuation of the works is uneconomical. This last corrective measure is very vague.
Pledge of claim in the redevelopment area based on a provisional property registration
Nürnberg Higher Regional Court, decision of May 6, 2013 – 15 W 494/13
By Gelena Yufa
If the claim based on a provisional conveyance entered in the land register is pledged, for the pledge notice for a plot of land in a redevelopment area to be entered in the register, the local authority's approval (without which the pledge is provisionally invalid) is required in accordance with § 144 para. 2 Nos 2, 3 of the Building Code.
A redevelopment notice and a provisional conveyance is recorded for a third party in Section II of the land register in question regarding a plot yet to be measured, as well as an assignment of the claims from this provisional conveyance to purchaser E. E created a land charge in favour of the Sparkasse, but this land charge could not be registered due to the lack of measurement of the plot; E then pledged all his rights and claims under the contract regarding the assignment of the provisional conveyance, especially the claim on conveyance to the recorded owner, as a security to the Sparkasse. At the same time, E made the following application to the land registry:
" 1. To register the notice of the pledge in the provisional conveyance,
2. To enter the mortgage, which gains legal force with the transfer of ownership, in the land register.
This entry should not occur if, at the same time as the transfer of ownership, the current land charge on the pledge ownership is entered in the order described above. In this case, the purchaser agrees to the cancellation of the pledge notice with an enforcement request."
The land registry has established by interim order a bar to proceedings, since there was no local authority approval under the Building Code. The land registry did not redress the appeal subsequently made by the purchaser and the other parties involved and referred it to the Higher Court for a ruling.
Content and subject of the decision
The Nürnberg Higher Regional Court rejected the appeal. The Court confirmed that the entry of the pledge notice in the redevelopment area requires the local authority's approval under the Building Code. The notarised contract of January 7, 2013 is, among other things, a binding agreement, which establishes the duty to create an encumbrance on the plot, in this case the mortgage under § 1287 para. 2 Hs. 1 of the German Civil Code. The Court states in particular that the entry of a provisional conveyance in the redevelopment area fundamentally requires no approval under the Building Code, since a conveyance does not constitute a right in rem but a special collateral with proprietary effects. However, the subsequent entry of the transfer of ownership does require the prior express approval of the local authority.
In contrast to the entry of the provisional conveyance, legal differences arise in the pledge of the conveyance claim and the entry of the pledge notice in the land register. If ownership of the property is transferred, the pledgee purchases directly, without the involvement of the local authority, a full material right in the form of a mortgage under §§ 1281, 1282, 1287 para. 2 Hs. 1 of the German Civil Code which can be entered in the land register as an amendment. The establishment of the mortgage justifies a material right of a third party which, as an independent financial charge, conflicts with the redevelopment aims. Therefore, the pledge of the conveyance claim justifies an encumbrance on the property within the meaning of § 144 para. 2 Nos 2, 3 of the Building Code.
Impact on day-to-day business
While financing the acquisition of property, the purchaser has often to specify security prior to acquisition of ownership with the entry of a conveyance. In buying a plot which has yet to be measured, or, as in this case, a sub-plot, the sub-plot may initially be burdened with a lien, if the plot division has been completed in the land register. Therefore, before the transfer of ownership, the purchaser may only have the option of specifying a loan collateral secured in the land register, while he pledges his claim based on a provisional conveyance to the lender. This type of security is accepted by most all-purpose banks and by some building societies. The Nürnberg Higher Regional Court's decision of 6.5.2013 somewhat delays this kind of pledge of the conveyance claim in the redevelopment areas, since from now on the local authority's express prior approval will be required for the entry of a pledge notice. The same requirements for urban development areas apply. In practice, purchasers must ensure that these approvals are obtained from the authority in due time.
Furthermore, we will need to wait and see whether the permitted right of appeal will be used by the parties and whether a supreme court ruling can produce additional legal security. The Nürnberg Higher Regional Court's argument does not appear to be completely clear and comprehensible. The direct application of § 144 para. 2 No 2, together with No 3 of the Building Code is questionable, since the mortgage gains legal force by operation of law and a corresponding duty to create it is not directly established in the binding agreement. The requirements for an analogous application of these provisions, unintended loopholes and comparable interests, were not set out explicitly in the decision.
