REAL PROPERTY IN GERMANY

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1 REAL PROPERTY IN GERMANY LEGAL AND TAX ASPECTS OF DEVELOPMENT AND INVESTMENT Edited by WOLFGANG USINGER and HANS-JOSEF SCHNEIDER Seventh completely revised English Edition of the book originally conceived by Riidiger Volhard and Dolf Weber Fritz Knapp Verlag Frankfurt am Main

2 TABLE OF CONTENTS Chapter I. REAL PROPERTY - TITLE, OWNERSHIP, LAND REGISTER - A. Title to Real Property : 1 1. Absolute Ownership 1 2. Restricted Ownership Rights: Condominium Ownership, Heritable Building Rights 2 B. The Owner 3 C. Land Register and Cadastral Map 3 1. Cadastral Map 3 2. Land Register 4 3. Transfer of Title 6 4. Priority Notices 6 Chapter II. THE SALE AND PURCHASE AGREEMENT A. Types of Transactions: Asset Deal, Share Deal, Portfolio Transaction 7 B. Agreement on Purchase of Assets 8 1. Notarisation 8 2. Notary..' 9 3. The Object of Purchase and the Land Register 9 4. Purchase Price and Maturity Closing - Transfer of Possession, Benefits and Burdens Costs and Taxes, Estate Agents 12 C. Agreement on Purchase of Shares Notarisation The Object of Purchase Purchase Price and Maturity Other 14

3 X REAL PROPERTY IN GERMANY D. Remedies for Defects and Breach of Contract Statutory Principles on Liability for Defects Liability for Defects by Agreement Residual Pollution Other Breach of Contract ~. 16 E. Purchase from Commercial Developers Commercial Developers Development Contracts The Estate Agents' and Commercial Developers' Ordinance 18 F. Options 19 G. Purchase of Real Property by Foreigners No Restrictions on Acquisitions by Foreigners Entitlement to Purchase Representation of Foreign Companies 21 H. Merger Clearance 21 Chapter III. PROPERTY COMPANIES, CLOSED-END FUNDS AND JOINT VENTURES A. Property Companies Preliminary Remark Co-Ownership Civil Law Partnership Commercial Law Partnership Limited Liability Company The Public Limited Company Internal Partnerships 37 B. Closed-end and Open-end Funds Closed-End Funds Open-End Funds 40 C. Joint Ventures Preliminary Remarks Contractual Joint Venture Equity Joint Venture Other Forms of Joint Venture Requirements of Form in the Case of Joint Ventures 45

4 Table of contents XI Chapter IV. REAL PROPERTY CONSULTANTS, ESTATE AGENTS, ARCHITECTS AND ENGINEERS A. General Aspects/Real Property Consultants 47 B. Estate Agents The Law Regulating Estate Agents' Contracts Commission 50 C. Project Management 50 D. Property Management 52 E. Architects and Engineers Area of Responsibility Conclusion of the Contract Remuneration Warranty Copyright Miscellaneous 57 Chapter V. PUBLIC LAW A. Introduction 59 B. Planning Law Overview Local Zoning Plans Protection and Realisation of Planning Aims Compliance with Planning Regulations Special Municipal Planning Instruments Municipal Building Contracts 75 C. Building Regulations Law Overview Regulations Concerning Construction Work Grant of Building Permits Orders of the Building Authority Legal Remedies 86

5 XII REAL PROPERTY IN GERMANY D. Environmental Law Introduction Residual Pollution Special Environmental Liability under Civil Law Environmental Law with Respect to Buildings Environmental Criminal Law Legal Protection Prospective Legislative Developments 102 Chapter VI. THE BUILDING CONTRACT A. Introduction 103 B. Types of Building Contract Legal Basis Names and Concepts Types of Contract 105 C. Formal Requirements for the Building Contract 108 D. Construction of the Agreed Work Building Work Owed Other Obligations 110 E. The Remuneration of Building Work... Ill 1. Remuneration Regulations Ill 2. Scope of the Work Covered by the Remuneration Time at which Remuneration Falls Due Limitation of the Claim to Remuneration 114 F. Changes of Performance/Other Alterations/ Divergences in Quantities Altered or Additional Performance Divergences in Quantities 115 G. Bearingthe Risk 116 H. Acceptance Definition of Acceptance Legal Consequences of Acceptance Formal Acceptance and Other Types of Acceptance 117

6 Table of contents XIII I. Liability for Defects Extent of the Contractor's Liability, Joint Responsibility of the Principal Principal's Rights in Relation to Defects under Statutory Law Governing Contracts for Work and Services The Principal's Rights in Relation to Defects under the VOB/B Periods of Limitation 122 J. Delay, Contractual Penalty Legal Consequences of a Failure by the Contractor to Perform in Good Time Ability to Vary the Realisation Time-Limits, in Particular Obstruction Contractual Penalty 125 K. Premature End of the Contract/Termination Principal's Free Right of Termination Further Rights of Termination of the Parties under the VOB/B Contractor's Right of Termination under Sections 642, 643 BGB The Right of Both Parties to Extraordinary Termination : 127 L. Security for Claims Contractually Agreed Security Statutory Security of the Contractor The Act on Security for Building Claims 129 Chapter VII. PUBLIC PROCUREMENT A. Introduction 131 B. Contracting Entity and Public Contract 133 C. Principles of Public Procurement 134

