A. Introductory remarks

When developers, lawyers, journalists and marketing professionals talk about smart contracts, they usually talk about different things. Legal literature presents blockchain-based products which either do not exist, should not exist or will never exist due to the lack of technical feasability. It is not uncommon that the foundations of (civil) law are left out of the equation.

Section 194 para. 1 of the German Civil Code (“Bürgerliches Gesetzbuch“, BGB) contains the legal definition of a claim:

“The right to demand action or omission from another“.

According to the smart-contract enthusiasts, a claim is:

“The right to force another to do or refrain from doing.“

Section 241 BGB is accordingly “interpreted“ as follows:

Obligations arising out of the smart contract

(1) By virtue of the contractual relationship, the creditor shall be entitled to enforce the performance owed by the debtor. The creditor shall be entitled to enforce omission through the use of manipulation.

(2) The contractual relationship does not include consideration for the rights, legal interests and interests of the other party.

Laying a foundation for private enforcement that creates an imbalance of parties’ rights violates German law. The legal system only provides for a superordination/subordination relationship between the state and the citizen. In a private partnership the law provides for a balance of interests and powers.

However, the efforts to create contract solutions that comprehensively regulate and even automate the rights and obligations of the parties within the framework of computer programs are no longer those of science-fiction authors. The reasons are manifold: on the one hand, it is the desire to move with the times, to be more modern than competitiors. On the other hand, it is the increasing pressure from the market counterparty to become more efficient and, thus, cheaper. Automated contract solutions are already feasible today. Well designed, they can avoid foreseeable conflicts, relieve the parties of the burden of obligatory actions and necessary deadline reminders, and ensure up-to-date, orderly contract documentation.

To call an automated contract solution a “smart contract” seems rather unwise. The term “smart contract” is afflicted with many misunderstandings and problems that cannot be overseen yet.^[1] It is better to refer to a (technically) true and not trend-oriented description. Last but not least, a blockchain smart contract is neither suitable^[2] nor necessary for useful inter partes contract automation purposes.

The following article refers to the example of the apartment rental agreement in order to introduce design options of an electronic, (partially) automated contract. The article also examines the landlord‘s ability to use a database management system (DBMS) not only to manage a rental agreement, but also to manage all current rental agreements, contracts concluded as well as advertisements and agent chatbots in parallel. It is not exhaustive and cannot offer more than basics for the further development of the software, contract content and law design. In order to replace the paper contract as the least manipulable medium, well coordinated legal and IT (security) advice, the involvement of insurers and, of course, suitable hardware and software are required. ___STEADY_PAYWALL___

B. Why blockchain-based smart contracts are unsuitable

I. General and common sense issues

A contract is an agreement between two or more parties who wish to share information and, based on this individually created basis of trust, grant benefits to each other. Unless the law does not provide for a certain form, the contract can be concluded in a non-physical, paperless manner.

A blockchain is a peer-to-peer data sharing and administation technology with special characteristics.^[3] The peers, computers run by human users, share information in order to create and maintain a shared truth. Information is being written into the shared database by the peers, thus limited to their individual understanding and the technical circumstances. The peers (automatically) accepting the entered information as “true” do not review it for (legal) correctness.^[4] Therefore, the shared truth not necessarily has to equal the truth memorized in paper documentation or minds outside of the network. What peers share and accept to be true is treated as true among them. If a court ruled a different truth based on facts of the real world, the network would have to find a way to correct the shared information or at least mark it as unlawful in order to bridge the gap between the differing truths.

In a data sharing network there is, by purpose, no confidential treatment of personal data provided to the contractual partner, which is usually necessary or at least expedient for the fulfilment of its contractually assumed obligations and the demand of its rights within the framework of the contractual relationship. A data sharing network that is able to hide secret content from third parties within the network, but allows for a shared truth by using substitute information (hashes, for example) is technically feasable; however, it moves the weak point to that person or group who holds the key to the “fog machine”.^[5] Having in mind that weaknesses and security risks are hard to detect if code is obsfucated and security through obscurity has proven risky, the decision of implementing a technology like the blockchain should be examined thoroughly.

