Processing fees for bank loans paid by entrepreneurs are also invalid!
(Federal Court of Justice, judgments of 4 July 2017 - XI ZR 562/15, XI ZR 233/16)
On 4 July 2017, the Federal Court of Justice (Bundesgerichtshof - BGH) ruled invalid the general terms and conditions (Allgemeine Geschäftsbedingungen - AGB) pre-formulated by the defendant banks in loan agreements concluded between credit institutions and entrepreneurs (Unternehmer) for processing fees (Bearbeitungsgebühren), that did not depend on the term period.
I. Main facts of the judgments
In both court proceedings, the borrowers (a real estate project developer and a real estate investor) were to be regarded as entrepreneurs within the meaning of Sec. 14 of the German Civil Code (Bürgerliches Gesetzbuch – BGB). The loan agreements concluded with the banks contained a form clause which stipulated that the borrower had to pay a processing charge (“Bearbeitungsentgelt”) or a processing fee (“Bearbeitungsgebühr”) irrespective of the term period.
Both borrowers had sued the banks for repayment of this charge because they deemed the clauses invalid. While the action in proceedings XI ZR 562/15 was successful in the lower courts (OLG Celle / LG Hanover), the action in proceedings XI ZR 233/16 was rejected by the lower courts (LG Hamburg / OLG Hamburg).
II. Main reasons for the decisions
The full reasoning for the decisions is not yet available. From the press release of the Federal Court of Justice (FCJ) of 4 July 2017, however, the supporting reasons can be deduced.
In the opinion of the FCJ, the clauses under attack constitute so-called price side-agreements (“Preisnebenabreden”), which do not withstand review. The agreement regarding the processing fee, irrespective of the term period, is incompatible with the basic principles of the law, which is why, in case of doubt, an unreasonable disadvantage to the other contracting party is to be assumed.
There are also no grounds for refusing this legal presumption regarding the entrepreneur loan agreements in question. In particular, the appropriateness of a processing fee, not based on the term period, could not be justified on the basis of any tax advantages that might result for the entrepreneurial borrower.
The contested clauses could also not be upheld taking into account the practices and customs that apply in business dealings.
Furthermore, the reasonableness of the clauses could not be justified by the specifics of business dealings. The fact that an entrepreneur might possibly be able to estimate the total burden resulting from different elements of the fees, is not decisive for the reasonableness of the clause as applied to entrepreneurs. This is because the required review of the reasonableness of contents should generally protect against clauses by which the dispositive statutory law, aimed at the balancing of mutual interests, is overridden due to the power of one party to unilaterally set the terms of a clause. There was no evidence that credit institutions could not make use of such unilateral power against entrepreneurs.
With regard to the statute of limitations defenses raised in both proceedings, the FCJ referred to the principles which it had established in its case-law on consumer loans in 2014 and declared them applicable to loans extended to entrepreneurs. In the case of entrepreneurs, after 2011, the levying of a complaint for repayment of processing fees was also reasonable.
III. Background to the new case law
With these decisions, the FCJ has extended its case-law of 2014, which held that processing fees set by banks in general terms and conditions to loan agreements were invalid for consumers, to cover commercial borrowers. At that time, the court ruled that the shifting of costs to customers incurred for activities of the drafter of the clause (i.e. the bank), which they were obligated to perform under statutory law or a side-agreement or which were conducted primarily in their own interest, was incompatible with essential principles of the legal system. There is a claim to this only if an exception is provided for in the statute. However, this is not the case with a loan agreement. According to the statutory model, the bank would have to cover the costs incurred for processing and paying out the credit with the interest rate tied to the term period. The bank is not, however, additionally entitled to any processing fee not dependent on the term period.
IV. Legal consequences for affected borrowers
In addition to the inadmissibility / invalidity of future processing fees in pre-formulated general terms and conditions to bank loan agreements with entrepreneurs, effected borrowers may reclaim already paid processing fees from the bank, if the repayment claims are not yet statute-barred.
1. Which borrowers are affected by the FCJ decisions?
The new case-law applies to so-called entrepreneurs. These are natural persons (e.g. individual entrepreneurs, members of the liberal professions, artists, scientists and farmers), legal persons (e.g. limited liability companies [GmbH] and stock corporations [AG]) or partnerships with legal personality (e.g. general partnerships [oHG] and limited partnerships [KG]), who when entering into a legal transaction (the loan agreement), act in exercise of their trade, business or profession.
2. What types of processing fees are covered by the FCJ decisions?
The decisions of the FCJ concern all fees levied for activities to which the lending bank is obligated by statutory law or by contract, or which were conducted primarily in their own interest. The following bank charges are therefore particularly affected:
- fees for processing the loan / loan application (creation of the so-called term-sheet);
- costs for the preparation of the valuation report (Wertermittlungsgutachten)
3. What processing fees can still be recovered from the lending bank and which claims can no longer be enforced due to the statute of limitation?
Simply put, the claim for repayment of any processing fees against the lending bank is enforceable if the relevant fee was paid in 2014 or later. Processing fees paid before this time are already statute-barred, unless timely measures to toll the statute of limitations had been taken.
V. Recommended course of action for borrowers
In each individual case, borrowers should carefully check whether their bank charged processing or valuation fees through their general terms and conditions, and if so, whether claims for repayment are still enforceable under the applicable statute of limitations.
It is to be assumed that credit institutions had already anticipated in 2014 the extension of the case-law to loans to entrepreneurs, and have since then attempted to negotiate their processing fees by way of a so-called individual agreement (instead of through the general terms and conditions). An individual negotiation of the fee could result in the new FCJ decision not being applicable from the outset, such that banks facing claims for repayment would likely raise the defense that the fees were negotiated in detail (individual agreement).
Smart and to the point.
DSC Legal focuses on rendering legal advice and providing notary services with respect to real estate, startup & venture capital, IP/IT, banking & finance, property construction, and renewable energy projects.
Advising on banking and finance law issues forms a core component of our legal practice.
We would be pleased to advise you on the applicability of the new case-law to your personal financing, and to represent you against the financing bank in the enforcement of repayment claims.