Keywords: real estate, Tenancy Law Amendment Act, lease agreement, contractual cure clause, written form, competition clause, commercial lease, power of attorney, transfer tax rates,
TENANCY LAW AMENDMENT ACT COMES INTO FORCE AS PER MAY 1, 2013
By Elmar Günther
On February 1, 2013, the Federal Council approved the "Act on energetic modernization of leased residential space and on the simplified enforcement of eviction writs", which had been enacted on December 13, 2012 by the German Parliament, without calling upon the Mediation Committee. Following the announcement in the Federal Law Gazette on March 18, 2013, the law will come into effect on May 1, 2013. Compared with the preliminary drafts (see articles in the Summer 2012 and Autumn 2011 issues of the Real Estate Newsletter), only marginal changes were made to the Cabinet's draft of May 2012. The regulatory content of the Act regarding residential tenancy law and the commercial tenancy law is briefly summarised in the following.
As before, the tenant is to tolerate certain modernization measures, including energetic modernization, which the government explicitly wishes to promote. Energy modernization measures are measures that sustainably save non-renewable primary and final energy with respect to leased objects. In spite of the impairment resulting from such energy modernization measures, the tenant will not be allowed to reduce the rent for the first three months. However, following these three months and in the event of the complete reversal of the fitness for use of the premises, the reduction will remain possible. Other modernization or conservation measures performed at the same time still do not exclude the continued reduction of rent. In the case of a dispute, law courts are authorised to estimate the ratio by which the various measures contribute to the impairment. The exclusion of reduction, however, will have no influence on tenants' possible reimbursement claims for damage or expenditure.
Regarding the advance information on expected savings potential, which will continue to be required, landlords will be able to refer to acknowledged standard values (e.g., 'Publication of Rules on Data Collection and Use of Data in Existing Residential Buildings' by the Federal Ministry of Transport, Construction and Urban Development of July 26, 2007) instead of commissioning costly expert opinions.
The costs for the modernization measures can still be allocated at a ratio of 11 percent p.a. The corresponding hardship test now is shifted to the subsequent demand for rent increases, in order to prevent the delay of implementing the measures. For this purpose, it is now provided for that the written form requirements and time limits for the tenant's objection due to hardship must be observed only in case the landlord pointed these out to the tenant at the time of announcing the measure.
In terms of establishing local comparative rent, which is restricted to residential tenancy law, energetic fit-out and characteristics have to be taken into consideration in the future. In addition, by way of legal regulation, federal state governments may lower the capping of rent increases up to the local comparative rent to 15 percent instead of 20 percent over a three-year period. This option is restricted to areas with a housing shortage.
By a switch to commercial heat supplied by specialised companies (contracting), the legislative expects energy savings and a more efficient use of energy. In future, the costs for contracting instead of generating energy by the landlord shall be allocatable as operating costs within the scope of the cost items "heat" or "hot water". This will depend on whether the following two prerequisites are met: (i) the supplied heat originates from a newly constructed plant or a heat network and (ii) the costs for supplying heat must not exceed the costs of previous energy generation of heat or water, i.e., the change must be cost-neutral for the tenant. In derogation of the supply of heat from a new system or a heating network, the heat supplier also will be able to operate the existing system more efficiently through 'plant management contracting'. However, this option is to be offered only to systems that already work efficiently, as, according to statutory regulations, older and less efficient systems should no longer be operated, if possible. Landlords must give three months notice in writing of the change in contract. Details are to be regulated in an ordinance issued by the German government. These rules and regulations relating to residential premises are a mandatory right for landlords and are to become a legal guiding principle for commercial tenancy law. It will make it easier to implement the change and cost allocation in this field. Even though varying agreements within commercial tenancy law are possible between the parties, the legal guiding principle, however, should be taken as the standard applied for the content control of standard form clauses.
Securing Order and Eviction
In addition, the Tenancy Law Amendment Act provides instruments against tenants that are unwilling to pay rent within the scope of civil procedures and compulsory execution.
