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                               Admissibility of Triple-Net Lease Contracts 1
                                                                      by Raphael Söhlke, P+P Pöllath + Partners, Berlin

Content of Triple-Net Lease Contracts                                     sistent understanding of what characterizes                              the operation of the property, as far as these
                                                                          a triple-net lease contract, however, still                              are not to be borne by the lessee. In order
Origin and Economic Significance                                          does not exist. Currently, the examination                               to exclude this risk, a second component of
Triple-net lease contracts aim to exempt                                  is regularly broken down into individual                                 the triple-net lease contract should provide
the lessor from the costs of the leased pro-                              questions:                                                               for the lessee to bear all incidental and ope-
perty, in order to thus secure yield realized                                                                                                      rating expenses. The (usual) clause which
from the lease payments. While such con-                                  In financial terms, the most important cri-                              determines that the lessee shall be respon-
tracts are quite common in Anglo-Saxon                                    terion for a triple-net lease contract is the                            sible for the operational expenses pursuant
countries, in Germany there is (still) some                               shifting of liability for maintenance and                                to sec. 2 of the Operating Expenses Ordi-
uncertainty on both the conceptualisation                                 repair to the lessee. According to statu-                                nance (Betriebskostenverordnung – Be-
as well as the validity of such contracts.                                tory provisions, the lessor is obliged to                                trKV) does not, however, cover various
The term “triple-net” implies that a “three-                              maintain the lease object in a condition                                 other costs. Thus costs expended for the
fold net” lease payment can be collected                                  which complies with the requirements of                                  commercial and/or technical administrati-
by the lessor, i.e. without (calculated) de-                              the lease contract. They thereby bear the                                on, for instance, are not operating expenses
ductions concerning tax, insurance and                                    maintenance expenses, in other words they                                within the meaning of the BetrKV.
maintenance. When concluding a triple-net                                 must carry out all maintenance and repair                                In order to ensure that all operating ex-
lease contract, the lessor/investor has two                               measures, including interior redecoration,                               penses are borne by the lessee and therefore
aims in mind: firstly, to procure the lease                               which are necessary to ensure the use of the                             do not reduce the stipulated lease income,
income without cost items which reduce                                    property by the lessee according to the con-                             it should be agreed that the lessee shall
the yield. All operating and administrative                               tract during the entire term of the lease.                               bear all further operational and incidental
expenses in connection with the property                                                                                                           expenses in addition to those pursuant to
(in the broadest sense) are shifted to the les-                           However, when leasing business spaces                                    sec. 2 BetrKV, and preferably also those
see, eliminating the need for a (calculated)                              it is common to impose a broad range of                                  which are incurred in the future.
reduction from the expected regular lease                                 maintenance and repair obligations on the
income. Secondly, the point is to minimize                                lessee (e.g. maintenance and repair of all                               By the same consideration, the lessor/inve-
the amount of work done on the property                                   areas exclusively used by the lessee). Ne-                               stor will also wish to ensure that the lessee
by the lessor during the term of the contract                             vertheless, part of the maintenance and re-                              shall bear the costs of the necessary (or
as much as possible, by making the lessee                                 pair obligations remains the responsibility                              pre-agreed) insurance policies.
responsible for the entire maintenance, i.e.                              of the lessor. This applies in particular to
upkeep, repairs and, as far as possible, the                              the maintenance of the roof and the sup-                                 By referring to sec. 2 no. 13 BetrKV (“co-
administration of the property.                                           porting structures of the building, often                                sts of property and third-party liability in-
                                                                          referred to as “Dach und Fach” (“roof and                                surance”) on the obligation to bear costs,
For the lessee, this at least results in the                              structure”).                                                             considerable progress may be made. Ac-
possibility of a cost reduction: in return for                                                                                                     cording to this provision, the lessee shall
bearing the higher costs and risks associa-                               Consequently, the lessor is obliged to ful-                              at least bear the costs of insurance for fire,
ted with a triple-net lease contract, they pay                            fill maintenance and repair obligations and                              storm, water and other elemental damages.