In relation to blockchain technology, smart contracts are scripts, i.e. computer programs. Their “smartness“ has neither sense nor function. A smart contract can be created by another smart contract, i.e. another computer program.^[6] All processes of a smart contract are executed 1:1 on the computers of the other peers.^[7] The human will, which is reflected in the declaration of intent as the basis of a contract, can be absent during smart contract creation and processing. Therefore, smart contract does not equal a legal contract.

Last but not least, when it comes to an apartment rental agreement, human trust will never be replaced by mere calculation processes either. The tenant brings his most personal belongings, thoughts and statements into the rooms of the landlord. His existence depends on the availability of the shelter. The landlord hands his property over to the tenant. He makes himself dependent on the tenant’s care for his rooms, not only the payments. Payments can be automated to a certain degree (a funded account), human care cannot. If the parties mistrust each other, no contract will be concluded. The discussion about cutting the intermediary out of multi-person relationships does not affect classic two-party contractual constellations that are built on human trust.

II. In the end, it is all about needs, not trends.

Contract automation first of all has to come with advantages in order to be deployed. As long as a simple piece of paper or PDF file satisfies the needs of landlord and tenant, there is no need to automate them. As long as a contract needs no regular updates and security fixes, private landlords will prefer paper over computer programs. However, having in mind commercial landlords managing thousands of apartments, even worldwide, contract creation and management automation does make sense from an economical perspective. This is what will be looked into in the following section.

C. Realizability of automated contracts, in particular apartment rental agreements

There are many possibilities of technical implementation with relational database systems and certainly there are better and worse alternatives. Cost factors often determine which form of realization of automated contracts will be commissioned and who will be responsible for development and maintenance. Therefore, only a simplified basic model with the essential requirements can be designed and described.

It should also be noted that there is no realizable full automation. Real-world circumstances can only be determined and processed within the framework of the written software code to a very limited extent.^[8]

I. Contract “form“

An automated apartment rental agreement as described here is basically just software. Software is a collective term for the entirety of programs, the associated data and the necessary documentation that allow tasks to be performed with the help of a computer.^[9] The contract software, like any other software, is subject to the classic life cycle, i.e. the phases of development, use, refurbishment and, if applicable, separation or replacement by a better alternative.^[10]

The contract software must be equally accessible and operable for both parties. Both contracting parties should be tasking parties in order to balance interests and powers. The performance of tasks by the computer in favor of one party always affects the other contracting party. The German laws on the general terms and conditions is intended to ensure a balanced distribution of risk between the parties. Therefore, it has to be made sure that the contract software carries out the contract administration within this legal frame. This means, for example, that if one party tries to misuse the software for its own benefit, the software must prevent damage to the other party, for example, by obtaining clearance.

The contract documentation must be exportable at any time in a complete, human readable and understandable form. The interpretation of the computer code may not be charged to the tenant. If, for example, he wishes to have legal issues clarified by a court, he must be able to present the contract in a form that is also legible and comprehensible to the judge. The document type must be common, such as PDF, Word or XML standard.

II. Contract “place of operation”

Tenant and landlord need a software both can comfortably use in order to manage their contractual obligations. Since they rarely live in the same place and do not want to give the other person access to their own computers, they must be able to access the contract software from at least two independent devices. The contract software could be a part of a database management system (DBMS), with its own rules as to who has access and modification rights to the jointly managed data. It must be ensured that third parties are excluded from access and change making. Personal data must be collected, processed and used in accordance with data protection rules. Backup strategies, back-ups, everything has to be taken care of.

Commercial landlords could be interested in the software running on their own IT infrastructure if they have a large portfolio of apartments. The tenant could then be granted exclusive access to the (centralized) contract database and software provided for the specific apartment. In any case, the software-based conclusion of the apartment rental contract must be preceded by a contract on the use of the contract software, meaning that at least two contracts have to be prepared, individualized, concluded and managed.

