Commercial real estate law and rules in Germany

1. Parties and Ownership – Who can own real estate and what types of ownership are there?

Parties

Any “person” with legal capacity may own real estate. This includes legal persons under private law (e.g. stock corporations or limited liability companies) as well as legal persons under public law (e.g. local authorities). Associations with legal capacity or non-profit-organisations may also purchase real estate.

Unlike the above mentioned legal persons, a civil law partnership (Gesellschaft bürgerlichen Rechts (GbR)) and its partners are not recorded in a public register. Also a change of partners cannot be verified. Therefore, when buying real estate property as a GbR, all partners must be entered into the land register.

Commercial real estate is often owned by insurance companies, banks, investment companies or real estate holding companies.

There are no statutory restrictions on foreign persons or companies acquiring real estate in Germany, provided that they have legal capacity.

Ownership

German law differentiates between the following types of ownership: 

  • Sole ownership (Alleineigentum) – the sole owner is the only person authorised to control and dispose of the land
  • Co-ownership (Miteigentum) – more than one person owns a share of the land. Each co-owner can dispose of its share (§ 747 German Civil Code (BGB))
  • Joint Ownership (Gesamthandseigentum) – land which forms part of jointly held assets, e.g. by a civil law partnership or an association without legal capacity. Each joint owner is entitled to a share of the joint property but is not entitled to dispose of its share independently
  • Rights which are similar to full ownership of real property – by analogy these rights are subject to the provisions on full ownership, provided that there are no special regulations. Heritable building rights (Erbbaurechte) are particularly important and are generally created for a period of up to 99 years. During that period, the holder of a heritable building right may build on the land and use it. Commonly, a recurrent charge or rent (Erbbauzins) is stipulated in the contract

Any transfer of title to land has to be entered into the land register (Grundbuch). Prior to this, real estate transfer tax and other financial duties relating to the property have to be paid. To assure these payments, the tax authorities responsible for the respective area have a right of appropriation. Only if the tax authorities waive this right can the transfer of title to land be executed.

A distinctive feature of German law is the annulation proceeding (§ 927 German Civil Code (BGB)). Under certain circumstances, the owner of a piece of land may lose its title to property. In particular, the land must have been in proprietary possession of another party for over 30 years and the real owner must be either missing or dead, or alternatively, not listed in the land register.

2. Interests – What types of interest in real estate are sold?

In Germany it is only possible to sell title to land or to create limited rights (beschränkte dingliche Rechte).

German law recognises several forms of interest in property. These are:

  • Ownership (including condominium ownership)
  • Limited rights in rem such as
    • heritable building right (Erbbaurecht)
    • easements (Dienstbarkeiten)
    • realty charge (Reallast)
    • mortgage (Hypothek)
    • land charge (Grundschuld)
    • annuity land charge (Rentenschuld)

Real estate may be held by means of sole ownership (Alleineigentum), joint ownership (Gesamthandseigentum) or co-ownership (Miteigentum).

In the case of real estate which is leasehold, only the land may be acquired. However, the buyer of leased real estate enters into the rights and obligations contained in the lease agreement in lieu of the lessor, i.e. as soon as the buyer is registered in the land register it automatically assumes the status of a lessor (§ 566 (1) German Civil Code (BGB)) if all conditions are met.

The buildings on the land and all other fixed components and items such as crops are regarded as essential parts of the land and cannot be separated from it. Consequently, a separate legal transfer of either land or building is neither necessary, nor possible. Unless the parties have agreed otherwise, the sale also includes the accessories (Zubehör), i.e. the movable items on the site that serve the commercial purpose of the land, such as construction materials or supplies of heating oil.

Condominium ownership is a special kind of right . It consists of individual ownership (Sondereigentum) of a flat/apartment in connection with joint ownership (Gemeinschaftseigentum) of all building parts, which are necessary for the existence and safety of the building (e.g. roof, stairwell) or facilities which are used from all owners together (e.g. heating plant or heating pipes). It is possible to sell the individual property in conjunction with a share of the jointly owned property. Any issue arising, which concerns the jointly owned property must be decided on jointly by majority or unanimous decision of all co-owners. The legal foundation of the aforesaid is the Condominium Ownership Code (Wohnungseigentumsgesetz).

