Relevance of duties of disclosure in real estate transactions


Mark Krenn, Partner

Marko Vladic, Senior Associate

The recent decision of the German Federal Court of Justice (Bundesgerichtshof) of 15 September 2023 (in case V ZR 77/22) on the pre-contractual duty of sellers to disclose information in real estate transactions is making waves not only in Germany, but also across the border in Austria.

According to the decision, the seller is subject to a separate duty of disclosure, even if the buyer was given the opportunity to access and view the information in a data room. This is the case in particular if the information in question relates to facts that may cause considerable economic damage to the buyer and if these facts are not immediately apparent when the data provided is being reviewed. In such cases, the buyer can expect as a matter of principle that the seller will draw its attention to this fact or set of circumstances, insofar as the information is known to the seller and therefore can be easily communicated to the buyer.

In its ruling, the Court adopted a landmark decision on the pre-contractual duty of sellers to disclose information in real estate transactions, which potentially could have implications for real estate transactions in Austria, too.

Facts of the case

This specific case revolved around the sale of several commercial units in a building complex for a total purchase price of approximately EUR 1.5 million in 2019. The seller gave a contractual undertaking that it was unaware of any extraordinary costs incurred in the current financial year or to be incurred in future and that no further special cost allocations had been decided upon by the owners' association.

During negotiations for the purchase agreement between the buyer's and seller's representatives, a virtual data room was used for important documents relating to the object of purchase. Signing of the purchase agreement at the notary's office had already been scheduled for 10 am on Monday 25 March 2019. On Friday 22 March 2019, three calendar days before the purchase agreement was due to be signed, the seller uploaded a substantial collection of resolutions to the data room, including one resolution from an owners' meeting back in 2016. At the owners' meeting in question, the decision was taken to make a claim against the (then) majority owner out of court and, if necessary, in court for payment of EUR 50 million to carry out extensive structural changes to the building complex. Legal proceedings concluded in January 2020 with a settlement that provided for the collection of funds allocated to cover special costs. The buyer – and current owner – of the commercial property was required to contribute some of the funds allocated to cover these special costs.

The current buyer and claimant challenged the purchase agreement on the grounds of fraudulent misrepresentation and withdrew from the purchase agreement as a precautionary measure, arguing it had been insufficiently informed of a possible special cost allocation of up to EUR 50 million, to which it would have to contribute as the new owner. It claimed that the minutes of the owners' meeting from November 2016 had been tacitly inserted into the data room and kind of "planted". The seller argued that the buyer had had the opportunity to obtain information and ask questions, of which it had failed to make sufficient use. Furthermore, a special cost allocation had not been agreed at the time of the conclusion of the contract.

Ruling of the German Federal Court of Justice and its practical implications

In summary, the Court concluded that the seller should have informed the buyer separately of the (not insignificant) obligation to bear the costs as this was undoubtedly of considerable importance to the buyer.

The Court emphasized that merely making information available in the data room is not enough to discharge the seller's duty of disclosure. In particular, the seller must explicitly draw attention to circumstances that could cause significant economic damage and that are important when making a purchase decision, even if the information is available in the data room.

This case related to a possible special cost allocation of up to EUR 50 million, which could result in the buyer sustaining considerable economic damage. The Court ruled that the seller (without being asked to do so) should have explicitly informed the buyer of the scope of the costs, as this fact was of crucial importance to the buyer. The mere existence of a data room and the performance of due diligence do not necessarily mean the buyer is aware of such facts or circumstances. The scope and structure of the data room, the naming of the documents and their systematic arrangement are factors that are equally as important as a notification that documents have been subsequently added and the time available for their review.

The seller's duty of disclosure is not fulfilled merely by uploading the minutes of the owners' meeting to the data room three days prior to notarization. The buyer had no reason to check the data room for new documents shortly before notarization, unless it had been expressly informed of this. The Court stressed that even in the absence of an agreed deadline for adding documents to the data room, the provision of information at such short notice was not to be expected. In addition, the fact or circumstance requiring disclosure was not clearly evident from the documents uploaded, as the collection contained all resolutions going back more than 10 years.

Further, the seller's duty of disclosure should not be regarded as being met simply because the buyer could have found references to pending construction measures in the data room. During the Q&A process, the buyer was given – at the very least – an incomplete answer by the seller in relation to the question of the expected costs for these construction measures. According to the Court, even if the buyer had asked additional (follow-up) questions, this would have led to contributory negligence on the part of the buyer at most, but not to the seller fulfilling its duty of disclosure.

The decision of the Court underlines just how important it is for sellers to check carefully which information is of material importance and inform the buyer of these facts or circumstances (in a timely manner), even if the information is available in the data room.

Significance for Austria:

The aforementioned decision of the German Federal Court of Justice has parallels with the pre-contractual duties of disclosure in Austria. Duties of protection and care on the one hand and duties of disclosure on the other can be derived from the pre-contractual principle of mutual consideration. If these pre-contractual obligations are violated, a claim can be made for any resulting damage or loss sustained.

The mere posting of information and documents in a virtual data room is therefore unlikely to be sufficient to fulfil the duty of disclosure in Austria and therefore does not exempt the seller from liability. If information crucial for the buyer's purchase decision is made available in the data room, the seller should take steps to ensure that the data room is both well organised and factually and technically structured. In the case of information that could have a significant economic impact, the seller should make explicit reference to this in a timely manner.

The seller in a real estate transaction would therefore be well advised to make explicit mention of important information that could be of great significance to the buyer and to ensure that this information is also included in the contract documents.