Duty to operate and protection against competition in commercial lease agreements

A topic-related analysis of the judgement of the German Federal Supreme Court of February 26, 2020 - XII ZR 51/19

According to a decision of the German Federal Supreme Court, the agreement of a duty to operate and a competition protection exclusion, which is typical for retail stores, can discriminate unreasonably against the tenant and therefore be ineffective, at least in the case of assortment ties. We put the decision into context and give further explanations.

The stipulation of clauses concerning the duty to operate and the exclusion of protection against competition is part of the "standard program" in the drafting of commercial lease agreements for retail space, not only in shopping centers, but also in city centers and shopping streets.

In most cases, such clauses are accepted by the tenant without reflection when the contract is concluded, as negative scenarios are usually not considered or ignored at this stage. Regardless of this, average tenants – at least before the COVID-19 Pandemic – were often reluctant to question such regulations in contract negotiations with the landlord, in order not to run the risk of losing the chances of renting for this reason alone. This is because experience has shown that most landlords of a retail stores are (at least up to now) hardly prepared to waive the tenant's duty to operate or to waive the exclusion of protection against competition because they fear negative consequences for their property.

Is this landlord's interest sufficient, however, to justify a duty to operate – which is usually very comprehensive and linked to regularly considerable minimum terms – and the exclusion of protection against competition at the expense of the tenant? In the past, the courts seem to have frequently lacked awareness of the problem when assessing this question. They tended – possibly unconsciously – to be rather generous in confirming the effectiveness of the duty to operate, although the legal situation was already quite ambiguous.

Usually only higher court decisions as well as decisions of the Federal Court of Justice (BGH) are published, such as most recently the one of February 26, 2020. The available decisions are often only transferable to a limited extent or contain only general statements on the admissibility of a duty to operate clause. In particular, the Federal Court of Justice has so far not expressed itself in a generalizable manner on where the admissibility of when and where mandatory duty to operate clauses reach their limits.

Invalidity of exclusion of protection against competition clauses?

As far as the effectiveness of exclusion of protection against competition clauses is concerned, the BGH has now, in its decision of February 26, 2020, fortunately commented on a previously controversial legal question. The BGH concludes that the exclusion of the protection against competition in a shopping center by means of a general terms and conditions/stipulated in a form and the simultaneous stipulation of a duty to operate with a product range commitment may unreasonably disadvantage the tenant and therefore be ineffective.

Although the decision of the BGH contributes to legal clarity, its exact effects are still unclear and it remains to be seen how the lower courts and contract practice will deal with it. The BGH offers little assistance in this regard in its decision.

In the reasoning for the ruling, the BGH states that the invalidity of the exclusion of protection against competition clause leads to the result that the landlord “has violated his obligation to provide undisturbed use in the form of protection against competition inherent to the contract” and this in turn could constitute a defect in the rental object. Based on this, the tenant is then entitled to assert warranty claims, such as damages or reduction or even (after a warning) to terminate the contractual relationship without notice.

Even more difficult to answer, however, is the question of whether the protection against competition inherent to the contract is actually violated in the concrete individual case. For the case constellation decided by it, the BGH expresses itself in this regard as follows:

The extent of the contract-immanent protection against competition depends on the respectively justified expectation of the market. For example, in a small shopping center with only a few stores, it can be assumed that the landlord ensures that the offer is as broad as possible and avoids overlapping product ranges. Conversely, the tenant of a store in a large shopping center must accept that typical overlaps in the product range with other businesses occur, especially since the attractiveness of a large shopping center increases with the presence of competing offers. According to the operating concept of the shopping center that forms the basis of the lease, it is then a question of the individual case in which proximity to his own business the tenant has to accept or can ward off a direct competitive situation”.

The BGH emphasizes thereby in the result that the question about the existence of a defect by possible infringement of the contract-immanent competition protection is to be answered on the basis the contractual regulations and circumstances of the respective individual case.

As a result, for each case of a (potentially ineffective) exclusion of protection against competition clause, legal practitioners are now faced with the challenge of weighing up on a case-by-case basis whether the (additional) competition must (still) be accepted by the existing tenant or – due to the contract-immanent protection against competition – leads to a defect. It is to be expected that in most cases this question will only be decided by the courts. Especially in the case of financially troubled existing tenants, landlords will be exposed to their warranty claims until that time. The latter with an uncertain outcome.

