Real Estate Law in Germany

Private law

Most of the relevant regulations related to real estate, both with respect to the acquisition and financing of ownership and lease agreements, as well as the relationship between landlords and tenants, are found in the German Civil Code (in German: Bürgerliches Gesetzbuch (BGB)).

The German Civil Code contains regulations related to the different types of property rights, their creation and transfer, as well as provisions dealing with the creation, transfer, and enforcement of security rights with respect to real estate, by which the real estate can be used as collateral for financing arrangements.

In addition, there are numerous other laws regulating specific real estate-related issues, such as – for example, but not limited to – the German Hereditary Building Rights Act (Erbbaurechtsgesetz), regulating details with respect to hereditary building rights, and the German Residential Property Act (Wohnungseigentumsgesetz), regulating the legal relationship within a condominium/community of owners of apartments and/or commercial units in a specific building.

Public law

Issues related to the planning, construction, and use of buildings are regulated by public law.

One of the cornerstones of public construction regulations is the German Federal Building Code (Baugesetzbuch (BauGB)) and the German Land Use Ordinance (Baunutzungsverordnung), which deals with building zones and different types of usage. The provisions in these acts are supplemented by building regulations for each individual German federal state regulated in the corresponding Federal State Building Codes (Landesbauordnungen), which determine the rules for building permits.

Apart from setting the rules for zoning and building permits, public law also regulates many other relevant aspects, such as the permit to operate certain businesses (e.g., hotels or restaurants) or laws dealing with contaminated sites.

The strongest right in rem is the ownership of real estate. German law follows a general principle by which the ownership in a building is, at least in principle, inseparable from the ownership in the land that the building is built upon. In other words, save for specific property rights as e.g., heredity building rights, the ownership in the land also comprises the ownership of all buildings on the land as well as the essential integral parts of these buildings. The ownership in real estate (including the buildings located on real estate) is transferred by notarial deed and registration of the new owner in the land registry (which is compulsory in order for the ownership to transfer). In Germany, the land registry is administered by the local civil law courts (Amtsgerichte).

The hereditary building right (Erbbaurecht (HBR)) creates an ownership-like position regarding the building erected on a certain plot of real estate for the building owner, which is typically not identical to the owner of the plots of real estate, which is limited in time (but usually entered into for a term of 60 to 99 years). The HBR must be granted by the owner of the real estate. HBRs used to be quite common in residential real estate, used by municipalities to enable lower-income individuals to become homeowners, and in commercial or infrastructure projects. In principle, HBRs can be sold, inherited, and encumbered in the same way as ownership rights to real estate. The beneficiary of an HBR usually pays the owner remuneration (Erbbauzins) for the HBR, which is typically calculated per annum. Upon expiry of the HBR term, the owner of the land usually becomes the owner of the building, while the former beneficiary of the HBR is compensated for the loss of their right to the building.

Easements (Dienstbarkeiten) can be of private or public nature. An easement is a means of providing security in rem for certain rights to a plot of land that is owned by another person. Such a right can either be a right of use (e.g., right of way or a passing right) or a right to demand that an owner of the land must tolerate the beneficiary’s actions or buildings (e.g., tolerance of a border building, i.e., a building extending to the borders of another plot of land). An easement can be granted for the benefit of a certain plot of real estate (e.g., its respective owner) and thereby be tied to another plot of real estate rather than a specific person (Grunddienstbarkeit) or be of subjective nature and tied to a specific person (individual or entity) (beschränkte persönliche Dienstbarkeit).

Certain transfer restrictions apply to the latter. For an easement to come into existence, it must be registered with the land registry. It may not be deleted from the register without the approval of the registered beneficiary of the associated right.

Public easements can also relate to certain public requirements or duties vis-à-vis the building authority which cannot be derived from the law already (e.g., the duty to provide enough parking space when planning a new building). In most federal states, easements must be registered in a special local register, the so-called Register of Public Easements (Baulastenverzeichnis), and may not be deleted without the approval of the holder of the associated right. This means that in order to have a good overview of existing encumbrances, one will not only have to look into the land registry but also in the register of public easements. The exception is the federal state of Bavaria where, rather than in a special register, public easements are registered in the land registry.

Transfer of title/asset deal/registration of owner

In Germany, direct ownership of a plot of land (and the building erected on such a plot of land) is typically acquired through an agreement for the acquisition of the respective plot of land, i.e., an acquisition of an asset by means of a notarial real estate sale and purchase agreement (SPA) (Grundstückskaufvertrag).

In real estate transactions, an alternative route is to acquire (the shares in) the legal entity owning the respective plot or plots of real estate, mostly a special purpose vehicle (SPV) whose purpose is limited to owning (and operating) the respective real estate, i.e., to go for an acquisition by means of a share deal on the basis of an SPA (Anteilskaufvertrag).

Germany follows the separation principle, pursuant to which one must distinguish between the obligatory part of a transaction and the in rem part of a transaction. To transfer the ownership in/the title to real estate, the parties must declare the conveyance (Auflassung). The conveyance of property is a specific in rem agreement between the transferor and the transferee regarding the transfer of the ownership of the real estate. Although typically declared as part of the respective sale and purchase agreement, it is different from and comes in addition to that (obligatory) agreement. The conveyance must be declared by both parties in the presence of a notary. The conveyance of ownership is most commonly declared within the notarial sale and purchase agreement, and mostly does not require the execution of a separate notarial deed.

