German law corporate acquisition agreements and real estate purchase agreements often include broad exclusions of liability.  However, pursuant to Section 444 of the German Civil Code (Bürgerliches Gesetzbuch), a seller is subject to statutory (non-excludable) liability if and to the extent the seller fraudulently concealed a defect of the sold asset.  To that end, it is often decisive whether the seller was required to inform the buyer about the defect in question.

On July 21, 2017 (V ZR 250/15), the German Federal Court of Justice (FCJ) ruled that (i) real estate is (already) considered to have a material defect if an abstract suspicion exists that it is contaminated due to the property’s former specific use, and (ii) the non-disclosure of such suspicion as such to the buyer may qualify as fraudulently concealing the defect even if there is no known contamination.

In the case at hand, the parties entered into a real estate purchase agreement providing for a customary exclusion of liability other than for intent and fraudulent conduct.  As known to the seller, the property had been used as an asphalt mixing plant in the past, with a sewage sludge retention reservoir having been operated on the site.  The seller did not inform the buyer about such former use.

Pursuant to the judgement, a seller of real estate must disclose information to the buyer about the abstract suspicion of contamination of the property if its specific former use creates the risk of substantial pollution, e.g., if the property was used as gas station, a wild garbage dump, or, as in the case at hand, an asphalt mixing plant and a sewage sludge retention reservoir.  The suspicion need not be specific.  Accordingly, a seller who is aware of the former use of a property must inform the buyer thereof if the relevant use results in an abstract suspicion of contamination, irrespective of whether further circumstances indicate that a contamination exists.  If a seller fails to inform the buyer accordingly, it fraudulently conceals a material defect from the buyer, resulting in potential liability for damages (e.g., for a reduction in value of the property or remediation cost if the property is in fact contaminated), unless the seller can prove that it had established with the help of experts that no contamination exists.

The decision substantially tightens the disclosure obligations of sellers.  Sellers should carefully consider disclosing their knowledge of the former use of properties in a comprehensive manner if such use creates the risk of substantial pollution, or at least establish with the help of experts that no contamination exists.  Otherwise, sellers risk losing the benefits of limitations on liability.  Similar considerations should be made where a property is part of a corporate acquisition agreement, be it as an asset deal or a share deal, where the sold company owns real estate forming a material part of the company’s assets.