Real Estate 2023

Last Updated May 05, 2023


Law and Practice


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 50 real estate lawyers in the Frankfurt, Munich and Berlin 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 REIM, CBRE Investment Management, GARBE, Principal Real Estate, Savills), as well as a number of Asian clients (eg, Hanwha, Frasers, Huazhu Group, Samsung, CapitaLand). The firm acknowledges with thanks the contribution made to this chapter by Isabelle-Carmen Weis 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).  

Not only due to the energy crisis, sustainability has become more and more important and impacted real estate financing. According to surveys, office and logistic properties are in 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 2022 were the sale of Marienturm as a single asset, the Seed Portfolio acquisition by GARBE and the takeover of Alstria Office holding approximately 110 office properties in Germany’s major cities.

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.  

Energy Price Cap (Energiepreisbremse)

In order to support end consumers with significantly increased gas and electricity prices, an energy price cap was introduced on 1 March 2023 with retroactive effect from 1 January 2023. As a consequence, prices for 80% (private consumers and small businesses) or 70% (medium and big businesses) of the previous year’s consumption of gas, distance heating and electricity are capped at a certain amount. The full price has to be paid by the end consumer only, if more than 80% or 70% of the consumption of 2022 are used in the year 2023. The limited percentage applies in order to create an incentive to save energy. The subsidy will expire in April 2024.


Since 2021, an additional CO2 charge has been applied to heating with oil or natural gas, which tenants had to bear on their own. The CO2 Cost Sharing Act (“CO2-Kostenaufteilungsgesetz“), which came into force in January 2023, introduced a stepped model of cost sharing for residential buildings: the worse the energy condition of the building, the higher the landlord’s share of the costs.

In the case of non-residential buildings, a transitional split of the CO2 price applies. Due to its peculiarities, such a graduated model is not yet suitable, and the data situation is not yet sufficient for a harmonised regulation. The data required must be collected by the end of 2024. A stepped model for non-residential buildings is to be introduced at the end of 2025. The exact terms and potential cost increases for landlords or tenants remain to be seen.

Solar Obligation

On a federal state level, more and more states will apply a solar panel and/or photovoltaic systems obligations regarding new buildings within the year 2023. Details vary from state to state. In most cases newly built commercial buildings and comprehensive roof refurbishments are concerned with residential buildings to follow in the coming years. 

Rent Freeze

While the state of Berlin’s rent cap was overturned by the Federal Constitutional Court in the year 2021, the discussion on a rent freeze has picked up speed again, not least because of significant rent and ancillary charges increases due to inflation. It remains to be seen if any measures will actually be taken in the year 2023.

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.

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.


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. 

Limitation of Liability

The statutory period for expiration of claims of approximately three years is often contractually limited to 12 or 18 months. Depending on the seller’s negotiation skills, a cap, de minimis amount and basket can be agreed to limit liability. The liability is often limited to approximately 5-10% of the purchase price (cap); claims can only be raised if the individual claim reaches at least 0.1-1% of the purchase price (de minimis) and exceeds 0.5-1.5% of the purchase price (however, approximately EUR500,000 maximum) either by itself or together with other claims (basket). It remains to be seen how the changed market environment influences these values in favour of purchasers.

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 in which the asset is located. VAT is in principle 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/shares of a partnership/corporation holding German real estate is transferred within ten years to new partners/shareholders.

In addition, RETT is triggered if at least 90% the shares in a corporation or partnership holding German real estate are directly or indirectly unified 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. A forced auction procedure takes a minimum of several months; in some cases it can take more than one year.

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 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, the reference had to be switched from LIBOR to rates based on risk-free overnight rates such as SONIA (for GBP) and SOFR (for USD). In most cases an active change and new negotiations of the concerned agreements were necessary in order to ensure a targeted and manageable change appropriate for the respective agreement.

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. 

There is no material ongoing regulation of rents or lease terms that resulted from the COVID-19 pandemic. The moratorium on termination of rental and leasehold agreements due to non-payment of rent established by the government expired on 30 June 2022.

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.

Newer 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, the landlord is hence not entitled to deduct input VAT. However, the landlord may waive the VAT exemption, resulting in its right to deduct input VAT. Such waiver is only effective 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 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, 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 may, depending on the individual case, claim a disturbance of the contractual basis  (Wegfall der Geschäftsgrundlage) allowing for adaptation of the lease agreement to the specific new circumstances. 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 always be taken into consideration so that there can be no generalised approach. 

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 predetermined 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 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 and the moratorium affecting concerning certain termination rights expired in the year 2022. 

