Risks Associated with Architects' Contracts in Germany

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Risks Associated with Architects' Contracts in Germany

By Mirko Ehrich and Robert Kessler*


Introduction:

International real estate investors are often surprised with some aspects of German law that must be adhered to when starting a building project in Germany. One of the most important contracts for a building project is the contract with the architect. This drafting involves risks that are often overlooked. Below, we will illustrate some of the issues that come up regularly in our Building practice.

1.      Legal minimum fee for an architect’s work and services

An architect’s contract is a contract for work and services. Currently it is considered as a general contract for work, but it will be included in the German Civil Code as a specific contract at the beginning of 2018.


Private architect law is used to regulate the relationship between an architect or engineer and a principal. Of particular interest within the German private architect law, is the German Fee Structure for Architects and Engineers (HOAI). The HOAI contains a so-called “price law” that defines a minimum and a maximum fee for typical architectural work. Although it does not define the rights and obligations arising from an architect’s contract directly, the HOAI describes, in some detail, the work and services usually provided by architects. Contracting parties regularly make use of this description by referring to the HOAI in an architect’s contract when describing the obligations of the contracting architect. As a result, the HOAI also plays an important role in the interpretation of an architect’s contract.


The aim of the HOAI as a price law is to help reduce building costs by setting a statutory limit on an architect’s fees. Another objective is to prevent ruinous price competition by ensuring that architects can claim adequate remuneration. Therefore, the HOAI grants architects a minimum legal rate for defined work and services.  In fact, it is not possible for contracting parties to agree on a fee below the mandatory legal fee for work covered by the scope of the HOAI. There are a small handful of exemptions from this principle. 


As a consequence, the architect’s contract must be checked carefully for compliance with the HOAI. Principals often attempt to ensure that the estimated costs will not be exceeded by negotiating a flat fee in the architect’s contract. Any flat fee must be between the minimum and the maximum fees stated in the HOAI. But even a flat fee within this margin may later be found null and void if, for example, the building costs rise. An increase in building costs leads to a corresponding increase in the legal minimum fee, which may then be higher than the agreed flat fee.


The HOAI and its legal minimum fees have been the subject of intense debate. Recently, the European Commission announced that it will take legal action against the HOAI before the Court of Justice of the European Communities. The European Commission argues that the HOAI violates the EU Services Directive because it may discourage foreign architects from establishing a business in Germany. However, the outcome of the proceedings is yet to be determined and therefore the HOAI remains valid.


2.     
Architects’ copyrights


This issue usually arises in two scenarios.


In the context of a substantial renovation, or where one architect initiates a project that is then completed by another architect, the copyrights of former architects must be respected. Risks arising from these copyrights must be assessed during the legal and technical due diligence phase leading up to the acquisition of a project. We know from experience that real estate investors often unintentionally overlook the copyrights of architects who have contributed to an existing building.


In the context of a new building, the contract with the architect must be drafted in accordance with German copyright law.


Not every plan for every building in Germany enjoys copyright protection. A plan, and the object built according to it, only enjoy that protection if a substantial degree of design work is involved, i.e., the plans and the building need to stand out from the “normal work” of an architect in order to be protected. However, even though a building may not enjoy copyright protection, some element of the building may. Most often the facade of a building is protected by copyright. But parts of the interior of a building may be protected as well, e.g. a lavishly designed staircase. It is often difficult to determine if sufficient creative work is involved so that copyright protection will apply.


If there is evidence for protection by copyright, the contracts with former architects must be reviewed with scrutiny to determine if they include permission to subsequently alter any aspect of the building. If the prior architect’s copyrights are not respected, the architect may be able to thwart the change. In this case, the building project may fail.


A famous example of a building’s copyright protection and the power of the copyright owner is the newly-built Berlin Central Train Station. The station's architect designed a cathedral-like vaulted ceiling for the station. The German railway company that owns it accepted the plans at first, but later installed a flat metal ceiling designed by another architect. The original architect sued the principal and demanded the removal of the flat ceiling at an estimated cost of €44.5m. The court decided in favor of the original architect and held that the station was a piece of art that had been considerably defaced. According to the contract, the principal was entitled to change the architect’s plans, but this did not give the principal the right to deface the building. In a subsequent settlement, the parties agreed to a donation of an unspecified sum to a foundation closely linked to the architect.


Copyright does not protect the existence of a building. Therefore, the principal may always tear down an old building and replace it with a new one. Also, changes to a merely “functional building” are usually possible if the principal has a legitimate interest in changing it. For example, compliance with current technical standards would be considered a legitimate interest.


Agreements with architects for a new building project should contain a copyright clause. The copyright itself cannot be transferred because it is a personal right. But the architect may grant rights of use. However, architects cannot consent to a defacement of their work. This exclusion must be stated explicitly in the copyright clause, otherwise the entire copyright clause is null and void. As a result, the principal does not receive any rights of use, and the explicit consent by the architect is required for any change to the plans or the subsequent building. 


3.     
Security for an architect’s claim for fees


The German Civil Code contains two statutory provisions for an architect to obtain security for a claim for fees. A demand for security might be surprising to a principal.


The Civil Code grants an architect (and all building contractors) a mortgage right in the amount of the full remuneration due them under a contract. Any such mortgage would be registered in the land register of the project property. Real estate investors often look for a mechanism to exclude an architect’s demand for a mortgage. Such a claim can be excluded either by an individual agreement between the parties or by standard form contract of the principal (i.e. standard terms of contract used in several contracts) if the principal offers an alternate form of security. Therefore, the contract should contain an alternate form of security for the architect’s claim for fees (i.e. a bank guarantee), if the investor wants to avoid the burden of a mortgage.


The second possibility for architects to obtain security is a statutory claim for payment guarantee. Pursuant to the Civil Code, an architect may claim such security – again up to the amount of the full agreed remuneration – before delivering his performance. This statutory claim shall provide a full payment guarantee for the architect and cannot be limited by an agreement of the parties or by an individual waiver.

4.      Transfer of an architect’s contract to a legal successor


Real estate investors often plan to transfer an architect’s contract (and all other building contracts) to third parties. This may either be a property company or the purchaser of the property. Therefore, an architect’s contract should contain a clause giving the principle the right to transfer the agreement to a legal successor.


This clause is valid if it is part of an individual agreement. However, few possibilities exist to grant a principal the right to transfer an architect’s contract to a legal successor in standard form agreements. The idea is that the contracting party cannot be forced to enter into an agreement with an unknown third party. Against this background, it is necessary that an architect be able to clearly identify the legal successor at the time of entering into the architect’s contract. A clause entitling the principal to transfer the contract to an unspecified third party is invalid in standard form agreements.


*Mirko Ehrich is a partner of Loschelder Rechtsanwälte in Cologne, Germany.  His practice focuses on construction and architect’s law. Robert Kessler is an associate in the firm's Building Practice Group. Mirko Ehrich may be contacted at mirko.ehrich@loschelder.de; Robert Kessler may be contacted at robert.kessler@loschelder.de.

 

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Cologne,
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Cologne,
Friday, July 7, 2017
Real Property