Some landlords might be afraid of additional legal responsibility and liability. Third party cloud service providers could offer both infrastructure (IaaS) and software (SaaS) to tenants and landlords, at lower prices. The advantage is the bundling of technical expertise and thus the elimination of (at least) an additional software maintenance contract. A major disadvantage of course is the loss of data sovereignty and independence. Trust in the infrastructure and provider has to be built first.

III.  Sketching the automated cyclical process

The lease of an apartment is cyclical. It begins with the advertisement of the object in order to draw the attention of prospective tenants to it. Then an inspection process accompanied by an agent, the landlord himself or his representative takes place. This is followed by contract negotiations, if necessary, with expert assistance. The conclusion of a contract is relatively simple and usually takes place by signing an identical copy of the contract. During the handover of the apartment and keys, the parties themselves or through representatives document existing defects and contract-relevant conditions. As soon as a termination occurs, new prospective tenants have to be attracted. Once these are found, the inspection process begins, which leads to contract negotiations etc. The cycle starts all over again.

This described rental cycle contains repeated high expenditures, high costs and inefficiencies, which can be strongly reduced or even avoided by electronic data processing. But what can the entire process of renting an apartment look like, from the advertisement via the conclusion of a rental contract to the termination of the contract?

A database management system (DBMS) similar to a client relationship management system (CRMS) is conceivable, as outlined below, in which the landlord can manage various (contract) databases together with the respective rental parties while excluding third parties. The databases contained in the database management system can be managed in parallel or sequentially.

1. The automated advertisement

Although the apartment advertisement is upstream of the rental process, a database management system allows a cyclical apartment administration from advertisement to advertisement. As soon as the software “knows“ that an existing apartment rental agreement will end, it is able to trigger the task of creating a housing ad. In addition to the classic data of an apartment, it can also gather and include the state of refurbishment and renovation and, if necessary, the need for modernization, calculate a current market price including the current rent index and automatically obtain the necessary approvals from the current tenant.

2. The chatbot agent

Chatbots are already being used in many industries to provide more efficient and personalized customer service. These chatbots allow a support tailored to the individual needs of the customer at any time, at any place and basically: open end. The expensive agent will also be replaced by chatbots in the foreseeable future. A chatbot can answer questions about the apartment advertised, coordinate the viewing, accompany and comprehensively document information discussions. There is practically no need for a human to invest hours of valuable time.

With regard to apartment viewings, the chatbot can be combined with a virtual reality application or, in the context of refurbishment and modernization measures planned by the landlord, with augmented reality applications. The prospective tenant would not have to pay any travel expenses, but could visit the apartment independent of time and place. The current tenant would not have to endure any disturbing inspections of his intimate premises by numerous prospective tenants, but rather at most a one-time inspection and measurement of the apartment by the landlord. The virtual room design and removal of the personal note could then be done by software. The landlord‘s need of access as well as the tenant‘s right of possession could thus be appropriately balanced. Additional information, such as defects that must be reported by the tenant, can be stored in and taken from the contract database.

The prospective new tenant‘s interest in information on the current state of the apartment can be satisfied by accurate documentation of the defects and a timeline documenting the progress of modernization, refurbishment and renovation measures in recent years. Personal needs, e.g. to find out whether the apartment has been beautifully painted, can still be satisfied by an elaborate, real apartment inspection. However, it can be assumed that the prospective tenant does not want to risk the expenditure of time, while hundreds of other competing prospective tenants would rent the apartment immediately, regardless of possible defects. The landlord who provides comprehensive and correct information sufficient for an informed decision by the prospective tenant for or against the apartment, on the other hand, relieves himself of the burden of discussions, work and thus wasted time.

It is important to note that a chatbot used towards third parties must not interact directly with the contract database. A gateway for malware and possibilities of access to personal tenant data must not be created. The tenant’s personal data must be separated from the relevant apartment data. It is conceivable to store a copy of the relevant apartment data in a separate apartment database from the contract database, which can be accessed by the chatbot software.

If a chatbot is used, prospective tenants should also be informed in detail about what happens to their personal data. People are communicative and might leave more personal information than necessary. Such information must be separable and deleted. For the protection of the new tenant, however, the chatbot itself should not be involved in the process of contract conclusion. This ensures that the chatbot always obtains and processes only relevant, i.e. apartment-based and not personal data.

