Commercial real estate law and rules in Austria

In principle, each natural or legal person can acquire real property. This includes public sector entities, charitable foundations under public law, foreign states as well as private law entities (limited liability companies, stock companies, partnerships, private trusts, funds, and foreign companies which have legal capacity within the European Union or are otherwise recognised in Austria).

As a general rule, foreigners (i.e. those who do not have Austrian citizenship), including legal persons with a foreign seat or legal persons who are directly or indirectly controlled by foreigners, require the approval of the land transfer authority for the acquisition of property rights (so-called “Ausländergrundverkehr”, or “transfer of properties to foreigners”). Such an approval will only be provided if the foreigner can demonstrate a specific social, economic or cultural interest. Foreigners that are citizens of a country within the European Union, or in the case of legal persons, have their seat in a country within the European Union, do not have to obtain an approval due to the free movement of capital.

Furthermore, as a general rule, the possession and ownership of property which is used for agriculture or for forestry is reserved for farmers and people engaged in forestry. This limitation applies both to nationals and to foreigners and serves to preserve agricultural space and land used for forestry, as well as the farming community.

The most important rights in connection with property are the:

• Right of ownership
• Right to residential property/Condominium right
• Right to build (“Baurecht”) and buildings on non-owned land (“Superädifikat”)
• Usufruct and the right to use a flat
• Other limited rights in rem
• Right to rent and leasehold.

The right of ownership is the ultimate right to real estate. It is defined as the competence to change the substance and the use of a thing at will, and to exclude everybody else from this. There is no stronger right than the right of ownership.

The right to residential property is the material right to exclusive use of a condominium and to dispose of it exclusively (to rent or to sell it). It is comparable to the right of ownership, but is limited to a specific residential property. Condominiums are currently very widely used in Austria and are usually found in apartment blocks as well as mixed use buildings (apartments and business premises). Usually this does not apply to purely business premises (such as office buildings or industrial premises).

In principle, buildings and land share the same legal status – the owner of the land and ground is necessarily the owner of the buildings on that ground (superficies solo cedit). The right to build (“Baurecht”) is an important exception from that principle where the ownership of ground and the ownership of buildings are separated. Therefore, the building right is the right in rem to have a building on or below the land. The building right can be granted for a minimum of ten years and a maximum of 100 years (however, this can be extended upon agreement) and can only be prematurely terminated in exceptional circumstances. In the case of termination of a building right, the building normally transfers to the owner of the land who must pay a legally determined lump sum for the worth of the building (25%) to the previous person with the building right. Deviations from this amount can be mutually agreed (also in advance).

A further exception from the principle of superficies solo cedit is the so-called “Superädifikat”. Similar to the building right, the ownership of land and ownership of buildings are separated. However, the Superädifikat is not subject to the strict disclosure requirements of the building right and is thus afflicted with legal uncertainty. An essential characteristic of the Superädifikat is that the building is built with the intention that it should not exist forever. This intention must be reflected in the type of building or in a contract.

The right of usufruct is the personal right in rem to enjoy a foreign object whilst respecting its structure, but without any further limitations. The holder of this right can therefore exclude the owner from use of the building and also lease and make use of other benefits. He may not interfere with the structure of the building, e.g. tear down the building. This right expires in principle with the death of the right holder.

The right to use a flat is the personal right in rem to use a flat. This right is mostly used in connection with the law of succession and should not be confused with renting or leasing.

Moreover, there are many other limited rights in rem (servitudes, easements) such as right of way, duties to tolerate under or over ground pipes and realty charges which can be freely agreed between the parties.

