The end of the written form problem in (commercial) tenancy law? - On the planned reform of § 550 BGB
Even with a longer term, there is no obligation to conclude the tenancy agreement and to agree significant addenda in a specific form - this can also be done by email or even verbally. According to the law, a contract concluded in this way is not invalid - on the contrary: according to Section 550 BGB, a tenancy agreement that has not been concluded in writing for longer than one year or that has been amended in key points is even valid for an indefinite period. However, this also means that the contract - contrary to the original intention of the parties - can be terminated with notice. Both landlords and tenants repeatedly take advantage of this fact to get out of unpleasant, unfavorable or unsuitable tenancy agreements without much effort.
The Federal Council wants to counter this practice and therefore presented the "Draft Act to Revise the Written Form Requirement in Tenancy Law" on 20.12.2019.
1. background and previous regulatory content of § 550 BGB
"If the tenancy agreement is not concluded in writing for longer than one year, it is valid for an indefinite period. However, termination is permitted at the earliest at the end of one year after the residential space has been made available." - SECTION 550 BGB
§ Section 550 BGB, which also applies to commercial tenancy law via section 578 (2) sentence 1 BGB, fictitiousizes the indefinite term of an actually fixed-term tenancy agreement in the event of a "lack of written form". This results - via Section 542 (1) BGB and contrary to the original intention of the parties to conclude the contract for a fixed term - in the possibility of (also) ordinary termination of this contract. A "lack of written form" in this sense does not only exist if the contract is not concluded in writing from the outset, but also if the contracting parties make (subsequent) agreements that are essential to the contract without recording them in a form that satisfies Section 126 BGB.
The original rationale of Section 550 BGB is perfectly understandable: it was to protect the acquisition of the rental property. As the latter enters into the existing tenancy by law (Section 566 BGB), the written form requirement was intended to ensure that all agreements concluded between the previous parties to the tenancy agreement and essential to the tenancy resulted from the written contractual documents. On the other hand, the purchaser should be able to withdraw from the contract relatively easily due to agreements that are alleged but not in writing and therefore ultimately not verifiable. § Section 550 BGB was therefore intended to create a balance for the purchaser who becomes a party to a contract over which he had no influence.
2 Effects in practice - Why is there a need for reform?
The core of the existing problems in connection with section 550 BGB is the fact that the standard - according to its wording and case law - applies not only to the purchaser of a property, but also to the original parties to the lease. In practice, these parties regularly attempt to invoke the invalidity of the fixed term of the contract by referring to the formal invalidity of a rental agreement and then, contrary to the original agreement, to terminate the contract (prematurely). § Section 550 of the German Civil Code is thus "misappropriated", so to speak, in order to get rid of unpleasant, fixed-term contracts that can only be terminated for cause.
Commercial leases are particularly affected by this practice, as a fixed term is the rule there, whereas in the area of residential leases it is only permissible from the outset under the conditions of sections 575 et seq. BGB are permissible. Particularly in the area of real estate development, i.e. for rental agreements for premises that have not yet been completed, Section 550 of the German Civil Code (BGB) as understood in this way means considerable effort for the contracting parties: they must - in order not to be confronted later with a sudden possible ordinary termination - set out in writing every (potentially) contractually significant change to the rental property in the correct form.
The sword of Damocles hanging over the contract in this way means great legal uncertainty and high financial risks for the party interested in the contract: for the landlord, the secure, long-term rental of his property often represents the basis for investments and the use of loans; for the tenant, the permanent and predictable rental of a property also regularly represents the basis for investments and the establishment of a secure business location.
This problem is exacerbated by the fact that Section 550 BGB is mandatory law. Any attempts by practitioners to contractually waive Section 550 BGB or to prevent or at least mitigate its legal consequences by means of "written form clauses" have been (definitively) rejected by case law.
3 Planned reform and status of the legislative process
The reform that has been initiated envisages deleting the current Section 550 BGB without replacement and instead creating a new Section 566 (3) BGB with the following wording:
"If the tenancy agreement has not been concluded in writing for longer than one year, the purchaser is entitled to terminate the tenancy in accordance with the statutory provisions. Notice of termination may only be given within three months of the purchaser becoming aware of the agreement made without the required written form. However, it shall be permissible at the earliest at the end of the year following the transfer of the residential space. The termination shall become ineffective if the tenant objects to it within two weeks of receipt and agrees to continue the tenancy in accordance with the agreements made in compliance with the required written form. The termination cannot be based on breaches of the written form that only occurred after the acquisition."
According to the planned new regulation, only the purchaser of a rented property will be able to terminate the lease due to agreements that do not comply with the written form requirement - in line with the original idea behind Section 550 BGB; the parties to the existing lease can no longer make use of this option.
In order to avoid exposing the tenant to permanent uncertainty due to a possible termination by the purchaser, the draft of Section 566 (3) BGB restricts the purchaser's right to terminate the lease to a period of three months from knowledge of the (additional) agreements contrary to the written form, whereby the purchaser bears the burden of presentation and proof with regard to compliance with the aforementioned period. In addition, abusive use of the termination option should be prevented by the fact that the purchaser should only be able to terminate due to agreements that were made prior to his acquisition.
The resulting disadvantage for the tenant, depending on the perspective, is to be compensated for by the fact that the tenant can unilaterally prevent the termination by objecting to it and agreeing to the continuation of the tenancy without the (additional) agreements contrary to the written form, i.e. on the terms agreed in writing.
4. outlook
In terms of timing, the above-mentioned draft is currently at the beginning of the legislative process. On 20.12.2019, the draft bill was adopted by the Bundesrat (Drucks. 469/19). On February 5, 2020, it was forwarded by the Federal Government to the Federal President, who must then bring about a resolution by the Bundestag. Prior to this, there may be numerous amendments to the draft. The duration of the legislative process is not specified by law, but rather determined by individual procedural steps, which is why it is difficult to estimate whether, when and in what form the current draft will become law. This is all the more true as the legislative process - should it not be completed before the end of the current legislative period - will have to be restarted in the next Bundestag due to the principle of discontinuity.
As is so often the case, the current provision of Section 550 BGB is a double-edged sword: depending on the perspective and interests of the terminating party or the terminated party, it can be a blessing or a curse. However, due to the legal uncertainties associated with the current legal situation and the associated investment and location risks for both parties to the tenancy agreement, the planned new regulation is ultimately to be welcomed. It returns the regulation to its original purpose as intended by the legislator and creates a fair balance between the conflicting interests in the event of a change of landlord. Last but not least, the planned new regulation would also mean that the original parties to a tenancy agreement would (once again) be required to conclude fixed-term tenancies in a more considered manner; however, the amended legal situation would also give them the opportunity to agree amendments and adjustments in a less complicated manner, as they would be threatened with less dramatic legal consequences. The parties to the existing tenancy agreement are also not unfairly disadvantaged by the draft; the possibility of termination for good cause continues to exist, which is why a right to terminate contracts that are simply unacceptable remains even after the new regulation comes into force.
However, it should be noted that the Federal Government has already spoken out against the Bundesrat's draft in its statement of February 5, 2020 (Durcks. 19/17034) and, despite recognizing a need for regulation, rejects it as a result. It therefore remains to be seen whether and, if so, in what form the draft will become law.
Status: 09.03.2020