On 26 September 2024, the German Parliament (Bundestag) passed the draft legislation on the Fourth Bureaucracy Reduction Act (Viertes Bürokratieentlastungsgesetz) (BT-Drucksache 20/11306). The draft legislation inter alia stipulates that in future text form will be sufficient for entering into commercial lease agreements. The Bundesrat (Federal Council) has approved the draft legislation on 18 October 2024. Upon announcement of the legislation in the Federal Law Gazette (Bundesgesetzblatt), it will enter into force on the first day of the quarter following the announcement, presumably on 1 January 2025.

Contrary to the requirements of written form, text form is subject to significantly lower requirements, meaning that the draft legislation will have considerable practical and legal implications for commercial lease agreements governed by German law.

Current legal situation

Pursuant to Section 550 of the German Civil Code, the written form requirement for lease agreements requires that, in formal terms, the parties must sign the lease agreement (in principle) on the same document pursuant to Section 126 paragraph 2 sentence 1 of the German Civil Code. Furthermore, in line with applicable case law of the Federal Court of Justice (Bundesgerichtshof), the written form is only complied with if all material contractual terms - in particular, the leased premises, the rent, the lease term and the parties to the lease - can be identified from the contractual document itself or can at least be determined on that basis. Overall, the threshold for materiality was not considered to be particularly high.

The strict form requirement was in particular attributable to Section 566 of the German Civil Code according to which the buyer of a property assumes all rights and obligations under an existing lease agreement. According to the intention of the historic legislator as well as the permanent jurisdiction of the Federal Supreme Court, the form requirement is in particular supposed to protect the interests of the buyer of a property, who should be able to fully and reliably inform itself on the basis of the written contractual document about the material contractual terms of the lease to be assumed. Accordingly, the lease should only be binding on a long-term basis if the written form is complied with.

In addition, the written form pursuant to Section 550 of the German Civil Code has a clarification, evidence and warning function, so that the original contracting parties are in principle also entitled to terminate the contract early if the form requirement is not complied with.

Against this background a complex and case-by-case case jurisdiction has been established in the past years with respect to the termination of leases due to breaches of the written form. The possibility of an early termination has often been used by a party to a lease to get rid of an economically disadvantageous agreements or to establish better commercial terms when negotiating amendments or lease renewals. The termination of lease agreements following a breach of the written form was only denied by the jurisdiction in exceptional cases and under very restrictive conditions based on a breach of the principles of good faith (Treu und Glauben) in accordance with Section 242 of the German Civil Code.

In light of ongoing criticism from practitioners of the current version and interpretation of Section 550 of the German Civil Code, there have been several attempts in recent years to amend the written form requirement for commercial lease agreements. For example, draft legislation from 2019/2020 provided for the possibility of termination to be limited solely to the buyer of the property and for the termination to be limited to three months from the date the terminating party became aware of the breach of the written form requirement. However, all reform efforts had ultimately not been implemented to date.

Content of the change in law

The draft legislation passed by the German Parliament on 26 September 2024 as part of the Fourth Bureaucracy Reduction Act which the Bundesrat fully approved on 18 October 2024, inter alia provides for the abolition of the written form requirement for commercial lease agreements and for the replacement of the requirement of written form by text form pursuant to Sections 578 paragraph 1, 550, 126b of the German Civil Code. Contrary to written form, a complete signature by the parties on the original deed is no longer required. Therefore, only lease agreements not complying with the text form requirements shall be deemed to have been concluded for an indefinite period and may be terminated within the statutory notice period.

The text form pursuant to Section 126b of the German Civil Code only requires a readable declaration on a durable medium that clearly identifies the person making the declaration. This means that commercial lease agreements having a fixed term of more than one year may now be concluded, for example, by exchanging pdf documents, mere email correspondence, messages in messenger services and therefore, without any wet-ink signatures of the parties on a physical printout of the agreement.

For lease agreements that will be concluded after the legislation has come into force, the requirement to comply with text form shall be immediately applicable. For existing lease agreements already existing on that date, a transitional period of 12 months shall apply, during which a termination due to a breach of the written form shall still be possible.

Effects of the change in law

The change in law results in lease agreements and their annexes no longer having to be printed out and signed by the parties wet ink. It will also no longer be necessary to circulate the originals by post afterwards. This should at least speed up the conclusion of lease agreements and further promote digitalization in the real estate industry.

However, it remains to be seen whether the change to text form can actually eliminate the risk of early termination of a long-term lease agreement that has often existed in practice to date. Rather, it has to be expected that the text form will cause new legal and practical problems:

• Lowering the form requirements from written to text form can lead to situations in which the legal interpretation of the parties' acts (such as email correspondence) can lead to the conclusion of long-term leases which are typically commercially more material than short-term lease agreements, even though the parties were fully aware of the legal relevance of their declarations at the time they were made. The same applies to lease amendments.
• Furthermore, it remains to be seen how German courts will apply today's required of the uniformity of the deed (Einheitlichkeit der Urkunde) to lease agreements in future with regard to the text form. Will this requirement no longer apply at all or will the lease agreement entered into in text form still need to contain all material contractual contents and will all related amendments still need to refer to the entire previous lease documentation and have to contain a continuation clause (Fortgeltungsklausel) that terms of the lease shall otherwise continue to apply? Provided that the case law continues to be applicable, the change in law will not minimize the risk of early terminations in practice and will not reduce the time and effort required for legal due diligence when acquiring properties in Germany.
• For potential buyers of real estate in Germany, it may also be difficult to assess to what extent the correspondence between the original contracting parties has actually been duly reflected in the lease agreement and therefore becomes legally binding for the buyer. In this respect, the efforts involved in a legal due diligence should not be significantly reduced. It also remains to be seen how form issues will be dealt with in property sale and purchase agreements in future and whether related warranties will be requested from the seller.
• Finally, it remains to be seen whether and to what extent the contracting parties will continue to make use of their right to opt for written form in future, even if text form would now be sufficient under applicable statutory law.

Conclusion and recommendation

Considering the numerous open questions in connection with the new version of Section 550 of the German Civil Code and the lowering of the form requirements to text form, we assume that the existing uncertainties with regard to the form of commercial lease agreement and the long-term commitment resulting from them will not diminish. However, the exchange of private deeds will likely become less common in practice in future.

It also remains to be seen what effect the reduction to text form will have on the legal due diligence and the drafting of property sale and purchase agreements.

In view of the short transitional period of 12 months during which the existing requirements of written form will continue to apply, the question also arises as to whether possible breaches of the written form are still identified in order to terminate the lease agreements affected prior to the expiration of the transitional period.

Overall, it is recommended to closely monitor the future case law on the new Section 550 of the German Civil Code and the text form and to align and adapt one's own practice with regard to commercial lease agreements accordingly where necessary. In any case, the contracting parties should continue to draft lease agreements and amendments carefully in future and continue to agree on useful provisions that have already been included to date, even if they have primarily served to ensure compliance with the written form requirement (e.g., continuation clauses in amendments).

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