Buying commercial property in Germany

Asset deal or share deal

In an asset deal, the buyer acquires the land or a share in the property directly. The purchase agreement is subject to the notarial requirement set out in Section 311b of the German Civil Code (BGB). Rights, encumbrances, tenancies and public-law characteristics of the property must be examined individually and addressed in the contract. The risks associated with the property, and in many cases existing tenancies, are transferred to the buyer. The seller’s other business history is not included.

In a share deal, shares in the property holding company are transferred. The land remains the property of the same company. Economically, control over the legal entity changes hands. Along with the property, the buyer also assumes the company’s contracts, liabilities, tax positions, legal disputes and any potential compliance risks. Due diligence must therefore combine property and corporate due diligence. If a limited liability company (GmbH) holds the property, the obligation to transfer its shares generally also requires notarisation in accordance with Section 15 of the German Limited Liability Companies Act (GmbHG).

This structure has significant implications for land transfer tax. The direct acquisition of the land is a taxable transaction under the Land Transfer Tax Act. The acquisition or transfer of shares in property-owning companies may also trigger the tax if the statutory criteria and shareholding thresholds are met. The applicable law operates, amongst other things, with 90 per cent thresholds and multi-year assessment periods. It is therefore incorrect to make a blanket statement that a share deal is ‘exempt from land transfer tax’. The chain of shareholdings, prior transactions, signing, closing and subsequent restructuring must be modelled from a tax perspective before the structure is finalised.

For foreign investors, the question of the acquisition vehicle also arises. A German special-purpose vehicle can facilitate financing, administration and subsequent disposal, but entails its own incorporation, tax and compliance obligations. A direct acquisition, a foreign company or a German special purpose vehicle should be compared in terms of liability, financing, distributions, exit and group requirements. The economically simplest option is not necessarily the best from a tax and legal perspective.

Financing must be considered at an early stage in this decision-making process. Lenders often expect mortgages, assignments of rent receivables, account attachments and other forms of security. In the case of a share deal, share pledges and restrictions under company law are also to be taken into account. The purchase agreement should allow the seller to participate in the financing without exposing them to uncontrolled liability risks. A subsequent change in structure may necessitate the redrafting of notarial documents, a fresh tax analysis and the re-approval of the loan.

Property Due Diligence

The legal review begins with the land register. Section I shows the registered ownership. The other sections contain, in particular, easements, preliminary notices, encumbrances, land charges and mortgages. The contents must be cross-checked against the survey, the actual development and the use of the property. A path, a utility line or a parking space may be used in practice without the necessary security in rem being in place. Conversely, old rights may be registered that hinder conversion or financing.

Public planning law must be distinguished from the land register. Development plans, planning permissions, changes of use, setback distances, parking spaces and other regulatory requirements determine whether the current and planned use is permitted. Where the relevant regional law provides for a register of building encumbrances, these must be checked separately. A legally existing building is not automatically approved for every use planned by the buyer. Anyone wishing, for example, to convert an office into a laboratory, a warehouse into a production facility, or a retail premises into a catering establishment should clarify whether planning permission can be obtained before the purchase.

Contaminated sites and environmental risks can have a greater impact on the purchase price and use of the property than a land register entry. Previous industrial use, tanks, building materials containing harmful substances, and groundwater or soil contamination require technical and legal assessment. Liability for the condition of the property and public-law remediation obligations do not follow solely from the contractual allocation of risk. The purchase contract may distribute the financial burden between the parties, but does not automatically bind the authorities.

In the case of let properties, the tenancy agreements form the core of the income value. Term, options, indexation, service charges, maintenance, fit-out obligations, protection against competition, security deposits, rent reductions and payment arrears must be reconciled with the business plan. Ancillary agreements, emails and addenda must be taken into account. Since the new legal provisions came into force, the written form requirement under Section 578 of the German Civil Code (BGB) applies to long-term commercial tenancy agreements: A tenancy agreement concluded for a term of more than one year which is not in writing is, in principle, deemed to have been concluded for an indefinite period. Deficiencies in documentation may therefore still jeopardise the planned fixed term, even if the former requirement for written form no longer applies.

Technical, tax and financial due diligence should be carried out in conjunction with the legal review. The roof, façade, building services, fire safety, energy efficiency and investment backlog all affect warranties, the purchase price and financing. In a share deal, annual accounts, tax returns, shareholder loans, distributions and contingent liabilities must also be taken into account. Findings from the report should be incorporated into the contract in the form of purchase price mechanisms, conditions precedent, warranties, indemnities, retention of title or insurance solutions.

A warranty is no substitute for due diligence. The buyer must know whether a risk prevents operations, merely triggers a cost, or can be remedied by a condition prior to closing. Key issues such as a missing planning permission, unsecured access or terminable anchor tenancy agreements should, where possible, be resolved before signing, rather than relying solely on a subsequent claim for damages.

Notary, transfer of title and when the purchase price becomes due

The notarised contract of sale is binding on the parties, but does not yet transfer ownership. For the transfer of ownership to take place, mutual agreement and entry in the land register are required under Section 873 of the German Civil Code (BGB). The transfer of ownership is declared before a competent authority in accordance with Section 925 of the German Civil Code (BGB); in practice, this is usually done in the notarial contract.

Following notarisation, a priority notice of transfer is usually entered. Under Section 883 of the German Civil Code (BGB), this secures the purchaser’s claim to transfer of ownership against any subsequent disposals that might prejudice it. The purchase price is generally not due until the conditions specified in the contract have been fulfilled. These may include the registration of the priority notice, documents confirming the cancellation of encumbrances not assumed by the buyer, necessary approvals, the waiver of rights of first refusal and other property-specific evidence.

The notarial notice of due date confirms that, in the notary’s opinion, the conditions stipulated in the contract have been met. It does not replace a commercial closing review by the buyer. In complex transactions, additional conditions may apply, the fulfilment of which the parties themselves must confirm. The payment flow, the repayment of existing financing and the release of security should therefore be clearly set out in a coordinated closing memorandum.

The economic transfer and the legal transfer of ownership often do not coincide. Benefits and encumbrances, rents, operating costs, risk, safety measures and insurance usually transfer on a contractually specified cut-off date, often coinciding with the payment of the purchase price. The buyer only becomes the owner upon entry in the land register. The contract must clearly specify who, during the interim period, is authorised to manage the property, inform tenants, deal with claims and decide on measures to be taken in relation to the property.

Financing is often secured by a mortgage on the property in question even before the transfer of ownership. To this end, the seller must cooperate with the encumbrance, whilst ensuring that the loan proceeds cannot be used for purposes other than the payment of the purchase price. A carefully drafted power of attorney for the encumbrance reconciles these interests. Foreign powers of attorney, register extracts, proof of signature and, where applicable, apostilles should be agreed with the notary’s office prior to the notarisation appointment.

Once payment has been made and tax matters have been settled, the notary applies for the transfer of ownership. The tax office usually issues a certificate of no objection regarding land transfer tax for this purpose. Processing the land register and completing the necessary administrative steps takes time. A realistic transaction plan distinguishes between the signing, the due date for the purchase price, the economic transfer and the final transfer of ownership.