Commercial real estate law and rules in Switzerland

Any natural or legal person may own real estate. Bodies which do not qualify as legal persons, such as partnerships, cannot own real estate.

Owners of commercial real estate include private developers, insurance companies, pension funds, banks and other financial institutions, private or public property companies as well as the Swiss confederation, the cantons and local authorities.

There are certain restrictions preventing foreign nationals or companies from owning real estate in Switzerland which do not, however, apply to commercial property (i.e. property which is used to conduct a business).

Legal ownership of property in Switzerland includes the following types:

• Sole ownership
• Joint ownership
• Co-ownership
• Condominium

Land may be held on trust by a legal owner for a beneficiary. The beneficial ownership is of a purely contractual nature, however, and the beneficiary has no right in rem, but only a contractual claim against the legal owner. It is possible to note in the Land Register that a Swiss property is held in trust for a foreign beneficiary, giving the beneficiary protection against breach of trust and in case of bankruptcy of the trustee.

Property in Switzerland is either owned or leased. There is a certain restriction in Switzerland on how long leases can be to the extent that “eternal” leases are not permissible. Ownership or leasehold title will be acquired depending on the circumstances of the transaction.

Ownership is a real right (a right in rem) whereas leasehold is a personal right (right in personam). The ownership of an apartment in a building, similar to the North American condominium interest, is governed by special provisions. Title to land must be registered at the Land Registry on completion of a purchase; a lease may also be registered.

Property interests which exist in Switzerland include:

• Ownership (such as sole ownership, joint ownership, co-ownership incl. condominium) – the best and most common legal title in land
• Possession
• Options and pre-emptions – rights to buy or first refusal
• Easements and real estate charges
• Leases

The parties must make it clear whether the fixtures and fittings at the property are to be removed prior to the sale or are to form part of the purchase. Essential elements which cannot be removed without destroying, damaging or changing the real property are integral parts (Bestandteile) of the property. The ownership of such elements is transferred with the ownership of the real estate itself. Accessories to the property (Zubehör), i.e. fittings which can be removed without difficulty, are also transferred with the real property and belong to its owner unless the parties agree otherwise.

The ownership of land extends upwards in the airspace and downwards below the ground as far as there is an interest in utilising ownership rights. Accordingly, ownership extends to structures on or beneath the land and the airspace above it.

Typical employment issues which may be relevant to real estate transactions include the transfer of undertakings, redundancies and changing terms and conditions of employment. 

Article 333 CO, which deals with the question of how business transfers affect employment agreements, is likely to be the most significant employment issue. Article 333 CO applies when a business (or part of a business) is transferred from one party to another. This might occur, for example, in the case of the sale of a shopping centre having its own management and security staff. The broad effects of article 333 CO are that:

• With effect from completion of the transfer, the employment agreements of the employees working in the business transfer to the buyer (who becomes their new employer), unless the employees object to such transfer
• Accrued continuity of employment is preserved
• Employees transfer with their existing terms and conditions intact
• Employees’ representatives must be informed and consulted about the transfer

Redundancies may arise on the closure of a business or part of a business or where there is a reduction in the number of employees required. In particular with regard to collective dismissals, care should be taken to ensure that the redundancies are carried out in a procedurally correct manner.

An employer may decide to change or harmonise terms and conditions of employment on the acquisition of a new business. This is possible, in principle, and can be imposed by the employer by means of a notice of termination pending change of contract (Änderungskündigung).

Sale and purchase agreements are negotiated and agreed by the representatives (often lawyers) of the seller and the buyer. 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.

However, real estate portfolios are often sold through a bidding procedure prepared and guided by specialised companies (e.g. JLL, PWC, KPMG Real Estate).

The buyer’s lawyers consider and suggest amendments to the draft sale agreement and at the same time will undertake general due diligence investigations (see section 6).

It is common for the sale and purchase agreement to provide for a deposit of a small percentage of the purchase price at the signing of a declaration of intent. This letter of intent precedes the signing of the actual sale and purchase agreement in front of the notary public.

If the seller is a foreign registered company, generally the buyer will require an opinion letter from an approved lawyer practising in the same jurisdiction confirming that the company is properly incorporated, has power to sell and has carried out appropriate authorisation procedures.

The contract for the transfer of ownership requires a specific form which is a prerequisite of its validity. In particular, the sales contract must be in writing and requires a public deed by a notary public. The parties are, therefore, not bound by the agreement before a public deed has been duly established by the notary, which requires a meeting in person of the authorised representatives of the seller and the buyer with the notary public.

The formally valid contract leads to rights and obligations between the seller and the buyer. Ownership of the property, however, does not transfer automatically upon completion of the sale and purchase agreement. In order to complete the transaction, the seller has to file the transfer of ownership with the Land Registry. The buyer becomes the owner of the real property once the transfer is registered in the Land Register.