The securing order issued by the court is to better protect landlords as plaintiff (as a rule) against accumulating payment arrears. The order is directed against sued tenants and concerns security deposits for monetary claims that have become due following the pendancy of the action. Proof of having paid a security deposit must be furnished within a time limit specified by the court. The prerequisites for furnishing said deposit, however, is that the action for payment is related to a claim for eviction. In the case of non-payment, the landlord may obtain a simplified eviction writ – but only for residential housing – through an interim injunction. However, one of the prerequisites for such an order is that the action has a high probability of success. It should be noted that in such cases, a short-term decision should be possible, which reduces the risk of large, accumulated payment arrears. While in the case of complicated and therefore protracted legal actions and a correspondingly high risk on the part of the landlord, the securing order usually would be inapplicable. Irrespective of the ordered security deposit, the plaintiff (usually the landlord) is obligated to pay damages if it loses the action in whole or in part. The defendant (usually the tenant) is able to participate concerning the claim during the proceedings.
Newly included is the statutory decree that courts must prioritise the processing of actions for eviction. It is doubtful whether the courts and the parties in question can appropriately monitor this regulation. However, it may well be that proceedings which are progressing very slowly can be attacked due to this regulation.
The 'Berlin Eviction' exclusively focuses on the eviction for obtaining direct possession of the premises without, at the same time, having to remove and place the tenant's property in storage at large advance payments of cost. The bailiff only needs to document the evidently movable items. If the items are not requested by the debtor within a one-month time limit following the allocation of property, they may be sold in an auction of distrained goods.
Being restricted by residential tenancy law only, the landlord may obtain an eviction writ by way of interim injunction in two constellations: First, against the tenant in the case of non-payment in response to the securing order, second, against the sub-tenant in the case of a sub-letting, which remains undisclosed until the conclusion of the hearings of the action for eviction against the tenant. This is a faster and less costly method than a corresponding separate court action for obtaining the eviction writ. The basis is that the eviction writ obtained against the tenant in the action for eviction cannot be executed against persons not named therein, such as unknown (unauthorised) sub-tenants.
Difficult Conversion into Condominium Property
In the field of residential tenancy law, the Act blocks the circumvention of tenant protection against termination of tenancy because of the owner's desired personal use of the premises in the case of converting residential buildings into condominiums pursuant to the so-called 'Munich Model': Even when a partnership acquires the leased object, a termination of tenancy because of (a partner's) desired personal use of the premises, is blocked for a three-year period, which federal state governments in densely populated areas may extend up to 10 years.
The changes in tenancy law will become applicable law much faster than anticipated. In spite of the evident focus on residential tenancy law issues, the legislator, incidentally adopted far-reaching changes in the commercial tenancy law. It remains to be seen whether the purposes pursued by the legislation can actually be realised and how these legal instruments prove their worth in practice. In any case, regulations on energetic modernization and the qualification of a quick and cost-effective 'Berlin Eviction' will lead to noticeable relief in the letting business.
THE WRITTEN FORM AND ITS EFFECTS ON THE BUYER
Düsseldorf Higher Regional Court, decision of November 29, 2012 – 10 U 34/12
By Dr. Jörg Michael Lang
A contractual cure clause, which is to remedy the lack of written form requirements of a lease agreement, is ineffective, unless overall it obligates not only the original contracting parties, but also the buyer as landlord.
The buyer, who has acquired the leased property with the lease agreement in question, asserts a claim for possession of the commercial property on the grounds of the lease agreement's lack of written form requirements. Compared with the Regional Court, Düsseldorf Higher Regional Court in the appeal ruled that no binding effect could be attributed to a standard cure clause with respect to the buyer of the property.
Content and Subject of the Decision
Lease agreements, whose term is in excess of one year, are subject to the written form requirements (Sec. 550 sentence 1 German Civil Code). The written form of a lease agreement is observed if all major agreements of the parties, which are set forth in a document, are adequately definable. If a written form is absent, the agreement will be concluded for a specific time and can be terminated, subject to a statutory time limit (Sec. 550 sentence 2 German Civil Code). In order to avoid the related disadvantages and risks, so-called 'cure clauses' are normally included in commercial leases. Under these clauses the parties are obligated to subsequently bring about the written form and prior to this time not to terminate the agreement due to lack of form. It is disputed whether such cure clauses as general terms and conditions of business, i.e., in the case of multiple application, are able to prevent the original contracting parties from terminating the lease agreement in good faith by referring to the lack of written form requirements. The issue here is further the question whether a standard cure clause has binding effect with respect to the buyer of the property. So far, there have been no high court rulings on these two issues.
