Contractual content and ground rent
We had already explained the ever-increasing importance of the ground lease, its history and its growing significance in our article of 23 November 2022. In this part of our series we would like to explain the contractual content of such a heritable building right as well as the regulations on the ground rent. In a subsequent third part, we will look at selected tips for drafting contracts.
Legal minimum content
Before considering the contractual content, it must be ensured that the statutory minimum content according to § 1 of the German Ground Lease Act (ErbbauRG) is fulfilled. This includes that the heritable building right may only relate to a structure (these are not only houses, but also bridges, railway tracks, high-voltage facilities, but also underground car parks lying below the surface as well as wind energy facilities or even golf courses). Since the heritable building right must be alienable and inheritable, all restrictions in a contract on conditions subsequent, final dates, etc. are inadmissible.
Details of the heritable building right secured in rem
The landowner and the heritable building right holder can (and should) agree on details of the content of the heritable buildings right. This contractual content is evvective in rem, i.e. it is covered by the agreement in rem (land register declaration) and is entered as such in the land register by reference to it. It is therefore valid vis-à-vis third parties, for example a new owner of the land, if the land is sold.
The contractual content includes regulations on the construction, maintenance and use of the building. It must also be clarified whether the heritable building right is also to apply to parts of the land that have not been built on. The following questions also arise: How should the building be insured and how should it be rebuilt in the event of destruction? Who is to bear the public and private burdens and charges? The leasehold must also include an obligation on the part of the leaseholder to transfer the leasehold to the landowner if certain conditions are met (reversion). The heritable building right holder may undertake to pay contractual penalties. The landowner may grant the leaseholder a priority right to renew the heritable building right after its expiry. Finally, the landowner may undertake to sell the land to the respective leaseholder.
Duration of the heritable building right
The duration of a heritable building right and the compensation due at the end of the heritable building right constitute the economic core of a heritable building right contract. The duration of the heritable building right is not regulated, i.e. there is no maximum and no minimum duration. The commonly known term of 99 years is not prescribed, as is often assumed, but derives from a first housing law. In practice, the duration of the heritable building right depends on the expected useful life of the building and the mutual economic interests. The type and extent of the leaseholder's investment play a significant role. Common terms are between 30, 50 or even 99 years. The heritable building right is automatically extended if the extension is not objected to before the expiry of the term.
The regulation on the ground rent, i.e. the remuneration to be paid by the heritable building right holder, is not part of the contractual and thus in rem content of the heritable building right. This means that the finality and/or type of consideration are not prescribed by law. It is therefore also possible that a heritable building right is transferred free of charge, i.e. without or only with a one-off consideration. It is also not mandatory that this involves recurring payments (monthly or annual payments) from the leaseholder to the landowner.
Ground rent not assignable for financing purposes
The landowner cannot assign this claim separately for financing purposes, e.g. to a bank, because it is "attached" to the land. There are no binding regulations in this regard. It is advisable to secure the value of the ground rent. In practice, this is done by indexation, e.g. to the consumer price index (in Germany, for example, on the basis of 2015 = 100).
In the third part of this series we will discuss which variants are advisable and where possible "traps" might arise for both the landowner and the owner of the heritable building right. This third part will follow shortly.
Düsseldorf, 05 December 2022
Dr Dieter Jasper, lawyer