Arrangement Fee Clauses in German Loan Agreements ruled invalid by German Federal Court

The German Federal Court issued a series of groundbreaking rulings on July 4, 2017. Arrangement fee clauses in German law loan agreements are invalid if they are included in general terms and conditions set by the lender. Borrowers are entitled to reimbursement of paid arrangement fees. The repayment claims will be limited to three years after the end of the calendar year when payment of the arrangement fee was made. 

The German Federal Court on July 4, 2017 ruled that clauses in general terms and conditions of banks providing for handling fees that are to be paid all at once, and which are not connected to the duration of the loan agreement, are generally invalid (ruling of July 4, 2017, matter numbers: XI ZR 562/17 and XI ZR 233/16). 

These court rulings affect in particular the so-called "Arrangement Fees" that are commonly included in loan agreements and structured as one-time payments. The court decisions apply to all kinds of loan financing, irrespective of the purpose of the financing, i.e. debt-financing for corporate and real estate transactions as well as credit lines or financing for other purposes. Business persons are affected by these court decisions as well as self-employed persons and investment funds as borrowers.

In regard to consumer loan agreements, the German Federal Court had already ruled in 2014 that agreements on respective handling fees are invalid (German Federal Court, judgment of October 28, 2014, matter number: XI ZR 348/13). In its decisions of July 4, 2017, the Federal Court has now clarified that the principles governing the aforementioned legal practice also apply to loan agreements in the professional area. According to the court rulings, one-time payment handling fees constitute an inappropriate discrimination of the borrower. Respective clauses conflict with fundamental principles of German statutory law (sec. 307 German Civil Code). 

However, the invalidity of the aforementioned handling fees applies only if the relevant agreements are subject to German law. In respect to this, it has become common banking practice in recent years with loan agreements that are subject to German law to enter into a separate agreement on the applicable fees ("Fee Letter") and to include a choice of law clause in favor of a different jurisdiction under which the fees are definitely valid. 

Banking fees that are connected to the duration of the loan agreement are not affected by the discussed decisions of the German Federal Court. Furthermore, banking fees that are not connected to the loan term are not affected if the relevant clause has been entirely offered up for discussion by the bank and was negotiated between parties, thus not qualifying as a general terms and condition. 

Borrowers are entitled to request reimbursement of paid arrangement fees. The banking economy in Germany is currently preparing for a wave of repayment claims by borrowers with regard to paid arrangement fees. Respective repayment claims involving the paid arrangement fee are subject to the general statute of limitation of the German Civil Code, which is three years (sec. 195 German Civil Code). The limitation period starts at the end of the calendar year in which the Borrower has paid the arrangement fee.

Read the German version of this update "Unwirksamkeit bestimmter Bearbeitungsgebühren in Darlehensverträgen" here.