Germany: Impermissibility Of The Use Of A Tenancy Deposit During An Existing Tenancy In The Event Of Contentious Claims By The Tenant Under Residential Tenancy Law

Keywords: Tenancy, Deposit, landlord, Commercial

BGH VIII ZR 234/13 of May 7, 2014

FACTS

The appellant is a tenant in a flat owned by the respondent. She remitted EUR1,400.00 to a tenancy deposit account in accordance with the tenancy agreement. An additional agreement by the parties to the tenancy agreement states:

The landlord may use the deposit to satisfy any claims due during the tenancy. In this case the tenant is obliged to increase the deposit to the original balance..."

In the course of the tenancy the appellant asserted a reduction in rent and partially retained the rent payments. The respondent then had the tenancy deposit paid out to him during the tenancy. The appellant now demands that the respondent pay the amount into the deposit account and invest it protected against insolvency. The district court has upheld the complaint, the regional court has dismissed the respondent's appeal. The respondent appealed the decision by the regional court as permitted by the appellate court, pursuing his motion to dismiss.

CONTENT AND SUBJECT OF THE DECISION

The respondent's appeal to the Federal Court of Justice was unsuccessful. The VIIIth Civil Senate of the Federal Court of Justice ruled that the respondent was not entitled to claim the tenancy deposit during tenancy.

The respondent's actions contradicted the trust relationship of the tenancy deposit as expressed in Section 551 para 3 Civil Code. The Federal Court of Justice holds that the tenancy deposit is not intended to grant the landlord an avenue to quickly satisfy alleged claims against the tenant in an ongoing tenancy. Under Section 551 para 3 sentence 3 Civil Code, the landlord is required to invest the amount ceded to him as a security separate from his own assets; the earnings are accrued to the tenant. This expresses the legislative intention that the tenant will receive back the full tenancy deposit after termination of the tenancy, even in the event of insolvency on the part of the landlord, insofar as the landlord has no claims against the tenant secured by this deposit. This goal would be undermined if the landlord were able to access the tenancy deposit due to a contentious claim during tenancy. The Federal Court of Justice therefore found the additional agreement enabling said access to be ineffective under Section 551 para 4 Civil Code.

IMPACT ON DAY-TO-DAY BUSINESS

It is questionable as to which ramifications this decision by the VIIIth Civil Senate of the Federal Court of Justice will have for the tenancy of commercial premises. Section 578(2) Civil Code, which among other things governs which provisions apply to commercial premises, does not reference Section 551 Civil Code and the landlord's obligation to invest governed therein. However, adjudication of the higher regional courts tends to award commercial tenants a claim to insolvency protected investment by way of an additional interpretation of the contract (Nuremberg Higher Regional Court). As early as 1994, the Federal Court of Justice had ruled that an agreed tenancy deposit inferred an obligation to pay interest on the amounts resulting from a business requirement for security, and that said interest should generally be paid applying the rate usual for savings, with a notice period of three months. Thus, according to the prevailing view in literature, a contractual exclusion of interest constituting as it does an inappropriate disadvantage for the tenant while providing no benefit to the landlord will be deemed ineffective. However, the aforementioned decision only affects the landlord's obligation to pay interest, and does not make any statement as to whether he or she may make use of the tenancy deposit during tenancy.

Commercial tenancy agreements often contain a clause permitting the landlord to make use of the tenancy deposit during tenancy. In the absence of such an agreement, the landlord may only access the deposit in the event of claims that are undisputed and upheld by a court or are obviously justified. Whereas parts of adjudication confirm the permissibility of a corresponding clause in commercial tenancy law under an inspection of General Terms and Conditions (e.g. Karlsruhe Higher Regional Court), there are opinions in literature that consider such a clause inappropriate due to it being an inappropriate disadvantage for the tenant. However, use of the deposit during tenancy is not in any way restricted by legal provisions. The Karlsruhe Higher Regional Court in its decision mentioned above emphasised that it was merely a controversial matter in adjudication and literature as to whether use of the deposit should be possible without an explicit contractual provision if the tenant disputes the existence of the principal claim. If such an agreement has been made, the landlord may make use of the deposit. It is likely the decision by the VIIIth Civil Senate of the Federal Court of Justice will not change this principle either, given that as outlined above, Section 551 Civil Code applies exclusively to residential tenancies and does not impose any restrictions on commercial landlords. This provision is also mentioned expressly in the present ruling, where the court rejects relevancy of its decision of January 12, 1972, which was based on a tenancy for a commercial premises. However, the decision of 1972 itself makes no mention as to whether an agreement governing the landlord's access to the deposit during tenancy is permissible in the event of a disputed claim and holds up to an inspection of the Terms and Conditions. A final decision by the Federal Court of Justice on the permissibility of such clauses in commercial tenancy is yet to be ruled.

It remains recommendable as a tip in practice to expressly include corresponding clauses in the tenancy agreement, which permit the landlord to use the deposit and which obligate the tenant to subsequently balance the deposit. There is a residual risk that such clauses will not bear up under an judicial inspection of General Terms and Conditions.

In this respect the adjudication of higher regional courts on use of the tenancy deposit after termination of the tenancy remains relevant. For example, the Karlsruhe Higher Regional Court in its decision of August 18, 2008 ruled that following termination of tenancy, the tenancy deposit acquired the function of realisation in addition to that of a security. The result is that a landlord may generally access the tenancy deposit at the end of tenancy provided a proper accounting was made to the tenant. Accordingly, the claims do not have to be undisputed and the tenancy agreement need not contain a corresponding clause. In this case the tenant is referred to legal action, as he has no recourse to temporary injunction. However, so far this decision has not been upheld by other higher regional courts and the Federal Court of Justice has not yet voiced its own opinion on the matter.

Originally published July 9, 2014

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