Another special kind of right is the heritable building right (Erbbaurecht). This is a temporary right to have a building on another person’s land. A transfer of title to land is not necessary (see question 1).

3. Employees – What employment issues affect real estate acquisitions?

In terms of real estate acquisitions, the following two employment issues have to be taken into consideration:

Transfer of business

The transfer of a business or part of a business is subject to special provisions under German law (§ 613 a (1) German Civil Code (BGB)). Frequently, employment relationships between the seller and third parties are so closely linked to the property that the transaction constitutes a sale of a business or part of a business. This often applies to the employment of caretakers and cleaning staff. Under these circumstances, the buyer takes over all the rights and obligations of the employment contracts existing at the time of the transfer.

Where the transaction constitutes a transfer of a business as described above, the seller (the former employer) and buyer will be jointly and individually liable for obligations arising under the existing employment contracts. These employment contracts may not be terminated on the grounds of the transfer of business or changed to the disadvantage of the employee within one year after the transfer. In this connection it is important that the employees concerned are informed about the business transfer at an early stage. The employees can object to the transfer of their employment within one month after receipt of the notification. By doing so, they continue being employed by the seller but run the risk of being made redundant if the seller is unable to provide a similar employment.

Employer-owned accommodation

When the transaction concerns property which includes accommodation let to the employees in connection with their employment, the landlord can terminate the lease agreement at short notice and without stating reasons once the employment has been terminated. However, this doesn’t apply where the accommodation is furnished mainly by the employee or he lives there with his family or other persons, with whom he has a joint, permanent household (§ 576b (1) German Civil Code (BGB)). Agreements made on different terms are invalid as far as they are to the disadvantage of the tenant.

4. Procedure – What are the steps in a sale and purchase transaction?

A letter of intent or heads of terms are not required in every sale or purchase transaction. These non-binding declarations of intent are used with large transactions, such as the sale of a real estate portfolio with a bidding procedure.

It has become common practice for a seller or buyer to carry out a due 
diligence process. The due diligence identifies problematic issues relating to the property and points out remedies (see question 6).

Usually, one party sends the other party a draft contract tailored to the specific property. Since a contract for the sale of land must be notarised, it is also possible to have the contract drafted by the notary. Lawyers are normally engaged to advise the parties and to draft the contract.

Once the parties have reached an agreement on the specifics of the contract, it has to be notarised. It is important to note that associated agreements must also be notarised if they are of significance to the conclusion of the contract, e.g. if a construction or lease agreement is coupled with a real estate sale. Otherwise, the whole contract is void. A binding offer of one party also requires notarisation. An offer or a contract concerning real estate, not concluded in that form, only becomes entirely valid if the transfer of title to land has been declared by the parties and entered into the land register.

Two essential criteria are required to be fulfilled for transfer of title to land (§ 873 German Civil Code (BGB)):

  • Declaration of conveyance of the property (Auflassung) – this is the agreement between the buyer and the seller necessary for the transfer of ownership of a plot of land which has to be notarised in the presence of both parties. Commonly, it is already included in the contract for the sale of land and does therefore not require separate notarisation
  • Entry into the land register – the entry into the land register completes the legal purchase and has a constituent effect, i.e. the title is not transferred before the buyer’s status as owner is entered into the land register. Some time, usually several weeks or months, may pass between the date on which the contract is notarised and the completion of the legal purchase (entry into the land register)

5. Contract terms – What provisions does a real estate contract contain and what is implied by law?

Provisions of the contract

Contractual provisions normally govern:

  • Definition of the object of purchase (land description, appurtenances, fixtures and fittings, encumbrances, etc.)
  • Exclusion of liability (e.g. soil contamination, hidden defects)
  • Protection of the seller
    The parties instruct the notary not to file the application for the transfer of title to land until the seller or the bank has confirmed the receipt of the purchase price. As far as the payment of the purchase price is concerned, the buyer submits itself to immediate execution on its entire assets. This means that the seller is able to access the assets of the buyer, thereby avoiding length‚y legal proceedings. Alternatively, payment can be deposited into an escrow account which is administered by the notary as trustee. However, this generates additional costs.
  • Protection of the buyer
    A very important contractual term is the priority notice of conveyance (Auflassungsvormerkung). It protects the buyer’s claim to a correctly ranked entry in the land register. The purchase price usually does not become due until the priority notice has been entered in a correctly ranked order.Transfer of possessionAt the date on which possession is to be transferred, the risk of accidental loss, deterioration not caused by either party, ability to use, compliance with encumbrances, and all duties to ensure that the land or premises are safe for persons or vehicles, are passed on to the buyer. It is advisable for the contract to make a specific provision for the transfer of possession. There should be a clear distinction between the recurring public charges and the allocation of infrastructure development costs and other levies.
  • Authorisation regarding execution of the contract
    At the notary’s office, the parties give authority to the notary’s staff regarding all declarations that are necessary to enter the legal transactions listed in the contract into the land register. In general, this authorisation expires once the title has been entered into the land register.
  • Advice of the notary
    The notary must advise the parties on all contract-related issues that might imperil the execution of the contract. A special clause of the contract 
contains this advice.

Terms implied by law

The German Civil Code (BGB) comprehensively regulates the law of purchase. Strictly speaking, therefore, all the parties have to do is to specify the subject of the contract and to reach express agreement on aspects of the transaction which differ from those provided by statute. However, there are certain mandatory provisions which the parties may not exclude by contract. The most important are the following:

  • The seller may not exclude or limit its liability where it has guaranteed the condition of the property or fraudulently concealed the existence of a defect (§ 444 German Civil Code (BGB)). Consequently, where liability is completely excluded the seller must specify all circumstances which, according to usual business practice, constitute a defect of land or buildings. Failure to do this may render the liability exclusion clause invalid.
  • Liability for defects
    In so far as liability for defects has not been excluded, the buyer has the following rights (§ 437 German Civil Code (BGB)):
  • demand cure, (§ 439 German Civil Code (BGB)): As cure the buyer may, at his choice, demand that the defect is remedied or a thing free of defects is supplied. The seller must bear all expenses required for the purpose of cure, in particular transport, workmen’s travel, work and materials costs.
  • revoke the agreement (§§ 440, 323 and 326 (5) German Civil Code (BGB)) or reduce the purchase price (§ 441 German Civil Code), and
  • demand damages (§§ 440, 280, 281, 283 and 311a German Civil Code (BGB)), or demand reimbursement of wasted expenditure (§ 284 German Civil Code (BGB)).
  • Protection of confidence by acquisition in good faith
    For the benefit of the buyer, the content of the land register is deemed to be correct. For this reason, title to land can be acquired from a party registered as owner in the land register, even if this party is in fact not the legal owner. Likewise, land can be purchased unencumbered, even if the encumbrances have merely been cancelled inadvertently. However, the buyer cannot refer to good faith if it has positive knowledge of the fact that the land register is incorrect. This protection of good faith does not apply to rights which cannot be registered, such as the existence or non-existence of a lease agreement.
  • Automatic passage of non-registrable rights
    In most of the German federal states (Bundesländer) public easements (Baulasten) have to be recorded in a special register (Baulastenverzeichnis). The public easement is a formal obligation to be supervised by the building authorities, stating, for example, that the landowner will not build on a certain area of the land. This obligation then becomes an encumbrance which is not to be entered into the land register and which applies to any legal successor of the property.
  • General terms and conditions of business
    Limitations regarding the content of general terms and conditions of business are regulated by law (§§ 305 et seq. German Civil Code (BGB)). Land transactions generally include some standard clauses not specific to a particular transaction. A clause used as general business term or condition is deemed invalid if it causes a breach of good faith or unfairly discriminates a contracting party. Whether this is the case or not must be decided on the merits of the individual case.

6. Due Diligence – What investigations does the buyer normally make?

The common law principle of “caveat emptor” does not exist under German law, quite the contrary, the buyer has no obligation to check the object of purchase. If there are any defects, the buyer has the rights, which are stated under § 437 German Civil Code (see the answer to question 5; liability for defects).

