Real Estate 2021

Last Updated April 13, 2021

Germany

Law and Practice

Authors



Linklaters LLP is a full-service provider offering international advice on legal and tax issues in the real estate industry, which gives it a leading edge in meeting client requirements and demands. The cross-practice team not only includes real estate experts, but also specialists in corporate, tax, finance, investment, competition and regulatory law. With more than 60 real estate lawyers in the Frankfurt and Munich offices and 350 real estate lawyers globally, the Linklaters real estate team is chosen by leading global investors, developers, occupiers and financial institutions to advise on their largest and most complex or multi-jurisdictional real estate transactions and disputes. The practice, inter alia, advises private equity clients (eg, Blackstone, Cerberus), funds and institutional investors (eg, BNP Paribas, CBRE Global Investors, LaSalle IM, Union Investment) as well as a number of Asian clients (eg, Samsung, Capitaland). The firm acknowledges with thanks the contribution made to this chapter by Alexander Zitzl at Linklaters LLP.

The main source of real estate law is the Civil Code (Bürgerliches Gesetzbuch).  

Of further relevance are:  

  • the Land Registration Act (Grundbuchordnung);  
  • the General Terms and Conditions for Building Contracts (VOB/B);  
  • the Mandatory Fee Structure Regulation for Architects and Engineers (HOAI);  
  • the Federal Building Code (Baugesetzbuch);  
  • the Federal Land Use Ordinance (Baunutzungsverordnung);  
  • the 16 states’ individual building regulations (Landesbauordnungen);  
  • the Notarisation Act (Beurkundungsgesetz);  
  • the Heritable Building Right Act (Erbbaurechtsgesetz); and  
  • the Condominium Act (Wohnungseigentumsgesetz).  

Despite the COVID-19 pandemic, the real estate market in Germany remained stable in 2020. Purchase prices continued to increase, although this increase did slow down. A similar trend can be observed regarding the volume of transactions, which increased, but to a greater extent in the residential, industrial and logistics sectors than in the office sector. Here, the COVID-19 pandemic plus home-office recommendations had a noticeable impact. The pandemic also led to a slowdown in processing transactions, as potential buyers were hesitant in the beginning, it took longer to obtain information, and site visits were not possible or only to a limited extent. The shortage of offers continues to prevail. According to surveys, residential, logistics but also core office properties are still in high demand. The most popular investment cities remain the top seven centres: Berlin, Hamburg, Munich, Frankfurt, Düsseldorf, Cologne and Stuttgart. 

The most significant deals in Germany in 2020 were the mergers of Ado/Adler/Census, the takeovers of TLG and Godewind, the sale of the Real supermarkets and the Medicus and Matrix Portfolios. The biggest transaction regarding a single property was the sale of Silberturm in Frankfurt am Main. 

There have been some ongoing developments and endeavours to take advantage of blockchain concerning real estate transactions, or to create new opportunities regarding capital investments in the form of tokenisation of real estate assets by some start-ups in Germany, but nothing concrete. Real estate data is kept in incompletely digitalised silos which means that neither quality data nor a decentralised data infrastructure have been achieved so far. Furthermore, regulatory questions have not been clarified so the legal framework has not been established. Therefore, although both applications are promising, it is unlikely that there will be significant development in the next 12 months.  

After long-planned reforms of the Condominium Act and regarding broker costs, which came into effect at the end of 2020, reforms proposed for 2021 are again part of the continued effort to create more affordable housing and to speed up the process for obtaining the required permits. Digital permission procedures and type permits (Typengenehmigungen) will be introduced. At the end of 2020, the Building Land Mobilisation Law (Baulandmobilisierungsgesetz) was passed by the federal government and is currently being discussed in parliament, with the possibility of coming into effect in 2021. It includes, inter alia, a "ban on conversion" (Umwandlungsverbot) of rental apartments into owner-occupied apartments and a right of first refusal for municipalities until the year 2025. It is likely that the legislator will primarily remain occupied with the COVID-19 pandemic in 2021 and not implement any further major reforms in the real estate sector.

Property Tax Act and Real Estate Transfer Tax

Two major tax reforms are pending. The new property tax act will be applicable from 1 January 2025 onwards and will significantly alter the determination of the assessment base. The federal states may make use of the opening clause allowing them to adopt their own assessment base for property tax; currently, six federal states intend to make use of such clause. Furthermore, the reform of the real estate transfer tax (RETT) on share deals is still subject to ongoing legislative discussion. Currently, a share deal only triggers RETT if at least 95% of the shares in a corporation or partnership holding German real estate are directly or indirectly concentrated in one hand. Furthermore, RETT is triggered if at least 95% of the partnership interest of a partnership holding German real estate is transferred within five years to a new partner. The reform intends to (i) also apply the latter rule to corporations, (ii) lower the 95% threshold to 90%, and (iii) extend the holding period to 10–15 years. The reform is currently due to apply as of 1 September 2021.

Generally, there are freehold titles granting full and absolute ownership, and heritable building rights (Erbbaurechte) giving the right to lease the land for a certain amount of time (30–99 years) and to erect buildings on it. Both categories can be split into condominium shares accompanied by special rights of use for a designated area of the property.  

Properties can be encumbered with various rights in rem, such as, easements (Dienstbarkeiten), land charges (Grundschulden) and mortgages (Hypotheken).  

The Civil Code and the Land Registration Act apply to every transfer of title. In addition, permits under other laws, in particular, the Federal Building Code for properties located in special areas and the Real Properties Transfer Act (Grundstücksverkehrsordnung) for first-time sales in eastern Germany after 28 September 1990, might be necessary. Local authorities might have statutory pre-emption rights in certain designated areas.  

The laws applicable to transfer of title do not distinguish between the types of use of the property.  

Transfer of title requires a deed notarised by a notary containing an agreement on the sale (Kaufvertrag) and an agreement on the transfer (Auflassung). The notary applies for the permits necessary for the sale and for the waiver of pre-emption rights, which are a prerequisite for transfer of title and usually also for the payment of the purchase price. The notary also informs the tax authorities about the conclusion of the sale and purchase agreement. They will issue a clearance certificate confirming that real estate transfer tax has been paid, which is also necessary for registration of transfer of title in the land register (Grundbuch).  

While economic transfer of title (transfer of possession, use and burdens) is usually agreed for the day following the payment of the purchase price, the actual legal change of ownership only takes place upon registration in the land register.  

Title insurance is not relevant due to the title guarantee resulting from the so-called "public belief" in the land register. Its accuracy is protected by law and therefore a buyer can acquire ownership in good faith (bona fide) even if the property is purchased from an unauthorised person registered in the land register. 

Legal and technical due diligence is usually performed on documents provided by the seller. Technical advisers often carry out site visits. Some information can be obtained from authorities with power of attorney from the seller and public registers. In some cases, separate environmental due diligence is performed.  

The typical legal report contains information about title and encumbrances, leases, public building and zoning issues and other permits (if required), environmental information and, if relevant, acquisition documents, service agreements and litigation. In a forward transaction where the building is still to be developed, the report also covers development, project management, construction, architectural and other agreements relating to the development.

Effect of COVID-19

The COVID-19 pandemic has not had a major impact on the content of legal and technical due diligence so far. However, due to lockdowns, the process of obtaining information from the authorities has often taken longer, and site visits have been more difficult to arrange, with only virtual viewings being carried out in some cases. On a positive note, digitalisation finally seems to have reached most authorities and more and more information can be obtained online. More importantly, a tenant’s insolvency risk is scrutinised more deeply from a commercial perspective.  

