With a spectacular ruling, the Federal Court of Justice has clarified the position on contractual clauses (Kautelarpraxis): As a matter of principle, remedial clauses for the written form are ineffective! If a long-term lease agreement violates the written form obligation of Section 550 German Civil Code, with immediate effect, such lease agreement can generally be terminated by ordinary termination.

Facts of the Case

The parties to the dispute had entered into a lease agreement for retail space that provides for a fixed term until 31 May 2020, with a one-off extension option of another five years for the tenant. There are several addenda to the lease agreement as well as correspondence on the change of the indexation clause laid down in the lease agreement. The change of the indexation clause was exclusively made in the correspondence between the parties, but it was not included in an addendum to the lease agreement that would meet formal requirements. The lease agreement contains a customary remedial clause on the written form, according to which both parties to the lease agreement undertake, amongst others, not to terminate the lease agreement on grounds of a violation of the written form. The lessor terminates the lease agreement on grounds of violation of the written form and demands by way of an action that the premises by vacated.

Ruling

The Federal Court of Justice upholds the decision of the previous instance, the Higher Regional Court Karlsruhe, according to which the termination by the lessor is ineffective. However, the reasoning is a bang: The Federal Court of Justice does not negate the termination right of the lessor due to the remedial clause on the written form that is contained in the lease agreement, but due to unlawfulness on the part of the lessor in the concrete case. En passant, the Federal Court of Justice generally negates the effectiveness of agreed remedial clauses on the written form – including contractually agreed clauses, since such clauses would constitute an illegal circumvention of the mandatory statutory provision of Section 550 German Civil Code. There had not been any previous Federal Court of Justice ruling on this issue and it had not been clarified in the legal literature either. So far, the Federal Court of Justice had merely commented on specific constellations, where it deemed the remedial clause on the written form to be ineffective, e.g. vis-à-vis the purchaser of a property who becomes a party to the lease agreement pursuant to Section 566 German Civil Code (Federal Court of Justice, ruling of 22 January 2014 – XII ZR 68/10). With its current ruling, Federal Court of Justice has now provided clarification insofar as remedial clauses on the written form are ineffective per se – irrespective of the constellation of the individual case!

Practical Information

Following the current ruling of the Federal Court of Justice, the written form will become more significant that it already has been anyway, since almost without exception, most long-term commercial lease agreement contain said remedial clause on the written form. Up to now, it was also merely meant to be a “safety net”. However, this last lifeline will lapse without replacement with the ruling of the Federal Court of Justice.

Therefore, with immediate effect, it will have to be ensured that when long-term lease agreements are concluded, the statutory written form requirements are met. Even greater care will have to be exercised with immediate effect regarding the management of leased out real estate/asset management: Agreements made only by email/letter or even just verbally must be strictly taboo.

Even more attention than previously will have to be paid to the written form in the context of the due diligence in relation to the acquisition of real estate.

(Federal Court of Justice, Ruling of 27 September 2017 – XII ZR 114/16)

Johannes Schuhmann, Laywer
Frankfurt am Main