Compensation payment

Compensation - Compensation is a payment or other form of restitution made by one party to another to make up for damage suffered, an impairment, or the loss of rights or property. In real estate law, compensation payments arise in a variety of situations: in cases of expropriation, rent reductions, construction defects, premature termination of a contract, or in the context of government intervention. The compensation payment is intended to place the affected owner or user in the same position as if the harmful intervention had not occurred.

Typical Compensation Payments in Real Estate Law

Depending on the situation, the grounds, basis for calculation, and payment terms vary:

Compensation for Expropriation:

• Basis: Art. 14(3) of the German Basic Law (GG); value is based on market value
• Determined by an official decision or a court ruling
• Owners may challenge the amount (Regional Court)

Compensation for defects and construction delays:

• Rent reduction if the apartment is not in a condition consistent with the contract (Section 536 of the German Civil Code (BGB))
• Damages against the contractor for construction defects (Section 634 of the German Civil Code (BGB))
• Compensation through insurance (building insurance, liability insurance)

Compensation for noise, emissions, or neighborhood disturbances:

• Claims for compensation for disturbances unusual for the locality (Section 906 of the German Civil Code (BGB))
• Noise protection compensation in the context of infrastructure projects

Compensation for early termination or contract cancellation:

• Severance payments for tenants upon voluntary move-out
• Early repayment penalty for premature loan repayment
• Compensation for use after the end of the lease (§ 546a BGB)

Overview of Compensation Payments - Cause, Legal Basis, Calculation

Cause	Legal Basis	Calculation Basis	Tax Liability
Expropriation (complete)	Art. 14(3) GG, BayEntEG	Market value (ImmoWertV)	Generally tax-exempt (private assets)
Partial expropriation	BayEntEG, BauGB	Value of the partial area + loss in value of the remainder	Generally tax-exempt
Rent reduction (Section 536 BGB)	Section 536 BGB	Reduction rate (judicial tables)	Treated as a reduction in revenue for the landlord
Damages for construction defects	Sections 634, 636 BGB	Repair costs / loss in value	Taxable (business) / tax-free (private)
Tenant settlement	Agreement	Several months’ rent (1-12)	Taxable (income from VuV)
Early repayment penalty	§ 490 BGB	Asset-liability or asset-asset method	For capital investments: income-related expenses
Compensation for use	§ 546a BGB	Local comparative rent	Taxable (income)

Calculation and tax treatment

The amount of the compensation payment depends on the respective legal basis:

• Market value: In cases of expropriation and compensation for loss of property, the market value determined in accordance with the ImmoWertV is decisive
• Rent reduction rate: The courts have developed guidelines for typical defects (e.g., heating failure in winter: 20-50%)
• Early repayment penalty: Calculation using the so-called asset-liability method or the asset-asset method

Tax treatment: Compensation payments may be taxable or tax-exempt depending on the type. Income tax generally does not apply to compensation for the expropriation of private residential property; compensation for commercial real estate or loss of rent may be taxable. Tax advice is recommended in all cases.

Tenant Severance Payment: Specifics and Practice

A form of compensation that is becoming increasingly relevant in practice is the voluntary move-out bonus (tenant severance payment). Landlords or buyers offer tenants a cash payment if they are willing to vacate the apartment voluntarily. Such agreements are generally permissible and must be documented in writing.

The following points must be addressed: the exact amount of the severance payment, the move-out date, the condition in which the apartment is handed over, and the tenant’s waiver of any claims. Typical severance amounts range from several months’ rent up to the equivalent of one year’s rent-depending on market conditions, the tenant’s length of tenancy, and the owner’s economic interests. A settlement agreement that is not notarized is nevertheless legally valid, as it is not a legal transaction requiring a specific form.

Practical Tip for Property Owners in Nuremberg and Franconia

In the Nuremberg area, compensation payments are particularly relevant in the context of infrastructure projects (road construction, S-Bahn expansions), noise abatement measures, and tenancy law matters. We recommend that owners always obtain their own market value appraisal when receiving compensation offers from authorities-experience shows that offers from authorities are often below the actual market price.

For tenant compensation negotiations (e.g., in the event of conversion), the following applies: A written agreement with clear terms protects both parties. We recommend having this agreement reviewed by a specialist attorney for tenancy law. The Nuremberg Local Court and the Nuremberg and Surrounding Area Tenants’ Association (Mieterverein Nürnberg und Umgebung e.V.) are key points of contact for disputes regarding the amount of compensation.

Frequently Asked Questions

How much is the compensation in the event of expropriation?

The compensation must correspond to the full market value (Art. 14(3) of the German Basic Law). This is determined by experts. Additionally, compensation may be payable for business interruptions, moving costs, and other financial losses. Owners have the right to challenge the determined compensation in court.

What is compensation for use?

If a tenant does not move out by the due date, the landlord may, pursuant to § 546a BGB, demand compensation for use in the amount of the agreed rent (or the local comparative rent, if higher) - for each additional month of use. This is not damages, but rather a legally regulated payment for continued use.

Do I have to pay taxes on compensation payments?

That depends on the individual case. Compensation that compensates for financial loss (e.g., expropriation compensation for a single-family home) is generally exempt from income tax. Compensation that replaces lost income (e.g., lost rent), on the other hand, is taxable. We recommend consulting a tax advisor in any case.

How do I properly negotiate a tenant settlement?

The starting point should be an objective analysis: What is the value of the vacant apartment, and what is the rental value? What legal protections does the tenant have? The longer the tenancy and the more difficult it would be to terminate the lease properly, the stronger the tenant’s negotiating position. In Nuremberg, we see severance payments ranging from three to twelve months’ rent as the standard range-depending on the location and the owner’s interests.

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