7 XIV REAL PROPERTY IN GERMANY D. Obligations to Call for Tenders when Awarding Public Contracts Awarding Contracts Above and Below Threshold Values Awarding a Works Contract Awarding a Supply or Services Contract or a Contract for Services Rendered by Independent Contractors Described Clearly and Exhaustively in Advance Awarding Independent Contractor Services, in Particular Architectural and Engineering Services Awarding Contracts in the Sectors of Water, Energy, Transport and Postal Services (Utilities) Exceptions 141 E. Overview of the Award Procedure Types of Award Procedures Tender Notice Time Limits and Deadlines within the Award Procedures Selection of Candidates Dispatch of Award Documents Tender Opening Date Review of Tenders Evaluation of Tenders Contract Award Cancellation of Invitations to Tender 149 F. Legal Remedies Primary Legal Remedies (Award Review Procedure) Secondary Legal Remedies 151 Chapter VIII. PUBLIC PRIVATE PARTNERSHIPS A. Types of PPP Projects 153 B. The Use of PPPs 155 C. Constitutional Law and Statutory Framework State Structure Constitutional Law Restrictions Statutory Framework 157

8 Table of contents XV D. Applicability of Public Procurement Law Sale of State Enterprises In-House Transactions Operator Model 160 Building Concession 160 Service Concession 161 Cooperation Model Advance Financing Model Leasing Model 162 E. Legal and Contractual Structuring of PPPs Forms of Structure Structuring of PPPs Financing of PPPs Contractual Allocation of Functions and Risks 165 F. Future Prospects 168 Chapter IX. LEASE CONTRACTS A. Introduction 169 B. Commercial Leases General Requirements of Written Form Scope of Use Other Contractual Issues 172 C. Rent Review Stable Value Clauses Other Adjustment Clauses Overall Market Rent Review 174 D. Financial Leasing Agreements 175 E. Lease-Backs 176 F. Registered Leases 176 G. Residential Tenancies 177

9 XVI REAL PROPERTY IN GERMANY Chapter X. REAL PROPERTY FINANCE A. Debt Origination Introduction Term Sheet Parties and Liability Legal Framework Loan Agreement Security Subordination and Mezzanine Financing 199 B. Real Property Securitisation Introduction Basic Structure of a Securitisation Rating Process (Analysis of Legal and Commercial Risks) A/B Loan Structures True Sale and Synthetic Securitisations Considerations Regarding the Property (Relevance of Due Diligence and Reports, Analysis of Typical Risks) Structure of the Borrowers Security Cash Flow Considerations and Tax Disclosure (Loan Summaries and Risk Factors) Servicing and Licensing Requirements 219 Chapter XI. REAL PROPERTY IN CRISIS - COMPULSORY AUCTION/ COMPULSORY ADMINISTRATION/INSOLVENCY A. Introduction -.' 221 B. Compulsory Auction Essential Elements Procedure 222

10 Table of contents XVII C. Compulsory Administration Essential Elements Procedure Appointing the Receiver Institutional Administration Receiver's Duties Instructions/Supervision Potential Advantages of Judicially Enforced Receivership Allocation of Proceeds End of Receivership 235 D. Insolvency Aim and Course of Insolvency Proceedings Foreclosure Sale by Way of Public Auction on the Creditor's Initiative Compulsory Administration Assumption of Liquidation of Real Property by the Insolvency Administrator Release of Immovable Property 245 Chapter XII. GENERAL TERMS AND CONDITIONS OF TRADE A. Sphere of Application of the Statutory Provisions about General Terms and Conditions of Trade Material Sphere of Application Personal Sphere of Application Application in a Concrete Case/Imposition of General Terms and Conditions of Trade 248 B. What are General Terms and Conditions of Trade? Definition Transformation of a General Terms and Conditions of Trade Clause into an Individual Agreement 250 C. How Do General Terms and Conditions of Trade Become Part of a Contract? Inclusion in the Contract Unexpected Clauses 251

