The issue prospectus of a real estate investment trust is inaccurate if it does not mention risks associated with an ambiguous provision in a rental guarantee.

In the case underlying the decision, the prospectus for a real estate investment trust did not mention that the provisions of a rental guarantee did not clearly define whether the guarantor was obliged to cover the incidental rental costs during times of vacancies of the buildings invested in by the trust.

As part of the ruling, the German Federal Court of Justice reiterated its former rulings on the required content of an issue prospectus. Following the case law established by earlier decisions, the investor has to be able to get an accurate picture of the potential investment. The prospectus must contain information on all aspects that are or can be of essential value for the investor’s decision, in particular a clear, accurate and complete evaluation of the risks involved in the specific investment. With regard to real estate investment trusts, it is of special importance to provide specific information about any potential obstacles to the ability to generate the scheduled revenue through lease contracts.

According to the court, the risks associated with the ambiguous guarantee clause should have been disclosed in the prospectus. Instead, the prospectus gave the impression that the guarantee would cover for the incidental rental costs. In order for the prospectus to be deemed inaccurate, the court considered it sufficient that the guarantor denied granting coverage. The court held it to be irrelevant if the denial was in fact justified because the prospectus should already have mentioned the risk of a possible different interpretation of the underlying clause of the guarantee.

German Federal Court of Justice, decision dated 23 October 2012 (II ZR 294/11)

Florian Puschmann