Better conditions for retail tenants in Germany

1 Jul 2020 , 6:40pm

Retail tenants in Germany should soon have much better conditions regarding protection of their long-term rental agreements, says DLA Piper Frankfurt partner Fabian Mühlen.

Commercial rental agreements for retail units are important for successful retail in the fashion industry, which is dominated by local shops. The German legislator is now planning a change to commercial rental law: the abolition of the much-discussed possibility to terminate agreements, which will offer much-needed security for commercial tenants in the fashion industry.

Until now, a long-term lease agreement (with a term of more than one year) could be terminated by either party at any time without observing the contractual term if the contract had not been concluded “in written form.” Finalising a contract “in written form” not only means in the literal sense, it also includes the obligation to record all essential contents of the contract (lease object, rent amount, method of payment, name of the parties and the rental period) and the physical or content-related connection of all documents and amendments. 

The “written form defect” is one of the most common breaches of German commercial rent law leading to early termination of rental agreements.The consequences of early termination can be disastrous. Having to find a suitable replacement shop space in a tense real estate market can be compared to looking for a needle in a haystack, and investing in the shop and the location can become economically worthless.

To prevent early terminations of long-term lease agreements and to help tenants avoid the problematic consequences, the German Parliament has recently been negotiating a reform of the written form requirement, which should promote more legal certainty for retail tenants in Germany. In the future, the parties to the lease agreement will no longer have the right of termination for breaches of the written form requirement. Only potential purchasers of the property will have this right, and only for a maximum of three months. 

Additionally, tenants will have the right to object to the termination in writing. Thus, there is the possibility to continue the rental agreement even though the written form has been violated. The German Parliament is expected to accept the planned innovations, providing good prospects of improved conditions for retail tenants in the fashion industry in Germany regarding the protection of their long-term rental agreements.