Claims on the buyer’s part made on the grounds that the condition/quality is not as stated in the contract are excluded only if the buyer was aware of the defect when signing the contract. If the reason for its lack of awareness was due to gross negligence, he may only assert claims for defects if the seller fraudulently concealed them or had given a guaranty that the object would have a specified condition/quality. Gross negligence depends on whether the buyer was under an obligation to examine the property prior to and at the conclusion of the contract. The seller is always liable for defects he conceals fraudulently.

As far as real estate transactions are concerned, case law has acknowledged that it is common practice for a buyer to carry out a diligent inspection of the land and/or buildings. The buyer should at least examine the land and the buildings for any obvious defects (technical due diligence).

In practice, the scope of the inspection to be carried out by the buyer is based on the extent to which the seller excludes liability for defects. The greater the exclusion of liability, the more detailed the buyer’s inspection is likely to be.

When the buyer carries out a due diligence review, he uses a comprehensive checklist tailored to the requirements of the specific transaction (location of the property, condition of the development, use). In addition to an examination of the legal situation regarding planning and building permits, an inspection of the following should also be carried out: encumbrances entered into the land register, public easements, and the actual condition of the site (in particular inherited environmental liabilities and contamination of the building). Concerning the building, the buyer should examine the condition of the building (backlog of repairs) as well as the lease and other contracts regarding the use of the building.

7. Registration and Notarisation of real estate – What are the basic requirements?

The ownership status of real estate is recorded in the land register, which is an official register kept by the land registries at the local courts. The land register contains the reference list (Bestandsverzeichnis) and sections I, II and III. The reference list contains a detailed description of the real estate and should correspond with the data in the cadastral plan, i.e. plan indicating the location and size/area of the land which is kept by the real estate offices (Liegenschaftsämter). Section I lists the name of the owner. Section II includes any encumbrances and/or restrictions (servitudes, rights of usufruct), while section III refers to mortgages, land and annuity charges. Any person verifying a legitimate interest may inspect the land register. In principle, there is an irrefutable presumption that the content of the land register is correct, i.e. the facts entered are deemed to be correct.

The land registry procedure is based on a number of statutory principles, the most important being:

  • Applications – the land registry only acts on an application. Ex officio entries are comparatively rare
  • Approval – any land register entry concerning a change in the legal rights must have the approval of the respective party. Such a party is anyone in whose favour a right is entered in the land register and whose right is affected by the desired amendment
  • Prior entry – according to the principle of material priority the rights in land are ranked in the chronological sequence in which they were entered in the land register. The chronological sequence of the entries refers to the date of the corresponding application for entry

A priority notice may be entered into the land register to secure a certain ranking. This protects the claim to a legal position . There are separate land registers for heritable building rights (Erbbaugrundbuch) and condominium property (Wohnungsgrundbuch). The land register for condominium property records the proportion of co-ownership in the land and the individual ownership (Sondereigentum) separately for each co-owner.

Contracts for the sale of land must be notarised. Notarisation is also required for all collateral agreements which are so closely linked to the contract that neither can stand alone. Hence, collateral agreements, such as a purchase of movable objects, an obligation to construct a building, or lease agreements must be notarised in their entirety if the parties intend that the various agreements should be so closely interlinked that they “stand and fall” together.

8. Permits – What permits are required for the use and occupation of real estate and are they personal?

Which permits are required for the use or occupation of real estate depends upon whether or not the land is developed.

Undeveloped land

Whether and how a piece of land can be developed is governed by public planning law. All land can be classified into one of three development categories:

  • Designated development area (§ 30 German Federal Building Code – Baugesetzbuch (BauGB))
    If a piece of land falls within the scope of a local development plan, which contains a minimum of specifications on the type and extent of the development, on the areas which may be developed, and on the local public access areas, the construction project is permitted. This only applies if the project complies with these specifications and the development infrastructure is assured.
  • Developed areas without a local development plan (§ 34 BauGB)
    Development is 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 project, the construction method, and the area which is to be built upon fit into the surrounding area and development infrastructure. Where the character of the area falls within one defined by the Federal Land Utilisation Regulation (Baunutzungsverordnung (BauNVO)), the proposed development has to meet the criteria required. This regulation defines the typical categories of land and permits certain types of use in various categories (e.g. residential, commercial, mixed areas etc.).
  • Non-developed area (§ 35 BauGB)
    If the land is not located within a continuous built-up area and if there is no local development plan, a construction project is only permitted, provided that it does not conflict with public interests, that the development infrastructure is assured, and that the construction project is a privileged project within the meaning of § 35 BauGB. Privileged projects are certain types of building projects which generally should be located outside developed areas, such as agricultural plants, power plants, etc.