The entry in the land registry completes the sale and purchase of a plot of land and brings about the transfer of the property, i.e., the transfer of the title to the plot of land. Only upon the buyer being entered as the new owner of the real estate in Section I of the land registry (administered by the local civil law courts, Amtsgerichte, see above), the transfer of title is complete and effective.

The process of registration in the land registry can take several weeks or even months to be finalized. In-between signing the purchase agreement and registration of the transfer of title in the land registry, the buyer’s claim to become owner of the real estate is generally unsecured and might even become unenforceable, for example, if the seller decided to sell and transfer the respective property to a third party (which can of course lead to claims for compensation by the buyer against the seller). To protect the buyer in this interim period, the purchase agreement will normally provide for the immediate registration of a so-called priority notice (Auflassungsvormerkung) for the buyer in the land registry.

Share deal

Besides an acquisition by asset deal, real estate can also be acquired indirectly by acquiring shares in the legal entity holding the ownership of the respective real estate, i.e., by means of a share deal. Sometimes, and provided that less than 90% of the shares are acquired, an acquisition by share deal can also be used to avoid real estate transfer tax (RETT) (Grunderwerbsteuer). The German legislator recently brought about changes to the relevant provisions in the RETT Act (Grunderwerbsteuergesetz) and thereby considerably limited the avoidance of paying RETT through share deals and considerably increased the scenarios in which RETT can be triggered. Tax advice is invaluable also in these cases.

The acquisition of real estate by means of a share deal also entails some risks:

• The buyer of shares in an entity holding real estate cannot be secured by means of a priority notice (Auflassungsvormerkung, see above), because the legal entity will remain the direct owner of the real estate before and after the share deal transaction and accordingly, there will be no change in ownership with respect to real estate eligible for a priority notice. Therefore, the share purchase agreement should provide for alternative mechanisms protecting the buyer’s legitimate interest, such as for example, clauses protecting the buyer, preventing the owner from selling the real estate to a third party prior to the transfer of the shares to the buyer.
• Furthermore, unless otherwise agreed by the parties, the buyer will not only indirectly acquire the real estate, but also “inherit” a legal entity “with a history” and, therefore, potential risks stemming from the past. Therefore, sufficient due diligence should be undertaken and representations and warranties to be granted by the seller discussed as part of the negotiations of contractual arrangements. In that
  context, the buyer should always consider that any
  representations and warranties given by the seller will only be as good as the person or entity giving such warranties and strongly depend on the seller’s financial covenant. Also, it must be considered that in case of a share deal, the real estate asset cannot generally be used as collateral for financing the purchase price because the buyer (who is the borrower of any financial means) is not and will not become the registered owner of the real estate to be encumbered. Hence, alternative security/collateral mechanisms, such as a pledge of shares etc. must be considered.

Generally, any individual or legal entity with legal capacity, whether resident or non-resident, can invest in and own real estate in Germany. This includes legal entities under private law, e.g., stock corporations (Aktiengesellschaft (AG)) limited liability companies (Gesellschaften mit beschränkter Haftung (GmbH)) or partnerships (mostly in the form of a German limited partnerships with a German GmbH acting as sole general partner, i.e. a so-called GmbH & Co. KG (KG)) as well as legal entities under public law.

The so-called civil law partnership (Gesellschaft bürgerlichen Rechts (GbR)), which is a partnership with unlimited liability of its partners, also has legal capacity to own real estate. Since according to the legal situation applicable until the end of 2023, a GbR could not be registered in the commercial register, it had to be registered with both the name of the GbR itself as well as the names of all its partners. Changes in the composition of the partners also had to be registered in the land registry. However, due to changes to the applicable provisions of German law applicable as from January 2024, civil law partnerships can also be registered in a special register and thus acquire the status of a so-called “registered civil law partnerships” (eingetragene Gesellschaft bürgerlichen Rechts). While, generally speaking, civil law partnerships can opt for acquiring that status, those civil law partnerships who act as acquirers/owners of real estate will not have that choice, but will be under an obligation to become registered in the special register and acquire the status of a registered civil law partnership, which makes make the process of becoming registered as an owner of real estate easier and avoid the need for having any changes in the composition of the partners registered with the land registry.

Foreigners and legal entities with a foreign domicile can become owners of real estate in Germany as well; however, there are some practical hurdles (see notarization below). Please note also that foreign entities holding directly real estate or directly or indirectly owning 90% or more in companies holding real estate located in Germany, these entities need to be registered in the transparency register (see “Requirements pursuant to anti-money laundering legislation” below).

The structure in which investors acquire real estate is to a large extent tax driven, most common vehicles are limited liability companies and limited partnerships domiciled in Germany or corporations and partnerships from other EU member states, often domiciled in Luxembourg or the Netherlands.

Land registry/structure

The legal status in rem of real estate located in Germany is registered in the land registry (Grundbuch). The land registries (Grundbuchämter) are located at and administered by the German (civil law) local courts (Amtsgerichte).

Form and sections

The particulars of plots are registered on so-called folios. Each folio of the land registry is divided into three sections (Abteilungen) and a reference list (Bestandsverzeichnis). The reference list contains a detailed description of the plots registered on the particular portfolio and corresponds with the cadastral plan indicating the size and location of the plots. Section I lists the former and current owner(s) of the land in historical order. Section II contains all relevant covenants and restrictions (Belastungen und Beschränkungen), e.g., hereditary building rights, private easements, pre-emptive rights etc. which encumber the plots. Finally, Section III lists the former and current land charges and mortgages encumbering the plots.

