by Johannes Fiala, MBA/Lawyer Kristina Starck, Munich/Dr. rer pol Klaus Werht, private lecturer at the Department of Economics of the University of Hamburg, damage assessor in Hamburg-Neugraben
I. Typical facts
The investor is regularly approached by a contact person with the aim of clarifying whether there is a general interest in saving taxes or acquiring a property with a view to retirement provision. The contact person is sent ahead by the intermediary (telemarketing) or acts as an intermediary himself. The investor experiences a subjective disappointment in the following years because his expectations are not fulfilled. This raises the question of who he can claim and for how long.
II Legal situation
1. claims against parties
It is possible to make claims against all parties involved.
1.1. Claims against the financial advisor
Claims under PVV (positive breach of contract) of the agency agreement can be asserted against the financial advisor if he acted in breach of duty in providing the advice. At this point, it must first be clarified whether the financial advisor is an investment advisor or an investment intermediary, because the expectations of the prospective investor with regard to the advisory behaviour of the financial advisor differ according to whether the latter works as a commission-dependent intermediary or as an independent advisor. An investment adviser is commissioned by the person willing to invest to give him expert advice on the evaluation and assessment of the investment and, taking into account his personal circumstances, to provide him with expert advice on the most favourable form of investment or to inform him whether one or other form of investment is to be recommended according to his personal circumstances and wishes. Neutral, expert advice is expected. The involvement of an investment advisor takes place because the investor expects an increased correctness of the investment decision to be made by him due to comprehensive information about all aspects of an investment. Investment brokerage is the brokering of capital investments by sales companies, whereby the investment broker does not offer a product of his own. He is remunerated by this distribution company, so he is also expected to behave in a promotional manner. The obligations of the investment intermediary therefore generally only comprise the provision of information and the brokerage of the capital investment. This distinction has to be made, since case law imposes higher obligations on investment advisors to provide information and advice. However, the duty of an investment intermediary to provide information is increased or approximated to that of an investment advisor if he places personal trust in the investor (BGH, WM 1993, p. 1238; NJW 1984, p. 2524). Such personal trust results, for example, from a personal acquaintance with the intermediary, e.g. acquaintance, colleague. Such an acquaintance is already capable of justifying the assumption of a personal trust. Such trust can also be transferred if the intermediary was recommended by an acquaintance, for example, or if the acquaintance works for the intermediary. The BGH justifies liability under CIC by pointing out that the investor, who shows more than the usual negotiating trust, is to be protected: the intermediary offers an additional guarantee, emanating from him personally, for the success of the legal transaction and thus influences the investor’s decision. Sufficient is e.g. an extraordinary expertise for the investment or a special personal reliability (BGHZ 56, p. 81, 83 f.; 70, p. 337, 341 f.). These principles can also be applied to distribution and brokerage companies (BGHZ 74, p. 103 ff.). The person obliged to provide information and advice must provide the information truthfully, clearly and completely. He must pass on all the information available to him to the investor in full, insofar as this is necessary for the proper execution of the advice. This includes using easily accessible information, such as colleagues, home or reference libraries, and computer searchable databases. In this context, the requirements placed on the person obliged to provide information must not be excessive, but must be based on the specific standard of care of an average advisor. Only in the case of special personal trust can the standard of care be raised above this.1 The information must not only be true and complete (whereby an incompleteness may already constitute a falsehood),2 but it must also be provided with the necessary clarity and precision. The duty to provide complete information is not only violated by false statements, but also by the failure to provide necessary information (BGH, WM 1988, p. p.48). Complete and correct information includes those circumstances which are of importance for the investor’s investment decision and which serve as a basis for his decision (BGH, NJW 1982, p. 1095). However, the BGH also focuses on the subjective need for clarification with regard to the existence, content and scope of the duty to clarify. Accordingly, the person of the investor, his previous knowledge and experience with the specific type of transaction must be taken into account (BGHZ 117, p. 135; BGH, NJW 1991, p. 1956 ). The obligation to provide truthful information means that the consultant is obliged to carry out his own investigations. The extent of this obligation depends on the degree to which the individual investor is worthy of protection and the extent of his trust in the accuracy of the information provided by the advisor (BGH, WM 1993, p. 1455 and WM 1979, p. 530). This measure increases with the advisor’s statements that the investment offered carefully examined earnings opportunities, or even that his own careful examination had taken place, as does the reference to previous best experience (BGH, NJW 1978, p. 997 et seq. and WM 1986, p. 517). In principle, an investment adviser may rely on expert opinions of third parties or attestations, provided that after its own plausibility check there are no grounds for doubting their correctness (BGH, WM 1988, p. 1685). If an investment adviser has omitted the necessary investigations, he must disclose this to the investor (BGH, NJW 1982, p. 1095). An adviser must not only meet the objectively necessary and sub- jectively required information needs of the investor, but must also provide him with suitable advice for his investment. In assessing the suitability of his advice, he must investigate and assess the investment objectives and the risk tolerance as well as the financial circumstances of the investor and base the suitability of an investment thereon; his recommendations must be appropriate for the investor and must be based on the risk profile – also expressed in layman’s terms – specified by the investor (BGH, WM 1993, p. 1455; WM 1987, p. 531; NJW 1982, p. 1095). If the consultant has breached one of the above-mentioned duties, there is a claim for compensation for the damage caused by this breach of duty.
