Carrying out and bearing the costs of modernisation measures in ongoing tenancies
Written By
Associate
Germany
I am a member of our Frankfurt team and of our Real Estate and Restructuring and Insolvency Practice Groups.
Accounting for over 30 % of greenhouse gas emissions in Germany, the building sector plays a decisive role in achieving climate targets. One focus is therefore on the energy modernisation of existing buildings. Obligations in this regard arise, among other things, from the reformed Building Energy Act (GEG), which came into force at the beginning of 2024. Tenants are also attaching increasing importance to greater energy efficiency in buildings. In existing rented buildings, there is the particularity that landlords are responsible for carrying out modernisation measures and initially bear the costs, while tenants primarily benefit from the resulting advantages, such as savings on heating and water costs. For landlords, the question therefore arises as to whether the costs of modernisation measures can be passed on to the tenant.
Modernisation measures
The term "modernisation measures" is legally defined in Section 555b of the German Civil Code (BGB). The starting point for modernisation measures is always the structural alteration of a building, even if this is only minor. When we refer to modernisation measures in the following, we mean those within the meaning of Section 555b BGB. Examples include the installation of new heating systems that meet the requirements of the GEG and are based on at least 65% renewable energy, the connection to a district heating network, the purchase of water-saving fittings, the installation of electric charging points or the connection to a fibre optic network.
No entitlement to the implementation of modernisation measures
Tenants generally have no claim against the landlord for the implementation of modernisation measures unless this has been contractually agreed.
In certain cases, however, the tenant can carry out modernisation measures independently and has a claim against the landlord for toleration, Section 554 BGB. This applies, for example, to the installation of electric charging points. The German government is also planning to extend the toleration obligation to the installation of so-called plug-in solar devices, better known as balcony power stations (BT Drs. 20/9890 (in German)).
Obligation to tolerate modernisation measures and restriction of the right to reduce rent
On the other hand, the landlord has a claim against the tenant to tolerate modernisation measures, unless there are special reasons for hardship, Section 555d BGB. For example, the tenant having to move out for several months to carry out the modernisation measures may constitute particular hardship.
Although the tenant is generally obliged to tolerate modernisation measures, a reduction in rent due to impairment of use or construction noise during the modernisation work is not excluded. An exception applies to energy-related modernisation work that contributes to the saving of final energy in relation to the rented property, for example through improved thermal insulation or the installation of new windows. In this case, a rent reduction due to impairments for a period of three months is not possible by law, without differentiating according to the extent of the impairment, Section 536 (1a) BGB.
This can lead to drastic restrictions in business operations and thus in the generation of rent, particularly for commercial tenants with public traffic, e.g. in retail or catering. If modernisation measures are carried out in direct succession, there is also a risk that the three-month period will be extended many times over. The duty to tolerate also applies to so-called "luxury modernisations" - i.e. if the building already has a high energy standard and the modernisation measures only achieve slightly increased savings for the tenant.
Assumption of costs for modernisation measures and newly arising operating costs
If the landlord carries out certain modernisation measures, he can pass on some of the construction costs to the tenant by increasing the rent to be paid. The landlord has a choice here: he can either increase the rent within the framework of the local comparative rent system (Section 558 BGB), where the modernised condition is considered, or on the basis of the costs incurred for the modernisation measures themselves (Section 559 BGB).
In addition to increasing the rent, the question arises as to whether the tenant can also be charged for any new operating costs incurred because of the modernisation measures. Initially, the operating costs that have been agreed between the parties to the tenancy agreement may be passed on. However, as modernisation measures lead to a change in the subject matter of the contract and the previous tenancy agreement typically contains a loophole regarding the new operating costs, this loophole must be closed by way of supplementary interpretation of the contract so that the landlord can pass on the newly incurred operating costs to the tenant.
There are no comparable statutory regulations on rent increases in commercial property law. From a sustainability perspective, however, it is difficult to understand why the costs of modernisation measures can be partially passed on to tenants of residential premises but not to tenants of commercial premises. Incentives for landlords to carry out modernisation measures in rented commercial premises therefore appear to be low.
The landlord will also be deterred from carrying out modernisation measures by the extraordinary right of termination to which the tenant is entitled upon notification of modernisation, Section 555 e BGB, if this is not contractually excluded. For the landlord, there is a risk that the tenant will take advantage of this to prematurely terminate unpleasant long-term tenancy agreements.
Deviating agreements in commercial so-called "green leases"
There is a great deal of contractual room for manoeuvre in commercial leases, for example within the framework of so-called "green leases", which are becoming increasingly popular. A "green lease" is a lease that, in addition to the usual regulations, contains further provisions for the most sustainable management and utilisation of a building.
In view of the legal loopholes described above and the one-sided burdens and risks partially regulated by law, the inclusion of provisions on the implementation and cost allocation of modernisation measures in commercial leases is recommended. In residential leases, however, no general deviations from the statutory provisions are possible to the detriment of the tenant. Deviating agreements are only possible on a specific modernisation measure and only to a limited extent within the framework of a so-called modernisation agreement, Section 555f BGB.
Key takeaways
The possibility of carrying out modernisation measures that is prescribed by law or that exists due to a contracting party's own initiative should be considered in rental agreements that are to be concluded. Against the background of achieving climate targets, it is to be expected that further modernisation measures will be prescribed by law in the future. These may have a significant impact on current tenancies. As far as possible, the implementation and cost-bearing of modernisation measures should therefore be regulated in the tenancy agreement from the outset or at least as part of a so-called modernisation agreement in line with the interests of the parties to counteract current legal loopholes or legal regulations to the detriment of one party.
