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WWW.DLAPIPER.COMAlthough every buyer of a2.3 Share dealsIt is currently common forproperty should undertake itsAnother way to acquire real estateonly 94.9% of the shares to beown survey and due diligence,is to purchase the legal entity whichtransferred because a transfer ofthe seller may not withholdowns the property. In Germany,95% or more to the same investor/important information relatingsuch legal entities are oftengroup of investors would triggerto the property. Under Germanorganized as limited partnershipsGerman real estate transfer tax.law the seller of a property is(Kommanditgesellschaft (KG)) with aThe remaining shares may beobliged to disclose informationlimited liability company (Gesellschaftacquired after five years.to the prospective buyer on anymit beschränkter Haftung (GmbH))important matter which would haveas sole general partner (GmbH &However, as of the date of thisa negative impact on the valueCo. KG).brochure, amendments to theof the property. It is reasonablereal estate transfer tax rules forto conclude that the buyer wouldThe name of the GmbHshare deals are in the making.not have agreed on the purchaseemphasizes the fact that theFor more details see below at 7.price if they had known about suchowners (Gesellschafter, also knownmatters. Such information may, foras shareholders) of the GmbHThe due diligence prior to a shareexample, include construction workare not personally liable for thedeal should, in addition to thewithout the appropriate permit,company’s debts. The GmbH &points mentioned in paragraphpublic orders, issues with the tenant,Co. KG, therefore, combines the2.2 concerning the property itself,technical defects, etc. Any failureadvantages of a partnership withcover the following aspects:by the seller to disclose thisthose of a limited liability company.information overrides any waiver ofInstead of a GmbH, the generalliability that the purchase agreementpartner is often a foreign limitedthe company owning the propertymay contain and may result incompany such as a UK Limitedsuch as pre-emption rights,claims for compensation or evenCompany or a Luxembourg S.à r.l.encumbrances etc.;rescission of the purchase contract.The establishment of such entities isgenerally tax driven.Notaries are entitled to be paid all legal aspects of the shares in whether the authorized sharecapital has been contributedcompletely and accurately andpursuant to a legally bindingIn order to transfer the shares offee order. The law prohibits anythe property-owning company fromagreement on lower notarial fees,the seller to the buyer, the partieshowever, fees are capped at ahave to execute a share purchasetransaction value of EUR60 million.and transfer agreement. In casesNotaries are regularly investigatedwhere the shares in a GmbH areto ensure that the fee order isto be transferred (e.g. in case thehas employees and the liabilitiesobserved. The declaration ofproperty is owned by a GmbH or inin relation thereto.transfer of ownership itself must becase a KG owns the property andcontained in a notarial deed issuedboth the limited partners’ interestsby a public German notary.and the shares in the generalpartner are to be transferred),Transaction costs for the transfer ofstatutory law requires a shareproperty to cover registration fees,purchase agreement for shares innotarization etc. can be estimateda GmbH to be notarized. The feesat 1.5% of the purchase price. Realpayable to the notary dependestate transfer tax (see paragraphon the value of the transaction6 below) currently varies betweenand are capped as stated above.3.5% to 6.5%, depending on theIn principle, the transfer of interestGerman federal state. This excludesin a partnership does not need to becosts for due diligence and thenotarized.involvement of attorneys andtechnical experts.whether it still exists; annual accounts of the company; debt and risks; and whether the property companyUnlike in many other jurisdictions,reliable shareholder registersdo not exist in Germany.Consequently, if the shares havebeen transferred several times, itis important to ascertain that thereis an unbroken chain of notarialtransfer agreements from theoriginal shareholder to the currentshareholder in order to ensurethat the seller actually owns theshares. If the seller does not havea good title to the shares, there isno protection in place in favor of7

