The end of the written form requirement for commercial lease agreements?

On 11 January 2024, the Federal Ministry of Justice published the draft bill of a Fourth Act to Relieve Citizens, the Economy and Administration of Bureaucracy (Fourth Bureaucracy Relief Act). Initially, it was still envisaged that the written form requirement for commercial lease agreements would be completely abolished.

The Federal Government has since introduced a draft of the Fourth Bureaucracy Relief Act. This now provides that the text form must be observed for commercial lease agreements.

KFR – Kanzlei für Real Estate explains the planned changes and their practical implications.

What does the draft bill regulate?

In the Federal Government’s draft bill, Art. 15 no. 7 initially continues to provide that the reference in § 578 BGB to § 550 BGB is removed.

Contrary to the draft bill published in January 2024, however, it is now provided that § 550 BGB shall apply with the proviso that a lease agreement that is not concluded in text form for a period longer than one year shall be deemed to have been concluded for an indefinite period.

This provision means that long-term lease agreements (i.e. those with a term of more than 1 year) as well as any subsequent amendments thereto would no longer need to be actually signed in original by both contracting parties, but that, for example, the exchange of signed scanned versions or even agreement by email or SMS would be possible.

A transitional period of 12 months is planned for existing lease agreements.

Federal Ministry of Justice and Consumer Protection – click here

Goals of the Fourth Bureaucracy Relief Act

As the name suggests, the Fourth Bureaucracy Relief Act is intended to relieve citizens, but also the economy and administration, of unnecessary bureaucracy, simplify and streamline processes and thereby also promote the achievement of the goals of the UN 2030 Agenda for Sustainable Development. This is also intended to promote digital transformation, e.g. by waiving or reducing formal requirements in civil law.

Furthermore, it is expected that written form terminations by the contracting parties will decrease as a result of the downgrading of the written form requirement to text form; the information and documentation needs of an acquirer are also to be adequately met by the text form.

Current legal situation

The German Civil Code currently provides pursuant to §§ 578, 550, 126 BGB that commercial lease agreements must be concluded in writing if they are to be agreed for a period of more than 1 year. In writing in this sense means that the lease agreement must actually be signed by the tenant and landlord. The same applies to subsequent material amendments. Furthermore, it is required that all material agreements between the parties are evident from a single document. If the written form is not complied with, the lease agreement can be ordinarily terminated by either party, as the lease agreement is then deemed to have been concluded for an indefinite period.

Why does the written form requirement exist?

The primary purpose of the written form requirement is to protect the acquirer of a let property.

The law provides in § 566 para. 1 BGB that the acquirer of a let property enters into the rights and obligations of the lease agreement. The provision that long-term lease agreements must be concluded in writing is therefore intended to allow the buyer of a property to be precisely informed about the contractual lease obligations they are entering into. If the content of the lease agreement or any supplementary agreements thereto were not concluded in writing and an acquirer was therefore unable to obtain comprehensive knowledge of the rights and obligations they are to assume, they are granted the option to withdraw from the lease agreement. However, this option is available not only exclusively to the acquirer of a let property, but also to the original parties to the lease agreement. In addition, the written form requirement of § 550 BGB serves a clarification, evidentiary and warning function with regard to the lease agreement parties.

Actual relief through the Fourth Bureaucracy Relief Act?

Whether the Fourth Bureaucracy Relief Act will actually bring the hoped-for relief for citizens and the reduction of written form terminations by the contracting parties remains to be seen.

It is certainly to be welcomed that lease agreement parties are now able to conclude long-term lease agreements or their amendments more quickly.

The question remains, however, whether the developed criteria for compliance with the written form requirement, which goes beyond the mere handwritten signature of the parties, will also apply to the text form requirement that will apply in future. Should this be the case, there may under certain circumstances also be the possibility for the contracting parties to withdraw from an unwanted long-term lease agreement prematurely despite the text form requirement.

For an acquirer, the abolition of the written form requirement will certainly lead to greater due diligence effort upon acquisition. For the recording of the parties’ lease agreement arrangements, the entire tenant files/tenant correspondence would in future need to be reviewed and examined for any arrangements relating to the lease agreement. This leads to additional costs in acquisition due diligence. At the same time, however, there is a constant uncertainty as to whether all arrangements relating to the lease agreement have actually been recorded in the tenant file/correspondence.

