Real estate finance law in Switzerland

Yes. Security over Swiss real estate (mortgages) can be granted to foreign lenders.

As a rule, a foreign lender whose loan is secured by a mortgage over Swiss real estate does not require authorisation under the Swiss statute on the acquisition of real estate by foreign persons (Lex Koller). Nor does the foreign lender require an authorisation under Swiss financial market laws.

However, where the Swiss real estate does not qualify as commercial real estate and the foreign lender has an owner-like position (e.g. in case of high leverage), the foreign lender may be prevented from receiving a mortgage. If the situation is not sufficiently clear, it is advisable to obtain a ruling from the competent Lex Koller authority.

Yes, lenders can take mortgages over land and buildings on the land. In practice, this is achieved in the vast majority of cases in the form of mortgage certificates (“Schuldbrief“/“cédule hypothécaire“) while the other available form of actual mortgages (“Grundpfandverschreibung“/“hypothèque“) is rarely used (and therefore widely ignored in the following sections). Mortgage certificates are typically issued as paperless register mortgage certificates (“Registerschuldbrief“/“cédule hypothécaire de registre“), but physically issued mortgage certificates in paper form (“Papierschuldbrief“/“cédule hypothécaire sur papier“) are still seen from time to time (and are easier to transfer as further described below).

Pursuant to the principle of accession, the buildings on the land share the legal fate of the land itself. Therefore, any security interest over the land normally encumbers the buildings erected on it. Only if the buildings are subject to an independent and permanent building right registered with the land register can the land and the buildings legally be separated from each other. This being the case, the two distinct property interests in the land and the buildings can also be separately encumbered with differing mortgages.

The creation of a mortgage certificate establishes a personal claim against the debtor in the amount of the mortgage certificate value, which is secured by a property lien. The mortgage certificate is thus issued for a certain value. Furthermore, the mortgage certificate constitutes a negotiable security, which can be pledged or transferred for security purposes. As to the costs, see 3.2.         

Yes, a second ranking security may be taken. The rank of the security may be agreed between the parties when the security is granted. However, the parties cannot agree on a ranking which would affect the security of a third party whose rights are already entered in the register, unless the third party gives its consent. To be effective, any agreed-upon new ranking must be entered in the land register. If there is no agreement as to the ranking between the parties, the order of priority is determined pursuant to the date of registration with the land register.

Yes. If real estate subject to a mortgage is transferred to a third party, the security interest and the obligation of the borrower generally do not change unless otherwise agreed. If the new owner has assumed the debt, however, the previous borrower is discharged unless the lender, within one year, declares to him in writing that he intends to retain his rights against him as borrower.

Yes. First, there are preferred statutory security interests, which do not require registration with the land register, particularly for real estate-related taxes. Such statutory security interests are (a) “invisible” and (b) often take priority even over first ranked mortgage certificates. Second, there are preferred statutory security interests, which require registration, particularly the craftsmen’s and contractor’s liens.

No. “All monies” mortgages cannot be taken in Switzerland. Under Swiss law, a real estate security interest may only be established for a specific amount in Swiss francs.

If the amount cannot be determined in advance, the parties must still fix a maximum amount up to which the real estate shall be liable for all claims of the lender. An “all monies” mortgage would violate the personal rights of the borrower.

It is possible for a landlord to grant security over its right to receive rent. In most cases, this is done by way of an assignment for security purposes. Alternatively, it can be achieved by way of a pledge.

The assignment for security purposes (or the pledge) requires a written contract between the security provider and the secured party. Notification of the landlord is not a perfection requirement, but may be advisable.

Yes, it is possible (and customary) for a lender to take security over the bank accounts of the borrower. Typically, this is done by way of a pledge (rather than by way of an assignment for security purposes). As a rule, notification of the account banks is a perfection requirement (given that there is usually a prior ranking pledge in favour of the account banks).

Whether the right to withdraw funds is restricted depends on the type of account. If the account bank is willing to cooperate, the signing rights and other matters related to the bank accounts can be stipulated in a tripartite account control agreement between the lender, the borrower and the account bank.

As a rule, the transfer of an ownership interest in land requires registration (i.e. lacking registration there is no transfer). The same applies for the creation of new mortgage certificates and the transfer of paperless mortgage certificates. In contrast, paper mortgage certificates can be transferred without registration by physically handing them over to the new security taker.