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 in principle not applicable to the sale of German real estate. If the property is sold business to business, the seller may 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 municipalities charge property tax which 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.

Generally, no income tax withholding applies to foreign investors for rental income they generate from German real estate. 

Corporations are subject to corporate income tax levied at a rate of 15% (plus a solidarity surcharge of 5.5% thereon, resulting in a tax rate of 15.825%). 

Partnerships are tax transparent; rental income will hence be subject to income tax at the level of the partners.

Corporations are generally subject to trade tax due to their legal structure as corporation. Unlike corporations, partnerships may be structured in a way that they are not subject to German trade tax. Foreign corporations and partnerships are however only subject to trade tax (i) if they have a German permanent establishment, and (ii) to the extent their income may be allocated to such German permanent establishment. Leased out real estate as such does not qualify as such a permanent establishment. Most commonly, the place of effective management of a foreign corporation constitutes a German permanent establishment if such management is actually rendered in Germany.

If the lease of real estate is subject to German trade tax, it can be exempt from trade tax due to proper structuring of the landlord’s activities, ie, if the landlord limits its activities in Germany to the mere letting of real estate and does not render any harmful activities (eg, the letting of operating facilities). The delivery of electricity from the operation of photovoltaic facilities or via charging stations for EVs is generally regarded as harmful activity. However, if these activities do not exceed a certain proportion of the lease income, ie, remain below a certain threshold in relation to the rental income, they are not harmful.

Trade tax is (i) levied by municipalities at rates varying between 7% and 17.15%, and (ii) payable by the corporation or partnership which is not deemed to be tax transparent for the purpose of trade tax. Similar principles apply to profits from the sale of real estate. 

The sale of interest in a partnership is treated as a (partial) sale of the assets held by the partnership.

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 resident 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, the German participation exemption regime providing for an effective tax exemption of 100% or 95% might apply. 

Buildings are subject to depreciation at an annual rate of usually 2% or 3% 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 an 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 conditions. This reserve will reduce the acquisition costs of real estate that are acquired in later years. Thus, the built-in gains of the sold real estate are not realised upon the sale of such real estate; hence, the tax on such built-in gains may economically be suspended by transferring the built-in gains to newly acquired real estate. 

Tax Benefits have recently been introduced regarding photovoltaic facilities. VAT-zero-rating applies to the supply of small photovoltaic facilities for residential buildings. Income from the operation of small photovoltaic facilities will be exempt from income tax.


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Current market situation

The current real estate market is characterized by an uncertain interest rate environment as the European Central Bank (ECB) has raised the main reference interest rate since July 2022 to its current 3.5%. The ECB stated that inflation is projected to remain “too high for too long” and is determined to ensure the timely return of inflation to the 2% medium-term target. These high interest rate levels are accompanied by high inflation costs, in particular construction costs, which may create a financial need to (partially) sell existing investments. 

Due to the unfavourable market conditions, first market participants such as Deutsche Bank speak of a potential shift of investments in bonds instead of real estate which might increase the risk of an abrupt revaluation of residential and commercial properties. Overall, demand for office space stalled slightly in the fourth quarter of 2022. Occupiers who rented their space recently with expansion in mind are increasingly offering space to sublet, resulting in higher vacancy rates. However, rising rents are still expected for prime space.

This rather complex situation will create good opportunities for PE funds and other investors to invest as prices are at a level that could not have been foreseen a year ago. However, a robust investment requires considering insolvency law-related challenges when structuring an investment.   

Factors to consider in distressed real estate transactions

Real estate transactions in a distressed situation typically follow a tight timeline due to the financially tense situation of the target/selling entity. An out-of-court solution may only be found if the management of the selling entity (or the sold entity) is not required to file for insolvency due to illiquidity or over-indebtedness resulting from lack of a (mid-term) going concern. 

With regard to the transaction structure, each real estate investor should carefully consider and assess whether an asset deal or a share deal is the more favourable option. In a distressed world in particular, investors must weigh potential claw-back risks, which come into play if the relevant seller needs to file for insolvency following the transaction. Claw-back risks – depending on the relevant jurisdiction in which the seller has its centre of main interest (COMI) – exist especially in relation to legal acts (eg, transfer of ownership, all kinds of payments) in the period after a material insolvency occurs but prior to formal insolvency proceedings. In this context, cross-border transactions imply an increase of complexity since, in particular, local insolvency law regulations differ significantly in the respective countries, even within the EU. In order to assess the overall magnitude of potential risks, the financial situation of the potential selling entity also needs to be considered. 

Reasons for Deal Structuring

The following section provides an overview of claw-back rights under German Law in an insolvency situation, focusing on the various claw-back rights, the legal consequences of a claw-back, and the so-called right of choice of the insolvency administrator.

