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Written form as market weapon for commercial lease agreements
Are you a long-term tenant or landlord of commercial real estate? In case please briefly lend us your ears to learn about the key topic in this context: compliance with the written form! We realize that this catchphrase will not get most of you buzzing with excitement. But we also know from many years of experience, however, that “non-experts” frequently fail to correctly understand the meaning of the written form requirement or its enormous economic consequences. In most cases, by the time they do realize it, they are trying to close the barn door when the horse is already gone. Allow us to give you a brief overview on this issue.
Whether as landlord or tenant of office, retail or logistics space, entire hotels, or properties for the operation of solar and wind power plants (obviously a non-exhaustive list), if commercial lease agreements are concluded for a term longer than one year, Section 550 sentence 1 of the German Civil Code applies, which reads: “If a lease agreement for a longer period of time than one year is not entered into in written form, then it applies for an indefinite period of time.”
Now, what does this mean?
“In written form” not only means that the parties just sign the contract once, thus automatically generating contractual security. Regrettably, this is a common misconception. “In written form” means way more than that: The commercial lease agreement must contain all material provisions, in particular as relates to the lease object, the lease parties, the term of the contract and the rent payments. Outside third parties should be able to easily recognize or at least to clearly determine from the lease agreement document itself everything that the parties agreed to be material for them. There may be neither contradictions within the text of the agreement nor between the contract text and its annexes.
But that’s not all: once a lease agreement has been concluded in compliance with the written form, it is also necessary to maintain the written form. Frequently, it will end up being destroyed by actions that the parties as such are not even aware of. Typical examples include: subsequent verbal or implied agreements about minor details of the agreement, subsequent minimal handwritten deletions or amendments of the lease agreement document without additional dated signatures by both parties, some type of written agreements on the contents of the contract without concluding an amendment that is complying with the written form, etc. Therefore, please pay close attention to the following: do not be cavalier or impetuous in this context, especially not to supposedly save time and money.
Why all the effort, the accuracy and, above all, the attentiveness?
And the answer is: it can cost you dearly. The reason: in case of non-compliance with the written form, the last half of Section 550 sentence 1 of the German Civil Code has the following surprise in store for you: “[...] then it (meaning the lease agreement) applies for an indefinite period of time.” As a consequence of this brief sub-clause, the lease agreement is deemed to have been entered into for an indefinite period and either party may terminate the agreement in accordance with the statutory provisions (lease agreement: Section 580a of the German Civil Code; usufructuary lease agreement: Section 584 of the German Civil Code); this despite the fact that the parties agreed on a fixed term, which is then simply no longer of relevance. As a result, for example, a lease agreement for business premises may be duly terminated by notice at the latest by the third business day of a calendar quarter with effect at the end of the subsequent calendar quarter, thus in the shortest case within six months (Section 580a(2) of the German Civil Code). In such an event, the long-term financial calculation of the allegedly non-terminable party (income/revenue for the tenant, cash flow for the landlord) frequently turns out to have been in vain, as the contract ends early if it is terminated by the respective other party.
This economically relevant legal consequence was further strengthened by the Federal Court of Justice’s September 27, 2017 decision (Case XII ZR 114/16). In the court’s opinion, all general clauses in commercial lease agreements that obligate the parties not to terminate the agreement for non-compliance with the written form and/or to remedy it (referred to as the “written form remediation clause”) are ineffective, whether they take the form of general terms and conditions or of individual agreements.
Thus, from this decision onwards, you are only left with a single option to legally conclude the lease agreement in the correct written form: right at the beginning, for example in the negotiation and drafting phase. Afterwards, each party will be dependent on the other’s party goodwill to remedy the non-compliance. That goodwill or ill will in turn depends on whether you find yourself in a landlord or tenant market. And be well aware of the following fact: the market-dominant party may use a violation of the written form to its advantage at any time in its own interest by giving proper notice or by forcing the party in the inferior market position to renegotiate the lease agreement in the former party’s favor; in addition, such a behavior generally does not violate good faith either. In our experience, this is not all just plain theory, but established practice. It is not for nothing that experts refer to non-compliance with the written form as a weapon.
Depending on which position you are in (tenant or landlord), always make sure to consider what it would mean for you financially if the continuation of your long-term commercial lease agreement is no longer secured, especially shortly after the beginning of the lease. This will make it all the easier for you to make sure right from the start that everything you intend to agree with your contractual partner also arises entirely from the lease agreement itself. And, if truth be told, do not even attempt to understand the legislator or the Federal Court of Justice, but just go ahead and meet their requirements. This will save time, effort, and your sanity. We will be happy to help you in doing so.