Setoff

Set-off - A set-off is a unilateral declaration by which one party to a contract offsets its own claim against a claim of the other party. As a result, both claims are extinguished to the extent of the lesser amount (Sections 387-396 of the German Civil Code (BGB)). In real estate law, set-off plays a role primarily in tenancy agreements - for example, when tenants wish to set off their own claims against the rent.

Requirements for Set-off

For a set-off to be effective, four requirements must be met:

• Reciprocity: Both parties must owe each other claims - the party making the set-off must be the creditor of the counterclaim and the debtor of the principal claim.
• Similarity: Both claims must relate to the same type of performance - in practice, almost always monetary claims.
• Maturity and enforceability: The counterclaim (used for set-off) must be due and free of defense. The principal claim must be enforceable.
• No prohibition on set-off: Neither law nor contract may preclude set-off.

Set-off is declared by means of a unilateral declaration requiring acknowledgment of receipt to the other party. It takes effect retroactively to the point in time when the claims first became set-offable against each other-not merely at the time of the declaration. This means that default interest ceases to accrue from the time of the earliest possible set-off.

Set-off in Tenancy Agreements

In tenancy law, set-off is particularly relevant in practice. Typical scenarios include:

• The tenant sets off a claim for damages (e.g., for repairs performed by the tenant pursuant to § 536a BGB) against the current rent
• The tenant offsets a credit for operating costs against the next rent payment
• The landlord offsets claims for damages after the tenant moves out against the security deposit to be refunded
• The landlord deducts overdue rent from a security deposit refund

Many lease agreements contain a setoff restriction that permits setoff only against undisputed or legally established claims and requires a notice period of at least one month prior to the rent’s due date. Such a clause is generally valid in standard form contracts, but it may not completely exclude set-off-this would be invalid under § 556b(2) of the German Civil Code (BGB) and Federal Court of Justice (BGH) case law.

Typical Set-off Scenarios in Real Estate Law

Situation	Party Offsetting	Principal Claim	Counterclaim	Permissible?
Tenant reduces rent due to defects	Tenant	Rent (Landlord)	Rent reduction / Damages § 536a	Yes, with notice
Landlord deducts damages from security deposit	Landlord	Return of security deposit (tenant)	Damages for tenant-caused damage	Yes
Tenant offsets utility credit	Tenant	Next month’s rent	Utility credit	Yes
Buyer reduces purchase price due to defect	Buyer	Remaining purchase price	Damages / Right to reduction	To be regulated in the notarial contract
Landlord pays contractor in advance	Landlord	Contractor’s fee	Damages for defects	Yes, if due and undisputed
Informal rent reduction without explanation	Tenant	-	-	No - considered a default

Set-off in the Purchase Price Payment

Set-off can also be relevant in real estate purchases: If the buyer has a due counterclaim against the seller-for example, from another contract-they may, under certain conditions, set it off against the purchase price. However, since the notary releases the purchase price only after full payment has been made, it is advisable to clarify the set-off before the notary appointment or to expressly stipulate it in the purchase agreement. Many notarized purchase agreements exclude set-off against the purchase price.

Practical Tip for Property Owners in Nuremberg and Franconia

We recommend that landlords in the Nuremberg metropolitan area include an effective set-off clause in the lease agreement that limits set-off to undisputed or legally established counterclaims and provides for a notice period of at least one month prior to the rent’s due date. This prevents tenants from unexpectedly withholding portions of the rent and causing you to face liquidity problems. Conversely, tenants who wish to set off claims should quantify and justify their counterclaim in writing beforehand-a mere reduction in rent without a formal set-off declaration constitutes a default in payment and may entitle the landlord to terminate the lease.

Frequently Asked Questions

Can the tenant simply transfer less rent?

No, a setoff must be expressly declared to the landlord. The tenant must specify which counterclaim they are offsetting against which portion of the rent and state the exact amount of the counterclaim. A rent reduction without explanation is considered a default in payment and may entitle the landlord to terminate the lease without notice after two consecutive months-even if the tenant’s counterclaim is justified, the informal reduction is the wrong approach.

Can the landlord completely exclude set-off in the lease agreement?

A complete exclusion of set-off is invalid in standard-form lease agreements under the law governing general terms and conditions (§ 309 No. 3 BGB). A restriction to undisputed or legally established counterclaims is permissible. In individually negotiated contracts, further restrictions are possible but are rare in practice, as they would place an excessive burden on the tenant.

What happens if the counterclaim exceeds the rent?

In this case, the rent claim for that month is fully extinguished. The excess portion of the counterclaim remains valid and may be offset by the tenant against the next month’s rent or asserted separately through legal action. It is advisable to specify the exact amount of the set-off in the statement so that both parties can clearly understand the remaining amount of the counterclaim and future rent obligations.

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