Background
Federal Court of Justice decision

Comment


A partnership under civil law is a popular legal structure for companies that wish to purchase real estate because such entities are easy to establish without strict formal requirements, involve a relatively small amount of administrative work and offer tax advantages. The Federal Court of Justice recently found a practical solution to the controversy surrounding the legal capacity of a partnership under civil law.

Background

In 2001 the Federal Court of Justice ruled that an (external) partnership under civil law has legal capacity. As a logical consequence of this position, in 2008 it was ruled that a partnership under civil law is also eligible for inclusion in the Land Register because if it has legal capacity, it can also purchase real estate. This had serious practical effects, because at the time the provisions of the Land Registration Act did not allow a partnership under civil law to be entered in the Land Register without additional details. As it is possible to change the articles of partnership without a prospective land purchaser being able to see the changes in the Land Register (or any other register), it was considered that a future purchaser of the real estate would have no legal certainty regarding the powers of representation for a partnership under civil law which claimed to be the owner of the property. Effectively, this meant that real estate owned by a partnership under civil law was excluded from commercial transactions.

The legislature reacted quickly and introduced Section 47(2) of the act. Under this provision, the partners of a partnership under civil law had to be named in the Land Register entry in addition to the partnership itself.

The resulting specific requirements for the partnership under civil law or its partners to prove the accuracy of the details given, which were regarded as a condition of registration in the Land Register, were the subject of debate in the courts and in legal literature. Most parties agreed that the requirements for registration should be subject to Section 29 of the act – that is, that proof should be provided in the form of public or publicly certified documents. One branch of opinion considered it insufficient for the partners to make a declaration in the notarial land purchase contract regarding the legal circumstances of the partnership under civil law, its existence and identity and the representation powers of the persons acting for the partnership. It was suggested that this merely proved that the declaration had been made and did not attest to the accuracy of its content.(1) In practice, this would have meant that a purchase of real estate by a partnership under civil law was possible only if the partnership itself was newly established in the course of the notary's conveyance of the land purchase, because this was the only configuration which would exclude the possibility that the legal circumstances of the partnership under civil law could be changed. As a consequence, all existing partnerships under civil law would effectively be excluded from any purchase of real estate due the technical rules of the land registration process.

A second branch of opinion also fundamentally considered that Section 29 of the act should apply. This opinion followed the principles for confirmation of powers of attorney in accepting the declaration of the partners about the partnership's existence and powers of representation as sufficient proof for the requirements for registration to meet the formal conditions for notarisation of the land purchase contract.(2)

On the other hand, some legal scholars considered that proof of the legal circumstances of the partnership under civil law in the form stipulated in Section 29 of the act was unnecessary. It was suggested that the persons acting for the company in the conveyance must make declarations about the existence, identity and representation of the partnership under civil law, but that the Land Register was not entitled to demand proof of accuracy. This opinion has now been confirmed by the Federal Court of Justice.

Federal Court of Justice decision

On April 28 2011 the Federal Court of Justice decided that in any purchase of land or residential property by a partnership under civil law, it is sufficient to register the change of ownership in the Land Register if the partnership under civil law and its partners are named in the notary's provisional notice of conveyance and the persons acting for the partnership under civil law declare that they are its sole partner.(3) Further proof of the existence, identity and representation situation of the partnership under civil law need not be provided to the land registry.

The court stated that a legal transaction in which a partnership under civil law purchases land or residential property can be completed in the Land Register, provided that the identity of the company has been established and sufficient proof of this identity has been provided.

The identity requirement serves to distinguish such a partnership from other partnerships under civil law and is a consequence of the principle of clarity and transparency which governs land registry law as a whole. When this principle is applied to the certainty of legal transactions, it means that not only the affected real estate itself and the content of the material rights must be clearly determined, but also the identity of the entitled party. The court argued that these requirements are met by an appropriate declaration by the partners in the notary's provisional notice of conveyance, which in turn is based on Section 47(2) of the act. Under this provision, the identification of the partnership under civil law is effected by the mandatory designation of its partners. Once this has been done, there is deemed to be sufficient certainty about the company, without the need for further details. In particular, no proof in the form stipulated in Section 29 of the act or proof of the accuracy of the partners' declarations is necessary. This conclusion is based on the systemic significance of Section 47(2) of the act and the purpose of the legislation. Section 47(2) is regarded as a special case of Section 47(1) of the act, which applies only to the content of the Land Register entry, and not to its requirements. The court pointed out that the text does not indicate the proof which must be provided to register the property of a partnership under civil law.

Moreover, the goal of the legislature when it introduced Section 47(2) was not to allow a partnership under civil law to be registered in the Land Register under its name alone, as often the legal circumstances cannot be proven in the form stipulated in Section 29. The provision in Section 47(2) aims to dispense with the need to present proof to the land registry if the property is registered under the name of the partnership under civil law only.

Therefore, the material ownership right of the partnership under civil law in the Land Register is technically and procedurally conveyed through the partners. A requirement to prove the legal circumstances of the partnership under civil law in the form stipulated in Section 29 of the act would be inconsistent with this provision. The land registry may demand such proof only if there are specific grounds to suspect that the Land Register would become incorrect as a result of the desired entry. The theoretical possibility of a change in the articles of partnership – even by word of mouth – does not constitute sufficient grounds for such a suspicion.

Comment

With this ruling, the Federal Court of Justice has found a practical solution which also covers the purchase of land and property by an existing partnership under civil law – a solution which may well have finally settled the controversy over the legal capacity of a partnership under civil law. A declaration by the partners in the course of the notary's conveyance is deemed to be the necessary proof for entry in the Land Register.

This solution is unusual because of the separation of the material ownership by the partnership under civil law and the formal mediating role of the partners in the Land Register procedure.

For further information on this topic please contact Florian Hanle at SIBETH Partnerschaft by telephone (+49 89 38 80 82 44 ), fax (+49 89 38 80 82 02) or email ([email protected]).

Endnotes

(1) See, for example, Case Wx 63/10, Munich Higher Regional Court, July 20 2010.

(2) See, for example, Case 5 W 371/09, Saarbrücken Higher Regional Court, February 26 2010.

(3) Case V ZB 194/10.