I. WHAT IS A DEVELOPER CONTRACT?
The regulations on property development contracts in section 650 u BGB (German Civil Code) and section 650v BGB were introduced into the BGB with the Act to reform the law on construction contracts in 2018.
The developer contract is legally defined in section 650 u (1) sentence 1 BGB as a “contract which contains the construction or conversion of a house or a comparable structure and the obligation of the contractor to transfer ownership of the land to the purchaser or to order or transfer a heritable building right.”
The property development contract is a mixed contract with elements of a purchase contract and a contract for work and services.
The law of sale is applicable to the obligation to provide the property or heritable building right and the law of contracts for work and services is applicable to the obligation to provide a construction service. In addition, elements of the law on contracts for work and services may apply.
The purchaser claims a property for an agreed fixed price without risks on completion. The construction description, planning, and management are carried out by the contractor. For the contractor, the sale of the property and the construction of the building are already connected for calculatory and constructional reasons.
II. WHAT DOES A DEVELOPER CONTRACT INVOLVE?
The contractor is also referred to as a property developer. A “property developer” is someone who wants to prepare, carry out and/or use building projects commercially as a builder in his own name for his own account or for the account of a third party. Pursuant to section 34 c (1) no. 3 a GewO, he requires permission from the competent authority. In addition, according to section 1 (1) MaBV, the regulations of the Makler- und Bauträgerverordnung (MaBV) apply to him.
The buyer, also called “purchaser”, can be a consumer or a commercial entrepreneur.
The general rules for property contracts apply to the conclusion of the contract. The contract requires notarial certification according to section 311 b sentence 1 BGB. The same applies to co-ownership in the form of residential or partial ownership.
According to section 650 u (1) sentence 2 in conjunction with section 650 j BGB, a building description must be provided if the purchaser is a consumer.
In addition, pre-formulated contractual conditions must comply with the requirements of section section 305 BGB and the general terms and conditions. Many development contracts fail to fulfill these requirements with regard to consumers which makes legal assessment beforehand very recommendable.
Section 650 u BGB applies to contracts concluded as from 1.1.2018. Pursuant to art. 229 section 39 EGBGB, the provisions of the EGBGB, the BGB and the Ordinance on Payments on Account for Property Development Contracts (Verordnung über Abschlagszahlungen bei Bauträgerverträgen), in the version applicable up to that date, shall apply to contracts concluded prior to that date.
Application and restriction of purchase and work contract law
On the legal consequences side, section 650u (1) sentence 2 BGB refers to the application of work/construction law regulations, (1) sentence 3 to the application of purchase law regulations.
III. WARRANTY RIGHTS: WHAT DO I HAVE TO WATCH OUT FOR?
- LIABILITY OF THE BUILDER FOR DEFECTS
Liability for construction defects and planning defects is determined by the provisions of the contract for work and services in section 633 BGB. Construction defects may include, for example,
- the use of materials they didn’t agree upon,
- cracks in the walls and floors,
- leaks or faulty installation.
The purchaser can demand supplementary performance in accordance with section 635 BGB. The contractor may remedy the defect or produce a new work. For this purpose, the developer must be given an appropriate period of time.
After the expiry of the appropriate period, the contractor may – in some cases – do the work himself, i.e. remedy the defect at the developer’s expense, and demand reimbursement of the necessary expenses, section 637 of the BGB. Please note that these pissibilities only arise in exceptional cases.
- MINDFULNESS REGARDING section 634, 638 BGB
The condition for a reduction is also an unsuccessful deadline for supplementary performance. The reduction claim is calculated by comparing the value of the house or work in the defect-free condition and the actual value in the defective condition and is reduced by the difference. The reduction according to section 634 no. 3 BGB can no longer be demanded after a validly declared withdrawal. It also applies in the case of insignificant defects, section 638 (1) sentence 2 BGB.
A deadline for supplementary performance must have been set without success. In accordance with section 278 (1) BGB, compensation for damages also requires the developer to have acted in breach of duty, unless a liability guarantee has been assumed in accordance with section 276 (1) sentence 1 BGB. The obligation to represent is legally presumed, the developer must exculpate himself and bears the burden of presentation and proof, section 280 (1) sentence 1 BGB.
The purchaser may also claim damages if he has previously validly withdrawn from the contract or demand a reduction in price.
- COMPENSATION FOR FUTILE EXPENSES UNDER sections 634, 284 BGB
After an unsuccessful extension of the deadline, claims for reimbursement of expenses may be asserted that were incurred in reliance on the handover of defect-free construction work. These are “frustrated expenses” that have arisen after liabilities are incurred.
The client has the right to withdraw from the contract after an unsuccessful extension of the deadline.
The breach of duty must be substantial.
If the right of withdrawal is exercised once, the contract shall be transformed into an unwinding relationship. The performances received by each other must be returned.
Partial withdrawal is generally not possible because the developer’s performance is not divisible. The purchaser cannot withdraw from the construction and at the same time demand the purchase of land. However, the purchaser can be given the option of terminating the part of the contract for work if this has been agreed upon in contract law. A corresponding provision must be included in the developer’s contract. This may be important if there are significant construction delays or possible, subsequent insolvency of the developer.
Pursuant to section 323 (6), withdrawal is excluded if the purchaser is solely or predominantly responsible for the circumstance or if the circumstance for which the developer is not responsible occurs at a time when the purchaser is in default of acceptance.
The exclusion of the obligation to perform pursuant to section 275 BGB matters in which it is impossible or unreasonable for the developer to perform.
IV. LIABILITY OF THE DEVELOPER FOR DEFECTS IN THE PROPERTY
The liability for defects of the real property and for movable objects sold together with the real property is governed by the law of sale, section section 433 BGB.