a (in some cases significantly) lower rent. It                            arrange for the necessary measures to be
is then up to the lessee to take advantage of                             taken. This can lead to a significant cost                               A further aspect is the question of which
the difference to bear expenses on the pro-                               burden for the lessor. In addition – parti-                              party to a triple-net lease contract shall
perty and to insure against risks resulting                               cularly with long-term lease contracts – it                              bear the risk of (accidental) loss of the pro-
from their maintenance obligation.                                        is almost impossible to reliably predict in                              perty, or which mutual obligations exist if
                                                                          advance what maintenance/repair requi-                                   the property is completely or predominant-
Individual Questions                                                      rements may arise during the term of the                                 ly destroyed, without this being the respon-
Tenancy rules (Mietrecht) in the German                                   lease. This uncertainty is at odds with the                              sibility of the lessor or the lessee.
Civil Code do not recognize the triple-net                                financial goals of lessors/investors, who
lease contract as a separate type of con-                                 rely on calculating the future revenue and                               According to statutory provisions, in the
tract. Until now, the standard commenta-                                  expenditures as accurately as possible upon                              case of the lease object being destroyed,
ry and textbooks on tenancy law scarcely                                  conclusion of the lease contract.                                        the lessor is released from their obligation
mention triple-net lease contracts; only the                                                                                                       to relinquish the lease object (sec. 275 Ger-
literature apart from commentary and text-                                In addition to the costs for maintenance                                 man Civil Code); the lessor is not obliged
books has already dealt with this in more                                 and repair, lease income will be reduced                                 to rebuild or repair the property2. In case of
detail. A conclusively reinforced and con-                                primarily by expenses in connection with                                 a partial destruction of the lease object, the

1   The present article is an abbreviated version of an article which the author published in Transaktionen, 2   BGH v. 13.12. 1991 – LwZR 5/91, ZMR 1992, 140, 141; LG Berlin v. 28. 5. 1998 – 62 S 401/97,
    Vermögen, Pro Bono - Festschrift zum zehnjährigen Bestehen von P+P Pöllath + Partners, Beck Verlag,          WuM 1998.
    January 2008, pg. 197 - 210




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lessor is only obliged to rebuild or repair if                          in the general terms and conditions (AGB)                                 is invalid in any case. With reference to this
this is possible during the lease term and if                           has been the object of countless individual                               judgment, the specialist literature thus takes
costs do not exceed a (financially) reasona-                            court decisions. Case law in many areas is                                the view that a transfer of liability for “Dach
ble limit (Opfergrenze)3. On the other hand,                            however still in flux. For the clauses/ele-                               und Fach” is also in principle invalid in the
the lessee is released from their obligati-                             ments of triple-net lease contracts as men-                               general terms and conditions (AGB)10.
on to make the stipulated lease payments                                tioned above, the following principles may
(sec. 275 para. 4, 326 para. 1 German Ci-                               be recorded:                                                              In 2005, the Federal Court of Justice (BGH)
vil Code). So in effect, the lessor prima-                              The question of whether general terms and                                 decided that the obligation for maintenance
rily bears the risk of (accidental) property                            conditions (AGB) may permissibly ob-                                      and repair may only be shifted to the lessee
loss. Until conclusion of rebuilding, they                              lige the lessee to carry out comprehensive                                as far as it extends to damages attributable to
receive no lease payments and also bear the                             maintenance and repair (including “Dach                                   use of the lease object or the lessee‘s sphere
risk of not having (sufficient) insurance for                           und Fach”) has not been conclusively an-                                  of risk11. The Federal Court of Justice’s
the damages incurred. In addition, they are                             swered. Based on two decisions of the Hig-                                decision pertained to a case in which the
responsible for rebuilding the lease object                             her Regional Courts (Oberlandesgerichte                                   lessee had only leased a part of the pro-
(including the conclusion of building and                               – OLG) of Cologne4 and Naumburg5, a                                       perty. However, the principle as stated by