Various opinions prevail in legal literature: According to one opinion the buyer of the property should be committed to a cure clause, since according to Sec. 566 German Civil Code this obligation and authorisation is transferred to the buyer. The buyer would be aware of this obligation from the lease agreement. According to another opinion, cure clauses that also obligate the buyer, should be invalid. This is substantiated as a violation of the protective purpose of Sec. 550 German Civil Code. Sec. 550 German Civil Code is intended to ensure that a subsequent property buyer who by law on behalf of the landlord enters into a rental agreement, whose terms and conditions are evident from the written agreement. In the case of lack of written form requirements, the buyer should be able to release himself from the contract prematurely by way of termination, so that the buyer would not have to accept agreements (in breach of the written form requirements) with which he is unfamiliar. This is to result in invalidity of the cure clause overall, so that the buyer (also) would be able to refer to it. This opinion was shared by Düsseldorf Higher Regional Court. However, the court allowed the appeal on points of law against the ruling, which was lodged.
Impact on Day-to-Day Business
The ruling of Düsseldorf Higher Regional Court, declaring the cure clause fully void, does not appear to be appropriate. This would mean that likewise the tenant would not be obligated to make good the written form requirements. The ruling of Düsseldorf Higher Regional Court does not take into consideration the circumstance that, as a rule, the owner's / buyer's investment decision is based on the continuous inflow of negotiated rents. If, in the course of the ownership change, the tenant would be granted the option of terminating the lease, this would have to be substantiated not only by giving dogmatic reasons, but also by counteracting the buyer's bases of calculation. On the other hand, the court's assumption that the buyer normally would have no knowledge of the lack of legal form requirements appears to be inappropriate. In the course of a careful due diligence it can frequently be determined whether there is a lack of legal form requirements. As a rule, the buyer is familiar with these defects and their potential cure. Of course, no one can ensure that the old landlord and the tenant entered into agreements that were in breach of the written form requirements, which had not been disclosed during the due diligence. The buyer only has limited options to safeguard against risks of this type. It is possible though for the parties to negotiate a guarantee that no agreements exist other than those disclosed between landlord and tenant. However, problems arise if the leased property is sold several times. In this case, the 'last' seller would hardly be willing to issue a guarantee for the period of previous ownership.
The only way out of this dilemma is if the cure clause is left out in the case of a sale, and the tenant remains committed to his obligations. The buyer, on the other hand, should be committed to the cure clause only to the extent that he was aware of non-formal agreements. Such a 'restricted' invalidity of the cure clause could be substantiated with the protective purpose of Sec. 550 German Civil Code, which protects the buyer only against unknown agreements that do not meet the written form requirements.
It remains an open question as to whether the Federal High Court of Justice will make a ruling in the short term, which will take into consideration legal and practical requirements.
COMPETITIVE SITUATION CONTRARY TO CONTRACT AS DEFECT OF THE RENTAL OBJECT
Federal Court of Justice, decision dated October 10, 2012 – XII ZR 117/10
By Anja Giesen
Providing competition protection may be of existential economic significance to the tenant of a commercial property. In particular, the scope and interpretation of competition clauses have repeatedly been subject-matters of disputes between tenants and landlords in recent years. In the 2012 summer edition of our Real Estate Newsletter for example we reported on the application of the principles of supplementary interpretation of contracts in case a competition clause was not agreed. Now the Federal Court of Justice had to decide whether a competitive situation in breach of a competition clause entitles the tenant to claim for rent reduction due to a defect. In its decision dated 10 October 2012 the Federal Court of Justice ruled that a breach of an agreed competition clause might constitute a defect with the consequence of a rent reduction.
A landlord's breach of a competition clause agreed upon in a commercial lease agreement constitutes a defect of the rental object pursuant to Section 536 para. 1 German Civil Code, which may result in a rent reduction.