3. Concrete documentation of the condition of theapartment

Instead of a superficial, possibly insufficient description of the apartment’s location in the rental agreement itself, it is possible to keep an up-to-date and permanent description of the apartment that is concrete to perfection. The apartment database, which obtains copies of all relevant data from the contract database, allows for a continued and accurate documentation of the apartment’s condition at a specific point in time in addition to a specific formulated rental agreement. Thus, thanks to copies of the relevant data from the (previous tenant‘s) apartment database, the condition of the apartment before or upon handover can be accurately recorded in the contract with a new tenant. A handwritten protocol would be obsolete.

4. Separate management and deletion of personal data

The tenant’s data and thus his personal data have to be stored in the contract database to fulfill the purpose of the rental agreement. However, these have to be separated from the apartment data. Separation is the only way to ensure that personal data does not fall into the hands of third parties. The landlord‘s apartment database, which is also inaccessible to the tenant, cannot and must not contain any (previous, current or future) tenant data.

The personal data of the previous tenant has to be deleted as soon as all mutual claims arising from the rental agreement are met, settled or time-barred.

5. Contract construction kit instead of oral contract negotiations

An automated apartment rental contract for the purpose of more efficient contract management makes only limited sense if all processes and declarations of the tenant are first documented in paper or text form and then manually entered into the contract database. It is smarter to grant the future tenant access to a contract database specifically set up for him and to guide him through a kind of modular system which allows decisions to be made within the framework set by the landlord.

Of course, the legal restriction must always be taken into account: An agreement deviating to the detriment of the tenant can be legally ineffective. Nevertheless, a shortcut solution can reduce the long decision-making process for the lazy or time-sensitive future tenant. If (as is usually the case) he does not wish to examine and negotiate the contents of the contract in detail, he can choose the option “General Terms and Conditions“ (GTC). According to section 305 para. 1 cl. 1 BGB (German Civil Code), general terms and conditions (“Allgemeine Geschäftsbedingungen”, AGB) are pre-formulated contractual terms and conditions for a large number of contracts which one contracting party (user) provides to the other contracting party upon conclusion of a contract. In this case, the tenant only has to enter his personal data and agree to the preset rental contract conditions, which are then displayed to him in the continuous text. This allows the landlord to arrange the general conditions in such a way that the contract meets his most favorable options – within the legally permissible framework.

a. Design that leaves choice to the tenant at any time

What could the interface of the contract construction kit look like on the tenant side? One could assume that the access takes place via the smartphone and the software is straightforwardly designed. The prospective tenant could be guided through a logically structured question-answer system. Consent is given by checking a box or leaving a “like”. The GTC should remain accessible via the contract software at all times to allow for comparison or altering a selection.

b. Automatic rent reductions as a chance

According to German law, the tenant owes a reduced rent if and as long as the usability of the apartment is reduced, see section 536 para. 1 cl. 2 BGB. There are no universal rules. Existing court decisions only provide orientation. As a result, many disputes arise over the question of how a shortage affects the percentage of usability of the apartment and thus by what percentage the rent is reduced.

The apartment rental contract software could provide for automatic rent reduction in case of various deficiencies. For example, the landlord has obtained legal advice and offers, as a result of a decision by the Berlin Regional Court^[11], automatic rent reduction, if the following defects occur and the tenant agrees to

• water supply failure: up to 20 % rent reduction
• failure of the gas supply for the stove: up to 10 % rent reduction

The choice option could be implemented with a slider. A contract would be concluded if the tenant chose between 0 and 20% or 10%. He is able to consult a lawyer or other legal support. No agreement would be made if the tenant exaggerated. However, an agreement would still be possible with no settings for automatic rent reduction though, i.e. by choosing the General Terms alternative.

It should be noted that an agreement on automatic rent reduction can always be overruled by a court. It is simply a way of bilaterally reducing the risk of disputes. However, depending on the individual contractual arrangement, the tenant would not have to fear termination due to rent arrears that result from the landlord’s contract offer.

