In addition to exclusive ownership there is also joint ownership or condominium ownership (where individual units in the same building can be owned by different people) (Wohnungseigentum), and hereditary building rights. Hereditary building rights are long-term leases (often of 99 years) which include the right to erect and maintain buildings on a property. They are registered in the land register and can be encumbered with mortgages and land charges in the same way as full ownership.
The concept of leasehold under German law is different from that in a number of other countries including the UK. In Germany a lease is only a contractual right relating to the leased property, while ownership gives full rights over the property.
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In general, foreign investors are not subject to any restrictions other than those imposed on resident German investors.
However, the government has the power to impose a restriction on the acquisition of property in Germany by foreign corporate investors, requiring them to obtain a public permit, where German companies are subject to similar restrictions in the investor's own country. However, no such restrictions are currently in place and we are not aware of any intention to introduce them. In any event, these restrictions would not apply to investors from countries within the European Union.
The Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV) has been amended and its scope includes now company asset deals. According to Sec. 55 (1a) of the Foreign Trade and Payments Ordinance, the Federal Ministry of Economic Affairs and Energy can assess whether there will be a likely effect on the public order or security, for example, of the Federal Republic of Germany in case of the acquisition of a definable part of the operation of a domestic company (no. 1) or all the essential operating equipment of a domestic company or of a definable part of the operation of a domestic company which is needed to maintain the operation of the company or of a definable part of the operation (no. 2).
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Municipalities may have mandatory pre-emption rights under the federal building code, the nature conservation law, the historic preservation laws or other laws of individual states. Where this is the case, the municipality is entitled to replace the buyer in the purchase agreement, subject to the same purchase price. The municipality must be informed when a purchase agreement is concluded. While such pre-emption rights arise frequently, in practice they are exercised only on rare occasions. In its decision of 9 November 2021, the Federal Administrative Court (Bundesverwaltungsgericht) also declared the practice of pre-emption rights of the Land of Berlin in social conservation areas to be unlawful. According to this, the far-reaching exercise of pre-emptive rights by municipalities in milieu protection areas with reference to mere (alleged) intentions of the purchasers is inadmissible. Tenants of residential real estate also have a mandatory pre-emption right in the event of a sale of condominium ownership, if their lease contract was already in existence when the condominium ownership was established.
The Building Land Mobilization Act (Baulandmobilisierungsgesetz) came into effect on 23 June 2021. The Act has amended Sec. 28 of the Federal Building Code; notably, the time frame in which the municipalities can exercise their pre-emption rights has been extended to three months (Sec. 28 (2) sentence 1 of the Federal Building Code).
Furthermore, the Building Land Mobilization Act has introduced Sec. 250 of the Federal Building Code, under which the conversion of leased premises into owner-occupied dwellings (home ownership),and consequently the sale of a flat to a third party, in a building with more than five flats in tense residential housing markets according to a statutory ordinance is subject to the approval of the local municipality. The aim of this legislation is the creation of residential accommodation. The statutory ordinance will be passed by the federal states (Länder) and will be valid until 31 December 2025. The federal states are authorized to deviate from the requirement of five flats and can include in the scope of their respective statutory ordinances buildings, which have between three and fifteen flats (Sec. 250 (1) sentence 6 of the Building Land Mobilization Act).
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The main sources of real estate law are:
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No. The laws on the transfer of title apply to all types of property in Germany.
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Once a sale and purchase agreement is concluded in a notarial deed, the notary applies for registration of the change of ownership at the local court holding the land register for the property in question. Transfer of ownership takes place when the change of ownership has been registered in the land register.
Until such registration a buyer is only protected if a priority notice of conveyance is registered in his favour. This is usually included in the sale and purchase agreement. A priority notice is registered in the land register before the change of ownership is registered and is usually a pre-condition for the payment of the purchase price to the seller. If a priority notice is registered, any change in the land register which endangers the buyer's acquisition of title is invalid.
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Real estate is registered in the land register which is kept by the local courts. Information is not publicly available and is only accessible to those who can demonstrate a legitimate interest. Also, access to the registers can be gained by a notary, who is always deemed to have a legitimate interest, if instructed to carry out notarial work regarding the property.