An agreement for the sale and purchase of land must contain all essential terms and conditions and must be concluded in the form of a public deed.

Real estate sale contracts often contain a disclaimer of all warranties. The buyer will therefore only have the benefit of statutory warranties which are compulsory and cannot be waived. However, exclusion and limitation of liability clauses are only valid if the seller did not deceive the buyer as to any defects in the property.

Usually, the purchase price becomes due when the transaction is registered on the Land Register. It is important for the seller that at this moment the purchase price is fully paid or at least secured. This can be done by a covered bankers’ cheque or a payment letter issued by a bank (Zahlungsversprechen). A very common form of payment of part of the purchase price is for the buyer to assume the obligations arising from an existing loan which has been secured by a mortgage on the real property.

In case of default, the seller is also entitled to establish a statutory mortgage (for the purchase price) on the property sold. The registration of such mortgage needs to take place within three months of transfer of ownership.

Real estate sale contracts usually contain a clause as to who is liable to pay relevant charges and taxes. Often the notary fees and Land Registry fees (Notariats- und Grundbuchgebühren) and, if any, the property transfer taxes (Handänderungssteuern) are paid equally by both parties. The immovable property gains tax (Grundstückgewinnsteuer) is payable by the seller.

Provisions relating to value added tax will be included where relevant to ensure that the agreed tax position is preserved between exchange and completion.

Contracts for sale of property subject to occupational interests such as leases will include clauses to cover ongoing management matters, and provide for apportionment of occupational income and outgoings on completion of the transfer of ownership in the property.

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.

The following terms are implied by law:

• Warranty with regard to title transferred
  This means a warranty by the seller that no third party, for reasons of a legal nature which already existed at the time of the conclusion of the sale contract, may deprive the buyer of the property purchased. Since, however, the Land Register protects a buyer acting in good faith with regard to the entries in the files of the relevant real estate, the role of this warranty is extremely limited. Once the buyer is registered in the Land Register as the new owner, he is protected against claims of third parties which were not registered. The buyer does, therefore, not have to revert to the seller.
• Warranty against defects
  The seller is liable vis-à-vis the buyer both for the express warranties made and for defects in the property purchased. Warranty claims regarding defects in a building must be brought against the seller within five years after the acquisition of title.

It should be noted with regard to warranties that agreements for the sale of real estate often contain a clause which excludes the obligation to warrant. Such a disclaimer of warranties is valid unless the seller has fraudulently concealed the defects.

Switzerland has a developed system of Land Registers and there is a legal presumption that the entries in the Land Register are true and correct. Due to this fact, a potential buyer can obtain most of the essential information about a particular property from the relevant Land Register file for that property.

Further enquiries will focus on information which cannot be obtained from the Land Register file, such as environmental matters and existing lease agreements.

Where the buyer intends to construct buildings on the land, he will try to ensure that the intended construction and use of the buildings is in accordance with the applicable zoning and construction laws as well as other public law regulations, such as environmental laws.

Where the property is subject to leases, the terms of the relevant lease contracts need to be considered carefully to ensure they are not contrary to the buyer’s intentions for the property.

Before a public deed is made for the real estate sale contract, the buyer’s lawyers usually report their due diligence findings to their client, raising any matter of particular importance or concern.

The contract for the transfer of ownership, or indeed any other rights in rem in real property in Switzerland, requires a specific form which is a prerequisite of its validity. In particular, the sales contract must be in writing and requires a public deed drawn up by and signed before a notary public. The parties are therefore not bound by any agreement until a public deed has been duly established, which requires a meeting in person of the authorised representatives of the seller and the buyer with the notary public. The exact manner in which the contract document is authenticated is governed by cantonal law.

If several real properties in different locations in Switzerland are sold at the same time by a corporate seller, it might be possible to transfer them in a single public deed (Vermögensübertragung).

All plots of land in Switzerland must be registered in the Land Register and details recorded on cadastral maps. There is no centrally kept Land Register in Switzerland. The Land Registers are kept by the relevant cantonal authorities. Every piece of land has its own file which contains information about the land, ownership, easements, options and pre-emptions, real estate charges, mortgages, etc.

There is a legal presumption in Switzerland that the entries in the Land Register are true and correct. This means that if an entry in the Land Register is false or incomplete for any reason, a party relying in good faith on such entry is fully protected by law. Only the encumbrances registered are binding on such a party, and the person registered is deemed to be the owner.

Swiss public law provides for detailed rules with regard to the development of land. Zoning law (which is governed by federal, cantonal and municipal law) as well as building regulations (enacted by the cantons) need to be complied with.

Applications for construction permits must be made to the competent municipal authority. Plans and documents must be submitted which show that the specific project complies with the zoning and building regulations in force. For developments that are likely to cause significant environmental impact, an Environmental Examination will need to be made, explaining the likely environmental impact of the development (Umweltverträglichkeitsprüfung).