IV. The written form

Indefinite apartment rental agreements do not require any form and do not pose any difficulty for their automation. The text form is sufficient for evidence purposes. The agreed text of the contract should therefore be human-readable for both parties and in an exportable common file format. Temporary rental agreements must be concluded in writing, sections 550, 575 para. 1 BGB. According to section 126a BGB the written form can be replaced by the electronic form, i.e. both contracting parties must provide an identical electronic document with their name and a qualified electronic signature according to signature laws.

The main obstacle, however, will be the qualified electronic signature for the tenant as a consumer. To electronically sign a document in a qualified manner, a personal and secret key is required which is located on a secure signature creation device – for example a signature card. At the present time, it cannot be assumed that consumers will have “matching“ signature cards such as widely accepted credit cards. There is a high risk that contract conclusion will fail due to the lack of compatible encryption technology on both sides. The legally effective realization of a fixed-term rental agreement in simple electronic form is not possible. However, taking into account the requirement of easy exportability of the contract at any time, the automated apartment rental agreement may be accompanied by two identical copies signed in writing by both parties.

D. Automating important contract content

I. Introduction

Before discussing a selection of individual implementation proposals, it should be noted that a comprehensive analysis of more automated contractual agreements is not possible in the brevity of a technical contribution. This requires comprehensive legal advice in close cooperation with the software manufacturer chosen by the client (landlord and/or software provider).

The main obligations of the rental agreement parties are

1. grant of use (section 535 para. 1 BGB),
2. rental payment (section 535 para. 2 BGB),

furthermore

3. rent amount (sections 557 ff. BGB)
4. right of set-off and retention (section 556b BGB)
5. rental collateral (section 551 BGB),
6. operating cost accounting, beyond that
7. reduction right (section 536 BGB),
8. notification- (section 536c BGB) and
9. obligation to remedy defects (section 535 para. 1 BGB),
10. compensation for damages and expenses (section 536a BGB),
11. announcement of maintenance and modernisation measures (sections 555a, 555c BGB)
12. transfer of use to third parties (section 553, 540 BGB)
13. contract termination.

II. On individual rights and obligations

1. Grant of use (section 535 para. 1 BGB)

The landlord is obliged to grant the tenant the use of the rental object during the rental period, section 535 para. 1 cl. 1 BGB. In this context, grant of use means grant of sole use, not joint use.

It is possible to operate the apartment door lock exclusively via an electronically operated motor and to make this electronic control the subject of the contract. There are already so-called smart homes today that can be completely remote controlled from the lock to the lighting control system. The grant of their use would, instead of a physical transfer of keys, require, for example, the establishment of an additional user account and the installation of the smart home app on the tenant‘s smartphone. Last but not least, it is conceivable to integrate the control of the apartment door lock into the contract database, which possibly functions like a set of keys and manages all contract applications.

Regardless of the questionable security of electronically controlled door locks, it should be debated how it is ensured that the landlord hands over all keys to the apartment to the tenant. The landlord is not allowed to withhold keys to the apartment. In this case, the landlord would remain unilaterally in a position to enforce his termination at any time by abusing tenant protection regulations. Pursuant to section 546 para. 1 BGB, the tenant is obliged to return the rental object after termination of the rental relationship, which is sufficient. An agreement to the effect that the landlord is entitled to take back the property after (the rejected) termination of the rental contract would be invalid, since it unreasonably disadvantages the tenant by allowing prohibited deprivation of possession in the sense of section 858 BGB. The judicial clarification as to whether the termination is effective or not is incumbent on the tenant, who would suddenly be homeless and without access to property, proof and documents.

In addition, the tenant will have no control over electronic keys. If the landlord sets up a “tenant key account“ and deactivates the “landlord key account” for the duration of the rental period, he can also reactivate his account during the rental period to open the apartment door. Only a temporary rental agreement could suggest that the landlord may not really have access, for example through a kind of time lock.