1.2. claims against the bank
Claims for damages against the Bank may arise from CIC (culpa in contrahendo) of the loan agreement if the Bank acted in breach of its duties when concluding the loan agreement. In principle, the bank does not have to inform the borrower about the risks of the use he intends to make of the loan; this applies in particular to tax-saving builder-owner models, where it can be assumed that the interested parties either have the necessary knowledge and experience themselves or avail themselves of the help of experts (BGH, e.g. WM 1992, pp. 216, 217). However, the Bank has a duty to inform and warn the borrower in exceptional cases if the borrower has a special need for information and protection in the individual case and the Bank is required to provide information in good faith (BGH, WM 1987, p. 1546). the bank goes beyond its role as a lender in connection with the planning, implementation and sale of the project, – it creates a risk for the customer that goes beyond the general economic risks of such projects or favours the existence of such a risk, – it involves itself in serious conflicts of interest in connection with the granting of loans both to the developer and to the individual purchasers, – it has a concrete knowledge advantage with regard to the special risks of the project (BGH, WM 1992, pp. 901 ff.). The bank has certain duties to inform and advise a borrower. It must warn a customer who is not as experienced in business as itself not only of the legal but also of the economic risks of a transaction if it is in a position to do so by virtue of superior expertise. In particular, it is obliged to protect the business partner from disadvantageous contract conclusions and to inform him of circumstances which are recognisably of decisive importance for him. What is required is advice that is appropriate to the investor and appropriate to the property (BGH, judgment of 6. 7. 1993). However, the aspect of the knowledge advantage only obliges a bank to disclose existing knowledge which it recognises as essential, but not to acquire such knowledge advantage in the first place (OLG Cologne, judgement of 5 November 1990). When giving investment advice, it does not have to enquire about the customer’s level of knowledge if the customer is being advised by an investment adviser and already has concrete ideas about the desired investment (BGH, judgment of 27 February 1996). If the bank knew that the investment was wrong for the borrower, then it has a duty of disclosure (BGH, WM 1978, p. 1038; WM 1979, p. 2092 ff; WM 1983, p. 1093; WM 1985, p. 221). In most cases, the problem arises that the bank did not provide advice that could have been used to clarify the situation. The Bank must, however, in accordance with. § 166 para. 2, 278 BGB the conduct of the intermediary and his knowledge. § 166 para. 2 BGB is not only applicable to the legal representative, but also to the knowledge representative. A knowledge representative is anyone who, according to the principal’s work organisation, is called upon to perform certain tasks in legal transactions as the principal’s representative on his own responsibility, to take note of the information and, if necessary, to pass it on. A legal power of representation is just as little required as an express appointment as a knowledge representative. It is also irrelevant that the knowledge representative is organisationally and economically independent. This is in principle the case when a bank hands over its loan forms to the intermediary and must therefore necessarily expect the intermediary to take over the contract negotiations. The bank is also subject to specific duties of disclosure if it has become involved in the planning and/or implementation of the project or has even given the impression that there is further cooperation between it and the project operators (BGH, WM 1985, p. 221). This impression is created when the customer thinks it is a total package. The facts relevant to the buyer’s decision also include the value of the property. Banks have ideas about the value of a property based on their experience with buying and selling real estate. In addition, the bank normally verifies the value of the property when granting a loan as part of an impairment test. In the vast majority of cases, a valuation fee is even charged for this examination. This creates a service contract in addition to the loan agreement in accordance with section 4.1 of the German Civil Code. § 611 of the German Civil Code (BGB) between the parties involved. Under this service agreement, the Bank has the obligation to inform the customer of the result of the valuation. The omission of this notification is a breach of duty in the sense of the PVV. In such a case, the bank has a knowledge advantage over its customer, which it even made the customer pay to obtain. The bank can be expected to pass on knowledge acquired at the expense of the customer. The customer can therefore assume that the value of the property corresponds to the purchase price if the bank does not inform him of anything to the contrary. According to a decision of the Federal Court of Justice, the bank is aiding and abetting fraud by stating false values in an expert opinion. In order to constitute an accessory, it is sufficient for the bank to accept that its actions may manifest themselves as an assisting contribution to a criminal offence without any further action on its part. It is therefore sufficient for the bank to willingly provide the principal offender with a decisive means of committing an offence and thus consciously increase the risk that a principal offence typically promoted by the use of precisely this means will be committed (BGH, NJW 1996, p. 2517 f). Usually banks lend a property only up to the amount of 50 – 60 % of the market value. This follows from § 11 of the Mortgage Bank Act and from the fact that losses of between a quarter and a third occur in the case of a forced sale. In addition to any unpaid interest and legal fees, such a percentage provides a realistic basis for calculation. Moreover, the banks concerned are often expressly so-called mortgage banks, with which the public, with a view to § 1807 para. 1 para. 1 BGB inherently expects special care. The Bank’s assertions that a valuation had not taken place are purely protective claims. This results in a breach of the Bank’s fiduciary duty under criminal law within the meaning of § 266 StGB. S. 266 StGB. If the bank provides a loan to an over-indebted initiator of a project in the knowledge of this over-indebtedness and the in rem security with a land charge on the property is insufficient, there is an obligation on the part of the banks to inform the purchaser of the risk associated with this particular project, which goes beyond the general risks of building projects, and of the conflicts of interest resulting from their own involvement (BGH, WM 1992, p. 216 ff). According to a decision of the Federal Court of Justice (BGH), the bank must accept responsibility for the knowledge of all its authorised representatives (BGH, NJW 1990, p. 975). The knowledge of even one member of the executive body authorized to represent in the matter is to be regarded as the knowledge of the executive body and is thus also to be attributed to the legal person (BGHZ 20, p. 149 ff).
