CONTRACT OF RENT 533
(para 2-124), this standard will change over time as advances in skills, techniques, equipment and knowledge are made; many professional bodies attempt to provide further guidance for professional service providers and clients alike by means of the adoption of written standards of best practice in their particular profession (on this last point, see the discussion in Jackson & Powell (cited above) on particular professions such as surveyors (chapter 9, paras 9-23–9-25), solicitors (chapter 10, para 10-91) and accountants (chapter 15, paras 15-93–15-96).
The correct classification, in terms of duty, of non-conforming performance of a contract of service is controversial in German law. (See, for an overview, Oetker and Maultzsch, Vertragliche Schuldverhältnisse, p 413.) Some argue that the provision of the service as such suffices and if it was not performed according to the standard implied by the contract, this constitutes merely the violation of an auxiliary duty not to harm the interests of the other party (§ 241 II BGB; eg, Richardi, NZA 2002, 1011). The right to recover damages would thus follow from § 280 I BGB. The obvious objection to this approach is that, under the contract, the employer is entitled to expect not just the provision of a mere activity, but the provision of a service that conforms to the standard implied by the contract. Bad performance of a contract of service is nonconforming performance and not merely the violation of an auxiliary duty of protection. The right to recover damages would therefore follow from §§ 280 I and III, 283 BGB, since in most cases it will no longer be possible to rectify the bad performance, ie to restore conformity with the contract. This approach however would mean that if in exceptional circumstance the loss could nevertheless be avoided by curing the ‘defect’, this would have to be demanded first according to § 281 I 1 BGB. In relation to losses that would not be avoided by bringing the performance into conformity with the contract, the legal basis for damages would again be § 280 I BGB.
5. CONTRACT OF RENT
Derleder, ‘Mängelrechte des Wohnraummieters nach Mietund Schuldrechtsreform’ NZM 2002, 676; Emmerich, ‘Neues Mietrecht und Schuldrechtsmodernisierung’ NZM 2002, 362; Gruber, ‘Mietrecht und Schuldrechtsreform’ WuM 2002, 252; Birgit Grundmann, ‘Die Mietrechtsreform’ NJW 2001, 2497; Hau, ‘Reformiertes Mietrecht und modernisiertes Schuldrecht’ JuS 2003, 130; Schmidt-Futterer, Mietrecht (8th edn, 2003); Unberath, ‘Mietrecht und Schuldrechtsreform’ ZMR 2004, 309.
(a) Preliminary Observations
The contract of rent or lease is regulated in §§ 535 ff BGB (Mietvertrag). Some important aspects of this type of contract have already been discussed (see especially, chapter 3, section 4(d), p 149). For present purposes, it is the remedies for breach of contract that are to the fore. The rules were subject to a major reform (in 2001, BGBl. I, 1149) which however was pursued independently of the reform of the law of obligations (BGBl. I, 3138) and followed different aims. The special rules for breach were not significantly changed and, more importantly, have not been fully adjusted to cohere and intermesh with general contract principles. This is also the reason why we
534 BREACH OF CONTRACT-SPECIFIC CONTRACTS
need to return to the contract of tenancy, even if only briefly. This section of the special part of the law of contract traditionally contains a number of qualifications to the rules in the general part. Two main types of variations may be identified. The rules on non-conforming performance are heavily modified and the rules to terminate the contract by notice are exclusively dealt with in the special part.
(b) Application of General Principles to Breach of a Contract of Rent
If we look first at the rights of the lessor, it is apparent that the special part does not contain special rules for breach, except for the right to terminate by notice (Kündigung) and a special rule of prescription. The main obligation of the lessee is to pay rent: § 535 II BGB. This will normally be provided for in English law by the inclusion of a covenant to this effect, whether expressly or by the implied inclusion of ‘the usual covenants,’ of which the obligation to pay rent is one (Propert v Parker (1832) 3 My & K 280): see Harpum, Megarry & Wade: The Law of Property (6th edn, 2000), para 14-245 ff.
