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 |  Dennis Wiegard

Property development contract - What if the contractually agreed completion deadline is not met

Property development contract - Lawyers Düsseldorf

Due to the reform of the building contract law, purchasers under a property development contract were partially defenceless. Since the first of January 2018, there has been a gap in protection in the event that the developer does not meet the contractually agreed completion deadline and the building project is simply not completed.

What is a property development contract?

Pursuant to section 650u (1) sentence 1 BGB, a property development contract is a contract which has as its object the construction or conversion of a house or a comparable building (e.g. condominium) and which at the same time contains the obligation of the contractor to transfer ownership of the property to the purchaser (or to create or transfer a heritable building right).

Anyone who concludes a property development contract pays up to seven instalments to the property developer in accordance with the Real Estate Agent and Property Developer Ordinance (MaBV) after construction has progressed. The purchaser's payments are secured by a priority notice of conveyance in the land register. This gives the purchaser the claim under the law of obligations to a change of title in rem, i.e. to the transfer of ownership after payment of the final instalment.

What happens if the developer does not meet the contractually agreed completion deadline?

Pursuant to Section 650k (3) sentence 1 of the German Civil Code (BGB), construction contracts, and pursuant to Section 650u (2) of the German Civil Code (BGB) property development contracts, must contain binding information on the date of completion of the work or, if this date cannot be specified at the time of conclusion of the construction contract, on the duration of the construction work. However, it often happens that property development projects in particular are considerably delayed. Most recently, the Corona pandemic and/or the shortage of building materials due to the Ukraine war are cited. The reasons become more incomprehensible when the building project is already one or two years behind schedule.

Of course, the purchaser has the right to withdraw from the contract. However, with the declaration of withdrawal, the priority notice would also be deleted from the land register, which is the only insolvency-proof claim of the purchaser against the developer. The claim for repayment of the instalments paid so far resulting from the withdrawal is not insolvency-proof. If the developer files for insolvency in the course of the construction project, the purchaser will not be helped by the titling of the repayment claim if the purchaser can only file his claim against an insolvent developer in the insolvency table. Withdrawal could therefore result in a total loss (loss of priority notice of conveyance/loss of paid instalments).

So where is the protection gap and how could the acquirer be protected?

Purchasers cannot terminate their property developer for cause if they do not fulfil their performance/production obligation by the contractually agreed completion date.

Termination of the property development contract was possible until 31 December 2017. The current loophole in the law is in Section 650u (2) of the German Civil Code (BGB), because since 1 January 2018 it explicitly excludes termination for cause.

If purchasers could terminate a property development contract for cause, purchasers, often consumers, would enjoy the protection of at least being able to continue to pursue their dream of owning their own home if they declared termination, as the priority notice of conveyance would also remain in place under the termination. The building project could be continued by a third party/new developer and the contract would not have to be rescinded (which should be the ultima ratio anyway).

Currently, purchasers can only claim their damages for delay - depending on the contractual arrangement maybe only a lump-sum damage for delay - against the developer.

According to § 44 GGO (Joint Rules of Procedure of the Federal Ministries), the new federal government is entitled to carry out an evaluation of the new construction contract law within five years. It is to be hoped that in the future, with the new Federal Minister of Justice, Dr. Marco Buschmann, the Federal Ministry of Justice will delete the exclusion of termination for cause according to § 648a in the reference of § 650u para. 2 BGB. The "new" construction contract law requires further improvements and renewals.

Düsseldorf, the first of June 2022

Author: Lawyer Dennis Wiegard

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