Real Estate 2022

Last Updated May 05, 2022

Germany

Law and Practice

Authors



Linklaters 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 includes real estate experts and 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 firm's 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 fully recovered and grew further in 2021. Purchase prices continued to increase. A similar trend can be observed regarding the volume of transactions. Investment focus was on residential, industrial, and logistics and office sectors. Investors have been more optimistic about the future and confident in the strength of economic growth following the government and central bank support measures. The shortage of offers continues to prevail. In addition, supply chain disruptions, surging energy costs and labour shortages show their impact on developments. Sustainability has become more and more important and impacted real estate financing. According to surveys, residential, logistics and core office properties are 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 2021 were the sale of Germany’s third highest office skyscraper T1, the development project Fürst and the takeover of three real estate funds from Deutsche Bank by RFR Holding.

There have been continuing 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.  

Sustainability

After subsidies for energy efficient new houses and buildings expired at a certain level on 31 January 2022, it is planned to increase support for the energy efficient refurbishment of existing buildings and houses. Further, a subsidy for private heavy rainfall and flood prevention was announced. However, it remains to be seen if the necessary underlying legislation will indeed be adopted in 2022.

Various states have already imposed an obligation to install photovoltaic and solar panels on new buildings and in the case of major roof renovations. Some further states will follow in 2022 and corresponding legislation on a federal level is expected soon.

Property Tax Act

The new property tax act will be applicable from 1 January 2025 and 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, seven federal states intend to make use of such clause.

The new federal government's coalition agreement envisages to allow the federal states to grant tax concessions for the purchase of residential property. However, no further details have been announced yet.

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 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 necessary for the registration of transfer of title in the land register (Grundbuch). The acquisition process has not been changed or simplified due to the COVID-19 pandemic.

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 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. No significant additional representations and warranties have developed due to experiences in the COVID-19 pandemic.

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. In some cases, a joint liability of or comfort letter by a parent company can be agreed with the seller. Less often a W&I insurance is contracted as security for the given seller guarantees. 

The statutory period for expiration of claims of approximately three years is often 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 must 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 to secure the 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 rate 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 at 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. 

RETT-neutral share deals were significantly impeded by the recent RETT reform. Share deals trigger RETT if:

  • at least 90% of the partnership interest of a partnership holding German real estate is transferred within ten years to a new partner; or
  • at least 90% of the share of a corporation holding German real estate is transferred within ten years to a new shareholder.

In addition, RETT is triggered if at least 90% the shares in a corporation or partnership holding German real estate are directly or indirectly concentrated in one hand or the hands of affiliated entities.

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 that 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 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 no restrictions on repayments made to a foreign lender under a security document or 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 on 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. 

No new restrictions on a lender’s ability to enforce security have been implemented as a response to the COVID-19 pandemic.

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

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 (Flächennutzungspläne, Bebauungspläne). 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 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. If debts arisen in the moratorium period have not been repaid by this date, a termination by the landlord is permissible.

Furthermore, the Federal Court of Justice (Bundesgerichtshof) clarified that a COVID-19 pandemic-induced closure of a retail shop does not constitute a defect in the rental object as such. Rather 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) allowing for adaptation of the lease agreement to the new circumstances in each individual case. This can lead to a reduced rent being payable for the relevant period, however, aspects of the individual case such as actual economic effects of the closure as well as possible state aid must be taken into consideration. 

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.

New leases contain specific provisions for a pandemic situation or another force majeure event in relation to delays in the fit-out works and therefore in the handover of the leased premises. In some cases, parties have negotiated material adverse change clauses related to the pandemic.

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 specific amount after a certain period. A turnover-linked rent will be adjusted to the change of turnover of the tenant for a certain period; 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 must 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 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 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. 

Tenants are often obliged to conclude a business interruption insurance. However, according to a recent decision by the Federal Court of Justice (Bundesgerichtshof), such insurance does not cover closures of businesses on the basis of the Infection Protection Act (Infektionsschutzgesetz) due to COVID-19 as long as COVID-19 is not explicitly mentioned in the insurance policy as relevant illness.

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 sublease, 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 existing tenant and the new tenant is necessary. In commercial leases, a transfer without the landlord’s involvement is sometimes permitted for 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 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. Since the German legislator tightened the rules with effect as of 1 July 2021, see 2.10 Taxes Applicable to a Transaction, RETT neutral share deals are significantly more difficult to realise.