Late performance of the obligation to pay rent will result in liability for delay if the lessee is in default (Verzug, for which see § 286 BGB). Interest may be claimed from that moment onwards according to § 288 BGB, while § 280 II BGB covers any exceeding loss of delay (Verzögerungsschaden). The fault principle applies (embodied in § 276 BGB), yet it will be recalled that money debts are generally construed as involving ‘guarantee’ liability. Where payment of the rent is late, under the English law of leases of real property enforcement by the landlord can take the form of an action for the money owed, distress (by taking the defendant’s goods from the property and selling them—a self-help remedy that does not require the sanction of the court) or the application of indirect pressure by threatening forfeiture of the lease (where the lease contains a forfeiture clause for non-payment of rent) (see, generally, Harpum,
Megarry & Wade: The Law of Property, para 14-252 ff.).
The right to terminate the contract by notice is specially regulated (and will therefore be discussed in the next section): the general rule in § 314 BGB is thereby ousted. The right to terminate the contract with retroactive effects (§ 323 BGB) is as a general rule excluded for this type of ‘continuous’ contract (Dauerschuldverhältnis). (The problem is analogous to the contract of services, see p 531.) Under the English rules on leases of real property, a lease for a fixed term cannot be terminated by notice (in the absence of express contractual provision to the contrary). Periodic tenancies however can in principle be determined by notice: express provision can be made under the contract for such notice periods, but the default position is that, eg, a yearly tenancy can be determined by providing at least half a year’s notice that will expire at the end of a completed year of the tenancy (Sidebotham v Holland [1895] 1 QB 378. Any periodic tenancy of less than one year requires notice of the full period to be given (Lemon v Lardeur [1946] KB 613). (See for details, Harpum, Megarry & Wade: The Law of Property, paras 14-068, 14-073, 14-076, 14-081 and 14-117.) These basic common law rules are subject to important statutory exceptions, which either restrict the landlord’s right to determine the lease or allow the tenant to remain in the rented property even after the lease has been determined. These extremely detailed provisions vary in intensity depending on the precise nature of the tenancy at issue (business, agricultural or residential dwelling tenancies) and are beyond the scope of this book: for discussion,
CONTRACT OF RENT 535
see Harpum, Megarry & Wade: The Law of Property, paras 22-062 ff (business tenancies); 22-086 ff (agricultural tenancies); and 22-128 ff (for residential dwellings).
By contrast, under German law the lessor’s right to recover damages follows general principle. The lessee incurs obligations of protection or duties of care (Schutzpflichten, § 241 II BGB) in relation to the rented property. Their breach will give rise to liability according to § 280 I BGB, provided that the lessor suffered loss and the lessee was answerable for the breach (§ 276 BGB). In relation to duties of performance (other than the payment of rent), the Nachfrist-approach applies. This means that, according to § 281 I 1 BGB, a claim for damages instead of performance presupposes that the ‘innocent’ party has set a period of time for performance, and that no performance was forthcoming during that period. An important example in practice concerns the obligation to effect certain maintenance works (Schönheitreparaturen). It is the duty of the lessor to keep the rented thing in a condition suitable for the purpose of the contract, § 535 I 2 BGB. However, it is customary that this obligation is partially delegated to the lessee and the courts accept such clauses, provided that they are not unreasonably burdensome for the lessee (see, eg, Unberath, ZMR 2004, 313 with references). If the lessee is under a duty to keep the property in good repair (for instance, to paint the flat when moving out) and breaches this obligation, the lessor must first set a period of time for performance according to § 281 I 1 BGB before he can recover the cost of effecting the works. If the lessee in our example moves out without having painted the flat, this may in the individual case amount to a final and serious refusal of performance. In such a case, the setting of a period of time for performance can be dispensed with: § 281 II BGB. (If a deposit is taken by the landlord, as it will usually be as a matter of course at the outset of a residential lease under English law, then the typical practice is to deduct any such expenses from the amount of the deposit returned to the tenant when the lease comes to an end, although this is subject to the comments made in the next paragraph.)
