FCJ: Stricter Disclosure Rules for German Property Deals

The German property market has long played an important role for Swiss investors. The steady rise in property prices in Germany and good expected returns justify the enthusiasm of Swiss citizens and companies for investing in German properties. In this context, Swiss (companies) have therefore been equally active on the buyer and seller side for years. In the course of the purchase or sales process, extensive due diligence checks are often carried out in advance in order to recognise and exclude elementary risks of the contractual or financing parties or to reflect them in the purchase agreement. A central point here is always the duty of the seller of a property to provide information about relevant factors of the intended property transaction. In its most recent decision on this, the Federal Court of Justice specified the requirements for a seller's duty of disclosure in connection with information provided in a data room in a buyer-friendly manner.

Facts

In March 2019, the plaintiff buyer purchased several commercial units in a building complex from the defendant seller for a purchase price of around EUR 1.5 million. In the purchase agreement, the seller assured the buyer that no resolutions had been passed that would result in a future due special contribution, that to the best of its knowledge, extraordinary costs not covered by the maintenance reserve had not been incurred in the current financial year and that it was not aware that such costs were imminent or that further special contributions had been decided. Furthermore, the purchase agreement stated that the seller had provided the buyer with the minutes of the owners' meeting for the last three years and that the buyer was aware of the content of the documents. A virtual data room was set up as part of the purchase contract negotiations. On the Friday before the notarisation of the purchase agreement, which took place on the following Monday, the seller uploaded the minutes of the owners' meeting from 2016 to the virtual data room without informing the buyer separately. At this meeting, the owners had decided to claim payment of EUR 50 million from the majority owner to implement extensive structural changes to the building complex. Following legal proceedings in 2020, the owners of the commercial units - including the buyer - were sued. The buyer was of the opinion that the seller had "secretly" posted the protocol in the data room and thus "foisted" it on her and, after the other owners had made a claim, declared to the seller that the purchase agreement was cancelled due to fraudulent misrepresentation. The plaintiff then sued for cancellation of the purchase contract and for damages. After the action failed in the lower courts, the Federal Supreme Court essentially overturned the judgement of the lower court and referred the case back to the court of appeal for a new hearing and decision.

Duty of disclosure regarding material contractual circumstances

The seller should have informed the buyer about the scope of the costs without being asked. The fact that refurbishment measures totalling EUR 50 million were outstanding was a circumstance that had to be disclosed and about which the seller should have informed the buyer. There was no general legal obligation to inform the other party of all details and circumstances that could influence the other party's decision. However, in contract negotiations, there is a duty to inform the other party of circumstances that could frustrate the purpose of the contract and are therefore of material importance for the other party's decision, provided that the other party could reasonably expect this information in good faith, taking into account the contractual conception. Such a circumstance is also deemed to exist if it is likely to cause considerable economic damage to the contractual partner.

Possibility of obtaining knowledge is generally not sufficient

The seller's duty of disclosure is not excluded by the fact that the buyer had the opportunity to obtain knowledge of the circumstance requiring disclosure himself, in particular not by setting up and making available a data room. Whether the performance of due diligence by the buyer has an impact on the seller's duty of disclosure can only be answered on a case-by-case basis. Only if the seller could reasonably expect in the individual case that the buyer would be able to perceive certain information provided by the seller in the data room and include it in its purchase decision would a separate disclosure by the seller not be necessary. Circumstances that confirm this expectation should include the submission of an expert report, support from experts and a clear structure of the data room. However, the buyer is not generally obliged to carry out due diligence. The burden of presentation and proof for the actual performance of due diligence by the buyer lies with the seller. In the case in question, the seller could at least not have the legitimate expectation that the buyer would take note of the content of the protocol - particularly in terms of time - before the contract was concluded.

Conclusion

The judgement means a tightening of the seller's duty of disclosure in the context of property transactions. In order to fulfil any duties of disclosure, the seller must always ensure that the buyer obtains actual knowledge of at least the circumstances essential for the conclusion of the contract. Posting all information in the data room does not appear to be sufficient for this, at least in principle. In particular, when submitting essential documents shortly before the conclusion of the contract, the seller is advised to inform the buyer accordingly. The principles laid down in the judgement of the Federal Supreme Court must be taken into account by Swiss investors in the sales process in future. In order to avoid liability scenarios, it is advisable to subject the relevant information on the transaction object to an internal assessment with the help of a lawyer before or at the start of the due diligence and before opening the data room. In doing so, it must be discussed which information is material to the contract in accordance with the principles set out in the judgement of the Federal Court of Justice and therefore justifies a timely duty of disclosure. This information should ideally be labelled separately and posted in the data room at an early stage. In addition, the aforementioned circumstances must be proven in court. With regard to the buyer's acknowledgement, a (possibly automated) declaration of acknowledgement should be made by the buyer.