Abolition of the strict written form requirement for commercial leases - text form is sufficient!
On 26 September 2024, the German Bundestag passed the Fourth Act to Reduce Bureaucracy for Citizens, Businesses and the Administration (Viertes Gesetz zur Entlastung der Bürgerinnen und Bürger, der Wirtschaft sowie der Verwaltung von Bürokratie - hereinafter referred to as ‘BEG IV’). The BEG IV contains a new provision of practical relevance for commercial leases, i.e. the renting and letting of premises that, according to the purpose of the contract, are used for commercial or self-employed professional activities. In future, commercial leases with a term longer than one year can be concluded and amended in text form - instead of the previously applicable written form - binding the parties to the agreed contract term. In contrast, the statutory written form requirement remains in place for fixed-term residential leases of more than one year, the breach of which leads to the option of premature termination of the lease.
A brief overview of the new provision is provided below.
I. Current legal situation
In accordance with Section 550 sentence 1 of the German Civil Code (Bürgerliches Gesetzbuch – BGB), a lease agreement for a longer period of time than one year that is not concluded in writing is valid for an indefinite period of time. In order to comply with the written form requirement within the meaning of Section 550 BGB, commercial leases currently have to fulfil the strict statutory written form requirement pursuant to Section 126 BGB. However, the written form requirement is not limited to the handwritten signature of the parties to the lease agreement, but is extended by the specific requirements of the case law of the Federal Court of Justice (Bundesgerichtshof - BGH) on the ‘uniformity of the document’, so that all essential provisions of the lease agreement must be contained in one document. The existing requirement of an original document signed by the parties to the lease agreement applies not only to the lease agreement document itself, but also to all subsequent amendments and supplementary agreements. Case law has relaxed this criterion, according to which there is no need for a fixed physical connection with the original lease agreement. Instead, the uniformity of the lease agreement must result, for example, from consecutive pagination or consecutive paragraphs. In the case of addenda, it results from a sufficient reference to the original lease.
If this form was not fully observed when the contract was concluded or in the event of subsequent amendments, the entire lease agreement was deemed to have been concluded for an indefinite period in accordance with Section 550 sentence 1 BGB. It could then be (prematurely) terminated by either party within the statutory periods, irrespective of the agreed term (Sec. 542 para. 1, Sec. 580a BGB). However, the termination was only permissible at the earliest at the end of one year after the business premises were handed over (Sec. 550 sentence 2 BGB).
The purpose of this drastic legal consequence is to protect the acquirer of the leased property who automatically enters into an existing lease as landlord in accordance with Section 566 (1) BGB (for commercial leases in conjunction with Sec. 578 para. 2 BGB - ‘purchase does not break the lease’). The new landlord should be able to clearly recognise his rights and obligations arising from the lease. In accordance with Section 566 BGB, an acquirer also enters into lease agreements that are not recorded in writing and are therefore not readily recognisable. In this case, however, the acquirer should be protected from unwanted long-term agreements by the fact that he can terminate the lease prematurely due to a breach of form. According to the case law of the BGH, however, this option also applies to the original parties to the lease agreement. In practice, this has often led to landlords or tenants being able to terminate a fixed-term lease agreement prematurely in the event of a breach of written form. According to the legislator, these cases are now to be reduced due to the new provision by downgrading the formal requirement to text form.
II. Future legal situation under BEG IV
Due to an amendment to Section 578 (1) BGB (addition of a 2nd sentence), Section 550 BGB will in future only apply to commercial leases with the proviso that a lease that is not concluded in text form (instead of the previous written form) for longer than one year is valid for an indefinite period. According to the legislator's reasoning, the need for information and documentation is also satisfied by a text form requirement, taking into account the protection of acquirers intended by Section 550 BGB.
