Investors in open-ended real estate funds which have since gone into liquidation can still assert claims for damages. Their prospects have improved, thanks to the jurisprudence of the Bundesgerichtshof (German Federal Court of Justice).
As a result of the outbreak of the 2008 financial crisis, investors in open-ended real estate funds were amongst those particularly affected by the realisation that the much-vaunted Betongold – literally concrete gold – is by no means a risk-free investment. A lot of open-ended real estate funds were forced to close, with investors being unable to redeem their shares.
To date, there are still large numbers of open-ended real estate funds that are currently in liquidation. During this phase, attempts are made to sell the fund properties. The investors receive rotational payments, the amount of which is largely dependent on the sales revenue. While financial losses are a possibility here, the investors do not necessarily have to be stuck with these losses; they are still able to assert claims for damages.
The basis of any such damages claims could be erroneous investment advice, since the intermediary banks ought to have comprehensively informed the investors in the consultation meetings, among other things, about the workings and risks associated with an open-ended real estate fund. Following a long period of uncertainty as to whether the possibility of the fund closing should be classed as a risk with respect to which one has to be informed, the Bundesgerichtshof provided clarity and came to a consumer-friendly conclusion last year.
The BGH held that intermediary banks need to explain the risk of open-ended real estate funds closing without being asked to do so, as the possibility of the ability to redeem one’s shares being suspended represents a constant liquidity risk for the investors during their investment phase. If the bank concealed this risk, it has thereby rendered itself liable to pay damages. The Karlsruhe judges went on to state that the obligation to inform is in no way contingent upon whether or not the closure of the fund was foreseeable at the time the agreement was concluded.
This case law from Germany’s supreme court presents numerous investors in open-ended real estate funds with the chance to assert their claims for damages. Having said that, it needs to be assessed on a case-by-case basis whether the bank in question has breached its obligation to provide advice. Investors can turn to lawyers who are versed in the fields of banking and capital markets law to examine and enforce their claims.
ABOUT THE AUTHOR: GRP Rainer LLP
GRP Rainer LLP is an international firm of lawyers and tax advisors who are specialists in commercial law. The firm counsels commercial and industrial companies and corporations, as well as associations, small- and mid-sized businesses, self-employed freelancers and private individuals worldwide from offices in Cologne, Berlin, Bonn, Dusseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London UK.
Michael Rainer
Lawyer, Managing Partner
GRP Rainer LLP
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