Germany: The Exerted Pre-Emptive Right In Property Purchase Agreements

Last Updated: 6 July 2018
Article by Jürgen Streng and Sabine Krause

THE SITUATION: The following example should illustrate the possible consequences if a purchase agreement contains no or only incomplete provisions in cases where a pre-emptive right is exercised:

A property which is encumbered with a pre-emptive right not registered in the land register is to be sold. The parties are aware of the pre-emptive right, and therefore the property purchase agreement stipulates that the purchase price falls due if the beneficiary of the pre-emptive right has declared that it will not exercise its right (so-called negative declaration) or the exercise period has expired. However, the parties missed agreeing in the purchase agreement a right of withdrawal in cases the pre-emptive right is exercised. Following conclusion of the purchase agreement, the public notary asks the beneficiary of the pre-emptive right for a negative declaration. The beneficiary instead exercises the pre-emptive right.

According to the contractual provision, the claim to payment of the purchase price can no longer become due and the purchase agreement can no longer be consumated. Through the exercise of the pre-emptive right, a second purchase agreement with the same content comes into existence between the seller and the beneficiary of the pre-emptive right. However, the seller has no contractual right to withdraw from the purchase agreement with the original buyer. At first, both purchaser and seller are stuck in the purchase agreement (pre-emptive rights whose exertion entails the lapse of the claim to transfer of ownership shall be disrgarded in this context). The seller is even bound towards two parties.

WHAT THE LAW REGULATES: Therefore, one has to ask whether the law helps the parties get out of this situation; in particular whether it provides for a right of withdrawal in these cases.

Firstly, a distinction is to be made whether the pre-emptive right is a right in rem, which means that it has been registered in the land register, or whether it was solely agreed in a contract under the law of obligations. In the case of pre-emptive rights in rem, the law (Section 1098 in connection with Section 883 para. 2 BGB [German Civil Code]) states that a transfer of the property contrary to the pre-emptive right is invalid towards the beneficiary of the pre-emptive right. The beneficiary has the right to demand the re-transfer of the property from the other purchaser. This also applies to the cancellation of a priority notice. Because it becomes impossible for the seller to transfer the property to the original buyer due to the strong legal position of the beneficiary of the pre-emptive right, the buyer has the right to withdraw from the purchase agreement under the prerequisites of the law (Sections 346 para. 1, 326 para. 5 BGB).

If, on the other hand, the pre-emptive right is not registered in the land register and if no priority notice in favour of the buyer has been granted, the situation is comparable with the case where the seller sells the same property to two different buyers (see below on the case of granting a priority notice to the buyer). The seller can indeed choose to which buyer it transfers the property. However, the seller is generally liable to pay compensation for damages for non-performance it can be accused of. In the case of non-performance of the seller, the other contract party may also be entitled to a statutory right of withdrawal.

Liability towards the original buyer as well as a statutory right of withdrawal should however be excluded if the buyer knew of the pre-emptive right at the time the purchase contract was concluded. This situation is described in our example. One, therefore, has to ask how seller and buyer can get out of the purchase agreement. According to a judgement of the German Federal Court of Justice ("Bundesgerichtshof", BGH) in 2009 the following applies: "If the buyer knows of the existence of the pre-emptive right, in case of doubt it is to be assumed that the purchase agreement should, according to the will of the parties, be subject to the condition precedent (auflösende Bedingung) of the exercise of the pre-emptive right." The case law therefore does not resolve the deadlock by use of a right of withdrawal. Rather, a purchase agreement with the original buyer generally terminates if the pre-emptive right is exercised through the occurrence of an unwritten condition precedent determined by way of interpretation of the purchase agreement. However, this does not apply in the exceptional case if the purchase agreement is to be interpreted in a way that the seller, in spite of both parties' knowledge of the pre-emptive right, warrants that the pre-emptive right will not be exercised by the beneficiary. If, however, the beneficiary exercises its pre-emptive right in contradiction of the seller's warranty, the seller should be liable to the original buyer.

If the original buyer is entitled to a priority notice, it has greater protection against the beneficiary of a contractual pre-emptive right. This legal priority position, however, only helps the buyer if it had no knowledge of the pre-emptive right at the time the purchase agreement was concluded. This is because, if the buyer had knowledge of the right, it must, according to the case law, be assumed in case of doubt that the purchase agreement is agreed subject to the condition precedent of the exercise of the pre-emptive right; the purchase agreement terminates when the pre-emptive right is exercised. A priority notice shares the fate of the right which it secures. If the purchase agreement then terminates with the claim to transfer the property ownership, the priority notice also terminates.

CONTRACTUAL AGREEMENTS: Ultimately, the buyer generally knows of pre-emptive rights from buyer due diligence and is therefore usually left with his transaction costs. As standard, the parties agree on a provision within the framework of the requirements for maturity for the payment of the purchase price that the non-exercise of the pre-emptive right is a condition for the purchase price becoming due. Beneficiaries of a pre-emptive right are generally the municipality in which the object of the purchase is located; the beneficiary of the right can also be a tenant who operates his business on the object of the purchase or another third party. Pre-emptive rights, in particular of tenants, are to be identified in advance in the course of a buyer due diligence.

As a reflection of this maturity rule, the purchase agreement should then stipulate a right of withdrawal of the seller for the case where a pre-emptive right is exercised. If such a contractual right of withdrawal is missing, the parties only retain the statutory rules as set out above. In order to also govern the fate of the usually granted priority notice for the original buyer if a pre-emptive right is exercised, the officiating notary should be instructed and e.g. authorised declare the consent to the deletion of the priority notice in these cases, or – prior to registration – to rescind the corresponding application for registration. This instruction to the notary is usually generally agreed for the case where one of the parties withdraws. If the exercise of a pre-emptive right triggers a right of withdrawal, the general instruction for cases of withdrawal is therefore also sufficient.

In the frequent cases, in which a part of the purchase price has already been deposited as down payment beforehand or into a notary escrow account at the time of the conclusion of the purchase agreement, the purchase agreement should also include an instruction to the notary for this amount to refund the down payment to the buyer if a pre-emptive right is exercised.

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2018. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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