General introduction to claw-back rights under German law

Insolvency Law in Germany is based on the principle of equal treatment of creditors. A very relevant tool to fulfil this principle and establish a level playing field between the various creditors is the claw-back right of the insolvency administrator. The German Insolvency Code (InsO) provides an exhaustive number of claw-back rights (cf. Sect. 129 et seq. German Insolvency Code (InsO)). In practice, insolvency administrators examine claw-back rights thoroughly given that their remuneration depends on the size of insolvency estate.

Legal consequences of claw-back

The following section focuses on the legal consequences of a successful claw-back by the insolvency administrator. In general, assets received as a result of the void transaction must be returned to the insolvency estate, ie, retransfer of ownership. Therefore the transfer of ownership claim revives, but:

  • is solely an unsecured insolvency claim;
  • can only be filed with the insolvency table;
  • is only satisfied on a pro rata basis, like all other unsecured claims.

If the transfer of ownership claim is to be realised, the purchase price might need to be paid again if the settlement of the initial purchase price payment was clawed back by the insolvency administrator as well.

With respect to the burden of proof, the insolvency administrator shall specify and prove:

  • the existence and scope of claw-back rights, ie, the voidable transfer of asset(s) to the creditor;
  • any benefits and surrogates; and
  • the specific value of the assets.

Overview: grounds for claw-back

The following section serves as an overview of claw-back under German law in an insolvency situation, discusses the general requirement of a creditor disadvantage and focuses on the different grounds for claw-back.

General Requirement of Creditor Disadvantage (“Gläubigerbenachteiligung”)

An objective creditor disadvantage is required for all grounds of claw-back.

Practical example: Sale of assets under market value or even the mere impairment of access to the asset.

Whether a direct, ie, immediate, creditor disadvantage is required or an indirect one is sufficient depends on the applicable legal provision for claw-backs. If third-party creditors are paid in full, there is no room for a creditor disadvantage (so-called solvent liquidation, see below).

In addition, creditor disadvantage is unlikely if the asset in question is encumbered to the full value. To answer the latter, the actual amount of the secured claims (not the nominal amount of security, in particular land charges) is decisive.

Practical hint: The German Federal Court of Justice (BGH) ruled that creditor disadvantage is not possible with regard to a property encumbered with a land charge to the full extent of its value.

Congruent Coverage (Sect. 130 InsO)

The most relevant ground for claw-back is the so-called congruent coverage (Sect. 130 InsO). A claw-back risk exists within up to three months before filing for insolvency if at the time of the relevant legal transaction (ie, the transfer in ownership) the debtor was unable to pay its debt when it was due and the creditor was aware of it at the relevant time, ie, knowledge of non-payment of claims and financial difficulties as a whole.

By law, knowledge of the illiquidity shall be deemed equivalent to knowledge of circumstances that compellingly indicate illiquidity (cf. Sect. 130 para. 2 InsO). This presumption cannot be refuted.

Practical example: Relevant circumstances may be: knowledge of instalment and deferral requests, mere partial payments or non-compliance with payment commitments.

The calculation of the three-month period begins with the filing for insolvency.

Practical example: If the filing occurred on 4 July 2023, any transaction up to and including 4 April 2023 falls within this period if the debtor was unable to pay its debt when it was due at the relevant time.

With respect to the burden of proof, the insolvency administrator shall specify and prove the objective and subjective requirements for a claw-back under Sect. 130 InsO.

Incongruent Coverage (Sect. 131 InsO)

Another possible ground for claw-back is the so-called incongruent coverage (Sect. 131 InsO). A claw-back risk exists within up to three months before filing for insolvency for any act to which the creditor was (i) not, (ii) not in the manner, or (iii) not at the time entitled to claim.

Practical examples: Transfer of ownership before obligation to do so, or payment in kind instead of payment in cash.

The further requirements of this provision depend on the time when the transaction occurs:

  • For the month before filing for insolvency, there are no further requirements.
  • For the second and third month before filing (i) inability to pay its debt when it was due of the debtor, or (ii) knowledge of creditor disadvantage of the creditor at the relevant time required.

With respect to the burden of proof, the insolvency administrator shall specify and prove the objective and subjective requirements for a claw-back under Sect. 131 InsO.

Further Grounds for Claw-Back (Sect. 133, 134 of the German Insolvency Code)

Other less relevant grounds for claw-back are Sect. 133 and 134 of the German Insolvency Code.