Rent and leasehold. In contrast to the rights mentioned above, rent and leasing have no effects in rem; therefore, they are not property rights which can be enforced against everybody, but simply a creditor/debtor relationship which is only valid between tenant/lessee and landlord/lessor. Yet tenants and lessees have a position which is “quasi” in rem. In addition, under the Rent Act (“Mietrechtsgesetz”), the landlord can only terminate for important reasons explicitly set out in the Act. This termination protection applies both for the rental of housing and of business premises. Moreover, under the Rent Act paying or demanding key money for a rental object is unlawful if there is no consideration in return such as interior or the like that equals the amount of the key money. Paid unlawful key money can be claimed back.

All rights in rem must be registered in the land register in order to become effective (more on this under question 7). Although the right to rent or lease does not have to be registered in the land registry to become effective, as it is not a right in rem, this can be done voluntarily so that it is visible for all.

Normally, investors purchase either the ownership of the asset itself (asset deal) or the ownership of the company which holds the asset (share deal).

Investors rarely purchase leasehold rights in Austria in order for them to realise them in the form of sub-leasehold rights or to sell these as a whole. The taking-over of an entire contractual relationship requires the agreement of all parties. Almost invariably the rules of transfer of properties to foreigners (see above under question 1) applies also to acquiring lease rights.

However, more often a business operation is purchased with the benefit of leasehold rights. Here, the purchaser enters into the existing leasehold right in the place of the seller of the business by act of law.

Pursuant to Council Directive 77/187/EEC on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of businesses, rights and duties of a transferor of a business resulting out of an employment contract are passed to the transferee of the business upon transfer.

The Austrian Employment Law Harmonisation Act (Arbeitsvertragsrechtsanpassungesetz) was passed in order to implement the Council Directive 77/187/EEC and applies when a transfer of a business or of parts of a business takes place.

The main elements of the Employment Law Harmonisation Act are that:

• employment obligations pass to a purchaser as a matter of law
• there is a one year cushion against making employment conditions less beneficial in certain cases
• works agreements remain valid after the transfer of the business and
• there is joint and several liability of the transferor and transferee for obligations under the employment contract, which is particularly important with respect to entitlements for pension and severance payments

The transfer of a part of the business as stated in Directive 77/187 and the case law of Austrian Courts depends upon:

• the existence of a part of the business
• the maintenance of the part of the business during the change of operator
• the maintenance of the previous business activity in the part of the business or
• the restart of the business after a short or conditional interruption

The concept of transfer relates to cases in which an economic entity – that is to say an organised group of persons and assets facilitating the exercise of an economic activity which pursues an objective specific to it – retains its identity following the transaction in question. This will not apply to all real estate transactions.

As a matter of general principle, a transfer of a business to another owner will not affect the employment relationship. The transferee takes over by operation of law the existing employment relationships together with all rights and obligations existing on the date of the transfer.

The previous employment conditions must remain the same, unless the provisions dealing with collective bargaining agreements, corporate pension promises or the validity of work agreements state differently.

The process of a property transaction largely depends on whether there is a share or an asset purchase. Normally heads of terms or a memorandum of understanding or letter of interest is drafted, negotiated and agreed on larger transactions.

Either following this or even during this stage, due diligence will be undertaken on the part of the buyer (see below question 6.).

The heads of terms (or memorandum of understanding or letter of intent) set out the principal terms agreed between the parties and are generally expressed to be “subject to contract”. They form the basis of the documents to be drafted by the lawyers.

Once the heads of terms have been finalised, they are sent to the parties’ lawyers. The seller’s lawyers will usually collate all information relating to the property and send it to the buyer’s lawyers together with a draft sale and purchase agreement (contract). The form of the sale agreement will vary according to whether the property being sold is under construction or already built and the extent to which leases to tenants have already been granted.

The buyer’s lawyers consider and suggest amendments to the draft sale agreement to reflect the purchaser’s requirements and the results of due diligence investigations.

Once the sale agreement is in an agreed form, the parties sign the contract (signing).

