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Eversheds Global Estate Management

Germany

Real Estate Guide

Principles of ownership

Principles of ownership

Freehold/Ownership - ownership of real estate is the full and exclusive right to possess and use a property ad libitum, also above and below the surface. According to the German Civil Code a building is an integral part of a property and can therefore in general not be subject to separate freehold ownership rights.

Heritable Building Right - a Heritable Building Right (Erbbaurecht) is the right to possess a property but merely for a fixed term, the length of which can be freely agreed by the parties. The Heritable Building Right grants full ownership of real estate, except to the time limitation. It has to be registered in the Land Register as an encumbrance on the property and also in a separate Land Register for Heritable Building Rights. The Heritable Building Right can be sold, transferred by way of succession and fully encumbered as a property held in ownership. Further details of the fixed term and the rent are agreed with the owner of the property by a separate Heritable Building Right agreement which is subject to notarisation.

Leasehold - not applicable.

Common hold/Usufruct - not applicable.

Condominium ownership - condominium ownership is a special form of ownership for housing estates, where a property is split into condominiums. Condominium ownership is established by notarial agreement between all owners or by notarial condominium declaration by an exclusive owner and must be registered in the Land Register. Thus, the land and the building are divided into part joint-ownership and part of individual freehold ownership for a specific apartment and ancillary rooms (cellar, parking place, etc). The individual owner can sell his/her apartment and shares in the joint-ownership without restrictions but pursuant to the condominium declaration often only subject to the consent of the property manager. By the establishment of condominium ownership the various condominium owners become part of a condominium owners association. The condominium owners association appoints a property manager to administer the building. Within condominium properties most of the management decisions (eg maintenance and repair works, and certain details of allocation of ancillary costs) are made by majority votes.

Utilisation right - not applicable.

Joint/Co-ownership - not applicable.

Registration - in Germany, every real estate as well as the respective ownership, servitudes and land charges are registered in the Land Register (Grundbuch). The Land Registers are administered by the local courts. Commonly, every plot of land is registered in a separate folio. If a housing estate has been split into condominiums, every single condominium is registered in the Land Register for condominium apartments in a separate folio. Leases cannot be registered. However, the right to lease a property can be secured by way of a tenant servitude. A purchaser of real estate or creditor of an encumbrance is entitled to rely in good faith on the accuracy of the details shown in the Land Register.

 

Restrictions on foreign ownership

Restrictions on foreign ownership

There are no restrictions on foreign individuals or corporations buying, holding or selling German real estate.

 

Title to real estate

Title to real estate

Investigation of title - title research is carried out by review of the Land Register. This is typically done by the notary or the purchaser’s lawyer. Public searches (regarding cadastral map, entries in the register for monument protection and for contaminated sites, payment of public charges, and review of local redevelopment statutes) are either issued by the seller or done by purchaser’s lawyer after receiving respective PoA from the owner of the property.

Transfer of title - not applicable.

Registration - in Germany, every real estate as well as the respective ownership, servitudes and land charges are registered in the Land Register (Grundbuch). The Land Registers are administered by the local courts. Commonly, every plot of land is registered in a separate folio. If a housing estate has been split into condominiums, every single condominium is registered in the Land Register for condominium apartments in a separate folio. Leases cannot be registered. However, the right to lease a property can be secured by way of a tenant servitude. A purchaser of real estate or creditor of an encumbrance is entitled to rely in good faith on the accuracy of the details shown in the Land Register.

Information on the register - each folio of the Land Register contains a property list of properties that are registered under this folio no. Each property numbered therein consists of the Description of the Land identified by district and corresponding plot no(s); furthermore, the address and a brief description of the kind of land (eg building space, open space, courtyard, agricultural area) are commonly mentioned. The Land Register does not contain a map as maps are administered separately. Section I of the Land Register shows the registered owner of the property, or in case of co-ownership, the share of each individual owner of the property. Section II shows encumbrances such as servitudes, priority notices, pre-emptive rights and life estates. Section III shows mortgages and land charges. Apart from the aforesaid (private law) charges, a property might also be encumbered with public law charges, eg restricting the use of the property. In a number of federal states, such charges are registered in a public law charges register.

Commercial leases - not applicable.

 

Structure of a real estate transaction

Structure of a real estate transaction

Negotiation of terms/Agreement - commercial terms are usually negotiated between the parties directly. The agreed terms are then provided to the parties’ lawyers.

Heads of terms – it depends on the individual case whether and to what effect heads of terms are binding between the parties. Parties usually agree to what extent the heads of terms shall be binding or not.

