Germany: Written Form In The Case Of Lease Agreements For Commercial Premises

Last Updated: 6 July 2018
Article by Benjamin F. Schulz

A change to the rent, which is based on a contract clause, according to which one contract party can request a new determination if there is a particular change in the index, must be agreed on in an addendum to the lease agreement which satisfies the written form requirement of Section 550 Sentence 1 German Civil Code (Bürgerliches Gesetzbuch - BGB).
(BGH, judgement of 11 April 2018 – XII ZR 43/17)

INTRODUCTION: Lease agreements which are concluded for a duration of more than one year require the written form, Section 550 Sentence 1 BGB. The written form is only observed if there is an agreement regarding all material contract conditions required for the conclusion of the contract arising from one of the documents signed by the parties or from identical documents signed by one of each of the parties. This equally applies for amendments to the original contract. In the opinion of the German Federal Court of Justice (Bundesgerichtshof – BGH), the rent concerns a circumstance which is material to the contract. Therefore, changes to the agreed rent must generally satisfy the written form requirement of Section 550 BGB. The BGH has now decided that the change to the rent, which is based on a contract clause, according to which one contract party can request a new determination if there is a particular change in the index, is subject to the written form requirement of Section 550 Sentence 1 BGB, unlike in the case of an automatic adjustment or a unilateral right to make an amendment.

THE DECISION: In 2006 the plaintiff leased commercial premises to the defendant, limited until 31 December 2017 for use as office premises. The contract included a provision, according to which each party can request a new determination of the last basic rent owed if the consumer price index for Germany increases or decreases by more than 4 per cent as against the time of the conclusion of the lease or the last rent amendment. If the parties cannot agree on a rent within 6 weeks after the index increase occurs, the rent was to be set by a sworn expert to be appointed by the chamber of commerce and industry. In a letter dated 27 December 2012, the plaintiff informed the defendant that the consumer price index had changed by more than four per cent since the last rent increase, and requested to adjust the monthly basic rent from 1 April 2013 to EUR 2,273.60. The defendant complied. It paid the higher rent from April 2013. In 2013, the defendant moved out of the rental premises. It sub-leased the premises. The plaintiff refused to consent to this sub-lease. The defendant thereupon terminated the contract without notice with a letter dated 12 February 2014 and suspended payment of the rent. The plaintiff deemed the termination to be invalid.

The German Federal Court of Justice decided that the extraordinary termination by the defendant did not result in the termination of the contract. This is, however, to be re-interpreted as an ordinary termination, which had terminated the tenancy. An ordinary termination is possible on the basis of a breach of the legal written form requirement of Section 550 BGB. There is a fundamental difference between the index clause under discussion here on the one hand and a clause with automatic adjustment or a unilateral performance determination right of one party on the other. In the latter cases too, the respective provisions in the lease agreement would have to be gauged by the written form requirement of Section 550 BGB. The clause at hand meanwhile prescribes that a contract party can request a new determination if there is a corresponding index change. The plaintiff did this by means of its request to adjust the rent. Therefore, it requested the defendant for a change to the lease agreement, which the latter accepted by paying the increased amount. Because this agreement about the adjustment of the rent was not made in an addendum which satisfied the written form, the lease agreement is considered to have been concluded for an indefinite period, and can therefore be terminated at any time with the statutory period of notice. The performance determination right of the expert – being only stipulated as a substitute for an agreement – would not change the regulatory content of the clause in a way that it would include a right of the contract parties to make amendments by way of a unilateral declaration.

IMPACT ON DAY-TO-DAY BUSINESS: It is not an uncommon linguistic design of index clauses in commercial lease agreements that a party "can request" an adjustment in the case of corresponding index changes. This request for an adjustment is just as often expressed in a simple letter and the corresponding adjusted rent subsequently paid. If a rent is adjusted in this form, the lease agreement no longer complies with the written form and can be terminated at any time. With regard to this, the index clauses in existing lease agreements and the method according to which the adjustments are to be made should be reviewed. Where applicable, the amended rent is to be recorded in an addendum which complies with the statutory written form requirement. For new contracts, index clauses with automatic adjustment or an unilateral right to make adjustments should be used.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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