Impending terminability of land use agreements for energy plants
The operation of energy plants, for example electricity generating facilities such as power stations, wind farms and solar plants usually means making sure the land needed for the plants is secured long-term by way of a use agreement with the landowner or other beneficial owners. Often, the maximum possible fixed term under civil law of 30 years is exploited fully in order to secure the right of use for most of the technical useful life of the energy plants if possible. Prematurely ending such a use agreement, for example through termination, and entering into a new one in return for a higher fee, can substantially reduce the profitability of investments in energy plants. Defects in the written form of use agreements therefore constitute a risk for such investments. These entitle both parties to terminate the long-term use agreement at any time after one year with the regular notice period (in contracts for undeveloped land, this usually means termination by the third working day of a quarter for the end of that quarter). To limit the risk of termination, to date ‘written form remedy clauses’ have been agreed in practice, but these have now been declared invalid by the German Federal Court of Justice (judgment of the Federal Court of Justice dated 27 September 2017 – XII ZR 114/16). So it is now particularly important to observe the written form requirement when entering into use agreements, and especially addenda to the agreements.
Written form requirements for use agreements
Below we explain in more detail what written form requirements exist for use agreements, what the specific legal consequences of violations are, and how they can be remedied, plus what precisely the Federal Court of Justice has decided.
Observing the written form requirement
The statutory written form requirement applies to leases and thus also to fee-based agreements for the use of land on which energy plants are operated. To observe the written form requirement, the principal provisions of the agreement must be laid down in writing in a uniform deed signed by all contracting parties. The principal details are considered to be in particular the contracting parties, term of the agreement, object of use and the consideration for use. Also, case law and the legal literature consider many other agreements to require written form. So it is advisable to set down all contractual agreements in the proper written form at all times.
The written form requirement applies not only to the use agreement itself but also to any addenda. If the addendum is not in written form, the entire use agreement no longer has the correct form and can therefore be terminated with the regular notice period.
Written form is observed by the signatures of both contracting parties on a deed. The individual pages of the use agreement and its annexes must be physically fastened together unless it is clear for other reasons (e.g. continuous pagination, clear reference) that the individual parts of the deed belong together. The same goes for addenda to the use agreement which must be in written form. If they are not firmly fastened to the use agreement, they must show a clear reference to the use agreement (including prior addenda) and make it clear that the other provisions of the use agreement are intended to continue to apply.
Legal consequences of written form defects/opportunities for remedy
There is a wide range of possible written form defects. Common examples are when the object of use (e.g. the exact location of the area where the energy plant is to be built), the term of the agreement or the consideration for use are not clearly specified in the written use agreement. Also, the content of an agreement is often changed verbally by the contracting parties, e.g. if due to planning changes the site of the energy plant, the amount of consideration due to the landowner or the agreed contract dates are amended.
If there is a written form defect, it can be remedied by an addendum to the use agreement in the correct written form. The addendum must state in the correct written form those items led to the (previous) written form defect. It must also make a clear reference to all previous contractual documents (see above).
In past contract drafting practice, the written form risk was to be reduced by adding a ‘written form remedy clause’. In the written form remedy clause, the contracting parties agree to remedy any written form defects and not to terminate the agreement by invoking a written form defect. Several higher regional courts have ruled that such clauses are valid without restriction or at least between the original contracting parties.
Decision of the Federal Court of Justice
The Federal Court of Justice has now decided that written form remedy clauses are invalid and do not prevent a contracting party from terminating a use agreement by invoking a written form defect. The Federal Court of Justice justified this by saying that the written form requirement is mandatory law that cannot be amended by a contractual agreement. The statutory written form requirement aims to ensure that a land buyer who enters into the long-term use relationship in place of the lessor by virtue of the law can see the contract terms from the written contract. In addition, the provability of long-term agreements is also to be guaranteed between the original contracting parties (proof function) and the contracting parties are to be protected from entering into long-term ties without due consideration (warning function and protection against undue haste). In the view of the Federal Court of Justice, these protective purposes are eroded by a written form remedy clause, making the written form clause incompatible with mandatory law and therefore invalid.
For contractual practice, the decision of the Federal Court of Justice means that in future even more care must be taken to observe the written form requirement. This is because the Federal Court of Justice has rejected the written form remedy clauses intended to protect against any possible written form defects. The recipient of notice of termination based on written form may in certain cases have the option of rejecting the termination because of a breach of good faith. The requirements for this are very strict, but following the decision by the Federal Court of Justice they may be in place if a contracting party uses a subsequently made agreement in breach of proper written form which is only beneficial to him as an opportunity, solely due to the defect of form, to get out of a long-term contract which has become a burden to it.
Any Questions? Please contact Dr. Clemens Schönemann (Real Estate Investment Group) or Dr. Martin Geipel (Energy)
Practice Group: Real Estate Investment Group, Energy