The municipality charges property tax. It is assessed on a value (Einheitswert) currently usually below the market value, with the average tax rate varying between 1.3% and 1.5%, depending on the municipality. A new property tax act will enter into force on 1 January 2025 and 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, seven federal states (including Baden-Wuerttemberg, Bavaria, Hesse, Hamburg, Saxony, Lower Saxony and Saarland) intend to make use of such clause.

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 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, 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 and trade tax while the latter is 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 subject to German (corporate) income tax if:

  • the company is situated in Germany; or
  • more than 50% of the value of the shares in such company is based directly or indirectly on German real estate.

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 maintains 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 built in gains of the sold real estate do not crystalise upon the sale of such real estate; the tax on such built-in gains may economically be suspended by transferring the built-in gains to newly acquired real estate. 

Linklaters

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, the firm is a market leader in investment and asset management as well as project development. GSK Stockmann 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.

The Third Year of the Coronavirus Pandemic – BGH decides on Tenants’ Rights!

We are now in the third year of the COVID-19 pandemic. Such a serious event has had and continues to have numerous effects on the German real estate market and to raise new legal problems for lawyers as well as the courts.

Having presented the pandemic’s effects on the German real estate transaction market in last year’s article, the focus is now on the long-awaited decision recently issued by the Federal Court of Justice (BGH) on how state-ordered operating restrictions may affect lease agreements.

However, before presenting and evaluating the landmark BGH decision of 12 January 2022 (XII ZR 8/21)in detail on the obligation to pay rent in the event of pandemic-related business closures (B), we first review the past year in real estate (A). Finally, we look ahead and venture a forecast for the year 2022 – especially in view of the BGH decision.

Overview of the Market

During the second year of the pandemic, market players seem to have become accustomed to the existing restrictions and uncertainties in many areas. Of course, this was largely because there were no more hard lockdowns.

As a result, there was an increased willingness to invest in the third and fourth quarters, especially in the more crisis-resistant asset classes (residential, office and logistics). After many large leases were initially postponed in view of the still unclear effects of the new “working from home” trend, there now seems to be a general belief that offices will not disappear altogether but may just need to be redesigned. The asset classes residential – with the healthcare segment as a key driver – and logistics have been the winners in the real estate sector since the beginning of the pandemic and continued this success streak in 2021.

However, the hotel and (apart from supermarkets and drug stores) retail property markets, the latter of which was already struggling even before the pandemic, continued to suffer severe setbacks in 2021. In fact, pandemic-related restrictions probably had a more significant and longer-lasting effect on these markets in 2021 than in 2020. In particular, the comprehensive state aid programmes, but also the strong pre-COVID years, have helped to prevent a wave of insolvencies in the hotel sector so far. However, it remains to be seen how the decline in business travel, which is likely to be permanent, will affect the hotel market. 

Federal Court of Justice Ruling of 12 January 2022 on the Obligation to Pay Rent during a COVID Lockdown

Background

The starting point for the court decision were the state-ordered closures in the spring of 2020. These measures and how they should be assessed legally instantly became the subject of heated discussions among legal experts. Did a forced closure constitute a defect of the rented property, a case of impossibility of the granting of the agreed use or an interference with the basis of the transaction (lease) according to Sec. 313 of the German Civil Code (BGB)?

In 2021, two Higher Regional Courts simultaneously ruled on this issue, specifically on the question of whether a branch of the clothing retailer KiK was required to pay rent for the month of April 2020. 

The Karlsruhe Higher Regional Court (judgment of 24 February 2021 – 7 U 109/20) rejected a claim to adjust the lease contract based on interference with the basis of the transaction. The court ruled that the assumption of unreasonableness of the rent payment in the context of Sec. 313 BGB requires an assessment of the circumstances of the individual case, considering the decline in sales, possible compensation through online sales, public benefits or state aid, saved expenses, etc. However, the tenant had not sufficiently asserted such special circumstances in that case, and the court ruled there was no claim for adjusting the lease agreement.