In order to comply with the text form stipulated in Section 126b BGB, it is sufficient to make a readable declaration on a durable medium that identifies the person making the declaration. Text form includes both paper documents and electronic documents; unlike the statutory written form or electronic form, however, a signature or qualified electronic signature is not required. However, a readable declaration (submission in written characters) is required. This means that all non-verbal options for submitting and transmitting the declaration are available. Text form therefore includes paper documents without a signature, be it a document created by data processing without a signature, be it a document with a mere signature facsimile, such as a computer fax, be it documents signed in the original but received without a signature (e.g. only as a copy or fax). On the other hand, the text form includes electronic documents without a qualified electronic signature, i.e. in particular e-mails or a retrieved website, as well as the transmission of a CD.
However, the specific requirements for the conclusion of contracts or their mutually agreed amendment in text form are still not regulated. For example, it is unclear whether the entire content of the contract, including the offer and acceptance, must be contained on a data carrier (e.g. e-mail) or whether a reference is sufficient. If a reference is sufficient, it is also not clear how this must be done in a form-preserving manner. The suggestion of the German Bundesrat to amend Section 126b BGB in this regard was not included in the legislative process for the BEG IV.
However, the new regulation in Section 578 (1) BGB (in the version of BEG IV) is not expected to result in any simplification with regard to the strict requirements of BGH’s case law on the uniformity of the document, so that these must continue to be strictly observed by contract practitioners.
III. Transitional provision for existing leases
In accordance with Article 229 of the German Introductory Act to the BGB (Einführungsgesetz zum Bürgerlichen Gesetzbuche), the previous legal situation will continue to apply for a transitional period of twelve months to leases already in existence at the time the new provision comes into force (see IV. below), i.e. Section 550 BGB (written form requirement) will continue to apply for this period. Terminations based on the fact that a fixed-term contract is deemed to have been concluded for an indefinite period of time pursuant to Section 550 BGB may still be possible during this period.
After expiry of the transitional period, existing lease agreements that have been concluded for longer than one year and not in written form but in text form in accordance with Section 126b BGB are no longer deemed to have been concluded for an indefinite period. Accordingly, the statutory termination option then ceases to apply as well. If the text form was also not complied with, the previous legal consequence remains.
If existing leases are amended after the new provision in Section 578 (1) BGB comes into force, the legislator believes that the contracting parties can be expected to deal with the amended provisions, meaning that a transitional provision is not required for such constellations. Rather, the new legal situation is fully applicable to the contract as soon as an amendment to the commercial lease is agreed, i.e. it is irrelevant whether the original lease and the amendment were agreed in writing or not. The only decisive factor is whether the text form was complied with. However, during the 12-month transitional period, it could sometimes be doubtful whether a relevant ‘change’ to the lease actually exists, so that legal uncertainties remain (e.g. in the case of indexed rent and operating cost adjustments).
IV. Entry into force of the new regulation
Following the Bundesrat's approval of the BEG IV on 18 October 2024, the new regulation will enter into force on the first day of the quarter following the promulgation of the law in the Federal Gazette (i.e. probably on 1 January 2025).
Smart and to the point.
DSC Legal is a notary’s office and law firm at Bebelplatz in Berlin.
Our experienced notaries and lawyers are specialised in providing comprehensive legal advice and support to domestic and foreign clients in connection with real estate transactions, project developments, the creation of condominium property as well as the establishment, acquisition and operation of companies.
Advising on issues relating to commercial lease law is one of the core areas of our legal practice.
DSC Legal moves into new offices in the BEHREN PALAIS
Our law firm has moved into new business premises (a few metres away from its previous location) and has been welcoming its clients and business partners to the
BEHREN PALAIS
Behrenstraße 36 in 10117 Berlin
(adjacent to the Rocco Forte Hotel de Rome)
With the move to the listed building complex, which Dresdner Bank had built at the end of the 19th century in the style of the Roman High Renaissance as its business headquarters and in which the Hamburg private bank M.M.Warburg & CO now operates a branch, our clients and business partners now have modern meeting rooms with a view of Bebelplatz. Notarisations and meetings can take place here in a quiet atmosphere, without any disturbing background noise from outside.