In terms of formalities, the following is necessary: (a) a written mortgage security agreement, (b) where new mortgage certificates are issued, a public deed, and (c) the registration in the land register (except for the transfer of existing paper mortgage certificates where registration is possible but not absolutely required). The registration in the land register requires the written declaration by the owner of the land requesting the land registry to register the mortgage.

The costs for creating new mortgage certificates (notary public fees) and the registration in the land register (land registry fees) vary across the 26 Swiss Cantons. In the Canton of Zurich, each of the notary public fees and the land registry fees amount to 0.10% of the amounts secured (i.e. 0.20% in aggregate). Where existing mortgage certificates can be used, the notary public fees fall away. Where paper mortgage certificates are available and the security taker does not wish to be registered as creditor, the land registry fees fall away.

Moreover, in order to be able to trade paperless mortgage certificates more quickly and at a lower cost, Swiss banks have developed a “nominee model“ where the infrastructure operator SIX SIS AG, acting as a fiduciary, is registered in the land register as the mortgage certificate creditor. This makes it possible to transfer or pledge paperless mortgage certificates by rebooking them at SIX SIS AG without the need for registration in the land register.

Under Swiss law there are no trusts in the Anglo-Saxon meaning. However, a similar result is achieved by using a security agent that holds the security on a fiduciary basis for the secured parties. For accessory security interests, such as pledges, the security agent acts as direct representative (i.e. in the name and for the account of the secured parties). For non-accessory security interests, such as assignments or transfers for security purposes, the security agent acts as indirect representative (i.e. in its own name but for the account of the secured parties). Furthermore, occasionally the parallel debt structure is used, even though this has not yet been tested before Swiss courts.

If a lender changes by means of an assignment of the secured obligations by the previous lender to the new lender, accessory security interests are transferred to the new lenders by operation of law. In contrast, non-accessory security interests do not move to the new lender by operation of law.

In practice, the loan facility agreement and the security agreements typically include provisions aiming at an automatic transfer of both the accessory and the non-accessory security interests (and all related rights and obligations) if a lender changes.

The landlord/borrower has only limited control over changes in tenants. In principle, such changes require the consent of the landlord. However, regarding leases of business premises, the landlord may withhold its consent only for valid reasons. Similarly, the landlord may withhold its consent to a sublease only for specific reasons.

Upon completion of the transfer of a business lease, the original tenant is no longer bound by the lease. However, the original tenant is jointly and severally liable together with the new tenant until the lease expires, whether by law or agreement, or may be terminated, and in any event no longer than for a maximum period of two years.

Regarding subleases, the (original) tenant continues to be the tenant and therefore remains fully bound by the lease.

In principle, in an international context, the parties to an agreement may agree upon a foreign jurisdiction to settle their disputes. In practice, however, this is only usual for foreign law governed loan facility agreements while Swiss courts (or, very rarely, a Swiss arbitral tribunal) are chosen for the Swiss law governed security agreements.

In an international context, the choice of an arbitral tribunal is not recognised if it does not meet the requirements set out in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958 (“New York Convention”).

The circumstances under which a choice of a foreign court is not recognised depend on the state in which the judgment was handed down:

1. If the judgment has been given in member state of the Convention on Jurisdiction and the Enforcement of Judgements in Civil and Commercial Matters done at Lugano on 30 October 2007 (“Lugano Convention“), the choice of the court must meet the requirements set out in art. 23 Lugano Convention. However, save for limited exemptions, the jurisdiction of the court of the state of origin may not be reviewed, and the test of public policy may not be applied to the rules relating to jurisdiction.
2. Where neither the Lugano Convention nor another international treaty applies, the choice of a foreign court must meet the requirements set out in the Swiss Private International Law Statute of 18 December 1987 (“PILS“) (i.e. the choice of the foreign court must be sufficiently specific and completed in writing, by telegram, telex, telefax or any other means of communication allowing it to be evidenced by text). Unless otherwise agreed, the choice of forum is exclusive, and must not result in abusively depriving a party from the protection granted to it by a forum provided by Swiss law. Unlike under the Lugano Convention, under the PILS, the Swiss court must review the jurisdiction of the court of the state of origin.