The extent of representations or warranties agreed depends on the market climate. Germany is currently a seller’s market, giving sellers enough leverage to avoid granting the buyer large-scale representation or warranties. Instead of objective guarantees, guarantees to the seller’s best knowledge are often given.

Remedies

The parties can agree on the type of remedies – either compensation in cash or actual repair of the damages. The parties often agree on a cap of the overall maximum amount of compensation. This agreement is regularly accompanied by both a de minimis method, granting damages only if the claim exceeds a certain amount, and a basket method, granting compensation only if the sum of all claims exceeds a certain threshold, resulting in the seller having to cover the total amount of the claims rather than just the difference between the total and the threshold.  

The buyer carries the risk of the seller's insolvency often without being especially secure. Possible security would be paying a certain amount into an escrow account, holding back on a certain amount of the payment, or simply lowering the purchase price.  

Often the statutory period for expiration of claims of approximately three years is limited to 12 or 18 months. 

In addition to the civil and public law provisions mentioned in 1.1 Main Sources of Law, the provisions contained in the Anti-money Laundering Law (Geldwäschegesetz) are particularly important for investors and the required know-your-customer checks sometimes create unexpected bureaucratic hurdles. Company register excerpts, passport copies, etc have to be provided to those who are obliged to carry out the checks. Corporations, partnerships and foundations operating on the financial market and/or buying real estate in Germany have to report their beneficial owners to the register of ultimate beneficial ownership (Transparenzregister). Checks and notifications not only have to be carried out by providers of financial services, but also to a certain extent by brokers, law firms and notaries.  

Under the Federal Soil Protection Act (Bundesbodenschutzgesetz), the polluter, all current and former users, and all current and former owners of a property can be held liable for environmental laws irrespective of whether they are aware of the contamination or if it was caused by them. When requesting remediation measures, the authorities act solely on the basis of the principle of effectiveness and will usually charge the most financially sound party, which is often the owner. However, the owner may take redress from the actual polluter if their actions or fault can be proved.  

A property owner has a right to a building permit if the proposed building complies with public building law. The issued building permit will ensure the legality of the building and its permitted use.

Local Authorities

In many areas, the general public building law is substantiated in local development plans (Bebauungspläne) issued by the local authorities that make provisions for the permitted use and size of the property. If there is no development plan, the permitted use can be determined by the Federal Building Code and the Federal Land Use Ordinance. If no local development plan exists or significant amendments are required for a development to be permitted, the owner might enter into an urban development agreement (städtebaulicher Vertrag) with the local authorities with the aim of establishing/amending the project-related development plan in order to secure its building project. 

The fundamental right to property is protected by the German constitution, which only allows the government to expropriate for public interest, if authorised by German law, for appropriate cause and against compensation. There are federal and federal state laws enabling expropriation. The procedure varies, depending on the law it is based on. Compensation is based on the market value of the property at the time of expropriation.   

Municipalities also have the right to expropriate, as a last resort, to fulfil their goals under the Federal Building Code, especially if the real estate is located in a development area (Entwicklungsgebiet).

Asset deals are subject to RETT, with the percentage varying between 3.5% and 6.5% depending on the federal state. VAT is normally not applicable to the sale of real estate. If the property is sold B2B, the seller can waive the VAT exemption, thus VAT of 19% applies. The buyer has to pay this VAT to the tax authorities (reverse charge). If the buyer intends to use the real estate to render non-VAT-exempt supplies, the VAT triggered may be reclaimed as input VAT; hence no VAT would actually be payable.  

Share deals may be structured in a RETT-optimised way. Usually less than 95% of the shares are transferred to one buyer, with either the seller retaining the remaining stake, or a second buyer acquiring the remaining shares. If the interest in a partnership is transferred, RETT is not triggered if less than 95% of the interest is transferred to new partners within five years. As a result, a buyer normally acquires less than 95%, with an option to acquire the remaining interest after five years. However, the German legislator plans to tighten these rules.   

Generally, there are no legal restrictions on foreign investors acquiring real estate in Germany.   

However, a notary may only notarise a real estate sale and purchase agreement with a foreign entity as the buyer and therefore a foreign entity can only acquire real estate in Germany if the entity is registered in the German ultimate beneficial owner register (Transparenzregister). Due to the European single market, registrations in an equivalent register of an EU member state are also sufficient. 

Generally, acquisitions are financed by both debt and equity, with the ratio between the two depending on the market. Equity is often provided downstream in the form of shareholder loans which are expected to be subordinated to the debt financing. If insufficient equity is available in the company’s group, additional funds may need to be obtained from mezzanine lenders. For mezzanine loans there will typically be an increased margin, giving the lender a way to participate in the profit and/or the possibility to transform the loan into an equity participation (“equity kicker”).  

Portfolios are often financed by syndicated loans involving different lenders, and secured debt is traded between the lenders. For refinancing, the so-called Pfandbrief (covered bond) is often used. In this case, the loan and the granted security must comply with a strict standard.    

Furthermore, sale-and-leaseback transactions can be seen as a different form of financing, as the former owner/now tenant of the property activates new liquidity.   

The most important security granted over real estate is the land charge (Grundschuld) or mortgage (Hypothek). While the more often-used land charge is non-accessory in nature and connected to the secured claim via a security purpose agreement, the mortgage is accessory in nature and attached to the underlying claim. Both are registered as rights in rem in the land register, as encumbrances over the freehold property or a hereditary building right.   

In addition, the typical security package includes the assignment of rental income, claims under the acquisition agreement, the property management agreement, insurances and contractor agreements. Bank accounts and shares or interest are pledged to the financing bank. The property/asset manager is expected to conclude a duty of care agreement.  

If developments are financed additionally, cost overrun and/or finance costs shortfall guarantees are commonly granted by the sponsor.  

There are no restrictions on granting security over real estate to foreign lenders and there are no restrictions on repayments being made to a foreign lender under a security document or a loan agreement.  

However, the payment of interest to foreign lenders can be restricted. Under German tax, banks and other financial services providers must withhold taxes on interest payments made to foreign lenders that do not themselves qualify as a bank or financial services provider.   

If a foreign lender has a permanent establishment in Germany and the loan is attributable to this establishment, the foreign lender is subject to German taxation on the profit resulting from the loan. Depending on the applicable double-taxation treaty, the interest will generally either be tax-exempt in the foreign jurisdiction or the German tax will be credited against the tax liability arising in this jurisdiction. 

Land charges/mortgages as well as share pledges require notarisation which triggers mandatory statutory notarial fees. Furthermore, the mandatory registration of land charges/mortgages in the land register triggers registration fees. If the land charge/mortgage is granted by a foreign entity, the land registry often requests a cost advance before registration.  

Enforcement of security is done via court proceedings for which court fees are payable. The court will only initiate the proceedings once the secured creditor applying for the proceedings has paid a cost advance.  

No taxes apply to the granting and enforcing of security. However, if a land charge/mortgage is enforced by way of public auction, RETT of between 3.5% and 6.5% (depending on the German federal state in which the property is located) is payable, for which the successful bidder and the property owner are jointly liable.   

Additionally, interest on loans granted by a foreign lender and secured by German real estate would trigger German domestic income for the lender; ie, interest would in principle be subject to German income tax if no double-tax treaty excludes the German right to tax this income. 

Depending on the security-granting entity, financial assistance and corporate benefit rules must be complied with.  