Our new offices are easily accessible by public transport (the underground stations "Unter den Linden", "Museumsinsel" and "Hausvogteiplatz" as well as the bus stops "Staatsoper", "Französische Straße" and "Werderscher Markt" are in the immediate vicinity).
If you are travelling by car, parking spaces are available in the public underground car park directly on Bebelplatz (Q-Park Unter den Linden / Staatsoper). A taxi rank is located directly in front of the building.
We look forward to welcoming you personally to our new office!
Smart and to the point.
DSC Legal specialises in legal advice and notarial support for M&A and real estate transactions, construction and architectural law, banking and financing law, law relating to start-ups and venture capital as well as IP / IT law.
Advising on issues relating to property law is one of the core areas of our legal and notarial practice.
The information in this newsletter cannot and should not replace in-depth legal advice based on a comprehensive examination of each individual case. Our experts will be happy to advise you on your legal options and represent you with outstanding expertise and extensive experience in the extrajudicial and judicial enforcement of your claims.
Changes to the law governing civil law partnerships (BGB-Gesellschaft) from January 1, 2024, due to the German Partnership Law Modernization Act (MoPeG)
On January 1, 2024, the German Partnership Law Modernization Act (Personengesellschaftsrechtsmodernisierungsgesetz - MoPeG) will largely come into force. The new legal regulations not only affect the formation of new civil law partnerships (Gesellschaften bürgerlichen Rechts - GbR), but may also trigger a need for action for partners in existing partnerships, especially those with real estate.
The main new statutory regulations are summarised below and their effects, particularly on civil law partnerships with real estate, are outlined. Finally, possible alternatives to the civil law partnership will be presented.
- Company register for civil law partnerships / de facto registration requirement
From January 1, 2024, a new register for German civil law partnerships will be created, which will be kept by the local courts, which are also responsible for the commercial registers, etc. Upon entry in the company register, the civil law partnerships is obliged to use the terms "eingetragene Gesellschaft bürgerlichen Rechts" (registered civil law partnership) or "eGbR" as a suffix to its name. The registration has the effect that the protection of good faith under Sec. 15 of the German Commercial Code (Handelsgesetzbuch – HGB) applies accordingly to the registered civil law partnership, in particular with regard to the information to be entered on the partnership, the partners and their power of representation. This makes it easier for the registered civil law partnership to participate in business transactions.
In principle, the entry of existing or new civil law partnership in the company register is voluntary. However, according to the new version of Sec. 47 para. 2 German Land Register Ordinance (Grundbuchordnung – GBO), a right shall only be entered in the land register for a civil law partnership if the partnership is entered in the company register. Changes in the land register - whether changes in the partner structure or in the right recorded in the land register - also require the prior entry of the civil law partnership in the company register and the pre-entry of the registered civil law partnership in the land register. This will result in a de facto registration requirement for civil law partnerships with real estate in the future. The same applies to civil law partnerships that are or are to be registered as shareholders in the commercial or company register, in the shareholder list of a limited liability company (GmbH) or in the stock register.
In order to be entered in the company register, an application signed by all partners in publicly certified form must be submitted to the registration court in whose district the partnership has its registered office. Civil law partnerships entered in the company register can choose their contractual domicile differently from the actual administrative domicile, which gives them greater local freedom of movement than non-registered companies. The registration must contain the necessary information about the partnership (name, registered office, address) and about each partner (name, date of birth and place of residence or business name, legal form, registered office and, if applicable, register and registration number), about the partners’ power of representation and the assurance that the partnership is not already registered in the commercial or partnership register. Changes must be recorded in the register.
As a public register, the company register can be inspected by anyone free of charge. Publicity in the register creates transparency regarding the existence and identity of a civil law partnership and its partners.