Given the approval of the responsible local authority, a commercial real estate project may be realised by way of a project-specific local development plan. The contracts dealing with large-scale projects in particular must ensure the possibility of realising the project according to all public law requirements and contain provisions to cover the possibility that the project cannot be realised as anticipated.

Once the plans for a project have been drawn up, a building permit (Baugenehmigung) is applied for. The requirements for a permit vary according to the Building Law of each German Federal State (Landesbauordnung). A building permit is necessary for the erection, demolition, or change in material or use of a building. In order to obtain a building permit, an application must first be submitted. It may be filed by the owner of the land or third parties if generally such agreement was reached with the owner beforehand.

If the construction project complies with the local development plans and if it does not infringe any public-law requirements, the local authority will issue the building permit, possibly attaching additional requirements (in particular relating to fire protection, building safety, etc.). The neighbours adjacent to the site will be notified of the construction project and given an opportunity to comment. The neighbours may file objections regarding the building permit and, under certain circumstances, hinder the progress of construction work by taking legal steps. However, this is only possible if the building permit infringes regulations specifically designed to protect the interests of neighbours, such as the distance between buildings and boundaries.

If the land is intended for commercial purposes, further permits may be necessary. Of particular practical importance is the permit under the Federal Emission Control Act (Bundesimmissionsschutzgesetz).

Certain projects, such as industrial buildings and shopping malls, additionally require an environmental impact assessment before the building permit can be issued.

German law distinguishes between rights attached to the land (Realkonzession) and rights attached to a specific individual. Where the right is attached to the land, it automatically applies to any new owner. Whether the permit is granted as a right attached to land depends on the specific type of permit. The building permit is issued for a specific piece of land and also applies to the new owner of the land. A new application is not necessary. In case the permit only applies to a specific individual, a new owner must re-apply for it.

Developed land

Regarding developed land, the buyer should ensure that the required permits have been obtained and, in particular, that any additional requirements have been observed. If certain conditions are met, existing buildings may enjoy legal protection (Bestandsschutz) even if the building permit is subsequently modified or withdrawn, and where this is the case the local authorities cannot force the owner to demolish the building.

Older buildings may be declared historical monuments by the Historical Monuments Preservation Authority (Denkmalschutzbehörde) according to the Monuments Preservation Code (Denkmalschutzgesetz). There are stringent requirements for intended alterations to the listed buildings. In urban areas, the local authorities may pass preservation and restoration regulations for certain designated areas. Construction work on such buildings is subject to a special permission.

9. Insurance and Risk – What insurance will the parties effect and when does the insurance risk pass at the time of sale?

There is no mandatory insurance for land and/or buildings. The owner bears the risk of deterioration or accidental loss of its property. In general, this risk is covered by a property insurance policy in the form of an all-risks insurance policy which covers the risk of loss and destruction. In addition, there is a third-party insurance policy for house and land owners and water pollution insurance including clean-up and demolition costs on a sliding-replacement costs basis. In the case of leased property, the insurance premium may be charged to the tenant provided there is a contractual clause to that effect.

If an insurance policy is concluded for a piece of land, the insurance along with the title to land passes to the new owner when the land is sold (§ 95 Insurance Policy Act – Versicherungsvertragsgesetz). The new owner is entitled to either continue the policy or to terminate it within one month after having been entered as the new owner into the land register. The insurer is also entitled to choose to terminate the policy within one month after having been informed by the seller or by the buyer. The insurer must be informed about the change in ownership without undue delay. Failure to do so may lead to loss of insurance cover.

If companies own more than one piece of land, they can insure the entire portfolio under one block policy. In this case, the insurance policies stipulate that if one piece of land is sold the insurance for that particular piece expires and the new owner has to be informed about the expiry. The new owner must take out a new insurance, to retain full coverage, ideally before the property is transferred.

