This article first appeared in Estates Gazette.
Sabine Reimann outlines the basic principles of German real estate law and explores the key differences between the German and English systems.
Investment in Germany is becoming more attractive, but before parting with your euros it pays to be aware of German real estate law.
Germany is popular with investors at the moment. Investments in commercial real estate on the German market amounted to €19.67bn in the first half of 2006 (excluding non-performing loans and flats). Only 16% of the investment originated from German investors – most came from England, the US, Ireland, Israel, Denmark and the Netherlands.
Germany’s real estate market is becoming increasingly attractive. On a worldwide scale, prices are low and it offers a wide range of effectively managed real estate projects. However, when buying property in Germany, one must be aware of the legal bases and potential pitfalls.
Land As A Legal Concept
Both German and English law identify land in a physical sense. In both jurisdictions, land comprises not only the ground, soil or earth but also all buildings on the land, any attached fixtures, mines and minerals and any incorporeal rights such as easements. It also includes the airspace above to a reasonable height.
In England, the Crown technically owns all land, whereas land in Germany is owned by a real person or by an official body such as a city or the government. Therefore, under German law, it is possible to purchase real freehold. This means that the individual occupier of land who is not a tenant or lessee, or owner of a heritable building right or others, owns the land.
As under English law, "land" comprises any object that is attached to it so as to form part of it. Consequently, when an object is fixed to land or buildings, it may become a fixture and forms part of the land. All objects that can be easily removed are deemed to be "fittings" under German law.
It can sometimes be difficult to differentiate between fixtures and fittings, particularly with regard to, among others things, fitted kitchens, built-in cupboards and partitions. This problem arises especially during sales negotiations, when decisions have to be made as to whether objects form part of the sale so must be left or whether the seller can remove them. The problem arises also in connection with mortgages, devices and settlements.
Classifying Types Of Ownership
According to the doctrine of estate under English law, ownership is defined by the length of time during which the authorised person is entitled to use the land. Since all land in England is held by the Crown, "estate" is defined as an interest in land of definite duration. It is an abstract entity that represents the extent of a person’s right to possession.
Ownership according to German law can be compared with the right of the English Crown, namely the owner of land remains as such until it sells it to another party. It can bequeath the land, give it away, sell it, build on it, use it – in short, do anything it wants without violating any laws. The length of ownership is not limited.
German law also identifies other ownership-equivalent rights that establish either lifelong ownership or ownership limited in time, for example, a lifelong right of abode. It also allows for two forms of co-ownership:
- joint ownership equivalent to the English tenancy in common and
- freehold flats, which indicates a property right and a right comparable to ownership.
Purchase of property
The prevailing form of property transaction in Germany is the sale. The buyer acquires all rights and obligations affixed to land, buildings on the land and objects affixed to the land. The purchaser supersedes the previous owner. In turn, it can do what it wants with the land. If the previous owner rented the property, the buyer will enter into the existing tenancy. However, finalising the sales agreement does not complete the purchase. The purchase must first be registered in the land register (Grundbuch).
German law assumes that land is especially valuable. Property cannot be sold frivolously and a sale agreement must be concluded before a notary to render it valid. Normally, the agreement provides for a clause instructing the notary to perform the sale, namely to effect the transfer (Umschreibung) of ownership in the land register. The buyer acquires ownership of the land after the sale has been registered. So, ownership can be determined relatively easily. The register is deemed to be correct and authentic, and those relying upon it are protected by the legal system.
A buyer will become the owner of property if the seller was registered as the owner in the register, even though it did not own the property. The land register also lists existing easements, pre-emption rights and mortgages as well as land charges. Except for lease agreements, which do not require registration, the register documents all tangible private rights of third parties affixed to the property that will transfer to the buyer when the property is sold, unless such rights are deleted before sale. However, obligations that are subject to public law are listed in the public easements register (Baulastenverzeichnis). Property is also liable for debts of land tax and of previous owners that have not been registered.
Landlord And Tenant Law
Under both English and German law, a tenancy is created if the owner grants to the tenant the exclusive right of ownership of all or part of the property for a period of time and if the tenant pays rent for such right. However, according to German law, each tenancy agreement can be terminated after 30 years. In respect of commercial tenancies, lease agreements of more than 30 years cannot be made.
