Contractual penalty

Contractual Penalty - A contractual penalty (penalty clause) is a monetary payment agreed upon in a contract that becomes due upon a breach of a contractual obligation-regardless of whether the creditor has actually suffered any loss (Sections 339-345 of the German Civil Code (BGB)). In the real estate sector, contractual penalties are particularly common in construction contracts (delay in completion), brokerage agreements (breach of exclusive agency), and commercial lease agreements (breach of usage agreements).

Contractual Penalty in Construction Contracts

The most common contractual penalty in the real estate sector is the penalty for delay in construction: The contractor agrees to pay a penalty per day or week of delay if the agreed completion date is exceeded. The standard rate is 0.1 to 0.3 percent of the contract amount per business day, up to a maximum of 5 percent of the contract amount in total (according to Federal Court of Justice case law on standard contract terms). For a contract amount of 400,000 euros and 0.2 percent per day, the penalty amounts to 800 euros per business day, with a maximum total penalty of 20,000 euros.

Penalty clauses in General Terms and Conditions (AGB) must be clearly worded and reasonable-unreasonably high penalties are invalid (Section 307 of the German Civil Code (BGB)). The VOB/B (German Construction Contract Procedures) provides for special regulations regarding contractual penalties in § 11: In a VOB/B contract, a contractual penalty is only valid if it was expressly agreed upon for delays and does not exceed the maximum limit of 5 percent of the contract value.

The practical significance of the contractual penalty lies primarily in its pressure function: The contractor knows that every day of delay costs money and prioritizes accordingly. In times of material shortages and a shortage of skilled workers, a well-formulated contractual penalty clause is one of the most effective tools for keeping one’s own construction site on schedule.

Liquidated Damages in Real Estate Brokerage Law

Under an exclusive brokerage agreement, the client may agree to pay the broker liquidated damages if the client sells the property during the term of the agreement without the broker’s involvement or engages another broker. The liquidated damages clause ensures the exclusivity of the agreement and compensates the broker for their efforts in the event of a breach. Such clauses should be clearly worded and specify a defined amount-typically between 1 and 3 percent of the asking price.

Conversely, the client may also agree to a contractual penalty in the event that the broker fails to perform contractually agreed services (e.g., preparing a property brochure, conducting a certain number of viewings, or adhering to reporting intervals). This is less common in practice but quite standard in professional investor contracts.

Requirements and Limits

A valid contractual penalty requires: a clear written agreement in the contract (verbal agreements are insufficient), a specific or determinable amount (daily rate plus maximum amount), reasonableness (in standard terms and conditions, a maximum of 5 percent of the contract amount according to Federal Court of Justice case law), and culpable conduct on the part of the debtor (in cases of default through no fault of the debtor, e.g., due to delays in obtaining official approvals, a contractual penalty cannot be demanded).

The creditor must expressly reserve the right to claim the contractual penalty at the time of acceptance (Section 341(3) of the German Civil Code (BGB))-if acceptance is declared without reservation, the right to claim the contractual penalty is forfeited, even if the delay is undisputed and was significant. This formal pitfall is one of the most common mistakes made during construction acceptance.

Practical Tip for Property Owners in Nuremberg

We recommend that property owners in the Nuremberg metropolitan area include a liquidated damages clause for construction delays in every construction contract-it is the most effective leverage against missed deadlines. The wording should be: “0.2 percent of the net contract amount per working day of delay, up to a maximum of 5 percent of the net contract amount.”

Be sure to specify the completion date as a specific date (not “approx. week 38” or “expected in the fall”)-only a clearly defined date is legally enforceable. Also note which reasons should exempt the contractor from the contractual penalty: force majeure, delays caused by government agencies, and design changes initiated by the client are typical exceptions that should be fairly addressed in the contract.

At the time of acceptance, record the reservation regarding the contractual penalty in writing in the acceptance report-not just verbally. Wording: “The right to impose a contractual penalty for delay in construction pursuant to § […] of the contract is reserved.” Upon request, we assist building owners in negotiating and drafting construction contracts and connect them with experienced construction law attorneys in the Nuremberg region.

Frequently Asked Questions

Is a contractual penalty permissible in a lease agreement?

In commercial lease agreements, yes-penalties for late rent payments, violations of non-competition clauses, or unauthorized subletting are common and enforceable. In residential lease agreements, penalties in standard terms and conditions are generally unenforceable (BGH VIII ZR 344/02)-they unreasonably disadvantage the tenant. Individually negotiated penalty clauses in residential lease agreements may be valid in specific cases, but they are very rare in practice and also difficult to prove. As a landlord, you should therefore not include a penalty clause in a residential lease agreement-it is invalid and may harm the tenancy.

What happens if I forget to include the reservation during the acceptance?

If acceptance is declared without an explicit reservation regarding the contractual penalty, the right to the contractual penalty is forfeited (Section 341(3) of the German Civil Code (BGB)). The creditor can then no longer assert the contractual penalty-even if the delay is undisputed and the builder has incurred significant additional costs. This risk is one of the most common mistakes during construction acceptance: In the stress of the acceptance process, building owners forget to state the reservation. Formulate the reservation clearly and unambiguously in the acceptance report before signing.

Can the contractual penalty be reduced?

Yes, under Section 343 of the German Civil Code (BGB), a disproportionately high contractual penalty may be reduced to a reasonable amount. However, this right to reduction is available only to non-merchants-merchants (business owners, developers) cannot invoke Section 343 BGB (Section 348 of the German Commercial Code (HGB)). In practice, courts reduce contractual penalties if they are clearly excessive in relation to the actual damage incurred and the debtor files a petition for a reduction. The debtor must actively assert the disproportionate nature of the penalty-the court does not reduce the penalty ex officio.

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