The prohibition on financial assistance only applies to German stock companies (Aktiengesellschaften). If there is a control agreement or a profit transfer agreement (Beherrschungs- oder Gewinnabführungsvertrag) in place between the stock company and the financially assisted company, the prohibition on financial assistance does not apply. On the other hand, a transaction carried out in violation of the financial assistance rules is void.

As a corporate benefit rule, managing directors are legally obliged to act as prudent business people vis-à-vis their company. In upstream or cross-stream loans within a group, there is an obligation on the lending entity to take security if there is a credit risk in relation to the borrowing entity. Furthermore, the German Code of Corporate Governance applies to members of the managing board and the supervisory board of German listed stock companies. An infringement of corporate benefit rules does not lead to the invalidity of a transaction, but to the possible liability of the directors, managing board, and/or supervisory board.   

In addition, other rules deriving from corporate and insolvency law apply, including rules relating to capital maintenance, restrictions on transactions between a company and its affiliates other than its own subsidiaries, and provisions relating to transactions that disadvantage creditors and have been entered into within a certain period before the commencement of insolvency proceedings. 

In addition to contractually agreed prerequisites for the enforcement of security, such as serving an enforcement notice to the security grantor and the borrower, and giving the chance of healing the default, additional statutory requirements apply to the enforcement of a land charge/mortgage. It must be terminated with a mandatory six months’ notice period and the enforceable copy of the land charge/mortgage deed must be officially served to the property owner. Only once this has been done, can enforcement proceedings via forced administration and/or forced auction commence.  

Additional steps to give priority to a lender’s security interest are not required.  

Existing secured debt can be subordinated both by agreement and by law.  

A creditor can agree to subordinate its existing debt to that of another creditor by means of a subordination agreement or an intercreditor agreement. If the existing debt is secured by a land charge/mortgage and such land charge/mortgage will be subordinated to a newly created land charge/mortgage, registration of such subordination is required in the land registry in order for it to become effective.  

Shareholder loans and other arrangements equivalent to shareholder loans are subordinated to the claims of all other creditors by law, except:  

  • when the relevant shareholder is not a director of the company and does not hold more than 10% of the registered share capital in the company (minority shareholding privilege – Kleinbeteiligungsprivileg); or  
  • when the shareholder has acquired shares with the intention of rescuing the company from insolvency (restructuring privilege – Sanierungsprivileg).   

In addition, newly created debt is subordinated by law to outstanding debt to public authorities.  

A lender holding or enforcing security over real estate cannot be held liable under environmental laws due to its position as lender/security beneficiary.   

Under the Federal Soil Protection Act, the polluter, all current and former users, and all current and former owners of a property can be held liable for contamination. The lender can therefore be held liable in the unlikely circumstances that they were in possession of the property or that they are themselves the polluter.   

In certain circumstances, a borrower's insolvency administrator may challenge agreements entered into by the borrower between one month and ten years prior to the filing for the opening of insolvency proceedings. The following are valid reasons for challenging security interests granted by the borrower:  

  • the creditor had knowledge of the borrower's illiquidity, or the borrower had already applied for the opening of insolvency proceedings, or the creditor was aware of circumstances leading directly to the conclusion that the borrower was illiquid or had applied for insolvency proceedings;   
  • the creditor is a shareholder of the borrower;   
  • the borrower provided the security intending to discriminate against the rights of other creditors and the creditor was aware of this intention;   
  • the creditor did not have a valid right to obtain the security that he or she was not due to receive, or was not yet due to receive, or was due to receive in a manner that was otherwise inconsistent with the original agreement between the borrower and the creditor;   
  • the interests of other creditors were directly prejudiced at the time the security was granted (it not being sufficient that they might have been prejudiced as a result of granting the security); or   
  • the security interest was granted gratuitously.  

If immediate and adequate consideration was received by the borrower for the transaction for which the security was granted, it can only be challenged by the insolvency administrator if the transaction was undertaken wilfully to discriminate against other creditors' rights.   

If a transaction is successfully challenged, the secured creditor has to repay any amounts already received or release the respective security interest.  

In German financings, reference is made to EURIBOR (Euro InterBank Offered Rate) and not to LIBOR (London Interbank Offered Rate), ie, the expiry of LIBOR is less relevant. Where applicable, it will most likely result in a change in the fair value of the underlying financial instrument, which may require adjustments to the contracts. For borrowers, this may involve additional internal and external transaction costs.  

There is currently a lot of uncertainty, even though loan agreements usually provide for a transmission to other rates, including re-negotiations.   

In Germany, strategic planning and zoning are governed by federal statutory law and the relevant statutory law of each of the 16 German states, as well as regional and local development plans (FlächennutzungspläneBebauungspläne). Particularly important codes are the Federal Planning Act (Raumordnungsgesetz), the Zoning Codes of the German states (Landesplanungsgesetz), the Federal Building Code and the Federal Land Use Ordinance.  

The design, appearance and method of construction of new buildings or refurbishment of existing buildings are governed by legislation, specifically the Federal Building Code and the Federal Land Use Ordinance. Regarding the safety of buildings (fire safety, layout and structural safety), the building codes of the respective federal states apply.  

Municipalities are responsible for the regulation of the development and use of individual parcels of land. The federal government of Germany lays down "leading concepts" (Leitbilder), such as the guarantee of equal living conditions within Germany, the protection of the natural environment, and the necessity of correcting structural imbalances between former East and West Germany.  

The federal states establish comprehensive plans (Raumordnungspläne) covering the entire state. These plans and their objectives are binding on all subordinate planning authorities. They mostly cover the requirements for the desired structure of settlements, the need for areas to remain undeveloped, and infrastructure locations and routes.  

The municipalities' planning functions are carried out at two levels:  

  • the development plan for the entire territory of the municipality (Flächennutzungsplan), which lays down the main features of the various types of land use that will be permitted on the basis of intended urban development and the anticipated needs of the municipality, eg, areas earmarked for development, transport, public infrastructure, green spaces, etc; and  
  • a detailed plan for individual areas within the municipality (Bebauungsplan), which designates the permitted land use and usually refers to the Federal Land Use Ordinance, giving a detailed description of the building areas (eg, residential, industrial, retail or business) and restrictions on the size, height and floor area of permissible buildings.

In order to obtain entitlements to develop a new project or complete a major refurbishment, an application specifying the planned construction work and the use of the land must be submitted. The responsible authorities will then forward the application to any other authority with potential interest in the planned project.  

The responsible authority itself verifies whether the project complies with planning law. If it does, and if no relevant concerns are raised by the other authorities involved, the responsible authority must grant the building permission. 

Legal action can be taken against the relevant authority's decision to refuse planning permission. Third parties, such as neighbours, can commence proceedings against the issuance of a building permit if they can prove that the decision may unlawfully affect their rights.  

Arrangements known as urban development agreements can be entered into between building owners or developers and the relevant municipality. In these contracts, the municipality undertakes to support the building owner/developer, or the building owner/developer undertakes to support the municipality in its planning goals.  

Local planning authorities can take certain steps to enforce restrictions on development and designated use. They can issue an injunction against proceeding with construction works where a relevant regulation has not been complied with (Baueinstellungsverfügung) or they can issue an injunction against using a building that has been erected in contravention of the regulations (Nutzungsuntersagung).  

Generally speaking, any entity, including foreign entities, that has legal capacity can hold real estate in Germany, unless prohibited by law or court or administrative order. Limited liability companies (GmbH) and limited partnerships (KG) are most commonly used to acquire and hold real estate.  

German law also recognises real estate investment trusts (REITs), which are listed real estate stock companies. However, there are only five REITs listed in Germany. 