What alternatives are available in this constellation? So far obviously only few, since according to the statement of the BGH in certain circumstances a contract-immanent competition protection is to be granted in principle, unless the landlord would be ready to do at least partly without the accumulation of the three clauses (duty to operate, assortment connection and exclusion of the protection against competition) and e.g. accept restrictions or an opening clause with respect to the assortment connection.

This “back door” is likely to result from the decision of the Federal Court of Justice in spite of everything and will have to be taken into account in the future drafting of contracts.

Duty to operate clauses – effective or not?

In this context, it is still not clear whether the invalidity of the three cumulative clauses would only render the exclusion of the protection against competition ineffective or whether the mandatory duty to operate clause itself would also be ineffective. While the tenor of the Federal Supreme Court's ruling of February 26, 2020 rather speaks in favor of the first variant, the explanations in the reasons for the ruling can also be interpreted to the effect that in the event of an accumulation all three clauses are to be regarded as ineffective. Here too, further developments in case law will have to be awaited – until then, the risk involved must be taken into account and a decision must be made in each individual case as to whether there is reason to in newly concluded contracts deviate from past practice or to attempt to adapt existing contracts on the basis of more recent case law. We will be pleased to support you in this respect.

General effectiveness of duty to operate clauses

Against the background of the BGH decision, the question arises as to the effectiveness of duty to operate clauses in general. In the decision of February 26, 2020, the BGH does not comment in detail on this issue, but merely states that the formal agreement of an operating and disclosure obligation “as a rule in itself” is not invalid.

The BGH thus confirms its basic position, but also points out that this only applies “as a rule”, so that the question of the demarcation of boundaries continues to arise in individual cases. This all the more under inclusion of the effects of the COVID-19 Pandemic.

Contents of a duty to operate

In principle, common case law distinguishes between a so-called “duty to operate” and a so-called “duty to maintain openness” (see for example the ruling of the Federal Court of Justice (BGH) of 03.03.2010 – XII ZR 131/08, NJW-RR 2010, 1017 and the ruling of the Higher Regional Court (OLG) of Koblenz of 27.06.2019 – 1 U 1471/18, NZM 2019, 588).

In this context, a duty to operate is essentially understood to mean the obligation of the commercial lessee to operate the leased property for the purpose specified in the lease agreement and to keep the product range available.

In contrast, the obligation to keep the rental object open (only) stipulates that the rental object may not be closed (see e.g. OLG Koblenz, loc. cit.) However, this does not mean that the object does not have to be used in accordance with the contract at the same time – an interpretation of the underlying clause can still lead to the conclusion that the parties actually meant and wanted a “duty to operate”. Thus also the OLG Celle has made clear in its decision of 27.02.2017 – 2 W 47/17, BeckRS 2017, 111318, that contracting parties mean in most cases a duty to operate with the agreements they have made, since such a clause is usually not only meant to ensure that the store premises must be accessible to the public, but also that the store is actually operated.

Risks of a violation

The consequences threatening a tenant who does not adhere to an (effective) duty to operate clause and thus becomes in breach of contract are complex and often entail a high (cost) risk. Tenants are therefore well advised not to rashly violate the duty to operate, but to first check whether the underlying clause is in fact invalid on the basis of the respective contract and the circumstances of the individual case.

The possible legal consequences of a tenant's violation of the duty to operate can be summarized briefly as follows:

  • First of all, a violation of an effectively agreed upon duty to operate leads to a claim of the landlord for performance, i.e. for the operation of the respective store. This claim can (according to the prevailing opinion) also be enforced by a temporary injunction. By negating the duty to operate the tenant would thus primarily incur a cost risk, since in the event of the landlord's victory any court and attorney fees incurred would have to be borne by him. In addition, there are the costs and disadvantages arising from a possible enforcement of the landlord.
  • At the same time, a tenant's violation of the duty to operate also entitles the landlord to claim damages. This will be on the part of the landlord however frequently only with difficulty to be numbered, since a measurable damage with an offence against an (effective) duty to operate is mostly hardly to be determined, as far as an effective (and not unusual) contractual penalty agreement does not facilitate the proof for the landlord.
  • Finally, a tenant's violation of the duty to operate due to the tenant's breach of contract can entitle the landlord to terminate the lease without notice in accordance with § 543 BGB - and, based on this, to claim damages for lost rental income. It is possible that the “loss” of the rental agreement would be bearable for the tenant at least in those cases where he did not use the rented property any more anyway. However, something different could apply in particular if the tenant wanted to “block” the rental property for use by a competitor by leaving it vacant until the regular end of the contract, because termination without notice would then enable the landlord to re-let the rental property promptly (possibly to a competitor), so that the goal pursued by the tenant can no longer be achieved.

