GER: Sale and Rent Back Schemes: Prohibited or Usury?

Jan 4, 2022 Benn-Ibler Rechtsanwälte

Does a business model pursued by a licensed pawnbroker who purchases motor vehicles commercially and then rents them out to the sellers with the option of them buying their vehicle back at a public auction at the end of the contractually agreed rental period constitute prohibited or usurious business? The German Federal Supreme Court (Bundesgerichtshof, hereinafter BGH) had to make a decision on this in four cases.

The defendant company operates an officially licensed pawnshop in Germany. In the course of their business activities the company buys motor vehicles and rents them back directly to the sellers (referred to as sale and rent back schemes). At the end of the lease period, the vehicles are then sold at a public auction in which the former owners can participate. It is agreed beforehand as part of the deal that the former owners will not receive any additional proceeds from the auction under the lease agreement if they are to purchase the vehicle themselves by way of auction. 

The BGH ruled on this case as follows: No infringement of the prohibition of buyback trading as standardised in the German Trade Regulation Act exists, therefore the purchase and rental agreements concluded can therefore not be null and void according to Section 134 of the German Civil Code (Bürgerliches Gesetzbuch, BGB). Furthermore, the court held that the plaintiffs had not been granted a right of repurchase. The mere choice of a contractual arrangement that circumvents the lien provisions is not enough. Rather, a special right must be agreed upon that enables the seller (customer) to buy back an item. In the above cases, buyers only had the factual possibility of buying back their previously disposed of motor vehicles by participating in a public auction. This does not constitute a case of prohibited buyback trading.

However, according to the BGH, a legal transaction similar to usury according to Section 138 (1) BGB may be present. This would have the consequence that the purchase and rental contract as well as the transfer of ownership of the motor vehicle to the defendant are null and void. In one of the cases, the court recognised such an invalidity. The defendant’s intent to defraud was presumed in this case because of the gross disproportion between the vehicle’s purchase price paid of EUR 5,000 and the retail purchase value of EUR 13,700.

BGH, VIII ZR 221/21 (16 November 2022)