The land registry does not list public easements (with the exception of Bavaria, see above) and does not list “defects” with respect to the real estate, such as contamination, etc. Therefore, prior to acquiring real estate, research should be undertaken into the information available in other registers, such as the register of public easements (Baulastenverzeichnis) or the register for contaminated soil (Altlastenkataster) and/or other public registers.

Compulsory nature of registrations

Registration with the land registry is compulsory for in rem rights to come into existence or be transferred. If the creation or transfer of in rem rights have not been registered, they are not effective (exceptions apply to certified land mortgages and land charges which can be transferred without registration, by a certified agreement and handover of the certificate).

Public reliance

The land registry is a public register granting public reliance (öffentlicher Glaube). This means that everyone can rely on the registrations in the land registry. Consequently, it is possible to acquire a plot of real estate from a person or entity registered as owner in the land registry, even if this person or entity is in fact not the legal owner of the respective plot of land because the land registry entries were not correct, provided the buyer was not aware of the incorrectness. Given the public reliance on the land registry, parties to any real estate transfer agreement should always review the content of a recent excerpt from the land registry prior to signing the sale and purchase agreement and the notary public is held to elaborate on the content during the execution of the notarial deed. It is also advisable to have the notary public verify with the competent land registry whether there are any pending applications.

Sales and purchase agreement/formal requirements

Purchase agreements related to real estate located in Germany require the form of a notarial deed if the real estate is the purchase object (i.e., in an asset deal). A private written agreement is not sufficient to constitute legally binding and enforceable obligations to transfer real estate, or to bring about the transfer itself. The notarial deed contains the contractual obligations of parties as well as the conveyance in rem – “Auflassung” (although this could be done in a separate deed which might be recommendable under certain circumstances, e.g., if the purchase object still needs to be measured out of several plots). The deed will also contain the necessary applications to the land registry which the notary will then file and execute.

Whereas a legally binding agreement to transfer real estate by asset deal might be validly notarized by a foreign notary (provided that the foreign rules on notarization and the status and competences of the notary are comparable to the German rules), the conveyance as pre-condition of the registration of the new owner can only be notarized by a German notary (and by German consulates abroad), but not by foreign notaries.

The notarization requirement does not apply to share deals, provided that the transfer of shares of the particular entity does not require notarization which will be the case for the transfer of shares in German limited liability companies. The transfer of shares in stock corporation or interests in (limited) partnerships does, however, not require notarization.

Extended reach of formal requirements

If an asset deal is associated with (the conclusion of) ancillary agreements so closely linked to a sale and purchase of real estate that neither can stand alone, e.g., construction contracts, lease agreements, finance agreements etc., then the entire contractual package can require execution by notarial deed, even if the relevant ancillary agreements would not be subject to specific formal requirements executed on a standalone basis.

Notary fees

Notarial costs in a German real estate transaction depend on the value of the land and buildings and can be considerable.

Requirements pursuant to anti-money laundering legislation

The notary is obliged before notarization to gather information from the parties on their corporate structure and their beneficial owners. If such information is not provided or contradictory to information available from the transparency register (the register of the beneficial owners of companies and partnerships which has been established due to EU legislation 2017), the notary is obliged to refuse notarization. The notary also must inform the competent authority in certain circumstances which indicate unlawful transactions and must postpone notarization and may only proceed if the authority has not prohibited the transaction within certain delays.

Requirements in case of non-German entities acting as buyers

A foreign purchasing entity needs to be registered in the transparency register (see above) of Germany or an EU member state, otherwise the notary must refuse notarization.

If a legal entity with a foreign domicile or a non-German legal entity purchases real estate property in Germany, some additional formal requirements may have to be complied with. For example, the foreign company acting as the acquirer must prove its existence. This is typically done by presenting/submitting an excerpt from the commercial register of the country in which the company is registered, which excerpt will have to be translated into German and legalized (to the extent the country of origin is a signatory to the Hague Convention by a so-called Apostille). Furthermore, the persons acting as signatories will have to render proof of their authority to act on behalf of the foreign company acting as acquirer.

If the company acting as acquirer originates from other countries, dealing with the relevant formalities can be tedious and time-consuming, as the German (land and other) registers are not always familiar with the respective local laws and the involvement of consulates or embassies can be required.

Notification to tax authorities

As the acquisition of real estate generally triggers real estate transfer tax (RETT), the parties to real estate transfer transactions are obliged to notify the tax authorities of any such transactions. If such notification duties are not complied with, the parties might not be able to recover RETT in case of the exercise of a rescission right by one of the parties or an abrogation of the purchase agreement.

German notaries public are also under an obligation of informing the competent tax authorities of any transfer of ownership stipulated in any deed that they execute, however the information by the notary does not substitute the duty of the parties to notify.

General

German statutory law obliges the seller of real estate to transfer full legal title to the property to the buyer and to deliver the plot of land and building free from defects.

Individual liability concept

As a general rule, in an agreement for the sale and purchase of a plot of land, rather than relying on the standard liability concept set by statutory laws, the buyer and the seller would typically agree on a specific set of representations and warranties and liability regime.

Scope

The exact scope of the representations and warranties, as well as the consequences of a breach of these, also in terms of de minimis, basket and cap provisions, largely depends on the individual case as well as the market circumstances, negotiation position, and bargaining powers of the parties to the transaction. When markets are overheated, as they were until recently in many regions of Germany, there is a certain tendency by prospective sellers to limit the scope of the representations and warranties and/or work with high thresholds and low caps.