Every transfer of title must be registered in the land register and title only passes to the buyer once registration is complete. The information registered relates to the premises, the owner, easements and similar encumbrances, land charges and mortgages.
Title insurance is neither common nor necessary in Germany since buyers can rely on the accuracy of the land register. Title to property can only be acquired via registration in the land register, actual possession of the land is not sufficient. As long as a buyer does not know about a specific inaccuracy in the contents of the land register, ownership is acquired in good faith (bona fide).
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Following due diligence by the buyer, the sale and purchase agreement is entered into. The purchase price is usually payable once a priority notice of conveyance has been registered in the land register and any other conditions agreed by the parties have been met. After payment of the purchase price the notary applies for registration of the transfer of ownership in the land register.
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Yes, usually before the execution of the sale and purchase agreement. For a single asset transaction due diligence normally takes around two to three weeks. In particular, investigations include verification of the title and encumbrances, leases and the zoning and planning situation.
It is common to agree on an exclusivity period for the buyer to carry out due diligence.
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In specific circumstances certain consents may be required, for example if the seller is a minor then approval by the court is required or, if the sale comprises the sale of a substantial part of the seller's assets (ie 85-90% of the assets), or under certain matrimonial property regimes, the consent of a spouse may be required. There are also consent requirements under public law, eg in areas designated for redevelopment.
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The parties are completely free to structure the sale and purchase agreement to suit their own particular needs and the deal in question. The agreement will, however, always contain clauses identifying the property, specifying the purchase price and payment terms, rules on the transfer of title (including the grant of a priority notice of transfer and then registration of the notice in the land register). This ensures that the title will pass to the buyer rather than anyone else who claims to have an interest. In most agreements, the seller will permit the buyer to grant a charge over the property in order to secure funding. Note that the purchase of real estate as part of a share deal may also require notarization, for example if shares in a GmbH (a limited liability company) are acquired. Asset deals always require notarization.
The most important aspects of the document relate to payment of the purchase price and the transfer of an unencumbered title. For this reason the contract specifies certain conditions which must be fulfilled before the purchase price is payable, for example, the notary receiving confirmation that any existing charges relating to the property have been cancelled or will be cancelled against payment of (part of) the purchase price, that all necessary approvals (eg by the relevant public authorities) have been granted and that a priority notice of conveyance in favour of the buyer has been registered.
The seller provides a warranty that the property sold is free of certain legal or physical defects. However, the seller's statutory liability for property and construction defects is usually excluded, except in sales of newly constructed property. The seller has a statutory liability to provide valid title (which cannot be excluded).
Usually, possession of the property is transferred on payment of the purchase price, though ownership passes only after registration of the change of ownership in the land register.
Confidentiality provisions are unusual, but can be included at the parties' request.
An agreement to sell real estate (as an asset deal) is only binding once the agreement has been notarised.
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Under statutory law, the seller must deliver the property free of any legal or physical defects. However, the seller's statutory liability for physical defects is often wholly or partially excluded. The buyer is then responsible for obtaining information which may affect the value of the property through careful due diligence. However, the seller has a statutory liability to provide valid title (which cannot be excluded).
In addition, the seller is responsible for disclosing any important matters which may have a negative impact on the property's value and are known to him but are not easily detectable through due diligence. If the seller fails to do this then he will be deemed to have acted fraudulently. It is therefore common to include a clause in the sale and purchase agreement stating that, to the best of the seller's knowledge, there are no such defects.
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These include withdrawal from the sale and purchase agreement, a claim for damages, or a claim for a reduction in the purchase price. Where appropriate, the buyer also has a right to take action to oblige the seller to rectify a specific defect.
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An investor should always verify that the building complies with the relevant building permits and the zoning and building laws. Usually the building permit will be sufficient to confirm that the building complies with zoning law but sometimes it is also helpful to check the zoning plan. This allows the investor to verify whether the proposed use of the premises is permitted.
Any change in use will require a revised permit.
New public law restrictions on rent increases for residential properties cap rental increase on entering into a new lease contract at 10 % above the local reference rent in areas subject to housing market pressures, subject to certain exceptions for new or extensively modernized buildings. New restrictions also limit the sale of residential condominium properties to tenants within a certain time after the conversion of rental space.