With respect to Sect. 133 InsO, a claw-back risk exists for any transaction intended to intentionally harm creditors within up to ten years before filing for insolvency if the creditor knew about the debtor’s intent. In the case of congruency (ie, the transaction is fulfilled as contractually agreed), knowledge is irrefutably presumed if the creditor knew that the debtor was not able to pay its debt when it was due and that the transaction was detrimental to the (other) creditors.

However, the German Federal Court of Justice recently tightened the requirements for the debtor’s intent to disadvantage creditors. In practice, proving the debtor’s malicious intent is now significantly more difficult for the insolvency administrator.

Practical example: The creditor is aware that the transaction leads directly to insolvency and corresponding debtor’s intention, given that the seller does not have sufficient funds available to continue its business or to be liquidated.

With respect to Sect. 134 InsO, a claw-back risk exists for any gratuitous performance by the debtor within up to four years before filing for insolvency. No gratuitousness exists if (i) the debtor’s performance is counterbalanced by a compensatory consideration, and (ii) performance and consideration are interdependent. The objective comparison of the values exchanged generally determines whether adequate consideration exists.

Practical example: Sale (far) below market value.

Right of Choice of the Insolvency Administrator

This section explains the most important grounds for claw-back and their legal consequences, and the so-called right of choice of the insolvency administrator.

In the case of a mutual contract, the insolvency administrator may choose if it wants to fulfil the contract, if the debtor and the other party have not fulfilled the contract at all or in full at the time of commencement of the insolvency proceedings (cf. Sect. 103 InsO).

Practical example: The investor and the debtor entered into an SPA, but the SPA has not been fulfilled prior to the commencement of the insolvency proceedings.

If the insolvency administrator refuses performance, damages for non-performance are only unsecured claims in the insolvency.

An exception applies in the case of real estate: If a priority notice of conveyance (“Auflassungsvormerkung”) is registered with the relevant land register, a creditor may demand satisfaction of its claim from the insolvency estate. In such a case, due to the secured position of the creditor, Sect. 103 InsO does not apply (cf. Sect. 106 InsO). However, the claw-back of the secured claim or of the priority notice of conveyance is still possible. Mitigation measures are therefore essential.

Potential Third-Party Claims

Third-party claims in a real estate insolvency scenario would likely be based on Sect. 826 of the German Civil Code (BGB), ie, the allegation that creditors have been impaired in a manner against good morals (“sittenwidrig”). The investor or the debtor may be liable pursuant to Sec. 826 BGB if the sale of the debtor or assets of the debtor was made in a manner against good morals, thereby impairing other creditors.

Possible practical example: Craftsmen have continued to work for the debtor in the belief that the debtor will continue as a going concern because of the sale; they were not informed that a sell-off is not sufficient to avoid insolvency and is only temporarily prolonging the debtor’s struggle for survival.

However, Sec. 826 BGB establishes high requirements for liability as a damage to third-party creditors must at least be tolerated by the investor or the debtor, and the other third-party creditors must prove this circumstance.

Risk Mitigation

As shown above, claw-backs by the insolvency administrator and third-party claims especially pose significant risks to a real estate transaction in a distressed scenario. This section discusses general considerations regarding risk mitigation, explains key mitigation methods, focusing on the practically relevant concept of fair market value and the liquidation agreement.

General Considerations

Typically, risk mitigation can be achieved more easily in real estate transactions compared to corporate transactions, because third-party creditors and their claims as well as cash demand in general are easier to identify. Further, the number of creditors – at least on PropCo level – is rather limited. 

As a starting point, the risk of potential third-party claims must be analysed. Depending on the potential volume of these claims, the investor should assess, based on the information available, whether these claims may be satisfied in full to avoid claw-back risks. If all third-party creditors’ claims are satisfied, the seller may be liquidated as a going concern. As a consequence, the relevant transaction would not be to the detriment of such creditors.

The solvency of the affected company must be carefully assessed in both a share and asset deal. In the case of a share deal, the solvency of the shareholding entity is primarily relevant since its potential insolvency administrator could claw back the share deal. On the contrary, in the case of an asset deal, the solvency of the relevant special purpose vehicle (SPV) is primarily relevant since its potential insolvency administrator could claw back the asset purchases.

In addition, the investor should consider whether an agreement with other existing creditors on the distribution of proceeds should be concluded, in particular taking into account existing collateral and non-secured creditors.

Key Mitigation Methods

In general, a thoughtful timing of the transaction with respect to the tight financial situation of the target is essential to avoid any obligation to file for insolvency. The mitigation of claw-back risks also includes a thorough deal structuring and the respective contract design.

