Termination of a Lease Agreement under German Law for Lack of Written Form Despite Obligation to Remedy Form Deficiencies

August 18, 2008

The Higher Regional Court (Oberlandesgericht – "OLG") of Rostock ruled on July 10, 2008 (case no. 3 U 108 / 07) that a long term commercial lease agreement may be terminated with six months’ prior notice to the end of any quarter due to written form deficiencies although the lease agreement provided that each party should use its best efforts in order to cure any deficiencies of the written form ("Remedy Clause"). This decision departs from a consistent chain of precedents of other OLGs, which considered such terminations as void due to violation of the principle of good faith. The German legal practice had significantly relied on those precedents in the past.

Issue

As far as long-term lease agreements are concerned, the requirement of written form has a significant economic impact on the parties.

If a lease agreement with a term of more than one year was not entered into in written form, the statutory law provides that either party may terminate the agreement at any time with the statutory notice period of six months once the first year of the lease term has expired.

The standards of the written form requirement are high. The purpose is to provide a future owner of the leased premises with clear information on the lease term and the content of the lease agreement. This is required as the future owner will become party of  the lease agreement  by operation of law.

Therefore, the substantial content of a lease agreement such as notably the parties, the location and the specification of the leased premises, the rent including provisions on additional charges and the lease term must be entirely reflected in a lease agreement in order to comply with the written form requirement. This means that the content of the lease agreement must be clearly contained in a single deed duly executed by the parties. Amendments must either be firmly attached to the original deed, or their wording must make explicit reference to the original deed.

The above mentioned termination right for written form deficiencies may also be exercised by the original parties and even if the lease agreement has been running for years without any problems. The courts only deny such termination right due to a violation of the principle of good faith. This is only the case, if such termination results in an "absolutely intolerable" situation, e.g., if it destroys the economic basis of one party.

However, several OLGs ruled in the past that a termination for written form deficiencies contravenes against the principle of good faith and is therefore void if the lease agreement contained a Remedy Clause and the terminating party did not previously request the other party to remedy the form deficiencies.

Under a Remedy Clause each party undertakes to comply with the written form requirement at all times and to remedy, upon the respective other party’s request, any deficiencies of the written form that are subsequently discovered. The only disputed question has been so far whether such Remedy Clause is only binding upon the original parties or also upon their respective successors.

Implications of the Decision

In its decision of July 10, 2008 the OLG Rostock departed from those previous decisions and declared that the original tenant legitimately terminated the lease agreement for written form deficiencies although the lease agreement did contain a valid Remedy Clause.

Consequences for the Legal Practice

Going forward, the drafting of lease agreements and their respective amendments requires even more diligence since Remedy Clauses cannot be relied upon anymore. A thorough check whether a lease agreement complies with the written form requirement has always been a material part of any due diligence in the context of a sale or purchase of the rented property. This check has now gained increased importance because the existence of a Remedy Clause can no more be validly objected against a termination. The option to terminate a lease agreement prior to its scheduled expiry may gain importance in the future in the context of rising consumer price indices and rising rents as a consequence thereof. The potential for added value which a purchaser expected to realize through rental increases based on rising consumer price indices may be jeopardized where lease agreements may easily be terminated for written form deficiencies.

Evaluation of the Decision

The decision of the OLG Rostock is based on the following deliberations: The tenant legitimately terminated the lease agreement for written form deficiencies. As the tenant thereby breached its obligation under the Remedy Clause to cooperate in remedying existing deficiencies in the written form, the landlord is only entitled to damages.

However, the Court does not take the idea of damages to its logical conclusion.

Under German law, liability for damages primarily means the obligation to restore the situation that would exist had the breach not occurred. Had the tenant duly cooperated in remediating the written form deficiencies, the reason justifying the termination would have ceased to exist. Therefore, in order to discharge its liability for damages, the tenant would have had to immediately re-enter into the lease agreement it just terminated.

It is a generally accepted rule that exercising a formal legal position notwithstanding an obligation to immediately restore the previous status is a violation of the principle of good faith. The termination of the lease agreement should therefore have been considered as void in this case.

In 2005, the Federal Court of Justice (Bundesgerichtshof – BGH) (case no. XII ZR 132/03) ruled that in a similar case the termination of a lease agreement for written form deficiencies was void. In that case the lease agreement did even not contain an unambiguous Remedy Clause as in the case decided by the OLG Rostock; in that lease agreement, the parties had only undertaken to "attach" any amendment "as addendum to the original lease agreement". The Federal Court of Justice derived from this provision that it was the parties’ intention to comply with the written form requirement. According to the Federal Court of Justice, this intention was sufficient in order to consider the termination of the agreement for written form deficiencies as violation of the principle of good faith, which made the termination void. The OLG Rostock did not discuss this decision.

As the OLG Rostock explicitly admitted that its decision may be appealed before the Federal Court of Justice, it remains to be seen whether such appeal will be lodged against the decision and, if so, whether the Federal Court of Justice will overrule it.

Gibson, Dunn & Crutcher LLP

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact Dr. Peter Decker, (+49 89 189 33 115, pdecker@gibsondunn.com), Dr. Matthias von Oppen (+49 89 189 33 122, mvonoppen@gibsondunn.com), Christoph Lauchs (+49 89 198 33 123, clauchs@gibsondunn.com) or Daniel Gebauer (+49 89 189 33 115, dgebauer@gibsondunn.com) in the firm’s Munich office.

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