Investigation of title - title research is carried out by review of the Land Register. This is typically done by the notary or the purchaser’s lawyer. Public searches (regarding cadastral map, entries in the register for monument protection and for contaminated sites, payment of public charges, and review of local redevelopment statutes) are either issued by the seller or done by purchaser’s lawyer after receiving respective PoA from the owner of the property.

Purchase deed - not applicable.

Contracts - all real estate acquisition and encumbrance transactions have to be notarised, (ie executed at the office of a notary public), otherwise the contract is invalid. Once the parties agree on the wording of the purchase agreement the lawyers arrange for the notarisation of the purchase agreement. All legal documents are reviewed by the notary; which includes a check of passports and authorisation documentation (if a person is acting on behalf of a third party). The authorisation documentation has to be certified. If the authorisation documentation is certified in a foreign country (ie Luxembourg or UK) prevalently also an apostil is required. For the execution, the notary public reads the deed aloud in front of all parties. The deed is signed by the seller, the purchaser and the notary public. The deed is irrevocable. However, rights of withdrawal can be agreed for both parties in the contract.

Completion/closing - the purchaser of real estate becomes the owner of the property only upon registration of the transfer of title in the Land Register. In the purchase agreement the parties usually instruct the acting notary to file for the registration of the transfer of title but subject to payment of the purchase price. Registration of the transfer in the Land Register can take several months. Therefore the parties usually agree that the economic transfer (ie handover and transfer of risks and benefits) shall occur on the date of payment of the purchase price or the following day.

Fees - pursuant to mandatory statutory law, a notarisation fee and a registration fee have to be paid in accordance with respective fee schedules. The amount of fees depends on the amount of the purchase price. All fees are usually paid by the purchaser.

Post completion - not applicable.

Leases - in Germany lease agreements are usually based on standard term lease agreements in which case they are to be considered general terms and conditions. These terms are subject to statutory provisions, resulting in a detailed judicial control of the individual contractual provision. As a rule, the general terms and conditions must not be unexpected. They must also be clear and comprehensible. Additionally, the terms must not unfairly prejudice the other party. Terms which do not fulfil these requirements are invalid and do not become part of the contract. The subject of an invalid term is then governed by the applicable statutory provisions. Deviations from statutory law are subject to fewer restrictions in commercial leases than in residential leases because statutory provisions on residential leases are mostly mandatory. However, lease agreements which do not comply with written form requirements can be cured by entering into an amendment to the lease agreement which complies with the written form requirements.

(i) Legal form requirements - lease agreements must neither be notarised nor registered to become effective. However, leases with a fixed lease term exceeding one year require ‘written form’, ie all relevant stipulations have to be made in writing and concluded in a single document to be bound together with all appendices, annexes, etc. Commercial leases are usually agreed for a fixed term. If the written form requirements have not been complied with, leases agreed for a fixed term are considered as having been agreed for an indefinite term. As a consequence the lease agreement can then be terminated by either party at any time with the statutory notice period.

Transfer of ownership of leased property (alienation) - not applicable.

Language requirement - certain transaction documents have to be filed with the Land Register for which German language is mandatory. Therefore, such documents need to be in German language or bilingual.

Governance of lease signature/administration> - there is no requirement under German law that the execution of lease documents needs to be facilitated by a local representative nor is any other local administrative process required in signing leases.

 

Usual commercial lease terms

Usual commercial lease terms

Summary of available lease types - not applicable, an overview as follows though:

In Germany lease agreements are usually based on standard term lease agreements in which case they are to be considered general terms and conditions. These terms are subject to statutory provisions, resulting in a detailed judicial control of the individual contractual provision. As a rule, the general terms and conditions must not be unexpected. They must also be clear and comprehensible. Additionally, the terms must not unfairly prejudice the other party. Terms which do not fulfil these requirements are invalid and do not become part of the contract. The subject of an invalid term is then governed by the applicable statutory provisions. Deviations from statutory law are subject to fewer restrictions in commercial leases than in residential leases because statutory provisions on residential leases are mostly mandatory. However, lease agreements which do not comply with written form requirements can be cured by entering into an amendment to the lease agreement which complies with the written form requirements.

Legal form requirements - lease agreements must neither be notarised nor registered to become effective. However, leases with a fixed lease term exceeding one year require ‘written form’, ie all relevant stipulations have to be made in writing and concluded in a single document to be bound together with all appendices, annexes, etc. Commercial leases are usually agreed for a fixed term. If the written form requirements have not been complied with, leases agreed for a fixed term are considered as having been agreed for an indefinite term. As a consequence the lease agreement can then be terminated by either party at any time with the statutory notice period.

Alterations/modifications - alterations by the tenant are not permitted unless approved by the landlord. However, the parties may agree in the lease agreement that certain alterations may be executed by the tenant.

