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
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 10 5. Closing - Transfer of Possession, Benefits and Burdens 11 6. Costs and Taxes, Estate Agents 12 C. Agreement on Purchase of Shares 12 1. Notarisation 12 2. The Object of Purchase 13 3. Purchase Price and Maturity 13 4. Other 14
X REAL PROPERTY IN GERMANY D. Remedies for Defects and Breach of Contract 15 1. Statutory Principles on Liability for Defects 15 2. Liability for Defects by Agreement 16 3. Residual Pollution 16 4. Other Breach of Contract ~. 16 E. Purchase from Commercial Developers 17 1. Commercial Developers 17 2. Development Contracts 17 3. The Estate Agents' and Commercial Developers' Ordinance 18 F. Options 19 G. Purchase of Real Property by Foreigners 20 1. No Restrictions on Acquisitions by Foreigners 20 2. Entitlement to Purchase 20 3. Representation of Foreign Companies 21 H. Merger Clearance 21 Chapter III. PROPERTY COMPANIES, CLOSED-END FUNDS AND JOINT VENTURES A. Property Companies 23 1. Preliminary Remark 23 2. Co-Ownership 24 3. Civil Law Partnership 26 4. Commercial Law Partnership 30 5. Limited Liability Company 31 6. The Public Limited Company 33 7. Internal Partnerships 37 B. Closed-end and Open-end Funds 38 1. Closed-End Funds 38 2. Open-End Funds 40 C. Joint Ventures 40 1. Preliminary Remarks 40 2. Contractual Joint Venture 40 3. Equity Joint Venture 42 4. Other Forms of Joint Venture 43 5. Requirements of Form in the Case of Joint Ventures 45
Table of contents XI Chapter IV. REAL PROPERTY CONSULTANTS, ESTATE AGENTS, ARCHITECTS AND ENGINEERS A. General Aspects/Real Property Consultants 47 B. Estate Agents 48 1. The Law Regulating Estate Agents' Contracts 48 2. Commission 50 C. Project Management 50 D. Property Management 52 E. Architects and Engineers 53 1. Area of Responsibility 53 2. Conclusion of the Contract 53 3. Remuneration 54 4. Warranty 55 5. Copyright 56 6. Miscellaneous 57 Chapter V. PUBLIC LAW A. Introduction 59 B. Planning Law 59 1. Overview 59 2. Local Zoning Plans 60 3. Protection and Realisation of Planning Aims 63 4. Compliance with Planning Regulations 66 5. Special Municipal Planning Instruments 69 6. Municipal Building Contracts 75 C. Building Regulations Law 78 1. Overview 78 2. Regulations Concerning Construction Work 79 3. Grant of Building Permits 82 4. Orders of the Building Authority 86 5. Legal Remedies 86
XII REAL PROPERTY IN GERMANY D. Environmental Law 89 1. Introduction 89 2. Residual Pollution 89 3. Special Environmental Liability under Civil Law 94 4. Environmental Law with Respect to Buildings 95 5. Environmental Criminal Law 101 6. Legal Protection 101 7. Prospective Legislative Developments 102 Chapter VI. THE BUILDING CONTRACT A. Introduction 103 B. Types of Building Contract 104 1. Legal Basis 104 2. Names and Concepts 105 3. Types of Contract 105 C. Formal Requirements for the Building Contract 108 D. Construction of the Agreed Work 109 1. Building Work Owed 109 2. Other Obligations 110 E. The Remuneration of Building Work... Ill 1. Remuneration Regulations Ill 2. Scope of the Work Covered by the Remuneration 112 3. Time at which Remuneration Falls Due 113 4. Limitation of the Claim to Remuneration 114 F. Changes of Performance/Other Alterations/ Divergences in Quantities 115 1. Altered or Additional Performance 115 2. Divergences in Quantities 115 G. Bearingthe Risk 116 H. Acceptance 117 1. Definition of Acceptance 117 2. Legal Consequences of Acceptance 117 3. Formal Acceptance and Other Types of Acceptance 117
Table of contents XIII I. Liability for Defects 118 1. Extent of the Contractor's Liability, Joint Responsibility of the Principal 118 2. Principal's Rights in Relation to Defects under Statutory Law Governing Contracts for Work and Services 119 3. The Principal's Rights in Relation to Defects under the VOB/B 121 4. Periods of Limitation 122 J. Delay, Contractual Penalty 124 1. Legal Consequences of a Failure by the Contractor to Perform in Good Time 124 2. Ability to Vary the Realisation Time-Limits, in Particular Obstruction 124 3. Contractual Penalty 125 K. Premature End of the Contract/Termination 126 1. Principal's Free Right of Termination 126 2. Further Rights of Termination of the Parties under the VOB/B 126 3. Contractor's Right of Termination under Sections 642, 643 BGB 126 4. The Right of Both Parties to Extraordinary Termination : 127 L. Security for Claims 127 1. Contractually Agreed Security 127 2. Statutory Security of the Contractor 128 3. 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