See, for an illustration, BGHZ 49, 56, case no 118, which has been already referred to in the section on mitigation in the previous chapter. In this case, the lessees rented a house form the lessor. The obligation to keep the leased premises in a ‘decorated’ condition was shifted to the tenants. They failed to execute the redecoration works at the end of the tenancy and the landlord claimed for the cost of effecting the works as damages. Meanwhile however new tenants had executed the works at their own expense. The Court nevertheless refused to accept this as a reason to make a deduction in the damages claimed, because it ‘would be unjustifiable to absolve the defendants just because the plaintiff was lucky in his further contractual negotiations.’ The case has a parallel in Joyner v Weeks [1891] 2 QB 31. In this case, the plaintiff lessor sued on a covenant contained in a lease by which the defendant lessee promised to leave the premises in good repair. However, in breach of this covenant the premises were left in bad repair. The plaintiff had made a demise of the premises to a third person, which demise contained a covenant to repair. The defendant argued unsuccessfully that the plaintiff was only entitled to nominal damages. Note however that as a result of section 18 of the Landlord and Tenant Act 1927, the damages recovered for breach of a repairing covenant must not exceed the value by which the reversionary interest has been diminished (see Harpum, Megarry & Wade: The Law of Property, paras 14-281 and 14-282). See further section 147 of the Law of Property Act 1925 (allowing the court to release the tenant from internal decorative repairs liability
536 BREACH OF CONTRACT-SPECIFIC CONTRACTS
where the landlord acted unreasonably) and the Leasehold Property (Repairs) Act 1938 (on which see Harpum, paras 14-285–14-287). The latter statute requires a notice to be served on the tenant by the landlord, informing the tenant of his right to serve a counter-notice on the landlord, exercising the tenant’s rights under the 1938 Act. This counter-notice requires the landlord to gain the leave of the court to take any further action, and to do so he must show on the balance of probabilities that the breach needs to be remedied immediately to save him from substantial loss or damage (section 1(5) of the 1938 Act: see Associated British Ports v CH Bailey Plc [1990] 2 AC 703 (noted by Bridge [1990] CLJ 401).
For the sake of completeness, it is necessary to mention a special rule in this section on general principle. For the right to recover damages just set out is subject to a special regime of prescription in § 548 BGB, provided that the claim concerns a loss resulting out of a deterioration in the condition of, or damage to, the leased property. This special period of limitation will normally commence with the return of the object and only lasts for six months. This particular period of limitation is said also to apply to any concurrent delict claim, for otherwise the lessor could easily circumvent the rule. (For details, see Unberath, ZMR 2004, 313. Note that this drastic effect is not attributed to the other special regimes of prescription for breach of contract: ie to the contract of sale and the contract for works.)
The starting point for the rights of the lessee is § 535 I 1 BGB. The tenant is entitled to be enabled to make the agreed use of the subject matter of the lease. (See in English law the implied covenant by the landlord that the lessor will enjoy quiet enjoyment of the property subject to the lease: Budd-Scott v Daniel [1902] 2 KB 351. Note that the default position as to the safety or fitness for purpose of the rented real property is that the landlord makes no implied promise to that effect (see Harpum, Megarry & Wade: The Law of Property, para 14-210; this is an area in which US law has moved rapidly towards increasing a tenant’s rights through first the doctrine of constructive eviction and then the implied warranty of habitability. Javins v First National Realty Corp 428 F 2d 1071 (DC Cir 1970), is a leading case on the latter point involving horrific housing conditions. An improvement innovation was giving tenants the right to withhold rent). There are exceptions to this general rule, however, both via the implication of terms at common law (see paras 14-211–14-214) and statutory protection for certain tenants under the Landlord and Tenant Act 1985 (Harpum, paras 14-216–14-225)).