Instead, a hardware token could be transferred which is displaying a constantly changing PIN code. The PIN would be required in order to open the apartment’s door. In addition, i.e. through Two Factor Authentication, the smartphone could serve as a second proof of identity. Such a combination can indeed be more secure than a physical key that never changes. If, however, the landlord remains “administrator“ of the door key software, and this is to be assumed, then he remains in a position to open the door and invalidate the tenant‘s keys at any time and produce new keys. As a result, this corresponds to the unauthorised retention of a key to the apartment and subsequent change of lock in order to lock out the tenant.

The mere possibility of the above-mentioned withdrawal of the contractual use by the landlord at any time does not constitute an obligatory granting of use within the meaning of section 535 BGB. The landlord would violate his main contractual obligation. In any case, the tenant would be entitled to claim all required passwords, in particular the administration password.

2. Rent payment

In the case of the rental payment, it is tempting to automatically collect the amounts due each month, at the latest on the third working day (section 556b para. 1 BGB) using software shared with the tenant. However, this is not directly possible via a shared database like the one discussed here. In the best case, the payment status is updated automatically or manually in a regular manner. Processes for reminders, warnings and terminations due to rent arrears can be linked to and triggered based on this information.

For the protection of the tenant, however, any payment data should be anonymised within the contract database. In addition, the landlord should store SEPA direct debit mandates separately. Even if a hack took place, the tenant could undo an unlawful removal.

Bearing the risks in mind that can be mitigated by payment reversal, it is highly problematic to implement automatic payments using blockchain technologies which are designed with the intention of non-reversal.

3. Amount of rent (sections 557 et seq. BGB)

An interesting question is whether and when the landlord is allowed to regulate the rent amount and its calculation using algorithms.

During the rental period, the parties may agree to an increase in rent, section 557 para. 1 BGB. They can also do so in advance, i.e. in accordance with sections 557b, 557 para. 2 BGB. Other increases are possible due to sections 558 to 560 BGB, unless an increase is excluded by agreement or the exclusion results from the circumstances.

In the case of both graduated (section 557a para. 1 BGB) and index rentals (section 557b para. 1 BGB), a written agreement is required. If the printable apartment rental agreement document including such a regulation is ready to be signed and two duly signed copies are exchanged, nothing stands in the way of an automated rental agreement management including automatic rental price updating.

A rent increase up to the local comparative rent needs only text form, see section 558a para. 1 BGB. The rental agreement software with comprehensive documentation and direct communication options between landlord and tenant would therefore meet the legal requirements. Accordingly, the tenant’s consent to the rent increase in accordance with section 558 BGB is not formally bound. A short text message via the rental contract software is sufficient.

The text form shall also apply to requests for rent increases due to modernization, cf. section 559b para. 1 cl. 1 BGB. However, the declaration shall only be effective if it calculates the increase on the basis of the costs incurred and explains it in accordance with the statutory requirements, cf. section 559b para. 1 cl. 2 BGB.

4. Right of set-off and retention (section 556b BGB)

Assuming the landlord‘s bank has no problem with SEPA direct debits issued in text form via the internet, the landlord can have a SEPA direct debit mandate for recurring payments issued by the tenant interacting with the contract program via the internet when the contract is concluded. In this case, the tenant has a right of revocation, which he could exercise through his right to change the contract database, such as when counterclaims become due. The intention must be indicated to the landlord however at least one month before maturity of the rent in text form, section 556b para. 2 cl. 1 BGB. The landlord should use this time period to prevent extra costs, for example, triggered by payment reversals.

5. Rent security deposit (section 551 BGB)

The rent security deposit can also be paid by issuing a SEPA direct debit mandate. However, the tenant must then be able to pay in three installments, see section 551 para. 2 BGB. Since the rent security deposit must be kept separately from the landlord‘s assets (section 551 para. 3 cl. 3 BGB), this SEPA direct debit mandate for one-time or triple recurring payments should not be issued to the landlord, but directly to the bank. For this purpose, the landlord could provide the tenant with the form provided for this purpose via the contract database, which the tenant may submit directly to the bank in the required form.