In principle, arbitral awards and foreign judgments are enforced in Switzerland without a review on the merits. In more detail:

Regarding the enforcement of arbitral awards, a Swiss court may refuse enforcement under the principles set out in the New York Convention. In essence, refusal may occur if (a) the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator(s) or of the arbitration proceedings or was otherwise unable to present its case, (b) the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, (c) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, or (d) the recognition or enforcement of the award is contrary to public policy. Therefore, recognition and enforcement of arbitral awards is subject to a certain degree of review.

In turn, enforcement of a foreign judgment in a Swiss court depends on the state in which the judgment was handed down:

1. If the judgment has been given in member state of the Lugano Convention, a Swiss court may refuse to recognise and enforce the judgment, inter alia, if (a) the recognition or enforcement is manifestly contrary to the principle of public policy, (b) the judgment was not properly served, (c) the judgment is irreconcilable with a judgment given in a dispute between the same parties in Switzerland, (d) the judgment is irreconcilable with an earlier judgment given in another state bound by the Lugano Convention or in a third state involving the same cause of action between the same parties, provided that the earlier judgment fulfils the conditions necessary for its recognition in Switzerland, or (e) the recognition or enforcement would not be in line with art. 35 of the Lugano Convention. This means that the merits of the judgment are not reassessed in the course of the enforcement.
2. Where neither the Lugano Convention nor another international treaty applies, the recognition and enforcement of a foreign judgment is governed by the provisions of the PILS. Thereunder, a Swiss court may, inter alia, refuse to give effect to any foreign judgement (a) if the foreign court had no jurisdiction under the applicable principles of the PILS, (b) the foreign judgment is inconsistent with Swiss public policy, or (c) if a party to the foreign judgement can establish that (i) under the laws of its domicile such party had not received proper service of process, (ii) the judgement was rendered in violation of fundamental principles of Swiss procedural law, in particular the right to be heard, or (iii) a lawsuit between the same parties concerning the same case was first initiated or decided in Switzerland or first decided in a third country, provided the requirements for the recognition of such decision are met.

As a rule, official debt enforcement proceedings must be initiated. Upon the opening of bankruptcy proceedings, the competent bankruptcy court (rather than the creditors) will appoint the bankruptcy administration, which, in most cases, is a governmental (state) agency of the Swiss Canton where the debtor is domiciled. The bankruptcy administration will ultimately auction off the security and distribute the net proceeds to the secured creditors. Alternatively, the bankruptcy administration may carry out a private sale, provided that (a) all parties concerned agree and (b) at least the amount of the valuation is offered. The proceeds of realisation of the security are applied to satisfy the claims of the secured creditors, with the exceeding amount, if any, to be returned to the security provider or applied in favour of the unsecured creditors, as the case may be. If the debtor is granted a moratorium (rather than adjudicated bankrupt) and enters into a composition agreement with its creditors, the rules for realising the security are more flexible.

If provided for in the security agreement, a lender can enforce its security interest by private sale, including self-sale (i.e. outside of the official enforcement proceedings). Upon the opening of bankruptcy proceedings, such a private enforcement option can no longer be exercised.

For detailed information, refer to the CMS Expert Guide to restructuring and insolvency law in Switzerland, which can be found here.

No. After default, the debtor remains responsible for maintenance and insurance of the real estate. Upon the opening of bankruptcy proceedings, the responsibility is with the bankruptcy administration.

Under Swiss law, it is not possible for a lender to obtain good title to the real estate in satisfaction of all or part of its claims, except if it obtains the real estate at the public auction or in the context of a private sale. However, a private sale is subject to several requirements.

Inter alia, the following other issues are of interest for a foreign lender:

As mentioned above, Lex Koller can, under limited circumstances, restrict the taking of security over Swiss real estate by foreign lenders. However, this law only applies to residential real estate and not to real estate used or reserved exclusively for commercial purposes.

If real estate is used for residential or mixed purposes, a case-by-case analysis is required. The lender can generally either:

1. seek a no-action letter confirming that the transaction is exempted from Lex Koller; or
2. if possible, structure the transaction in a way ensuring compliance with Lex Koller without obtaining a no-action letter.

