Due diligence in the purchase of real estate in Germany

Risk assessment and valuation before real estate purchase in Germany

Commercial real estate transactions are often complex in german practice. Due diligence is an effective instrument to minimize potential risks during the purchase and sale in Germany. A systematic review of the property can/must be conducted from a legal and tax perspective as well as from an economic and technical perspective.

The commercial real estate buyer typically carries out due diligence from a certain investment level. Depending on the type of property (e.g. developed with office space vs. brownfield) and the purchase structure (asset deal vs. share deal), the due diligence can become more or less complex.

As a law firm specializing in german business and real estate law, we advise clients nationwide on commercial real estate transactions from a legal and tax perspective.

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In advance: Real estate asset or share deal in german practice?

A key decision is whether to acquire a property directly or to acquire shares in the company holding the property. It is obvious that the examination effort will be significantly higher in the case of a share purchase, since the prospective buyer must also examine the company itself for risks (so-called due diligence under company law). On the other hand, there is tax leeway in the acquisition of a real estate company instead of the acquisition of its sole asset. On the other hand, there are risks due to increasingly strict tax regulations under german law and, of course, the theoretically unlimited liability risks that the buyer exposes himself to by acquiring a company. The purchase of real estate by share deal therefore needs to be well considered in Germany.

What is due diligence in the german real estate industry?

A due diligence is the examination of the real estate for risks. There are various sub-areas to consider.

Legal due diligence under german law

Here, attorneys are hired to examine the property for legal risks. This begins with an examination of the current status of the land register and extends to an examination of existing rental agreements under german tenancy law; existing warranty claims against from building contracts and questions of german public building law (e.g., does the existing building permit also cover the intended use?).

Economic Due Diligence in Germany

Here, service providers are called in to evaluate, for example, the attractiveness of a particular retail location, especially taking into account demographic circumstances and transport connections.

Technical due diligence in german practice

Technical due diligence involves technical service providers who examine the property for defects, especially construction defects or environmental defects.

German due diligence by the seller or the buyer?

In a way, due diligence by the prospective buyer is classic. After convincing the seller of his seriousness, the seller opens his documents and has his company checked for risks. It should also be noted here that, for reasons of liability avoidance, the buyer's management must carry out due diligence.

However, there are also scenarios in which the seller performs the due diligence (vendor's due diligence). In german real estate law, this is appropriate with regard to rights to be registered in the land register or rights that still have to be eliminated, since applications and registrations in the land register often require several weeks, if not months. In individual cases, the seller may therefore be well advised to check the property for land register obstacles at a very early stage and to initiate registration/cancellation processes.

Due diligence process in german practice

In Germany, due diligence begins with the sending of a due diligence questionnaire. The seller then works through this sheet and makes the requested information and documents available electronically. Often, the real estate seller also gives powers of attorney to the prospective buyer so that the latter can then submit information requests to government agencies.

The information provided is evaluated and questions are asked and answered (Q&A). Typically in german practice, a certain period of time is set for this due diligence process before it begins.

Ideally, the prospective buyer should be provided with an interim status of the review process at an early stage (one pager; indications of red flags) in order to point out any transaction obstacles at an early stage.

Unless a deal breaker, i.e. an insurmountable transaction obstacle, has become apparent beforehand, the prospective buyer in Germany receives a due diligence report based on the results of the review, which highlights risks and the corresponding possible solutions. The results of the real estate due diligence form the basis for contract drafting and negotiation in german practice. In particular, their results are incorporated into indemnity and warranty clauses. It is also possible that the recommendation is to make the due date of the purchase price still dependent on the occurrence of certain conditions precedent (such as conclusion of lease agreements with anchor tenants; obtaining building permits).

The due diligence service provided by our lawyers and certified specialists in Germany includes, among others, the following services:

  1. Ownership: examination of the ownership structure
  2. Land register encumbrances: Examination and evaluation of land register encumbrances, such as hereditary building rights, easements, rights of first refusal and land charges
  3. Encumbrances outside the prohibition on disposal/restrictions on disposal Investigations regarding existing obstacles to disposal, such as insolvency of the seller, ongoing execution of wills, administration of estates or public law approval requirements
  4. Rental and lease agreements, in particular verification of compliance with the mandatory statutory written form requirement
  5. Financing agreements, in the case of the assumption of existing financing, examination of the extent to which the claims secured by land charges are still valid,
  6. Insurance policies, review of insured risks, sums insured, limits and annual insurance premiums, termination options
  7. Maintenance and service contracts: Review of contracts for property management (technical and commercial)
  8. Public-law contracts/notices, such as subsidy notices, redevelopment agreements, development contracts

With regard to all non-legal aspects of real estate due diligence, we can establish contacts with established service providers in Germany.

Further information on relevant real estate topics in german practice can be found on the following pages of our law firm on the Internet:

  • PRINCIPAL
  • COMMERCIAL REAL ESTATE TRANSACTIONS
  • REAL ESTATE PURCHASE AGREEMENT; LAND PURCHASE AGREEMENT
  • COMMERCIAL LEASE LAW
  • REAL ESTATE RELATED CORPORATE LAW
  • REAL ESTATE AND TAXES

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