FCJ decision finds that mere suspicion of contamination resulting from a sold property’s past use constitutes a defect.

By Patrick Braasch and Christian Thiele

The German Federal Court of Justice (FCJ) has ruled that an abstract suspicion of contamination resulting from a sold property’s past use already constitutes a material defect — irrespective of the actual existence of any contamination. A seller’s failure to disclose the known usage history — which objectively gives rise to the suspicion of contamination — constitutes fraudulent conduct. As a consequence, the seller cannot invoke any contractual limitation of liability.

Case background

The FCJ’s judgment, dated 21 July 2017 (V ZR 250/15), involved a case in which the plaintiff had acquired from the defendant several plots of land that had been developed as a business park. In the notarized sale and purchase agreement, any liability of the defendant was excluded, with the exception of intent and fraudulent conduct. The defendant was aware that an asphalt mixing plant for regional road construction, as well as a sewage sludge retention basin, had been operated on the property from the 1960s until the 1980s. When the defendant acquired the property in 1989, the seller at that time represented that he was not aware of any soil contamination.

After the plaintiff learned of the property’s historic use, which gave rise to a suspicion of contamination, he demanded damages from the defendant for the reduction in the property’s value resulting from such defect in the amount of €884,000. Furthermore, the plaintiff sought a declaratory relief regarding the defendant’s obligation to compensate the plaintiff for any further damages arising from the acquisition of the property in this context.

The FCJ’s ruling

The FCJ’s ruling addresses several key legal questions that arise in property sales, including the following.

Does an objective suspicion of contamination constitute a material defect?

According to the FCJ, the historic operation of an asphalt mixing plant and a sewage sludge retention basin objectively gives rise to a suspicion of contamination, which generally constitutes a material defect and must be disclosed to the purchaser. The existence of any actual contamination is not relevant, as the risk of actions by public authorities and the reduction in the property’s value resulting from a suspicion of contamination already constitutes a defect.

What constitutes a suspicion of contamination?

Regarding the difficult question of what constitutes a suspicion of contamination, the FCJ only provides a few pointers, rather than clear criteria. While not every property with a history of industrial use automatically establishes a suspicion of contamination, such suspicion does arise if the historic use establishes a “risk of substantial pollution”. Such risk is to be assumed, for example, in case of a former “wild garbage dump” or a gas station, as well as when a property was used as an industrial landfill without subsequent disposal. In any case, the suspicion does not need to be “concrete and obvious”, nor does it need to be substantiated by “concrete and weighty facts”.

Therefore, according to the FCJ, the suspicion is to be determined exclusively based on the historic use, without any further circumstances needing to indicate the presence of actual contamination.

What are the requirements for fraudulent concealment?

The FCJ held that a property seller who believes that the property’s historic use could possibly give rise to a suspicion of contamination, yet fails to disclose such historic use to the purchaser, has acted fraudulently. Whether the seller actually knows of substances and pollutants that have entered the soil, for example, is irrelevant. These low requirements are based on the idea that by disclosing the historic “suspicious” use, the seller has provided the purchaser the opportunity to commission an environmental survey and to estimate potential remediation costs.

Does a lack of suspicion constitute bona fide protection?

The FCJ held that the assumption of fraudulent conduct in the case at hand could not be rebutted solely because of the previous owner’s representation that he was not aware of any contamination. The court took the view that the actual existence of contamination is irrelevant and that the suspicion of contamination exists regardless of the previous owner’s representation. While a seller who is convinced that there is no suspicion of contamination does not act fraudulently, such seller bears a secondary burden of proof for objective circumstances supporting his or her conviction.

The court’s finding constitutes a significant shift of the burden of proof in favor of the purchaser. If the purchaser can demonstrate an objective suspicion of contamination, it becomes the seller’s burden to prove his or her good faith at the time of conclusion of the sale and purchase contract. If the seller fails to do so, the courts generally should assume fraudulent conduct.

What are the terms for damages?

The purchaser may demand compensation for the reduced value of the property or for the costs of remedying the defect. If the purchaser proves that the property is actually contaminated, the purchaser’s damages may include remediation costs. As a result, the seller may be liable for the full remediation costs. Notably, contractual exclusions or limitations of liability may not be invoked in case of fraudulent conduct (section 444 German Civil Code). The purchaser can therefore claim damages in full, irrespective of contractual arrangements.

Practical consequences

The FCJ’s declaration that the mere suspicion of contamination constitutes a material defect — regardless of whether or not actual contamination is present — represents a fundamental shift. The requirements for such suspicion are very low, exposing the seller to unlimited liability for (potentially very high) remediation costs if any “suspicious” historic use of the property is not disclosed. Sellers are therefore well advised to always fully disclose the known usage history and any assumptions regarding past remediation measures. This is the only way for a seller to prevent an allegation of fraudulent conduct and to secure contractual limitations of liability.

Another important aspect in this context is the definition of knowledge bearers in sale and purchase agreements. The actual knowledge of long-serving employees and other agents is often unclear, especially if the seller has owned the property for a long time. While the legal effectiveness of knowledge provisions with regard to liability for fraudulent conduct is controversial, in the context of risk management, a seller may be sensible to limit the attribution of knowledge to specific persons — who then, of course, must fully disclose their actual knowledge. From a purchaser’s point of view, the opposite applies; that is, the seller’s attribution of knowledge should be as wide as possible, and, in any case, the knowledge bearers should include persons with the longest possible knowledge of the property, ideally going back to the property’s original acquisition.