REAL ESTATE INVESTMENT IN GERMANYthe buyer even though it may beBeyond these mandatoryaccompanied by legal advisors.purchasing in good faith. This is aaspects, the parties frequentlyIn brief, the public auction is led byclear distinction from an asset dealagree on various other mattersthe competent local court whichwhere, as previously mentioned,such as calculation methods forwill appoint an expert to valuethe seller will be assumed to bethe purchase price, subsequentthe property. At the first date ofthe owner of the real estate if itconditions, warranties and remediesthe auction, the property can beis registered and therefore anin case of breach of warranty.withdrawn from sale if the bid isacquisition in good faith is possible.less than 70% of the estimatedThis demonstrates the paramountThe transfer of shares becomesvalue of the property. In such aimportance of a thorough and(unless otherwise agreed in thecase a second date for the auctionproperly conducted due diligenceagreement) immediately effectivemust be set. At this second dateexercise in the case of a shareupon signature. Although thethe property can be sold as long asdeal and the need to investigatemanaging director of a companythe bid is high enough to pay for thepotential third-party rights.is obliged to submit updatedcosts of the auction. With thoroughshareholders’ lists to thepreparation and investigation,Furthermore, it is not uncommoncompetent commercial register,a portfolio of properties can befor the company’s articles ofsuch lists have no official status andacquired at a low cost at publicassociation to contain certainany potential buyer should not relyauction, but this option usuallyrestrictions regarding the transferon their accuracy.only appeals to specialist investors.transfer of shares to require the2.4 Public auctionsIn this context, it should be addedprior approval of a certain majorityFor specialist investors, purchasingthat the number of public auctionsof the existing shareholders or theat a public auction can be an option.has continuously decreased inexisting shareholders may haveProperties for sale by auction arerecent years as other work-outrights of pre-emption.usually the subject of an enforcedstrategies are preferred by bothsale, such as a sale pursuant toproperty owners and banks.of shares. It is common for anyThe share purchase agreementa court order or a sale whereto be entered into by the sellerthere has been default under aand the buyer must includeLand Charge.certain mandatory aspects suchas the parties, the denominationThe complexity of the auctionof the shares which are beingprocedure makes it advisabletransferred and the purchase price.for a prospective buyer to be8

WWW.DLAPIPER.COM3. Other rights to property3.1 Mortgages andchargesunavoidable; certified land chargesDienstbarkeit). This type ofshould be and usually are avoidedeasement is used, for example,There are three types of charges.for the reasons mentioned.to ensure that long-term leasesThe ordinary mortgage (Hypothek)In order to be valid, mortgages andtermination in the case of andepends on the existence of anland charges must be registeredinsolvency of the landlord.underlying claim, whereby thein the Land Register. Creating aThe construction and maintenanceHypothek can only be enforced asmortgage or land charge does notof supply lines are often securedlong as, for example, a repaymentof itself require a notarial deed,by a Limited Personal Easement asclaim for a loan exists. The Hypothekhowever, to enable registration toopposed to unlimited easementscan only be assigned to a third partybe effected in the Land Register,granted in favor of neighboringtogether with the underlying claim.notarization is necessary.property owners.Nowadays, mortgages do not playThe third type of mortgage, which isFinally, properties may bea significant role in practice asnot commonly used, is an annuityencumbered in a way that givesland charges are generally favoredcharge (Rentenschuld). This is a forma particular person certain rightsby banks as security for loansof land charge where the principalof use, especially to harvest cropsfinancing the acquisition of property.amount of the loan is not to beor have the right to lifetime use asThese land charges (Grundschulden)paid out of the land but instalmentstheir own residence. Such rightsdo not depend on the existenceare to be paid at fixed intervals.are most commonly used in orderof an underlying claim and can beLike land charges in general,to ensure the right to continueassigned independently. In almostannuity charges must be registeredliving in a certain property, i.e.all cases these land charges will bein the Land Register.when parents give the property toare protected from extraordinarylinked to the underlying claim witha security purpose declaration.3.2 Easementstheir children during their lifetimefor tax reasons.Properties under German law canBoth the Hypothek and thebe encumbered in favor of theAll easements must be entered inGrundschuld can be created as aowner of a neighboring propertythe Land Register. The contract itselfcertified mortgage or land charge,by establishing rights of way,does not need to be set up as ai.e. with a document certifyingcertain rights of use or preventionnotarial deed; however, the contractand evidencing the existence ofof use, prevention of construction,must be notarized to enable a validthe mortgage or land charge inallowance of construction etc.application to be made to the Landaddition to being registered in the(Grunddienstbarkeit). Such rights orRegister for registration.Land Register. Any assignment oreasements are widely used to createvariation of a registered certifiedrights of way, rights to erect and3.3 Pre-emption rightsmortgage or land charge requiresmaintain electrical or other supplyA landowner can grant a pre-the presentation of the originallines, and to prevent or controlemption right over its property tocertificate. Certified land chargesdevelopment on certain land inany third party. Such a right mustare sometimes required bythe circumstances mentionedbe set up as a notarial deed andfinancing banks but their use is notin paragraph 3.4 below.registered with the Land Registerwidespread due to the formalitiesin order to be valid and binding.required in the event of assignmentThe property may also beNevertheless, it is quite common inor variation. From an investor’sencumbered by Limited Personalpractice for pre-emption rights topoint of view, the acceptance of landEasements under which a particularbe entered into without observingcharges as opposed to mortgages isperson or entity is entitled tothese formalities, but no claims forcertain rights (Limited Personalany remedies would succeed if theEasement – beschränkt persönlicheformalities are not observed.9