Limited Liability Company

A GmbH as limited liability company is a corporation acting fully independently of its shareholders, subject to rights and obligations. Only the company assets of a GmbH serve to discharge the company's obligations vis-à-vis creditors, and any personal liability of the shareholders is excluded if the capital contributions have been fully paid. The applicable legal framework is quite flexible, and the company's articles can be adjusted to specific needs. Its foundation requires a notarial act. The management is vested with one or more managing directors, who are generally bound by the instructions of the shareholders. The company may have a supervisory board (Aufsichtsrat).  

Limited Partnership 

The KG is a limited partnership under German law and must have at least two partners. The partnership agreement does not require notarisation, unless it contains obligations requiring the observation of specific form requirements (eg, contribution of real estate). It is characterised by having at least one general partner, personally liable without limitation, and one or more limited partner(s) only liable to the extent of their liable contribution (Hafteinlage) registered in the commercial register. Additional contributions can be agreed. Management is vested with the general partner.  

The minimum share capital for a GmbH is EUR25,000. Capital contribution in kind is possible but is subject to further restrictions.   

No minimum capital requirements apply for a KG. 

No specific governance requirements apply to real estate investments as such. However, regulatory requirements apply if the investment vehicle qualifies as an investment fund under the German Investment Code (KAGB) – ie, any collective investment undertaking that raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and that is not an operative business outside the financial sector. The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) supervises German fund managers and investment funds offered by such companies under the provisions of the KAGB. 

The annual entity maintenance and accounting compliance costs depend on the individual circumstances of the entity and the property itself.  

German law differentiates between Pacht, entitling the tenant to use the property and to benefit from it, and Miete, which only entitles the tenant to use the property. For example, the leasing of a hotel, including all fixtures and equipment, and the right to operate the hotel is regarded as a Pacht contract. 

There are no different types of commercial leases, apart from the general differentiation explained above.  

Leases are subject to the Civil Code, which regulates basic contractual matters. Within that scope, contracting parties may freely negotiate the contractual provisions, as long as they do not violate any mandatory law, eg, regulations on the maximum rent payable and its increase for residential leases.  

In the wake of the COVID-19 pandemic, the government established a moratorium on termination of rental and leasehold agreements due to non-payment of rent in the period from 1 April 2020 to 30 June 2020, which is effective until 30 June 2022. 

Furthermore, commercial tenants who are directly affected by the government's protective measures to contain the pandemic can claim a disturbance of the contractual basis (Wegfall der Geschäftsgrundlage), which allows for adaptation of the lease agreement to the new circumstances in each individual case.  

Fixed leases typically run for a period of between five and ten years, and extension options are often agreed. It is possible to negotiate terms of up to 30 years.   

The landlord is obliged to maintain the premises in the agreed condition – therefore, the landlord must bear all costs for repairs and decoration. It is market standard for maintenance and repair work to be undertaken by the tenant at its own cost. In most cases, the landlord remains responsible for structural and major repairs, and the tenant carries out internal repairs and maintenance as well as repairs solely for interior decoration.  

Case law regards clauses that oblige the tenant to repair the roof and structure of the leased premises, to decorate at fixed intervals, to comply with unlimited renovation obligations at the end of the term, or to pay for renovation irrespective of the premises’ actual state at the end of term, to be unfair and invalid.   

Triple net leases (in which the tenant agrees to pay all real estate taxes, building insurance and maintenance) are generally not permitted unless individually agreed, eg, in sale-and-leaseback transactions.  

Rent is mainly paid on a monthly basis. In rare cases quarterly, six-monthly or yearly rents are agreed. 

It remains to be seen if new leases will contain specific provisions for a pandemic situation or another force majeure event. So far, no clear trend is visible, and it will very much depend on the market situation and the negotiation position of tenant and landlord.  

In principle, the parties are free to agree on the amount of the rent and its increase under commercial tenancy law. The parties generally agree on rent adjustment systems, such as indexation rent, graduated rent or turnover-linked rent. For residential leases, strict limitations apply to a possible rent increase.  

It is usual to agree on the rent adjustment system in the lease agreement itself. It is seldom agreed to negotiate a new rental based on the then-applicable average market rent after a certain number of years, or if the tenant has exercised an option right. Generally, commercial rents are adjusted according to changes in the Consumer Price Index (Verbraucherpreisindex). A graduated rent will be raised by a certain amount after a certain period of time. A turnover-linked rent will be adjusted to the change of turnover of the tenant for a certain period of time; in order to mitigate the risk of falling sales, however, a minimum fixed rent is usually agreed.  

In principle, rent is VAT-free. However, the landlord may waive the VAT exemption, thereby entitling it to deduct input VAT. This is only possible if the tenant exclusively uses the premises to render supplies which do not exclude the right to deduct input VAT; ie, the landlord’s input VAT deduction depends on the tenant’s use of the property. Lease agreements therefore normally provide for a compensation claim if the landlord’s waiver fails due to the tenant’s use.  

Rent securities, such as deposits or bank guarantees, are often requested before the commencement of a lease, if agreed upon in the lease agreement. In landlord-friendly markets such as Berlin, Frankfurt and Munich, landlords also increasingly demand a lump-sum payment for administrative costs of between 1% and 5% of the annual rent. Such lump-sum payment has to be made irrespective of whether such administrative costs have actually been accrued by the landlord. 

Generally, the landlord must pay for the maintenance and repair of commonly used areas, provided no other agreement has been made in the lease. In commercial leases, those costs usually have to be borne by the tenants in proportion to their leased area and are normally capped at 5–10% of the annual net rent.  

The Civil Code provides for two ways of regulating such costs: either the actual costs can be allocated to the tenants on an annual basis, or an annual lump sum can be fixed to cover these costs. It is also possible for specific utilities to be allocated to the tenant according to the actual consumption, and a lump sum payment agreed for other utilities. The parties can also agree that the tenant will enter into direct contracts with the utility provider for specific utilities. Leases generally provide for a monthly utility cost prepayment together with the rent. The actual costs will be settled regularly within 12 months of the end of each rental year.  

It is standard market practice for the landlord to procure an all-risk insurance policy for the building, usually covering the risks of fire, storm, hail, water damage and other natural disasters. The incidental insurance premiums are allocated to the tenant as part of the operating costs. The landlord's insurance policies, however, do not cover any personal property of the tenant; therefore, the tenant should cover possible damages with liability insurance. Landlords also often take out loss-of-rent insurance and, depending on the location of the property, terror insurance at their own cost.  

The specific use of the real estate is generally agreed between the parties in the lease agreement. Any change of use is usually subject to approval by the landlord. Public building law and the respective zoning plan also impose what uses are possible, and the building permit for the property is issued for a specific use based on this. If the tenant intends to deviate from the use granted in the building permit, a change-of-use permit must be obtained from the responsible building authority. Such permit might list additional building requirements to be adhered to. The agreement between the parties who bear the related costs and carry out the necessary measures very much depends on the market situation.   

Regarding subletting, the landlord may restrict the use to the extent that it is only permitted with the landlord's consent. Furthermore, the landlord generally lays down house rules – ie, general conditions for the use of the property – to avoid conflict between and with the tenants. 

The tenant may not cause any damage to the real estate, which might also – from the landlord’s point of view – include any alterations or improvement. It is important for the tenant to clear the conditions the landlord has set in the lease agreement before starting to change anything substantially and irreversibly. Any alterations by the tenant are generally subject to the landlord’s prior consent.  