The plaintiff, an orthopaedic specialist, was the tenant in a building with several doctor's offices. In the lease agreement the parties agreed upon the use of the premises as an orthopaedic surgery and the further scope of activities, in particular the performance of surgeries in the surgery centre located in the building. The lease agreement provided for a competition clause with respect to the specialisation in orthopaedics and the focus on chiropractic except for traumatology for children and adolescents as well as chirotherapy for children and adolescents. In the same building the landlord leased premises to a group practice specialized in surgery/accident surgery at a later date. The plaintiff objected this was a breach of the competition clause because in his opinion surgical and nonsurgical treatment of organs of support and movement performed by physicians of the group practice as well as traumatology for adults constituted a breach of the agreed competition protection. He claimed inter alia the rectification of the competitive situation at the earliest possible date and filed for injunctive relief regarding leasing of premises to the group practice. Furthermore, he filed for an action on a declarative judgement concerning a rent reduction in the amount of 50 percent and the corresponding repayment of rent that had been overpaid due to the reduction.
Content and Subject of the Decision
First of all the Federal Court of Justice determined that the group practice worked in areas covered by the contractually agreed competition clause and insofar confirmed the interpretation of the competition clause by the Court of Appeal.
In its decision, the Federal Court of Justice subscribed to the majority view in literature and confirmed a landlord's breach of its duty to grant competition protection. The Federal Court of Justice substantiated its ruling in particular by stating that the breach of immanent competition protection as well as expressly negotiated competition protection can be considered as disturbances from the outside of the rental object and that these disturbances have an direct impact on the suitability of its contractually agreed use of the rental object. With regard to the competition protection, which had been contractually agreed in this case the Federal Court of Justice stated that the contractually agreed use was substantiated by the explicitly agreement that the landlord has to grant to the tenant the use of the premises without being disturbed by a specific competitor. The disturbance of the contractually agreed use caused by a breach of the competition clause therefore constituted a defect of the rental object. As the amount of a rent reduction in depends on the actual disturbance and to what extent the quid pro quo between performance and counter performance was affected, the Federal Court of Justice recommitted the case to the Court of Appeal which needs to determine the actual degree of disturbance. Furthermore, the Federal Court of Justice confirmed that the landlord is obligated to remedy the competition situation. Within the scope of possible and reasonable actions the landlord shall ensure that the physicians of the group practice no longer provide treatments covered by the competition protection or (prematurely) terminate the lease agreement.
Impact on Day-to-Day Business
A competitive situation in a leased property, may result in a considerable economic loss for a landlord, if one or several of the affected tenants in question exercise their right to rent reduction. The finding of the Federal Court of Justice that the use of the premises may be disturbed by a competitive situation may have the consequence that a tenant is not only entitled to a rent reduction, but also that the tenant may terminate the lease for cause if the competitive situation continues. For a landlord this means that potential competitive situations need to be taken into consideration at the time of entering into a lease and that the lease should be drafted accordingly. The object of the lease should be negotiated with necessary caution as an immanent competition protection may result from the respective agreement on the use of premises. When negotiating a competition clause it should be clearly stated which activities shall be covered and non-covered. If premises are rented to other tenants the existing competition situation should be considered and amended to the extent necessary. Depending on the circumstances it might be advisable to expressly exclude competition protection and negotiate a non-compete clause. From a tenant's perspective the fact that the Federal Court of Justice's ruling confirms the majure opinion in literature should enable the tenant to easier enforce its rights in the future in case of a breach of the agreed competition clause or immanent competition protection by the landlord.
ON STANDARD TRANSFER OF CENTRE MANAGEMENT, ADMINISTRATIVE AND CARETAKER COSTS
By Dr. Jürgen Streng
In its ruling of September 26, 2012, the Federal Court of Justice confirmed and elaborated on the limitation and restriction of the standard transfer of centre management, administrative and caretaker costs in commercial lease agreements.
The parties had argued whether and to what extent individual incidental charges relating to the communal facilities can be apportioned effectively (on a pro rata basis) to tenants.
The costs for 'centre management', 'administrative costs', 'caretaker costs' and 'insurance costs' in particular had been in dispute.
Content and Subject of the Decision
Section 307 para. 1 sentence 1 German Civil Code had been the starting point for the Federal Court of Justice's ruling. Correspondingly, the provisions in the general terms and conditions are ineffective if they put the user's contracting party at an unfair disadvantage. In this case, an unfair disadvantage also may arise if the provisions are unclear and not easily understandable (Sections 307 para. 1 sentence 2 German Civil Code). According to the Federal Court of Justice, in the case of agreements relating to the transfer of service charges to the tenant, special significance is attached to this rule of transparency. This is due to the fact that a tenant will be able to assess the appropriateness and fair market value of service charges reliably only if, based on an expressly and sufficiently specified allocation agreement, the tenant is able to get a rough idea of the additional costs involved apart from basic rent.