planning contracts), for which financial in-                            comprehensive transfer of the maintenance                                 the Federal Court of Justice should also be
vestors are not normally equipped.                                      charges to the lessee in the general terms                                valid for the case which almost exclusively
The statutory provisions in turn do not cor-                            and conditions (AGB) is in essence inva-                                  occurs in triple-net lease contracts, where
respond with the financial interests of the                             lid. The lessee would be burdened with an                                 the entire property is leased. On areas and
lessor/investor regarding unreduced lease                               incalculable cost risk which could not be                                 facilities which are exclusively used by the
income. The lessor/investor will therefo-                               predetermined and the lessee could be held                                lessee – in particular if the entire property is
re be anxious to shift the risk of acciden-                             liable irrespective of any fault (verschul-                               leased – the (complete) transfer of liability
tal property loss as far as possible to the                             densunabhängige Haftung) and would have                                   for maintenance and repair should thereby
lessee, e.g. with the following provision:                              to bear the expenses of any damages and                                   be admissible in the general terms and con-
firstly, that the lessee is obliged to arrange                          wear and tear already present prior to con-                               ditions (AGB), as far as it results from use
for the rebuilding or necessary repairs. For                            clusion of the contract.                                                  of leased property or is within the lessee’s
this purpose, they are either assigned any                                                                                                        sphere of risk.
insurance claims of the lessor or the lessee                            In both decisions, the respective clauses
themselves must take out the (building) in-                             were, however, each restrictively interpre-                               In argumentum e contrario, this means firstly
surance. Secondly, provisions are made to                               ted so that in effect the lessee only had to                              that the lessee may not be held liable for de-
ensure that the obligation to pay the rent                              carry out maintenance and repair work ne-                                 fects already existing upon the surrender of
shall only be discontinued until the point                              cessitated by their use of the leased proper-                             the leased premises to the lessee. Secondly,
in time at which the rebuilding work could                              ty6. However, it is doubtful whether this re-                             no liability for maintenance/repair measures
have been concluded if the lessee had pro-                              strictive interpretation of general terms and                             may be transferred to the lessee arising from
perly fulfilled these obligations.                                      conditions (AGB) is valid against the back-                               accidental loss of property (e.g. through a
                                                                        ground of sec. 305 c para. 2 German Civil                                 fire which is not the fault of the lessee)12.
Admissibility of Triple-Net Lease                                       Code (doubts on the interpretation shall be                               These principles should also be valid wi-
Contracts                                                               to the detriment of the user of the respective                            thout exception for the maintenance and
The question of the legal admissibility of                              term or condition) and the principle that an                              repair of “Dach und Fach”. In its 2005 deci-
triple-net lease contracts is currently an-                             invalid provision may not be reduced to its                               sion, the Federal Court of Justice did not ex-
swered on a case-by-case basis (Einzelbe-                               permitted content (Verbot der geltungser-                                 pressly comment on respective provisos on
trachtung), namely whether the clauses ty-                              haltenden Reduktion)7. The OLG Dresden8                                   “Dach und Fach”. However, there should be
pical for this structure are admissible. It is                          and the Higher Regional Court of Berlin                                   no room for such a proviso after the Federal
important to understand this individual ex-                             (Kammergericht)9 have also determined                                     Court of Justice’s decision in 2005. Firstly,
amination before deliberating whether an                                that the (complete) transfer of liability for                             in its decision the Court gives no indication
overall examination (Gesamtbetrachtung)                                 maintenance and repairs is not admissible                                 that its stated principles should not be valid
might lead to different results.                                        in the general terms and conditions (AGB).                                for the maintenance of “Dach und Fach”.
