Overview

Germany is one of the world’s most stable and popular locations for property investors owing to its positive economic outlook, solid labour market and rental opportunities in top office centres and prime shopping locations.

Like everywhere else, acquiring real estate requires local expertise. The final due diligence report provides an executive summary setting out the major findings clearly, particularly useful for clients from China and other foreign jurisdictions, given that Chinese property law is quite different from German property law.

Real estate aspects are not only relevant for direct/indirect real estate investments but also for M&A transactions. The property ownership rate of German companies is 70% on average, especially where the target company has a great need for land, e.g. if it operates in the manufacturing industry or logistics sector.

Thus, identifying legal pitfalls and offering efficient and sustainable real estate solutions are essential for transaction success.

Ownership

The first question foreign investors usually ask is:

Who can own real estate in Germany?

In Germany, all individuals and legal entities with legal capacity, irrespective of whether resident or non-resident, can invest in real estate and become an estate holder. Unlike some of the other European countries, there are no legal restrictions for Chinese investors in Germany.

Due to the formal land registry law, real estate investments in Germany – as compared to European and international standards – are characterised by a high level of legal certainty. The review of title forms an important factor in any real estate transaction.

The most common form of title in land in Germany is freehold, i.e. the freeholder has complete control of land and buildings with no time limitation. Depending on the legal implementation of the transaction, German law differentiates between sole ownership, co-ownership and joint ownership.

Other forms of ownership are, for example, the hereditary building right, according to which the beneficiary acquires the alienable and inheritable right to own a building on or below the surface of land for a certain period of time. The ownership of land as well as the hereditary building right can be encumbered with servitudes, mortgages, land charges and other rights in rem. All premises in Germany and any encumbrances are recorded in the land register, which is kept at the local courts.

Leases

Leases have a material impact on the success or failure of an investment in Germany. If the investment is based on the cashflow generated by leases, the validity, duration, rent and credit rating of the tenants are the key factors for the profitability of the investment. If the essential production locations of the target company are held via leasehold, the unexpected termination of a lease can endanger the economic foundation of the target company.

Sale and Purchase Agreements (SPA)

Under German law, agreements relative to the conveyance of property need to be officially recorded before a notary. By law, the notary is obliged to act impartially and ensure that the conveyance complies with statutory law. A fundamental element of notarization is the reading out of the sale and purchase agreement by the notary. After the reading procedure, the sale and purchase agreement needs to be signed by the parties and the notary. Without notarization, the agreement would be void.

A sale and purchase agreement is a complex contract containing all relevant provisions, e.g. payment of purchase price, representations and warranties, guarantees, caps, limitation periods, costs and financing.

Usually, a sale and purchase agreement is drafted by the parties using their own external advisors who ensure that their client’s legal interests are upheld.

Typically, the cost of notarization and registration of the title transfer in the land register is borne by the buyer. The costs for advisors (legal, technical and any other) are borne by each party individually. As a rule of thumb, for commercial property transactions, fees for notarization and implementation of the conveyance amount to about 1% of the purchase price.