Besides the Civil Code, there is no special regulation or law regarding the lease itself. However, operation of the tenant’s business on the premises may be subject to particular laws and regulations, which might have an impact on specific provisions in the lease. Furthermore, specific laws and regulations can apply to the rent payable by residential tenants and its increase. Regarding commercial tenants who are directly affected by the government-imposed lockdown due to COVID-19, refer to 6.3 Regulation of Rents or Lease Terms

A landlord does not have the right to terminate a lease due to a tenant’s insolvency. A termination due to rent arrears is only possible before the opening of insolvency procedures over the tenant’s assets.   

If an insolvency administrator is appointed for the tenant under insolvency legislation, the administrator has an extraordinary termination right regarding the lease. During the insolvency proceedings, any claims the landlord might make against the tenant must be formally filed with the insolvency administrator.   

A rent security is usually agreed between the parties. For residential leases, a cash deposit or pledged account is typical, while various other rent securities can be found in commercial leases, particularly bank guarantees or letters of comfort (Patronatserklärungen). For residential leases, German law prohibits a rent security exceeding three months’ net rent.  

Additionally, the landlord has a lien (Vermieterpfandrecht) over the movable assets of the tenant in the leased premises. This lien has priority over contractual liens.  

The Civil Code gives the tenant the right to occupy the premises even if the contractually agreed fixed term has ended, if the landlord does not object within two weeks after the official termination date. In this case, the lease will continue, and statutory ordinary termination rights (usually between six and nine months) will apply. Parties regularly exclude this provision in lease agreements. Leases do not typically contain any further stipulations to ensure that the tenant leaves on the termination date, as the tenant is obliged to vacate the premises after the lease has ended under statutory law. Therefore, the landlord cannot arrange for timely eviction by the tenant in advance, but can claim for damages if the tenant does not vacate the property on time.  

The right to sublet to third parties is commonly accepted, and in the case of residential leases it cannot be excluded. Subletting is usually subject to the landlord’s prior written consent which can only be withheld for good cause. The main tenant remains fully liable for rent payment and compliance with other obligations under the lease agreement vis-à-vis the landlord. It is sometimes agreed that the surplus rent generated in the sub-lease or a certain percentage thereof has to be paid out to the landlord. If VAT is payable in addition to rent, subletting is often permitted only to parties which must pay VAT as well.  

Non-authorised subletting constitutes a serious offence and justifies extraordinary termination of the lease agreement without notice.   

For transfer of the entire lease agreement to a third party, an agreement involving the landlord, the old tenant and the new tenant is necessary. In commercial leases, a transfer without the landlord’s involvement is sometimes permitted to affiliated companies.   

Commercial leases are usually agreed for a fixed term and ordinary termination rights are excluded. Sometimes break options towards a pre-determined date are granted to the tenant. The Civil Code grants both landlord and tenant extraordinary termination rights if the other party cannot reasonably be expected to continue the lease, considering all circumstances of the individual case.   

The tenant may terminate if:  

  • the property is not handed over on time;  
  • the tenant is deprived of its use; or  
  • the landlord has increased the rent.  

The landlord may terminate if:  

  • the tenant violates the rights of the landlord by substantially endangering the property; or  
  • if the tenant is in significant rent arrears (for two successive due dates or for payments amounting to at least two months’ rent).  

The latter termination right is affected by temporary regulations in the light of the COVID-19 pandemic. Landlords are not entitled to serve notice to tenants who did not pay rent in the period from 1 April 2020 to 30 June 2020 due to the pandemic. 

The Civil Code also grants both parties the right to terminate the agreement 30 years after the start of the lease, with a statutory notice period of six to nine months.  

In addition to this, in commercial leases, parties typically agree on further extraordinary termination rights in favour of the landlord, such as unauthorised subletting. If the property is sold due to foreclosure or the insolvency of the owner, the new owner has an extraordinary termination right. 

There are no registration requirements for leases and a lease cannot be recorded in the land register. However, form requirements apply. Leases of a fixed term of more than one year need to be in writing, signed by each party, and contain all terms and conditions. If a lease contains a pre-emption right or is part of a sale-and-leaseback transaction, it needs to be notarised.   

Tenant easements (Mieterdienstbarkeiten) preventing an early termination in case of the landlord’s insolvency or a forced auction over the premises, and permanent right of use (Dauernutzungsrechte), to which statutory lease law only applies if expressly agreed, must be registered in the land register.   

For such registration, an approval certified by a notary is required. Statutory registration fees are applicable. The parties can freely agree who bears these fees and the costs are usually seen in the context of the entire commercial agreement. No matter what the parties decide, vis-à-vis the land registry, the party that files the registration application will be liable for the fees. 

A tenant can be forced to leave after a lease agreement is effectively terminated or has expired. If the tenant will not leave voluntarily, the landlord can file for an action for eviction (Räumungsklage). If the tenant does not follow the court's order, the landlord can file for a forced eviction (Zwangsräumung) with the local authorities. However, due to various regulations protecting the tenant and the inevitable court proceedings, this can be a long process and an average timeframe cannot therefore be given. Forced eviction as such is not affected by any COVID-19 legislation, however, certain termination rights are. Refer to 6.3 Regulation of Rents or Lease Terms.  

If the leased premises are sold due to the landlord’s insolvency or due to foreclosure, the buyer of the leased premises has a statutory extraordinary termination right regarding existing leases. In such instances, the tenant generally cannot claim compensation for lost expenditure but may be able to claim against the buyer for unjustified enrichment if the buyer is able to lease the premises to a third party for a higher rent than the rent agreed with the tenant.  

Protection against such extraordinary termination right can be granted in the form of a tenant easement, which gives the tenant a right in rem to continue to occupy and use the premises in accordance with all the conditions set forth in the lease agreement, irrespective of the termination. The tenant easement is an encumbrance that needs to be registered in the land register. 

For construction agreements, two types of prices are usually agreed on: either a unit price (Einheitspreis) for partial services or a fixed price (Pauschalpreis) for the completion of the entire project. If the parties choose to agree upon a unit price, all individual services provided to complete construction as a whole are listed separately. In this case, the price is not fixed in the beginning but will be calculated depending on the services and units actually delivered for construction. The construction contract therefore includes only a cost estimate, which is not final until the final invoice for the work is rendered.  

Hourly-rate contracts (Stundenlohnverträge), cost-plus contracts (Selbstkostenerstattungsverträge) and guaranteed maximum-price (GMP) contracts (garantierter Maximalpreisverträge) are relatively rare.  

Often the responsibility is split between a constructor for construction work and an architect for the planning of the project. In this case, the cost of the architect's remuneration is prescribed by law (HOAI, the official scale of fees for services by architects and engineers); for the constructor it is – as usual in German Civil Law – freely negotiable.  

The other possibility is to instruct a general contractor for all construction services, including planning tasks. In this case, the HOAI is not applicable, although architect services are included in the general contractor agreement. 

To manage construction risks on a project, a constructor's all-risk insurance is a general liability insurance normally used to reduce risk. Additionally, the Civil Code offers a liability system, which usually applies to every construction, architectural and engineering contract. Furthermore, it offers a special liability system including a longer limitation period regarding construction contracts, taking the general terms and conditions for building contracts into account. The liability of a contractor is generally not limited. Some contracts provide limitation of liability in the amount of the insurance coverage or to the extent of purpose or gross negligence.  

Under the Civil Code, the contractor is liable for construction delays if they are caused negligently or wilfully.  

