29.08.2024
The written form provisions of German landlord and tenant law, in particular Section 550 German Civil Code, are a key issue when dealing with leases entered into for a term longer than one year. While said provisions were initially meant to protect the purchaser of the leased property, who, it is believed, should be able to ascertain the content of a lease transferred to it by operation of law upon acquisition, the courts now take the view that the original parties to the lease are also included within the protective scope of the written form requirement so as to guarantee the protection of the parties to long-term leases. In legal and judicial practice, however, the written form provisions have time and again been a matter of discussion and dispute, which has led to thought being given to reforming the law.
According to Section 550 German Civil Code, leases that are entered into for longer than a year must be drawn up in writing. If the written form requirement is not complied with, the lease is deemed entered into for an indefinite period of time and may be terminated by either tenant or landlord by giving the notice required by law. These provisions serve the purpose of providing transparency and clarity about the rights and obligations of both contracting parties, as well as protecting the parties from unclear oral agreements.
In practice, however, the strict written form requirement often leads to problems, in particular in the case of long-term commercial leases, which, more than other agreements, require frequent changes, for example, with regard to the amount of rent, the manner of use or the operating costs. Such changes are often agreed orally or without observing a particular form, which undermines the written form requirements and can result in the entire lease being considered to be subject to notice.
Even minor deviations from the written form, such as incomplete signatures, the absence of a date or oral agreements on subsequent changes, can result in the entire lease being deemed entered into for an indefinite period of time. This involves significant risks for both landlords and tenants and can lead to the undesired cancellation of leases. In the past, it regularly happened that parties searching for errors or mistakes made with regard to the written form were able to rid themselves of commercial leases that were no longer wanted.
In response, contract drafters tried with some success to create a certain degree of legal certainty in practice by using clauses prohibiting the contracting parties from pleading failure to comply with the written form requirement and requiring them to do everything, even after the fact, to ensure compliance with the written form. However, the German Federal Court of Justice completely removed the basis for this practice with its rulings, holding in two decisions from the years 2014 and 2017 that Section 550 German Civil Code is absolutely mandatory and cannot be deviated from even by individual agreement.
The last defence now available to a party who has been provided with notice of termination based on Section 550 German Civil Code is to invoke the principle of good faith due to its existence being threatened.
In view of said problems, consideration has been given to the idea of reforming the written form provisions of Section 550 German Civil Code. One approach to reforming the law could be to adopt more flexible written form requirements and adjust them to fit the circumstances of modern contract drafting.
a) Introduction of the text form
One reform proposal is the introduction of the text form as an alternative to the written form. The text form, which is defined in Section 126b German Civil Code, would allow entering into leases and agreeing changes to leases by e-mail or other electronic means of communication. This would give the contracting parties more flexibility and fulfil the formal requirements without jeopardising the entire contractual structure.
b) Clear distinction between different types of error or mistake
Another approach to reforming the written form provisions would be to clearly distinguish between serious and minor violations of the written form. Minor errors or mistakes, such as the absence of a date or incomplete signatures, could be regarded as curable deficiencies that do not automatically “infect” the lease. This would increase legal certainty without significantly restricting the protection afforded to the parties.
c) Extended grace period for curing deficiencies in written form
Another option under consideration is the introduction of an extended period during which deficiencies in written form can be cured. This grace period could place the contracting parties in a position to subsequently correct formal errors or mistakes without the lease being immediately deemed entered into for an indefinite period of time. This could strengthen legal certainty and prevent the unwanted termination of leases in particular in the case of long-term tenancies.
d) Attempts at reform
Following the 2017 decision of the Federal Court of Justice, the German Bundesrat made a first proposal for reform in 2019, which was not, however, implemented by the German Bundestag. A further attempt in 2021 by the then Federal Minister of Justice also failed. In March 2024, the federal government tabled a draft aiming to reduce the formal requirements for tenancies regarding land and premises – which means, in particular, for commercial leases – to text form. However, messages sent via WhatsApp or SMS, for example, would also fulfil the text form requirement and thus cause considerable evidentiary problems.
The reform of the written form provisions of Section 550 German Civil Code presents an opportunity to adjust German landlord and tenant law to be in line with practical requirements without abandoning the idea of protection as such. The introduction of the text form, a discriminating assessment of formal errors and mistakes, and the opportunity to subsequently cure formal deficiencies could help to increase legal certainty for all of the parties involved while allowing at the same time more flexibility in the drafting of contracts.
It is difficult to tell when and how the reform process will end. In view of the enormous economic relevance of long-term commercial property leases, a reform should in any case be carefully considered in order to adequately take into account both the protection of tenants and the interests of landlords and purchasers.
Frank Gutsche
Partner
Stuttgart
frank.gutsche@luther-lawfirm.com
+49 711 9338 19194
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