Discussion of the judgement of the BGH of 20.07.2007

Published on 10.01.2008

The Federal Court of Justice (BGH) sentenced an initiator (redeveloper of old housing stocks) to reversal in its judgement of 20.07.07. The judgement is based on the following grounds Attorney-at-law Dr. Johannes Fiala (www.fiala.de), Munich, has discussed the judgement and sent it to us for publication together with his lead sentence.
Excerpt from the judgment brief:
Liability of initiators or real estate redevelopment companies
The initiator had bought up old housing stock, refurbished it, divided it up according to WEG, and provided it with a financing proposal together with a “sample profitability calculation” by an agent. In particular, an incorrect calculation of distributions from a rental pool led to the underfunding.
Seller’s liability for advice due to incorrect calculation examples
According to established case law, a consultancy contract with the seller is concluded if the seller or his vicarious agents present a prospective buyer with calculation examples of the costs and financial advantages of a purchase. This “liability for information” generally applies to “sample calculations” in connection with capital investments: an “inner” will “not to want to be liable” is irrelevant, since the “objectively discernible will”, i.e. the recipient’s horizon, is what matters.
Numerous incorrect calculation items can lead to liability
According to this BGH ruling, examples of overly optimistic calculations are – too positive a picture of the potential increase in value – inaccurate picture of the expected income – incorrect indication of the achievable rent (e.g. due to missing additions/deductions) – in particular incorrect information on the rental pool risk or rental loss risk – calculation of too low revenue reserves (e.g. for vacancies, uncollectible rents, maintenance expenses, compensation for accumulated defaults).
Ambiguities in the calculation method also lead to liability
Other ambiguities about “the true effect and meaning” of a yield calculation can also lead to liability: This has already been shown by the judgement of the LG Munich II of 17.08.2006 on the misleading of investors by the internal rate of return (IRR). In particular, advertising with the IRR has repeatedly been regarded by higher courts as “misleading advertising for a capital investment”.
Fundamental importance also for other capital investments
This is not a special feature of this type of investment: according to the case law of the higher courts, life insurance companies, for example, are also liable if their (allegedly) completely “non-binding” model calculations are based on incorrect calculations. This is the case, for example, if outdated mortality tables are used as a basis, so that overly optimistic maturity benefits are presented in the brokerage.
Guiding Principle:
Initiators or sellers are liable for false statements (including those made by their vicarious agents) in sample calculations for investors regarding yields, potential increases in value, potential rental income, costs and vacancies, especially in the case of the rental pool.
(DA No 45A/07 of 07.11.2007, p. 4)
Courtesy of www.direkteranlegerschutz.de.