Bankruptcy (Real Estate Developer)

If a developer goes bankrupt during the construction phase, the term “developer bankruptcy” is still commonly used-legally, however, since 1999 this has been classified as insolvency proceedings under the German Insolvency Code (InsO). Buyers who have made installment payments risk losing their advance payments and are left with an unfinished or even unstarted construction project. Protective measures such as the guarantee under the MaBV and the registration of a priority notice of conveyance are therefore indispensable.

Legal Background: MaBV Protection and Priority Notice of Conveyance

The Real Estate Brokerage and Developer Ordinance (MaBV) stipulates that developers may only accept installment payments if certain security measures are in place. These include, in particular:

• Priority notice of conveyance in the land register in favor of the buyer before the first installment is due
• Completion guarantee or contract performance guarantee from a bank or insurance company
• Linking of installments to objective construction progress in accordance with § 3 MaBV

If these requirements are met, the buyer is significantly better protected in the event of insolvency: The priority notice secures the transfer of ownership, and the guarantee covers potential additional costs for completion.

The MaBV protective provisions are mandatory; developers may not choose a contract structure that circumvents these safeguards. In practice, however, some developers attempt to circumvent or weaken the MaBV requirements through convoluted contractual terms. Buyers should therefore have every developer contract reviewed by a specialist attorney for construction and architectural law before signing.

Procedure for a Developer Insolvency Proceeding

After an insolvency petition is filed, the local court appoints a provisional insolvency administrator. The administrator assesses whether continuing the construction project-potentially by seeking investors-makes economic sense. Buyers become insolvency creditors and must file their claims with the insolvency schedule. Possible scenarios include:

1. Project continuation by the insolvency administrator or a purchaser of the company
2. Completion by a group of buyers who finish the project themselves
3. Liquidation and pro-rata reimbursement from the insolvency estate (usually a small percentage)

The period from the filing of the insolvency petition until it is determined which scenario will occur can take six months to two years. During this time, construction sites often come to a standstill, and buyers find themselves in a legally and emotionally stressful situation. Important: Buyers should join forces early on and seek legal advice together-a coordinated group of creditors carries more weight with the insolvency administrator and in the search for an investor.

Early Warning Signs and Prevention

Buyers should check the developer’s creditworthiness before signing the contract (commercial register extract, annual financial statements, reference projects). Warning signs include repeatedly extended construction timelines, supplier reminders, or missing building permits. Contract clauses requiring payments before the MaBV milestones are invalid and should be clearly refused.

Other warning signs: incomplete or incorrect building permit documents, missing financing confirmations from the developer, press reports about payment difficulties or supplier lawsuits, purchase prices that are below market average (dumping prices as an alarm signal). A SCHUFA credit report on the developer and a credit check with Creditreform can provide additional insights.

Practical Tip for Homeowners in Nuremberg and Franconia

In Nuremberg’s real estate market, new construction projects by developers-such as in the Gibitzenhof and Lichtenreuth neighborhoods or in northern Nuremberg-are in high demand. We recommend that buyers always have a legal review conducted by an attorney (§§ 3-7 MaBV checklist) before signing a developer contract. In Nuremberg and the metropolitan region, there are several law firms specializing in construction law that typically offer such reviews at flat rates. We are happy to assist in identifying reputable developers with a solid track record and in critically reviewing the contract documents.

Buyer Consortium as a Protective Strategy

If a developer goes into insolvency, individual buyers are structurally at a disadvantage compared to the insolvency administrator and potential investors. An organized group of buyers, on the other hand, can act in a coordinated manner, jointly retain a lawyer, and actively participate in the insolvency meeting as a group of creditors. In some cases, groups of buyers have completed the half-finished project on their own-by taking over the construction site from the insolvency administrator and hiring a new general contractor.

It is best to start building such a group early in the construction phases: exchange contact information with other buyers, track construction progress together, and respond in a coordinated manner to delays. At the first serious signs of trouble-no movement of construction cranes, contractors leaving, complaints from suppliers-the group should seek legal advice immediately.

Frequently Asked Questions

What happens to my down payment if the developer goes bankrupt?

If there is a valid guarantee under the MaBV, you can draw on it and receive your payments back. Without a guarantee, you become a general bankruptcy creditor and will receive, on average, only a fraction of your claims.

As a buyer, am I obligated to see the construction project through to completion?

No. You have a choice: Either you withdraw from the contract and file your claim with the insolvency table, or you agree to the project’s continuation by the insolvency administrator or a new investor.

Does the priority notice of conveyance fully protect me?

The priority notice of conveyance secures your right to acquire ownership, thus preventing the property from being encumbered or sold to another party. However, it does not guarantee completion-the additional completion guarantee is crucial for this.

How can I identify a reputable developer?

Reputable developers provide complete building permits, cite completed reference projects, name specific financing banks, and offer contract documents that fully comply with MaBV requirements. They are not willing to demand unscheduled advance payments and can provide guarantee commitments from reputable banks or insurance companies.

What costs will I incur if I have to take legal action against a developer?

Attorney fees are based on the value of the matter (usually the purchase price). For a purchase price of €400,000, the initial consultation and filing for inclusion in the insolvency table typically incur costs of €2,000 to €5,000. Anyone with legal expense insurance that covers construction contract law should check this early on. A coordinated group of creditors can spread legal fees across multiple parties, thereby reducing the burden on each individual.

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