Interest payable to foreign creditors on loans secured by Swiss real estate is subject to federal and cantonal source taxes in the aggregate amount of approx. 13% to 33%, depending on the Swiss Canton where the property is located. There are various states, which have concluded double taxation treaties with Switzerland under which such source tax has been reduced or entirely eliminated. To avoid (or at least reduce) the source tax for loans secured by Swiss real estate, it is crucial to ensure that the lenders are domiciled in states that have concluded the appropriate double taxation treaties with Switzerland.

Moreover, whether the loan is secured by Swiss real estate or not, federal withholding taxes and federal stamp duty may be levied in respect of the execution, performance or enforcement of the loan facility agreement if more than ten creditors which are not Qualifying Banks participate in the loan facility agreement (directly or indirectly through sub-participation) and/or during the term of the loan facility agreement the borrower has more than 20 creditors (including the creditors under the loan facility agreement) extending interest-bearing credit to the borrower which are not Qualifying Banks. “Qualifying Banks“ mean any Swiss or foreign financial institution acting for its own account, which qualifies as a bank pursuant to the laws of the jurisdiction where its office is located in which it books the loan under the loan facility agreement and which carries on a genuine banking activity as per the applicable explanatory notes and circular letters of the Swiss Federal Tax Administration.

To the extent a Swiss company grants security interests of any nature whatsoever, including pledges, security assignments, security transfers, guarantees, suretyships and joint and several liability, for obligations not owed by itself but by any of its affiliates (other than its direct or indirect wholly-owned subsidiaries), or enters into undertakings with similar effect to the benefit of such affiliates, including subordination of claims, and waiver of set-off, subrogation or other rights, such security will be considered an upstream security. Under Swiss law, inter alia, the following rules apply with respect to upstream security granted by a Swiss company:

1. The granting of upstream security at non-arm's length terms and payments or other disposals of assets made thereunder are deemed dividend distributions subject to the applicable rules of Swiss corporate law. Under the test applied by the Swiss Federal Supreme Court, it is very difficult to prove that up-stream security has been granted at arm's length. As a consequence, any payments and other disposals related to upstream security may only be made out of the freely disposable equity capital of the Swiss company, subject to the general rules and prerequisites for formal dividend distributions. The freely disposable equity capital of the Swiss company may be reduced by (i) an amount corresponding to the value of such upstream security, (ii) the aggregate amount of any intercompany loans granted by the Swiss company to its affiliates, and (iii) other adjustments. Furthermore, in order for the upstream security to be valid and enforceable, not only the execution of the respective security undertaking but also each single payment or other disposal made thereunder (including the use by the grantee of the realisation proceeds of pledged or assigned assets) may require specific corporate actions, including the approval by the shareholder's meeting of the Swiss company at the relevant time based on a stand-alone audited balance sheet of the Swiss company prepared in accordance with Swiss law and Swiss accounting principles and showing sufficient freely disposable equity capital.
2. Upstream security granted at non-arm's length terms is also treated as a dividend distribution for tax purposes. Therefore, the Swiss company may become subject to Swiss withholding tax of up to 53.8% of (i) the amount of a guarantee or a similar fee customarily paid to a grantor under similar circumstances, (ii) the amounts paid under the upstream security (if any), and (iii) if at the time of the grant of the upstream security it was foreseeable that the affiliate whose obligations are secured may become insolvent, the entire amount secured under the upstream security. Furthermore, for income tax purposes, (i) the amount of an adequate guarantee or similar fee may be deemed profit of the Company, (ii) payments under the upstream security may not be admissible as deductible business expenses, and (iii) any provisions made for the contingent security obligation may be disregarded.

Art. 14 of the Swiss Withholding Tax Law provides that an agreement contradictory to the mandatory requirement that withholding taxes must be charged to the recipient of a taxable payment, such as interest and dividends (including deemed dividends), is void. While no binding court decisions or rulings dealing with the issue exist, legal scholars have expressed the opinion that tax gross-up agreements fall under this statutory rule. Moreover, art. 63 of the Swiss Withholding Tax Law sets forth that the voluntary or negligent violation of this rule may be penalised with a fine of up to CHF 10,000. Tax gross-up provisions may, therefore, be illegal and not enforceable. Therefore, it is Swiss market practice to regulate the gross-up in so-called minimum interest provisions rather than in “hard“ gross-up provisions, with the aim to mitigate the risk that the interest increase is inadmissible pursuant to art. 14 and 63 of the Swiss Withholding Tax Law.

Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate:

Yes, in security over shares, there are generally no limitations on granting such security to a foreign lender, save where pursuant to the articles of association of the company, the company must have a majority of Swiss shareholders.

Furthermore, a foreign lender may require authorisation under Lex Koller (see 7.1 above).

Yes, it is possible to take second ranking security (i.e. a pledge) over shares. As a rule, the ranking of the security is determined by the chronological order in which the security was granted. Therefore, a higher-ranking security can only be lowered in its ranking if the holder of the higher-ranking security agrees to the new ranking.

A registration of the security over shares is neither required nor possible. It is, however, a perfection requirement for the second ranking security that the holder of the higher ranking security is notified in writing of the second ranking security and instructed to hand over the pledged shares to the second ranking secured party upon its satisfaction. Moreover, it is Swiss market practice, even though not a perfection requirement, that both the first and the second ranking security is reflected in the share register of the company whose shares are pledged.

There are no registration requirements for security over shares.

In order to take security over certificated shares, the security provider and the security holder must conclude a valid agreement and the secured party must obtain physical possession of the relevant shares (i.e. the possessory pledge principle). Indeed, the security holder does not have a security interest over the collateral as long as the security provider retains possession and control over it. Furthermore, regarding registered shares, it is Swiss market practice that the owner endorses the share certificates in blank in order to facilitate the enforcement.

Under the Federal Intermediated Securities Act (“FISA“), a securities interest in uncertificated shares held through an intermediary may be created in two ways: Either by a transfer of the intermediated securities to the account of the secured party (security interest by transfer) or by an irrevocable agreement between the security provider and the intermediary holding the shares that the intermediary will follow the directions of the secured party without the need for any approval by, or consent of, the security provider (security interest by control agreement).

The costs of creating a security interest in shares are not regulated and thus depend on the parties involved.

See 3.2 above.

In case of a security over certificated shares, there are two main forms of enforcement:

1. Private enforcement is only permitted where the parties have agreed to it in advance in the security agreement. In relation to shares, the value of which can be objectively determined (e.g. listed securities), the pledgee itself generally purchases the pledged assets, and applies the proceeds to satisfy its claims (self-sale).
   
   If security is privately enforced, the pledgee must protect the interests of the pledgor and must obtain the best price possible in the sale of the pledged assets, fully document the enforcement and provide documentation to the pledgor and return any surplus remaining after the application of the proceeds to the secured debt to the pledgor.
    
2. Enforcement pursuant to the rules of the Swiss Debt Enforcement and Bankruptcy Act can be summarised as follows: The usual form of enforcement under the Act would be the sale of the pledged assets in a public auction. Shares may, however, also be sold without public auction by the bankruptcy administration if the shares have a market price (e.g. if they are traded on a stock exchange).

The enforcement of security over uncertificated shares held through an intermediary is governed by the FISA. Thereunder, the secured party may privately enforce its security under the terms of the security agreement by (a) selling the shares and settle the claim with the proceeds or (b) obtaining the shares and settle the claim with their value. The right and modalities of the private enforcement is subject to the security agreement.

Regarding both certificated and uncertificated shares, a foreign party which intends to acquire the pledged shares needs to ensure that such acquisition does not need an authorisation under Lex Koller (see 7.1. above).

If the shares are transferred by way of security (rather than pledged), which is very rare in practice, enforcement in a strict sense is not required, as the ownership has already been transferred to the secured party. In this context, enforcement means that the obligation to return the transferred shares assets under the security agreement expires. Again, the secured party is obliged to fairly value the transferred shares, document the valuation, apply the proceeds to the secured claims and return any surplus remaining after the application of the proceeds of the secured obligations to the security provider.

Shareholder loans are not subordinated by operation of law. However, the shareholders may subordinate their claims to those of the lenders by entering into a subordination agreement, which is not unusual.

Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective.

Generally, the parties are free to determine the lease length according to their economic needs. Typically, commercial leases are entered into for a five-year term (such term being the prerequisite for an indexed rent). Furthermore, commercial lease agreements often provide for renewal options in favour of the tenant for another term of five years.