6. Operating cost accounting

Tenant and landlord may agree that the tenant bears operating costs, section 556 para. 1 cl. 1 BGB. They can also agree that appropriate advance payments will be made on the operating costs, section 556 para. 2 BGB. In this case, the operating costs shall be invoiced annually; at the latest by the end of the twelfth month after the end of the accounting period, section 556 para. 3 BGB. If the landlord offers an integrated operating cost accounting service as part of the joint contract management, which informs the tenant immediately after completion and includes all necessary invoices that can be viewed, the landlord saves considerable additional effort and reduces the risk of no longer being able to assert an operating cost claim due to the elapsed accounting period.

A push message could be sent to the tenant’s smartphone via the shared contract software in order to draw attention to the payment due. The receipt of payment could be confirmed accordingly.

7. Reduction right (section 536 BGB)

According to section 536 para. 1 cl. 1 BGB, the tenant is exempt from paying the rent for the period in which the suitability of the apartment for contractual use is suspended. For the time during which the suitability is reduced, he has to pay only a reasonably reduced rent (clause 2). An insignificant reduction of the suitability remains out of consideration (clause 3).

The reduction shall occur by operation of law, but the amount has to be determined by court in every individual case. However, the parties are always free to agree on the reduction amount. As suggested above, if certain reduction quotas have been agreed in advance, the monthly rent can be automatically reduced after the tenant has entered a defect report.

8. Obligation to report defects (section 536c BGB)

If, during the rental period, a defect in the rental object becomes apparent or if a measure is required to protect the rental object against an unforeseen risk, the tenant must notify the landlord immediately, section 536c para. 1 cl. 1 BGB.

Within the framework of a joint rental contract management, the tenant could, for example, report defects on his smartphone via a special interface. Delays due to lack of availability can be ruled out. The tenant will find the 1-2 minutes to make a necessary entry on the smartphone. The incentive is particularly high if the entry leads to the automatic rent reduction mentioned above.

In addition, the tenant could arrange the inspection of the defects with the landlord in a subsequent date inquiry. Photos of the defect could be uploaded directly by the tenant and transmitted to the landlord.

9. Obligation to remedy defects (section 535 para. 1 BGB)

In order to comply with the removal of defects more quickly, the landlord could provide current contact data of partner companies via the contract database. The tenant would thus be in a position to coordinate his schedule directly with the specialist company.

10. Damages and reimbursement of expenses (section 536a BGB)

The joint contract management could also exclude the risk of disputes following claims for damages and reimbursement of expenses of the tenant according to section 536a BGB, too. As a rule, the tenant can solve his problem himself. If the landlord does not agree with the cost estimate of the partner company, he is still free to commission another company.

11. Announcement of maintenance and modernization measures (sections 555a, 555c BGB)

Maintenance measures are to be announced to the tenant in good time, unless they are only associated with an insignificant effect on the rental object or their immediate implementation is mandatory, section 555a para. 2 BGB. Since there is a direct connection to the tenant via the contract management software, the landlord could use push messages to announce necessary immediate measures himself.

The landlord has to announce a modernization measure to the tenant at the latest three months prior to its commencement in text form (modernization announcement), section 555c BGB. Whether a push message or a letter entered in the contract database that can be exported – the required text form can be easily fulfilled with the help of the contract software.

12. Transfer of use to third parties (sections 553, 540 BGB)

The tenant is not entitled to leave the use of the apartment to a third party without the permission of the landlord, cf.  section 540 para. 1 cl. 1 BGB.

If, after conclusion of the rental agreement, the tenant has a justified interest in letting part of the living space to a third party for use, he may demand permission from the landlord to do so. This does not apply if there is an important reason lying in the person of the third party, if the living space would be excessively occupied or the landlord cannot be expected to allow it for other reasons (section 553 para. 1 BGB).

The law does not prescribe any particular form for the notification of the tenant or the permission of the landlord. Here, the parties can also communicate the essentials via the contract management software. However, caution is required when transmitting personal data of third parties.

13. Termination of contract and deprivation of use

As already indicated above, deprivation of use by the landlord against or without the tenant’s will is not permissible (see section 858 para. 1 BGB, “Verbotene Eigenmacht”). In particular, it is not permissible to withdraw the tenant‘s possession of the apartment in order to force rent payments.