XIV REAL PROPERTY IN GERMANY D. Obligations to Call for Tenders when Awarding Public Contracts 134 1. Awarding Contracts Above and Below Threshold Values... 134 2. Awarding a Works Contract 136 3. Awarding a Supply or Services Contract or a Contract for Services Rendered by Independent Contractors Described Clearly and Exhaustively in Advance 138 4. Awarding Independent Contractor Services, in Particular Architectural and Engineering Services 139 5. Awarding Contracts in the Sectors of Water, Energy, Transport and Postal Services (Utilities) 140 6. Exceptions 141 E. Overview of the Award Procedure 142 1. Types of Award Procedures 142 2. Tender Notice 143 3. Time Limits and Deadlines within the Award Procedures 143 4. Selection of Candidates 145 5. Dispatch of Award Documents 146 6. Tender Opening Date 146 7. Review of Tenders 147 8. Evaluation of Tenders 147 9. Contract Award 148 10. Cancellation of Invitations to Tender 149 F. Legal Remedies 149 1. Primary Legal Remedies (Award Review Procedure) 149 2. 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 156 1. State Structure 156 2. Constitutional Law Restrictions 156 3. Statutory Framework 157
Table of contents XV D. Applicability of Public Procurement Law 159 1. Sale of State Enterprises 159 2. In-House Transactions 159 3. Operator Model 160 Building Concession 160 Service Concession 161 Cooperation Model 161 6. Advance Financing Model 162 7. Leasing Model 162 E. Legal and Contractual Structuring of PPPs 163 1. Forms of Structure 163 2. Structuring of PPPs 164 3. Financing of PPPs 164 4. Contractual Allocation of Functions and Risks 165 F. Future Prospects 168 Chapter IX. LEASE CONTRACTS A. Introduction 169 B. Commercial Leases 170 1. General 170 2. Requirements of Written Form 171 3. Scope of Use 171 4. Other Contractual Issues 172 C. Rent Review 173 1. Stable Value Clauses 173 2. Other Adjustment Clauses 174 3. Overall Market Rent Review 174 D. Financial Leasing Agreements 175 E. Lease-Backs 176 F. Registered Leases 176 G. Residential Tenancies 177
XVI REAL PROPERTY IN GERMANY Chapter X. REAL PROPERTY FINANCE A. Debt Origination 179.1. Introduction 179 2. Term Sheet 179 3. Parties and Liability 180 4. Legal Framework 182 5. Loan Agreement 183 6. Security 192 7. Subordination and Mezzanine Financing 199 B. Real Property Securitisation 200 1. Introduction 200 2. Basic Structure of a Securitisation 200 3. Rating Process (Analysis of Legal and Commercial Risks).. 201 4. A/B Loan Structures 204 5. True Sale and Synthetic Securitisations 205 6. Considerations Regarding the Property (Relevance of Due Diligence and Reports, Analysis of Typical Risks) 210 7. Structure of the Borrowers 211 8. Security 213 9. Cash Flow Considerations and Tax 218 10. Disclosure (Loan Summaries and Risk Factors) 219 11. Servicing and Licensing Requirements 219 Chapter XI. REAL PROPERTY IN CRISIS - COMPULSORY AUCTION/ COMPULSORY ADMINISTRATION/INSOLVENCY A. Introduction -.' 221 B. Compulsory Auction 222 1. Essential Elements 222 2. Procedure 222
Table of contents XVII C. Compulsory Administration 232 1. Essential Elements 232 2. Procedure 232 3. Appointing the Receiver 232 4. Institutional Administration 233 5. Receiver's Duties 233 6. Instructions/Supervision 233 7. Potential Advantages of Judicially Enforced Receivership... 234 8. Allocation of Proceeds 234 9. End of Receivership 235 D. Insolvency 235 1. Aim and Course of Insolvency Proceedings 235 2. Foreclosure Sale by Way of Public Auction on the Creditor's Initiative 238 3. Compulsory Administration 240 4. Assumption of Liquidation of Real Property by the Insolvency Administrator 243 5. 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 247 1. Material Sphere of Application 247 2. Personal Sphere of Application 248 3. Application in a Concrete Case/Imposition of General Terms and Conditions of Trade 248 B. What are General Terms and Conditions of Trade? 249 1. Definition 249 2. 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? 250 1. Inclusion in the Contract 250 2. Unexpected Clauses 251
