Commercial real estate in Germany: overview
A Q&A guide to corporate real estate law in Germany.
The Q&A gives a high level overview of the corporate real estate market; real estate investment structures, including REITs; title; tenure; sale of real estate; liability; due diligence; warranties; real estate tax, including VAT and stamp duty/transfer tax; climate change targets; restrictions on foreign ownership; real estate finance; commercial leases; and planning law.
To compare answers across multiple jurisdictions, visit the Corporate Real Estate Country Q&A tool.
This Q&A is part of the global guide to corporate real estate law. For a full list of jurisdictional Q&As visit www.practicallaw.com/realestate-guide.
The corporate real estate market
The German real estate market has continued to rise over the last 12 months. Deals with an aggregate volume exceeding EUR55 billion were closed in 2015. Foreign investors are highly attracted to German real estate investments, driven by the perception of the German market as a safe haven. About half of the investors have been foreign. Frequently, large portfolios have changed hands.
As a general trend, the high demand for real estate has caused price increases, and as a consequence yields are decreasing. Rent levels have remained stable, and have increased in the most sought-after locations, such as Munich, Hamburg and Berlin.
Office spaces were the prevailing asset class in 2015, followed by retail and hotel properties.
A significant trend has been the rise of mezzanine financing to bridge any financing gap.
Some of the most significant deals included:
The sale of the Trianon tower in Frankfurt by Morgan Stanley and Madison Real Estate to North Star for EUR540 million.
The sale of Kaufhof department stores by Metro Group to Hudson Bay for EUR2.8 billion.
The sales of the Lanxess Arena in Cologne by Oppenheim Esch Fonds to Junson Capital und Mirae Asset Global Investments for EUR400 million.
The sale of the Eurotower in Frankfurt (former seat of the European Central Bank) by RFR Holding to IVG Institutional Funds for EUR480 million.
The sale of a 51 object-strong portfolio by D&R Investment to Deka Immobilien for EUR700 million.
Real estate investment
Typically, real estate investments are held through one of the following structures:
Limited liability company.
Civil law partnership.
Commercial law partnership (general or limited partnership).
It is also possible to acquire German real estate through a foreign entity such as a Dutch private limited company.
Real estate investment trusts (REITs) exist under German law, but at present there are only a handful of REITs in Germany.
Investors and project developers have ample organisational scope to set up joint ventures.
The rise of alternative investment structures, in particular mezzanine investments, has become a major trend in the German real estate market. Junior subordinated loans or profit participation loans can serve to close developers' financing gap and provide investors with a highly attractive return on investment.
Close-ended and open-ended funds are available and regulated under the German Investment Code, the domestic legislation that enacted Directive 2011/61/EU on alternative investment fund managers (AIFM Directive).
Restrictions on foreign ownership or occupation
There are no restrictions on foreign individuals or entities owning or occupying real estate. However, from a practical point of view, restrictions may result from land registers refusing to acknowledge foreign entities as having legal capacity, and therefore refusing their registration as legal owner of property in the land register. Again, from a practical point of view, involving a foreign entity in the acquisition process can lead to issues with a German senior lender.
Title to real estate
Real estate consists of land and the buildings built on it. On acquisition of land the buildings on the land are therefore also acquired. There is no separate register for title to buildings.
In exceptional cases, ownership of buildings and land can be separate, for example, when hereditary building rights are involved, or if the building was constructed by a tenant.
The Land Register displays property information in the land register directory (Bestandsverzeichnis). The directory provides general property information, such as:
There are also three sections providing additional information, as follows:
Section 1. Legal owner of the property.
Section 2. Property encumbrances, such as:
priority notices; and
Section 3. Mortgages (Hypotheken) and land charges (Grundschulden).
While the land register is a public register, access is only granted if the interested party has a legitimate interest in reviewing it. However, a legitimate interest is assumed where serious negotiations for a lease or an acquisition are taking place.
There is no state guarantee of title. Registration of title is carried out by notaries and the land register. Notaries are subject to statutory liability to the parties.
However, if the Land Register is at fault, parties can claim compensation from the relevant federal state (Land) for wilful or negligent acts or omissions relating to the Land Register. A buyer who relies in good faith on the content displayed in the Land Register is considered a bona fide purchaser under statute.
Title insurance is generally not available in Germany and usually not offered by German insurance companies.
The most common way to hold real estate is land ownership; that is, buying the land with the buildings on it. Generally, title to buildings and land are not legally separate, except in special circumstances, for example in:
Condominium ownership (Wohnungseigentum), where title is to specific, legally separate premises, with a co-ownership share in common areas and installations.
