The Higher Regional Court of Cologne shows how quickly lived market logic becomes a question of contract interpretation.
The ruling of the Higher Regional Court of Cologne of 25 April 2024 (case no. 24 U 77/23) on redemption suspensions for open-ended special real estate funds is likely to make many asset management companies more nervous than some new regulations.
Because it is a very clear reminder that civil courts do not look at questions of doubt from the perspective of the fund industry. It is not the market logic that is decisive there – but the logic of the contract.
And it is precisely in the memory of this that the real relevance of the decision lies.
What is the price if share redemptions are “on hold”?
In the specific case, there were 33 months between an investor’s request for return and the actual payment of the fund units — with unit prices falling significantly in the meantime.
The capital management company was of the opinion that the later, lower share price should therefore be decisive. Economically, this seems logical at first: If real estate can only be sold at a discount during a redemption suspension, the remaining investors should not unilaterally bear the market losses.
However, the court looked elsewhere: namely not at the market logic, but exclusively at the investment conditions. And from the court’s point of view, these were less clear than many market participants would probably have assumed themselves. The documentation did regulate the valuation date for redemption requests — but apparently not explicitly enough what should apply in the event of a later suspension of redemption.
So this is where the difference became apparent.
On the one hand, the industry has so far treated many things as lived market logic. Civil courts, on the other hand, treat questions of doubt as a pure question of interpretation of “the paper”.
From a legal point of view, investment conditions are not a mere description of lived market practice, but contractual conditions – and thus ultimately shaped by general terms and conditions law. In case of doubt, ambiguities can therefore be at the expense of the person who formulated the documentation.
Therefore, starting from market logics only works until one of the participants refers exclusively to the paper in his hand.
General relevance for share redemptions
The actual explosive nature of the judgment therefore extends far beyond classic suspensions of redemption under section 257 KAGB.
Because the legal core of the case ultimately concerns a much more general question:
What actually happens legally and economically in the time between the return request and the actual service? So far – just following the logic of the market – people have thought more practically in the purely technical dimensions in the sense of administrative processing or liquidity procurement.
The ruling now suggests that it is precisely these interstices that are likely to be considered much more precisely from a legal point of view in the future. And this does not only apply to the provision of Section 257 KAGB, which was created for the purpose of dealing with pronounced liquidity crises. For example, with the new liquidity management tools, constellations will arise much more frequently in the future in which redemptions are “on hold” in time: through gates, stretched redemptions, liquidity management, swing mechanics or other instruments that decouple redemption requests and actual payouts in time.
This is exactly where the same question suddenly becomes relevant: What price actually applies during this interval?
The price at the time of the return request? The price at the time of actual operation? Or even something in between?
So far, much of this has been solved through market practices, pragmatism and common understanding.
The ruling now makes it unmistakably clear: In case of doubt, it is not market logic that decides — but documentation logic.
And that is precisely why the decision is likely to force numerous AIFMs to read their investment conditions much more precisely — and presumably also to formulate them more precisely.
Not because existing constructions are necessarily wrong. But because the ruling makes visible how quickly a supposed market standard can turn into an open question of interpretation.
📌 To put it bluntly as the conclusion:
Civil judges are not trained to intuitively think about market mechanics.They read contracts.
And this is precisely why investment conditions must formulate technically precise, clear and unambiguous what is economically desired.
Not for those who understand the market “from the market”.
But for someone who sits in an office and looks at the entire fund exclusively through a piece of paper.