Market research shows that there are certain swings following market circumstances and that it is very hard to define an over-arching customary practice or market standard.

Common representations and warranties – land

Representations and warranties that are commonly provided for would generally inter alia include:

• Title (i.e., the guarantee that the transferor holds full and unrestricted legal and beneficial ownership and title to the property);
• No encumbrances (i.e., that the property is not subject to easements and encumbrances other than those specifically disclosed); and
• That the transferor is not aware of any contamination of soil (regulations dealing with contamination are often a hot topic and heavily debated during the negotiations).
  

Common representations and warranties

Buildings

Where the acquisition of the real estate relates to and includes one or several buildings, additional representations and warranties often include that:

• Apart from normal wear and tear, the building is in normal condition and that the transferor is not aware of any specific grave defects; and
• All the relevant building and other permits exist, and that the transferor is unaware of any breaches of the existing permits and/or any intentions of the relevant authorities to change, amend or withdraw the relevant permits.
  

Common representations and warranties - Lease agreements

Where the transaction relates to real estate and buildings for which lease agreements exist, as this will regularly be the case for financial investors, representations and warranties will often also relate to:

• The existence, validity, remaining term of the lease agreements, and/or the WALT (i.e., weighted average lease term); and
• The actual net rent per annum generated under the existing lease agreement.
  

Knowledge

The representations and warranties are often qualified by specific or general knowledge qualifiers (“to the best knowledge of transferor”; “unless the circumstances giving rise to the claim were known to the acquirer or would have been known to the acquirer had he exercised sufficient diligence”) or limited by specific or general disclosures (“save as explicitly disclosed in Schedule X”, “unless the circumstances constituting a breach and/or giving rise to the claim were discernible from the information made available in the data room”) and, finally, come with limitations for damages payable by the transferor in case of a breach (“the transferor’s aggregate liability for a breach of any of the representations and warranties is limited to x% of the purchase price”).

Also, unless regulated otherwise, a buyer is generally limited in exercising rights for a breach of the representations and warranties to the extent the underlying circumstances were known to the buyer or should have been known to the buyer. This general concept is often deviated from as part of the corresponding agreements.

Environmental issues

Environmental insurance is usually taken out if the acquired property is burdened with an elevated environmental risk (such as a petrol station). In that context, German environmental legislation stipulates that, apart from the user (tenant/occupier) that has caused the contamination, both the former and the current owner of a property can be subject to environmental liability for the same event of damage. Therefore, in purchase agreements a balance must be struck between the seller's interest in being relieved from liability and the buyer's interest in not being held liable for damages caused by the seller or even by the previous owner. This is most commonly intensely negotiated. Generally, a seller or occupier remains liable for environmental damages even though the real estate has been transferred (for further information see section “Environmental and energy“).

Disclosure obligations

When discussing representations and warranties, as well as associated liability of the seller, German law stipulates a seller - even without explicitly being asked for it - is held to disclose such information to the buyer that is substantially relevant to the buyer's purchase decision. If the seller fails to duly inform the buyer - and subject to more specific regulations in the underlying agreements - the buyer may void the contract or claim compensation on the grounds of willful deceit (arglistige Täuschung).

General

The “classic” means of providing collateral for financing real estate purchases are the creation of land charges (Grundschulden) or mortgages (Hypotheken). If a loan is secured by that type of collateral and the borrower does not fulfil their obligation under the loan, the lender can satisfy the debt by enforcing and realizing the collateral, e.g., in the case of mortgages or land charges finally by having the land sold (by auction). In the past, the legislator had thought of the mortgage as the primary instrument to be used. In practice, land charges have become more commonplace.

Mortgage

The mortgage (Hypothek) is one of the instruments typically given to a financial institution as collateral for a loan to be received by the owner or acquirer of real estate. A mortgage is granted for one specific claim/loan with limited possibilities of exchanging the loan that is secured by the mortgage without affecting the mortgage itself.

Given its nature as an accessory right, a mortgage automatically decreases in amount to the extent the loan is repaid. A mortgage loan usually covers around 60-70% of the real estate’s market value.

Among others, typical kinds of mortgage are the fixed interest loans structure (with capital and interest repayment) and interest only loans structure (Zinszahlungsdarlehen). There are also supporting programs like the Bank Home Ownership Program (Kreditanstalt für Wiederaufbau (KfW).

To grant a mortgage, the mortgagor must register the mortgage with the land registry. When doing so, the mortgagor is obliged to specify the mortgagee, the secured claim, and the lending rate. The mortgagee usually acquires the mortgage by obtaining the mortgage certificate. However, the issuance of a mortgage deed can be excluded. In case of the latter, the mortgagee acquires the mortgage as soon as it is registered. The mortgage is strictly accessory in nature, i.e., its existence depends on the existence and “fate” of the secured claim.

Land charge

Whilst the mortgage is a so-called accessory right which is strongly linked to the contractual claim it secures as referred to in the corresponding loan agreement, the land charge (Grundschuld) is an abstract right. This means that the land charge and the obligations thereunder are independent of a specific contractual claim and may even exist in the absence of an underlying claim that it secures, only for the purpose of securing a certain rank in the land registry. The land charge may be used to secure other, also future obligations.

