Clarity for landlords and tenants: The Federal Supreme Court (BGH) has ruled that provisions in lease agreements which exclude protection of competition and at the same time impose an obligation on the tenant to operate are invalid (BGH, ruling of 26.02.2020, XII ZR 51/19). Operators and purchasers of shopping centers should review rental agreements in this respect. Although only the relevant clauses – not the entire lease agreement – are invalid, financial risks and disputes may still arise: if the exclusion clause is invalid, the tenant benefits from competition protection by operation of law, and a violation of such protection by the landlord may result in rent reductions or claims for damages.
Tenants of shopping centers are often obliged to conduct their business operation and are limited to a certain range of products. This assortment commitment prevents the tenant from unilaterally expanding or changing the assortment of goods. Consequently, the portfolio of the existing product ranges in the shopping center is secured. Some lease agreements furthermore exclude a protection of the tenant against competition. Hereby, the landlord wants to ensure the best possible utilization of the shopping center, which ultimately also benefits the tenants.
Independently of each other, both clauses can respectively be contractually agreed.
The question of whether both can be agreed concurrently in a lease agreement as general terms and conditions provided by the landlord was previously disputed in literature and case law and was expressly left open by the Federal Supreme Court itself in its last decision on this issue (BGH ruling of 03.03.2010, XII ZR 131/08). The Federal Supreme Court has now ruled that this is not possible, which was previously the minority view in German legal literature and German lower courts.
In the opinion of the judges, the landlord’s obligation to provide undisturbed use of the rented space results in a so-called contractually immanent protection of competition, even if this is not expressly agreed.
If in a shopping centre any protection of competition is excluded, but at the same time a duty to operate with a fixed product range is imposed on the tenant, then – according to the Federal Supreme Court – the tenant is prevented from avoiding a competition situation, that has arisen only after conclusion of the lease agreement, by changing the product range or limiting the operating hours in order to save costs.
In the opinion of the Federal Supreme Court the combination of the two clauses would allow the landlord to bring about a subsequent competitive situation and thereby soften the strict branch mix. This puts the tenant at an unreasonable disadvantage if the tenant is not allowed to adjust the product range himself.
Consequence/need for action:
If a lease agreement for a space in a shopping center excludes protection of competition and also contains an obligation to operate with a fixed product range, then (only) these two clauses are invalid. The validity of the remaining provisions remains unaffected. The Federal Supreme Court clarifies that the use of both clauses does not immediately justify a termination of the lease agreement without notice.
If the clause which excludes the protection of competition is invalid, a protection of competition inherent in the contract (so-called vertragsimmantenter Konkurrenzschutz) comes into effect. The violation of this (contract-inherent) protection of competition can, however, have financial consequences for the landlord: it can lead to a reduction of the rent or justify tenants claims for damages. The landlord will need to attempt to amend existing lease agreements or even terminate some of the existing leases in order to achieve that the tenants right of being protected from competition is honored. If the situation cannot be changed, it may even justify an extraordinary termination.
This must be taken into account in future contractual arrangements as well as in current leases and especially when purchasing shopping centers.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2021