Federal Court of Justice, 04/04/2014, Ref.: V ZR 275/12
The typical contractual obligations of the seller include the obligation to provide the buyer with the item free of material defects and defects of title. If the item is nevertheless defective, the buyer is entitled to warranty rights after the transfer of risk.
The buyer can then demand compensation for the costs of remedying the defect, among other things. Although the amount of compensation is generally unlimited, the seller can argue that the costs of remedying the defect are disproportionately high.
At this point, the question arises as to when this is the case and which value should be used to determine disproportionality. This question is particularly relevant in the case of property purchase agreements, as the objective market value and the actual purchase price of a property are often not identical.
In the above-mentioned judgement, the Federal Court of Justice had to decide whether the damages of the buyer of a property are to be limited and which value of the property is decisive.
Facts of the CaseThe plaintiff purchased a plot of land with a block of flats from the two defendants for a purchase price of € 260,000. After the property was handed over, the plaintiff discovered that the building was infested with dry rot.
The Regional Court then ruled in a basic judgement that the defendant sellers were obliged to pay damages on the merits. In the subsequent amount proceedings, the defendants were ordered to pay damages in the amount of € 89,129.86 and € 45,000 as compensation for the remaining mercantile reduction in value after the sponge remediation. In addition, it was determined that the defendants are also obliged to compensate for the further damage caused by the dry rot. The judgements are legally binding.
Following the implementation of further remediation measures, the plaintiff now demanded compensation from the defendants for further partial damages in the amount of € 499,728.86 as well as out-of-court legal fees in the amount of € 5,371.66.
Their claim was successful in the lower courts; in the opinion of the Court of Appeal, the defendant's obligation to pay compensation was not limited. When examining whether the costs of remedying the defects were disproportionate, it was not the purchase price but the market value of the defect-free property that had to be taken into account. This would be (at least) €600,000, whereas the payments to which the defendants had been ordered to date totalled €639,230.38 and were therefore only approx. 6% above the market value. The defendants lodged an appeal against this judgement with the Federal Court of Justice.
Federal Court of Justice: The BGH overturned the judgement of the Court of Appeal and referred the case back to the Court of Appeal for a new hearing and decision.
According to the BGH, the buyer can in principle demand compensation from the seller for the costs required to rectify a defect.
However, if the costs required to remedy the defect are disproportionate, the claim for damages is limited to the reduced value of the purchased item due to the defect in order to protect the seller.
The assumption of the disproportionality of the rectification of defects or the costs required for this requires a comprehensive assessment of all circumstances of the individual case.
In the case of property purchase contracts, it can be assumed as a first point of reference that the costs of remedying defects are disproportionate if they exceed either the market value of the property in a defect-free condition or 200% of the defect-related reduced value.
Based on the findings of the Court of Appeal, according to which the current value of the entire property in the state of infestation with dry rot was €507,202 and that without dry rot infestation was (at least) €600,000, disproportionality of the costs of remedying the defects could seriously be considered. However, the previous findings of the court of appeal were not sufficient.
When assessing the disproportionality of the costs of remedying the defect, the buyer's commencement of remedying the defect should be taken into account. If it only transpires in retrospect that the costs are higher than expected, this only precludes an obligation to pay compensation if an economically minded buyer would not or would not have continued the work, even taking into account the costs already incurred. This forecasting risk is borne by the seller.
The appeal judgement should therefore have been set aside and the case referred back to the Court of Appeal for a new hearing - also to rectify further errors of law in the determination of the costs of remedying defects that are in principle recoverable.
Source: Federal Court of Justice
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