Property Finance in Germany

It is no secret that Germany is undergoing a major divestment of property assets. Indeed, the German property market is on the move. Transaction volume significantly increased to EUR 51.4 billion in 2005 of which 62 % of the investment originated from non-German investors, in particular from the UK, Ireland and the USA. The German property market is considered as undervalued. In addition, 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 some legal and practical issues which may arise for prospective lenders in relation to property acquisitions in Germany.

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 registry.

Land Registry

For each parcel of land located in Germany the land registry 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, ie one may rely on its accuracy and completeness and it may be relied upon by all parties 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

All property agreements need to be notarised by a notary public who is impartial. Whilst the purchase agreements in major transactions are generally drafted by the parties’ lawyers, the notary is obliged to examine the entries in the land registry and to include these entries in the property purchase agreement. He will also carry through the conveyancing process for the parties.

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 Civil Code. As the notary’s duty is limited to examine the title and all related encumbrances, the prospective buyer and mortgagee should carry out independent diligence in relation to leases, planning and environmental issues and all other relevant matters.