Leases may be entered into for a definite or an indefinite period of time.

Regarding leases entered into for a definite period (i.e. leases not granting ordinary termination rights and ending after the lapse of the stipulated term), there are no express statutory provisions prescribing a minimum or maximum lease length. However, the maximum lease length is limited under general principles of Swiss law. In absence of clear precedents expressly addressing the maximum length, it is fair to say that terms of 20 or even 30 years are still admissible (a 20-year term can also be combined with two options for additional five-year terms). Such terms also correspond with the longest terms that market participants agree upon. Contract provisions linking the term of the lease to the existence of a business or company (e.g. lease terminable only upon winding up of a certain company, etc.) are, according to court rulings, after the lapse of the admissible period of time (around 30 years), subject to ordinary termination.

Leases entered into for an indefinite period (i.e. leases not stipulating any term), are, as a rule, terminable with a notice period of six months (commercial leases) or three months (residential leases) with effect to local customs or contractual dates (31.3. or 30.6. or 30.9. of each calendar year) or, alternatively, to the end of a three-month lease duration.

Leases expressly excluding termination rights of any party (i.e. “eternal leases”) are inadmissible. However, Swiss courts will generally not hold such leases as null and void, but only reduce the “eternal term” to an admissible lease length.

Fixed term leases end after the lapse of the respective term. If the parties continue the lease after the lapse of such a term, the lease is transformed into a lease for an indefinite period.

Leases entered into for an indefinite term (i.e. lease agreements not providing for a term) may be terminated on six months (commercial leases) or three months (residential leases) notice to expire on certain dates (31.3. or 30.6. or 30.9. of each calendar year) or, alternatively, to the end of a three month lease duration.

Commercial leases entered into for an indefinite term or a fixed term may generally be extended by the competent court for a maximum period of six years. To obtain an extension by the court a tenant would be required to prove that the termination of the lease would result in hardship for the tenant, which is not justifiable by the interests of the landlord. In weighing the interests, the competent authority takes into account the following criteria:

1. the circumstances of entering into the lease agreement and its terms;
2. the duration of the lease relationship;
3. the economic condition of the parties and their behaviour;
4. a need for personal use by the landlord and the urgency of such need;
5. the local market conditions for business premises.

The tenant may only twice apply to the court for an extension. The two extensions may in the aggregate not exceed six years. In practice, courts seldom grant extensions reaching the maximum period because often reasonable replacement premises for the tenant are available within a shorter timeframe.

Furthermore, a termination by the landlord may be subject to challenge by the tenant if it is given in violation of principles of good faith. In particular, this is deemed to be the case if the termination is given:

1. because the tenant has in good faith asserted contractual claims;
2. to impose unilateral changes detrimental to the tenant or to adjust the rent;
3. during a conciliation or court proceeding in relation to the lease relationship (save where the tenant abusively initiated such proceedings);
4. prior to the expiration of three-year “barring-period” after a conciliation or court proceeding regarding the lease relationship in which the landlord:
5. lost to a substantial degree;
6. has withdrawn or substantially reduced his claim or action;
7. has waived his right to appeal to the judge;
8. has concluded a settlement or otherwise reached an agreement with the tenant.

A successful challenge makes the termination invalid. Furthermore, it triggers the “barring period”, which factually precludes the landlord from giving termination for the next three years.

A tenant may terminate fixed term leases with immediate effect only if:

1. the landlord does not either transfer the premises at the agreed time or transfers it in time but with defects excluding or significantly impairing its suitability for the predetermined use and, in addition, fails to transfer the premises or cure the defects within a reasonable period of time (generally, five to 15 business days); or
2. after the transfer of the premises, the landlord is aware of a defect preventing or significantly impairing the predetermined use of the premise, but does not remedy such defect within a reasonable period of time.

Defects that affect the use of the premises less significantly lead only to damages claims and other remedies (reduction of rent, deposit of rent, remedy of defects by third party).

Furthermore, a tenant may terminate a fixed term lease by extraordinary termination if the tenant can avail itself of valid reasons rendering the further performance of the lease intolerable. Courts construe such reasons very narrowly. Generally, only circumstances not foreseeable at the time of entering into the lease agreement may be taken into account. If the tenant can avail itself of valid reasons, he may terminate the lease at any point in time respecting the statutory notice of six months.