Furthermore, the parties may agree on contractual damages (Vertragsstrafe) for the delay of contractually agreed milestones. In this case, the parties agree on a certain amount the contractor has to pay for each day's delay after the breach of a milestone, with a usual maximum cap of 5% of the overall fee. The parties may agree intermediate milestones or the finalisation date of the construction work, which will be subject to liquidated damages. According to High Court judgments, the maximum amount of damage per day may be 0.25% of the net purchase order for the finalisation of construction work, and 0.15% of the net purchase order for any agreed intermediate milestones. In any case, the liquidation damages have to be deducted from any damages for delay of works under the Civil Code.  

A warranty bond of 10% of the net fee is market standard to secure the performance of the contractor's work until completion.   

From completion onwards, a warranty bond of 5% of the amount of the final invoice for malperformance within the liability period is market standard.   

Generally, warranty bonds are provided as bank guarantees. 

Contractors of a construction project (or parts of such) may acquire a right over the property, comparable to a lien, in the form of granting a mortgage on the property to secure the contractor's remuneration (Sicherungshypothek des Bauunternehmers). However, this is only applicable if the buyer is also the owner of the relevant property on which the construction work is performed and the work, the value of which is to be secured, has already been performed. In addition, the contractor may claim a lien (Werkunternehmerpfandrecht) on movable items the contractor has been instructed to create or modify for the buyer.  

Once the contractor’s payment claim has been satisfied, it is obliged to approve the deletion of the encumbrance in the land register and to return the movable item to the buyer. 

For all building projects, the necessary building permits must be obtained before the start of construction work. This includes the official approval of necessary fire safety standards and other technical certificates by the building authority or the responsible engineer. In some, but not all federal states, the building project is formally accepted by the building authority after completion.   

In some instances, if the building is intended for a specific commercial or industrial purpose, a business licence must also be issued. 

VAT is not normally applicable to the sale of real estate. If the property is sold business to business, the seller can waive the VAT exemption, triggering VAT at a rate of 19%. The buyer owes the VAT triggered to the tax authorities (reverse charge). If the buyer intends to use the real estate to render non-VAT-exempt supplies, the VAT triggered may be reclaimed as input VAT; hence no VAT would actually be payable.  

These principles do not apply for operating facilities (Betriebsvorrichtungen), the transfer of which is always subject to VAT. Furthermore, no VAT would be triggered if the real estate is transferred by way of a transfer of a going concern (Geschäftsveräußerung im Ganzen) which is not subject to VAT by law. A transfer qualifies as a transfer of a going concern, if the buyer continues the VAT-able business rendered by the seller, which typically applies if the buyer continues the existing lease agreements. 

German tax law does not provide any commonly used methods to mitigate the RETT burden in asset deals. However, share deals may be structured in a RETT-optimised way; see 1.4 Proposals for Reform and 2.10 Taxes Applicable to a Transaction. Furthermore, if partnerships are affected, a pre-transaction conversion of these partnerships into corporations might be reasonable, to avoid RETT being triggered by the transfer of at least 95% of the partnership interest to new partners within five years, as this rule only applies to partnerships under the current law. However, the planned RETT reform also foresees the application of such a rule to corporations, see 1.4 Proposals for Reform.

The municipality charges property tax. It is assessed on a value (Einheitswert) usually below the market value, with the average tax rate varying between 1.3% and 1.5%, depending on the municipality. However, there are reform plans for the property tax regime – see 1.4 Proposals for Reform.  

No income tax withholding generally applies to foreign investors for rental income they derive from German real estate.  

Corporations are subject to corporate income tax which is levied at a rate of 15% (plus a solidarity surcharge of 5.5% on corporate income tax).   

Corporations are generally subject to trade tax if they maintain a trading business or a permanent establishment for the purpose of this trading business in Germany. Leased real estate does not qualify as a permanent establishment for this purpose. In addition, the lease of real estate can be exempt from trade tax due to proper structuring, ie, if the investors limit their activities in Germany to the mere letting of real estate and do not render any harmful activities (ie, activities triggering corporate income tax, such as, the letting of operating facilities). Trade tax is levied by municipalities at rates varying between 7% and 17.15%.   

If a partnership leases out real estate, the rental income will be subject to income tax at the level of the partner trade tax and this will be payable by the partnership. Unlike corporations, partnerships may be structured in a way that they are not subject to German trade tax.  

The same applies to capital gains from the sale of real estate.  

Capital gains from the sale of shares in a corporation holding German real estate are generally subject to German income tax. However, if the shares are held by a corporation, a participation exemption of 100% or 95% might apply.  

Buildings are subject to depreciation at an annual rate of 2% or 4% on the acquisition costs. Land and shares are not depreciable. Taxable rental income will be reduced by the costs incurred for rendering the lease (eg, interest, maintenance).  

If the investor has a permanent establishment in Germany, profits from the sale of real estate allocable to this permanent establishment can be offset by accounting for a reserve that reduces taxable income, subject to specific circumstances. This reserve will reduce the acquisition costs of real estate that is acquired in later years. Thus, the gains built in real estate do not have to be taxed upon their revelation (ie, the sale of real estate property) but can be delayed by transferring the built-in gains to newly acquired real estate.  

Linklaters LLP

Taunusanlage 8
60329 Frankfurt am Main
Germany

+49 69 71003 0

+49 69 71003 333

info@linklaters.com www.linklaters.com
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GSK Stockmann is a leading independent European corporate law firm with more than 200 professionals across offices in Germany and Luxembourg. Highly regarded for its real estate and financial services and with one of the largest real estate teams in Germany, GSK Stockmann is a market leader in the areas of investment and asset management as well as project development. GSK Stockmann also has deep-rooted expertise in key sectors, including funds, capital markets, public, mobility, energy and healthcare. The dedicated teams provide expertise and experience in M&A, private equity and venture capital, dispute resolution, tax, compliance, restructuring, IP and IT, data protection, antitrust and employment law, enabling them to find the right solution for clients' business needs.

One year after the outbreak of the COVID-19 pandemic, we assess the legal and factual repercussions on the real estate transaction market in Germany.

Overview of the Market

Looking back with the benefit of hindsight, it is evident one year after the outbreak of the COVID-19 pandemic that the German real estate market has demonstrated its continued stability for both private and institutional investors. 

Although certain differences may have emerged in individual asset classes, the COVID 2020 year was eminently successful overall, registering a total transaction volume of around EUR79 billion (cf CBRE Real Estate Market Outlook). We are certain that the German real estate market will continue to attract investors, given that there are virtually no other alternative investment opportunities with comparable security and returns in the face of the high investment pressure exerted by many investors. This trend will be significantly reinforced by the sustained low interest rate policy, as a result of which, investors will continue to search intensively for investment opportunities in the German real estate market. Above all, newly emerging opportunities will offer foreign investors, especially, the option to enter the German real estate market. 

The differentiation which has already begun between different asset classes, and even within them, will continue. 

Certain asset classes were more substantially hit by the COVID-19 pandemic than others. It therefore comes as no surprise that investors have developed a preference for the “asset winners” emerging in 2020. This particularly includes properties for living, healthcare and logistics, as well as retail in the food and pharmaceutical segment. 

Opportunities exist even in asset classes which have come under greater pressure due to the COVID-19 pandemic and which therefore, at first glance, appear riskier. After all, a higher risk usually entails better returns, even more so if one recognises existing problems and applies customised solutions. 