11 XVIII REAL PROPERTY IN GERMANY D. Legal Consequences of Agreeing Invalid Clauses What Applies Instead of the Invalid Clause? Claims to Damages for Use of Invalid Clauses 253 E. Unclear Clauses 253 F. Clauses Prohibited Under Section 308 BGB Unreasonable Time-Limits for Acceptance and Performance Reasonable Extensions of the Original Time-Limits Objectively Unjustified Reservations of the Right to Withdrawal Unreasonable Reservation of the Right to Make Alterations Fictitious Declarations Fictitious Receipt of Declarations Unreasonable Remuneration in the Case of Premature Termination of the Contract Non-Availability of Performance 257 G. Prohibited Clauses under Section 309 BGB Prohibition of Price Increases at Short Notice Prohibition of the Restriction of Rights to Refuse Performance Prohibition of Set-Off Reminders and the Imposition of Time-Limits Liquidated Damages Contractual Penalties Liability for Gross Fault Exclusion of the Right to Release from the Contract Agreements concerning the Liability for Defects Duration in the Case of Continuous Obligations Change of Contractual Partner Agreements on the Burden of Proof Form of Notifications and Declarations 262 H. The General Clause in Section 307 BGB General The Precept of Transparency Compensation of Disadvantageous Clauses by a Price Advantage? Contractual Penalties Rights to Determine Price or Performance 264

12 Table of contents I. The Claim to Forbear From Using General Terms and \\ Conditions of Trade in the Suit for Discontinuance Act 264, J. Consumer Contracts under Section 310 (3) BGB Sphere of Application of the Provision Content of the Regulation 265 i K. No Circumvention by Agreement on Foreign Law 266 \ \ Chapter XIII. G-REITs \v A. Introduction 267 B. Corporate Structure and G-REIT Requirements General Requirements Share Requirements Asset Requirements Leveraging Restrictions Earnings and Profit Distribution Requirements Restricted Trading in Real Property 270 C. Taxation Exit Tax Taxation of G-REIT Taxation of Investors 273 D. Pre-REIT 274 Chapter XIV. BASICS OF REAL PROPERTY TAXATION A. Introduction 277 B. Individual Income Tax Taxpayer Tax Year Tax Base Tax Rates Withholding Tax 287

13 XX REAL PROPERTY IN GERMANY C. Corporate Income Tax Taxpayer Tax Base Tax Rates Interest Barrier Rules Change of Control 291 D. Trade Tax General Tax Rates 293 E. Real Property Tax 293 F. Value Added Tax Tax Base Exemptions from VAT : Sale of Business as a Going Concern Waiver of Exemption, VAT Option Adjustments to the VAT Credit 296 G. Real Property Transfer Tax Direct Acquisition of Real Property Acquisition of Shares in a Corporation Acquisition of Real Property Through a Partnership Trust Arrangements Heritable Building Rights and Buildings on Third Party Land Procedures 300 H. Inheritance and Gift Tax 300 I. Tax Assessment Procedures ' Tax Returns Assessment Procedure External Tax Audits Appeals Procedures 302

14 Table of contents Chapter XV. TAXATION OF INTERNATIONAL PROPERTY INVESTMENTS A. Introduction 303 B. Individual and Corporate Income Tax Taxpayer Tax Base: German Source Income Tax Rates 308 C. Trade Tax Permanent Establishment Requirement Extended Exemption Tax Rates 312 D. Treaty Law General Personal Scope Substantive Scope Avoidance of Double Taxation Real Property Income Business Income Distinction Between Real Property Income and Business Income Interest Dividends 315 E. Investment Structures General Foreign Direct Investment Foreign Special Purpose Companies German Special Purpose Companies 322

15 XXII REAL PROPERTY IN GERMANY Chapter XVI. OPEN-END REAL PROPERTY INVESTMENT FUNDS AND THEIR TAXATION A. General 329 B. Different Kinds of Open-End Funds Public Funds Special Funds 330 C. Corporate Structure 331 D. Investments 331 E. Income Tax Exemption of German Open-End Funds 332 F. Taxation of Current Income from Fund Assets 333 G. Capital Gains Fund Disposes of Real Property Investor Disposes of its Units in the Fund 335 H. Liquidity Reserve 335 Chapter XVII. SAMPLE CONTRACTS A. Grundstiickskaufvertrag (Muster) 340 Real Property Purchase Agreement (Sample) 341 B. Generalunternehmervertrag (Muster) 362 General Contractor's Agreement (Sample) 363 C. Mietvertrag (Muster) 400 Lease Agreement (Sample) 401 APPENDIX Abbreviations 427 List of Editors and Authors 435 INDEX German-English 437 English-German 467

Table of Contents PREFACE... XIX ACKNOWLEDGEMENTS... XXI ABBREVIATIONS... XXIII

Table of Contents PREFACE... XIX ACKNOWLEDGEMENTS... XXI ABBREVIATIONS... XXIII PREFACE... XIX ACKNOWLEDGEMENTS... XXI ABBREVIATIONS... XXIII Chapter 1. COMMERCIAL LAW: DEFINITION, DEVELOPMENT, SCOPE & SOURCES... 1 1. DEFINITION, DEVELOPMENT & SCOPE... 1 2. SOURCES OF COMMERCIAL LAW...