                                                                        Similarly to the decisions of OLG Cologne                                 Secondly, this conclusion results from the
Individual Examination According to                                     and OLG Naumburg, this is justified on the                                following consideration: the decision refers
the Requirements for General Terms                                      grounds that the lessee would be burdened                                 expressly to the transfer of responsibility for
and Conditions (Klauselrechtliche                                       with incalculable expenses. From the wor-                                 maintenance and repair of jointly used areas
Einzelbetrachtung)                                                      ding of the judgment, one could argue that                                and facilities. Against this background, there
Whether, and to what degree, the parties                                according to the opinion of OLG Dresden                                   is no reason the (jointly used) roof should be
may deviate from the statutory distributi-                              and Kammergericht Berlin, the transfer of                                 treated differently than, say, a (jointly used)
on of risks to the detriment of the lessee                              liability for maintenance of “Dach and Fach”                              heating system.
3   BGH v. 20. 7. 2005 – VIII ZR 342/03, NJW 2005, 3284.                                                    8 OLG Dresden v. 17. 6. 1996 – 2 U 655/95, NJW-RR 1997, 395 (396).
4   OLG Köln v. 17. 12. 1993 – 19 U 189/93, NJW-RR 1994, 524.                                               9 KG Berlin v. 23. 5. 2002 – 20 U 233/01, NJW-RR 2003, 586.
5   OLG Naumburg v. 12. 8. 1999 – 2 U (Hs) 34/98, NJW-RR 2000, 823.                                         10 Schmidt-Futterer, Mietrecht, ninth ed. 2007, § 535 para. 80; Schlemminger/Tachezy, NZM 2001, 416
6   Cf. also Wolf/Eckart/Ball, Handbuch des gewerblichen Miet-, Pacht- und Leasingrechts, ninth ed. 2004,      (416 et seq.).
    para. 370.                                                                                              11 BGH v. 6. 4. 2005 – XII ZR 158/01, ZMR 2005, 844 (846).
7   Heinrichs, in: Palandt, BGB, sixty-sixth ed. 2007, „vor § 307“, para. 8.                                12 BGH v. 25.2.1987 – VIII ZR 88/86, NJW-RR 1987, 906.




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The allocation of the operating expenses                                 results in a (substantial) reduction in the                                primarily justified with the following consi-
itself requires a defined and unambiguous                                rent. This should later put the lessor in the                              derations: the lease object is often purchased
agreement in the contractual provisions.                                 position to argue that the assumption of the                               or installed by the lessor according to the
The lease contract must define the ope-                                  maintenance and repair obligations is part of                              specifications of the lessee, so that the main
rating expenses to be borne by the lessee.                               the agreement on the rent, which is not sub-                               interest in the property and its use may in
The lessee should be able to at least appro-                             ject to the proviso control pursuant to sec.                               fact be attributed to the lessee22. The calcu-
ximately determine which additional costs                                305 et seq. German Civil Code. This proce-                                 lation of the consideration to be paid to the
may be incurred13. Therefore, the statutory                              dure may be possible if the parties seriously                              lessor usually also results from the concrete
requirement of certainty (Bestimmtheits-                                 discuss the difference between a “normal”                                  purchase and credit costs (financing func-
erfordernis) applying to general terms and                               rent associated with restricted maintenance                                tion of the lease).
conditions is not fulfilled by such formulati-                           obligations for the lessee and a reduced rent
ons as “the lessee shall bear all operating ex-                          associated with a shift of all maintenance                                 The considerations which justify the “spe-
penses” or even “... the customary operating                             obligations to the lessee. In this case, there                             cial handling” of leasing contracts are ap-
expenses”14. Similarly, a provision by which                             is also the question of whether the contrac-                               plicable in the same way to triple-net lease
all newly resulting operating expenses are                               tual regulation finally agreed upon qualifies                              contracts, in any case on agreements which
allocated to the lessee is invalid pursuant to                           as a general term/condition (and is thereby                                are very similar to leasing. An example
sec. 307 German Civil Code15.                                            subject to certain restrictions governing the                              thereof may be sale-and-lease-back arran-
                                                                         use of these AGB) at all. In all other cases,                              gements: companies try to capitalize on
Insurance premiums in addition to sec. 2                                 significant doubts are raised about whether                                the liquidity tied up in their real property
Nr. 13 BetrKV may also be assigned to the                                the parties may successfully argue that the                                by selling and utilizing the revenue more
lessee. The expenses for special insurance                               respective contractual regulation is part of                               profitably in their actual core business. In
policies such as, for example, glass insu-                               the agreement on the rent. In its decision of                              order to be able to continue to use the real
rance, insurance for damages to telecom-                                 the year 200518, the Federal Court of Justice                              property, it is simultaneously re-leased. In
munications, alarm and fire alarm systems,                               determined that supplementary agreements                                   practice, triple-net lease contracts are often
other electrical and electronic systems,                                 which deviate from ”non-compulsory” sta-                                   seen in this connection.
