The new onus is on the seller to point out any possible defects to the potential buyer.
In a significant judgement earlier this month, Germany's Federal Court of Justice in Karlsruhe (BGH) considerably tightened the disclosure obligations of sellers and strengthened the rights of buyers. The judgement has wide-ranging implications not only for real estate sales, but also across a wide range of corporate transactions.
In essence, the judgement will now require sellers of property to provide much more comprehensive information about the property for sale than has been the case to date. This is particularly critical where a buyer may not be in possession of all relevant facts that could affect upcoming renovation costs, or the information has been delivered at too short notice before notarisation. The decision will also require sellers to proactively inform potential buyers about the inclusion of new documents in a virtual data room, for example, without placing the onus on the buyer to discover these for himself.
Christian Osthus, legal adviser to the German Real Estate Association (IVD), said the ruling would require sellers to more carefully prepare all relevant material circumstances and information, and provide it earlier and in a very clear manner, rather than in the hitherto frequently common practice of providing, at short notice, bundles of disorganised documents which are often designed to discourage more thorough due diligence. The new onus is on the seller to point out any possible defects to the potential buyer.
The case arrived in Karlsruhe via Hannover, where a buyer had bought several commercial units in the prominent Ihme Centre complex in the city for more than €1.5 million. It subsequently claimed it had been fraudulently deceived in respect of future high costs for the maintenance of the complex.
The seller had posted the minutes of an important owners' meeting in a digital data room only three days before the contract was signed. From the plaintiff's point of view, this happened "clandestinely" and was thus "foisted" on her. Because it was a Friday, it was also the last working day before the planned signing. The case ended up in court.
The Celle Higher Regional Court dismissed the case, taking the view the responsibility was largely with the buyer. The BGH took a different view and largely overturned the Celle decision, determining that the seller had an obligation to disclose information about the scope of the likely costs, put at about €50m, which it said was "undoubtably of considerable significance".
In legal terms, this is referred to as "circumstances subject to disclosure". Justice Bettina Brückner, in explaining the Court's decision, did point out that the duty to disclose all circumstances could be waived if defects catch the buyer's eye during an inspection, or if an expert opinion has already been obtained in connection with such defects. By contrast, a seller should no longer expect that a buyer will automatically scrutinise financing documents or a folder handed over to him outlining defects in the property. He must explicitly draw attention to these defects, the ruling states.
Justice Brückner added that the new case law applies equally to cases involving data rooms. "The mere fact that the seller sets up a data room and allows prospective buyers to access the data does not always allow the conclusion that the buyer will take note of the fact subject to disclosure." Rather, it depends on the individual case, and how the data room and the access to it is structured and organized.