While in practice many land charges take the form of a security land charge (Sicherungsgrundschuld), where the exact scope of secured claims and other terms and conditions for its enforcement are regulated in a separate contractual arrangement, the so-called security agreement (Sicherungszweckvereinbarung) between the owner and the financial institution, this does not change the abstract nature of the land charge as such.

A land charge does not decrease in amount where repayments with respect to the claims that it secures are being made. Also, the land charge can typically be enforced without having to demonstrate that the underlying claims that it secures (still) exist.

For these reasons, land charges bring along advantages with respect to enforceability and flexibility, and, therefore, have become the most prevalent collateral in real estate transactions. However, as a result of legislative changes (which were at least in part owed to some cases of abuse of the abstract nature of the land charge by financial institutions) this flexibility has suffered in recent years. While previously it was possible to acquire a land charge free from any pleas or defenses of the debtor if the buyer was in good faith, the owner may now resort to pleas or defenses deriving from the contractual arrangements originally entered into by and between the owner and the financial institution.

Therefore, irrespective of the abstract nature of the land charge, at least where a land charge has the character of a security land charge, the owner can now invoke the regulations contained in the contractual arrangements pursuant to which the bank has declared that it would not enforce the land charge to the extent the secured claims have already been satisfied.

Applicable laws/types of leases

Main source

The majority of the regulations of German tenancy law is found in Book II (Law of Obligations) of the German Civil Code (BGB), §§ 535 ff. BGB.

Other sources

Other legislation - some of which are only relevant for specific types of real estate – include:

• The Ordinance on the Calculation of Heating Costs (Verordnung über Heizkostenabrechnung – HeizkostenVO) setting forth rules on the calculation and allocation of costs for heating and warm water for premises with more than one apartment;
• The 2nd Ordinance on the Calculation of Housing Costs (II. Verordnung über wohnungswirtschaftliche Berechnungen = II. BV) contains a full set of rules on the calculation and allocation of costs, charges,
  encumbrances etc.; and
• Special regulations concerning stable-value clauses, as contained in the German Price Clauses Act (Preisklauselgesetz), operating costs, as contained in the Operating Costs Ordinance (Betriebskostenverordnung) and so forth, must also be taken into consideration, but cannot be described in further detail, here.
  

Distinction between various classes of users/classes of use

Some general rules related to lease agreements are applicable to virtually all asset classes, but German law provides for a clear distinction between the rules applicable to residential real estate, i.e., regulating the relationship between the landlord and tenants, mostly individuals, for residential buildings on one hand, and the rules applicable to commercial real estate, i.e., regulating the relationship between landlords and businesses, on the other hand.

High level of protection in residential tenancy law

German residential tenancy law is characterized by a remarkable level of tenant protection, where sometimes the tenants’ right of use as interpreted by German courts shows features that would typically be associated with ownership rights. The same does not necessarily hold true for commercial lease agreements. That said, it must also be considered that the percentage of self-owned, self-used residential real estate in Germany is much lower than it is in other EU member states.

Lease agreements general

As it is the case with other agreements, a lease agreement is brought into existence by reciprocal declarations of intent (Willenserklärungen), i.e., an offer and an acceptance.

Written form requirement

Although a lease agreement does not have to be executed in writing to be valid, § 550 (1) BGB states that contracts for a term of over one year must be executed in writing or else they are deemed to have been concluded for an indefinite period in time and can be terminated at any time according to statutory provisions. A wide range of court decisions deals with the prerequisites of § 550 (1) BGB.

Freedom of contract

While the parties to a commercial lease contract generally enjoy ample liberty to deviate from statutory tenancy law, it is not the same with residential tenancy agreements for which numerous compulsory provisions must be observed.

Standard agreements/GTC

Making use of standard agreements and/or general terms and conditions is generally allowable; however, particularly in residential tenancy agreements, where the vast majority of tenants are individuals, but also to a lesser degree, in commercial tenancy agreements, standard agreements, standard clauses and GTC (i.e., general terms and conditions) are subject to strict scrutiny by German courts.

Minimum content

Any tenancy contract, especially a commercial lease agreement should at least describe the parties, the rental object, the term, the amount of rent and the residential purpose, which is especially necessary in case of a mixed-use tenancy.

Other provisions that would typically be included relate to information on the start date for the first term, the size of the rented premises, the purpose for which the premises are to be used, scope of use, terms on the keeping of animals, contracts of supply, the allocation of costs for utilities, and the duty to carry out cosmetic repairs as well as to bear the costs for minor damages.

Residential lease agreements

Tenant protection

German law provides for a high level of tenant protection. Residential lease agreements cannot be freely terminated by the landlord, the amount of rent payable by residential tenants is regulated and, in order to have tenants effectively vacate dwellings after a justified termination of the lease agreements, can require going through potentially tedious (court) procedures.

Recent developments

Residential lease contracts which were always highly regulated have in the last years become even more regulated with the introduction of a cap on city rent rises (Mietpreisbremse) in §§ 556 d – 556 g BGB.

More than five years have already passed since the legislator introduced these new rules related to caps on residential rent, which puts statutory restrictions on increases in rent in certain regions. In regions with a so-called tightened/overheated residential real estate market (Gebiete mit angespannten Wohnungsmärkten) the initial rent due under newly concluded residential lease agreements may not exceed the comparative local customary rent (ortsübliche Vergleichsmiete) by more than 10%, unless the rent owed by the previous tenant was higher.

