Option right in the german commercial lease agreement
Unilateral renewal option of the lease for commercial or practice space in Germany
Commercial leases or practice leases in Germany are regularly concluded with longer fixed terms of 5 or even 10 years. But what if the business is doing well and the tenant is looking at the end of the lease? The tenant then finds himself in an unfavorable situation. He would not like to change the location, also or especially for reasons of customer loyalty. This applies above all to doctors and dentists as well as retailers and catering businesses in Germany. The german tenant also wants to avoid the turmoil and expense associated with a move. In this situation, he is vulnerable and the landlord could take advantage of this to virtually force a new lease on very one-sided terms.
This risk can be eliminated by agreeing on option rights under german law.
Legal expertise in the case of option rights of the german tenant
Our real estate attorneys offer you the experience gained from countless consulting and litigation mandates in german practice. We have a special focus on providing tenancy law services to physicians, pharmacists and dentists in Germany.
From our offices in Hamburg, Berlin, Munich, Frankfurt and Cologne, we advise clients nationwide in matters of german commercial tenancy law. Our range of services includes in particular
- Drafting of lease agreements including option rights
- Exercise of option rights, advice regarding the reaction to exercised option rights
- Expert opinions on special questions in connection with commercial leases
For a non-binding mandate inquiry, please contact one of our contacts directly by telephone or e-mail or use the contact form at the bottom of this page.
The tenant's option - meaning and wording in german practice
Option rights give the german tenant the right to unilaterally (i.e., without the landlord being able to prevent this) demand the continuation of the lease for the time of termination.
An option clause may read something like the following:
"The tenant may, by unilateral written declaration, extend the contract twice for 3 years each time after the expiry of the fixed lease term. He must exercise this option right vis-à-vis the landlord no later than 6 months before the end of the fixed lease term, otherwise it expires. The other terms and conditions of the contract shall continue to apply unchanged even after the option has been exercised."
No option right - the extension clause under german law
Not to be confused with an option right are so-called renewal clauses in german practice, according to which the contract is automatically renewed unless one of the two parties to the contract objects to the renewal in good time. Understandably, this variant does not give the german tenant any protection against an unwanted termination of the lease.
Care must be taken when drafting option rights in german practice. It must be made clear who is entitled to the option right, with what period of notice and in what form it must be exercised under german law. Furthermore, the contract should also clarify from when the fixed term (and thus also the period for exercising the option) runs if the handover of the property is delayed (for example, due to work still to be carried out). Here, a provision could be that the term of the contract only starts from the handover of the premises.
Since the option right is a contractual right, it also applies to the new owner - here as well, the principle of "purchase does not break rent" applies. Until the transfer of ownership, the option right is to be exercised vis-à-vis the old owner, thereafter vis-à-vis the purchaser as the new landlord.
Coupling of option exercise with rent increase in german practice
Occasionally in german practice, a clause is found in commercial leases stating that the rent level must be renegotiated each time the option is exercised. Sometimes these clauses also contain an escalation mechanism whereby an independent arbitrator is to have the final say in the event of a disagreement over a new, appropriate rent. Such clauses are very prone to dispute and are generally not recommended in german practice. It is better to use index clauses or simply a successive rent increase (staircase rent), as they are less conflictual under german law. If nothing of the sort is agreed, the lease simply continues to apply with its previous conditions.
Written form under german law - the devil is in the details
It is fundamentally important not to make any formal mistakes when exercising the option in Germany. In particular, the option should always be exercised in writing and precautions should be taken to obtain proof of receipt so that in the event of a dispute it can be proven that the declaration actually reached the landlord. Although there is german case law according to which a declaration in text form is also sufficient, it is worth playing it safe here and exercising the option "in writing", i.e. by signed letter. In particular, caution is advised in the case of large landlords who are represented by asset managers; here it is anything but clear whether the asset manager (still) has a power of attorney to receive such declarations.
Caution - if the option right is not exercised in Germany, it expires
If the german tenant misses exercising the option right, the contract expires at the end of the agreed fixed term. The tenant is therefore well advised in german practice to set resubmissions in his calendar so as not to lose opportunities to extend the contract through carelessness.
As a commercial law firm and real estate law firm, we assist landlords and tenants in all matters pertaining to german commercial tenancy law and, in particular, in matters pertaining to the termination and renewal of commercial and medical practice leases.