The validity of a lease agreement under both jurisdictions is bound by strict formal requirements. However, these are quite different in detail. Under English law, lease agreements of less than three years can be concluded either orally or in writing. Longer leases must be made by deed and those created for a duration of more than seven years must be registered at the Land Registry. German law, on the other hand, requires neither a deed nor a witnessed signature and there is no register for lease agreements. Under German law, lease agreements for longer than one year must contain all material contractual provisions in one deed signed by both parties or their representatives. Both signatures should be made within five days. Where that has not been done, the courts have given different decisions on the compliance of the written form requirement. Non-compliance will not invalidate the lease agreement, but it does give each party the right to terminate the tenancy at any time without giving reasons. Under English law, a failure to meet the written formal requirements will mean that the agreement is invalid or a court must determine its validity for reasons of equity.
Rights and obligations
Under both legal systems, the landlord is obliged to grant to the tenant undisturbed ownership, and the tenant must pay the agreed rent. The principle in Germany is to assign the object of the lease to the tenant in return for certain remuneration. In general, the tenant has no further obligations unless the agreement provides otherwise. Where there is no agreement for the tenant to pay the costs of heating, electricity, water, tax, insurance, maintenance and repair, for example, the landlord will bear such costs.
As a result, commercial lease agreements in Germany contain detailed provisions, concerning, for example, obligations on costs and obligations in respect of maintenance, repair and renovation. German courts adhere to the principle that no unforeseeable costs may arise for the tenant. Thus, in general, costs for maintaining the building’s structure and roof can be imposed on the tenant only subject to very strict conditions. Costs for maintenance, repair and care of joint facilities can be imposed on the tenant only up to a maximum of 10% of the annual gross rent. The allocation of costs in respect of the property is permissible only in so far as such costs do not arise for works performed exclusively in the landlord’s interest. Hence, costs for loss of rent insurance cannot be allocated to the tenant.
Under English law, the definition of "maintenance" and "repair" is subject to interpretation. Although German law also does not provide for a clear definition, few disputes arise on this subject because a distinction is made between: (i) the joint facilities for which the landlord is entitled to allocate maintenance and repair costs, although only up to an annual maximum amount and (ii) facilities located inside the property that allow the landlord, in the lease agreement, to impose on the tenant the obligation to maintain and repair the premises.
The question of how to define "repair", "maintenance" and "replacement" in German leases is not as relevant as the classification of facilities and their location (inside or outside the leased object).
In Germany, the tenant cannot transfer its right to lease, namely sublease, without the landlord’s consent. Even if the landlord does grant permission, a tenancy between the sublessee and the owner will not exist. At the end of the main tenancy, the sublessee will also lose its ownership rights. A separate termination notice from the landlord with regard to the sublessee is not required.
Under German law, a tenancy ends after the expiry of the agreed duration and a special termination notice is not required. If the tenant does not vacate, a new tenancy of unlimited duration begins, subject to a legal notice period of six to nine months. This can be terminated by either party at any time. If the lease agreement does not provide for a fixed duration or for termination, the statutory provisions will apply, according to which each tenancy can be terminated with a six- to ninemonth notice period.
However, German law states that a tenancy does not terminate when the tenant relinquishes its right of possession. Instead, it will carry on and the tenant will be obliged to continue to pay rent. During this time, the landlord will not have the right to use the premises. Under English law, a tenancy never passes into an unlimited ownership right. In Germany, this always requires a separate agreement. In addition, unlike English law, German landlord and tenant law provides for a termination option if the tenant commits a breach of agreement even where the lease agreement does not specifically provide for it.
Different but similar
A number of differences can be seen between German and English law, but in many circumstances similar regulations apply. However, when it comes to investment, specialist legal advice should be sought.
- Germany is currently enjoying huge popularity with international investors
- The German real estate market offers competitive prices and a wide range of effectively managed real estate projects
- It pays to be aware of the key differences between real estate law in Germany and England before investing
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.