Outlook for practice

Even in the event that the written form requirement for commercial lease agreements is reduced to the text form, KFR – Kanzlei für Real Estate recommends continuing to record all provisions relating to the tenancy in agreements or addenda and to document their binding nature through (scanned) signatures of the parties. Only in this way can it be demonstrably ensured what is intended to form part of the lease agreement. This applies in particular in the event of a sale, but also in the case of a (judicial) dispute between the parties.

KFR – Kanzlei für Real Estate supports owners, landlords and investors in the legally secure drafting of commercial lease agreements and advises on the implications of the new text form provision.

What real estate owners should know about the Green Lease

With the revision of the guide for green leases by the Central Real Estate Committee (ZIA) in February 2024, the Green Lease was adapted to the current European ESG requirements. The most important points at a glance:

What is a Green Lease – and what are its benefits?

The level of sustainability in real estate cannot only be achieved and maintained through sustainable new construction or renovation. Rather, it is necessary for the latter that the property is operated sustainably throughout the entire holding period. For this purpose, the implementation of green provisions in the lease agreement is an essential component. There is still no statutory definition of the term “Green Lease”. The ZIA continues to understand Green Lease as “a lease agreement oriented towards sustainability aspects, which through its special design, possibly flanked by the requirements of any existing certification of the property, is intended to encourage the tenant towards the most sustainable possible use and the landlord towards the most sustainable possible management of the property”. In practice, the “Green Lease” means that properties with a high degree of sustainability receive greater interest on the real estate market and can therefore also be financed more favorably. An advantage for real estate owners.

The birth of the Green Lease guide

In 2018, the ZIA developed a definition for the Green Lease together with a project group of real estate experts. Building on this, it created a comprehensive regulatory catalog for the Green Lease. This regulatory catalog was and continues to be used today not only by law firms as a practical guide for drafting sustainable clauses. It can also be assumed that banks and financial institutions take this guide into account when evaluating properties based on ESG criteria.

What is new about Green Lease 2.0?

As of February 2024, the aforementioned practical guide was revised once more by the ZIA and in particular adapted to the European ESG regulatory frameworks. There are still two categories:

• Basic Green Lease:

  Reduced to the provisions considered essential by the ZIA and focuses on the most important aspects for implementing the goals associated with the Green Lease

• Extended Green Lease:

  Contains more comprehensive and detailed regulatory proposals

The Basic Green Lease

Compared to the 2018 version, the ZIA has now attempted to standardize the concept of “sustainability” based on the Taxonomy Regulation and the Disclosure Regulation. According to the ZIA, the Basic Green Lease should now focus only on the following core elements.

The four core points of the Basic Green Lease:

1. Mutual exchange of consumption data: Tenant and landlord exchange consumption information (e.g. on energy, water, and gas),
2. Promotion of sustainable energy sources in energy and heat supply,
3. Resource conservation: measures to save energy and water as well as reduce waste,
4. Environmentally and resource-friendly implementation of construction and repair measures.

The Extended Green Lease

The Extended Green Lease supplements the basic version with more comprehensive sustainability provisions. These include, among others, energy-related modernizations, certifications as well as social and governance aspects such as accessibility. The goal is to involve landlords and tenants more strongly in the responsibility for sustainable building use overall.

Why is the Green Lease worthwhile for property owners?

• Market advantage

  Properties with sustainability standards are generally more sought-after by buyers and tenants.

• Financing plus

  Potentially better credit conditions through fulfillment of ESG criteria.

• Future security

  Achievement of ecological, economic and social sustainability goals.

What do you need to consider?

Despite the revision of the guide and the ZIA’s proposed wording, based on our practical experience there is no standard solution for sustainable lease agreements. It must be examined on a case-by-case basis which of these provisions makes sense in relation to the lease structure, building and interests of both contracting parties and can also be implemented in practice. These can range from loose declarations of intent to strict obligations. In general, any engagement with the topic of sustainability in lease agreements is to be welcomed, however mere “greenwashing” must be avoided. It is to be expected that a mere “green facade” will no longer be sufficient.

Our conclusion

Real estate owners who want to act in a future-proof and sustainable manner should familiarize themselves with the new Green Lease 2.0 provisions and integrate green clauses into lease agreements. Individual solutions are required – we are happy to support you as experts in the design process. Please feel free to contact us. By Lena Forster and Sinje Grefe