Germany: Federal Court of Justice (BGH) tightens duty of disclosure of real estate sellers

By judgement of 15 September 2023 (V ZR 77/22) the Federal Court of Justice has ruled the following: Sellers of real estate must inform buyers about potential costs for upcoming maintenance works without being asked - regardless of the buyer’s possibility to inspect the respective documents uploaded in a (virtual) data room. This also applies if the sales and purchase agreement expressly includes a provision according to which the buyer is aware of the content of the relevant documents. Merely uploading documents in a virtual data room - without a specific hint - is only sufficient in certain cases.

Facts of the case (simplified)

The plaintiff and the defendant concluded a property sales and purchase agreement (“SPA”) regarding several commercial spaces in a large building complex for a purchase price of approx. EUR 1.5 million, thereby excluding liability for material defects.

The seller‘s exposé and minutes of the owners‘ meeting, which was uploaded into the data room shortly before the notarisation of the SPA, indicated possible future maintenance works and a corresponding specific risk for the respective owner of the property to bear (pro rata) costs (here: special levy) of up to EUR 50,000,000.00. Also, the SPA expressly provided for a provision according to which the buyer is aware of the content of the minutes uploaded in the data room. After the buyer was held liable to bear the pro rata costs for maintenance works, he contested the SPA due to deceit (arglistige Täuschung).

Decision

Legally, the ruling does not deal with the question whether there is a material defect or a defect of title of the object of purchase, but with the seller‘s liability for breach of a pre-contractual duty of disclosure (vorvertragliche Aufklärungspflicht). According to the court, the seller must inform the buyer - even without being asked - that works leading to costs of up to EUR 50,000,000.00 are imminent.

Uploading the relevant protocol in the virtual data room is – according to the court – explicitly not sufficient. The buyer‘s possibility to obtain knowledge about a relevant circumstance does not per se exclude the seller‘s duty of disclosure. The seller shall only fulfil its duty of disclosure if and to the extent it can reasonably expect that the buyer becomes aware of the fact to be disclosed by inspecting the data room. This, however, depends on the specific circumstances of the individual case (e.g. whether and to what extent buyer carries out a due diligence, structure of the data room, discoverability of the documents in the data room, etc.).

Conclusion

Sellers of real estate can now no longer escape responsibility by referring to the buyer‘s due diligence. As in the specific case sellers would have difficulties in assessing whether the duty of disclosure is fulfilled by merely uploading documents into the data room, the court’s decision will prompt sellers to make more extensive (i.e. also prophylactic) disclosure of circumstances in a sales processes in order to avoid a breach of the duty of disclosure and a contest of the SPA by the buyer. If sellers want to be on the safe side, they will have to carry out their own due diligence on their property prior to sale.