- Expanded opportunity for the registered civil law partnership to participate in conversions according to the German Conversion Act
Until now, a civil law partnership could only participate in conversions as the target legal entity of a change of legal form within the meaning of the German Conversion Act (Umwandlungsgesetz). In contrast, registered civil law partnership will in the future have the opportunity to be the permissible source and target legal entity for mergers, divisions and changes of legal form within the meaning of the German Conversion Act.
- Check the need for adjustments to existing partnership agreements!
When the German Partnership Law Modernization Act (MoPeG) comes into force on January 1, 2024, some regulations of the German Civil Code (BGB) will also change, which may require selective adjustments to existing partnership agreements:
For example, according to the previous legal regulations, the partners are entitled to voting power, share of the result and liquidation proceeds on a per capita basis, i.e. in equal shares, unless otherwise agreed in the partnership agreement. In the future, the legal rule will be that these partners’ rights are primarily based on the agreed shareholdings (Sec. 709 para. 3 sent. 1 German Civil Code future version).
Furthermore, until now death, termination and insolvency of a partner lead to the dissolution of the partnership by law. If the partners did not want the partnership to be dissolved, but rather to continue the partnership with the remaining partners, an express provision in the partnership agreement was necessary. According to Sec. 723 para. 1 German Civil Code future version, from January 1, 2024, the legal rule is that the partner in question shall leave the partnership and therefore the partnership continues to exist with the remaining partners.
If an adjustment to the partnership agreement is necessary as a result of the legal changes, the partners would have to take action accordingly. Partners who do not want the new regulations to apply to their partnership agreement can request the application of the previous rules in writing from the partnership by December 31, 2024, before a reason leading to the dissolution of the partnership or the departure of a partner arises within this period (Art. 229, Sec. 61 German Introductory Act to the Civil Code - EGBGB). The request can be rejected by a partners’ resolution.
- Entry in the company register leads to an obligation to report to the transparency register
According to Sec. 20 para. 1 sent. 1 of the German Money Laundering Act (Geldwäschegesetz - GwG), the registration of a civil law partnership in the company register leads to the obligation of the partnership to obtain, store and keep up to date information on the beneficial owners and to immediately submit the information to the registering authority to enter them in the transparency register. According to Sec. 20 para. 1 sent. 2 of the German Money Laundering Act, this obligation should also apply if the registered civil law partnership has its administrative seat abroad, i.e. in particular if it holds ownership of a property located in Germany or undertakes to acquire such property, etc.
A real estate civil law partnership operated for the purpose of acquiring and renting out residential or commercial space can initially avoid this obligation of transparency and thus keep its circle of partners confidential by not exercising the registration option of Sec. 707 para. 1 German Civil Code future version. However, due to the de facto registration requirement described above in the event of impending changes in the number of partners or in the partnership’s rights recorded in the land register, transparency is ultimately ensured about the respective beneficial owners in the transparency register.
- Will the leasing of real estate only be possible in the future through a registered civil law partnership?
As in the past, a civil law partnership as such can only conclude contracts, including rental agreements for property, if it can acquire rights and enter into liabilities itself. This is the case with the civil law partnership with legal capacity within the meaning of Sec. 705 para. 2 var. 1 German Civil Code new version, whereas the internal partnership (Innengesellschaft) without legal capacity cannot be a party to a rental agreement.
If a partnership with legal capacity is newly founded for the purpose of acquiring, holding and leasing real estate after January 1, 2024, it must first be entered in the company register in accordance with the de facto registration requirement described above due to the new regulation in Sec. 47 para. 2 German Land Register Ordinance (GBO), before it can then acquire ownership of a property in the land register (and then rent it out).