If the performance of this obligation is impossible at the time at which the parties entered into the contract, the contract is deemed valid according to § 311a I BGB and the lessee may recover damages instead of performance (or wasted expenditure) according to § 311a II BGB. It should be noted that this depends on whether the lessor is answerable for the breach. This will be the case if he had actual or imputed knowledge of the impediment at the time of contracting (§ 311a II 2 BGB; for a fuller discussion see the previous chapter, p 456). Prior to the reform, the assumption was that the promisee ‘guaranteed’ his ability to perform the contract. In cases of initial impossibility, liability was thus treated as ‘strict’. The present position of the law is different: the fault principle in § 276 BGB is applied. In relation to subsequent impossibility, liability for damages instead of performance is regulated by § 283 BGB and depends on whether the lessor was answerable for the impossibility (requiring application of the fault principle: see chapter 9, section 5, p 456, for a comparison with the English case
CONTRACT OF RENT 537
of Taylor v Caldwell. Note that, after much uncertainty, the doctrine of frustration has been held in principle to be applicable to leases of real property: National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, which raises the prospect of the Law Reform (Frustrated Contracts) Act 1943 being applied to frustrated leasehold estates (see our general discussion of this Act in chapter 4, section 4, p 334).
Impossibility is of special importance in relation to leases because the performance must normally be offered at a particular time. If this is not satisfied, the performance becomes impossible (absolutes Fixgeschäft) simply due to the lapse of time. If the obligation of the seller under § 535 I 1 BGB is not fulfilled, the lessee is as a general rule released from his obligation of counter-performance: § 326 I 1 BGB. However, if the lessee was in delay of acceptance when the performance became impossible, the right to the rent is preserved (§ 326 II 1 BGB: see BGH NJW-RR 1991, 267 for an illustration—the result previously followed from the old § 324 II).
The liability of the lessor for defects in the leased object is subjected to a special regime of rules contained in §§ 536–536d BGB. These rules are self-contained and no serious attempt was made to adjust them to general contract principles, which general principles—as a result of the latest reform of the law of obligations—have changed considerably. The rules on non-conformity of performance must therefore be examined more closely below. At this stage, we must briefly state the rules that determine when each set of rules is applicable. Such ‘meta’-rules are an inevitable complication of any system that maintains special and general rules for failure of performance. The courts proceeded hitherto on the following assumptions and it is to be expected that they will also adhere to them after the reform. (See, eg, BGHZ 136, 102; BGH NJW 1991, 3277; BGH NJW 1963, 804, case no 121. Academic writers tend to oppose the position of the jurisprudence on these issues: see, for a fuller discussion and references, Unberath, ZMR 2004, 310–11.) First, within the scope of application of the special rules the general rules are ousted. Secondly, the special rules in relation to physical defects apply from the moment that the leased object is handed over to the buyer. Thirdly, in relation to legal defects (§ 536 III BGB) the special rules as to nonconforming performance apply.
The definition of conformity in § 536 BGB therefore is also crucial to an understanding of the scope of application of the special rules. It suffices here to remark that, as in relation to the other types of contract, it is for the parties to define the requirements that performance must satisfy in order to be regarded as free from defects. Thus, the general rule is that the leased object must be suitable for the use presupposed in the contract: § 536 I 1 BGB. The need for adjustment between the various reforms can be seen from the fact that § 536 II BGB still refers to the ‘guaranteed features’ of the subject matter of the contract. Since the reform of the law of obligations, this type of limited ‘guarantee’ is also located in § 276 I BGB. However, the duplication is only a cosmetic flaw and does not create any difficulties in practical application. Finally, § 536b BGB governs the question as to when the lessee is deprived of his rights in relation to the defect on the ground that he had actual or imputed knowledge of the defect and did not reserve his rights.
