German Bureaucracy Relief Act IV - Text form replaces written form in commercial leases in future

Until now, commercial leases – including hotel leases – with a term of more than one year have been subject to a strict written form requirement. If this is not complied with, the lease agreement is deemed to have been concluded for an indefinite period. The lease agreement can therefore be terminated with statutory notice period for ordinary terminations despite any agreed fixed lease term.  

From the entry into force of BEG IV, commercial leases that are not concluded in text form for a term of more than one year are deemed to have been concluded for an indefinite term.
The written form requirement for residential lease agreements with a term of more than one year remains unaffected. 

Background of the reform: facilitating of digital contract conclusion

The reform aims to facilitate the conclusion of digital contracts, which is to be achieved by reducing formal requirements.

In addition, terminations of commercial leases – including hotel leases – due to violations of formal requirements shall be reduced. Historically, the written form requirement was primarily intended to protect the purchaser of a leased property, which assumes the rights and obligations of the preceding landlord. The purchaser was thus given the opportunity to ordinarily terminate a lease agreement of which it did not have full knowledge because the lease agreement or an additional agreement thereto was not concluded in writing or did not fully contain all essential lease conditions.

According to the case law of the German Federal Court of Justice, however, this right of termination applied not only to purchasers, but also to the parties of the lease in general. In practice, this meant that landlords and tenants alike were able to terminate lease agreements prematurely, i.e. before the expiry of an agreed fixed term, due to a breach of the written form requirement. The downgrading to a text form requirement is intended to reduce such cases.

Text form: both a relief and a challenge

The text form (Section 126b German Civil Code) requires a declaration to be recorded on a durable medium, such as an email, a PDF document or a USB stick. The person making the declaration must be identifiable. In addition, the closure of the declaration and its completeness must be evident, for example by stating the name, a scanned signature, a greeting or the note "This declaration is not signed".

The simplification of the formal requirement from written form to text form will make it easier and significantly speed up the conclusion of commercial lease agreements, but also provides for uncertainties.

For example, it could become more difficult for a purchaser of real estate to reliably capture the full content of a lease agreement. This applies in particular in case significant changes to the agreement have been made by email or other communication in text form.

Unity of documentation: expected to remain essential

Originally, from the written form requirement, the obligation to provide unity of documentation has been derived. This meant that all annexes, addenda and supplementary agreements had to be linked to the original execution version of the lease agreement in order to maintain the written form, whereby a "mental link" was sufficient, for example through explicit references and, eventually, back references between the contractual documents.

The explanatory memorandum to BEG IV indicates that the protection of purchasers should also be maintained in context with the text form, which argues in favor of retaining the requirement of documentation unity. This means that even a commercial lease agreement concluded in text form must contain all essential contract terms and conditions, and addenda, supplements and additional agreements require a specific and recognizable link to the lease agreement. Loosely worded emails, extensive, confusing email histories or similar communication between the parties are likely to entail the risk of not making the legally binding agreements clearly identifiable and thus not guaranteeing the desired legal certainty.

Contractual written form clauses: Exclusion of statutory text form possible

Lease agreements – including hotel leases – often contain so-called written form clauses, according to which contractual changes may only be made in writing.

In the case of so-called double written form clauses, which expressly provide that the amendment of the written form clause itself may only be made in writing, this formal requirement cannot be deviated from without further ado.

However, if the double written form clause is a General T&C clause, the written form requirement can be deviated from by means of an individual agreement that takes precedence (Section 305b German Civil Code) - including verbally or tacitly, by submitting an informal declaration amending the contract. Such informal declarations previously violated the statutory written form requirement of Sections 550, 126 German Civil Code, with the consequence that the lease agreement could be terminated prematurely. With BEG IV, this risk of premature termination no longer applies to declarations in text form.

Transitional provisions: application of text form to new and existing leases

To commercial leases concluded before BEG IV comes into force, a one-year transition period applies, during which such pre-existing leases can still be terminated due to a lack of written form. After expiry of the transition period, pre-existing leases can also only be terminated prematurely regarding breaches of form due to a possible breach of text form. However, the parties are free to exclude the termination of pre-existing leases due to breaches of written form in the lease agreement with effect even before expiry of the transition period. 

Conclusion, outlook

The reform of the written form requirement for commercial leases offers landlords and tenants more flexibility and quickness when concluding contracts. The electronic conclusion of long-term lease agreements, e.g. by exchanging scan copies of handwritten signed documents or using (not necessarily qualified) electronic signatures, will be possible in a legally secure manner.

For new hotel lease agreements, consideration should be given to agreeing a qualified text form to design legally binding communication for additional and supplementary agreements in a clear manner, e.g. by agreeing that legally binding contractual declarations shall in any case require a scanned signature or electronic signature or contain an explicit reference such as "legally binding contractual declaration".

Purchasers of leased real estate should evaluate the entirety of the lease agreement documentation even more carefully and, if necessary, expand the catalog of the seller's assurances in the property purchase agreement or have tenants confirm the completeness of the lease agreement documentation.