Normally, conditions precedent are agreed in the purchase agreement (closing conditions), whose occurrence is dependent upon certain circumstances (e.g. the granting of an approval required by the land transfer authorities or the competition authorities, or the completion and handover of a building which has yet to be built). During this time between signing and closing, the purchase price will normally be controlled by a fiduciary who will pay this out to the seller upon the occurrence of the closing conditions. For large transactions, a meeting will be arranged for the closing (closing meeting).

Depending on the type of the deal, the lawyers are engaged before and after the closing to conclude the transaction. This includes bringing about the required approvals and entries for the register (e.g. approvals from the property regulation authorities, registrations in the companies’ register and land register, etc.).

An agreement for the sale and purchase of land is commonly in writing and contains or clearly refers to all main terms and conditions, and is usually in a form in which one copy of the contract is signed by both the seller and the buyer.

An important part of the contract is the warranty provisions of the seller with regard to the purchase object. These vary depending on the type of the deal and the type of the target object. Normally, freedom from defects in title regarding the ownership of the real estate to be purchased or to the shares in the company which holds the real estate is guaranteed (title guarantee). Similarly, it is usually guaranteed that the real estate is free from encumbrances apart from those listed in the land register. In terms of a share deal, an accounts warranty will also normally be granted.

A warranty as to freedom from physical defects is normally and occasionally strictly, limited. This can be anything from an entire exclusion of the warranty to the smallest limitation (limitations for each individual defect and/or a materiality level which must be exceeded) as well as the limitation of warranty periods. However, it is normal to receive the assurance of the seller that the building does not contain any illegal substances or substances which may be hazardous to health (e.g. asbestos).

The statutory law (which can be deviated from and often is deviated from) implies that the seller is liable to ensure that the object corresponds to the contract. Therefore, he is liable in particular for the fact that the object has the stipulated normally expected qualities that correspond to its description and that it can be used according to the nature of the business or the agreement reached.

The warranty period for immovable objects is three years, but can be extended as well as shortened.

With regard to the payment of the purchase price very often a fiduciary settlement with the help of a trustee (mostly notary public) is agreed in the context of the transfer contract. Various legal constructions and securities can be chosen in determining the trust conditions.

The trustee is subsequently responsible for ensuring that the trust payment in his possession is not made to those authorised until all prerequisites provided for and agreed on have been fulfilled. Appropriate evidence of this is to be submitted to the trustee.

After all the agreed prerequisites have been fulfilled, the trustee makes the payment to the authorised party.

Because the buyer has the opportunity of conducting full title investigation or due diligence before exchanging agreements, the buyer is usually prohibited from making any objection to any matter of title after the date of exchange.

Provisions relating to value added tax will be included where relevant to ensure the agreed tax position.

If the property being sold is in the course of construction, the contract for sale will incorporate provisions dealing with the obligations of the seller to construct in accordance with an agreed specification and to provide to the buyer separate deeds of warranty from the building contractor and persons such as the architect in order to safeguard the buyer against defective design or workmanship.

The buyer is likely to commission a survey of the building and in appropriate cases, soil and geological investigations, plant and machinery tests, and environmental investigations. There are three limbs to the pre-exchange due diligence by the buyer and the buyer’s lawyers.

First, title to the property will be investigated. The buyer’s lawyers will consider the entries on the Land Register and relevant historic title documents. Where title to the property is not registered at the Land Registry, the buyer’s lawyer will consider the unregistered deeds to check that the seller has a sufficient title to the property.

Secondly, the buyer’s lawyers will review the position regarding municipal and zoning consents, environmental matters, utilities serving the property, financial encumbrances etc. Where the seller is a company, the buyer’s lawyers will also conduct searches of the seller at the companies register to ascertain whether the company is solvent and therefore able to dispose of its assets freely. Where the search result refers to security, the buyer’s lawyers will ask for confirmation that such matters do not encumber the property and that no third party consents are required for the transaction to proceed.

Thirdly, during the due diligence process the buyer may often arrange a survey of the property.

Finally, major contracts are to be examined.