A property is defective if it has a legal or a material defect. It is defective in quality if it does not have the agreed properties, for example, if the property does not have the declared area in the contract.
If the conditions are met, the purchaser has the same rights, i.e. supplementary performance under section 439, reduction under section 441, damages under section section 440, 280, 281, 283, 311a or withdrawal from the contract under section 440, 323, 326 (5) BGB.
Property defects are not as important in property development law as construction defects.
V. BUILDING IS COMPLETED TOO LATE – THE “STUCK BUILDING”
The BGB has various rights for the purchaser in the event of delayed completion of the construction project for the compensation for damages.
The delay in performance with a claim for damages according to section 286 BGB requires that the client has a due claim for the production of the agreed work against the work contractor. A further condition is the non-performance of the work contractor at the relevant time.
The work contractor must have been expressly reminded after this claim became due unless the reminder is dispensable in exceptional cases. This is particularly the case if – as is customary in the case of a construction contract – deadlines for completion or readiness for occupancy are included. Finally, the contractor must be responsible for his failure to perform, i.e. the delay.
Damages incurred by the purchaser as a result of delayed construction are, for example, the
- rental costs,
- travel expenses,
- hotel accommodation or storage costs for furniture,
- financing costs, in particular interest on travel costs,
- attorney’s fees,
- expert costs or
- compensation for loss of use.
Example from case law:
In its judgment of 15.05.2018 – 21 U 90/17, the Kammergericht ruled that the defendant had to pay damages to the plaintiff for delayed handover of a condominium. These damages consisted to the extent of the rental of a replacement apartment, the broker’s commission for the extension of the replacement lease, the costs of storing the furniture, costs of accommodating guests and commitment interest.
The developer cannot invoke a liability agreement if it can be proven that he concealed the defect fraudulently.
The exclusion of liability also includes the assumption of a guarantee by the contractor.
Pursuant to section 309 no. 7a of the BGB, a form of consumer contract may not include a limitation or exclusion of liability for damages arising from injury to life, body or health that are based on a negligent breach of duty by the user. This also applies in accordance with section 309 no. 7b BGB for other damages. In addition, section 309 no. 8 BGB contains a list of inadmissible clauses that must be observed.
In the case of defect rights, the client has a right of choice.
The start of the limitation period for defect rights is structured differently.
For work on a property, the warranty periods under commercial law apply from the time of the handover in accordance with section 438 BGB. For work on a building, the warranty periods apply under the law on contracts for work and services. Pursuant to section 634a (1) no. 2, construction defects expire after five years from the acceptance of the building.
Case law defines acceptance as an approval of the work. There must be an inspection of the contractual object by the purchaser and the developer. Legal changes are associated with the acceptance: Transition from the stage of performance to the stage of supplementary performance, the start of the limitation period for claims for defects, transfer of risk, due date for payment, and reversal of the burden of proof.
From this on, the warranty period begins, and the buyer must prove that there is a defect in the property. Until the time of acceptance, the developer must prove that he has built without defects and that the property was ready for acceptance.
TERMINATION OF THE DEVELOPER’S CONTRACT
Section 650u (2) BGB excludes the applicability of free termination under section 648 BGB and termination for cause under section 648a BGB to the developer contract. They can agree on the inclusion of the VOB/B in the contract and attempt to enforce its validity or include different termination rights in the contract.
LIABILITY FOR DEFECTS UNDER THE VOB/B (CONTRACTING RULES FOR CONSTRUCTION WORK)
The performance of construction service is generally assessed in accordance with the BGB, unless the provisions of the German Construction Contract Procedures (Vergabe- und Vertragsordnung für Bauleistungen) have been agreed upon as an exception.
According to this, the purchaser has no right of withdraw when it comes to warranty rights. At most, he has a claim to subsequent performance, reduction of the purchase price, or compensation for damages in accordance with section 13 VOB/B.
Section 8, 9 VOB/B regulates more extensive termination opportunities for the purchaser.
In addition, the statute of limitations for the VOB construction contract in section 13 no. 4 VOB/B must be observed. Claims expire within two or four years if the VOB has been agreed upon, and even one year for defects in buildings and for work on a plot of land.
Under circumstances, there may be compensation in addition to damages for delay. But only if the parties have included a contractual penalty provision for the event of the delay.
Contractual penalties are available to the client as exerting pressure to ensure that the contractor performs the agreed construction work to the planned extent and meets the completion date on time. The client doesn’t have to provide proof of damage as in the case of a claim for damages.
Contractual penalties must be agreed upon in the notarized property development contract. In addition, they must be limited in amount. The amount of the limitation is based on the contract value.
The time limits must also be determined at the time the contract is concluded, or they must be effectively included in the contract later.
Development restrictions during the construction period and the resulting postponements of the completion date can cause problems.
EFFECTS OF THE CORONA PANDEMIC ON THE EXTENSION OF OCCUPANCY AND COMPLETION DEADLINES
Developers are facing challenges due to the Corona Pandemic. When are they allowed to invoke an extension of ready-for-occupancy and completion deadlines because the construction has been delayed?
Property development contracts often contain clauses that provide extensions in the event of “force majeure.” The Corona pandemic is regarded to be an unforeseeable, unavoidable and extraordinary event, and therefore as “force majeure”.
In this case, the burden of proof is shifted to the developer. The developer must then demonstrate and prove that there were difficulties in the delivery of materials and the deployment of personnel.
JUR | URBAN ADVISES PURCHASERS, ENTREPRENEURS AND DEVELOPERS ON BUILDING LAW. DO YOU HAVE ANY QUESTIONS?