The Dresden Higher Regional Court (judgment of 24 February 2021 – 5 U 1782/20), on the other hand, affirmed a claim for adjusting the contract pursuant to Sec. 313 BGB, and agreed to a blanket reduction to 50% of the basic rent. According to the court, the examination of whether adhering to the contract is unreasonable or not should not be based on the economic burden on the tenant, but rather on the disruption of the equivalence relationship, ie, the relationship between performance and consideration. Unreasonableness needs to be redetermined for each month, the court ruled. It was the court’s view that a closure of more than one month was so substantial that it was unreasonable for the tenant and thus resulted in a claim for adjustment of the contract. Since neither of the parties had caused or provided for the interference with the basis of the transaction, the court deemed a reduction of the rent by 50% for the duration of the ordered closure as reasonable.

It was this ruling of the Dresden Higher Regional Court that was appealed before the Federal Court of Justice and became the immediate subject of the decision.

The ruling

The ruling essentially contains four key points.

  • The closures do not constitute a defect of the rented property.
  • It is not a case of impossibility (of the granting of the agreed use).
  • There may be a claim for adjusting the contract according to Sec. 313 BGB, but whether this is the case or not and to what extent depends on the specific circumstances of the individual case.
  • There is therefore no blanket claim for adjustment of the contract to 50% of the basic rent.

In accordance with the majority of first and second instance case law, a closure order does not constitute a rental defect, as it was not issued based on the concrete physical condition, the state or the concrete environmental conditions/location of the rental object. Instead, such an order is linked to the tenant’s business operations, the type of use and the resulting public traffic, which was restricted to prevent the spread of infection. There is also no possibility of granting the use of the rental object. Both assessments apply if operation as a retail business is expressly agreed as the purpose of the lease.

With regard to the interference with the basis of the transaction, the BGH generally assumes that there can be a claim for adjustment of the contract pursuant to Sec. 313 BGB. Unless this risk is allocated in the lease agreement, government closure orders due to a systemic crisis such as a global pandemic constitute a serious change in the circumstances that existed when the contract was signed and thus a case of interference with the basis of the transaction. According to the Federal Court of Justice, such circumstances go beyond the usual risk of use, which generally lies with the tenant.

However, not all such drastic changes necessarily lead to a claim for adjustment of the contract. The closure of a business thus does not automatically lead to a claim. Instead, a claim exists only if – taking into account all the circumstances of the individual case – adhering to the contract without changes can be considered unreasonable. It is thus possible that a tenant may be obliged to pay the full rent after a consideration of the circumstances.

The first point to be considered are the disadvantages suffered by the tenant. The starting point here is the decline in sales at the specific rental property during the closure. However, it is not only the disadvantages that need to be considered. In addition, any state aid that may have been received as well as any potential means to reduce losses as well as the landlord’s interests must be taken into account. It is particularly important not to overcompensate the tenant.

It is the tenant’s responsibility to demonstrate and prove that it is unreasonable for them to be expected to pay the rent. They bear the burden of presenting evidence of the disadvantages they have suffered specifically due to the closure orders and what reasonable measures they have taken to compensate for losses (eg, including applying for state support payments).

The Dresden Higher Regional Court did not originally take such a nuanced view, leading the Federal Court of Justice to overturn that judgment and refer the proceedings back to Dresden for a new hearing and decision.

Evaluation

In purely practical terms, the ruling is a double-edged sword. On the one hand, it is obvious that a blanket rule such as the one adopted by the Dresden Higher Regional Court can never ensure justice across all individual cases. On the other hand, focusing on the individual case at hand always leads to uncertainties. Only a comprehensive assessment of the individual circumstances of the case can determine whether and to what extent a claim for contract adjustment exists, and that proves to be a rather difficult undertaking.

In principle, however, some general guidelines can be identified that may allow a preliminary assessment. These include:

  • the decline in sales, taking into account alternative sales opportunities (eg, shift to online sales and/or sales increases in months not affected by the lockdown, ie, catch-up effects);
  • expenses saved by the tenant (eg, reduction in costs due to short-time work benefit (Kurzarbeit), etc); and
  • state aid (eg, bridging assistance, but not pure loans) or other support (eg, insurance benefits).

Landlords have an advantage in this respect because the tenant must present evidence on these points. It falls to the tenants to demonstrate that it was unreasonable to adhere to the contract without changes. The relevance of this point is illustrated by the ruling from the Karlsruhe Higher Regional Court, which allowed a claim for adjustment of the contract to fail because the tenant failed to present sufficient evidence.