Requisitions deal with completion formalities such as the seller’s lawyers’ bank details. The buyer’s lawyers will also conduct pre-completion searches including a priority search of the Land Registry.

Before exchange of agreements the buyer’s lawyers usually report their due diligence findings to their client, raising any matter of particular importance or concern.

According to Austrian law, the ownership of real property and easements etc. is acquired only by the entry of the right into the Land Register.

It is therefore necessary to have at least the signatures of all agreements concerning such rights attested by a notary public, if attestation by a notary public is not otherwise compulsory.

Moreover, the agreement must contain a declaration (consent to the transfer) made by the seller in which he consents to the registration of the agreement in the Land Register. This declaration can also be made outside the contract. In this case, the signature of the person who makes the declaration has also to be attested by a notary public.

The entry into the Land Register is an essential element for the acquisition of the property right to real property, easements and other rights in rem regarding real property (e.g. mortgages) etc. According to Austrian civil law and the land register law, the original of the agreement is the basis for registration and original certificates specified by law (clearance certificate furnished by the tax office, proof of citizenship etc.) are to be submitted to the competent land register court. After positive examination of the certificates by the registrar at the land register court, entry is made into the Land Register. Thus, the acquisition of the property right takes effect.

Any proposed development of property must always correspond to the planned use and the provisions of the land development plan.

If applicable, a notice of proposed building is made. In other cases, a building permit can be applied for. The building permits granted are invalid if the building operation has not started within a given period (four years in Vienna but variable according in each province) or the building is not finished within that period, after the start of construction.

After completion of the construction project, the building structure is inspected for compliance with the building permit. Thereupon, a licence for use is granted by the authority following submission of a statement of completion. Apart from the procedures required under the building regulations, the business or trade to operate from the building requires a relevant commercial licence to be obtained.

For the business location itself, a permit for the operating equipment (Betriebsanlagengenehmigung) may be necessary according to the Austrian Industrial Code (Gewerbeordnung).

In the course of the building operation, architectural conservation requirements and limitations have to be observed, particularly in urban centres and in protected zones contained in a land development plan. Compliance must also be made with the regulations concerning the respective interests of adjoining owners during the carrying out of building operations.

Before a sale is contemplated, insurance is generally the responsibility of the owner of the freehold interest in a property. The seller always bears the risk prior to the conclusion of the contract of sale. The transfer of risk from the seller to the purchaser is specified in the contract of sale. The purchaser bears the risk after the contractually agreed date.

The purchaser enters into existing insurance contracts instead of the seller by act of law. However, he has the right to terminate the insurance relationship within one month after purchasing the property.

The insuring party should have a fully comprehensive buildings insurance policy to protect the structure and fixtures and fittings of the property in the event of damage or destruction by any of a comprehensive list of insured risks, such as storm, lightning, fire and water damage. The policy may also cover additional special heads of cover such as subsidence, heave, earthquake and, if applicable, terrorism.

Insurance policies (the insurance contracts containing the contractual terms between the insurance company and the insured) may either comprise a single policy for one particular property or a block policy designed to cover a portfolio of properties. Larger institutional investors may self-insure.

Occupying owners generally have separate policies to cover the contents of the property, especially if the property includes costly plant and machinery.

The liability for pollution of real estate and its removal is regulated according to the principle of causal responsibility. The buyer as owner of the real property is secondarily liable for pollution.

Due diligence as part of the acquisition process may involve the appointment of environmental consultants to consider documentary information and to carry out a site visit (Phase I). If considered necessary, further more intrusive investigations (Phase II) may then be undertaken. It is important to identify potential problems early so that there can be negotiation on price, the need for and scope of any remediation and/or the need to put in place protection in respect of any existing contamination related losses that may arise in the future. Such protection may take a number of forms, including obligations to remediate any contamination discovered post-acquisition, indemnities in respect of third party claims, or environmental insurance to cover these risks.