1.2.1. Immorality of the loan agreement
The loan agreement must also be examined to determine whether it is immoral according to the law. § 138 para. 1 BGB exists. A legal transaction is immoral if it puts the debtor in an economically hopeless situation at present and for the future, if the creditor is aware of this situation and there are additional aggravating circumstances (BGH, NJW 1994, p. 1278). This is the case if the loan is disproportionately high in relation to the borrower’s income and the bank should have realised on close examination that the conclusion of the loan agreement would mean that the borrower would not be able to earn a livelihood in excess of the subsistence level for the foreseeable future (e.g. BGH, ZIP 1984, p. 1465; ZIP 1987, p. 363). There must be an obvious, blatant excessive demand on the part of the debtor, which in particular must be readily apparent to any lender. This is the case if it is already certain at the time of the conclusion of the contract that the debtor will in all probability not be able to repay the amount owed by him (BGH, NJW 1996, p. 1276). A comparison must be made between the borrower’s annual income minus all regular expenses, such as rent, other loan obligations, etc., and the annual burden of the loan.
1.2.2. Objection pass-through
Liability in accordance with the principles of objection is only permissible within narrow limits. According to the established case law of the Federal Court of Justice (BGH), in the case of a financed purchase, the purchase agreement and the loan agreement are to be regarded as two legally independent contracts despite their close connection (BGH, NJW-RR 1987, p. 529). The right to raise objections is not only possible in the case of a financed hire-purchase agreement, but also in other cases where there is a close connection between the loan agreement and the financed legal transaction in accordance with the principle of good faith (BGH, loc. cit.). This requires an internal or economic connection between the financed legal transaction and the loan agreement. Such a connection exists only to the extent that the loan is usually granted to the buyer for a specific purpose. However, this is usually not sufficient for an objection to be raised in accordance with § 242 BGB because there are no additional circumstances which would make the reference to the legal independence of the loan appear to be a breach of good faith. However, the preconditions for an objection to be raised cannot be conclusively denied either. The objection requires that the lender, due to special circumstances, must allow himself to be treated as a partner in the financed purchase despite the legal independence of the loan agreement. This is usually the case only if the bank, as the developer’s global lender and at the same time as the property applicant’s lender, behaves in a manner that is comparable to contradictory behaviour. This is only the case if the bank does not limit itself to its role as lender, but participates in the financed transaction in a way that goes beyond this, i.e. in particular performs tasks of the developer in cooperation with the latter, e.g. by actively participating in the sale of the apartments or by advertising the purchaser, or that the entire legal structure of the triangular relationship is attributable to it (BGH, NJW 1980, p. 41), e.g. by actively participating in project advertising and sale. Thus, the principles of objection passing are generally not applicable in favour of applicants for ownership who participate in a builder’s model. The bank only has a duty of disclosure if it has intervened in the conception of the property in an advertising or otherwise active manner on the part of the initiator or has created a special risk situation, e.g. by providing the loan forms to the agent of the property (BGH, WM IV, 1992, p. 901 ff.).
1.3. Claims against the trustee
In the vast majority of cases, a trustee is appointed to conclude and manage the contract. Claims against the trustee may arise under PVV of the agency agreement if there is a breach of duty. According to case law, the duties of a trustee arise from §§ 675, 664 – 667 BGB (German Civil Code), from the respective contractual relationship, from the professional guidelines (lawyer, tax consultant, auditor) and from the general principles of proper trusteeship (duty of loyalty and due diligence), in particular the principle of independence and the safeguarding of interests. Therefore, the scope of liability and the contractual ancillary duties, in particular the duties to provide information and advice, are generally determined by the primary duties assumed (OLG Cologne, judgment of 20 May 1996 – 16 U 86/95; DB 1996, p. 2174). In this context, it must be examined whether the duties are only directed towards the conclusion of the necessary contracts precisely described in the trust agreement, in which case there is no general duty of disclosure, or whether there is a responsibility with regard to the investment decision to be taken. Such extended liability may arise, for example, from the fact that the trustee is also a tax adviser and prepares the tax returns for the purchaser of the property. In this case, it must recognise that the financial burden on the purchasers is not sustainable. However, if he only confirms the incurred income-related expenses for the investor, there is no breach of duty. The Trustee must serve and protect the interests of the Settlor. Therefore, he has the obligation to inform the latter without being asked about a transaction that is disadvantageous for him. This results on the one hand from the general fiduciary duties, in particular from the duty of loyalty, and on the other hand from the fact that the fiduciary is a trustee for the investor and is supposed to look after his interests and not those of the bank or the developer. Even if the investor manages the assets of the settlor or investor, the settlor always remains entitled to issue instructions. This corresponds to the trustee’s duties of notification and clarification vis-à-vis the investor. However, a claim under PVV may arise from the mere obligation to conclude the contracts if, for example, the notarial purchase contract concluded by the trustee specifies a different purchase price than previously negotiated. In this case, the trustee’s breach of duty lies in the fact that he did not pay attention when concluding the contract. However, claims based on § 242 of the German Civil Code (BGB) may also arise in respect of these obligations laid down in the trust agreement. According to the principle of good faith, the trustee is obliged to inform the settlor that the value of the property and the purchase price to be paid bear no relation to each other. Especially if the trustee is a tax advisor, as is the case in most cases, he also has the additional duties arising from the professional law of the tax advisor. According to a decision of the RG, a lawyer has the obligation to instruct a particularly uninformed person also about possible economic dangers of the transaction (RG, JW 1932, p. 2854). Such an obligation can probably also be applied to the tax adviser. As a tax adviser, it must impose itself on him, if with such a project artificially advertising costs are produced, which are actually to bring a tax advantage, but in the result it amounts to the fact that for the trustor at the end a quantity of debts remain, because the object does not compute itself, so that in the result no tax saving exists. A tax advisor is particularly suited to act as a fiduciary in tax saving schemes because of his expertise. Fiduciary activities are among the tasks which are particularly compatible with his professional duties (Section 57 (2) (3) StBerG). For activities compatible with the tax adviser profession, the professional duties do not apply directly, but are largely regulated via § 57 para. 2 StBerG is applicable. It follows from this that the Trustee must maintain independence. He may only assume the function of a trustee if he is legally and economically independent of the other functionaries. A dependency would already be assumed if a trustee manages tax-privileged capital investments to a substantial extent which are initiated by one person or a fixed group. The upper limit for this is likely to be 25%. Otherwise there is a concern of a conflict of interests, which prohibits the tax adviser from acting (No. 3 Para. 1 RLStB). It would also be contrary to the profession if the tax adviser were to accept commissions from the other functionaries for the conclusion of contracts (No. 6 (1) RLStB). According to a decision of the OLG Düsseldorf (judgement of 23. 1. 1992, Gl 1993, p. 207), a tax consultant loses his claim to payment of fees if he disregards the requirement to avoid a conflict of interests. Such conduct in breach of duty also gives rise to PVV liability.
