What are typical mistakes being made when buying or renting real estate in Germany? What are the risks regarding notarial sales contracts? What clauses have to be considered within proper rental contracts? This list is intended to provide a short overview of the issues and obstacles that may arise when acquiring, selling, or renting out real estate in the Federal Republic of Germany.
1. A notary public must certify the sales contract
The first aspect you should keep in mind when thinking about selling or purchasing real estate in Germany is that real estate sales contracts need to be certified by a notary public in Germany. Unless this is done, the sales contract will be void. Failure to comply with the required form will also result in non-registration in the land register.
2. The land registers record all relationships
This leads us to the second aspect that you should keep in mind. In Germany, the land registries (that are mostly part of the local courts) keep extensive and detailed land registers. These contain information on the ownership structure and on many other rights to, and encumbrances on, real property. Although this may appear cumbersome, this system offers some key advantages compared to other legal systems. Apart from the simple and rather secure traceability of the ownership structure, it mainly ensures the protection of good faith with respect to the accuracy of the land register.
This means that anyone who, in good faith, believes that the owner registered in the land register is the rightful owner of a property, may purchase said property from the registered owner and said purchase will be legally binding. This does not change even if subsequently the registered owner turns out not to have been the rightful owner. As a consequence, the land register is of considerable importance for real estate purchases in Germany. It is strongly recommended to always check a current abstract from the land register if you are considering and/or making a real estate purchase in Germany.
3. Hidden encumbrances may emerge
It is equally indispensable to check the land register for entries of third-party rights or encumbrances on the real property. Any mortgages or land charges on a property, for example, can be derived from the land register. The same applies to rights of usufruct or abode, as well as to any right-of-way or utility easements. All these rights, which are normally not affected by a change of ownership, can cause the real property not to be usable as planned. In the context of an acquisition, it is hence important to have such rights cancelled – if possible – or at least to ensure that they are not in conflict with the intended use. In this context, it should be noted that mortgages and land charges are usually created by entry in the land register against the respective owner, which means that the property will continue to be subject to liability even after the change of ownership.
4. Seller’s cooperation in the financing
Evenconcerning the sales contract itself, there are a few critical issues, some of which we want to examine here. When it comes to financing the purchase price, which is necessary in many cases, the purchaser should take care that, by signing the contract, the seller agrees to cooperate in providing security for the financing. Preferably, the seller should even grant a power of attorney giving the right to encumber the property.
The background to this is that banks often require a land charge to be registered in their favor on the property to be purchased. However, registration of a land charge requires the consent of the owner. In Germany, the change of ownership generally only takes effect upon payment of the purchase price, which means that the purchaser may not cause registration of a land charge without the seller’s consent or power of attorney. As a consequence, the seller’s cooperation is often needed to receive the financing. These aspects should be incorporated in the sales contract so as to prevent the seller from making additional demands for its subsequent cooperation.
5. Purchase price = fixed price
In Germany, the purchase price agreed is usually a fixed price and not a square meter price. In this context, it may be reasonable to itemize some parts of the purchase price separately, for instance, when moveable items (such as furniture, photovoltaic systems, etc.) or permits or licenses are part of the deal as these are usually not subject to German land purchase tax. The portion of the purchase price paid for the building should also be shown separately as it may be eligible for depreciation deductions for wear and tear.
6. Who bears the development costs?
Notarial sales contracts often clearly define who bears which of the costs involved in the purchase and transfer of ownership. Especially when acquiring properties planned to be developed later on or under construction it is highly recommended to also determine who will pay the development costs. These costs include public charges for getting the property connected to power, gas, and public water supply networks and waste water disposal systems and also the path network. According to the pertinent provisions of law, the seller usually bears the development costs for those building measures that have been commenced on or prior to the conclusion of the contract. As these development costs may partially be very high, they should be taken into account when determining a fair purchase price.
7. Sold as seen
Another issue that should be approached with a great deal of caution is warranty. Basically, the seller has to transfer the property free from defects in title or quality. With respect to defects in title this means that the property must be unencumbered, hence, in particular, free from third-party rights. Not only land charges and mortgages but also utility easements and the right-of-way must have been cancelled when the property is transferred. This applies, unless the purchaser agrees to take over the said encumbrances. However, in such case, the sales contract should set out the conditions governing this issue so as to avoid any disputes arising later in time.
Cases concerning defects in quality are different as the seller owes the property in the condition set out in the sales contract. Where no contractual provisions are agreed, the seller owes a condition of usual kind and quality. Especially when properties with used houses are sold, the sales contract often contains far-reaching clauses that limit the seller’s liability (“sold as seen”). In order to prevent any later disputes, it is crucial to describe the contractually agreed condition in the greatest detail possible. It may be advisable to hire an expert to assess the condition of the property. This applies even more where there is a risk that the building and/or the property might be contaminated (e.g. soil contamination, building materials that are no longer permissible). In fact, cleaning up contaminated sites often involves considerable costs.
8. Pre-emptive rights of the local municipality
One obstacle for the seller are the various pre-emptive rights to which – among others – the local municipalities may be entitled. A pre-emptive right that is often neglected is that of the present tenant who, in a specific case, may be entitled by law to a pre-emptive right. If, during the term of a tenancy agreement, an existing property is divided into individually owned apartments for the first time and then sold, the present tenant of the respective apartment has a pre-emptive right. If the owner (seller) fails to inform the tenant about the intended sale of the apartment, the tenant may claim damages from the seller. Depending on the value development of the apartment, the amounts of such damages may be considerable.
9. Fixed-terms only in writing
Which takes us to some issues pertaining to tenancy law. A common issue that does not always receive adequate attention is that tenancy agreements that contain a fixed term and that are hence not concluded for an indefinite period, must comply with a strict written form requirement. Failure to comply with this formal requirement will result in the agreement running for an indefinite period of time which can be terminate subject to the legal provisions.
Especially in case of commercial leases, any previous considerations regarding the profitability of a property can thus quickly become obsolete. While the original agreement is mostly concluded in compliance with the strict written form requirement, later on it often goes unnoticed that subsequent amendments or collateral agreements, especially if made orally, may well be sufficient to annul the written form of the original agreement. In this context, we need to be extremely careful not only when concluding a contract but also during its execution.
10. Rents are tied to the general economic situation
Especially where commercial leases are concerned, the contractually agreed rent is commonly indexed, i.e. tied to the development of the price index for the living expenses of all private households in Germany as determined by the Federal Statistical Office. The advantage of this system is that the rent adapts to the general economic situation which guarantees a reasonable development of the rent. If the index rises, so does the rent and vice versa. However, it should not be overlooked that such tying clauses are only permissible if the lease is concluded for a fixed minimum period of ten years or if the lessor has contractually waived its right of termination for a period of no less than 10 years. If this was overlooked, the tying clause is void and, accordingly, the agreed rent does not change.
When renting out housing space, the landlord is entitled by law to demand an adjustment of the rent to the comparative local market rate at regular intervals. However, in this context the so-called cap on rent increases must not be overlooked. This cap provides that this type of rent increase must not cause the rent to grow by more than 20% (15% in separately designated areas) within three years. In areas, where additionally the so-called brake on rents regulations apply, rent increases, even in case of new tenancies, have been made even more difficult. These factors need to be considered when analyzing the profitability of a property.
Given the abbreviated format of this presentation, we can only describe a limited number of issues. This presentation cannot replace legal advice in a specific case, either. If you experience real estate issues in Germany, please do not hesitate to contact us.
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