As for the Individual Costs: Insurances
The Federal Court of Justice determined that the according to the above standards the transfer of costs for 'insurances' is invalid. The content of the clause is unclear because it provides no indication as to the type and amount of potential insurance costs.
In its ruling of August 3, 2011, the Federal Court of Justice confirmed that the agreed standard form allocation of 'Centre Management's' costs to the tenant, which are not itemised in detail, are invalid because thislacks sufficient transparency. The allocation of the Centre Management costs gave no indication as to what costs were included or which services in terms of content are to be covered by the Centre Management. The term Centre Management (in contrast to the term administration, see below) was not defined and intrinsically did not allow the limitation of content-related individual items. For example, this may include costs for market analyses, determining customer requests, advertising and PR measures, decorations, events and other profiling measures. Since the scope of the measures to be taken by the Centre Manager is not described in detail in the lease and therefore cannot be defined – as pointed out by the Federal Court of Justice – the costs incurred for the tenant could not even be estimated, so that the clause therefore is non-transparent and invalid.
Caretaker and/or Maintenance of All Technical Facilities
Further, the Federal Court of Justice also considers the overburdening of costs for a 'caretaker' and 'maintenance/repairs of all technical facilities' to be an inappropriate disadvantage if consequently the maintenance burden for the entire real estate (in this case: shopping centre) can be imposed upon the tenant. The apportionment of service charges – as pointed out by the Federal Court of Justice – must be limited at the point where the maintenance burden of areas and facilities used jointly by other tenants is imposed upon tenants without limitation of the amount. Consequently, costs would be imposed upon tenants, which are not caused by their use and are outside their sphere of risk.
The Federal Court of Justice reiterated its opinion that with respect to commercial rent the term 'administration costs' within the meaning of Sections 307 para. 1 sentence 2 German Civil Code is adequately defined in the standard form clause. For specifying the term administration costs, one can refer to the essentially concurrent definition in Section 26 para. 1 Second Calculation Ordinance and/or Section 1 para. 2 no. 1 Operating Costs Ordinance.
Impact on Day-to-Day Business
The Federal Court of Justice in its decision reiterated that it allows the contractual structure in its general terms and conditions, which deviates from the statutory guiding principle (incidental charges are borne by the landlord) only if they are in keeping with the requirements for transparency and if the tenant is able to estimate the scope and type of costs from the allocation agreement. It therefore is recommended that the landlord should specify and define the apportionment of costs in detail in the lease agreement. If the costs for communal areas and/or facilities are to be apportioned, a cost ceiling must be stipulated in the lease agreement.
Tenant – especially in the case of older lease agreements – one should examine whether the lease meets the transparency requirements of the Federal Court of Justice, and therefore the incidental charges are apportioned justifiably. It may even conceal a considerable savings potential.
IMPERMISSIBLE APPEAL TO THE INVALIDITY OF A POWER OF ATTORNEY BY THE PRINCIPAL
Federal Court of Justice, decision of July 20, 2012 – V ZR 217/11
By Slaven Kovacevic
If a contracting party is not entitled to appeal to the invalidity of the power of attorney issued by the opposition's representative due to the principles of good faith, said party is also not entitled to recall its statements according to Section 178 German Civil Code or to request the opposition to approve the contract in accordance with Section 177 para. 2 German Civil Code.
The buyer ("Defendants") in 1991 acquired a freehold flat ("Real Estate") by a notarized purchase contract ("Purchase Contract") from T-GmbH. The Defendants authorised T-GmbH, free of the limitations of Section 181 German Civil Code ("Power of Attorney"), that is, the prohibitions of engaging in so-called self-dealing and double representation, by way of an agency agreement ("Agreement"), to declare all statements required for the acquisition. The Agreement comprises (among other things) acquisition financing, the conclusion of a tax consulting agreement, a rent guarantee and a rent pooling agreement. Furthermore, the Power of Attorney authorised representation vis-à-vis government authorities and banks. T-GmbH did not have the necessary authorisation in accordance with the (former) Legal Advice Act.