By means of the Act, governments of the federal states have been authorized to - by means of ordinance and for periods not exceeding five years - establish those regions with tightened/overheated residential real estate markets, to which the respective rules apply. In fulfilment of the respective authorizations and following the entering into force of the Act on 1 June 2015, many ordinances have already been enacted in several federal states or have already been abolished. Currently, regions with tightened/overheated residential real estate markets include Berlin, Bremen, Düsseldorf, Frankfurt a.M., Hamburg, München, Potsdam and Stuttgart. On the contrary, the federal states Saxony, Saxony-Anhalt and Saarland have not yet introduced those ordinances (status as of June 2022).

Common problems

Common problems between landlords and tenants involve security deposits and the termination of the lease.

The tenant usually must pay a security deposit which serves the purpose of securing proper fulfilment of its obligations by the tenant. Security deposits often equal two- or three-months’ rent, the latter also representing the allowable maximum amount. The security deposit may be paid in three monthly instalments, whereby the first instalment falls due upon the beginning of the lease. The landlord must keep the security deposit in a separate account. If the landlord intends to retain all or part of the deposit, they must provide the tenant with a list of the damages and repair estimates within a reasonable period of time after the tenant moves out. In the case of a real estate transaction, i.e., the acquisition of real estate with existing lease agreements, the buyer would have to ensure access to these security deposits, as they may be held liable for repayment by the tenants.

In Germany, a landlord cannot freely terminate a residential lease agreement. They are only entitled to terminate where sufficient cause exists. German law describes several acceptable reasons: A landlord who needs to use the rented premises personally, or for family, or for a member of their household, has valid reasons, but only if the need is compelling. Termination is also lawful if a landlord wishes to sell the residential property and can prove that selling the property “with tenants” will result in substantially less profit than selling it “without tenants.” A landlord may also terminate a lease if the tenant permanently/repeatedly violates the lease.

A landlord wishing to terminate a lease, must give the tenant a written termination notice. For leases of up to five years, the notice must be given three months prior to the termination date. Longer leases require longer termination periods. The notice must explain the justification for the termination.

Therefore, it is difficult for a landlord to terminate any residential tenancy agreements.

Commercial lease agreements

General

Unlike residential leases, the statutory regulations governing commercial leases do not cover every relevant aspect and provide for a higher degree of freedom of contract for the parties.

Termination rights

For commercial lease agreements, no statutory regulations excluding ordinary terminations or making terminations subject to sufficient cause exist. Also, there are no specific rules governing rent adjustments.

This means that more issues must but also can be regulated in the respective agreements and the continuous developments in case law on a wide range of standard clauses/contractual conditions must be taken into consideration when entering into commercial lease agreements.

Fixed term

In contrast to most residential lease agreements, commercial lease agreements can be and often are concluded for a fixed term. Depending on the exact asset class and the parties, commercial lease agreements often provide for a fixed term of five or 10 years, commonly combined with extension options for the tenants.

Formal requirements

If commercial lease agreements have a term of more than one year (which is quite often the case), both the conclusion of and any and all amendments to a commercial 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 (see above “Written form requirement”). Stricter formal requirement can apply where a lease agreement is concluded in the context of a transaction which requires execution by notarial deed.

Also, parties sometimes agree on a right of purchase wording as a unilateral option, by which a preliminary contract or a conditional contract of sale is then incorporated in the lease agreement. This can lead to the entire lease agreement being considered null and void because it has not been recorded by a notary. The same principle applies when an in rem pre-emptive right is granted.

Minimum contents

The leased object and the purpose of the lease must be described exactly. Prior to the conclusion of the agreement, the competent authority must have approved the property’s use for commercial purposes in general, and its use for the specific purpose intended by the tenant, in particular, so-called “Bau-/Nutzungsgenehmigung.”

Amount of rent

The parties to a commercial lease agreement are generally free to agree on any amount of rent for as long as the amount of rent is not unconscionable. The amount of rent is deemed to be unconscionable if the rent exceeds the customary local rent for similar properties by 100%. In case it is determined that the amount of rent was or is unconscionable, the tenant may demand that the landlord repays any excess amount received.

The amount of rent will not increase or decrease automatically. It is common practice for commercial lease agreements, however, to include indexation clauses that allow for the rent to be adjusted to changes in the consumer price index. While previously such indexation clauses were subject to approval, this is no longer the case.

Nevertheless, certain prerequisites would have to be fulfilled in order for indexation clauses to be lawful and enforceable.

Frustration of contract/clausula rebus sic stantibus (Wegfall der Geschäftsgrundlage)

Following the outbreak of the COVID-19 pandemic and the consequences associated with the pandemic and the measures taken by governments to limit its spread, the issue arose as to whether a tenant, who, because of state imposed restrictions, cannot make use of the leased space at all or only to a limited extent, can claim a reduction of the rent for those periods in time in which usage was limited. Where landlords and tenants were unable to find an amicable solution for the issue, the German courts were called in to decide on the matter, often on the basis of court actions initiated by landlords for payment of rent that the tenant had refused to pay or withheld. German courts took deviating decisions on the matter. In a court ruling issued in January 2022, the German Federal Supreme Court (Bundesgerichtshof) ruled that the pandemic and its consequences can entitle a tenant to reduce the rent, based on the concept of the so-called Wegfall der Geschäftsgrundlage, the German variant of the clausula rebus sic stantibus developed in Roman law. As regards both, the general existence of a corresponding claim for a reduction of the rent as well as the amount by which the rent can be reduced, the German Federal Supreme Court indicated that this would need to be established on the circumstances of the individual case and that there is no rule of thumb, pursuant to which a 50/50 solution could per se be considered appropriate.