are only transferable to the lessee if at the                            tutory provisions may not be part of the
same time he is the beneficiary of such in-                              agreement on the rent. In all other cases                                  The economic reasoning behind such trans-
surance policies16. Moreover, as to unusual                              which solely serve to revoke the provisions                                actions is thereby primarily a financing
insurance policies the respective contractual                            on proviso controls pursuant to §sec. 305 ff.                              transaction (“repayment of the purchase
provisions may be regarded as a “surprising                              German Civil Code, the risk is relatively                                  price by lease payment”) and not exclusi-
provision” (überraschende Klausel) within                                high that – given the actual motives of the                                vely the surrender and use of the property
the meaning of sec. 305 c para. 1 German                                 parties – the courts will deny the validity of                             for a period of time which characterizes
Civil Code, and thereby be invalid17.                                    such clauses.                                                              the lease contract. Based on this particular
                                                                                                                                                    proximity to leasing (if classification as a
The transfer of the risk of accidental pro-                              Overall Perspective                                                        leasing agreement cannot be considered),
perty loss may also be problematic from                                  Unlike the case of the individual exami-                                   tenancy contracts in this constellation may
an “AGB perspective” based on the state of                               nation, an overall examination (Gesamt-                                    be treated in the same way as an atypical
current case law. As previously mentioned,                               betrachtung) of this contractual configu-                                  tenancy contract, also such as a leasing
the OLG Naumburg and the OLG Cologne                                     ration, in particular a comparison with the                                contract. The particular proximity of this
have determined that a transfer of the main-                             case law on leasing, may lead to a different                               contractual constellation to leasing justi-
tenance and repair obligations is limited at                             conclusion.                                                                fies the handling of such tenancy agree-
the point at which the danger of (accidental)                                                                                                       ments in the same way as leasing contracts
loss (Sachgefahr) is transferred to the les-                             Although (real property) leasing may in                                    as far as the admissibility of certain regu-
see and the burden of the maintenance and                                principle be attributed to tenancy law19, the                              lations in the general terms and conditions
repair obligations therefore represent an in-                            Federal Court of Justice has deemed sub-                                   is concerned. The fact that this may gene-
calculable cost risk to the lessee.                                      stantive deviations from statutory provisions                              rally be valid for triple-net lease contracts
                                                                         of tenancy law to be valid20. It has thus seen                             however, is not yet self-evident from this
Taking into account the aforementioned le-                               the shifting of the risk of accidental loss                                argument.
gal risks relating to general terms and con-                             and the risk of paying the rent (Sach- und
ditions (AGB), an array of approaches is                                 Gegenleistungsgefahr) in the general terms                                 However, the triple-net lease contract, as
recommended in order to validly agree upon                               and conditions (AGB) to be admissible21. In                                can be seen from the aforementioned, de-
the respective provisions. In particular, it is                          addition, for the area of leasing of goods the                             monstrates a particular peculiarity as oppo-
recommended that the contractual parties                                 (complete) transfer of maintenance liability                               sed to a normal lease contract which justifi-
document that the assumption of all main-                                to the lessee in the general terms and condi-                              es its privileged treatment in the same way
tenance and repair obligations by the lessee                             tions (AGB) is deemed to be valid. This is                                 as the leasing contract.
13   OLG Köln v. 4. 12. 1990 – 15 U 75/90, WuM 1991, 357.                                                   19   Cf. BGH v. 30. 9. 1987 – VIII ZR 226/86, NJW 1988, 198 (199).
