- Hereditary building rights (Erbbaurechte)
A hereditary building right entitles its beneficiary to own and/or develop one or multiple building(s) on real property owned by another party. It must be registered in the land register and can be separately disposed of and/or encumbered. As consideration, the beneficiary pays rent to the owner of the real property. Upon expiration of the hereditary building right’s term (for example, 99 years), the title to the building(s) developed by the beneficiary is transferred to the owner of the real property by operation of law. Whether the owner must compensate the beneficiary for the loss of the title to the building(s) depends on the individual agreement. Hereditary building rights are often granted by municipalities or churches to allow building measures on their property without losing title and to create jobs in their area.
- Commercial leases
Most commercial lease transactions commence with an offer to lease, which contains the business terms agreed upon by the parties, including the space, term, rent and any tenant inducements (such as rent-free periods or construction allowances). Commercial leases generally provide for rent plus additional service charges comprising a proportionate share of the operating costs caused by the ownership of the real property, e.g., taxes, insurance premiums, utility and common area maintenance charges. In a retail lease, a tenant may also be required to pay rent based on a percentage of its annual sales.
- Residential leases
Residential leases are subject to a tighter legal regime under German mandatory law, which strongly protects residential tenants. As a consequence, residential lease agreements cannot be fully and freely negotiated or terminated, but certain compulsory statutory law prevails and must be taken into account (e.g., limiting the ability of the landlord to terminate the lease or to increase residential rent).
- Tenancy agreements (Pachtverträge)
Tenancy agreements are similar to commercial leases granting the tenant not only the right to use the leased space, but also the additional right to reap the fruits generated on the leased space (e.g., stones from a stone quarry or profits generated by a leased filling station, restaurant, etc.).
Generally, lease provisions are freely negotiable. While commercial leases and hereditary building rights can be widely negotiated between the parties, residential leases are strongly regulated. Further restrictions apply if lease provisions qualify as general terms and conditions; if so, they are subject to particular scrutiny and have to comply with a specific set of statutory provisions and case law to be valid. These restrictions mainly apply to standard residential leases, but may also influence the validity of standard clauses in commercial leases which needs to be taken into account when drafting and negotiating the lease agreement.
German leases may have an indefinite term subject to termination within the statutory or contractually agreed notice periods. Generally, fixed terms must not exceed a term of 30 years. A lease agreement providing for a fixed term of more than 30 years will be deemed a lease having an indefinite term after 30 years and may be terminated accordingly. The 30-year period is calculated as of the day on which the lease term has been agreed or has last been renewed. It is therefore possible to extend the term of an existing lease for a further 30 years. Hereditary building rights are not subject to any restrictions as to their term.
Ground leases/hereditary building rights often have a term of 99 years as this term is usually deemed to be the economic lifetime of buildings. Commercial lease agreements usually provide for a term of five or 10 years with one or two options in favor of the tenant to extend the term by five more years. Residential leases must provide for an indefinite term, unless a fixed term is expressly permitted under German law (e.g., if the landlord needs the leased space for its own use).
Residential tenants may challenge a termination of the lease by the landlord for social reasons.
German mandatory law provides that each lease agreement may be terminated by either party for cause. Generally, a lease can be terminated if the other party is in material breach of contractual obligations so that the other party cannot reasonably be expected to continue the lease. Further restrictions apply to the termination of residential leases and termination due to insolvency.
Parties are generally free to set rent in other currencies but arrangements for paying rent in a currency other than euro are not typical.
Rent is usually paid in advance on a monthly basis, before the third business day of each month.
Rents are usually fixed for the initial term, unless otherwise agreed in the lease.
The German Price Clause Act generally prohibits an automatic indexation of monetary obligations. As an exception to this rule, rent under commercial leases with a term of at least 10 years may be linked to the consumer price index published by the German Federal Statistic Office on a monthly basis. Sometimes, commercial leases provide for stepped rent or a lease review clause instead to adjust the rent to fair market price at the time of renewal or extension.
Rent increases under residential leases are highly regulated. Generally speaking, rent may be agreed upon as stepped rent, be linked to a certain price index, or increased if the average rent of comparable space in the same area is higher than the rent initially agreed upon. Also, modernization works may entitle the landlord to increase the rent. Effective as of 1 June 2015, the German parliament has adopted a controversial bill aiming to strengthen the rights of tenants in metropolitan areas identified as having overstretched housing markets (Mietpreisbremse). The bill entitles German federal states to determine so-called “tight housing areas” where new leases must not exceed the local average rent by more than 10%. So as not to hamper the development of new housing space, the bill provides for an exception for newly constructed and fully renovated buildings.
The following are usually required of landlords:
- Hand over the leased space in the agreed condition
- Repair and maintain the roof and shell of the property (provided that the general maintenance and repair obligations are effectively shifted to the tenant)
- Insure the property
The following are usually required of tenants:
- Pay rent on time
- Keep the property in good order and to carry out the maintenance and repair works for which the tenant is responsible
- Inform the landlord of required repairs
- Give access to the landlord for inspections or landlord's work (commercial lease)
Typically, tenants are only allowed to sublet the leased space with the landlord’s consent. Unless the lease provides otherwise, the landlord may grant or withhold such consent at its sole discretion. If the landlord withholds the consent other than for cause, the tenant may terminate the lease. However, in commercial leases such termination right can be excluded. The transfer of the lease also requires the landlord’s consent, and is usually effected by the landlord and both the current and new tenant signing a three-party transfer agreement.
If the premises are substantially damaged or destroyed by force majeure, the lease can usually be terminated by the parties. Rent generally abates depending on the extent of the damage or destruction.
If the premises are substantially damaged or destroyed due to causes attributed to the tenant, then the tenant remains obligated to pay the rent and may also be held liable for repairs or replacement.
The landlord is usually responsible for insuring the leased premises. The cost of standard insurance such as building insurance and landlord’s liability insurance can be recovered from the tenant through the service charges. Commercial leases usually obligate the tenant to obtain further insurance such as third-party liability insurance, plate glass insurance, inventory insurance, burglary insurance and business interruption insurance.
Lease agreements survive and will be transferred to the new owner by operation of law once the change of ownership is registered in the land register. It is common in asset sales for the parties to agree on an economic transfer of all right and burdens of a lease already with effect as of closing/ transfer of beneficial ownership.