Real property law

In German property law, a “right equivalent to real property” refers to rights that are legally treated as equivalent to ownership of a parcel of land and can therefore be registered and encumbered in the land register in the same way as a parcel of land. The most important example is the right of hereditary building: The holder of the right of hereditary building possesses a right, registered in the land register, to erect and use a structure on another person’s land-this right is transferable, inheritable, and mortgageable, just like real property.

Which rights are considered equivalent to real property?

The German Civil Code (BGB) and special laws define the following rights equivalent to real property:

• Heritable building right (Sections 1-38 ErbbauRG): The most significant right equivalent to real property; the holder of the heritable building right pays ground rent to the landowner and may encumber and sell the right.
• Condominium ownership and fractional ownership (Section 1 WEG): Each unit of exclusive ownership is treated in the land register as a separate parcel of land.
• Mining rights under the Federal Mining Act (BBergG).
• Fishing rights in certain federal states.

For the real estate market, leasehold rights are of particular practical importance.

Legal Treatment of Rights Equivalent to Real Property

Rights equivalent to real property are entered in a separate land register (leasehold register). They can be encumbered with land charges, mortgages, or other encumbrances and thus serve as collateral for loans. The same formal requirements apply to the creation, transfer, and encumbrance of these rights as to real property-in particular, notarization and registration in the land register.

Significance in Real Estate Purchases

Anyone who acquires a property on a leasehold plot is not purchasing the land itself, but rather the leasehold right, which is equivalent to real property. This has implications for financing (some banks only provide limited loans against leasehold rights), for the remaining term (if it is too short, the market value decreases significantly), and for the ground rent (an escalation clause can increase the burden over the term). When purchasing such a property, a thorough review of the leasehold agreement is essential.

Practical Tip for Property Owners in Nuremberg and Franconia

In Nuremberg and the Franconia metropolitan region, there are a number of properties situated on leasehold land-often owned by the City of Nuremberg, the Protestant Church, or other public entities. Before you buy, we’ll review the remaining term, the ground rent, and any reversion clauses for you. Buyers should be especially cautious with short remaining terms of less than 30 years, as financing options and resale value can be significantly limited in such cases.

Frequently Asked Questions

Can I sell a leasehold property like a standard piece of land?

Yes, the leasehold interest is transferable and inheritable. However, the sale is often subject to the landowner’s (lessor’s) consent as well as a right of first refusal, which is stipulated in the leasehold agreement.

What happens when the leasehold interest expires?

Upon expiration of the term, the structure reverts to the landowner (reversion). The leaseholder is then entitled to compensation-typically amounting to two-thirds of the market value of the structure, unless the agreement contains a different provision.

Is a leasehold interest more affordable for buyers than a standard purchase?

The purchase price for a leasehold is generally lower than for a comparable freehold property because the buyer also pays ongoing ground rent. Whether this is more cost-effective overall depends on the term, the amount of ground rent, and expected appreciation-an individual calculation is recommended.

Real Property Rights and Financing

Financing a leasehold interest is possible, but with restrictions. Banks generally accept leasehold interests as collateral if the remaining term of the leasehold interest exceeds the loan term by at least 10 to 20 years. The shorter the remaining term, the more cautious banks become, and the more difficult it is to secure follow-up financing. Anyone purchasing a property on leasehold land should clarify the financing options in advance and, if necessary, agree on an extension of the leasehold with the grantor.

The ground rent is an ongoing expense that must be factored into the financing calculation. For example, with a ground rent of 4% of the land value on a €500,000 property, annual costs amount to €20,000-a significant burden that noticeably reduces the property’s return on investment. Whether this makes economic sense depends on the price advantage compared to comparable properties with full ownership.

In Nuremberg, leasehold properties are primarily owned by the city, churches, and individual foundations. We are familiar with the specific terms of these leasehold grantors and can assess whether and under what conditions an extension or purchase of the property is possible.

Ground Rent: Calculation and Adjustment Clauses

Ground rent is the ongoing payment that the leaseholder makes to the landowner. It is usually agreed upon as a percentage of the land value-typically between 3% and 5% annually. With a land value of 400,000 euros and a ground rent rate of 4%, the annual cost amounts to 16,000 euros, or approximately 1,333 euros per month. This expense is fixed and independent of the lease income or the financial situation of the leaseholder.

The adjustment clauses contained in the contract are important. Many leasehold agreements provide for indexing the ground rent to the Consumer Price Index (CPI) or to changes in the land value. During periods of rising inflation or rising standard land values, this can lead to significant increases in ground rent. Anyone purchasing a property on a leasehold site should read the adjustment clause carefully and calculate the potential interest rate trends for the remaining term.

Reversion and Right to Compensation

If the leasehold expires without being renewed, the structure erected on the property reverts to the landowner (known as reversion). In this case, the leaseholder is entitled to compensation, which generally amounts to two-thirds of the building’s current market value-unless the leasehold agreement contains a different provision. In older contracts, the compensation provisions may be significantly less favorable. Anyone purchasing a leasehold property with a short remaining term should carefully review the reversion value and the amount of compensation to assess the financial risk.

In practice, many leaseholders seek to extend the leasehold right or purchase the property in a timely manner. Church-owned leasehold grantors in Nuremberg typically negotiate such extensions based on current standard land values-which can become correspondingly expensive after a decade of sharp price increases. We advise you on whether and how an extension or a buyout makes economic sense.

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