14   Cf. OLG Jena v. 16. 10. 2001 – 8 U 392/01, NZM 2002, 70.                                               20   Cf. BGH v. 30. 9. 1987 – VIII ZR 226/86, NJW 1988, 198 (200).
15   Cf. Kinne, GE 1999, 1540 (1544).                                                                       21   Mörtenkötter, MittRhNotK 1995, 329 (339).
16   Langenberg, Betriebskostenrecht der Wohn- und Geschäftsraummiete, third ed. 1999, Part A, para. 102.   22   Cf. BGH v. 30. 9. 1987 – VIII ZR 226/86, NJW 1988, 198 (200); Wolf/Eckart/Ball (cf. footnote no. 6)
17   Schmid, Handbuch der Mietnebenkosten, ninth ed. 2005, para. 5531.                                           para. 1675.
18   BGH ZMR 2005, 844 (845).




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The starting points in the leasing contract         Even if individual questions on the deter-              undertakes such a comprehensive transfer
and in the triple-net lease contract are            mination/description of triple-net lease                of risk from the lessor to the lessee may not
different, however. The leasing contract            contracts are still open to discussion, their           thereby be satisfied.
is def ined by the fact that the lessor first       economic aims are nevertheless explicit:
purchases the property – according to the           unlike a “normal” lease contract, a compre-             In order to comply with the statutory re-
specif ications of the lessee – in order then       hensive transfer of risk to the lessee shall            quirement for transparency (Transparenz-
to grant use to the lessee. This “purchase          take place. This type of contract is quite              gebot) which applies to general terms and
act” does not normally take place in tri-           common in some business circles (e.g. lea-              conditions (sec. 307 para. 1 sentence 2 Ger-
ple-net lease contracts. Incidentally – as          sing of large-scale real property) and is a             man Civil Code), it is certainly necessary
with the leasing contract – the contrac-            common contractual construct, particularly              to expressly designate the triple-net lease
tual constellation of the triple-net lease          in international contexts. Through its assi-            contract as such in order to identify the de-
contract follows an overall economic                gnment of risk, which thereby reduces the               viating risk assignment and its peculiarity.
concept. The triple-net lease contract is           rent payments, it fulfills the respective ex-
not only a lease contract for business pre-         pectations of fairness of the participating             With this in mind, much speaks for the reco-
mises which deviates from the statutory             parties and, at the same time, the existing             gnition of the triple-net lease contract as a
guiding principles in certain provisions            need for security with regard to calculations           separate type of contract, thus withdrawing
and thereby constitutes an unreasona-               of particular investors.                                it from the “normal” test as regards com-
ble disadvantage to the lessee. Such an                                                                     pliance with the requirements for general
examination is reduced too much to the              When looking at the leasing, there is no ob-            terms and conditions.
individual provision to be examined and             vious compelling reason why the economic
disregards the intended overall economic            (and practically relevant) need for a con-              For further information see the law firm
concept.                                            tractual model which, outside of leasing,               profile at the end of the Handbook.




                     P+P Pöllath + Partners
                     Raphael Söhlke is a lawyer in the Berlin office of P+P Pöllath + Partners. P+P is a law firm with a strong specialization in legal and
                     tax advice on:
                     I M&A transactions with the focus on private equity and venture capital;
                     I structuring and placing of private equity, venture capital and other closed-end or public funds;
                     I real estate transactions and project development; and
                     I asset management, including trusts and foundations, particularly for family offices, entrepreneurs and investors.

                     Raphael Söhlke focuses on real estate M&A and real estate private equity transactions, as well as project development. Raphael
                     Söhlke joined P+P in 2000 after working for an international law firm in Frankfurt. He studied at the Universities of Trier and Aix-en-
 Raphael Söhlke      Provence/France; he graduated from the University of Trier. He is a lecturer for the postgraduate course “Real Estate” at the University
                     of Münster.
                     For more details, please visit www.pplaw.com.




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