Assignment and sub/under letting - subletting is not permitted, unless it is with the prior consent of the landlord. However, if such consent is not granted the tenant is entitled to terminate the lease, unless the refusal of consent is justified for reasons relating to the subtenant. Usually the parties agree that certain conditions have to be met, eg with respect to competition protection. However, the tenant remains liable in regard to the performance of his/her obligations towards the landlord.

Destruction/reinstatement - under statutory law the tenant is obliged to reinstate any alterations at the end of the lease and to return the premises to the landlord in accordance with the contractual obligations, even if the landlord has approved the alterations.

Duration of lease - usually the parties to a commercial lease agree on a fixed term of several years, often with one or several renewal option(s) for the tenant. Because of the length of the term, the lease agreement must meet the written form requirements mentioned above. If the agreed fixed term exceeds 30 years, either party can terminate the lease agreement after 30 years with the statutory notice period.

Forfeiture/irritancy - not applicable.

Insurance - the landlord is liable for insuring the leased premises. However, he/she can charge the respective costs for third-party liability insurance and for building insurance to the tenants as part of the operating costs if the parties agreed that the tenant shall bear ancillary costs.

Rent review - the parties are free to agree on rent increases. The rent is commonly reviewed by provision of a stepped rent or by way of automatic indexation (in relation to the increase/decrease of consumer price index). However, such indexation clauses are only valid in contracts binding for the landlord for a minimum term of ten years, whereas for residential leases no minimum lease term has to be observed, but the rent must be unaltered for at least 12 months.

Repair/decoration/furnishing - according to statutory law, the landlord is responsible for maintenance and repair as well as for decorative repairs. Usually the parties agree that the tenant has to carry out and bear the costs of decorative repairs and for the maintenance of and repairs to the rental unit. According to jurisprudence the costs for maintenance and repair of roof and façade cannot be allocated to the tenant in standard lease terms. Also, maintenance and repair obligation of the tenant in relation to common areas must be capped at least at 10% of the annual net rent.

Service Charges - not applicable.

Tenant’s duties - not applicable.

Termination/break clauses - pursuant to mandatory law, leases for both fixed and indefinite terms can be terminated extraordinarily for good reason at any time. In addition, specific early termination rights can be individually agreed.

 

Increasing covenant strength

Increasing covenant strength

Lease deposit - under statutory law security in the amount of a sum equal to three months rent can be agreed for residential leases, whereas for commercial leases a higher amount can be agreed. The security can be provided in cash, by way of a cash deposit in an interest bearing bank account which is pledged to the landlord, or by way of bank guarantee. In practice, guarantees from the parent company can be agreed on.

Surety - not applicable.

Warranty - not applicable.

Rent deposit/bank guarantee - under statutory law security in the amount of a sum equal to three months rent can be agreed for residential leases. The security can be provided in cash, by way of a cash deposit in an interest bearing bank account which is pledged to the landlord, or by way of bank guarantee. In practice, guarantees from the parent company can be agreed on.

 

Security of tenure

Security of tenure

Under statutory law the tenant is obliged to hand over the leased premises at the end of the lease term. If the tenant continues to use the leased property and the landlord does not object within two weeks the lease extends for an indefinite time. Usually the parties agree that this statutory provision is not applicable; in consequence the tenant cannot remain in the leased premises. However, in the event that the tenant continues to use the premises for a longer time period without the objection of the landlord, an implied extension of the lease term is possible, even if the statutory provision has been excluded.

 

Taxes

Taxes

On sale/acquisition of real estate - Real Estate Transfer Tax (Grunderwerbsteuer) is payable by the parties to a land purchase agreement as joint and several debtors upon direct or indirect transfer of real estate to a third party, whether by asset or share deal. In the event of a share deal Real Estate Transfer Tax is not triggered if no transferee acquires 95% or more of the (direct or indirect) interest in the real estate. The rate of the Real Estate Transfer Tax differs between the federal states. It used to amount to 3.5% of the purchase price. In the meantime, almost all federal states have increased the percentage to a rate of 4.5 to 6.5%. Typically it is agreed in the land purchase agreement that the Real Estate Transfer Tax shall be borne by the purchaser.

Immovable property tax - not applicable.

Income tax - not applicable.

Land tax - (‘Grundsteuer’) is payable by the owner of the land to the local authority in relation to the value of the building. The land tax paid by the landlord can be allocated to the tenant if the tenant must bear ancillary costs.

Lease tax - not applicable.

Local tax - not applicable.

Mortgage - not applicable.

Other taxes - not applicable.

Property lease tax - not applicable.

Value added tax - not applicable.