GER: Contractual Penalties after Withdrawal from Contract

Jun 20, 2025 Benn-Ibler Rechtsanwälte

A customer’s withdrawal from a property development contract generally does not preclude a claim against the property developer for payment of a previously agreed-upon contractual penalty. This has recently been decided by the German Federal Court of Justice (Bundesgerichtshof, hereinafter BGH).

Delayed construction completion

In the case at hand, a property developer had agreed to convert a factory building into a residential building with 27 units and transfer ownership of the finished property to the buyer. The agreed-upon completion date was October 2022. The purchase price was EUR 7.3 million. The contract stipulated that in the event of late completion, a penalty of up to 5% of the purchase price would be imposed for each working day of delay. Additionally, the contract included a mutual right of withdrawal if the project was not completed by August 2022. Since the property was not ready for acceptance by the agreed-upon date, the buyer withdrew from the contract on December 31, 2022. At the same time, the buyer demanded the agreed-upon penalty.

The BGH confirmed the lower court’s opinion that withdrawal does not necessarily preclude asserting a contractually agreed-upon penalty. The contractual provision is decisive, and the dispositive law does not preclude such a combination. Section 325 of the German Civil Code (Bürgerliches Gesetzbuch, BGB) clarifies that withdrawal does not exclude the right to claim damages. Even if the contractual penalty is not expressly mentioned in the law, it must be functionally classified as lump-sum damages.

Contractual penalty after withdrawal

According to the BGH, a claim to a contractual penalty does not automatically expire upon withdrawal. Withdrawal results in a restructuring of the contractual relationship ex nunc. Although the primary performance obligations no longer apply, the contractual relationship is not restored to its original state. The legal consequences that continue to apply within the framework of the obligation to return what has been received must be determined on a case-by-case basis, taking into account the parties’ intentions and the function of the respective clause.

Given the purpose and structure of contractual penalties, they should continue to apply even in the event of withdrawal. They serve not only to compensate for damages caused by delay (having a compensatory function), but also to exert pressure on the debtor (having a punitive function). The compensatory and punitive functions would be undermined if withdrawal always resulted in the penalty being waived.

BGH VII ZR 129/24 (22 May 2025)