Hereditary building rights (Erbbaurechte), where buildings are constructed and remain legally separate for a certain period, so that the buildings can be sold separately from the land.
As an alternative to buying real property directly, an investor can buy shares of a special purpose vehicle company that owns the property (indirect purchase).
Sale of real estate
Typically, at some point in the deal process the seller and purchaser agree on a letter of intent/memorandum of understanding. In principle, these documents are not legally binding under German law. However, they are very useful as they provide clarity on key deal elements and have a certain degree of persuasive power, as unilateral deviations from the deal set out in the memorandum of understanding require significant explanation.
A corporate real estate contract typically contains the following provisions:
Precise description of the real estate to be sold, including easements, if any.
A priority notice (Vormerkung), to be registered with the land register, is usually agreed on. The priority notice protects the purchaser from dispositions the vendor makes regarding the property between signing and closing.
Purchase price, and conditions precedent for maturity of purchase price.
Date for transfer of benefits and burdens of the property (Nutzen- und Lastenwechsel). This date is required, as registration as new holder of title in the land register may take several months. As the parties usually do not wish to wait, it is common practice to agree that the purchaser can use the property as if it were the legal owner once it has paid the purchase price, despite not having yet acquired good title.
Provisions regarding seller's liability, disclosure, limitation of liability, basket, thresholds, caps and so on.
Power of attorney granted to the acting civil law notary authorising him to make the required filings with the land register on behalf of the parties.
A share purchase agreement for a real estate holding partnership/company typically contains representations and warranties relating to the special purpose vehicle to be acquired. As only the shares in the owner of the real estate are acquired, the holder of legal title to the property remains unchanged. Therefore, there is no need to convey title to the property.
Real estate due diligence can be divided into four different subject areas:
Legal due diligence.
Technical/environmental due diligence.
Tax due diligence.
Financial due diligence.
The following documents are reviewed, among others:
Land registry records.
Lease and employment agreements.
Service and advertising contracts.
Environmental and engineering inspection and surveys.
Financial and tax records.
Typically, attorneys, tax advisor and technical and/or environmental specialists are involved.
The seller typically warrants that:
It holds title to the property.
The property is not subject to easements other than those disclosed.
It knows of no environmental damages inflicted on/by the property other than those disclosed.
Warranties are typically qualified by disclosure carried out during the due diligence.
The seller must provide full legal title to the property and must deliver a property which is free of defects. This statutory liability can be confined by mutual agreement in the purchase contract. However, the seller must, even without being asked for it, disclose information to the purchaser that is substantially relevant to the purchaser's purchase decision. Typically, this includes informing the purchaser of contamination or of disputes with neighbours. If the seller fails to duly inform the purchaser, the purchaser can void the contract on the grounds of wilful deceit.
It is quite common to carry out environmental surveys before acquiring commercial real estate.
Environmental insurance is commonly taken out if the acquired property constitutes an elevated environmental risk (such as a petrol station). Under German environmental legislation, both the former and the current owner of a property can be subject to environmental liability for the same event of damage. In sales contracts a balance must be struck between the seller's interest in being relieved from liability and the purchaser's interest in not being held liable for damages caused by the seller or even by the previous owner. This is usually intensely negotiated.
The main transaction document is the purchase contract, which must be concluded before a notary. The acting notary is commissioned by both parties to submit the required declarations to the land register to create the land charge and duly register the conveyance of title.
Title does not transfer before payment of the due real estate transfer tax. The land register will not register the new owner unless an affirmative certificate from the tax authority is presented.
The conveyance of title can take several months. Commonly, the parties prefer not to wait until proper registration has been completed. Therefore, typically, it is agreed that the purchaser can take over the property once the purchase price is paid. The seller provides the purchaser with all required documentation so that the purchaser is in a position to exercise all property rights and conversely bears all property burdens before being registered as owner of legal title to the property.
Real estate tax
The acquisition of real property is subject to real property transfer tax (RETT). However, transfer tax can also apply in an indirect purchase of real property. An indirect purchase of real property takes place if either:
At least 95% of the shares in a corporation holding real estate are transferred direct or indirectly or accumulated.
At least 95% of the interest in a partnership holding real property is transferred during a period of five years.
There are statutory exemptions from RETT. For example, for real estate transfers between spouses, divorcees or close relatives, or for gifts.
Both parties are jointly liable to the tax authorities for the RETT. The parties usually agree that the buyer bears the RETT. The current tax rates are (as a percentage of the purchase price):
Mecklenburg-Western Pomerania: 5%.