1.4. Claims against the “non-fiduciary” tax advisor
Claims against the tax consultant can only arise from PVV of the tax consultant contract in conjunction with § 57 para. 2 StBerG. The tax adviser must refrain from any activity that is not in keeping with the reputation of his profession. If the tax adviser cooperates with one of the above-mentioned parties to the detriment of the client, this is not compatible with the dignity and reputation of the profession, as it can bring the entire profession into disrepute. If, however, the tax adviser is only instructed to prepare the tax return after all the contracts have been concluded, this does not give rise to any special duty of disclosure because the tax adviser was involved neither in the conception nor in the processing (pure declaration advice). However, there is a duty to provide information if it becomes apparent to him that a tax saving is not possible at all but that, on the contrary, a disadvantage arises for the investor.
1.5. claims against the seller
Such a claim could result from the immorality of the sales contract. Unconscionability of the purchase contract acc. § Section 138 of the German Civil Code is given if there is a blatant disproportion between performance and consideration, from which the reprehensible attitude of the beneficiary contracting party can be inferred (BGH, NJW – RR 1990, p. 950; NJW 1996, p. 1204). The objective value of the service is decisive. According to a decision of the OLG Hamm (NJW 1985, p. 2661), immorality exists if the agreed purchase price exceeds the actual market value by 87.7% and the seller cannot dispel the presumption of a reprehensible attitude. In a ruling, the Federal Court of Justice (BGH) assumes immorality if the purchase price exceeds the actual market value by 80 % (BGH, WM 1980, p. 597). In a further judgement, the BGH assumes an immorality of more than 100 % (judgement of 12. 1. 1996 – V ZR 289/94). The market value of an apartment is determined according to its income value (BGH, WM 1992, p. 901 ff). There is a certain degree of uncertainty in case law as to which property valuation method – the comparative value method, the capitalised earnings value method or the asset value method – should be used. For example, the XI Civil Senate ruled that the capitalised earnings value method was the more accurate method of determining the price of a commercial property than the asset value method (BGH, WM 1992, pp. 901, 903). The V. Civil Senate (BGH, NJW 1996, pp. 1204, 1204), on the other hand, did not allow the application of the capitalised earnings value method in the case of a property that had obviously been sold below its value, “because the acquisition of such a property for capital investment is not interesting”. Instead, the asset value method was to be applied. If – as is the case in many cases – the apartment cannot be rented out, the question arises as to how the income value of the apartment is to be calculated. This has not yet been decided by case law. It is probably not possible to reduce the value of the dwelling to zero, but in any case a deduction must be made from the income value calculated with the assumed rent. If the purchase agreement is null and void, then it must be considered whether the loan agreement is also null and void by way of objection.
1.6. Claims against the notary
Liability of the notary involved results from §§ 19 BNotO, 17 BeurkG. This requires intentional or negligent behaviour on the part of the notary. In the case of a negligent breach of duty, however, the notary can only be held liable in accordance with § 19 Paragraph 1 Clause 2 if the injured party cannot obtain compensation in any other way (subsidiarity of official liability). Pursuant to §§ 19 BNotO, 17 BeurkG, the notary must investigate the will and knowledge of the contracting parties and the existing facts. In principle, there is no obligation to inform the notary about the economic risks of a transaction. He must, in any case, explain the risks of a contract if, due to special circumstances of the case, he has reason to assume that one of the parties is threatened with damage and that the party is not or not fully aware of this danger (BGH, NJW 1975, p. 2017; BGH, WM 1991, p. 1049). It can be assumed that the notary knows from his experience what the value of the flat really is and what the total expenditure is compared to this. For this reason, there is an obligation to provide information and a breach of this if no information is provided. This in turn triggers a claim for damages from § 19 BNotO and § 839 BGB in conjunction with Art. 34 GG. Both claims are subject to the statute of limitations according to § 852 BGB, i.e. 3 years from knowledge of the damage. In such a case, however, it is problematic that the notary does not, in principle, get to see the purchasers, as the contract is concluded before him by a trustee and the purchasers themselves are not present. He may, however, refer to the fact that the trustee, who represents the purchaser in accordance with §§ 164 ff., 278 BGB, is knowledgeable and is also obliged under the trust agreement to safeguard the interests of the investor and to inform him of the facts of which he had to inform himself beforehand.