As far as the transferability of insurance policies is concerned, a distinction is made between property and third-party insurance. Whilst in principle property insurance policies are transferred to the new owner (see above), third-party policies generally refer to one person i.e. a new policy has to be concluded.

10. Environmental – What are the common environmental issues?

Protection of the environment is a very important issue in Germany. According to the German Constitution (Grundgesetz (GG)), the state is responsible for the protection of the “natural basis of life” (Art. 20 a GG).

Low-energy construction methods

Every new building must comply with the current Energy Saving Act which became effective on 13 July 2013 (Energieeinsparungsgesetz) in conjunction with the current Energy Saving Regulation (Energieeinsparverordnung (EnEV)) which became effective on 1 May 2014. The EnEV 2014 stipulates specific standards concerning the conservation of energy through heat insulation and low water consumption which must be observed by property developers. Under certain circumstances, existing buildings must be upgraded. This concerns, in particular, buildings with old boilers and buildings which are refaced.

Since 1 October 2007 the Energy Pass (Energieausweis) is stipulated in the EnEV. The Energy Pass documents the energy needs of a building. It has to be shown to every buyer/tenant of an already existing residential building as guidance in advance of any contractual agreements. Since 1 July 2008 this applies to residential buildings constructed in 1965 or earlier, and since 1 January 2009 to all existing residential buildings. The Energy Pass is also required for non-residential buildings since 1 July 2009.

Waste law

Waste management is an integral part of environmental protection. The main aims are firstly to avoid waste and secondly to recycle materials or convert them into energy. These two alternatives have clear priority over disposal. Production plants must comply with the extensive waste prevention regulations.

Soil protection

The issue of “inherited environmental liabilities” arises in virtually all property sales.

Liability for inherited environmental obligations is mainly governed by the Federal Soil Conservation Act (Bundesbodenschutzgesetz). Not only must contamination be avoided but also precautionary measures must be taken. Soil which has been contaminated must be cleaned up. With property transactions, the clean-up issue is extremely sensitive since several responsible parties might exist where property has frequently changing owners. The principle whereby the party which caused the contamination is obliged to remedy the damage does not apply unreservedly in this case. The competent authority follows the principle of finding the most effective means to avert danger and may decide between a number of potential candidates (§ 4 BBodSchG). The responsible party may be:

  • the causing party (as far as it can be clearly identified) or its legal successor (e.g. the successor in title or a company which has come into existence as a result of a merger)
  • the owner of the land registered in the land register or the party having actual control (a tenant) even if the party has neither caused nor even been aware of the soil contamination
  • a party which is liable for a legal person for commercial or corporate reasons (e.g. liable partner/shareholder, under certain circumstances also a director or liquidator)
  • a former owner of the land if transfer of title took place after 1 March 1999 and he knew or ought to have known about the contamination. This liability has serious implications for the seller since it may still be held liable by local authorities many years after ‚‚the sale. Thus, as a rule, the seller will seek an indemnity from the buyer to protect itself against such liability

Where more than one party from the above groups is liable, the party against whom the local authority directs the claim does not always have to bear the costs of clean-up itself. Under § 24 (2) Federal Soil Conservation Act (Bundesbodenschutzgesetz), the party liable may seek recourse from the other parties. The extent of the duty to render such recourse depends upon the extent to which the danger or the loss was caused primarily by one party. Unless otherwise agreed in the contract, a passive offender will generally be able to demand full compensation from the party that caused the contamination. In a landmark decision, the Federal Constitutional Court (Bundesverfassungsgericht) has ruled that in individual cases the liability of the passive offender may also be restricted to the purchase price received for the land. This would be the case if the owner’s other assets were not related to the contaminated site.