Lower Saxony: 5%.
North Rhine Westphalia: 6.5%.
Thuringia: 5% (an increase to 6.5% becomes effective 1 January 2017).
There are acquisition structures aiming at the avoidance of RETT (known as "RETT-blockers"). Frequently, the purchaser acquires only 94 % percent of the shares in a property holding company, while the remaining 6 % of the shares either remains with the seller or is acquired by a third party purchaser. While in principle permitted, these structures are under increasingly strict scrutiny of the tax authorities.
Real estate tax (Grundsteuer) is a municipal tax, assessed annually on 1 January and based on a property's value. The applicable tax rate varies between different cities in Germany. The real estate tax rate ranges from 0.8% to 2.8% of the tax base, depending on the location of the property. The average effective tax rate across Germany is approximately 1.5%. Real estate tax can be used as tax-deductible expense for income, corporation and trade tax purposes.
Climate change issues
Germany aims to reduce greenhouse gas emissions by 40% compared to 1990 levels before 2020. The Renewable Energy Heating Law (Erneuerbare-Energien-Wärmegesetz) obliges owners of new buildings to use a certain percentage of renewable energy to heat their buildings. In addition, the Energy Conservation Act (Energieeinsparungsgesetz) and Energy Conservation Regulation (Energieeinsparverordnung) require a reduction in energy use and set out technical standards to be complied with (for instance, in relation to heat insulation and facility technology). Further, a so called energy pass (Energieausweis) must be obtained if a building is newly developed, substantially altered or sold. German environmental legislation therefore can lead to a significant increase in building costs.
Real estate finance
Secured lending involving real estate
Typically, property financing is secured by a mortgage (Grundpfandrecht). Being a charge on the property, it gives the lender a power of sale in rem against the property (dingliches Verwertungsrecht). There are two types of mortgage:
The Grundschuld (land charge).
However, the practical use of a Hypothek is very limited and a land charge is the typical mortgage instrument used. Frequently, in addition to providing a land charge, project developers are requested to provide a surety (Bürgschaft).
The creation of a land charge requires a loan agreement, a security purpose agreement and the establishment of a land charge in rem against the property by registration in the land register, applied for by a civil notary. A surety can be validly agreed on in simple written form.
Lenders impose conditions precedent in financing agreements (for example, that the necessary public permits have been obtained or that equity contributions are in place).
In addition, it is common to agree on real estate and financial covenants (such as regular reporting on the financial situation of the borrower, or refraining from terminating lease contracts without prior consultation with the lender). Future lease or sales proceeds are also often assigned to the lender as collateral.
The person causing environmental damages is subject to environmental liability, as are the polluter's legal successors and even the (innocent) owner/occupant of the concerned property in some circumstances.
However, as a general rule, lenders are not potentially subject to environmental liability as long as their role is confined to lending and does not include acquiring the real estate concerned directly or indirectly via a shareholding in a special purpose vehicle.
Senior lenders typically have a first-ranked land charge on the real estate. The land charge itself constitutes an enforceable title. On termination of the finance agreement they can enforce the land charge, which then leads to public auction proceedings, the proceeds of which are used to offset the remaining loan amount.
Typically, the senior lender ties his commitment to a first-ranked land charge. A first-ranked land charge means that the holder of the land charge has privileged access to the proceeds of an auction/sale of the encumbered property. The insolvency administrator must distribute the proceeds from the disposal of the property first to the senior lender in order to (ideally) fully pay off the senior lender's claim against the insolvent borrower.
Other real estate financing techniques
Sale and leasebacks are a common finance technique in Germany. The same applies for real estate securitisation. In addition, small and mid-caps bonds are occasionally issued (by private placement or via the stock market) to finance real estate projects. Mezzanine financing is on the rise in Germany.
Real estate leases
Negotiation and execution of leases
Generally, rent is freely negotiable. However, excessive rent above the usual level of rent is prohibited. Agreeing on excessive rent, or taking advantage of and exploiting the other party's economic plight, are also prohibited.
The parties enjoy ample liberty to deviate from statutory lease law. However, general terms and conditions (such as standard contractual terms imposed by one party) are under strict court scrutiny, even if both tenant and landlord are commercial parties.
Residential lease contracts are highly regulated and have recently become even more regulated with the introduction of a brake on rent rises (Mietpreisbremse).