Impact of the Pandemic on the Acquisition Process and the Purchase Agreement

We outline below the issues that need to be taken into consideration since the outbreak of the COVID-19 pandemic, and probably will for some time thereafter, particularly in the context of legal due diligence and purchase agreements. In this context, we make a distinction between existing properties on the one hand, and properties under project development on the other.

Existing properties

The purchase price factor relevant to real estate depends upon macro-location and micro-location as well as on the intended use of the property. To determine the purchase price of a property the respective purchase price factor is multiplied by the annual net cold rent. Against this backdrop, it is evident that the respective net cold rent obtainable from the property is a decisive factor for the purchase price. Depending on the asset class, the COVID-19 pandemic may have direct repercussions (at least temporarily) in this regard. 

Lease adjustments in conjunction with Section 313 of the German Civil Code (BGB)

The operations of many retailers, restaurant owners, hoteliers, etc, were severely impacted due to the measures taken to combat COVID-19. Restaurant owners and hoteliers were the first to be affected after the first lockdown in March/April 2020, and then had to close their businesses again as early as November 2020 ("lockdown light"). From the middle of December, most retailers were then also forced to close their establishments and introduce new sales models (eg, "click & collect” etc). 

Many tenants used the government restrictions as an opportunity to reduce their rents and/or ask their landlords for rent reductions/deferrals. As expected, the courts then also had to deal with the upsurge in legal disputes concerning the tenants' obligation to pay rent. While rulings by the Federal Supreme Court do not yet exist, the local and regional courts have mostly denied claims for reduction/deferral of rent by tenants. 

A law to further shorten the residual debt discharge procedure was passed on 17 December 2020 by the German parliament (Bundestag) as a supplement to the COVID-19 Act of March 2020. By simplifying the application of Section 313 BGB during the COVID-19 pandemic, one of the intentions of this law is to strengthen the negotiating position of tenants, which can also be viewed as a political signal for more tenant-friendly legislation. This must also be taken into consideration against the backdrop of the second lockdown having led to a longer period of imposition, and in some cases, with even more stringent measures. 

Pursuant to Section 313 (1) BGB, amendment of the contract can be demanded if:

  • the circumstances which became the basis of a contract have significantly changed since the contract was entered into;
  • the parties would not have entered into the contract at all or only with different content had they foreseen that change; and
  • taking account of all the circumstances of the specific case, in particular, the contractual or statutory distribution of risk, one of the parties cannot reasonably be expected to uphold the contract without alteration.

As outlined, Section 313 BGB assumes an unforeseen significant change in circumstances which was not even considered at the time the contract was entered into. Therefore, Section 313 BGB generally does not apply in the case of rental/lease agreements which were concluded subsequent to the onset of the pandemic. 

The recently incorporated Section 7 of Article 240 of the Introductory Act to the German Civil Code (EGBGB) now provides for a revocable presumption that the contractual circumstances have significantly changed since the conclusion of the contract (first requirement of Section 313 BGB), if the rental object cannot be used or can only be used with considerable restrictions due to government measures to combat the pandemic. The applicability of Section 7 extends to all rental/lease relationships pertaining to industrial premises, commercial space, land and property, with the exception of residential premises.

There is regularly a significant restriction in state regulations if no part or only a specified part of the commercial space may be used for public traffic or if only a limited number of people may occupy a specified area. If, on the other hand, an operation which involves public traffic loses customers due to a decline in the willingness to consume, the presumption does not apply, because this is deemed to be part of the tenant's operating risk.

In simplified terms, a claim by a commercial tenant pursuant to Section 313 BGB therefore still requires that there are actual requirements/restrictions governing the specific operation of the tenant which result in it being unreasonable for the tenant to adhere to the original, unamended contract. Whether it is actually unreasonable for the tenant to adhere to the existing contract is to be decided on a case-by-case basis, and must be proven by the tenant. In this regard, factors such as a decline in sales compared to previous years, any entitlement of the tenant to state support and possible reserves, must specifically be taken into account. 

Depending on the assessment with regard to the afore-described reasonableness, rent deferral, rent reduction and termination rights may be considered as adjustment options. At present, it is probably best to assume that the parties will only have the right to terminate the lease in very exceptional cases. Deferrals would be conceivable, particularly if the tenant is basically entitled to sufficient state benefits, but payment of the same is delayed and there are therefore temporary liquidity bottlenecks. In most cases, however, it would be fair to assume that, at best, an adjustment in the form of rent reduction can be claimed.

The adjustments (deferral or rent reduction) will only be temporary in nature, namely, specifically for the duration of the lockdown, provided that the situation reverts to normal within a short time due to a vaccine becoming available. If, however, landlords have to enter into long-term rent reduction agreements due to the financial circumstances of tenants, this will probably have an impact on the purchase price of property. 

Tenants of properties in other asset classes who are not directly affected by the COVID-19 measures, but who may nevertheless feel the effects indirectly (eg, providers of office space), are in any case not entitled to a contractual adjustment, since the premises can continue to be used without restriction. A general economic crisis or a decline in sales due to the economic situation does not justify a contractual adjustment, as this is fundamentally a matter of tenant's risk. 

Acquisition process/provisions in the purchase agreement

It is clear from the above that the due diligence process should enquire specifically whether tenants have asserted claims in connection with the COVID-19 pandemic and, if so, to what extent rent reductions/deferrals have already been granted, or whether there is indeed a question of termination. The tenant’s payment history (irrespective of the amount of rent owed) should also be examined. In addition, legal due diligence should focus to an even greater extent on the rental securities provided and their effectiveness. This also incidentally applies to asset classes that may be only indirectly affected by the COVID-19 measures (eg, office premises). 

Finally, today more than ever, in addition to legal due diligence, tenants should also be reviewed from a business perspective. After all, despite government aid, an increasing number of tenants, at least in the restaurant/hotel or retail sectors, are likely to find themselves in a crisis that threatens their existence, whilst some of them could ultimately go bankrupt. 

In this context, there might be a risk that, if the landlord is aware of the tenant's insolvency and/or excessive indebtedness, the tenant may face an insolvency challenge with regard to the rental instalments already paid, if the tenant actually becomes insolvent at a later date. One consequence could be that rental payments which have been made up to four years prior to the insolvency application can be contested, and thus could include payments that fall within the period of possession and ownership of the purchaser. In principle, only the rental from the time when the obligation to file for insolvency actually arose and the landlord was aware of the same, or such knowledge on the part of the landlord is assumed, can be contested in each case. As a rule, however, so-called "cash transactions" (ie, payment of rent for the current month during the current month) are excluded from being contested. 

Such risks must be recognised and, if necessary, incorporated into pricing as part of the due diligence process.

Risks identified in the course of the due diligence process can also at least be minimised by appropriate provisions in the purchase agreement. For example, purchase agreements usually include a Material Adverse Change (MAC) clause. Such clauses enable a buyer to withdraw from the contract if a disadvantageous material adverse change (eg, destruction due to fire through no fault of the buyer) occurs with regard to the property in question, between the time the contract was entered into and the due date of the purchase price (usually a period of several months). In these times of the COVID-19 pandemic, this clause should be supplemented by the insolvency of the tenants (or at least the anchor tenants). This would ensure that the insolvency risk of the tenant is borne by the seller at least for a few months subsequent to the conclusion of the purchase agreement. As an alternative to withdrawal from the contract, the purchase price can be adjusted in the purchase agreement by means of a price variation formula to be agreed upon. This is especially relevant if, despite the insolvency of a tenant, the property as a whole remains attractive to the investor.