However, the law gives the tenant the option of an “early return“. In this case, the tenant proposes a suitable replacement tenant to the landlord, which is prepared to take over the tenancy under the same conditions (e.g. scope of the rented property, amount of rent, etc.). The landlord must accept this proposal, provided that the proposed replacement tenant is appropriate.

Cantonal rent control laws apply in certain parts of Switzerland.

The parties may freely agree on the dates of payment of the rent and the relevant costs connected with the use of the premises (e.g. monthly/quarterly in-advance or in-arrears). The statutory default provision stipulates that, if no other time is in accordance with local custom, the payment date shall be at the end of each month (i.e. payment monthly in arrears), and at the latest at the end of the lease period. Typically, commercial lease agreements provide for monthly or quarterly rental payments in advance.

Commercial leases are usually entered into for a fixed term of five years. Such term allows for an indexation of the rent linked to the Federal Index of Consumer Prices. And indexed rent entitles the landlord to rent increases in accordance with this index. Moreover, the parties can provide for staggered rents, which enable the landlord to increase the rent yearly by the amount the parties have agreed upon. Furthermore, parties may agree to a variable rent tied to the turnover of the tenant’s business. Indexed, staggered and turnover rents may not be combined. In addition to these special increase mechanisms, a landlord may also increase the rent on a restricted number of general grounds, in particular in case of renovation and additional benefits granted to the tenant.

If the lease agreement does not provide for one of these mechanisms, the landlord may increase the rent pursuant to the general grounds justifying a rent increase, in particular in case of an increase of the interest rate for mortgage loans or an increase of inflation.

The parties can agree on:

1. variable rents (e.g. turnover rents, normally upwards, with a “floor” or minimum rent);
2. staggered rents (generally, only upwards; however, also a “mixed down and upward staggering” qualifies as staggered rent and must meet the pertinent requirements);
3. indexed rents.

If the parties do not agree on these mechanisms, the basis of review is determined on the general grounds justifying an increase (for more details, see 2.2).

The law protects tenants against abusive initial rents and abusive rent increases by allowing a tenant to challenge the rent. Generally, a rent qualifies as abusive if it results in excessive net returns or if it is based upon an obviously excessive purchase price. The net return can be briefly defined as the ratio between the profit from rental income calculated per year and the equity invested, expressed as a percentage.

As a rule, however, rents are deemed not abusive if the rent:

1. falls within the range of rents customary in the neighbourhood (so called “Orts- und Quartiersüblichkeit“), but this criterion is only subsidiary to the net return calculation;
2. is based upon increased costs or additional benefits granted to the lender;
3. with regard to relatively new buildings lies in the range of a cost covering gross return;
4. only serves to compensate for a previously granted lower rent based on deferred market conformed financing costs, and if it is set out in a payment plan disclosed to the tenant in advance;
5. merely compensates a cost increase regarding the risk carrying capital; or
6. does not go beyond the extent recommended by landlord and tenant associations or organisations safeguarding similar interests in their general agreements.

In addition, cantonal rent control laws apply in certain parts of Switzerland.

Generally, the landlord is under a general duty to keep the leased premises in a condition suitable for the predetermined use and to maintain it in such condition throughout the period of the lease. Thus, the duty of internal and external maintenance and repair is, as a rule, an exclusive duty of the landlord. Regarding (internal) maintenance and repair, tenants have only very limited duties, and only small outlays for cleaning and small repairs (rule of thumb: CHF 100 – 200) are to be borne by tenants. The tenant may renovate or modify the premises only with the written consent of the landlord. If the parties agree upon a core & shell lease, the maintenance, decoration and repair obligations are contractually transferred to the tenant.

In practice, however, there is a widespread need in commercial leases to make special maintenance arrangements that deviate from the above principles. This applies in particular for so-called “triple-net“ and “double-net“ rental agreements. In lack of clear court precedents, it is, however, uncertain whether such deviating arrangements are valid and enforceable.

