US data center leases in Germany – does one size fit all?

Data centers are everyone’s darling – urgently needed by the industry and increasingly popular as an asset class for investors. Developers’ and operators’ existing or planned projects are selling like fresh German pretzels. The big (US) players in this sector have no difficulty in leasing white space in data centers or even entire centers. On the user side we find the usual suspects – in particular US cloud service providers – dominating the market.

Standard leasing contracts from various US projects are available and ready to be used for projects in Europe. But does it work everywhere? Does one template fit all? What must be considered for a data center contract according to German law? In this article we look at whether US data center leases can be used in Germany.

Classification of the data center lease

With a data center lease one party provides the other party with a right of (exclusive) use of a data center (or parts of it) and to demand specific (optional) services connected to the use. Hence, we have a “leasing” and a “service” part in any such agreement.

Basically, any agreement that obligates one party (landlord/data center operator) to grant the other party (tenant/user) the (exclusive) use and possession and right of usage of space (colocation space or entire data center) for an agreed term in exchange for an agreed fee (rent) is classified as a lease agreement (Mietvertrag) under German law. If the purpose of any such lease agreement is not housing of people, the lease is considered a commercial lease agreement (Gewerbemietvertrag). A commercial lease agreement is subject to tenancy law provisions, which are partly mandatory to the parties.

Any services agreed in the course of a lease agreement for a data center or space in the data center are either qualified as “ancillary services” to the lease agreement or as “single standing services” subject not to the tenancy laws but to the laws of a service agreement. This basically depends on the emphasis of the agreement. In some cases, if the provision of space in a data center is only an ancillary part of a service agreement, the data center lease can be regarded as a service agreement with a right to occupy some space (that space is not defined, and the right of usage is not exclusive). Usually, the element of providing certain spaces is so essential for the agreement that the whole agreement is classified as a lease agreement and the mandatory applicable statutory provisions for tenancy law apply accordingly.

Even if tenancy law mandatorily applies, the contractual relationship is primarily governed by the provisions in the lease agreement, which can be negotiated by the parties. Thus, the parties are basically free to agree on any provisions on liability, maintenance and repair, cost coverage and others. However, there are several statutory provisions applicable for lease agreements under the laws of Germany that cannot be amended or waived by the parties, including but not limited to the statute on general terms and conditions. Finally, there might be some additional statutory restrictions when it comes to data centers that qualify as critical infrastructure. Such special situations should be reviewed on a case-by-case basis.

Review of provisions

First of all, the US templates of data center leases need to be reviewed in detail and the provisions need to be categorized in the following groups:

1. provisions that work under the laws of Germany without any legal modification
2. provisions not compliant with the applicable mandatory statutory provisions and which therefore need to be modified and revised (eg limitation language, formalities and right of first refusal)
3. provisions that need to be replaced by other provisions, as these are unknown or not possible to agree on under the laws of Germany (eg “Subordination and classification as Superior Lease” and “Estoppel Certificates”)

With regards to the provisions in group 1, there is nothing more to add. Regarding the provisions in group 2, we want to draw your attention to the most critical sections, namely the limitation of liability and formalities. Concerning the provisions in group 3, we will show how we ensure the client’s position is properly reflected by using alternative legal instruments.

The concept of indemnification corresponding with obligations to provide insurance and wide limitation of liability as established in the US is not common in Germany. A lease agreement in Germany states certain main contractual and ancillary claims and obligations. In the event of a breach of any of these obligations or a bad or even a nonperformance on claims, the other party is entitled to claim for fulfillment or compensation if the counterpart is responsible. This statutory regime can be amended by the parties to the extent specified by law or jurisdiction. An extensive or even a complete limitation of liability is not possible. At least all damages relating to a material breach of the essential obligations under a lease (Kardinalspflichten); or damages relating to expressly guaranteed conditions of the premises let (zugesicherte Eigenschaften); or damages covered by the insurance required under the lease or damage to life, limb or health resulting from any willful or negligent breach of landlord or tenant; or in respect of any other damages resulting from any willful or grossly negligent breach of landlord or tenant, cannot generally be excluded or limited in a data center lease in Germany.

The lease agreement for a data center basically does not need to meet any formalities except the effective execution of the lease agreement for a data center itself (properly executed and signed with sufficient power of representation and compliance with the statutory written form requirements) to be enforceable. According to the mandatory statutory requirement of Section 550 of the German Civil Code (BGB), lease agreements, any amendments or any other material agreements related to them must be concluded in written form as stated in Section 126 BGB. According to this provision, the document of the lease agreement or the amendment must be signed (wet ink) by hand and must not be agreed orally. The wet ink signature of the parties can be replaced (only) by a qualified electronic signature (qualifizierte elektronische Unterschrift) according to Section 126a BGB. A qualified electronic signature is a signature created by a qualified electronic signature creation device and based on a qualified certificate for electronic signatures (QES). A QES can only be created using suitable signature software. However, this technically requires the same document to be signed with a qualified electronic signature twice by both contracting parties to get the signed document, including two signature files (one for each party) as a file package. If these requirements are met, the file package result is an electronic lease agreement that complies with the written form.

Regarding an agreed right of first refusal, one needs to separate between the object affected by this right. As long as the right of first refusal provides the beneficiary with a right to lease (certain) additional spaces, no strict formalities apply. If the right of first refusal puts the beneficiary in the position to have a pre-emptive right on the leased premises in the event of a disposal intended by the landlord, strict formalities apply. Any such right of first refusal will only be enforceable if it has either been registered in the land register with an encumbrance (dingliches Vorkaufsrecht) or if the agreement initiating the right of first refusal has been notarized and signed by the parties in person and in front of a notary public (beurkundet). This will trigger material costs depending on the value of the lease agreement calculated on basis of the annual rent.

Concerning the provisions in group 3, the proper understanding of all aspects covered in the US provisions is key. We have picked “Subordination and classification as Superior Lease” and “Estoppel Certificates” as examples to demonstrate our approach for this category.

The essence of the US provision on “Subordination and classification as Superior Lease” is to secure the tenant’s position and rights resulting from the data center lease. As there is basically neither a registration of lease agreements in the land register nor multiple leases (aside from a sublease relation), the provision of the subordination and the classification as a superior lease does not really make sense from a German legal perspective. However, to make sure the property let remains in an unchanged condition and the right to use the property granted under the lease remains effective if the landlord becomes bankrupt, a so-called tenant easement (Mieterdienstbarkeit) in favor of the tenant can be registered in the land register of the property. With a tenant easement the tenant remains entitled to use the property even if the lease agreement is terminated in the event of an insolvency of the landlord and a long-term usage is secured (in accordance with actual provisions in the lease agreement). The registration of a tenant easement needs to follow strict formalities and the application for registration to the land register office must be made public with the help of a notary, but it does not require the lease agreement itself to be agreed in a special form or the involvement of a notary. The financial effort for a tenant easement is rather low.

Regarding estoppel certificate provisions, German law states that any reason of invalidity of a lease remains even if an estoppel certificate is issued. Thus, to transfer this into a lease agreement in Germany, a proper form-curing provision containing the obligation to agree on an amendment curing any potential written form violation appears to be most suitable. However, the most recent jurisprudence had some doubts on the written form cure provisions and any third party that becomes party of the lease agreement (eg by acquiring the property let) will not be bound to such provision.

Conclusion

Unfortunately, one size does not fit all when it comes to data center leases in Germany and a US data center lease needs to be carefully reviewed and revised to comply with the laws in Germany.