1.7. Claims against the contributors to the prospectus
In the case of prospectus liability, a distinction is first made between prospectus liability in the narrower sense and prospectus liability in the broader sense. Prospectus liability in the narrower sense applies to the issuers of the prospectus and the persons responsible for drawing up the prospectus, the persons who stand behind the investment company or the prospectus, have special influence in the company and share responsibility, and persons who claim personal or typified trust from a kind of guarantor position which arises by virtue of their profession or is based on special expertise and who create a special basis of trust through their outwardly appearing involvement in the prospectus. It is still unclear whether, in the case of participation in builder-owner models, prospectus liability claims in the narrower sense are subject to a limitation period of 5 years analogous to § 638 BGB or 30 years according to § 195 BGB (BGH, WM 1990, p. 1276; NJW 1990, p. 2461; DB 1990, p. 1913). Prospectus liability in the broader sense applies to persons who claim personal trust, make use of a prospectus in the fulfilment of their duty to inform and thereby adopt the content of the prospectus as their own, or who create an additional basis of trust derived from a person in order to provide an additional, if not decisive, guarantee for the correctness of the information provided in the prospectus. As CIC claims, these claims are subject to a limitation period of 30 years (BGH, WM 1982, p. 554; NJW 1982, p. 1514; NJW 1994, p. 2524). The Federal Court of Justice regards as a prospectus any advertising material which serves to inform and acquire investors and which forms an essential basis for their decisions (Federal Court of Justice, WM 1980, p. 794; NJW 1980, p. 1840; DB 1980, p. 1591). This also includes so-called non-binding tax calculations of the intermediaries. These are due to § 276 para. 1 and 2 not non-binding, since according to § 276 para. 2 an exclusion of intent in advance is not possible. Prospectus liability is a declaratory liability. The prospectus must therefore meet 3 conditions: it must be complete, accurate and not misleading. If necessary, there is a duty to correct (BGH, WM 1988, p. 48; BB 1988, p. 163). The duty to provide information also extends to circumstances which, although it is not yet certain that they jeopardise the purpose pursued by the investor, make it probable (BGHZ 115, p. 214). The prospectus creator or publisher is primarily responsible for this. In its case law, however, the Federal Court of Justice (BGH) has extended the circle of responsible persons: on the one hand, to the effect that the addressees of the prospectus for companies also place their trust in those who stand behind the company, e.g. the initiators, the shareholders and the managers of the company (BGHZ 71, p. 284; 72, p. 382). On the other hand to the effect that also such persons who, because of their professional and economic position as experts, make statements in the prospectus themselves and thereby create an additional basis of trust (BGHZ 71, p. 172). This is generally not the case for banks. However, liability is also possible if the bank has not issued the prospectus but has contributed to it, even if this is not outwardly apparent. However, this still requires that the addressees of the prospectus place their trust in the bank behind it, e.g. because the issuer of the prospectus is a subsidiary of the bank. Furthermore, banks are liable in addition to the prospectus issuer but only if they themselves make statements in the prospectus. As a rule, however, banks do not meet these requirements and are therefore generally not liable under general trust law prospectus liability. The Federal Court of Justice (BGH) has assumed a bank liability from a prospectus in connection with tax-saving capital investments only if – the bank is a co-publisher of the prospectus and has not pointed out incorrect information in the prospectus to the investors (BGH, WM 1985, p. 533), – the bank does not publish the prospectus itself but brokers an investment described by it as “bank-approved” (BGH, WM 1986, p. 517). – The Federal Court of Justice (BGH) has established the principle that a bank already establishes an additional basis for trust if it has included the capital investment in its advisory programme and has brokered it, thereby giving it the appearance of seriousness (BGH NJW 1987, p. 1815). – The Federal Court of Justice (BGH) has clarified that a bank is obliged to check the correctness of information in a prospectus and to inform investors of any existing risks if it allows itself to be named in the prospectus of a builder-owner model not only as a contractual partner for the financing but also as a reference (BGH, WM 1992, p. 1269). According to previous case law, the liability of guarantors (tax advisors, auditors) can also be assumed in the case of real estate investments under the following conditions: – Assumption of personal trust or breach of a typical professional duty, – Assumption of a guarantor position through outwardly conspicuous involvement in the prospectus or in the tax, legal or economic concept, – Creation of a special additional basis of trust, e.g. by agreeing to be named in the prospectus as “expert” and issuing or reproducing corresponding statements (BGH WM 1985 p. 221; NJW 1985 p. 1020). e.g. by agreeing to be named in the prospectus as an “expert” and making or reproducing corresponding statements (BGH, WM 1985, p. 221; NJW 1985, p. 1020). The decisive factor here is whether the guarantor has limited himself exclusively to his role as advisor to the initiator or whether he is also involved in the project. However, since it is a matter of liability for declarations, a fact of reliance can only arise to the extent that a declaration has been made in the prospectus or other sales documents (BGH, NJW 1990, p. 2461).