Generally, there are no specific formal legal requirements to execute a lease. A valid lease simply requires a mutual agreement between landlord and tenant, which can be concluded orally. However, leases with a fixed term must be in line with the written form requirement under section 550 of the Civil Code to avoid triggering statutory termination rights. Any and all amendments to a lease contract must be made in writing; otherwise the parties run the risk of triggering statutory termination rights allowing for premature termination of a fixed term lease contract.
If the lease object is located in a redevelopment area (Sanierungsgebiet), or other specifically designated zoning areas, then consent from the competent redevelopment authority is required. A lease concluded or extended without this consent is invalid. In addition, a lease must be notarised if it includes, for example, a pre-emption right regarding real property.
If a company or partnership enters into a lease, either an authorised representative of that entity or a third party based on a written power of attorney must sign the lease.
Commonly, the tenant provides a security deposit. This is done by way of either:
A cash payment to the landlord, who in turn must keep the deposit in a separate interest bearing bank account.
A bank surety.
Interest accumulated on the rent security deposit is for the benefit of the tenant. On termination of the lease the deposit must be returned to the tenant, unless the landlord finds that the tenant has not left the premises in the agreed state.
Length of term and security of occupation
The parties can freely negotiate the length of the lease. However, if a rental contract is concluded for a period exceeding 30 years, each party can terminate the rental contract by giving the statutory notice period after 30 years have elapsed.
Often, a fixed lease term of several years is agreed on. The term of a lease is often combined with an option right for one party to renew the lease for a further fixed term, and/or a tacit extension of the lease if neither party terminates before expiry. If no fixed term is agreed, the lease can be terminated by either party giving the statutory notice period.
An additional tool to protect the tenant's interest in having certainty as to the long-term use of a property is a limited personal encumbrance (beschränkte persönliche Dienstbarkeit) in favour of the tenant. This is a proprietary right in rem, to be registered in the land register. Effectively, it provides the tenant with an additional right to use the property in addition to the lease right. Such a right proves extremely beneficial if of the landlord becomes insolvent, as, unlike a lease, an insolvency administrator cannot terminate a limited personal encumbrance.
There is no statutory right of renewal at the end of term, although the parties are free to agree otherwise.
A tenant cannot freely dispose of the lease and requires the landlord's consent for subletting, even if the sub-lease is in favour of one of tenant's group entities. The same applies for sharing the premises with another group entity.
If the tenant carries out a reorganisation measures, such as a spin-off or a merger under the German Transformation Act (Umwandlungsgesetz), the lease is automatically transferred to the new entity. However, the lease contract may include protection for the landlord resulting in a veto right even in these cases of general succession. In principle, a sale of the tenant (amounting to a change of shareholders) does not have any effect on the lease. However, it is not uncommon to find change-of-control clauses in lease contracts which provide the landlord with a termination right if a change of control occurs.
Repair and insurance
In principle, the landlord alone is responsible for maintaining the leased premises. However, in commercial lease contracts the parties enjoy ample liberty to agree otherwise. Frequently, it is agreed that the tenant must bear minor repairs until a yearly threshold amount has been reached. Typically, insurance contracts are entered into by the landlord, and insurance costs are passed on to the tenant as part of the running costs of the property.
On termination of the lease, the tenant must return the premises in the state in which the premises were handed over at the start of the lease, meaning improvements must be removed. However, in practice, the landlord often insists on a provision which provides him with the right to choose between keeping the improvements or requesting the tenant to undo the improvements. The tenant is not entitled to compensation payments for improvements made during the lease term.
Landlord's remedies and termination
If the tenant breaches the lease, the landlord can claim indemnification for all losses caused by the tenant. In addition, if the tenant's contractual infringements are substantial, the landlord can terminate the lease for cause. Generally, the landlord must provide the tenant with a warning letter before terminating for cause. Payment default constitutes good cause.
In principle, the lease continues if the tenant becomes insolvent. Once insolvency proceedings have been applied for, the landlord cannot terminate the lease due to default in payments or deterioration of the tenant's financial situation. However, the landlord can terminate once insolvency proceedings have begun and the tenant again defaults in payment. The insolvency administrator can terminate the lease at any time by observing the statutory notice period, irrespective of the agreed fixed term. If the insolvency administrator does not exercise this termination right, the landlord is entitled to rent payments falling due after the start of insolvency payments. The insolvency estate must be used to settle this claim as a priority before the assets are distributed to creditors.
A landlord's claim for rent that accrued before the commencement of insolvency proceedings is not settled in advance. Therefore, these rent claims are only paid if sufficient assets are available.