Building/planning restrictions

The construction, alteration, change in use, and demolition of a building structure in Germany generally requires a building permit in accordance with state building regulations. While the exact requirements for obtaining a building permit are contained in building regulations issued by each individual German federal state, building regulations are fairly standardized throughout Germany.

Each project involving construction, change, or demolition must comply with the specifications of zoning laws and building regulations. The zoning law covers the so-called land-use planning and distinguishes two levels of detail: the first level is the land utilization plan (Flächennutzungsplan) which is a preparatory plan; and the second level is the development plan (Bebauungsplan) which is the legally binding plan showing the permitted use of land.

Development plan

The development plan (Bebauungsplan) is the decisive regulation for building permits. Whether and how a piece of land may in principle be developed and built on is governed by public planning law. The urban development permissibility of a building project depends on the development categories in which the area/site to be developed is situated. The federal building code provides for three different development categories:

Designated development area

If a piece of land falls within the scope of a local development plan which contains specifications regarding the type and extent of the development, areas to be developed, and the local public access areas, then the building project is generally permitted.

Developed areas without local development plan

Development is also permitted inside continuous built-up areas for which a local development plan does not exist. However, this only applies if the type and extent of the building project, the construction method, and the area which is to be built upon fit into the surrounding area and development infrastructure.

Non-developed area

If the land is not located within a continuous built-up area and if there is no local development plan, then a building project is only permitted if it does not conflict with public interests, that the development infrastructure is assured, and that the building project is a privileged project, e.g., agricultural plants, power plants, etc.

Building permit

Once the plans for a building project have been drawn up and prior to its implementation, a building permit (Baugenehmigung) must be applied for and obtained. The exact requirements for the issuance of a building permit vary according to the different statutory laws of the federal German states. In order to obtain a building permit, a written application accompanied by several documents required by law must be filed with the competent building control authority (Bauaufsichtsbehörde). This involves coordinating with architects etc. If the building project complies with local development plans and does not infringe any public-law requirements, then the local authority will issue the building permit, possibly subject to fulfillment of some additional requirements (Auflagen) e.g., relating to fire protection and building safety. The neighbors adjacent to the site will be notified and given an opportunity to comment on the permit. Neighbors may file objections and/or initiate legal proceedings against the building permit within a statutory term on the grounds that neighbor interests might be violated. This may hinder progress of construction work.

Environmental issues

The Building Energy Act (Gebäudeenergiegesetz (GEG)) is a German federal law. It brings together the Energy Conservation Act (Energieeinsparungsgesetz (EnEG)), the Energy Conservation Ordinance (Energieeinsparungsverordnung (EnEV)) and the Renewable Energies Heat Act (Erneuerbare Energien Wärmegesetz (EEWärmeG)). It was enacted as Article 1 of the Act to Unify the Energy Conservation Law for Buildings and to Amend Other Laws, which unifies the energy conservation law for buildings and amends other laws.

With few exceptions, the GEG applies to almost all new buildings. Owner-occupied homes and public buildings are particularly affected by the requirements of the GEG. However, there are also important requirements for heating systems, insulation, and modernizations for existing buildings.

Waste law

Waste management is an integral part of environmental protection, especially for commercial properties.

The main issues to be resolved are the avoidance of waste, and the proper recycling or converting of materials into energy. Production plants and other real estate development projects must comply with extensive waste prevention regulations.

Soil protection

“Inherited” environmental liability can lead to an enormous financial burden and thus is one of the critical issues in real estate sales. Therefore, the examination of contamination/environmental issues is a recommended/ essential component of due diligence to be undertaken by the buyer, at least when the real estate in question is known to have been used for industrial purposes.

Liability for inherited environmental obligations is mainly governed by the Federal Soil Conservation Act (Bundesbodenschutzgesetz). This Act states that contamination must be avoided and precautionary measures to avoid contamination must be taken. Contaminated soil must be cleaned up. These statutory regulations are especially important because it is not only the party having caused the contamination which is held liable and obliged to remedy the damage.

In general, the authorities choose the most effective means of averting risks for the general public and may decide between a number of possible parties. It can either be the party that has caused pollution/ contamination (such as previous tenants/owners that have operated facilities on the real estate, as far as these can be identified) or the owner of the real estate or the party exercising actual control of the real estate, such as a current tenant, even if such party has neither caused nor been or is aware of any contamination of soil.

There are many areas in Germany that have been used for industrial and comparable purposes and could therefore, cause events of inherited environmental liabilities. Allocating the economic risk stemming from potential liability for environmental issues is frequently a major topic in negotiations. It is recommended that the buyer undertakes a thorough due diligence review prior to acquiring certain pieces of land. Sale and purchase agreements generally contain detailed provisions dealing with environmental liability. This allows a risk assessment and the allocation of risks between the parties concerned. These aspects should also be considered when negotiating a lease agreement.

ESG status of implementation

At the level of the individual federal states, state-specific climate protection and energy transition laws have already been enacted in some cases, such as the Berlin Solar Act, which has been in force since mid-July 2021 and provides for an obligation to install photovoltaic or solar thermal systems for all new buildings (from 50 square meters of usable building area) for at least 30% of the gross roof area from 1 January 2023. Other German states are following suit.