2. organisational liability of the developer due to structural superiority
It would also be conceivable that the entire complex of contracts is ineffective from the point of view of structural superiority. The BVerfG has decided in a decision on the effectiveness of a guarantee contract in the case of a guarantee by relatives that the private autonomy of Art. 2 para. 1 GG is limited if one of the contracting parties has such a strong preponderance that it can in fact unilaterally determine the content of the contract. If a case exists in which the structural superiority of one party to the contract is so great and the consequences of the contract are unusually burdensome for the other party, a correction must be possible on the basis of the principle of private autonomy and the principle of the welfare state (BVerfG, NJW 1994, p. 36 ff.). A comparison of the situations must be made here. Also, the investors in a tax saving scheme are normally inexperienced in business and are unable to see the full extent of the contracts they have entered into. The overall package of contracts, the trust agreement, the purchase agreement and the loan agreement, none of which was individually negotiated and some of which the parties were unaware of before the trustee concluded them, was so overpowering that it was possible for the contracting parties to unilaterally determine the content of the contract. The immorality of the contracts already results from this. The decisive connecting factor here is that the investor must leave the conclusion of all contracts to a trustee, the contracts are brought to the trustee by the initiator or the distributor, and if instructions are not obtained and notices are not given, the trustee of the investor represents himself at least de facto as being in the camp of the seller and the distributor as well as the financier. The structural superiority of the parties to the agreement results from the link between them. Behind the agent of the apartment is the bank in one case and the developer in the other. The existence of such a link is shown by the fact that not inconsiderable commissions are paid in the internal relationship between the parties. If, according to the case law of the Federal Court of Justice (BGH), the bank is already liable for the conduct of the intermediary, then the developer whose apartments are sold by the intermediary is all the more liable. The developer also has superior expertise over the client due to the overall package of contracts over which the client has no control. In addition, the customer is kept deliberately ignorant by the way in which the contracts are sold and handled; he cannot exert any influence because of the involvement of a trustee. Through the chance acquaintance of owners, it became known that the sales concept is carried out in a planned and systematic manner. This speaks for superior expertise and for a restriction of the investor’s private autonomy, which is why the investor must be protected. The structural superiority of the contractual partners corresponds to the attribution to the initiators and financiers as well as sales and brokerage companies pursuant to the German Banking Act. §§ 166, 166 analogue as well as 278 BGB. From the above constitutional jurisprudence is derived directly what the higher courts have commonly judged on the collision of duties and the imputation of misconduct: Commonly overlooked by the parties in the conception is the consistent imputation of misconduct by §§ 276, 278 BGB. The conduct of the intermediary is attributed both to the financing bank (e.g. when providing the application forms) and to the sales company and the intermediary company behind it (Stuttgart Higher Regional Court, judgment of 19 December 1995 – 12 U 150/95 – with further references). This established case law assumes liability under CIC for, in particular, creating the false impression of profitable or at least loss-free investment. In principle, any untruthful misadvice is attributable. The investment intermediary is liable if he presents himself as a neutral and independent investment advisor and omits to inform the investor that he also receives other internal commission (e.g. from the distributor) in addition to the investor’s commission. This is because the investor must be informed if there is an economic, capital or personal link with the developer or initiator. This justifies the OLG Stuttgart (among other things) with the fact that the danger for the investor exists that he does not receive correct or complete information over all circumstances substantial for its investment decision. In this sense the OLG Düsseldorf decided that the lawyer as trustee would have to disclose due to collision if he was at the same time managing director of the operating company of a time-sharing model (NJW 1997, p. 529 f.). It has also been decided for the real estate agent that he loses his commission due to concealed double activity if he does not disclose that he receives a commission from both sides: This is justified with the reference to the increase of the contract costs and the diminution of the chance to reach an economically optimal contract conclusion (OLG Naumburg, NJW-RR 1996, p. 1082 f. with further references). It should only be pointed out in passing that the pecuniary loss liability insurance is exempt from payment in the event of a knowing breach of duty: According to a decision of the OLG Hamm (AnwBl. 1996, p. 237) the unchecked disposal of trust assets is sufficient. This freely after the motto that also for professionals simple ignorance does not protect against punishment. In the aforementioned decision, the court points out that it is implausible for a professional (here: notary) not to be aware of his obligations arising from a fiduciary relationship.
III. expert valuation and damage calculation
Expert opinions help to clarify two questions: – Was the purchase price of the property immorally inflated? – What damages have been incurred by the purchaser of the property?
1. the immorality test
An answer to the question of immorality is given by the comparison between the purchase price of the property and its value at the time of the conclusion of the contract. The Valuation Ordinance (WertV) distinguishes between three methods for determining market value: the comparative value method (§§ 13, 14 WertV), the capitalised earnings value method (§§ 15 – 20 WertV) and the asset value method (§§ 21 – 25 WertV). With regard to the choice between these procedures, § 7 para. 2 WertV that the procedure is to be chosen according to the nature of the object, taking into account the customs existing in the ordinary course of business and the other circumstances of the individual case. The choice must be justified. The aim of the valuation is to make an accurate statement about the market value of the property. The market value provides information on the price at which the property could have been sold on the market on the valuation date. Accordingly, the method of determining the value which most accurately reflects this price must be used.
1.1. The comparative value method
The application of the comparative value method3 requires that properties in the same location and with the same features have changed hands in the recent past. The average price determined from these sales represents the comparative value. It corresponds to an average market price. Provided that the dispersion of the observed purchase prices around their mean value is kept within narrow limits, the comparative value thus comes quite close to the objective of accurately capturing the current market price. However, due to differences in development, developed properties usually lack the all-important comparability (exception: identical condominiums in a large residential complex).4 For this reason, the comparative value method is mainly used to determine the market value of undeveloped land. This application does not necessarily presuppose that the property to be investigated is actually undeveloped, but rather that the building on it is separated from its subsoil by means of arithmetical tricks; the land value and the building value are thus determined separately. In order to obtain meaningful results, the rule of thumb is that at least 10 property sales should be used for comparison.