Since there are a large number of inherited environmental liabilities in Germany such as abandoned or disused houses, industrial landfills, ammunition from the First and Second World Wars, unofficial dumps, former production sites with soil contamination, tank storage and waste water pipes, the risk of inherited environmental liabilities is frequently an important and sensitive issue in negotiations for property transactions. This risk makes a thorough due-diligence review an absolute necessity. Generally, an initial assessment of the risk can be made by researching the history of the site (past use of the site, existence of ammunition). If research suggests there may be inherited environmental liabilities, the next step is to make exploratory investigations by taking soil samples. Should they reveal a soil contamination, the parties must agree by way of contract on the obligations of remedying the contamination and bearing the costs. Similar problems arise with asbestos and PCB (polychlorinated biphenyls) contamination in older buildings. It may be necessary to ascertain the extent of the contamination by analysing the air in the buildings’ rooms.

Contracts for the sale of land generally contain detailed provisions on environmental liability. This allows the risk in the specific case in question to be assessed and to be allocated between the parties concerned.

Nature preservation

If the property provides a habitat for rare species of animals or plants it may be subject to nature preservation requirements. The property developer may, for example, be barred from building in certain areas or be required to create similar preservation areas at another location in substitution.

11. Pricing/Valuation – What sets the price/valuation of real estate?

The purchase price of real estate primarily depends on whether or not the 
property is leased, an undeveloped site or developed real property. There are 
different methods of valuing real estate depending on the use the property is 
designed for. The market value of real estate can be determined by professional property values. There are various valuation methods.

Leased property can be valued according to the “capitalised earnings value method” (Ertragswertverfahren). In Germany, this method is defined by statute (§§ 78 et seq. Evaluation Statute (Bewertungsgesetz)) and the revenue from rent is incorporated into the valuation method. However, more recently the international “discounted cash flow method” (Internationale Ertragswertmethode) has become more widespread. This method establishes the value of real estate by discounting the expected income and expenditure, which must be determined regularly. This covers necessary future repairs and maintenance work and the expected loan costs that must be taken into account. The purchase price for property with a long-term lease is commonly calculated by multiplying the net annual rent with a certain factor, usually between 11 and 17.

The market value of land the owner itself intends to use is generally determined by the “property value method” (Sachwertverfahren). The calculation is based on the usual building costs of all buildings on the land taking into account their remaining economic life, building defects and damages, as well as other circumstances affecting the value of the land itself. This calculation of market value can also be carried out by an expert committee of the local authority (Gutachterausschuss). The expert committee can also provide land values as a guide for evaluation of the site.

12. Taxes and Costs – What are they and who pays them?

The purchase of real estate generates land transfer taxes which currently vary in the range of 3.5%–6.5% of the purchase price. Every Federal State in Germany has the right to state this specific tax rate. Legally, the buyer is obliged to pay the respective amount.

Federal State

Tax rate in %

Bayern, Sachsen 

3.5

Hamburg 

4.5

Baden-Württemberg, Brandenburg, Bremen, Mecklenburg-Vorpommern, Niedersachsen, Rheinland-Pfalz, Sachsen-Anhalt, Thüringen 

5.0

Berlin, Hessen 

6.0

Nordrhein-Westfalen, Saarland, Schleswig-Holstein

6.5

Value Added Tax (VAT) is due only if the buyer is an entrepreneur and if the real estate is directly related to its company. However, the seller can waive its right to VAT exemption. The issue of VAT options becomes complex in the case of real estate which combines residential and commercial property. Residential areas are not covered by the VAT exemption. For the purpose of calculating the tax burden, the residential area must be calculated as a percentage of the whole. According to the current legal tax situation, the buyer must pay VAT (at present 19 %) to the tax authorities or it can offset using an input tax refund claim. In order to assert the input tax refund claim, the seller must issue an invoice to the buyer which complies with the VAT requirements. The real estate contract itself does not have to specify VAT.

If a real estate agent is involved in the property purchase, the instructing party must pay the agent’s fees. In exceptional circumstances the agent may charge both the buyer and the seller.

The notarisation costs of the transaction and the land-register entry costs are normally borne by the buyer. However, in the contract they can be stipulated differently. In practice, the seller is occasionally willing to assume the notarisation costs if it is allowed to select the notary.

Unless otherwise agreed, fees for lawyers, valuers and other consultants are borne by each party individually. The same applies to the costs associated with due diligence work such as inspecting official registers, copies and extracts from detailed local development plans, permit charges, etc.