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The written form requirement under German lease law – a relict of former times with hidden risks

  • Germany
  • Construction and engineering
  • Litigation and dispute management

30-05-2017

Whilst there is a an international trend for digital document management and digital signing of contracts, international companies concluding commercial lease contracts in Germany are often surprised to hear about the strict written form requirements under German law.

Also in Germany commercial lease agreements can be concluded orally, however, there is a plethora of risks associated to commercial lease agreements not concluded according to the written form requirement. One of the more obvious risks is that an oral contract conclusion can be hard to proof. However, and this is a paramount risk, commercial lease agreements that are entered into for period of more than one year or longer (for example for a fixed term of ten years or more) are only binding for both parties if they adhere to the strict written form requirements under German law. If this is not the case either party to the agreement can terminate the lease agreement ordinarily. By doing so an intended long-term contractual relation can be “pulverized” by serving a six month termination notice. High investments into the fit-out of the lease and the future strategy of the tenant and/or the landlord are therefor at a high risk. A good knowledge of the relevant case law and the requirements to fulfill the written form requirements are therefor of paramount import for long-term investments and reliable real estate lease transactions.

What does it take to fulfill the written form requirement?

According to German law, the written form requirement is fulfilled when the printed-out lease documentation is signed by the parties in wet ink and with a readable signature identifying the signatory or the legal entity represented by him as the one who is to be bound by the lease contract. Authorized representatives can also sign lease contracts however, this requires an explicit addition to the signature that the signatory is not acting for himself but as an authorized representative of the tenant or landlord entity. In order to sign a lease document the original of the document has to be circulated as a hardcopy between the parties which can take a lot of time especially with international parties with signatories spread around the world. Furthermore the signature has to conclude the agreement. Therefore, all material provisions, which are set out below the signature line are a violation of the written form requirement.

Purpose of the written form requirement

Despite the warning function and the alleviation of proof due to a printed and signed original document, the most important reason for the written form requirement is the protection of a potential buyer of the property. According to German law, a potential buyer of the property enters into the lease agreement by law with all rights and especially with all obligations under the lease agreement. Therefore, a potential buyer must be in the position to get a comprehensive picture of his rights and obligations under the lease agreement only by reviewing the complete documentation of the lease agreement. The protection of this “comprehensive” picture of his rights and obligations is ensured by a strict approach to the written form requirement.

The extend of the written form requirement

In order to fulfill the purpose of the written form requirement all material contents of the lease contract have to be documented in a way which fulfills the written form requirement. This includes the parties of the contract, the object of the lease, the term of the lease and the rent. Any changes to the aforementioned material aspects of the contract must therefore be documented in a way that respects the written form requirement. Therefore such changes must be documented in an addendum to the lease contract which is also properly signed and which refers to the main lease documentation. There is an extensive case law on the question which changes to the content of the contract are considered material changes which require proper documentation. The German Federal Supreme Court (Bundesgerichtshof) has decided that even a slight change of the rent by a couple of Euros cannot be agreed orally without a violation of the written form requirement and must therefore be the content of a formal addendum to the lease contract.

Consequences of a violation of the written form requirement and how to avoid surprises

As pointed out previously a violation of the written form requirement does not lead to an invalid lease contract. To the contrary, the lease contract and all its provisions, even the ones agreed upon orally, are binding for both parties. This even applies for the potential buyer of the property who enters (by law) into the lease contract as the new landlord. Therefore the new Landlord must have the possibility to relieve himself from surprises (orally agreed upon between the previous parties to the lease) by having the right to terminate the contract on short term notice (6 months). However, if a lease contract is “infested” by a violation of the written form requirement it is not only the landlord that can terminate the lease but also the tenant. Due to this it is part of every due diligence before an asset deals which also contains assets that are subject to lease contracts, to review the complete lease documentation in order to identify potential risks due to a violation of the written form requirement.  Once these risks are identified, they can be healed by way of a new addendum to the lease contract that brings all former side agreements into the form required under the written form requirement. This review should be part of every real estate due diligence and the conclusion of the healing addenda are essential CPs for every real estate purchase.

Where there are risks there are chances or; how to be the “bad cop”

A violation of the written form requirement by one of the parties can also be used as a chance or leverage to preliminarily terminate a commercial lease agreement that has become either unattractive for the tenant or for which the landlord sees better chances in remarketing it according to current market prices. Even though this strategy has many legal risks in front of the courts, threatening with the stick of a violation of the written form requirement does have the tendency to “open” discussions.

Conclusion

The strict written form requirement has the impact to slow down signing processes. The violation of the written form can be a material risk to long-term investments or can better/worsen the bargaining power where the initial business case has changed. Therefore when doing commercial leases in Germany on should always be aware of the strict requirements of the written form.