1.2. The capitalised earnings method
The capitalised earnings value method, as defined by the Valuation Ordinance, distorts the actual character of this method, which is to be seen in a capital or cash value calculation. The gross income (§ 17 WertV) comprises all annual income to be achieved on a sustainable basis under proper management and permissible use. The management costs (§ 18 WertV) are to be deducted from the gross income: management costs, operating costs, maintenance costs and loss of rental income risk. The resulting periodic net income represents the arithmetical basis for the determination of the capitalised earnings value. Pursuant to § 16 para. 2 WertV by the amount which is to be designated as the imputed interest on the land value. The relevant value of the undeveloped land is obtained by means of the comparative value method. The annual interest income of the land is obtained by multiplying the land value by the property interest rate, the rate at which the market value of real estate is usually subject to interest (§ 11 para. 1 WertV). This leaves a net income that is exclusively attributable to the buildings on the property. This net income is multiplied by a so-called multiplier (Annex to § 16 para. 3 WertV), which expresses on the one hand the capitalisation of future net income and on the other hand the formation of a renewal reserve for the consumption of value.5 The multipliers are broken down according to the remaining useful life of the buildings and the debit and credit interest rates on which the calculation is based. The net yields multiplied in this way provide information on the imputed income value of the building structures on the property. If the land value is added to the income value of the buildings, the result is the income value of the entire property. The capitalized earnings value describes the present value of all future earnings. It therefore specifies the maximum amount of money an investor may spend on the purchase of the property in order to realise a normal market return on it. The market value of a property is at least as high as its income value. In this respect, the capitalised earnings value only represents a lower price limit. On the one hand, resourceful investors may envisage a structural redesign of the property that will generate higher than current yields,6 on the other hand, outspoken enthusiasts of certain properties may be willing to spend more than the income value to acquire them. The number of cases with such misjudgements will be rather small. As a rule, the capitalised earnings value method therefore leads to valuations in line with the market. From a legal point of view, therefore, it may be argued that the party claiming a higher market value of the property bears the burden of proving that an income capitalisation calculation is lower than the price obtainable on the market. In this respect, the statements of the Federal Court of Justice7 that an application of the capitalised earnings value method is out of the question if the purchase price appears to be favourable compared with the capitalised earnings value, but the acquisition of the property as an investment is not interesting because a letting is not possible or only possible at a lower rent or a temporary vacancy is to be feared, are incorrect. All these critical points do not constitute objections to the capitalised earnings value method, but rather indicate that there was a misconception as to the mathematical premises on which the method had to be based. Due account shall be taken of the fact of difficult lettability or other onerous conditions when determining the capitalised value.
1.3. The asset value method
Similar to the capitalised earnings value, the land value and the value of the buildings are also determined separately in the asset value method (§ 21 WertV). As a rule, the land value is to be determined according to the comparative value method (§ 21 para. 2 Wert V). The valuation of the buildings is to be based on the usual production costs per unit of space or area (§ 22 WertV). These normal production costs are to be multiplied by the actual dimensions of the object. The normal production costs also include ancillary construction costs such as planning and implementation costs, as well as costs for official inspections and approvals and the costs for the financing required in direct connection with the construction. Insofar as necessary, the normal production costs are to be calculated back to the valuation date using construction price index series (§ 22 Para. 3 Wert V). The residual value of building structures is generally calculated according to the ratio of the remaining useful life to the usual total useful life (§ 23 Value V). The reduction in value for construction defects and damage is to be made according to experience (§ 24 Value V). The asset value method is not very suitable for determining the market value. It corresponds to the calculation of an automobile manufacturer who sets the selling price of the vehicle according to the cost of the installed parts. However, no one guarantees him that this price can be achieved on the market. The market price is determined by the willingness to pay of the demanders. This takes into account not only the amenities of the property, but also profit-making opportunities, issues of functionality, location and taste, etc. are taken into account.8 The asset value method can only be used as a basis for determining the value of properties for which, on the one hand, there is no functioning market at all due to low demand, thus making it impossible to determine a price, and, on the other hand, for which the capitalised earnings method cannot be used, e.g. in the case of public buildings (town halls, swimming pools). Then the value can be determined approximately from the cost side. The asset value method proves to be unsuitable for determining fair market prices for so-called purchaser models. In addition to flawed valuation, it gives project operators the wrong incentives to behave. The interest of the clientele of project developers is directed towards achieving the highest possible after-tax return through the acquisition of the property with relative security. Accordingly, the acquirers are concerned with the after-tax income value of the property. From the investors’ point of view, the project developer should let his planning be guided by this objective. Accordingly, the appropriate calculus for an unconscionability test would be to compare the after-tax capitalized earnings value to the purchase price paid. However, the legal principles of valuation do not permit the valuation of a property at its after-tax income value. For the question of the immorality test in the case of a tax-saving property, these principles may be justified to the extent that the purchaser should not be relieved of a certain responsibility for checking realisable tax advantages. Under the current rules of valuation, the calculation of comparing the purchase price paid with the income value of the property therefore proves to be a reasonable solution. If the control of immorality consisted in comparing the purchase price paid with the real value, there would be a danger that project developers – anticipating this type of control procedure – would take less care to consider suitable locations and development possibilities. A too low income value of the property would not lead to an immorality of the purchase contract as long as the purchase price and the asset value are in a reasonable relation. Instead, the project developer would turn his attention more to the asset value than to the income value of the property, although the clientele would expect him to place the income value at the centre of his planning.
The results can be summarised as follows: The capitalised earnings value method proves to be the most suitable method for determining the market value of a property. The application of the capitalised earnings value method in accordance with the standards presupposes that the land value is determined using the comparative value method and the value of the buildings using their capitalised earnings value. The immorality of the contract of sale leads to its invalidity. Therefore, the contracting parties are obliged to surrender the benefits received in accordance with the provisions of the law on enrichment. According to § 818 BGB, the obligation to surrender also extends to the benefits derived. Accordingly, the seller must refund the purchase price received in return for the retransfer of the property. He will have regularly derived benefits from the purchase price received without legal grounds, e.g. if he invested it at interest or if he used it to redeem an interest-bearing loan and thus saved himself further interest payments.