The tenant can withhold rent payments if the landlord does not carry out measures to restore the premises. In addition, the tenant can unilaterally reduce the rent for a period during which premises were not usable as contractually agreed. Like the landlord, the tenant can terminate the lease contract prematurely for good cause. The tenant's right for termination for cause cannot be waived.
Planning and development controls
The authorities can expropriate real property. Typically, this happens in case of infrastructure planning. Any and all expropriation is subject to indemnification at market value. In addition, the relevant local authority has a statutory pre-emption right for a real estate purchase to, for example, secure land for infrastructure projects.
If the local authority exercises the statutory pre-emption right, it must in principle pay the purchase price agreed by the buyer and seller.
The local building authority is the competent authority for planning law.
Planning law encompasses federal, state and local law, including the:
Federal Building Act, as amended on 20 October 2015 (Baugesetzbuch), which sets out the rules and guideline for urban planning.
Building Codes of the Federal States (Bauordnungen der Länder), which set out permission procedures as well as technical, safety and fire protection requirements.
Development plan issued by the municipal authorities, which sets out if and to what extent industrial, commercial and residential buildings in a certain area are permitted.
To obtain a building permit, the individual project must comply with the local development plan and the requirements of the Building Code of the relevant Federal State.
However, the building authority has discretion to grant partial relief from the restrictions set out under the plan and the code. If no development plan exists for the concerned property, the building authority bases its decision on whether the building project fits into the already existing development.
Many types of residential buildings or buildings under a certain height are regulated by a simplified permission process under the Building Codes of the Federal States. In these cases, an architect or construction engineer must confirm in writing that the building complies with the relevant building regulations. In addition, the local authorities can also verify compliance during construction.
The relevant municipal building authorities have authority to decide applications for building permits. The local development plan and certain intended industrial uses may require a public consultation regarding the intended project. Usually, a permit is granted or denied within three months. However, the authorities may extend this period.
Third parties may have a right to object to a building permit, based on alleged violations of their property rights by the project. Usually, this third party right is confined to adjacent neighbours.
The owner can appeal the building authority's decision within one month by filing an objection with the municipal authority. If the objection is denied, the owner can take the matter to the administrative court.
From 1 January 2016, the next level of the Regulation on Energy Saving (Energieeinsparverordnung) (EnEV) sets out higher energetic requirements for new buildings. The primary energy requirement must at least be 25% lower as has previously been required by law. In addition, heat insulation must improve by 20%.
In addition, a first draft amendment of the German Civil Code regarding the regulation of constructions contracts has been presented. The goal of the draft is, among other things, to refine the currently very rudimentary statutory rules on construction contracts and thereby promote transparency and legal certainty for the parties involved.
Several federal states have also announced caps on rent rises in residential lease contracts.
Transfer tax on the sale of real estate
Is substantial transfer or registration tax payable on the sale of real estate? Who pays and what is the rate?
Is notarisation required? Who pays and what is the typical notary fee?
Are there any exemptions or methods to mitigate corporate real estate tax liability?
The seller and purchaser of real estate are jointly liable for tax. In practice, the purchase contract imposes the tax obligation on the purchaser.
Tax rates vary among the federal states between 3.5% and 6.5%
Notarisation is required. Seller and purchaser are jointly liable towards the notary. Usually, the purchaser bears the notary fees in full.
The notary fees are calculated based on a statutory fee table. Large real estate transactions can easily trigger notary fees in a five or even six figure Euro amount.
Yes, there are structures which allow for avoidance of real estate transfer tax. Typically, these structures involve a special purpose vehicle which owns the property, while the special purpose vehicle is owned by two legally and commercially independent parties. These structures are under strict scrutiny of the tax authorities and require advance legal and tax advice.
German Federal Ministry of Justice
This is the official website of the German Federal Ministry of Justice. Some acts and ordinances are translated into English. However, only the German version is authoritative.
Rose & Partner LLP
Professional qualifications. Rechtsanwalt, Germany
Areas of practice. Corporate law; real estate law; corporate and real estate finance
Legal due diligence and advice on the acquisition of several retail centres across Germany.
Advice on raising mezzanine capital for real estate investments.
Structuring inbound real estate investments for foreign private clients.
Languages. German, English, Spanish
Rose & Partner LLP
Professional qualifications. L.LM (Taxation), Attorney at law, Tax adviser
Areas of practice. Tax structuring, real estate taxation, inheritance tax, tax
- Tax due diligence for a share deal acquiring real estate in Bielefeld.
- Tax structuring for several inbound investments in real estate.
- Tax structuring for a real estate development.
Languages. German, English
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