A contractual cure clause, which is to remedy the lack of written form requirements of a lease agreement, is ineffective, unless overall it obligates not only the original contracting parties, but also the buyer as landlord.
The buyer, who has acquired the leased property with the lease agreement in question, asserts a claim for possession of the commercial property on the grounds of the lease agreement’s lack of written form requirements. Compared with the Regional Court, Düsseldorf Higher Regional Court in the appeal ruled that no binding effect could be attributed to a standard cure clause with respect to the buyer of the property.
Content and subject of the desicion
Lease agreements, whose term is in excess of one year, are subject to the written form requirements (Sec. 550 sentence 1 German Civil Code). The written form of a lease agreement is observed if all major agreements of the parties, which are set forth in a document, are adequately definable. If a written form is absent, the agreement will be concluded for a specific time and can be terminated, subject to a statutory time limit (Sec. 550 sentence 2 German Civil Code). In order to avoid the related disadvantages and risks, so-called ‘cure clauses’ are normally included in commercial leases. Under these clauses the parties are obligated to subsequently bring about the written form and prior to this time not to terminate the agreement due to lack of form. It is disputed whether such cure clauses as general terms and conditions of business, i.e., in the case of multiple application, are able to prevent the original contracting parties from terminating the lease agreement in good faith by referring to the lack of written form requirements. The issue here is further the question whether a standard cure clause has binding effect with respect to the buyer of the property. So far, there have been no high court rulings on these two issues.
Various opinions prevail in legal literature: According to one opinion the buyer of the property should be committed to a cure clause, since according to Sec. 566 German Civil Code this obligation and authorisation is transferred to the buyer. The buyer would be aware of this obligation from the lease agreement. According to another opinion, cure clauses that also obligate the buyer, should be invalid. This is substantiated as a violation of the protective purpose of Sec. 550 German Civil Code. Sec. 550 German Civil Code is intended to ensure that a subsequent property buyer who by law on behalf of the landlord enters into a rental agreement, whose terms and conditions are evident from the written agreement. In the case of lack of written form requirements, the buyer should be able to release himself from the contract prematurely by way of termination, so that the buyer would not have to accept agreements (in breach of the written form requirements) with which he is unfamiliar. This is to result in invalidity of the cure clause overall, so that the buyer (also) would be able to refer to it. This opinion was shared by Düsseldorf Higher Regional Court. However, the court allowed the appeal on points of law against the ruling, which was lodged.
Impact on Day-to-Day Business
The ruling of Düsseldorf Higher Regional Court, declaring the cure clause fully void, does not appear to be appropriate. This would mean that likewise the tenant would not be obligated to make good the written form requirements. The ruling of Düsseldorf Higher Regional Court does not take into consideration the circumstance that, as a rule, the owner’s / buyer’s investment decision is based on the continuous inflow of negotiated rents. If, in the course of the ownership change, the tenant would be granted the option of terminating the lease, this would have to be substantiated not only by giving dogmatic reasons, but also by counteracting the buyer’s bases of calculation. On the other hand, the court’s assumption that the buyer normally would have no knowledge of the lack of legal form requirements appears to be inappropriate. In the course of a careful due diligence it can frequently be determined whether there is a lack of legal form requirements. As a rule, the buyer is familiar with these defects and their potential cure. Of course, no one can ensure that the old landlord and the tenant entered into agreements that were in breach of the written form requirements, which had not been disclosed during the due diligence. The buyer only has limited options to safeguard against risks of this type. It is possible though for the parties to negotiate a guarantee that no agreements exist other than those disclosed between landlord and tenant. However, problems arise if the leased property is sold several times. In this case, the ’last’ seller would hardly be willing to issue a guarantee for the period of previous ownership.
The only way out of this dilemma is if the cure clause is left out in the case of a sale, and the tenant remains committed to his obligations. The buyer, on the other hand, should be committed to the cure clause only to the extent that he was aware of non-formal agreements. Such a ‘restricted’ invalidity of the cure clause could be substantiated with the protective purpose of Sec. 550 German Civil Code, which protects the buyer only against unknown agreements that do not meet the written form requirements.
It remains an open question as to whether the Federal High Court of Justice will make a ruling in the short term, which will take into consideration legal and practical requirements.