The German real estate market under a legal perspective

The German real estate market is still one of the most attractive markets worldwide. In 2007 the real estate investments have once again exceeded the investment volume of the previous year. It is roughly estimated that about a third of the investment volume was contributed by foreign investors, mostly by private equity and hedge funds. The prosperity of the German property market is due to several reasons:

The low rate of interest is very attractive for investors. As a result of the growing German economy in the five major office centres (Frankfurt, Hamburg, Düsseldorf, Munich and Berlin) there is an ongoing need of prime office and retail space. The strong Euro obviously is also a reason for the attractiveness of German real estates in the world.

From the legal perspective investments in German properties are connected with several problems. German law actually requires a deed executed by a German notary for all other contracts closely related to a real estate purchase contract. In the specific case it can be very difficult to decide whether a notary deed is necessary or not. To assure that the real estate purchase contract and the connected contracts are effective it is strongly advisable to execute the contracts in a notary deed. It should also be noted that the certificate of authority of the chief negotiators of both sides does not have to be notarized if the certificates of authority are revocable. Thus, it is crucial to know that any defects in notarization or the lack of notarization can be rectified. The respective purchase contracts become effective if the conveyance of ownership and the entry of the transfer of property in the German land register are executed.

 

Another legal issue - which is often overlooked - is the transfer of tenancy agreements; the buyer of German properties principally acquires full ownership. According to Section 566 BGB the buyer also enters into the tenancy agreements existing for the purchased housing units. It has to be known that this rule provides a lot of exceptions. First of all, the living space must have been handed-over to the tenant prior to the transfer of property. Therefore Section 566 BGB does not apply to “future” tenancy agreements wherefore rented property must not have been handed-over. Difficulties are frequently arising if property is bought and sold several times by different companies within a short period of time. I.e. it is de facto only passed on. Section 566 BGB is only applicable if the seller is also the owner of the residential real estate. However, according to German law ownership is not acquired immediately upon conclusion of the purchase contract but only upon the entry of the transfer of property in the land register.

 

The transfer of property is often not registered in the land register if several companies in succession acquire and immediately resale the residential real estate after conclusion of a respective real estate purchase contract. As a result thereof ownership is no longer acquired by the individual companies and consequently the tenancy agreement is not assigned to the company which finally acquires the property. 

”Knowledge about all important legal issues is the decisive factor for the execution of a thorough legal due diligence on real estate and to avoid disadvantages or the ineffectiveness of the purchase contract” says the attorney Dr. Thomas Senff of the law firm Mütze Korsch Rechtsanwaltsgesellschaft. Together with his colleagues Dr. Michael Mütze and Dr. Jutta C. Möller in 2007 he has edited a real estate manual (“Real Estate Investments in Germany”, Springer Verlag) which helps foreign investors with the economic parameters of the German market and its special legal and tax characteristics.