The Federal Climate Protection Act (Bundesklimaschutzgesetz (KSG)), the Building Energy Act (GEG) and the Act on the Digitization of the Energy Transition apply. The apportionment of the CO2 price was introduced under the Fuel Emissions Trading Act (BEHG) with effect from 1 January 2024 and is based on a tiered model according to building energy classes. Since 1 January 2024, every heating system installed in a new building must be operated on the basis of 65% renewable energies. Also from 1 January 2025, all new buildings are to comply with the Efficiency House (EH) 40 standard. Since 1 January 2024, the parts to be replaced in major extensions, conversions and extensions to existing buildings are to comply with an EH 70 standard. The "Federal subsidy for efficient heating networks (BEW)" for the expansion and decarbonization of heating networks, as well as a "Federal subsidy for energy and resource efficiency in industry (EEW)" for the use of industrial waste heat have been introduced in recent years.

Real estate transfer tax

The transfer of real estate located in Germany is subject to the real estate transfer tax (RETT). RETT also generally applies to the direct or indirect transfer of at least 90% of the shares in a company holding German real estate.

In a direct transfer of real property, RETT is calculated on the purchase price. For direct and indirect share transactions, it is determined based on the special tax value of the property, which following recent court decisions would typically be similar to its fair market value.

Since September 2006, the federal states have been free to set their own rates (prior to which RETT was levied at a standard rate of 3.5%). Consequently, there has been an ongoing trend to increase the RETT rate to improve the state budgets. The following table summarizes the RETT rates in all the German states as of 31 December 2021.

Although pursuant to the law, RETT is owed by both the seller/transferor and the buyer/transferee, agreements for the acquisition of real estate frequently contain regulations pursuant to which in the relationship between the parties, RETT is imposed on the acquirer, which also from an economic perspective is in line with customary practice.

Because RETT will regularly be triggered at the date when the purchase agreement is actually signed (regardless of the date of transfer of economic ownership or the date of payment of the purchase price), one must be careful when entering into pre-contracts (in particular: pre-emptive rights, option rights) and/or when entering into agreements incorporating so-called designation rights, where discussions about the entity to act as final purchaser, for example, an SPV are still ongoing.

Indirect tax

The regular value added tax (VAT) rate in Germany is 19%. Depending on certain characteristics of the acquired real estate, the acquisition of real estate may be regarded as a transfer of a business unit (Geschäftsveräußerung im Ganzen) on which no VAT is levied. In addition, the buyer enters the seller’s VAT position with respect to the deducted input VAT amounts and a potential correction. Therefore, should – following the acquisition – the use of the real estate change (i.e., property that was let without charging VAT on the rent prior to the acquisition, but is let with a VAT charge after the acquisition and vice versa), input VAT on the initial acquisition/construction of a building or on services to renovate a building may either be refunded on a pro rata basis (to the extent it could not be claimed in the past) or it may have to be repaid on a pro rata basis (to the extent it was claimed in excess in the past). The correction period for such a refund/repayment is up to 10 years following the acquisition/construction of a building or on services to renovate a building. For assets that are “fixed” (i.e., certain kinds of operational facilities which cannot be easily separated from the building), the 10-year correction period also applies. Additionally, construction costs etc. generally lead to separate correction periods which start after this has been completed. For all other assets that are not ”fixed” in nature but can be separated easily, a five-year correction period applies. Even if the transfer of the real estate does not fulfil the requirements for qualifying as a transfer of a business unit, the sale is generally VAT-exempt. However, the seller may waive the exemption and opt to charge VAT. In this case, the buyer is obliged to calculate and pay the VAT according to sec. 13b VAT Act (“reverse charge”). The seller must issue an invoice without VAT, but with a reference to sec. 13b VAT Act.

Real property tax

Every property owner in Germany is liable to pay real property tax (Grundsteuer). The tax rate depends on the type of real property, which is sorted into two categories; (i) real property tax "A": real property used for agriculture and forestry; and (ii) real property tax "B": constructible real property or real property with buildings.

The real property tax burden is calculated by multiplying: (i) the assessed value of the real property; (ii) the real property tax rate; and (iii) the municipal multiplier. The real property value for purposes of the tax assessment is determined by the tax authorities according to the German Assessment Code (Bewertungsgesetz). The German Assessment Code refers to historic property values that are usually significantly lower than their current market values.

The tax rate varies between 0.26% and 1% (if calculated on the basis of market values) depending on the federal state (in which the real estate is located) and the use of the property.

By passing the legislative package to reform the real property tax within the deadline set by the Federal Constitutional Court by the end of 2019, the federal legislature has fulfilled its responsibility to maintain the real property tax as a significant source of revenue for municipalities beyond 2019. Based on the reformed property tax and valuation law, new assessment bases are to be determined for all of the approximately 36 million economic units of real property for property tax purposes from calendar year 2025.

The majority of the federal states implement the new property tax according to a federal model, which was introduced with the Property Tax Reform Act. In the area of the so-called Grundsteuer A (agricultural and forestry assets/agricultural and forestry enterprises), most of the states implement the federal model. In the area of the so-called Grundsteuer B (real property/land), the states of Saarland and Saxony deviate from the federal model only in the amount of the tax assessment figures. The states of Baden-Württemberg, Bavaria, Hamburg, Hesse, and Lower Saxony, on the other hand, apply their own property tax model.

Download: Handbook for Real Estate Transactions