Arrangement fees in Germany: how to deal?

The Federal Court of Justice (Bundesgerichtshof (BGH)) ruled in 2014 and 2017 that clauses implementing arrangement fees (Bearbeitungsentgelte) in consumer and commercial loan agreements are subject to regulations governing standard terms and conditions (AGB-Inhaltskontrolle).

Arrangement fee clauses which are actually negotiated by the parties will fall within an exception to the regulations. If, however, the relevant provision falls within the ambit of the regulations and fails to comply, a court could deem it ineffective. In these circumstances, any fees paid would have to be reimbursed.

Interests of the parties

In commercial loan agreements, both the lender and the borrower usually prefer having a one-off arrangement fee, rather than a higher interest rate running throughout the duration of the loan. The lender gets its money upfront, irrespective of early termination of the loan agreement and/or prepayment, and the borrower can often reduce its tax burden.

Unfortunately, the legislation and judicial interpretation presently work together to lead to the bizarre situation that even when both lender and borrower have agreed on an arrangement fee, they may be thwarted by the decision of a German court.

Circumventing the rules: possibilities

Borrowers and lenders have therefore tried to find new solutions to factor in arrangement fees for payment on signing, despite the BGH's ruling:

• The parties may conclude a separate fee letter governed by a foreign law which is not as restrictive as German law. Since Article 3 par. 1 of the Regulation (EC) No 593/2008 of 17 June 2008 (Rome I) expressly allows such choice of law, this is seen as the most convenient route.However, the AGB-Inhaltskontrolle may still apply in cases where there is no connection to the country whose law was chosen according to Article 3 par. 3. One cannot exclude the possibility that a German court would hold such a division of the payment obligations – interest under German law, and a one-time fee under a different country's law – inconsistent and therefore ineffective. While there is at least one foreign party in most commercial financings, which would allow for a fee letter even when taking the restrictions described above into account, this is not always the case
• To evade the application of the German provisions on standard terms and conditions, the borrower might therefore issue a fee letter as an offer to the lender. The borrower would therefore be considered the 'user' (Verwender) under the AGB-Inhaltskontrolle instead of the other (supposedly weaker) party that the German law provisions are intended to protect. However, if the borrower offers to pay an arrangement fee just because such fee is considered to be market standard, it may be the case that a German court concludes that the borrower needs to be protected nonetheless, and deems the fee void
• As another option, the lender might consider applying a higher rate of interest for the first few interest periods, which would yield the same results as a one-time fee. However, sec. 306a German Civil Code (BGB) expressly states that the AGB-Inhaltskontrolle provisions apply when the parties try to circumvent them by other structures. One cannot exclude the possibility that a German court would rule that such construction is a circumvention, therefore holding the clause ineffective

Conclusion

While market participants are currently using methods to include arrangement fees for loans, these have not yet been tried and tested by the German courts.