The German Federal Supreme Court for Civil Matters (Bundesgerichtshof – BGH) held in two cases on 4 July 2017 that provisions contained in the standard contracts of banks providing for the payment of management or loan administration fees (Bearbeitungsentgelt) by the borrower is invalid under German law, irrespective of whether the borrower is a consumer or a company and irrespective of whether the borrower is a small, medium-sized or large company.
The cases related to the financing of real estate and to loan agreements where the fee provisions had not been specifically and genuinely negotiated between the bank and the borrower and therefore constituted standard contract terms.
The BGH held that lenders are not allowed to charge borrowers fees for the preparation, documentation, valuation, due diligence, balance sheet reviews and other solvency checks (Bonitätsprüfung) as well as other preparatory steps and the administration of the loan in German law governed standard contract term contracts, because the BGH held that such acts are not done in the interest of the borrower but in the bank’s own interest so that the bank can comply with its own regulatory rules and obligations. The BGH held that such costs need to be factored into the relevant interest margins and need to be recovered from interest payments during the lifetime of the loan, but cannot be charged to the borrower as a one-off fee.
The BGH held that a genuine negotiation of the fee provisions does require that the bank actively and genuinely offers to effectively negotiate the fees with the potential borrower and to arrange for alternative models; the BGH further held that a reduction of the fee amount during the documentation phase is not necessarily a sign of a genuine negotiation by the bank if the bank is not prepared to waive the request for the payment of fees in its entirety.
The decisions of the BGH are very broad, strict and rigid and the BGH did not allow any argument for differentiation between consumers on the one hand and companies on the other hand nor did the BGH allow a differentiation between various different types of companies. Because of the rigidity of the arguments of the BGH it needs to be assumed that such case law will also be applied by German courts in future to loans granted in the context of restructurings.
Further, even though this is not addressed in the two cases which have been decided by the BGH, there is a risk that the same line of thinking also applies to syndication fees and agency fees, since the BGH might argue – despite of arguments against such potential view – that the syndication and agency work is done in the interest of the participating banks rather than in the interest of the borrower (in particular in cases where the syndicated banks are not liable for any other syndicate member not disbursing the relevant committed amounts).
Apart from genuinely negotiating relevant fee arrangements (preferably as separate documents) in relation to German law governed loan agreements and documenting such negotiations, banks should consider agreeing separately documented fee arrangements not under German law but under the laws of other relevant jurisdictions, to the extent that such jurisdictions allow fee arrangements even if they are not “genuinely” negotiated between the parties.
Finally it should be noted that the BGH held that borrowers have a claim under rules on “unjust enrichment” (ungerechtfertigte Bereicherung) for reimbursement of fees paid under standard contract term loans, even if they relate to loan agreements entered into prior to 4 July 2017. However, the BGH also held that the relevant limitation periods (Verjährungsfristen) mean that only loan administration or management fees which have been paid under German law governed standard contract fee clauses in 2014 or later can today still be clawed back by the relevant borrower; any fees paid prior to 2014 cannot be reclaimed unless litigation or other legal process was started prior to the lapse of the relevant limitation period.