Overseas investment in the German real estate market: what to watch out for

An overseas investment can take multiple forms.  Along with the acquisition of an existing business, which we touched upon in our February newsletter, one of the most popular is to invest in real estate. More so than many areas, real estate is an area where the rules can vary significantly from country to country and the legal position is supplemented by the local procedural requirements.

In this article, we focus on transactions from the US into the German real estate market – which is considered to be a particularly attractive investment due to Germany's positive and stable economic environment and the booming demand for commercial and residential property.

Cross-border real estate transactions are common in Germany.  The investment structure is outside the scope of this article and is often driven by tax considerations and/or finance documents.  There are, however, a few local legal aspects which might be considered unique from an US perspective and should be factored into timetables and budgets when considering German real estate investments.

1. Notarization

The role of a notary in Germany (and indeed around much of the EU) is a lot more formal than in the US.  The main document governing the real estate transaction is the land sale contract.  Unlike in other jurisdictions, it does not suffice to simply sign the agreement following successful negotiations.  German law requires both parties to attend a public notary (whether you are acquiring real estate directly or through shares).  Each party to the land sale contract must be physically present at the notary’s appointment or, at minimum, be duly represented, such as, by their attorney (which would require a formal power of attorney to be signed in advance).

It is the public notary’s job to read aloud the entire contract in the presence of the parties or their authorized representatives.  Depending on the length of the agreement, the scope of open points left to be agreed by the parties and obviously the notary’s ability to read fast, the notarization process may take a few hours, or even be spread out over two days.  Although this may seem silly or at least uncommon from an US perspective, it is surprising how many misunderstandings between the parties are detected and resolved during the notarization process.

There are, however, certain exceptions, which allow the public notary to read aloud annexes to the land sale contract (such as land registers and disclosure schedules) and certain collateral agreements (agreements are closely linked to the land sale contract, which therefore must notarised, such as lengthy construction contracts or lease agreements) to a staff member prior to the meeting in which the main document, the land sale contract, is notarised.  A time saver for the parties (and their representatives) – but not so much fun for the public notary’s staff member!

The notary fees depend on the value of the property (land and buildings) and are, in German market practice, usually borne by the purchaser.  In some cases, the notary fees total up to a higher five-figure amount, usually calculated in accordance with stepped fee rates.

2. Land register

It is typical for due diligence to be undertaken in a real estate transaction in Germany and important for  the purchaser to examine the land register.  The land register (which is maintained by local courts within their jurisdiction) includes a detailed description of the real estate, a list of the current and historic owners, relevant covenants and restrictions (including easements) as well as land charges and mortgages.

The land register is deemed to be correct, for the benefit of the purchaser who can rely on its accuracy for legal purposes.  So, the title in land can be acquired from a person or entity that is in fact not the legal owner of such land, as long as the person or entity that acts as the seller is registered in the land register.

3. Share deal or asset deal?

The terms and conditions of a land sale contract largely depend on the deal structure.  A purchaser may choose either to purchase the land directly (an asset deal), or to acquire the legal entity holding title in the target real estate, by way of a share deal.

The deal structure largely depends on tax implications.  If structured correctly, the real estate transfer tax (RETT), which can be up to 6.5% of the sales price, can be avoided.  Of course, there are also contrary arguments against such structure – as always… take local legal and tax advice!

4. Transfer of title

Last, but not least, a German land sale contract requires two aspects to effect the sale: (1) the terms relating to the sale and purchase of the real estate and (2) the terms relating to the legal conveyance of the land.

It is possible for the terms of sale and purchase to be governed by whichever laws the parties agree, but the legal transfer must be governed by German law to give legal effect and to comply with German civil code.