In the case of existing civil law partnerships with real estate, regardless of whether it was already rented out before January 1, 2024 or is only to be rented out afterwards, there is no obligation to enter it in the company register simply because of the (intended) rental. From Sec. 12 para. 2 no. 1 German Money Laundering Act new version, a de facto registration requirement is occasionally justified with the argument that in order to collect the rent it is essential for the partnership to open a current account with a credit institution, but that a credit institution must first collect and check the legally required information about the civil law partnership with legal capacity on the basis of an extract from the company register. However, the existing civil law partnership may already have a corresponding account, so further verification is not readily necessary. Furthermore, the verification of the relevant information is also permitted in accordance with Sec. 12 para. 2 no. 2 German Money Laundering Act on the basis of founding documents or equivalent evidentiary documents. However, if changes in the number of partners occur after January 1, 2024 or if changes affect the rights of the civil law partnership in the land register, the pre-entry requirement in the company register as described above remains.
It is therefore advisable to register a civil law partnership with real estate in the company register in order to keep the company capable of acting.
- Risks when renting out living space, if the possibility of claiming personal use is to be preserved, and in the case of temporary rental contracts for living space
Sec. 573 para. 1 sent. 1 German Civil Code limits the landlord's right to properly terminate a residential tenancy to the existence of a legitimate interest. A legitimate interest exists in particular if the landlord requires the rooms as accommodation for himself, his family members or members of his household (so-called personal use).
Until now, the highest court ruling (BGHZ 213, 136) have recognised the right of partners in a civil law partnership to claim personal use, even though a partnership by its nature cannot "live" itself and also has no "family or household members". However, some in the literature on tenancy law doubt that the previous case law on termination for personal use can be upheld once the German Partnership Law Modernization Act (MoPeG) comes into force since the legal capacity of the civil law partnership and the independence of the partnership's assets vis-à-vis the partners are now legally established and thus the basis for the corresponding application of Sec. 573 para. 1 sent. 1 German Civil Code to the partnership with legal capacity no longer applies in the future. This means that there is a risk that, from January 1, 2024, a termination for personal use of a partner of a civil law partnership could be ruled out by a court on these grounds.
The reasons for the previous authorisation of a termination for personal use by the partners of a civil law partnership apply accordingly to the conclusion of temporary rental agreements within the meaning of Sec. 575 para. 1 sent. 1 no. 1 German Civil Code. Should it therefore be established by a court in future, in line with the above-mentioned opinion, that a termination for personal use by partners of a civil law partnership with legal capacity is excluded under the new law, the conclusion of a temporary rental agreement within the meaning of Sec. 575 para. 1 sent. 1 no. 1 German Civil Code by a civil law partnership should also be ruled out. It remains to be seen whether even existing temporary rental agreements could then be "overturned" with the result that they are deemed to have been concluded for an indefinite period in accordance with Sec. 575 para. 1 sent. 2 German Civil Code.
- Possible alternatives to the registered civil law partnership for partnerships with real estate
As pleasing as the legal certainty in legal transactions with civil law partnerships that the German Partnership Law Modernization Act (MoPeG) aims to achieve is, there may well be cases in which the parties involved shy away from the bureaucratic effort associated with the de facto registration obligation and the disclosure of their personal data in a company register that can be inspected by anyone, which may lead to conclusions about this existing real estate assets. This applies in particular to married couples or non-married partners who have acquired real estate in the form of a civil law partnership.
For these persons, a change to a fractional ownership (Bruchteilsgemeinschaft) may be an alternative to the registered civil law partnership (eGbR). This would require the existing civil law partnership to be dissolved. This can be done, for example, by a resolution of all partners to dissolve the partnership. The partnership’s assets would then have to be divided among the partners. The existing real estate can be transferred to the partners in proportion to their economic interest in fractional shares in the course of the division of assets, with the result that they would be entered in the land register as co-owners. Compared to the civil law partnership, co-ownership has the potential disadvantage that each co-owner can freely dispose of their co-ownership share at any time. However, the co-owners can enter into legally binding agreements on the management and use of the co-ownership or also exclude the right to demand the cancellation of the community for good or for a limited period of time. Such a co-ownership agreement also applies to the special successor of a co-owner if it is entered in the land register in accordance with Sec. 1010 German Civil Code.