In a “triple-net“ lease, the tenant is held responsible for obligations typically associated with the landlord. These include maintenance, repair and renewal as well as taxes, duties and insurance costs, which would otherwise be the responsibility of the landlord. In the context of English legal terminology, such leases are referred to as “full repair and insuring leases“ (i.e. FRI leases). From an economic standpoint, the proprietor of a property or the entity that finances its acquisition is typically interested in maintaining a consistent and predictable income stream from the property, which can be utilised to cover interest and amortisation expenses. For property funds and other institutional investors, the triple-net rent offers the advantage of a more transparent yield calculation for the investor and an almost complete allocation of the risk of variable costs, such as maintenance and repair costs, to the tenant. In Switzerland, triple-net leases are primarily negotiated in sale-and-rent-back transactions and property leasing. In academic discourse on the subject, the permissibility of such agreements is affirmed on the condition that the tenant is compensated for maintenance expenditures through favourable contractual stipulations, such as a lengthy rental period.

In the case of “double-net“ leases, the tax, duty and insurance burden is also passed on to the tenant, whereby the tenant's maintenance obligation is limited to the interior of the building. The landlord is responsible for the maintenance, repair and replacement of the building shell and the load-bearing elements (i.e. “roof & shell“ or “core and shell“).

Furthermore, it is often the case that the landlord pays the taxes, levies and the insurance costs and is responsible for the maintenance, repair and replacement of the building envelope and the load-bearing elements while the tenant is responsible for the maintenance of the interior of the building. Such leases are sometimes referred to in the property industry as “roof & frame“ (“Dach und Fach“) leases whereby “roof & frame“ covers the structural parts of a building, such as the roof, façade and load-bearing elements.

See 3.1.

The landlord has responsibility for structural repairs. Moreover, the landlord must bear all maintenance costs that do not qualify as small repairs (see 3.1).

The premises are subject to mandatory insurances. Premiums have to be paid by the landlord and cannot be passed on to the tenant.

Rental income for business leases is generally exempt from VAT. However, the landlord may under certain conditions opt to become subject to VAT. After “opting in”, the landlord may charge the applicable rate to the tenant. Furthermore, it entitles the landlord to the input tax deduction, in particular on any building costs or maintenance and repair costs.

The ordinary Swiss VAT rate is currently (August 2024) at 8.1%.

1. Interest on mortgage loans.
2. Actual expenditures connected with the use of the premises (“Nebenkosten“), such as heating, hot water and other similar operating costs (e.g. cost for cleaning the staircase) and public levies.

In principle, only those expenses that are directly related to the use of the rented property may be charged as additional costs. In order to charge any costs to the tenant, the lease agreement must precisely state each type of costs.

Like in other civil law systems, Swiss landlord and tenant law generally consists of a set of default rules that will govern the lease in the absence of a contrary agreement of the parties. In addition to these rules, landlord and tenant law provides for several mandatory provisions, which cannot be altered by the parties (in particular, provisions with a protective aim, such as rules against abusive rents and terminations, extension of leases, etc.).

Thus, the primary source of law is the agreement of the parties, which must respect the mandatory provisions of the landlord and tenant statute. The agreement will only be supplemented by the default rules if it does not contain provisions deviating from such rules.

Like in other civil law systems, the Swiss judiciary is generally restricted to the task of interpreting the relevant statutes. However, because neither statutes nor lease agreements tend to be complete, the judiciary also has the task of filling in the gaps of either the statute or the agreement.

Given the foregoing, courts must recognise any lease term that does not contravene mandatory provisions of landlord and tenant law.

Parties are free to support allegations made in court by valuations prepared by any kind of real estate appraiser (it being understood that the better the standing of the appraiser, the more the court may be convinced by the valuation). To be admitted as formal evidence (i.e. expert opinion), however, a valuation must be prepared by an appraiser appointed by the court.

Yes. Local government agencies as well as insured environmental professionals may – on request – issue environmental reports in respect to a certain property.

Furthermore, most of the 26 Swiss Cantons have official online cadastres where polluted areas are marked.

In Swiss environmental law, the “polluter pays principle“ (“Verursacherprinzip“) provides that a party breaching environmental law is liable for the damage incurred. The lender only holding a mortgage over real estate is generally not liable for damages resulting from breaches of environmental law by the property owner or any other person.

However, if a property is contaminated because of a breach of environmental law, its value decreases, which may indirectly affect the lender as well.