In addition – and from an economic point of view decisive – the landlord's threatened claim for damages as a result of the termination by the landlord due to breach of contract by the tenant can assume considerable proportions. This applies in particular where the (terminated) lease agreement still had a long, effectively limited (minimum/basic) term and new letting is either not possible at all or, for example, can only take place at significantly worse conditions due to changes in the market.

Legal position / GTC law

According to the case law of the German Federal Supreme Court (loc. cit.), both a duty of opening a shop to the public and a duty to operate can generally also be effectively agreed upon on a form basis (as is usually the case in rental agreements as part of the general terms and conditions, GTC).

However, this only determines the general admissibility of such clauses, but does not yet say anything about the possible limits of contractual agreements in individual cases.

For example, the clause on which the decision of the BGH of 03.03.2010 was based did indeed provide for an obligation to maintain the shop open to the public, but closures due to inventories or works meetings were expressly excluded from it. Also against the background of these restrictions, the BGH at that time affirmed the effectiveness of the obligation to maintain the shop open to the public.

This restriction makes it clear that the effectiveness of the clauses must be assessed separately in each individual case and on the basis of the wording chosen and the circumstances in each case. The same also follows from other decisions of higher courts, which do not always convey a uniform picture.

For example, the Berlin Kammergericht decided in 2009 (cf. judgment of March 5, 2009 – 8 U 177/08, NJOZ 2010, 149) that an undifferentiated duty of disclosure puts a tenant at an unreasonable disadvantage if the tenant is thereby prevented, for example, from carrying out the cosmetic repairs imposed on him. The Higher Regional Court of Dresden (OLG Dresden, see decision of July 15, 2015 – 5 U 597/15, BeckRS 2015, 15062) also addresses this issue and discusses the general concerns about the effectiveness of a corresponding clause raised by other courts, although it emphasizes that the circumstances of the individual case, in particular the size of the store, are always important and must be taken into account.

In a further decision, the Kammergericht, in its ruling of January 28, 2013 – 8 W 5/13, NZM 2013, 731, in contrast to the decision from 2009 (see above), then took the view that the form-based agreement an undifferentiated duty of disclosure is permissible if the clause reserves the right to deviate from the duty of disclosure with the consent of the landlord.

The Higher Regional Court (OLG) of Hamm, in turn, in its decision of August 9, 2017 – 30 U 53/17, NZM 2018, 87, took the view that a clause which does not contain any restrictions cannot automatically be considered to prohibit temporary closure for cosmetic repairs or the like. This view is criticized, however, because of the Federal Supreme Court's practice of prohibiting the so-called validity-preserving reduction of general terms and conditions.

Further developments

Even if the previous – mainly higher court – case law, which concerns the confirmation of the general effectiveness of a duty to operate clause, is generally more landlord-friendly, doubts are raised by German scholars, against the background of the increasingly tenant-friendly case law of the BGH in recent years, whether the principles developed in the previous BGH case law could still apply to all properties or whether differentiations do not need to be made, e.g. with regard to lettings outside shopping centers (see Gomille, “Betriebspflichten für vermietete Einzelobjekte”, NZM 2018, 809 et seq. and judgment of the OLG Koblenz of 27.06.2019 with comment Herrlein, NZM 2019, 591 et seq.)

The reason given for this is that according to the over-arching principles set by statutory law, a tenant only has a right of use but no obligation to use, so that deviations from the principles due to a duty to operate clause are generally to be viewed critically, as is also proven by the BGH case law on other tenancy law issues (e.g. in the context of the imposition of cosmetic repairs, maintenance obligations, etc.).

