Decisions of the Higher Regional Court of Cologne on prospectus liability claims against real estate fund initiators
In its decision of September 4, 2012 (Ref. 18 U 42/11 et al.), the Higher Regional Court (OLG) of Cologne dealt with so-called prospectus liability in connection with closed-end real estate funds. Specifically, 16 investors sought damages from several issuing houses, arguing that misleading or incomplete statements in the fund prospectuses had led them to make misguided investments. The OLG dismissed the claims. The following will examine the decision, its reasoning, and its significance for investors in more detail, and will place it within a legal context.
Background: Prospectus liability and real estate funds
Legal basis for liability – Prospectus requirement and information obligations
When placing closed-end real estate funds, initiators and founding partners are subject to extensive prospectus obligations. A sales prospectus must disclose all circumstances that may be material for a potential investor’s investment decision. If essential facts are concealed or misrepresented, the investor may in principle have a claim for damages due to so-called prospectus liability. The decisive factor is whether the prospectus conveys an accurate, complete, and unbiased picture of the fund’s economic and legal situation.
Significance of closed-end funds and risks for investors
Closed-end real estate funds are often associated with long-term commitments and structurally elevated risks – for example, regarding the profitability or lettability of properties. The availability of information before subscription therefore plays a central role in investor protection within the framework of capital market law. Courts are repeatedly called upon to clarify whether and to what extent prospectuses must transparently disclose potential risks and economic uncertainties.
The decision of the Higher Regional Court of Cologne
Claims of the investors
The investors claimed that the prospectus used contained numerous defects and concealed key facts, such as the bases for forecasts or market risks. Therefore, they demanded the rescission of their investment and compensation for alleged financial losses. The liability of the initiators was thus governed in particular by § 13 VerkProspG (former German Sales Prospectus Act) as well as the principle of prospectus liability in the narrower sense.
Substantive reasoning of the court
The Higher Regional Court of Cologne dismissed the lawsuits after a thorough assessment of the prospectus and the alleged defects. In its reasoning, the court stated, among other things:
- Transparency and risk disclosure: The prospectus had presented the essential fundamentals of the investment, in particular its operation, opportunities, and risks, accurately, comprehensibly, and sufficiently clearly. The court did not identify any incorrect or insufficient presentation of material circumstances.
- Causality of the prospectus information: Furthermore, there is no claim if any prospectus defect was not causative for the plaintiff’s investment decision. The plaintiffs had not sufficiently demonstrated that they would have refrained from investing had they been correctly informed.
- Liable parties: The Higher Regional Court further clarified that prospectus liability generally attaches only to initiators and founding partners, and not to any other third parties, provided they are not designated as prospectus responsible parties.
Relevance of the decision
The decision clarifies the requirements for prospectus liability in closed-end real estate funds. It emphasizes that negative developments of the investment or subsequent economic problems alone do not justify the assumption of an inaccurate prospectus. In addition, the judgment highlights the requirements for demonstrating causality between possible prospectus defects and the individual investment decision.
It should be noted that the judgment refers to the specific case to be examined and cannot be generally applied to all fund participations. In the field of prospectus liability, review is always case-specific.
Capital market law consequences and options for action
Implications for investors and initiators
The decision of the Higher Regional Court of Cologne is of considerable significance for both parties: investors as well as initiators of real estate funds. It highlights the high requirements regarding the burden of presentation and proof in prospectus liability actions and underscores the importance of a careful, risk-focused review of offering prospectuses. For initiators, it confirms the value of well-prepared and comprehensive prospectuses.
Developments in case law
The judgment is in line with a still demanding position taken by the Higher Regional Courts regarding the prerequisites for liability. Especially in the context of investments in closed-end funds, it is, from a legal perspective, essential to carefully compare prospectus contents with the actual economic circumstances.
Outlook and legal support
Prospectus liability remains a complex area in both case law and practice, requiring a precise analysis of each individual case – whether in regard to the contents of prospectuses, their interpretation, or potential liable parties. Unresolved or legal issues regarding closed-end real estate funds and prospectus liability claims should always be assessed taking into account current case law and the circumstances of the individual case.
Should you have any questions regarding closed-end real estate funds, prospectus liability, or general capital market matters, you may contact the Rechtsanwälte at MTR Legal Rechtsanwälte. We operate nationally and internationally in all areas of commercial law and assist clients with complex issues concerning capital markets, corporate, and banking law.
Source: Higher Regional Court of Cologne, judgments from 04.09.2012; published on urteile.news (https://urteile.news/OLG-Koeln18-U-421118-U-471118-U-4811-uaProspekthaftungsklage-OLG-Koeln-weist-Klagen-von-16-Immobilienfonds-Anlegern-zurueck~N14095).