Further, EU-legislation had an impact on architecture in order to be more sustainable. Buildings account for 40 % of total energy consumption in the Union. Therefore, the EU enacted several directives in order to reduce energy consumption and to use energy from renewable sources in the buildings sector. With regard to Austria this means that basically the regional building codes have been adapted. Thus, for new buildings and also for major reconstruction measures before construction starts, the technical, environmental and economic feasibility of high-efficiency alternative systems such as (i) decentralised energy supply systems based on energy from renewable sources, (ii) cogeneration, (iii) district or block heating or cooling, particularly where it is based entirely or partially on energy from renewable sources or (iv) heat pumps, if available, has to be considered and taken into account and has to be demonstrated to the authority. However, such alternative systems do not have to be considered if they are not cost-effective through the economic lifetime of the building.

Pricing of real estate investments is a combination of the aggregate rent being paid by occupational tenants of the property and the value that investment buyers consider that a property of the specific type and location is worth at the time of valuation taking into account that income.

The rent for a particular property is likely to be assessed by multiplying the area of the property by the market rental value per square metre. The market rental value will take into account factors such as the location of the property, its type and condition, and the length of the lease term.

In the case of retail shops, it is common for the rent of the property to have differential values according to the positioning of the floor space – that nearest to the frontage is the most valuable. The rental values of the various areas will be added together to provide an overall rental value for the property.

The value of a piece of land is determined according to the property evaluation law (“Liegenschaftsbewertungsgesetz”) and the evaluation methods detailed in that law. Accordingly, if the law or the legal transaction do not stipulate otherwise, the market value of the property is to be determined. This is the price that can normally be achieved on a sale in a business transaction. Value ascertainment methods are used for the evaluation, such as the method of comparison, the gross rental method and the asset value method.

Investment properties are commonly referred to as being sold on a particular yield, meaning the investment return that will be gained from the capital sum which it is necessary to pay to buy the property. For example, where a property with an aggregate rent of EUR 10,000,00 is sold for EUR 200,000.00 it will have a yield of 5%. Conversely, the interest can be said to have been sold at a YP (years’ purchase) of 20.

With regard to taxation, the transfer of property is subject to real property acquisition tax amounting to 3.5% of the purchase price. The real property acquisition tax is normally not levied in case of a share deal. However, if 100% of the shares of a company, which ownes real property, are united in one hand, this tax falls due also in case of a share deal.

A further fee of 1.1% of the purchase price is charged for the entry of the right into the Land Register (only in case of asset deal).

Pursuant to the Turnover Tax Law (UStG), sales of property are fictitiously exempted from the turnover tax. However, a buyer has the option of treating the transaction as subject to the tax payment. This is to be recommended if input tax charges are to remain deductible or if a correction of input tax charges already asserted is to be avoided. However, it needs to be noted that the turnover tax (20%) added increases both the purchase price and the real property acquisition tax.

During the due diligence for the acquisition, the buyer will also pay the costs of conducting searches, including in particular of the local authority (which includes zoning matters, building regulations and general municipal consents, notices, etc), and, if relevant, companies providing utilities, the local waterways boards, the Environment Agency, railway operators, and coal authority. The buyer will also pay for any valuations and surveys of the physical state of the property and for any environmental audits or desktop studies.

Occasionally, the negotiated heads of terms for a transaction will provide for one or other party to pay the other’s costs. Generally, each party pays its own expenses. If the property is leasehold, the seller is usually responsible for paying the costs of obtaining any consent required from any landlord in order to sell.

Finally, the buyer will be responsible for the payment of the Land Registry fees associated with registration of the transfer to the buyer.

Since 2012 selling real property is also subject to income taxation in the private sphere. The income tax is basically 25% of the profit (selling price less acquisition cost) gained. As of 2016, the tax rate will be increased from 25% to 30%. An exemption is made for people who lived in the sold property for two years continuously before the sale or for five years continuously within the last ten years before the sale.