538 BREACH OF CONTRACT-SPECIFIC CONTRACTS
(c) Enforced Performance
The contract of rent is a continuous contract. As a result, a defect in the leased object cannot be cured for the time it persisted. To this extent, ‘subsequent’ performance is impossible (§ 275 I BGB). It is curable, if at all, only with effects for the future. The obligation of the lessor to cure the defect follows from § 535 I 2 BGB. The lessee must enable the lessor to bring the performance into conformity with the contract, for otherwise he is deprived of his rights: § 536c BGB. As we have seen in relation to the contract of sale and the contract for works, the special regimes demanding that defects be cured also subjected the right to enforced performance to a ‘reasonableness’ test. Such cure could be refused if it involved disproportionate outlays (§§ 439 III, 635 III BGB). Somewhat surprisingly, no such special limit is laid down in the section on the contract of rent. The courts have nevertheless limited the obligation of the lessor arising from § 536 I 2 BGB (eg, BGH NJW-RR 1991, 204). If the cost of reinstatement would exceed a certain threshold (Opfergrenze), the defect of the leased object should no longer be regarded as a ‘defect’ in the technical sense of the term. This argument is evidently made to conceal the fact that a special test of reasonableness is missing from the list of provisions on the contract of rent. The test in § 275 II BGB is available only in extreme cases where the cost of reinstatement is grossly out of proportion to the performance interest. (See Unberath, ZMR 2004, 311; and Emmerich, NZM 2002, 365, who suggests that the rules as to the foundation of the transaction, § 313 BGB, ought to be applied instead.) Under English law, a breach of a landlord’s obligation to repair is often the subject of an order of specific performance (eg, Joyce v Liverpool City Council [1996] QB 252; the court has inherent equitable jurisdiction to do this, but may rely instead on the statutory power laid down in section 17 of the Landlord and Tenant Act 1985) and may even lead to a mandatory injunction being issued by the court to compel the landlord to fulfil his obligation to maintain or repair the property (eg, Parker v Camden LBC [1986] Ch 162, at 173). Alternatively, if the tenant does the repairs himself after giving the landlord notice of the defect, he can then use his common law rights of set-off to reduce his rent payments by the amount expended on the repair (Lee-Parker v Izzett [1971] 1 WLR 1688; see the comments above on the US case of Javins—this approach is a recent innovation in the US). Note that where the equitable jurisdiction is invoked, its exercise will be at the court’s discretion and thus subject to the traditional equitable restrictions on the grant of the remedy (which might be a way in which demands to put repairs in hand that will be excessively costly could be resisted by the landlord, although there does not appear to be any case law on this subject to date).
It should also be noted that enforced performance may be particularly important for the lessor who claims the leased object back from the lessee. The obligation of the lessee is laid down in § 546 BGB. The lessor is entitled to the rent for the period of time the object is withheld: § 546a I BGB (§ 571 BGB stipulates special rules for residential leases). Finally, §§ 721, 749a ZPO govern the execution of a judgment that orders a lessee to vacate residential premises and provide for special protection of the tenant (basically affording the tenant a period of grace).
CONTRACT OF RENT 539
(d) Termination by Notice and Price Reduction
If the leased object is defective, the rent is automatically reduced according to § 536 I BGB, and this applies whether or not the lessor is answerable for the breach. The right to price reduction therefore is not dependent on whether the lessee resorted to price reduction by unilateral declaration and does not presuppose that the lessee demanded removal of the defect first (contrast, eg, § 441 BGB). This is sensible, since the defect cannot be cured retroactively for the time it actually persisted. However, it will be recalled that the buyer must bring the defect to the attention of the lessor according to § 536c BGB. Rent that was paid in excess of the amount of the reduced rent can be claimed back according to the rules of unjustified enrichment (§ 812 BGB). (See BGH NJW 2003, 2601, as to the question whether unreserved payment extinguished the right to recover excess rent.) In order to preserve good relations between lessor and lessee and to avoid arguments over minor issues, § 536 I 3 BGB excludes the right to price reduction if the defect is ‘minor’ (only trivial breaches are covered by this exclusion. This is now in clear contrast with the rules on the contract of sale and for work, and probably will result in different approaches as to what constitutes a ‘minor breach’). (On the issue of price reduction in English law, see the comments above relating to set-off by the tenant of expenses (incurred to remedy the landlord’s breach of a covenant to maintain or repair) against rent owing to the landlord; equally, a damages claim may be brought for such breach, based on the loss of comfort and convenience resulting from disrepair (if the tenant remains in occupation) or on the reduction in the value of the lease (on assignment) or the rental (on sub-letting). Such damages may ultimately have an effect somewhat similar to a price reduction regime. See, generally, Harpum, Megarry & Wade: The Law of Property, para 14-280 and the references cited therein.)