XVIII REAL PROPERTY IN GERMANY D. Legal Consequences of Agreeing Invalid Clauses 252 1. What Applies Instead of the Invalid Clause? 252 2. Claims to Damages for Use of Invalid Clauses 253 E. Unclear Clauses 253 F. Clauses Prohibited Under Section 308 BGB 254 1. Unreasonable Time-Limits for Acceptance and Performance 254 2. Reasonable Extensions of the Original Time-Limits 254 3. Objectively Unjustified Reservations of the Right to Withdrawal 254 4. Unreasonable Reservation of the Right to Make Alterations 255 5. Fictitious Declarations 255 6. Fictitious Receipt of Declarations 256 7. Unreasonable Remuneration in the Case of Premature Termination of the Contract 256 8. Non-Availability of Performance 257 G. Prohibited Clauses under Section 309 BGB 257 1. Prohibition of Price Increases at Short Notice 257 2. Prohibition of the Restriction of Rights to Refuse Performance 257 3. Prohibition of Set-Off 258 4. Reminders and the Imposition of Time-Limits 258 5. Liquidated Damages 258 6. Contractual Penalties 259 7. Liability for Gross Fault 259 8. Exclusion of the Right to Release from the Contract 260 9. Agreements concerning the Liability for Defects 260 10. Duration in the Case of Continuous Obligations 261 11. Change of Contractual Partner 261 12. Agreements on the Burden of Proof 261 13. Form of Notifications and Declarations 262 H. The General Clause in Section 307 BGB 262 1. General 262 2. The Precept of Transparency 262 3. Compensation of Disadvantageous Clauses by a Price Advantage? 263 4. Contractual Penalties 263 5. Rights to Determine Price or Performance 264
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 265 1. Sphere of Application of the Provision 265 2. 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 268 1. General Requirements 268 2. Share Requirements 268 3. Asset Requirements 269 4. Leveraging Restrictions 269 5. Earnings and Profit Distribution Requirements 270 6. Restricted Trading in Real Property 270 C. Taxation 270 1. Exit Tax 270 2. Taxation of G-REIT 272 3. Taxation of Investors 273 D. Pre-REIT 274 Chapter XIV. BASICS OF REAL PROPERTY TAXATION A. Introduction 277 B. Individual Income Tax 278 1. Taxpayer 278 2. Tax Year 278 3. Tax Base 278 4. Tax Rates 286 5. Withholding Tax 287
XX REAL PROPERTY IN GERMANY C. Corporate Income Tax 288 1. Taxpayer 288 2. Tax Base 288 3. Tax Rates 289 4. Interest Barrier Rules 289 5. Change of Control 291 D. Trade Tax 291 1. General 292 2. Tax Rates 293 E. Real Property Tax 293 F. Value Added Tax 293 1. Tax Base 294 2. Exemptions from VAT : 294 3. Sale of Business as a Going Concern 294 4. Waiver of Exemption, VAT Option 295 5. Adjustments to the VAT Credit 296 G. Real Property Transfer Tax 297 1. Direct Acquisition of Real Property 297 2. Acquisition of Shares in a Corporation 298 3. Acquisition of Real Property Through a Partnership 298 4. Trust Arrangements 299 5. Heritable Building Rights and Buildings on Third Party Land 299 6. Procedures 300 H. Inheritance and Gift Tax 300 I. Tax Assessment Procedures '. 301 1. Tax Returns 301 2. Assessment Procedure 301 3. External Tax Audits 302 4. Appeals Procedures 302
Table of contents Chapter XV. TAXATION OF INTERNATIONAL PROPERTY INVESTMENTS A. Introduction 303 B. Individual and Corporate Income Tax 303 1. Taxpayer 303 2. Tax Base: German Source Income 304 3. Tax Rates 308 C. Trade Tax 311 1. Permanent Establishment Requirement 311 2. Extended Exemption 312 3. Tax Rates 312 D. Treaty Law 313 1. General 313 2. Personal Scope 313 3. Substantive Scope 314 4. Avoidance of Double Taxation 314 5. Real Property Income 314 6. Business Income 314 7. Distinction Between Real Property Income and Business Income 315 8. Interest 315 9. Dividends 315 E. Investment Structures 316 1. General 316 2. Foreign Direct Investment 316 3. Foreign Special Purpose Companies 321 4. German Special Purpose Companies 322
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 330 1. Public Funds 330 2. 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 334 1. Fund Disposes of Real Property 334 2. 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