2. the compensation for damage
With the purchase of the property, the aggrieved party makes an investment decision which ties up the investment capital in the long term. Violations of the duty to inform on the part of persons or organisations of which the aggrieved party availed himself in the run-up to the conclusion of the contract make them liable to pay damages. As a rule, the obligation to pay damages aims at the compensation of the damage caused by reliance, i.e. the assessment of the damage is based on the comparison with the situation that would have occurred if the contract had not been concluded (status quo ex ante). Compensation for the loss caused by reliance does not, however, preclude a comparison being made in the calculation of the loss with an alternative possible substitute investment, the income from which the injured party would have lost because he opted for the real estate investment. As a rule, however, a comparison with the economic result that the injured party would have achieved if all the promises made to him before the conclusion of the contract had been kept is excluded. Only in exceptional cases, i.e. if the non-observance of the duty of disclosure would have led to the conclusion of the contract with the content sought by the aggrieved party, the claim extends to the interest in performance.10 If the aggrieved party adheres to the contract, he may demand an adjustment of the contract. The adjustment of the contract, however, requires a disturbed relationship between performance and consideration or additional expenses incurred.11 Cases of real estate acquisition in which, if the breach of duty had not occurred, the contract would have been concluded with the content sought by the injured party or the injured party adheres to the contract are the exceptions. Thus, as a rule, the claim for damages aims at the restoration of the status quo ex ante. In the following it will therefore be explained how the claim for compensation is to be assessed.
2.1. Breaches of duty attributable to the seller
If the seller or a person whose conduct is attributable to the seller has culpably breached an obligation, the buyer will regularly demand the rescission of the contract. In this way it is usually – but not always – excluded that the breach of duty has an effect in the future. The contract ends when it is terminated and the injured party can claim the damages incurred up to that point. a) As a rule, parts of the real estate acquisition are financed with equity, while other parts are debt-financed. For the calculation of damages, the question arises as to which of the payments made are actually to be considered as damages. For example, do the notary’s fees and court costs paid out of the loan granted constitute items of damage? Can the interest and repayment instalments on the loan be included in the calculation? If both loan-financed costs and benefit rates are included in the loss calculation, there is a risk of double counting. Therefore, it is important to precisely delimit the damage positions. A useful criterion for the accrual is to include in the calculation of damages all those payments that were made out of equity. Credit-financed expenses therefore do not constitute loss items. The purchase price, notary and court fees etc. only become relevant for damages if they were paid out of equity. On the other hand, the monthly interest and redemption payments made on the loan are relevant to the damage, as is the transfer to redeem the loan or any early repayment penalty. On the income side, a distinction must also be made as to whether the amounts received (e.g. rent payments or tax benefits) directly increased equity or were used to repay the loan. Only in the former case do these payments reduce the amount of the loss. b) The expenses that the aggrieved party financed from equity capital were withdrawn by the aggrieved party from another form of investment. According to § 252 sentence 1 BGB the damage to be compensated also includes the loss of profit. Thus, in addition to the primary damage costs, the disappointed real estate purchaser can also demand compensation for the lost income that he would have realized if he had not invested the money spent in the real estate purchase, but rather in another form of investment. If the alternative form of investment was, for example, a savings investment that could be terminated at any time, the amounts paid out must be reimbursed at the interest rate on savings from the time they were withdrawn from equity. More complicated to assess, but typical of equity financing, are those cases in which the purchaser refrained from making an alternative long-term investment because of his real estate commitment. Normally, the alternative investment would have outlasted the date of the injury calculation, so that some of the effects of the property acquisition would still be felt into the future. If the alternative investment was a security investment, it can generally be assumed that the security intended for purchase at the time is also currently obtainable at the current price for its remaining term. The injured party is therefore to be compensated for the current market value of the security. On the other hand, those costs must be excluded from the calculation of damages which the injured party envisaged for the investment in securities at the time of his real estate investment. In addition, the unrealised periodic interest income of the security must be entered. The following schematized cash flow outlines the components of the loss calculation: The variables characterize in detail: I0, W0: The equity investment in the real estate commitment or, alternatively, in the securities investment (I0, W0 <0) at time t = O. Since the same investment volumes are to be assumed for the loss calculation, the balance of both variables is zero. I1: A possible further investment (I1 <0) oder eine erste Einnahme (I1> O) from the real estate exposure. W1, …, W6: The periodic interest income of the security. I3, I5 Further income from the property, but also possible interest and repayment obligations from a loan agreement. W7: The cost of purchasing the security at the current market price at the time the loss is calculated. The damage amounts thus accruing at the different points in time t0 – t7 are to be referred to a common point in time, the point in time of the damage calculation. Once again, a suitable reinvestment premise must be selected for this purpose. A further complication in the calculation of damages arises if the alternative investment neither terminates at the time of the reversal of the real estate exposure nor is procurable for its remaining term. In this case, the prematurely terminated real estate investment and the alternative investment can only be brought to a common temporal denominator by assuming that the amounts accruing to the injured party at the time of the settlement of the claim flow into a capital market investment whose term corresponds exactly to that of the alternative investment. The cash flow is thus extended into the future. The individual values of the differential investment must therefore be discounted in part and interest in part.
2.2. Breaches of duty which are not attributable to the seller
In cases where the breach of duty is not attributable to the seller, the aggrieved party cannot demand that the contract for the sale of the property be rescinded. Unless he succeeds in selling the property, he remains bound by it. (a) If the sale is successful, the calculation of damages may be carried out as in 2.1. as described above. However, caution is advised. With a hastily staged distress sale to an injured party possibly for the damage occurred jointly responsible (§ 254 paragraph 1 BGB). b) If the injured party remains tied to the property, the calculation of damages would actually be as under 2.1. b) to continue into the future as described. In this context, however, it proves to be problematic that, in contrast to typical capital market investments, neither the future payment stream that the property will trigger nor the end date for the commitment are certain. Therefore, it seems more appropriate to make a market value determination at the time of the damage calculation. In this case, the injured party receives as compensation the present value of all past damages (including lost profits from alternative investments) minus the market value of the property. Because the injured party would like to dispose of the property, the damages must be justifiably supplemented by those additional costs which the injured party would incur if he sold the property.
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About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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