Municipal investments in data centres are under scrutiny at the Frankfurt Administrative Court

What is the issue?

Frankfurt Administrative Court has ruled on municipal shareholding in data centres

On 28 May 2025 (Ref. 7 K 3996/23.F), the Frankfurt Administrative Court ruled that the City of Frankfurt am Main’s indirect participation via Mainova AG in the data centre operator Mainova WebHouse GmbH is unlawful insofar as it is aimed at the operation of data centres.

The ruling is not yet final; as an appeal was lodged on 8 July 2025.

 

Who brought the action and what did the court decide?

A private provider questioned the City of Frankfurt's shareholding in a data centre

The plaintiff, a private data centre operator in the Frankfurt city area, brought an action for a declaratory judgment against the city's economic activity in the form of an indirect participation in Mainova WebHouse GmbH.

Mainova WebHouse was originally a wholly owned subsidiary of Mainova AG, but has been majority-owned by an international investment fund since June 2024. It builds and operates, among other things, the “MHW01” data centre campus in Frankfurt-Seckbach. This project has already been leased on a long-term basis to an international hyperscaler.

In its action, the plaintiff alleged a violation of the principles of economic efficiency and subsidiarity under municipal law as set out in the Hessian Community Ordinance (HGO). According to this ordinance, municipalities may only engage in economic activities if they are justified by a public purpose and are proportionate to the needs and capabilities. Furthermore, private providers must be unable to perform the task equally well and economically.

In its ruling, the Chamber found, as requested by the plaintiff, that there had been a violation of the so-called qualified subsidiarity clause pursuant to Section 121 (1) sentence 1 no. 3 HGO in conjunction with Section 122 (1) and (5) HGO.

 

What does the ruling mean in practice?

Local authorities must analyse the market in detail

The court found that the principle of subsidiarity had been violated, as the city failed to prove that private providers were unable to meet the demand. In its justification the court further explains in its justification that, when assessing this requirement, the municipality has, in principle, only limited discretion that can be reviewed by the courts. This relates to the decision to forecast whether there is an undersupply by private providers in the market segment in question. In this respect, the court can only examine whether the municipality has established the facts completely and accurately, and whether it has considered any irrelevant factors.

In this specific case, however, the court found an error of assessment. The city of Frankfurt had not presented any reliable market research or objective needs analysis to justify its entry into the data centre market. Particularly in an area that is strongly influenced by the private sector and dominated by providers active internationally, a careful and documented assessment of needs is absolutely necessary.

Local authorities may therefore only engage in economic activities under strict conditions. This is particularly true of technology- and investment-intensive business models - such as the operation of data centres in the present case - where a detailed examination of market access by municipally owned companies is essential.

Even grandfathering does not always apply

The city was also unable to invoke grandfathering rights. Although Mainova AG had previously offered data centre services, the court found that the current project - specifically the construction of the MHW01 data centre - constituted a significant expansion of its previous activities. Legally, such an expansion must be treated as a new economic activity, subject to the provisions of Sections 121 et seq. HGO. Grandfathering rights only apply if the activity remains essentially the same.

This judgement has significant implications for municipal shareholdings nationwide

Conclusion: Overall, the court found that the threshold for impermissible economic activity had been crossed, as neither the requirements of Section 121(1) HGO regarding subsidiarity nor the requirements for a permissible extension pursuant to Section 122(1) and (5) HGO had been met.

The principle of subsidiarity also applies to the municipal codes of other German federal states, such as Bavaria and Thuringia, meaning it is relevant in other German states, too.

Therefore, the ruling is relevant beyond the individual case to all municipal investments in privately organised infrastructure projects. However, a final ruling on the appeal is not expected for several months.