In particular, the following tools can help depending on the individual case:

  • Comprehensive due diligence prior to the acquisition that is not only limited to the assets but also with regard to the financial situation of the selling entity or the SPV (asset v share deal, see above).
  • Confirmation of a restructuring expert that the solvent liquidation or going concern of the selling entity is predominantly likely; in a best-case scenario, the investor enters into a liquidation agreement with the selling entity (for more details below).
  • Payment of purchase price only at the time of transfer of ownership (“Zug-um-Zug”) to avoid the right of choice of a potential insolvency administrator.
  • Registration of a priority notice of conveyance (“Auflassungsvormerkung”) in the relevant land register as early as possible to avoid the right of choice of a potential insolvency administrator.
  • No payment of the purchase price by the purchaser during the preliminary insolvency proceedings to avoid claw-back pursuant to Sect. 130 InsO; however, a specific agreement with the insolvency administrator may be found which would protect the purchaser.
  • Consideration of a legal expert opinion to limit claw-back risks and liability issues based on wilful misconduct by the investor.

Focus: Fair Market Value (“Bargeschäft”)

A practical exemption to the claw-back by the insolvency administrator is the concept of fair market value: Cash transactions (“Bargeschäft”, Sect. 142 InsO) are exempted in the case of an at-arm's-length direct exchange of goods or services against payment (unless there is an intention to harm creditors). If the assets are sold significantly below book value, a market valuation should be considered to reduce claw-back risks. In a best-case scenario, an auction process should be held because it is the most secure option to prove a fair market value. That said, off-market opportunities and the generally tight schedule often do not allow for such measures.

A less time-consuming option may be to seek a shorter third-party opinion regarding the fair market value or that the seller has no reason to file for insolvency (if applicable, when the purchase price has been received). 

Nevertheless, the agreement on a purchase price below market value is always possible if the target has a going concern or may be liquidated (by paying off all third-party creditors and covering the costs of the liquidation) after receipt of the purchase price. In this case, a fair market value is not decisive if filing for insolvency is avoided or is likely to be avoided.

Focus: Liquidation Agreement

In addition to the aspect of a fair market value, a liquidation agreement may serve as a practically important tool. The liquidation agreement is executed between the investor, the selling entity and potential third-party creditors, and secures the solvent liquidation process of the selling entity.

The underlying idea behind the agreement is the following: No claw-back and liability risks exist if an insolvency filing is avoided due to the solvent liquidation. Therefore a liquidation agreement could create a more secure foundation for the transaction with regard to insolvency law-related risks.

The investor should also assess whether remaining third-party claims (which are not part of the agreement, if any) are so marginal that the investor is generally willing to pay them off if necessary to avoid a filing for insolvency.

However, even if a liquidation agreement is concluded, the financial situation of the selling entity must be carefully assessed because the purchase price might not be sufficient to avoid an insolvency. Therefore, even if the investor enters into a liquidation agreement with the selling entity, the second line of defence against potential claw-back risks should be that the solvent liquidation was predominantly likely according to a third-party expert.

In general the liquidation process for a German corporation includes the following steps:

  • The majority of third-party creditors are paid off as of closing. 
  • Some payments such as public fees, eg, taxes, may follow. 

After settlement of all third-party claims, the shareholders of the relevant corporation pass a resolution on the dissolution of the entity. 

Following the full pay-off of creditors and the relevant resolution by shareholders, a one-year waiting period applies in the case of a German stock company or limited liability company. 

After the lapse of such waiting period, the entity can be deleted from the relevant public register and the liquidation is fully completed.


The current commercial environment provides great investment opportunities in the German real estate market. Investors should carefully consider any potential insolvency law-related risks if they witness a clear indication that the selling entity is in distress. The risks may be mitigated to a large extent if an investor performs thorough due diligence, which includes scrutinising the selling entity’s financial situation, and on such basis selects the right deal structure. 

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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 50 real estate lawyers in the Frankfurt, Munich and Berlin 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 REIM, CBRE Investment Management, GARBE, Principal Real Estate, Savills), as well as a number of Asian clients (eg, Hanwha, Frasers, Huazhu Group, Samsung, CapitaLand). The firm acknowledges with thanks the contribution made to this chapter by Isabelle-Carmen Weis at Linklaters LLP.

Trends and Developments


Latham & Watkins LLP delivers innovative solutions to complex legal and business challenges around the world. From a global platform, the lawyers advise clients on market-shaping transactions, high-stakes litigation and trials, and sophisticated regulatory matters. Latham is one of the world’s largest providers of pro bono services, steadfastly supporting initiatives designed to advance diversity within the firm and the legal profession, and committed to exploring and promoting environmental sustainability.

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