It is also interesting that the Federal Court of Justice noted in a subclause that there were indications that the tenant was in a generally good economic condition and this alone fuels doubts as to whether the decline in sales was unreasonable enough for the tenant to justify reducing the rent. This comment could perhaps be interpreted to mean that the tenant’s overall economic condition, particularly whether they were able to accumulate reserves, is a further criterion to be considered.

Even if in a specific case it is concluded that it would indeed be unreasonable to adhere to the unchanged contract, the amount of the adjustment remains to be determined. A blanket rent reduction by 50% is not legal because the amount of the adjustment claim also depends on the circumstances of the individual case. A reduction of the rent by half can only be assumed if there is no sales revenue whatsoever and a complete lack of any other form of compensation. Such cases are likely to be extremely rare. However, if there is not a complete absence of sales revenue, if there is other income and/or catch-up effects, if the tenant had the option to access state aid or if it was possible to reduce costs through short-time work benefit or other reduced expenses, or if the tenant can be expected to accumulate and draw on a certain level of reserves, taking into account the duration of the tenancy and the profits of the previous few years, this reduces the tenant’s claim for adjustment up to a complete refusal of a rent reduction. Consequently, a 50% rent reduction for lockdown periods represents an absolute and extremely rare maximum. According to previous case law, this adjustment claim can also be satisfied with a mere deferral, eg, if the tenant’s fixed costs (and thus also the rent) are covered by state aid, but this aid takes a long time to be paid out.

Finally, we would like to add three comments regarding the scope of application of the judgment discussed above.

  • First, the ruling only referred to closure orders. Other government-issued restrictions, such as a reduction of the number of customers allowed in a shop, were not the subject of the ruling. A latter Federal Court of Justice Ruling of 16 February 2022 (XII ZR 17/21), however, meanwhile confirmed that cases of government-issued restrictions are treated accordingly.
  • Secondly, the assessment only applies if no contractual risk allocation for such a case is provided in the lease agreement. In particular, agreeing on a sales-based rent could have an impact.
  • And finally, the principles of the ruling cannot be applied, or at least not without some adjustments, to lease agreements that were concluded after the beginning of the pandemic.

Outlook/Summary

From the landlord’s point of view, the Federal Court of Justice’s ruling is certainly to be welcomed. One positive aspect is that tenants can no longer invoke a blanket 50% reduction of the rent owed. Instead, it is up to them to comprehensively demonstrate the disadvantages they have suffered. This will not be an easy task for tenants, facing the risk of a contract violation if they reduce the rent more than permitted. One drawback of the decision is the above-mentioned dependence on the circumstances of the individual case and associated legal uncertainty regarding the specific amount of the adjustment claim. This, however, negatively affects tenants and landlords equally.

As a result, we have already seen an increased willingness to settle out of court. The criteria listed above can serve as a guide for the conditions of such settlements. In addition, the parties should be aware that a 50% adjustment claim will only be accepted in extreme cases and that out-of-court settlements will likely amount to less than this. Furthermore, it must be taken into account that the judgment was only issued regarding ordered closures. If a state-ordered restriction is the cause for a conflict with the tenant, this must also be considered as a point in the favour of the landlord during negotiations.

Additionally, so-called force majeure clauses, which provide for a contractual distribution of risk for precisely such cases, are probably going to be included in more and more commercial leases in the future – at least in the catering, retail and hotel sectors.

All in all, we believe that the Federal Supreme Court’s ruling greatly helps to almost entirely eliminate the previous legal uncertainty and make rental claims that are (still) unpaid due to the pandemic assessable for both property owners and investors.

In general, the pandemic seems to have lost much of its original horror due to further research breakthroughs in this field, making at least severe and prolonged lockdowns less likely in the future. Of course, this also has a positive effect on current or upcoming development projects, as pandemic-related delivery problems and/or labour shortages are no longer an issue.

However, due to the war in Ukraine, portfolio holders, project developers and investors once again face similar problems as they did two years ago during the onset of the pandemic. In particular, raw material supply difficulties and rising raw material prices will pose major problems for the construction industry. Rising interest rates are a burden on real estate investors. However, due to the general volatility of the global market for other forms of investment, the German real estate market is likely to remain attractive for both domestic and international investors.

We will keep an eye on these developments. 

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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Linklaters 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 includes real estate experts and 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 firm's 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

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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, the firm is a market leader in investment and asset management as well as project development. GSK Stockmann 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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