Providing competition protection may be of existential economic significance to the tenant of a commercial property. In particular, the scope and interpretation of competition clauses have repeatedly been subject-matters of disputes between tenants and landlords in recent years. In the 2012 summer edition of our Real Estate Newsletter for example we reported on the application of the principles of supplementary interpretation of contracts in case a competition clause was not agreed. Now the Federal Court of Justice had to decide whether a competitive situation in breach of a competition clause entitles the tenant to claim for rent reduction due to a defect. In its decision dated 10 October 2012 the Federal Court of Justice ruled that a breach of an agreed competition clause might constitute a defect with the consequence of a rent reduction.
A landlord’s breach of a competition clause agreed upon in a commercial lease agreement constitutes a defect of the rental object pursuant to Section 536 para. 1 German Civil Code, which may result in a rent reduction.
The plaintiff, an orthopaedic specialist, was the tenant in a building with several doctor’s offices. In the lease agreement the parties agreed upon the use of the premises as an orthopaedic surgery and the further scope of activities, in particular the performance of surgeries in the surgery centre located in the building. The lease agreement provided for a competition clause with respect to the specialisation in orthopaedics and the focus on chiropractic except for traumatology for children and adolescents as well as chirotherapy for children and adolescents. In the same building the landlord leased premises to a group practice specialized in surgery/accident surgery at a later date. The plaintiff objected this was a breach of the competition clause because in his opinion surgical and nonsurgical treatment of organs of support and movement performed by physicians of the group practice as well as traumatology for adults constituted a breach of the agreed competition protection. He claimed inter alia the rectification of the competitive situation at the earliest possible date and filed for injunctive relief regarding leasing of premises to the group practice. Furthermore, he filed for an action on a declarative judgement concerning a rent reduction in the amount of 50 percent and the corresponding repayment of rent that had been overpaid due to the reduction.
Content and subject of the decision
First of all the Federal Court of Justice determined that the group practice worked in areas covered by the contractually agreed competition clause and insofar confirmed the interpretation of the competition clause by the Court of Appeal.
In its decision, the Federal Court of Justice subscribed to the majority view in literature and confirmed a landlord’s breach of its duty to grant competition protection. The Federal Court of Justice substantiated its ruling in particular by stating that the breach of immanent competition protection as well as expressly negotiated competition protection can be considered as disturbances from the outside of the rental object and that these disturbances have an direct impact on the suitability of its contractually agreed use of the rental object. With regard to the competition protection, which had been contractually agreed in this case the Federal Court of Justice stated that the contractually agreed use was substantiated by the explicitly agreement that the landlord has to grant to the tenant the use of the premises without being disturbed by a specific competitor. The disturbance of the contractually agreed use caused by a breach of the competition clause therefore constituted a defect of the rental object. As the amount of a rent reduction in depends on the actual disturbance and to what extent the quid pro quo between performance and counter performance was affected, the Federal Court of Justice recommitted the case to the Court of Appeal which needs to determine the actual degree of disturbance. Furthermore, the Federal Court of Justice confirmed that the landlord is obligated to remedy the competition situation. Within the scope of possible and reasonable actions the landlord shall ensure that the physicians of the group practice no longer provide treatments covered by the competition protection or (prematurely) terminate the lease agreement.
Impact on Day-to-Day Business
A competitive situation in a leased property, may result in a considerable economic loss for a landlord, if one or several of the affected tenants in question exercise their right to rent reduction. The finding of the Federal Court of Justice that the use of the premises may be disturbed by a competitive situation may have the consequence that a tenant is not only entitled to a rent reduction, but also that the tenant may terminate the lease for cause if the competitive situation continues. For a landlord this means that potential competitive situations need to be taken into consideration at the time of entering into a lease and that the lease should be drafted accordingly. The object of the lease should be negotiated with necessary caution as an immanent competition protection may result from the respective agreement on the use of premises. When negotiating a competition clause it should be clearly stated which activities shall be covered and noncovered. If premises are rented to other tenants the existing competition situation should be considered and amended to the extent necessary. Depending on the circumstances it might be advisable to expressly exclude competition protection and negotiate a noncompete clause. From a tenant’s perspective the fact that the Federal Court of Justice’s ruling confirms the majure opinion in literature should enable the tenant to easier enforce its rights in the future in case of a breach of the agreed competition clause or immanent competition protection by the landlord.