New BGH judgements: Help for defrauded investors in real estate funds and junk real estate

Numerous tax saving models of the 90’s and also 80’s are cause of judicial disputes.

The investors were promised at that time, a very good capital investment, which should make high profit possible in some years by a resale. Tax savings and rental income should nearly cover the cost of interest and principal, and the monthly burden would be low. All formalities would be taken care of by the provider, own assets would not be necessary, there would be a rental guarantee etc. The problem is that usually a property or a share in a real estate fund company was purchased, which was often financed by borrowing.

In the meantime, both the agent involved in the transaction, the guarantor of the lease, the seller and the trustee, have become insolvent. Reversal in real estate funds. Ultimately, therefore, the question is to what extent the bank is liable for the non-realisation of the expectations associated with the purchase of a real estate investment. In principle, the loan agreement and the financed transaction must be considered separately.

The bank bears the credit default risk, the bank customer bears the credit utilisation risk. However, this strict separation does not apply if the loan agreement and the fund contribution are so closely intertwined in economic terms that they constitute related transactions within the meaning of Section 9 of the Consumer Credit Act (VerbKG). In the meantime, there is a supreme court ruling on the conditions under which investors can reverse the transaction vis-à-vis the bank.

The latest decision of the XI Senate (“Banksenat”) of the Federal Court of Justice (BGH) of 25.04.2006 sets out on the basis of several groups of cases which claims can be asserted against trustees, intermediaries etc. and ultimately against the bank. Reversal with scrap real estates Also adjoining owners of the so-called “scrap real estates” can breathe a sigh of relief.

On 16.05.2006, the XI. Senate of the Federal Court of Justice (BGH) changed its previous case law to the effect that it affirmed a liability of the financing bank. In cases of institutionalized cooperation between the lending bank and the seller or distributor of a financed object, investors can successfully invoke a concrete knowledge advantage of the financing bank that triggers the duty of disclosure under facilitated conditions.

If the intermediary, seller or brokerage initiator has fraudulently misled the investor by providing incorrect information, then this fraudulent misrepresentation is attributable to the financing bank. Insofar as the intermediary, seller or and the financing bank cooperate in an institutionalised manner, in particular in the form of a joint venture. if the financing of the capital investment was also offered by the seller or intermediary, and the incorrectness of the information provided by the seller etc. is evident under the circumstances of the case, the bank is liable.

In this case, the bank can no longer rely on your “ignorance” of the fraudulent misrepresentation. Result for “cheated” investors: Who puts its money into real estates and/or on the grey capital market, should consider whether it uses its lawyer only later as “repair shop” – or better before conclusion of appropriate contracts for a fraction of the costs the advice of experts catches up. Notarial contracts offer no protection against overreaching through worthless real estate and fund investments. Care should also be taken when using trustees – it is not uncommon for trust agreements to be null and void. Prior consultation protects against saying “Mr. Client, your money isn’t gone, it’s just someone else’s”.

 

by Dr. Johannes Fiala

by courtesy of

www.competence-site.de (published in Competence-site, 2006-09)

and

www.KOLLOSS.de (published in Steuern + Recht 4/2006, page 12.)

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

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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