Properties in the project development phase

The current COVID-19 pandemic has led to so-called "force majeure clauses" or even "corona clauses" becoming commonplace in project development contracts. Prospective buyers must therefore pay special attention to the various forms of such clauses when negotiating contracts. It is very important, in this context, to understand the background and the requirement for contractual provisions of this type. 

If a final handover deadline has been agreed upon in the framework of project development and this deadline cannot be met due to construction stoppages or delivery failures caused by the pandemic, the question inevitably arises as to what rights the parties are entitled to and what risks have to be taken into account. 

The COVID-19 pandemic as a force majeure circumstance

The current COVID-19 pandemic can be deemed to constitute a force majeure circumstance even in connection with a project under development. The question as to whether the requirements of force majeure are met must be assessed on a case-by-case basis, taking into account the overall circumstances and the agreed allocation of risk. 

It can be assumed that a force majeure event will affect a project under development, especially if official orders are issued or quarantine measures are adopted at the construction site, causing shutdown of the site, entry restrictions or supply bottlenecks due to disruption of supply chains, as a result of which, the contractor responsible for fulfilling contractual obligations is prevented from doing so.

On the other hand, force majeure is not deemed to exist if the impairment is based on a (voluntary) precautionary/safety measure without a corresponding official order. In such cases, the characteristic of "inevitability" is lacking. A force majeure circumstance can also not be deemed responsible if the contractor's foreign workers no longer come to the construction site for fear of soon being unable to return to their home country. Looking at the big picture, a decisive factor is whether the specific effects of the COVID-19 pandemic were avoidable on the part of the contractor. The characteristic of "inevitability" is generally not fulfilled in cases where the contractor could, for example, have compensated for a supply bottleneck by obtaining supplies elsewhere, deploying different personnel on the construction site or deploying a different sub-contractor. The procurement of a replacement material or the obligation to compensate is, however, subject to the condition of reasonableness; the precise point at which this limit lies depends on the distribution of risk and the circumstances in the individual case. 

In accordance with the provisions of Section 313 BGB, force majeure will also probably not count as a factor if the contract was concluded only after the outbreak of the pandemic in complete awareness of the situation.

The requirements governing the burden of demonstration and proof that such an impairment exists are relatively stringent. In this context, the notice of impairment must specifically list the facts that resulted in a concrete impediment to the fulfilment of the contract. Information must also be provided as to precisely which work is impeded or is imminently facing such impediments. Generally formulated notices of impediment from a contractor do not meet these requirements, as was the case at the beginning of the pandemic.

Extension of the construction period on the grounds of force majeure

If the fact of force majeure is established in an individual case, and the parties have not reached a contractual agreement on how to deal with this, the question arises as to how the delay affects the contractually agreed handover deadline. 

In the context of project development, a distinction must be made here between the legal relationship between the seller as the developer and the companies carrying out the construction work, and the legal relationship between the seller and the buyer.

Relationship between seller and buyer

If the purchase agreement (with a construction obligation) provides for a handover deadline and this deadline is not met, the seller is in default. This also applies in cases where the delay is due to force majeure. The BGB does not contain a provision on "extension of construction period" comparable to Part B of the German Construction Tendering and Contract Regulation (VOB/B). The buyer can therefore either adhere to the contract and continue to demand contractual performance by the seller or withdraw from the contract. 

However, according to statutory law, in the absence of fault on the part of the seller, the buyer has neither a claim for contractual penalty nor for damages against the seller. Damages due to delayed handover to a tenant are therefore not to be compensated, just like financing damages/interest damages (in particular, commitment interest).

Therefore, from the buyer's point of view, care should be taken when drafting the contract to link non-compliance with the latest handover deadline to the obligation to pay a contractual penalty or something similar. 

Relationship between the seller as developer and the construction companies

In contrast, the situation is different as regards the relationship between the seller as the developer and the construction companies as contractors. 

If the principal and the contractor have agreed on the applicability of the VOB/B (which will usually be the case), the contractor is entitled to an extension of the construction period pursuant to Section 6 (2) no 1 c) VOB/B to the extent that the hindrance is caused by factors including “(...) force majeure or other circumstances which are beyond the contractor's control”.

As far as the seller is concerned, this means that there is no concurrence between the construction contracts on the one hand and the purchase agreement on the other hand. While the seller must therefore accept an extension of the construction period on the part of the contractor without compensation in the event of force majeure, the seller is exposed to the risk of withdrawal and possibly even a claim for payment of a contractual penalty on the part of the buyer. It is therefore essential for the seller to also agree to a corresponding provision in the purchase agreement, according to which, an extension of the construction period due to force majeure leads to an (automatic) postponement of the contractually agreed latest handover deadline. 

Contract negotiation and drafting 

Several options are available when negotiating and drafting a "force majeure clause" or "corona clause". From the buyer's point of view, it is particularly important that the requirements for the burden of proof for the existence of force majeure circumstances are not diluted by the contractual provision. Moreover, it should be made clear that only delays which could not be avoided or compensated despite the seller's best efforts, and which could not be made up for or compensated for by other measures available to the seller, will result in a postponement of the handover deadline by the period of the delay which could not be avoided by the seller. It is also possible to agree on a maximum period by which the handover deadline is postponed. In the event that the seller has already leased the property and the lease agreement provides for a handover deadline, it must be ensured that the tenant has agreed to the divergent handover deadline in the form of a written addendum to the lease agreement.

Summary

In conclusion, Germany continues to be a secure location for investors. The COVID-19 pandemic has not fundamentally changed this situation and has even brought certain asset classes (eg, healthcare and logistics properties) increasingly into the focus of investors. 

If the issues mentioned above are addressed within the scope of a sound legal due diligence process and tailored to the needs of the respective investor, it is still possible to achieve attractive investments across all asset classes. 

The disruption of the market caused by the COVID-19 pandemic may even give new investors a unique chance to get into the German real estate market.

GSK Stockmann

Mohrenstraße 42
10117
Berlin
Germany

+49 30 203907 / 7763

+49 30 203907/ 44

christine.stroem@gsk.de www.gsk.de
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Law and Practice

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Linklaters LLP is a full-service provider offering international advice on legal and tax issues in the real estate industry, which gives it a leading edge in meeting client requirements and demands. The cross-practice team not only includes real estate experts, but also specialists in corporate, tax, finance, investment, competition and regulatory law. With more than 60 real estate lawyers in the Frankfurt and Munich offices and 350 real estate lawyers globally, the Linklaters real estate team is chosen by leading global investors, developers, occupiers and financial institutions to advise on their largest and most complex or multi-jurisdictional real estate transactions and disputes. The practice, inter alia, advises private equity clients (eg, Blackstone, Cerberus), funds and institutional investors (eg, BNP Paribas, CBRE Global Investors, LaSalle IM, Union Investment) as well as a number of Asian clients (eg, Samsung, Capitaland). The firm acknowledges with thanks the contribution made to this chapter by Alexander Zitzl at Linklaters LLP.

Trends and Development

Authors



GSK Stockmann is a leading independent European corporate law firm with more than 200 professionals across offices in Germany and Luxembourg. Highly regarded for its real estate and financial services and with one of the largest real estate teams in Germany, GSK Stockmann is a market leader in the areas of investment and asset management as well as project development. GSK Stockmann also has deep-rooted expertise in key sectors, including funds, capital markets, public, mobility, energy and healthcare. The dedicated teams provide expertise and experience in M&A, private equity and venture capital, dispute resolution, tax, compliance, restructuring, IP and IT, data protection, antitrust and employment law, enabling them to find the right solution for clients' business needs.

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