On 4 July 2017, the German Federal Court of Justice (Bundesgerichtshof — BGH) ruled that upfront fees agreed in standard form commercial loan agreements are unenforceable.
The BGH held that upfront fees that are charged without the bank providing substantial additional services do not conform with the statutory concept for remuneration of loan agreements. In the view of the BGH, generally only interest payments are permissible as remuneration for a loan provided on standard terms. Consequently, the BGH ruled that upfront fees lead to an unreasonable disadvantage to the borrower, irrespective of whether such borrower is a consumer or a commercial entity.
It is to be expected that borrowers will reclaim upfront fees under existing standard commercial loan agreements, and banks have already made provision for such scenarios. However, as a mitigating factor, the BGH has also ruled that borrowers should have been aware of their right to reclaim such upfront fees since 2011, and consequently, due to the statutory limitation period of three years, any claims having arisen before such period are time-barred.
Going forward, the possibility to validly agree upfront fees in standard commercial loan agreements governed by German law are limited. However, the ruling of the BGH only applies to standard form documents, banks can theoretically agree upfront fees in "individually negotiated agreements." The criteria for "individually negotiated agreements" set by the BGH is that detailed documentation exists showing that the bank has not imposed its terms on the borrower, but instead the upfront fee was freely negotiated. In the daily commercial loan business of a bank, this criteria is likely to be difficult to satisfy.
Other workarounds exist. For instance, it is possible to apply foreign law to the agreement containing the upfront fee or insert an arbitration clause so that the statutory rules on general business conditions (Allgemeine Geschäftsbedingungen), provided for in Sections 305-310 of the German Civil Code (Bürgerliches Gesetzbuch), will not apply. However, certain restrictions apply to these options. For example, the choice of a foreign law requires that the transaction has a foreign law nexus and will not be an option in an all-German scenario. While there are convincing arguments that the selection of arbitration will negate the application of the general business conditions, it has not yet been tested.
The "practical" solution suggested by the BGH, namely to price the upfront fee in the interest calculation, bears commercial disadvantages for the banks. For example, in case of an early repayment before the calculated maturity, the upfront fee would not be fully recovered. In the current low-interest environment, higher interest rates might also encourage borrowers to go "abroad" when it comes to finding the right bank.