Pursuant to section 543 para. 2 cl. 1 no. 3 BGB, the landlord may terminate the tenancy for good cause without notice if the tenant is in arrears with payment of the rent or a not inconsiderable portion of the rent for two consecutive dates or is in arrears with payment of the rent for a period which extends over more than two dates in the amount of an amount which reaches the rent for two months. According to section 569 para. 3 no. 1 BGB, the arrears in the rent are only to be regarded as not insignificant if they exceed the rent for one month. The termination becomes ineffective according to section 543 para. 2 cl. 3 BGB, if the tenant could free himself from his debt by set-off and immediately after the termination declares the set-off. The termination shall also become invalid pursuant to section 569 para. 3 cl. 2 no. 2 BGB if the landlord is paid with respect to the rent due and the compensation due pursuant to section 546a para. 1 BGB at the latest by the end of two months after the service of the action for eviction or if a public body undertakes to satisfy the claim.

The landlord is not allowed to take the law into his own hands. An agreement deviating from section 569 para. 1 to 3 BGB or from section 543 BGB to the detriment of the tenant is ineffective.

The termination of the tenancy also requires the written form, section 568 para. 1 BGB. In the event of termination by the landlord, the tenant‘s objection to the termination must also be declared in writing, section 574b para. 1 cl. 1 BGB. The communication of these declarations cannot be legally effective via contract management software as described here.

E. Conclusion

In principle, it is possible to automate apartment rental contracts. The advantage lies above all in the reduction of administrative expenses and costs for the landlord. By exploiting the savings potential for the landlord, the tenant benefits from a wide range of advantages that would normally be claimed through legal action at great expense. Data protection and security requirements are high, but can be met in comparison to the use of blockchain technology. In any case, the landlord requires professional legal and technical implementation advice.

It is clear that a full automation is not possible. Tenants and landlords will have to make entries in most cases, in order to reach an expenditure by the software. Automation also has (rational) limits: for example, a well-crafted contract also provides for regulations that simply clarify the legal relationship and the distribution of risk between the parties in order to prevent unnecessary disputes. Above all, an automation of small repair and cosmetic repair clauses makes no sense.

In many points, the written form remains, subject to a law change, mandatory, the qualified electronic signature is not convertible (yet). However, the written form can be fulfilled if the contracting parties additionally fix the export- and printable electronic agreement in writing.

Finally, it should be noted that the automation of rental contracts must not lead to the landlord unilaterally placing his interests above the interests of the tenant who requires protection. The legal invalidity of agreements to the detriment of the tenant is and remains law.

V

V

^[1]  Illustrative: Otto/Conrad, Ri 2019, 111 (112 et seq.).

^[2]  Otto, annex to the statement for the German Bundestag, https://www.bundestag.de/resource/blob/627774/a702b4a61c8b64e6fc9ac8176f473167/11-RAin-Claudia-Otto-COT-Legal-data.pdf (last downloaded on 15 December 2019).

^[3]  That is why it is a subset of distributed ledger technology (DLT).

^[4]  There is no possibility and will to check the contents of a transaction as correct. There is no time to do so. See Otto, Ri 2018, 16 (24, 32), also Bernzen, Ri 2018, 148 (157); Otto, Ri 2018, 164 (184) with further references.

^[5]  Otto, Ri 2018, 164 (168 et seq.).

^[6]  Otto, Ri 2017, 46 (47).

^[7] Otto, Ri 2017, 3 (4).

^[8]  At this point, the discussion of possibilities of so-called Artificial Intelligence, e.g. Machine Reasoning (MR), seems premature and rather science fiction.

^[9]  Lassmann (editor), Wirtschaftsinformatik: Nachschlagewerk für Studium und Praxis, p. 127.

^[10]  See Lassmann (editor), Wirtschaftsinformatik: Nachschlagewerk für Studium und Praxis, p. 132.

^[11]  LG Berlin, decision dated 18 August 2002 – file number 67 T 70/02.