Prevention of reasonable economic exploitation: Why does a termination for economic reasons occur?

Nowadays, the topics of the real estate industry and the rights of tenants and landlords are more relevant than ever. Therefore, in this article, we would like to shed light on the topic of termination of tenancy for economic exploitation. Let us take a deep dive into this fascinating topic together and learn how it is applied in practice.

What is a termination for the purpose of commercial exploitation?

First, we will dive into the definition of the termination for commercial exploitation. From a legal perspective, this form of termination is the landlord's right to end the tenancy if they see an appropriate economic utilization of the affected property being prevented by it. This is a special type of termination that allows the landlord to end the tenancy in order to prevent serious financial losses or to enable a better use of the property.

The law formulates the possibility of a termination for the purpose of economic exploitation in Section 573, Paragraph 2, No. 3 of the German Civil Code (BGB) with the following words:
„A legitimate interest of the landlord in terminating the tenancy exists, in particular, if the landlord is prevented from making appropriate economic use of the property by the continuation of the tenancy and would thereby suffer considerable disadvantages.“

In simpler terms, this means that it is not enough for an impairment or hindrance of economic exploitation if the current use of the property merely generates slightly less money than another possible use. Rather, the use of the property must be such that it completely blocks the optimal economic use of the property, either due to facts or financial aspects.

Impaired economic exploitation – a brief overview

In practice, impaired economic utilization could mean that the landlord, if the tenancy continues, would suffer substantial financial losses—whether through inadequate rental income or a missed sales opportunity. The goal here is to maintain a balance between the protection of the tenant and the landlord so that neither side is disproportionately disadvantaged.

Termination for economic utilization: What should be fulfilled?

For a legally valid termination due to intent to sell or utilize the property, four important conditions must be observed by the landlord:

• Change of use of the property: The first point refers to the owner's intention to use the house or apartment for a different purpose. Examples of such changes include the sale of the property, extensive renovation, or even the demolition of the entire building to construct something new.
• The planned new use is appropriate: The intended change of use of a property must be reasonable and based on comprehensible grounds. The adjustment should not be arbitrary or impractical and, in most cases, should also comply with applicable local laws and regulations.
• The lease agreement prevents the new use: The existing lease must not hinder the proposed new use of the property. This could be, for example, a clause in the contract that prohibits the sale of the property or includes restrictions on renovations.
• Financial disadvantages for the owner due to prevention of use: The final point refers to the financial losses incurred by the owner due to the blockade of the planned use by the rental agreement. This could be the case, for example, if potential buyers are only interested in a vacant property, and the presence of tenants makes the sale of the property extremely difficult and prevents it.

Note: If even one of these four conditions is not met, the termination for commercial exploitation will not hold up and the termination of the lease becomes invalid. It is therefore very important that all aspects are considered before issuing a termination for commercial exploitation.

Termination for economic exploitation: What factors can trigger it?

The primary motivation behind termination for economic exploitation is to use a property in a more economical way. There are numerous reasons that can justify such a termination. Some of these are:

• Sale of the property (either a house or an apartment)
• Renovation or repair work in the building
• Removal of the building from the property (known as a demolition notice)

It is essential to understand that the main criterion for a termination for economic exploitation is that the landlord suffers significant financial disadvantages due to the tenancy that prove to be unreasonable. Alternatively, it could also be that the tenancy actually prevents the economic utilization of the building (for this, see also the example judgment of the Potsdam Regional Court, case reference: 4 S 163/11).

Here is a practical example:
A landlord informs his tenants that he must sell the building due to a family inheritance dispute. He claims that continuing to rent out the property would reduce the sale price. However, a termination for the purpose of selling the property would only be justified if the achievable sale price were so low that the sale would no longer make economic sense. A minor reduction in the sale price (such as 10 percent) would not justify such a termination.

In many cases, even major renovation work or comprehensive modernizations do not necessarily justify a termination for economic exploitation by the landlord. The reason for this is that such work is considered part of the landlord's maintenance obligation and must be tolerated by the tenants. However, if the landlord can prove that the tenants must move out of their apartments in order to carry out this work, a termination for economic exploitation based on comprehensive renovation work would be justified.

With regard to the demolition notice, it should be noted that demolition without subsequent reconstruction does not constitute economic utilization (according to a ruling by the Federal Court of Justice, Case No.: VIII ZR 188/03). In such cases, landlords should be able to credibly demonstrate that they intend to pursue an economic use of the property following demolition, such as the construction of a new building.

Statutory deadlines for termination due to intent to sell or utilize property

A termination for redevelopment must be given within certain time periods, which are referred to as regular notice periods. The length of these periods is specified in Section 573c(1) of the German Civil Code (BGB). Depending on how long the tenancy has been in effect, the notice periods are as follows:

• Up to 5 years: In this case, the deadline is 3 months
• More than 5 years: In this case, the period is extended to 6 months
• More than 8 years: If the lease term exceeds 8 years, the landlord must give 9 months' notice

The termination must be submitted in writing and take effect no later than the third working day of a month in order to be effective at the end of the month after next.

Strictly regulated: The rights of tenants in the event of termination for realization of economic value

The law protects tenants against terminations for the purpose of realization that are unjustified and serve solely the financial benefit of the landlord. A termination for the purpose of realization must therefore meet certain requirements in order to be valid.

Tenant rights

If you receive a termination for economic exploitation as a tenant, you should carefully examine it and ensure that there is a detailed justification that justifies the termination. In case of uncertainties, you can consult a lawyer to help you review the termination. A residential legal expenses insurance policy will financially support you in finding competent legal counsel.

If the landlord plans to demolish the building, they are obligated to explain why they consider the building to be beyond repair and what structural measures are planned instead (see Federal Court of Justice ruling, file number: VIII ZR 155/10). If this justification is insufficient or missing entirely, the termination is invalid. In the event of a move-out, you as the tenant are entitled to compensation.

What landlords need to watch out for

It is important for the landlord to fulfill all requirements for a termination for economic exploitation in order to avoid legal disputes and ensure a fair relationship with the tenants. Landlords should therefore ensure that the termination notice contains a detailed and comprehensible justification and that they meet all statutory requirements. In case of uncertainty, landlords can also seek legal advice to ensure that their notice of termination is legally valid.