The project will be published in the local official gazette and affected third parties will be given the opportunity to object to the project. Within the time limit laid down by the relevant regulation, the competent municipal authority must either grant or reject the construction permit; this decision can be appealed against by interested parties. A permit to develop the land will be issued provided the project is in accordance with all relevant regulations.

The construction permit is limited in time and the owner of the real property has to start the execution of the approved project within the set deadline. The permission is not necessarily granted to the owner of the land. If the beneficiary is a third party, however, the landowner must give his approval in writing for the filing of an application to obtain a construction permit.

Since the construction permit is, in fact, a confirmation of the authority that a particular project complies with the requirements of public law, the decision benefits not only the original applicant, but also its possible legal successors (e.g. a purchaser of the property).

Before a sale is contemplated, insurance is generally the responsibility of the owner of the property. In the absence of any contrary contractual provisions, the risk passes to the buyer when he is given possession of the real property.

In most cantons there is a mandatory public building insurance. The protection by this insurance (which covers damages due to fire, weather-related perils and earthquake) is not affected by the transaction and the new owner becomes liable to pay the premiums from the date the transaction is completed.

For further risks and a more comprehensive cover, the owner of real estate will consider additional private insurance.

Swiss federal law and Swiss cantonal law are relevant in the field of environmental protection. The detailed zoning laws play an important role in this area. The construction of new buildings is subject to detailed environmental regulations. In order to control the possible detrimental effects of large new developments on the environment, an Environmental Examination, i.e. a detailed assessment of the project’s likely future environmental impact (Umweltverträglichkeitsprüfung), is required before a construction permit can be issued.

As a general rule, the environmental law in Switzerland is based on the “polluter pays” principle (Verursacherprinzip): the person who has spilled, released or discharged a substance will normally be liable for any ill-effects it causes and has to pay for the damage. However, future owners and occupiers may also become liable for contamination already present at the real estate when they acquire it.

Real estate may be contaminated as a result of current and former uses. Based on the federal law on contamination (Altlasten), the authorities can require a remediation of such contamination at any time, and not only on the occasion of an application for a construction permit. The costs for such measures are usually to be borne by the actual owner. Accordingly, a relevant search with regard to such contamination needs to be made prior to the purchase of a real estate, since a potential contamination of the building or the soil may considerably influence the price of an object and may lead to substantial additional costs.

Newly built as well as existing buildings must fulfil certain conditions in order to obtain a construction permit. With regard to air pollution, the specific emission limits set by law must not be exceeded. In case an inspection shows that the emission standards are no longer met, the owner will be set a deadline for the modification or the replacement of the system.

Acquisition due diligence may involve the appointment of environmental consultants to consider documentary information and to carry out a site visit or, if necessary, to undertake further intrusive investigations. Due to the serious possible effects of environmental issues, it is important to identify potential problems early so that there can be negotiation on price, in particular considering 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.

If a real property is registered in the brownfield cadastre, the property transfer is subject to the prior consent of the competent authorities.

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 that income into account.

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

The discounted cash flow (DCF) method is generally used in conjunction with other valuation methods (in order to test the plausibility of its results). It equates the value of the real estate with the sum of all discounted cash flows the owner can expect in the future. The discounted cash flow method usually considers the future costs and earnings within a projected period of ten years. For the period thereafter, a terminal value (the presumed resale value at the end of the projection period) is determined. The value of the real estate will thus be computed based on the total discounted cash flows during the ten year period plus the terminal value discounted to the valuation date.

Investment properties are often referred to as being sold on a particular yield (e.g. 5% of the purchase price), meaning the investment return that will be gained from the capital sum which is necessary to purchase the property.

Apartments and one-family houses are often valued according to the “hedonic method” which is based on the prices paid for such property and a statistical procedure. The market value of a real property is thus calculated by software taking into account factors such as location, expanse, age, etc.

For the establishment of a public deed for the real estate sale contract, notary fees are payable. In addition, there is a Land Registry fee associated with the registration of the transfer to the buyer. These costs vary from canton to canton. In practice, the notary fee and Land Registry fee (Notariats- und Grundbuchgebühren) are often evenly paid by both parties. The same applies with regard to property transfer taxes (Handänderungssteuern) which vary between around 1% and 3% of the sales price, depending on the canton in which the property is located; some cantons have recently abolished this tax.

The immovable property gains tax (Grundstückgewinnsteuer) is levied on sales of private real property and is payable by the seller. Gains realised on business property, on the other hand, are in most cantons subject to the normal income tax and there is no liability for an immovable property gains tax.

In some cantons, a real property object tax (Liegenschaftsteuer) is due which usually varies between around 0.5% and 2%. This tax is levied in addition to the normal income and capital tax.

Value added tax (VAT, standard rate 8%) is usually not payable on the sale or leasing of real property. In certain circumstances, however, the statutory exemption from the VAT regime may be waived.