Upon conclusion of the Purchase Contract an attorney represented the two parties, always free of the limitations of Section 181 German Civil Code. This attorney acted on behalf of the Defendants based on a sub-power of attorney issued by T-GmbH as well as on behalf of T-GmbH, based on a power of attorney issued by T-GmbH. After insolvency proceedings had been initiated in 2000 concerning the assets of T-GmbH, the insolvency administrator ("Plaintiff") notified the Defendants in January 2009 as to the invalidity of the Purchase Contract – due to a violation of the Legal Advice Act – and the corresponding Power of Attorney, requesting a statement on the approval of all concluded contracts. The Defendants gave no approval. In early December 2009, he requested all declarations that were necessary for changes to be made in the Land Register. By the end of December 2009, the Defendants, by way of precaution, declared the approval ("Approval") of the Purchase Contract and the conveyance. The Plaintiff then requested from the Defendants authorisation to transfer of title in the Real Estate.
Content and Subject of the Decision
The Federal Court of Justice rejected a claim to the changes to be made in the Land Register according to Section 894 German Civil Code. The acquisition was said to have taken effect by the authorisation given at the end of December 2009. Even though, due to the absence of the necessary authorisation – which was necessary in accordance to the Legal Advice Act – the Purchase Contract and conveyance in principle were provisionally invalid, as this offered the only way of preserving the protective purpose of the Legal Advice Act. The fact that the parties were represented by an attorney could not compensate for the absence of the required authorisation. Nor could the granting of the Power of Attorney be separated from the remaining stipulations of the Agreement, as otherwise the reservation of permission would be to no effect. The Defendants would only be able to attain protection if both the Agreement and the Power of Attorney – and as result of this also the Purchase Contract and the conveyance – were invalid. Even when taking into consideration Sections 171, 172 German Civil Code and the principles of apparent authority, nothing else could apply, as their purpose was to protect third parties. But there was no third-party relationship between the Defendants and T-GmbH.
Ultimately, the Defendants were able to validly declare the Approval. An approval could be barred only if it was not granted or rejected, or rejected under Section 177 para. 2 page 2 German Civil Code due to a plea of limitation ("Plea of Limitation") following the contracting parties' request or if a recall ("Recall") of the declarations was made by the contractual party according to Section 178 German Civil Code. None of these would come into consideration.
The requests of January 2009 and early December 2009 would neither cause a Plea of Limitation nor would the Plaintiff be able to declare a Recall, as T‑GmbH, according to good faith pursuant to Section 242 German Civil Code, had been denied to plead the invalidity of the Power of Attorney. This was to be substantiated in the fact the Defendants' interest in holding on to the business outweighed T- GmbH's interest in the invalidity of the Power of Attorney. The reason was that the Agreement had long been processed already and its objective of acquiring the Real Estate had been realised more than 16 years ago, so that both sides had rendered their performances and had benefited from their respective counter-performances.
Moreover, the Legal Advice Act only wanted to protect the Defendants by way of the obligation to obtain permission rather than T-GmbH. But if the Defendants wanted to continue the business, it no longer would have to be protected under the Legal Advice Act. Even from a point of view of insolvency law, there could be no other result, as the assets constituting the insolvency would not be entitled to more than that to which the insolvency debtor is entitled. In this case, the Plaintiff possibly would have the right to learn whether the Defendants would plead invalidity of the Power of Attorney. Failure to respond to such an inquiry might possibly result in the Defendants not being able to plead invalidity – unless in an individual case they also were prohibited from doing so in good faith – so that the legal transaction would continue to exist in that case also. The Plaintiff, however, would be unable to bring about the invalidity of the transaction.
Impact on Day-to-Day Business
The decision deals with an issue that similarly can be reflected in various segments. In fact, with effect of July 1, 2008, the Legal Advice Act has been replaced by the Legal Services Act. However, the Legal Services Act also requires the obligation to obtain permission for specific services, which also may result in invalidating a transaction and related powers of attorney. Furthermore, the Legal Advice Act continues to apply to old cases. One should also be alerted to consciously bringing the situation presented to one's advantage, so that later one had a free choice. The Federal Court of Justice consciously declared that the other party may also be denied the plea of invalidity of the Power of Attorney and the contracts concluded.
OVERVIEW REAL ESTATE TRANSFER TAX RATES
By Susan Günther
Originally published April 25, 2013
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