How far do real estate sellers have to provide information? According to experts, a decision by the Federal Court of Justice goes well beyond the specific case.
Real estate sellers must inform potential buyers about relevant facts and, under certain circumstances, specifically point out upcoming renovation costs. The Federal Court of Justice (BGH) decided that this also applies to cases in which documents are posted in a virtual data room.
The Karlsruhe judges thereby tightened the sellers’ obligations to provide information and strengthened the rights of the buyers. (Af. V ZR 77/22)
From the point of view of Maximilian Findeisen from the law firm Norton Rose Fulbright, this means that not only for real estate sales, but for all corporate transactions, the sellers have to prepare and implement the due diligence more carefully and provide early and clear information about the circumstances that are important for the purchase decision. . A purchase investigation called due diligence does not necessarily have to be carried out per se. According to the real estate association Germany IVD, it practically always takes place.
Experts see trend-setting decision
“The Karlsruhe judges are putting a stop to the usual practice of sellers of exempting themselves from any liability simply through excessive and sometimes very short-term disclosure of documents,” explained Findeisen. The deputy federal managing director and general counsel of the IVD, Christian Osthus, emphasized after the verdict: “It is not enough for the seller to dump all relevant facts, beyond material and legal defects, at his feet in an unfiltered manner. Rather, the decision can be understood as meaning that the seller “He has to poke his nose at it.”
What circumstances these are depends on the individual case, as the presiding judge of the fifth civil senate, Bettina Brückner, explained. In this specific case, a company had bought several commercial units in a large building complex – the Ihme Center in Hanover – for more than 1.5 million euros. She feels that she was fraudulently deceived because she found out too late that she could incur high costs for maintaining the shared property.
The case
This concerns the liability of the seller due to negligence when concluding the contract due to failure to provide information. The seller had only put the minutes of an important owners’ meeting in a digital data room three days before the contract was signed. From the plaintiff’s point of view, this happened “secretly” and was therefore “foisted on” her. Because it was a Friday, it was also the last working day before the planned signing.
Up to 50 million euros were budgeted for the renovation work. Because the majority owner didn’t want to pay, the case ended up in court. The process ended with a settlement according to which the owners of the commercial units were to pay a special levy. The plaintiff challenged the purchase agreement. However, the Celle Higher Regional Court saw the responsibility primarily as lying with the buyer.
However, Germany’s highest civil judges now took their side, largely overturned the verdict and referred it back for a new trial. The seller should have explained the extent of the costs without being asked, which at 50 million euros was “undoubtedly significant”. In technical jargon there is talk of “circumstances that require disclosure”.
Buyer horizons come into focus
The obligation to provide information about this could, for example, be waived if the buyer notices defects during an inspection or if an expert report is handed over in connection with defects, explained Brückner. “On the other hand, a seller cannot simply expect that the buyer will examine financing documents or a folder with documents relating to the purchased property that has been given to him for defects in the purchased property,” the explanation says.
This case law should also be transferred to cases with data rooms. “The mere fact that the seller sets up a data room and allows prospective buyers access to the data does not always allow the conclusion that the buyer will take note of the circumstance that requires disclosure.”
Rather, in each individual case it depends on “how the data room and access to it are structured and organized, what agreements have been made in this regard, how important the information is that is being disclosed and how easy it is to find in the data room”. IVD legal counsel Osthus explained: “The associated uncertainty of relevance is unsatisfactory for sellers.” Ultimately, it can be deduced from the decision that we need to pay more attention to the buyer’s horizon.
“And if you emphasize or say something, you as the seller should document it in order to avoid a claim for damages from the buyer,” said Osthus. Kathrin Groß, lawyer at the commercial law firm CMS Deutschland, expressed a similar opinion in a statement: “From a seller’s perspective, the reference to the circumstances relevant to the purchase and the agreement on a cut-off date from which no more documents will be placed in the data room should be included In the future, no purchase contract will be missing.”
Source: Stern