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1 November 2023

Ciao, § 550 BGB

In Germany, lease agreements for solar and wind projects need to follow arcane rules on the written form. In the 21st century, these rules have no purpose anymore. It's time to get rid of them.

It is a truism that the transition to renewable energy requires large investments. And large investments require legal certainty.

Astoundingly, a seemingly innocuous provision, the written form requirement in Section 550 of the German Civil Code (BGB), has hindered investment in renewable energy. The German parliament should urgently address this issue; the best solution would be to abolish the provision altogether.

Strategic leverage

If a lease of more than one year is not agreed in writing, the fixed term is disregarded and the lease may be terminated at any time.

The rule applies not only to residential leases, but also to land leases. Land lease agreements for wind and solar projects are typically signed for at least 20 years, and sometimes up to 30 years. The long-term right to use the land secures significant investment in the development and construction of projects.

However, the written form requirement of Section 550 BGB is complex: contracts and addenda must be signed by hand and unclear clauses can breach the requirement.

Because of fierce competition for scarce space, the written form has degenerated into a tactical means of achieving expensive renegotiations and new contracts. The savvy lawyer can find a breach of the written form requirement in almost any lease agreement.

The result is that Section 550 BGB creates uncertainty for project developers, operators, investors, and financiers. It undermines the duration of the parties’ agreement for no apparent reason. This very German complication makes foreign investors scratch their heads in disbelief.

Misguided purchaser protection

Originally, Section 550 BGB was only intended to protect the purchaser of a property. He should be able to find out about the terms of the lease that he is acquiring with the property. If he could not do so because of non-written agreements, he then could end the lease.

However, if the purchaser wants to ensure that the lease continues to provide a source of income after acquiring the property, he might face legal uncertainty. The purchaser cannot be sure that the written form requirement has been complied with, nor does the purchaser have full knowledge of the details of the agreement, including whether all critical elements have been included.

Greetings from the Bundesgerichtshof

Although the written form requirement was only intended to protect the purchaser, the original contracting parties can, according to the case law of the Federal Supreme Court (Bundesgerichtshof), also invoke Section 550 BGB to terminate the lease. It remains unclear what need for protection is served by such a possibility of termination, which obviously deviates from the original intention of the parties. According to the Bundesgerichtshof, the parties cannot waive the written form requirement. At the same time, the requirement has become more stringent. In recent years, case law has turned Section 550 BGB into a quagmire for contract drafting.

Reform is overdue

There is also no convincing reason to keep the provision for other leases outside of renewable energy projects. The principles of freedom of form and fidelity to the contract outweigh the purchaser’s need for protection. The purchaser may be able to claim damages from the seller for failure to disclose non-written agreements.

The right to terminate at any time is not even in the interests of the purchaser or the original parties. Abolishing Section 550 BGB would, at little cost, restore the principles of the German Civil Code, eliminate case law that has gone astray, and create legal certainty (also) for renewable energy.

The legislator must act

A reform was attempted during the last parliamentary term (BR-Drucksache 469/19 and BT-Drucksache 19/17034). However, the attempt was short-lived. The German Wind Energy Association criticised the proposed amendments because they did not adequately address the problems with the written form requirement. With the end of the parliamentary term, the initiative was dropped.

The German parliament should act now and abolish Section 550 BGB. The Federal Ministry of Justice has reportedly drafted a new bill to reform the written form requirement, which has not yet been published. I encourage the legislator to follow through this time and make the necessary adjustments for a simpler, investment-friendlier regulation.

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