Therefore, the question may and must be raised as to whether, in the legal assessment, a differentiation is to be made between the letting of retail space in a shopping center, a medical center or the like on the one hand and the letting of an individual property in an inner city location on the other. Even if case law has not yet explicitly expressed itself on this question, this can hardly be denied, since each form-based duty to operate clause must also be measured against GTC law. For example, according to the case law of the Federal Court of Justice, in general terms and conditions of business “provisions which deviate from the essential basic idea of the legal regulation are generally to be regarded as inappropriate and thus invalid”, in particular if “the regulation deviates even further from the legal model than is necessary under rental law practice and leads to an inappropriate tightening of contractual obligations to the detriment of the tenant” (cf. Federal Court of Justice, ruling of 08.10.2008 - XII ZR 84/06, NZM 2008, 890 marginal nos. 12 and 15).

Shopping centers / medical centers and the like

In accordance with these principles, it is generally held that the effectiveness of a contractually agreed duty to operate depends on which of the parties to the lease can show better reasons for or against the establishment of a corresponding obligation.

For this reason, the agreement of a duty to operate in a shopping center (but also in a medical center, a large office building with a mix of sectors, etc.) is predominantly considered effective. This is based on the consideration that the individual store in such properties is part of a larger overall complex with a marketing concept that is generally uniform and recognizable to the tenant, and that this concept relies heavily on the mutual attraction effects of the tenants, i.e. the tenants often benefit from each other. In addition, a vacancy in a larger overall complex often also has a direct impact on the lettability of the remaining space in the same property, so that – if the operating obligation clause were to become ineffective – there would be a risk that the overall property would be devalued.

In such a constellation the interest of the landlord in an obligation to operate is regarded as justified and comprehensible, why no unreasonable disadvantage should be present (see to the preceding considerations Gomille, loc.cit.).

Stores in/as individual objects

The situation is usually different for a retail store operated as a single object. Although the existence of a duty to operate a store would generally facilitate the subletting of a single property, the above-mentioned considerations cannot be transferred to a single property because the integration into a superordinate marketing concept and thus the mutual attraction effects are missing. Unlike in the case of a shopping center or similar, the vacancy of a single property can certainly not cause any disadvantage for the landlord beyond this property. According to German scholars, strict requirements must therefore be set in this case within the framework of weighing up and the admissibility of the deviation from the over-arching principles of statutory law and it is expressly emphasized that individual properties are to be assessed differently from shopping centers (see Munich Commentary on the German Civil Code, § 535 marginal no. 208 et seq.) It is at the same time however also noted that the courts called to the decision frequently lack the problem consciousness and, as concerns the evaluation of the effectiveness of such clauses, are consequently “rather generous”.

With single objects therefore the effective agreement of a duty to operate according to legal scholars is possible only by individual agreement. It is also relevant here that a landlord does not have to make any special investments when letting an empty store (and the tenant does not profit thereby also from equipment provided by the landlord), whereas the tenant of an individual object would have no more freedom of decision with a possibly effective duty to operate in the long run no more and would have to carry, apart from the pure renting costs, still further substantial current business costs. The resulting loss for the tenant is considered unjustified because the investment costs are not adequately and fairly distributed due to the complications caused by the duty to operate clause.

Even if the sight of the vacancy of a store in a city center location or shopping street is anything but “beautiful” and does not increase the overall attractiveness, it seems nevertheless conclusive against the background of the differences to a shopping center or the like, to refuse a landlord's interest worthy of protection in the case of an single object which was rented without inventory or the like, to be able to impose a duty to operate on the tenant through general terms and conditions.

In this constellation, the consideration will then rather be at the expense of the landlord and the respective operating obligation clause according to § 307 BGB will be considered invalid.

Conclusion / Recommendation for action

As shown above, the question of the effectiveness of a duty to operate clause must always be considered on a case-by-case basis and an assessment of the respective constellation must be made. Also due to the very different types of clauses used in commercial leases to regulate an obligation to operate, no general statement can be made on the effectiveness of such clauses. In general, however, the more unrestrictedly the duty to operate and the associated obligations or restrictions of freedom according to the contractual clause in question are to be imposed on the tenant, the more dubious and exposed to the risk of their invalidity they are; however, a weighing of interests in the individual case always remains decisive.

For retail stores as single objects in shopping streets or the like, based on the available case law and German scholars as well as the fact that the tenancy law jurisdiction of the BGH has become more critical in recent years, as far as the shifting of risks to the tenant and the restriction of landlord obligations is concerned (cf. most recently the decision of the BGH of February 26, 2020), there are, however, good arguments for the view that in this respect a duty to operate cannot be effectively agreed upon, so that the concrete design of the clause would then no longer be relevant.

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