The European Radiation Protection Directive lays down comprehensive limits for radon for the first time – impacts on existing properties and the acquisition of real estate
By Dr. Marius A. Boewe
Radon is a carcinogenic gas that is hazardous to health and undetectable due to its lack of colour, smell and taste. Despite the significant hazard it poses to health and its appreciable presence in Germany, this gas has thus far hardly played any noticeable role in German public perceptions. This will most likely change in the near future, because a new European directive will, for the first time, lay down comprehensively binding limit values for this gas. Radon is not only hazardous to health – the new limits also lead to obligations to remedy defects and investment risks.
Radon is a naturally occurring radioactive gas that is released from the soil as a decay product of uranium. The radon concentration in Germany varies depending on different geological conditions. Due to an almost complete lack of binding limit values thus far and the fact that any discussion around the issue has been largely academic, radon does not yet play any real role in public consciousness. The general lack of interest in radon does not correspond to the health risks that result from an too high exposure to the gas.
According to one study from 2006, in Germany, approximately 1,900 people die each year of lung cancer caused by the occurrence of radon in buildings. For comparison – 3,340 people died in traffic-related incidents in Germany in 2013. In Switzerland, radon is the second most common cause of lung cancer after smoking.
This is usually caused by radon that enters the building as soil gas from the layers of rock below and it collects in the basement rooms in particular. Structural measures can reduce the concentration in the affected areas; in some cases the health hazard can be diminished by installing air circulation systems. In this regard, it should be noted that air circulation is impaired in particular in buildings that have special sealing measures to optimize them for energy efficiency, which can therefore lead to increased radon exposure for residents. However, before taking any countermeasures, the affected parties must first be informed in order to provide an appropriate level of awareness at all.
Until recently, radon was a gas for which, broadly speaking, no limit values existed. The Radiation Protection Ordinance regulated and introduced mandatory limit values for the gas only for certain professional activities (such as working in mines or water catchment plants). Beyond this very narrow scope of control, only non-binding recommendations have thus far existed, mostly from non-governmental entities.
This will change rapidly in the future. The Directive 2013/59/Euratom of the Council of the European Union of December 5, 2013 introduced for the first time standards detailing binding guidelines for radon that apply to the entire European area, including for the home and the workplace. These standards are to be implemented in binding national law by February 6, 2018. From that date at the latest, reference values for building interiors will be defined, among other measures. Proof of compliance with these limits will in future be a required formality for employers, property owners and landlords. It would, however, be hazardous negligence for property owners to wait until 2018 to schedule problems and responsibilities related to radon for re-submission. At least as of the adoption of the Directive, it can not be excluded that compliance with the limit values that will be mandatory from 2018 will already now be required by the authorities as part of an interim approval process. The requirement usually laid down in the building codes of the federal states, explaining that a building at risk to life or limb may not be approved, should also before 2018 at least allow for the option to refuse planning permission if it exceeds the (future) radon exposure limits deemed hazardous to health, prescribe restrictions of use (e.g. for sensitive use such as schools, kindergartens and hospitals) and issue orders for decontamination. The same can also become relevant for real estate purchases. The radiation exposure of a building can certainly be regarded as a defect of quality, at least if a threshold clearly hazardous to health is exceeded. These may also result in requests for a reduction in rent.
These transitional issues could therefore only become even more relevant in the near future, since with entry into force of the said Directive the issue of radon is gradually gaining more general awareness.
Practical consequences and outlook
Experts believe that with the future limit values, about 1/3 of German property will at least require being inspected. The so-called radon map of the Federal Office for Radiation Protection does provide information on the radon concentration in soil air, but buildings that are located in areas that are harmless in themselves may exceed the limit values due to their construction. This happens regularly. The issue of radiation exposure of buildings should therefore no longer be excluded from any real estate transaction. Existing properties should be tested for radon pollution, if only to prevent possible claims from tenants. This can be done quickly and inexpensively through geographical preselection and a technical inspection of the site.
Overview Real Estate Transfer Tax Rates
By Cornelia Wiendl
The following table provides an overview of the current status of the real estate transfer tax rates in the individual federal states (September 20, 2014). To the extent that specific information and indications regarding a change of the real estate transfer tax rate exist in a state, this was noted accordingly. Changes since the last issue in summer 2014 are marked in bold.
Previously published 1 October 2014
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