Property Acquisition in Germany

The German property market is a promising one. With low interest rates and properties considered as undervalued, the investor will find adequate acquisition opportunities. In 2005 the transaction volume significantly increased to EUR 51.4 billion and 62 % of the investment originated from non-German investors, in particular from the UK, Ireland and the USA. Both investors and lenders find in Germany a highly developed legal and land registry system enabling reliable title transfer and property financing.

This briefing note looks at legal and practical issues which prospective buyers should be aware of in relation to property acquisitions in Germany.

The Basics

Ownership of property
Absolute title to property, comparable to the common law concept of freehold, is recognised under the German Civil Code. The owner has the right to possess and to dispose of the property, to encumber it, grant leases and other rights over it. Absolute title to property is evidenced in Germany by the respective entries in the land register (Grundbuch).

Land Registry
For each parcel of land located in Germany the land registry (Grundbuchamt) records its owner and existing encumbrances. The boundaries of the land will be shown on a cadastral map. Entries in the land registry are conclusive. That means all parties may rely on its accuracy and completeness unless they have positive knowledge that the respective entry is incorrect. Hence anyone purchasing from the person registered as the owner will acquire good title and likewise anyone taking security from the person registered as owner, will acquire valid and enforceable security interests.

Property Purchase Agreement
In general, property purchase agreements are considerably shorter than in common law jurisdictions as most of the relevant applicable legal provisions and principles are set out in the German Civil Code (Bürgerliches Gesetzbuch). All agreements pertaining to properties need to be notarised by a notary public. The notary is a legally trained official appointed by the federal state and deemed to be strictly impartial. Commonly, the purchase agreements are drafted by the parties’ lawyers and, subsequently, forwarded to the notary for his review. The notary is obliged to examine the entries in the land register and to include these entries in the property purchase agreement. He will also carry through the conveyancing process for the parties.

However, as the notary’s duty is limited to examining the title and all related encumbrances, the prospective buyer should carry out independent due diligence in relation to leases, planning, environmental and tax issues as well as all other relevant matters.

Asset Deal and Share Deal

Properties may be acquired by way of an asset deal or a share deal. The distinction is that the buyer acquires the property as an asset, i.e. directly, whilst in a share deal, the buyer would purchase the shares or interests of a company/partnership holding the property as an asset. The decision to acquire property by way of an asset or share deal depends on the actual legal situation and on the envisaged structure of the transaction.

Asset deal
Within the property purchase agreement, the vendor agrees to transfer the legal title and the buyer agrees to pay the purchase price. However, title will only pass upon registration of the new owner in the land register. The buyer will obviously not agree to transfer the purchase price without securing its title to the property. As this only happens upon registration of the new owner which may take up to several months, it is common practice to hand over the monies upon registration of a priority notice of conveyance (Auflassungsvormerkung) for the benefit of the buyer. This is an entry in the relevant land registry securing the claim to transfer of ownership.

As a result, any disposition by the vendor which adversely affects the buyer’s right or any foreclosure instigated against the vendor between the conclusion of the purchase agreement and the registration of the buyer, i.e. new owner, are of no relevance in relation to the buyer. Upon notification by the notary of the registration of the priority notice of conveyance, the buyer is requested to transfer the monies to the vendor in order to complete the transaction.

The purchase price is either paid directly to the vendor or to a notary’s escrow account. In both cases, the notary public supervises the payment and conveyancing requirements. Typically, payment and conveyance is conditional upon the registration of the priority notice and, in case of debt finance, the legal charge for the benefit of the buyer’s lender.

Share Deal
By acquiring all the shares or interests of the company/partnership, the buyer will control the property. An entry in the land register of the purchase of the shares/interests by the buyer will not be necessary as no transfer of title to the property takes place. In a share deal, merely the shareholder/partner changes and the property holding the company/partnership continues to be the legal owner of the property.

With an asset deal, the purchase price would be transferred upon registration of a priority notice of conveyance (thus ensuring the legal transfer of title), but in a share deal, the purchase price would be paid on a mutually agreed date upon the condition of transferring the shares/interests in rem (dinglich) to the buyer.

Whilst the registered priority notice of conveyance effectively prevents the transfer of the property to a third party, such legal protection is not available for a buyer of shares/interests. This is due to the fact that the buyer acquires the shares/interests of a company/partnership rather than the property itself. As a result, the buyer can legally not hinder the vendor’s sale and transfer of the shares/interests of the company/partnership to a third party until the actual transfer of shares is perfected and is also not protected of any foreclosure procedure as against the vendor during that period. If such issues were to arise then the vendor, being in breach of contract, would be liable for damages. Moreover, the buyer may protect himself by inserting in the purchase agreement the right to a contractual penalty where the vendor does not transfer the shares.