Real estate purchase agreement – legal aspects one should focus on when drafting a real estate purchase agreement

The real estate purchase agreement is the core of every real estate transaction.

Although sales and property law is extensively normalised in German law, real estate transactions usually require comprehensive contractual regulations. In this process, essential is a good interplay between the sales and property law on one hand and the notarisation and land registry law on the other. In many aspects, the legislative framework is however not sufficient or does not meet the expectations of the parties so contractual provisions should be agreed to adjust the statutory regulations in the interest of the parties.

When drafting the contract, it is important to know, among others, the following legal aspects, which, of course, can also often be a subject of contractual negotiations.

 

According to Article 311b of the German Civil Code (BGB), real estate purchase agreements must be notarised. The notarisation requirement extends to everything that, according to the will of the parties, “stands and falls” with the transfer of the real estate. In particular, leaseback rights or recovery/renovation or construction obligations of a contracting party should be taken into account. The notarisation requirement may also apply to a lease agreement or an addendum to a lease agreement related to the transaction. Failure to notarise a document – even if it is only one lease agreement – renders the entire agreement void until the new owner is registered in the land register, so a formal defect can have serious consequences. For example, a priority notice usually protecting the buyer would be devoid of purpose, and the effect would be that the payment of the purchase price would be unsecured.

However, the situation is different in the case of changes to a land property purchase agreement in the period between the conveyance and the entry of ownership in the land register. In this case, the addendum does not involve any formal requirements. Any doubts as to this fact were resolved by the Federal Supreme Court (BGH) with its judgment of 14/09/2018 (file no. V ZR 213/17). According to this, once the parties' declarations under the law of obligations are notarised and the declarations in rem required for the transfer of ownership (conveyance) are notarised, the protective function of Article 311b BGB has been fulfilled. In this case, the parties have made all necessary efforts to ensure that the transfer of ownership is registered and are less in need of protection. Any subsequent changes taking place between the declaration of conveyance and the registration in the land register therefore do not require notarisation, unless another object of purchase is added.

 

Since real estate is often held as private property for tax reasons, it is quite common that a natural person is a party to a real estate purchase agreement. Crucial is the question of whether this natural person acts as a consumer or as an entrepreneur, particularly in terms of special aspects arising from notarisation law to be observed by the notary. In the case of consumer purchase agreements, the notary must provide the consumer with a (largely) final draft version of the purchase agreement to be concluded two weeks before its notarisation. This period of time between the receipt of the draft purchase agreement and the notarisation is intended to protect the consumer from any haste and at the same time to enable him or her to examine all essential points. Failure to comply with the time limit does not render the agreement ineffective, but may give rise to official liability on the part of the notary, which is why it is important to consider this time limit in the timetable of the transaction.

 

For the purpose of defining the object of purchase, all information entered in the land register regarding the property subject to the agreement should be specified because the description in the land register clearly identifies the property being the object of purchase. The land register entry also shows the encumbrances on the property which play quite a significant role in the drafting of the agreement, because they are automatically transferred to the buyer, at least in their material scope, upon the purchase of the property.

The encumbrances and restrictions on ownership entered in Section II of the land register (such as utility easements, rights of first refusal, note on the land property being situated in a regeneration area, or restrictions on disposal) can be decisive for the buyer as regards the planned use and thus influence the value of the property. The handling of such encumbrances in the purchase agreement depends on the result of the real estate due diligence, which thoroughly examines the authorisations underlying the encumbrances. If it is found during the due diligence examination that the registered encumbrances and restrictions cannot be married with the future use of the land property intended by the buyer or are not to be taken over by the buyer, it is advisable to make the striking-off of the encumbrance or restriction from the land register a precondition for the payment of the purchase price.

 

Depending on the constellation, there may also be in-depth discussions between the parties about the preconditions for the payment of the purchase price. As a rule, it is always contractually regulated in real estate purchase agreements that the seller only ceases to own the property being sold when the purchase price has been paid in full and that the buyer only pays the purchase price when it is ensured that ownership of the real estate will pass to him or her once the payment is made.

In order to secure the buyer's advance payment, several preconditions for the payment of the purchase price are defined which must be met jointly. In addition to the classic preconditions for the payment of the purchase price such as registration of the priority notice, release from encumbrances and waiver of the municipal right of first refusal, other preconditions for the payment of the purchase price may arise from individual special aspects of the property being sold. Here, one might think of the conclusion of tenancy agreements or similar, for example. However, what should be avoided is making the payment of the purchase price conditional on external third parties.

 

In most cases, liability in real estate purchase agreements is regulated through independent warranties. Independent warranties regulate the responsibility for success that goes beyond the mere absence of material defects and is therefore not linked to the statutory warranty framework. Because most real estate transactions are preceded by an extensive due diligence phase, in which the property being sold is usually examined from a legal, tax and technical point of view, the seller's warranties – in addition to the basic warranties regarding ownership, use and permits – are usually limited to the defects and risks found in the course of the real estate due diligence. When designing a contractual warranty framework, care should therefore always be taken to ensure that it is as specific as possible and outlines the particularities of the property being sold, taking account of the deal's DNA.

 

Liability limitations and exclusions are – as in M&A transactions – the focus of every real estate purchase agreement. Generally, the same rules as in the purchase of movable property apply: While in acquisitions of newly constructed real estate or real estate yet to be constructed it is usually agreed that the seller (developer) accepts liability for material defects and defects in title, in acquisitions of already existing real estate this liability is excluded within the legal limits. Here, the real estate is purchased according to the “as is” rule.

Standard liability limitation clauses which are usually included in contracts are only valid if they meet the content-related requirements for business terms stipulated in Articles 307-309 BGB. Thus, exclusions and limitations of liability for losses arising from intentional or negligent injuries to life, limb, health as well as for other losses caused at least by gross negligence are inadmissible and invalid. The same applies to exclusions of liability relating to essential contractual obligations.

Furthermore, according to Article 444 BGB, a seller may not invoke an exclusion or limitation of liability if he or she has given a quality warranty of. The fact whether the parties agreed on a particular quality does not necessarily have to result from the sales agreement. Instead, in individual cases, also statements made outside the real estate purchase agreement may constitute a quality agreement without the parties noticing it.

Therefore, as for the catalogue of warranties, it is necessary to distinguish between a mere (fault-related) warranty declaration and a quality agreement (assurance of a particular quality for which the seller is willing to bear liability irrespective of fault). Since it is often impossible to distinguish between the two due to the fluid line between a quality agreement and a quality warranty, it is recommended that the parties agree in general how the distinction should be made in the purchase agreement.

 

Conclusion

The importance of real estate transactions on the market is increasing and so is the complexity of their legal structure. The explanations above show that real estate purchase agreements are a prime example how necessary it is to appropriately design a contract. Despite the seemingly extensive legal foundations, there is an enormous need for the contractual regulation of the legal aspects of real estate transactions in order to be able to carry them out successfully.