Particularly in the case of partnerships with only two partners, such as spouses' civil law partnerships, it is also possible to transfer the property to one of the two partners by one partner leaving the partnership. As part of a withdrawal agreement, for example, the partners can stipulate that the partnership will cease to exist without liquidation and that the share of assets of the departing partner will accrue to the other partner. The latter would have to be entered in the land register as the sole owner by way of a land register correction.
There are no reporting obligations to the company or transparency register for co-owners or sole owners of real estate. Similarly, renting out property by co-owners or sole owners is of course possible without further ado. There can then also be no doubt about the basic authorisation to assert personal use as a landlord or to conclude fixed-term rental agreements if the other legal requirements are met. Whether the one-off higher notary and land registry costs resulting from the change to fractional ownership or sole ownership are justified is something the parties involved must decide for themselves. In any case, the parties involved are advised to seek prior tax advice on the consequences of the change to fractional or sole ownership.
Smart and to the point.
DSC Legal specializes in legal advice and notarial support for M&A and real estate transactions, construction and architectural law, banking and financing law, the law relating to startups and venture capital as well as IP / IT law.
Advice on issues in the area of real estate law is one of the core areas of our legal and notarial practice.
The information in this newsletter cannot and should not replace in-depth legal advice with a comprehensive examination of the respective individual case. Our experts will be happy to advise you on your legal options and represent you with outstanding professional expertise and extensive experience in enforcing your claims out of court and in court.
Double award for Dr Peter Diedrich - Cross of Merit of the Federal Republic of Germany with Ribbon and Bene Merito Medal of the Republic of Poland on 25 October 2023
We are very pleased to announce that the Managing Partner of DSC Legal, attorney at law and notary Dr Peter Diedrich, was awarded the Cross of Merit of the Federal Republic of Germany by Federal President Frank-Walter Steinmeier on 28 June 2023 for his outstanding personal commitment to the common good of our country. This Order of Merit was presented to him on 25 October 2023 by the Senator for Justice and Consumer Protection of the State of Berlin, Dr Felor Badenberg, in a festive ceremony attended by H.E. the Ambassador of the Republic of Poland, Mr Dariusz Pawłoś, in addition to 25 invited guests.
In a subsequent ceremony on the same day, H.E. the Ambassador of the Republic of Poland, Mr Dariusz Pawłoś, presented Dr Diedrich with the highest Polish award, the Bene Merito Medal, for his extraordinary efforts to promote German-Polish international understanding and, in recognition of the presentation of these two high awards to Dr Diedrich, held a ceremony at the Polish Embassy, which was attended by around 60 invited guests, including Senator Dr Badenberg.
Some photos of the ceremonies in the Nordsternsaal of the Berlin Senate Department for Justice and in the Polish Embassy on 25 October 2023:
DSC Legal again advises the Czech EPH Group on the acquisition of a German railway undertaking and rolling stock
The EPH Group of Czech entrepreneur Daniel Kretinsky has acquired all shares in SGL - Schienen Güter Logistik GmbH (SGL) from Knape Gruppe Holding GmbH (KGH) via its subsidiary EP Logistics International a.s.
As part of a related asset deal, another company from the EPH Group acquired all assets of KGH’s rail vehicle leasing sub-business (locomotives, traction units, railway wagons, etc.).
SGL is a licensed rail transport company based in Dachau with around 100 employees.
EPH was advised by DSC Legal throughout the entire transaction.
Smart and to the point.
DSC Legal is a notary's office and law firm at Brandenburg Gate in Berlin.
One of our core competencies is the legal advice and support of German and foreign clients in the acquisition and sale of companies. We regularly advise on domestic and cross-border acquisitions of companies in all economic sectors under German law.
- Excellent buying opportunities ahead for equity strong investors on the German residential real estate market
- Extension of the scope of application of notarial online procedures
- Stricter obligation to notify beneficial owners for entry into the transparency register - Considerable fines loom!
- Online formation of a GmbH via video conference with the notary possible from 1 August 2022!