REAL ESTATE INVESTMENT IN GERMANY3.4 Register of publiceasements3.5 Non-registrablerightsIn share deals, however,such personal contractual rightsApart from the registrable rightsand obligations can be inheritedThe Land Registers are maintainedmentioned above, under Germanas the company or other entityby the local courts. Beside them,law, anybody is free to enter into anywhich entered into the contractthe local authorities maintain publiccontract with anybody else coveringis itself being acquired by theregisters for particular easementsa variety of obligations and rightsbuyer. Under such circumstances,designed to protect or preventwhich relate to a particular property,it is necessary to undertake dueconstruction. For example, if abut which are personal in naturediligence with regard to the possibleproperty is built upon in a mannerand not intended to be assigned orexistence of any such contractsexceeding local building andpassed on to other people.or other arrangements with thirdzoning laws, this can be regularizedparties. Appropriate representationsby the owner of a neighboringIn an asset deal, the rights andand warranties should be includedproperty waiving their right toobligations created by suchin any purchase agreement in afuture development. By registrationcontracts, because of their personalshare deal.in this Register for Publicnature, will not pass to the buyer.Easements (Baulastenverzeichnis),Only rights registered in thethese two properties will be regardedRegister for Public Easements or inas one and future developmentthe Land Register are an integralof the burdened property will bepart of the property and will passprevented (Vereinigungsbaulast).to the buyer when ownership isOther limitations on constructiontransferred.can be registered in the Registerfor Public Easements.10

WWW.DLAPIPER.COM4. Zoning and planning law permitsIn Germany, land-use planning stipulations on the extent andThe requirements for obtaining suchis one of the major functions ofuse of a building, the land areasa building permit are set out in thelocal government. It gives thewhich can be built on, the buildingbuilding regulations. Although eachlocal municipality the opportunitymethod;German federal state has its ownand obligation to control urbandevelopment. The municipalitymay set up a land use plan(Flächennutzungsplan) that relatesto the land usage in the area ofthe municipality and outlines designation of areas subject tospecial structural precautions orfor areas severely contaminatedwith substances detrimental tothe environment; andthe main features of land usage subsequent provisions taken fromidentifying areas designated forother statutory regulations suchdevelopment, public and privateas the law on the preservation ofinfrastructure, certain types ofhistorical sites and state laws.transport, green areas, areas withrestriction on use, etc.On a smaller scale the municipalitymay also issue a development plan(Bebauungsplan) as a by-law. Thereare various types of developmentplans which differ in their contentand in their dependence on aland use plan, such as qualified,non-qualified and project-relateddevelopment plan. Contents of adevelopment plan will include:regulations, they are all similar incontent. A building permit containsa declaration by the building controlauthority that the building projectdoes not conflict with the provisionsof public law.If there is no land use or buildingplan in place which regulates theplanned development, permissibilityof a project will have to be inaccordance with the immediatesurroundings, the security of publicinfrastructure, the requirementsof healthy living and workingconditions and the overallappearance of the locality.In Germany, a building permitis required to develop a projector significantly alter an existingproperty after purchase.11