In the federal state of Berlin, a so-called rent cap has been in force since 23 February 2020. Residential rents will be capped for five years at the level of 18 June 2019 and an increase is prohibited by law. Exceptions only apply in special cases, such as social housing. Fines of up to €500,000 may be imposed for violations.
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Under German statutory law:
can all be required to carry out decontamination by order of the relevant authorities (what is known as the principle of efficiency of risk prevention).
However, the party taking the remedial measures can then make a claim against the party who actually caused the problem, unless the possibility of such a claim was expressly excluded in the sale and purchase agreement.
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Public authorities establish zoning plans designating the permitted use of an area. Uses can be changed, but there is protection for existing buildings, so that if a use has been permitted in the past it remains permitted, even if the zoning plan has changed since then.
Building and zoning plans are accessible to the public and the building authority can provide the relevant information.
As regards the building permit, the buyer can ask the seller to provide a copy in the course of due diligence.
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Developers often enter into agreements with the relevant public authorities. Charges may be negotiated as part of a specific agreement.
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Expropriation is possible but only where specific legislation or an ordinance related to that legislation permits it. Expropriation is only allowed when it is necessary in the public interest. The state must pay compensation to the relevant party.
In Berlin, some political parties are discussing the expropriation of housing space due to constantly rising rents. However, due to constitutional concerns and the recently passed rent cap, expropriation is very unlikely.
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The most important tax is the property transfer tax. Most sale and purchase agreements stipulate that this tax is paid by the buyer.
The rate of property transfer tax is between 3.5% and 6.5% of the purchase price, depending on the German federal state.
VAT may also apply. The rate of VAT is 19%. Property transactions are not normally subject to VAT if they form part of the transfer of a business as a going concern. Even where this is not the case, property transactions are generally exempt from VAT, although a seller can opt for VAT to apply to a particular sale. This can be advantageous to a buyer where the VAT on costs incurred during related development activities can be offset against VAT on the purchase price.
Transaction costs usually include:
Normally each party pays its own legal fees. Property transfer tax, notarization fees and the legal costs related to the implementation of the sale and purchase agreement are paid by the buyer, with the exception of any legal costs incurred in connection with the discharge of existing encumbrances by the seller.
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The most important relevant tax is the property transfer tax. Most sale and purchase agreements stipulate that this tax is paid by the buyer.
In share deals, there are strategies available to avoid property transfer tax if the seller remains as a shareholder in the company, holding a stake of more than currently 5 %, for more than five years (note that this requirement must be observed from a genuine economic perspective, not just formally). If this requirement is not met, the rate of property transfer tax lies between 3.5% and 6.5% of the purchase price, depending on the German federal state.
A reform of the property transfer tax came into effect on 1 July 2021. This reform concerns especially share deals in real estate transactions. According to the new law, property transfer tax can only be avoided if less than 90%, instead of 95%, of the shares or interest in corporations or partnerships are transferred and the holding periods for the seller for his minority stake or interest of more than 10% has been extended to 10 years, instead of 5 years.
The rules applicable to corporations will be aligned to the rules that currently apply to partnerships.
Transaction costs include:
Notarization and registration costs are quite substantial.
Normally each party pays its own legal fees. Property transfer tax, notarization fees and the legal costs relating to the implementation of the sale and purchase agreement are paid by the buyer, with the exception of any legal costs incurred in connection with the discharge of existing encumbrances by the seller.
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What are the most important areas of public law for an investor to consider when purchasing real estate?
An investor should always verify that the building complies with the relevant building permits and the zoning and building laws. Usually the building permit will be sufficient to confirm that the building complies with zoning law but sometimes it is also helpful to check the zoning plan. This allows the investor to verify whether the proposed use of the premises is permitted.
Any change in use will require a revised permit.
New public law restrictions on rent increases for residential properties cap rental increase on entering into a new lease contract at 10 % above the local reference rent in areas subject to housing market pressures, subject to certain exceptions for new or extensively modernized buildings. New restrictions also limit the sale of residential condominium properties to tenants within a certain time after the conversion of rental space.
In the federal state of Berlin, a so-called rent cap has been in force since 23 February 2020. Residential rents will be capped for five years at the level of 18 June 2019 and an increase is prohibited by law. Exceptions only apply in special cases, such as social housing. Fines of up to €500,000 may be imposed for violations.
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