Termination by notice (Kündigung) is one of the main remedies available for breach of contract to the parties to a contract for rent and is referred to as ‘extraordinary’ termination. Special rules apply. The right of the lessee to terminate the contract in cases of non-conforming performance follows from § 543 II 1 Nr. 1 BGB (§ 569 BGB contains qualifications as to the lease of residential premises; as discussed under subsection (b), above, English law has a similar series of qualifications to determination of the lease of residential premises by notice). The right of the lessor to terminate by notice if the lessee fails to perform follows from § 543 II 1 Nr. 3 BGB if the obligation to pay rent is breached (note § 569 III BGB applies to rent for residential premises) and from § 543 II 1 Nr. 2 and I 2 BGB in respect of other breaches.
(e) Damages for Non-conforming Performance
§ 536a BGB contains a comprehensive regulation of the liability of the lessor for non-conforming performance, which replaces §§ 280–3 BGB of the general part (note however that the right to recover for wasted expenditure instead of damages for nonperformance is also granted to the lessee: § 284 BGB). § 536a I BGB entitles the lessee to recover damages for loss caused by a defect in the leased object. The provision extends to consequential loss as well. On these matters, beyond damages claims for breach of covenant as outlined above (where notice must be given to the landlord of such defect or disrepair), English law also applies the Defective Premises Act 1972
540 BREACH OF CONTRACT-SPECIFIC CONTRACTS
where the landlord is obliged to maintain or repair the premises (section 4(1)) or has a right to enter the premises to effect maintenance (section 4(4)). In such circumstances, the landlord owes a duty of care to all persons (including the lessee) who are affected by his failure to fulfil those duties and this duty can arise even in the absence of his actual knowledge of the relevant defects—see section 4(2), which covers the situation where the landlord should in all the circumstances have known of that defect. Thus, any defect that fell within the scope of the obligation to repair or that the landlord could have entered the premises to fix will be sufficient, and the duty will be breached if the landlord was negligent in not discovering that defect
Paragraph 536a II BGB entitles the lessee to recover the cost of curing the defect if the lessor is in default (Verzug) and has failed to do so himself; more importantly, the cost of cure is also available if the lessee was entitled to effect the cure himself because of a situation of necessity (in the latter case, the right exists independently of any fault on the part of the lessor; see the foregoing comments on set-off under English law, which would seem to operate more widely than merely in situations of necessity).
The right to recover damages under § 536a I BGB distinguishes between defects that existed at the time the contract was entered into and defects that have subsequently came into being. In relation to initial defects, the provision establishes a ‘guarantee’ liability. (See, for an illustration of this important instance of ‘strict’ liability in the BGB, BGH NJW 1963, 804, case no 121.) In relation to subsequent defects, the condition for recovery is that either the lessor was answerable for the defect (§ 276 BGB) or the lessor was in default (Verzug) in curing the defect, thereby also presupposing that the lessor was answerable for the breach (§ 286 IV BGB). Prior to the reform, the ‘guarantee’ liability envisaged by § 536a BGB for initial defects operated in harmony with general principle, for it was generally assumed that the contractual debtor ‘guarantees’ that, at least at the time of contracting, he is able to perform. However, as was explained above (in chapter 9, section 5(b) and (especially) (d), p 457), the Second Commission came to the view that the fault principle should apply also in relation to initial impediments to performance (see § 311a II BGB). The special rule of the contract of rent establishing ‘guarantee’ liability is thus now a true exception. This can create unsatisfactory results when applied in combination with the rules as to the scope of application of § 536a BGB. As explained earlier in this section, the provision only applies in relation to physical defects once the leased object has been handed over to the lessee. This has the unfortunate consequence that before this point, liability is fault-dependent (§ 311a II BGB), while from the moment the leased property is handed over, liability is strict (§ 536a I BGB in respect of initial defects: see further, Unberath, ZMR 2004, 312).