REAL ESTATE INVESTMENT IN GERMANY5. Environmental liabilityUnder the Germancharged to recover payment fromwater by existing or former use ofFederal Soil Protection Actany other party whose liability forthe property or as a result of warfare(Bundesbodenschutzgesetz),the particular contamination canetc. is registered (the Cadastrethe polluter, the current owner,be proven.for Contaminated Sites –Altlastenkataster). These cadastresthe current user and all formerowners and users of a propertyThe law is such that there is noare an important source ofmay be subject to mandatoryway of avoiding the possibility ofinformation on any investigationmeasures for decontamination bybeing charged by public authoritiesprior to acquisition of a property.order of the competent authorities.under these circumstances.However, if the property is notShould any contamination ofThis sometimes has the effect ofregistered or no issues are referreda property render it necessarycomplicating the sale of propertiesto in the cadastre, this does notto undertake decontaminationwith known contamination due tonecessarily mean that the propertymeasures, the relevant authoritiesthe difficulty of sufficiently securingis free from contamination.will not necessarily charge therecourse for the buyer againstpolluter, but look for the mostthe seller.financially sound party that is orenvironmental investigation prior tohas been the owner or has beenThe local authorities maintainin any other way in possession ofa cadastre in which all availablethe property. The law grants specificinformation on possiblerights to any party which may becontamination of soil or ground12It is highly advisable to undertake anany acquisition of property.

WWW.DLAPIPER.COM6. LeasesGerman law differentiates betweenIn residential leases, the rulesResidential leases may be adjustedleases for commercial and/orprotecting tenants are strong.in line with market rent; however,residential premises (Mietvertrag)It is seldom possible for a landlordonly within certain limitations, e.g.and leasehold agreementsto recover possession from athe rent shall not be increased by(Pachtvertrag). Leases of commercialresidential tenant except in limitedmore than 20% within three yearsor residential premises arecircumstances (proven necessityetc.more common than leaseholdfor the landlord itself or a familyagreements. While a lease ofmember to use the premises,6.3 Operating expensescommercial and/or residentialessential works of renovation, etc.).In commercial leases, the tenant ispremises entitles the tenant to usegenerally obliged to pay all operatingthe leased property, the beneficiary6.2 Rentof a leasehold agreement is entitledRent is usually calculated on theincluding costs of maintainingboth to use the leased propertybasis of a figure per m2 of usablecommon facilities, ground tax andand to benefit from it. For example,space. Usually, rent payments areinsurance. Lease agreements oftenin the case of a lease of a farm thatdue on a monthly basis and are paidrefer to the operating expensesincludes all farm machinery and thein advance.stated in the Ordinance on Operatingexpenses relating to the property,Costs (Betriebskostenverordnung).right to harvest crops etc. The legaldifferences are usually coveredValue added tax (VAT) must beThe validity and interpretation ofby regulations within the leasestreated separately. Rental paymentsclauses on operating expenses isthemselves so that regular leasesare normally exempt from VAT.often subject to dispute betweenand leasehold agreements canA landlord can however waive thislandlord and tenant. German courtsfor the most part be regarded asexemption in certain circumstances,have for instance ruled that thesynonymous. All issues mentionedas detailed in paragraph 7.2 below.tenant’s contribution to the costbelow refer to both types of lease.of repairs of common parts of theGenerally, commercial rents arebuilding must be capped or thatadjusted according to changesthe scope of center managementResidential leases in Germanyin the Consumer Price Indexcosts must be clearly defined inare normally entered into for an(Verbraucherpreisindex), although itthe case of commercial leases.indefinite period of time whileshould be noted that the Consumercommercial leases mostly have fixedPrice Index does not necessarilyIn residential leases, the landlordterms of five to ten yea

a German company owning real estate 17 7.6 Taxation of capital gains on German real estate 17 7.7 Taxation of capital gains from the disposal of shares in a German company 18 7.8 Taxation of gain on disposal of partnership interest in a German partnership 18 7.9 Real estate investment trusts 18 7.10 German open-end real estate funds 18