Beware the terminators
Non-lawyers might be astonished at the legal specifics of long-term leases in Germany. Frank Müller explains
“Dear Client, in your commercial lease agreement with a fixed lease period of 10 further years, the signature dates of landlord and tenant deviate by more than two weeks. Despite the contractually agreed fixed lease period we cannot, therefore, exclude that the lease can be validly terminated at any time with a six to nine months notice period.”
Property investors with experience in the German market might already have heard this or a similar statement from their legal advisers in the course of a legal due diligence.
But those facing the German written form requirement for long-term lease agreements for the first time – and the resulting legal consequences – might be astonished and wonder why such strange legislation exists.
Indeed, the written form requirement for long-term lease agreements is a legal concept specific to Germany which is at first hard to understand for foreign investors and non-lawyers.
However, as the validity of long-term leases and the reliance on the contractual lease term is essential for the value of a property, professional property investors must take a closer look at this topic.
When the economy is in a downturn, tenants (but also landlords) might try to use a written form defect of their lease agreement to extricate themselves from superfluous and unprofitable lease agreements, or at least to magnify a threat in order to renegotiate the rent.
In an area or at a time where other tenants are difficult to find, a landlord might rather enter into negotiations on a rent reduction instead of being faced with the risk of a long lasting law suit with an important tenant over the validity of a lease agreement or its termination.
Still reasonable
The intentions of the German legislator were well intended when it enacted the provisions of the German Civil Code more than 100 years ago and the laws remain reasonable today.
In Germany, lease agreements can be concluded orally. Only lease agreements with a fixed term of more than one year require the written form. If the written form is not met, the lease agreement is still valid; however, it can be terminated at any time with the statutory termination period of six to nine months.
With such regulation, the German Civil Code aims to protect the purchaser because, under German law, the purchaser automatically assumes the existing lease agreements as the new landlord with the change of ownership.
The written form requirement ensures that the purchaser of a property can inspect the lease agreements – and their content – which he or she enters into as the new landlord upon purchase.
Compliance with the written form means that the provisions of an agreement must be recorded in writing. In the case of a lease, this includes the parties to the lease, the rented premises, the rental payments and the term of the lease.
At first sight, this does not seem so difficult. However, in the last decades, clever lawyers have terminated lease agreements for their clients by claiming a breach of the written form and reverting to all kinds of arguments in this respect.
Some were successful, which resulted in many German court decisions explaining in detail which “mistakes” constitute a breach of the written form.
Lease agreements can, for example, be terminated early because the annexes to the lease agreement do not clearly indicate every single parking space which is let together with office space, or because the annexes are not firmly affixed to the lease agreement itself.
Signature dates
Early terminations have also been accepted by the courts if the parties to the lease – unaware of the strict form requirement – subsequently amended the lease by oral agreement or, as mentioned above, because the signature dates of the landlord and the tenant deviated by more than two weeks.
Although the aim of the written form requirement is to protect the purchaser (and new landlord) of a property, an early termination can be declared by both landlord and tenant at any time, even without the entrance of a new landlord, and also years after the conclusion of the lease agreement.
This also applies if the terminating party only wants to get rid of an inconvenient lease agreement.
From a tenant’s perspective, the termination can be a measure to vacate superfluous or overly expensive lease areas; from a landlord’s perspective, it can be an attempt to regain space in order to let it at a higher price or to redevelop a building.
The written form requirement should nevertheless not hold back investors from purchasing German property. As always, knowledge and information minimise risk. A legal due diligence prior to any purchase should reveal the pitfalls.
Furthermore, formal defects in lease agreements can be cured at any time by concluding a (written!) supplement agreement.
Finally, asset and property managers should be aware of the issue so that defective lease agreements can be avoided from the beginning.
Frank Müller MRICS is a senior associate at Lovells LLP in Frankfurt and specialises in real estate law and litigation
