Reversion (Leasehold)

Reversion refers to the right of the landowner (lessor) to reclaim the leasehold under certain conditions-and thereby take ownership of the building erected on the property. It is the lessor’s most powerful tool and must be agreed upon in the leasehold agreement. Reversion may only be exercised in the event of serious breaches of duty by the leaseholder and does not result in a lack of compensation: The leaseholder receives compensation for the building as provided by law or contract.

Conditions for Reversion

The Leasehold Act (ErbbauRG) permits reversion only if certain circumstances defined in the contract occur. Typical grounds for reversion are:

• Significant delay in paying the ground rent (usually more than two annual installments)
• Serious breach of the obligation to maintain the building
• Sale of the leasehold right without the consent of the grantor (if contractually required)
• Insolvency of the leaseholder
• Use of the property contrary to the contractually specified purpose

The grantor must actively exercise the right of reversion; it does not take effect automatically. The exercise period and procedure must be specified in the contract. In practice, many grantors-often churches, municipalities, or foundations-give advance notice of an impending exercise of the right of reversion and grant the leaseholder the opportunity to remedy the breach of duty. Such goodwill is not legally required but is customary.

Compensation upon Reversion

Pursuant to § 32 of the German Leasehold Act (ErbbauRG), the leaseholder is entitled to compensation equal to the market value of the building, unless the contract provides otherwise. Contracts often stipulate compensation of two-thirds of the market value; however, lower rates are possible and permissible. Existing real property liens (e.g., the mortgage held by the financing bank) are given priority in being satisfied from the compensation.

Compensation is calculated based on the market value of the building at the time of reversion-not on the investment value. Anyone who has extensively modernized a building on a leasehold property will receive only the current market value, which may not fully cover the investment costs. Therefore, it is important to carefully review the compensation mechanism in the leasehold agreement before undertaking extensive renovations.

Reversion and Financing - A Special Risk

Banks that finance a leasehold typically protect themselves through an agreement with the grantor of the leasehold: In the event of reversion, the bank is given the option to designate a third party as the leaseholder who will continue the loan (so-called buyout clause). Without this safeguard, lending against leasehold rights is more difficult for banks; some institutions refuse such loans outright or require significantly more equity.

The buyout clause must be expressly agreed upon in the leasehold contract or in a separate agreement with the leasehold grantor. If it is missing, the bank may come away empty-handed in the event of reversion or must settle for the reversion compensation. For prospective buyers, this means: The financial viability of a leasehold interest depends not only on one’s own creditworthiness but also on the contractual terms agreed upon with the leasehold grantor.

Practical Tip for Owners in Nuremberg and Franconia

In the Nuremberg metropolitan region, there are leasehold properties owned by the city, the Protestant and Catholic churches, and various foundations. Anyone purchasing such a property should carefully review the leasehold agreement for reversion clauses and clarify which obligations could trigger them.

We also recommend making leasehold rent payments meticulously on time and documenting maintenance work. Especially with church-owned leasehold properties-in Nuremberg, these are often the Evangelical Lutheran Church or the Archdiocese of Bamberg-long-term contracts with strict usage restrictions apply, which are binding for decades. A real estate lawyer should review the contract before purchase. We are happy to coordinate an experienced local attorney for our clients.

Frequently Asked Questions

Do I lose the building without compensation upon reversion?

No. According to Section 32 of the German Leasehold Act (ErbbauRG), the leaseholder is always entitled to compensation. The minimum rate cannot be contractually reduced; two-thirds of the market value of the building is standard, and in some contracts even more.

What happens to my bank financing upon reversion?

The financing bank generally has the right, through a buyout agreement, to designate a third party as the new leaseholder who will continue the loan. The bank is also to be satisfied with priority from the reversion compensation. Without such an agreement, the risk for the bank is considerable, which is why the creditworthiness and contractual requirements are stricter.

Can the leaseholder grantor demand reversion even without a contractual basis?

No. Reversion requires that it be agreed upon in the leasehold contract and that one of the conditions specified therein has occurred. There is no general statutory right of reversion; the Leasehold Act (ErbbauRG) leaves the agreement to the discretion of the parties.

Can I prevent reversion if I am in default of payment?

Yes, in many cases, remedial action is possible. The leaseholder must actively exercise the right of reversion and must observe principles of proportionality in doing so. Payment of arrears before the formal exercise of the right of reversion may extinguish the right. In case of doubt, a lawyer specializing in real estate law should be consulted immediately.

How does reversion affect existing leases in the building?

If the leasehold property is leased and reversion occurs, the leases are transferred by law to the new owner-that is, the grantor of the leasehold. The tenant cannot be terminated solely due to the reversion; they remain protected under tenancy law. For the grantor of the leasehold, who may be, for example, a church or municipality, this means that upon reversion, they also assume the role of landlord. This situation can be inconvenient for both parties and often leads in practice to negotiations regarding a quick sale of the building to a new leaseholder.

Market for Hereditary Building Rights in the Nuremberg Metropolitan Region

Properties with hereditary building rights are occasionally offered on the market in Nuremberg and the surrounding region-both by private leaseholders who wish to sell their right of use and by grantors who are advertising properties for the granting of hereditary building rights. Pricing for hereditary building rights is complex: In addition to the building’s value, the remaining term of the leasehold, the amount of the ground rent, and the contractual terms-particularly reversion clauses and renewal options-play a decisive role. Leasehold properties with a short remaining term (less than 30 years) are difficult to finance and are subject to high risk premiums by banks or rejected entirely. Anyone wishing to purchase a leasehold should treat the remaining term and the renewal option as primary decision-making criteria. In Nuremberg, church leaseholds often have terms ranging from 75 to 99 years-with a long remaining term and moderate ground rent, they can represent an attractive alternative to freehold property.

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