Share deals in the real estate market have been in the public and political spotlight for several years. Up to now, tax law issues have dominated the debate. Now the Berlin Senate wants to extend the municipal pre-emption rights to real estate-related share deals.
On 9 February 2021, the Berlin Senate decided to submit the “Draft Bill to Strengthen the Municipal Pre-emption Right pursuant to Sections 24 et seq. of the German Building Code (Baugesetzbuch, BauGB) (Pre-emption Right Strengthening Bill)” to the German Federal Council (Bundesrat) (Federal Council Journal 124/21).
The current situation
Provided that a property is located in one of the special areas mentioned in section 24 (1) BauGB or the municipality has established a special pre-emption right to a property for itself by statute (Satzung), the municipality may be entitled to a pre-emption right in the case of a literal “purchase of property” (section 24 (1) sentence 1 BauGB). By exercising this right, a municipality acquires the sold property instead of the original purchaser and can thus determine its future use.
According to a ruling of the Federal Court of Justice (Bundesgerichtshof, BGH) on the pre-emption right under civil law (section 463 of the German Civil Code (Bürgerliches Gesetzbuch, BGB)), share deals are in principle not suitable to trigger a pre-emption right. However, contractual arrangements are conceivable “which, from a material point of view, come so close to a purchase within the meaning of the pre-emption right that they can be considered equivalent to it“. In the case decided by the BGH, however, it was a clear case of circumvention, in which the sole purpose of the arrangement was apparently to avoid the pre-emption right. In proceedings for interim legal protection, the Administrative Court of Berlin (Verwaltungsgericht Berlin, VG Berlin) considered the applicability of the municipal pre-emption right under the BauGB to share deals to be conceivable. According to the VG Berlin in its – now apparently legally binding – decision (ref.: 19 L 566/19), it is “possible that so-called circumvention transactions, which are similar to a purchase, trigger the pre-emption right“.. The VG Berlin did not have to decide whether the municipality indeed had a pre-emption right in this specific case. The decision was rightly criticised in the legal literature, especially since it remains completely unclear which legal consequences should arise if the municipal pre-emption right is exercised. In any case, it seems hardly conceivable that the municipality would want to or be able to enter into the share purchase agreement. A direct claim to transfer of ownership of the real estate property is likely to fail due to the lack of a legal basis. The decision has nevertheless created a sense of uncertainty in legal transactions.
Proposed to come
Municipal pre-emption right for real estate share deals and “equivalent” transactions
With the draft bill proposed, regulations should now be included in the BauGB according to which the municipal pre-emption right can undoubtedly also be exercised in the case of real estate-related share deals. The proposed broad wording to extend the municipal pre-emption right to all contractual arrangements “which, from an economic point of view, are equivalent to the sale of a real estate property” is, however, also intended to include other “yet unknown contractual and case arrangements“. According to its reasoning, the draft bill sees a sufficient restriction in the fact that an economic equivalence of a share deal with an asset deal can only be assumed “if the sole or at least primary purpose of the sold company is the administration of the real estate property or if the real estate property represents the main asset of the sold company“.
Comprehensive notification obligations and considerable fines
The proposed extension of the municipal pre-emption rights is flanked by comprehensive notification obligations towards the municipality of public bodies (courts, authorities, and notaries) as well as of the parties directly involved in the sale. Non-compliance with the obligation to notify contrary to duty by sellers and purchasers should in future be punishable by a fine of up to EUR 500,000.
Doubled period for review and exercise of rights
In addition, the draft bill seeks to extend the period for exercising a pre-emption right (section 28 (2) sentence 1 BauGB) from two to four months.
As the legal consequence of exercising the pre-emption right, the municipality shall have a claim to transfer of ownership of the property concerned. It should not be possible for the municipality to enter into the share purchase agreement instead of the original purchaser of the company shares.
The draft bill proposed fits in with the development of Berlin’s municipal legal policy in recent years. Asset deals and real estate-related share deals are to be treated as equally as possible, not only in terms of taxation, but also regarding municipal pre-emption rights. Most transactions in the real estate market are likely to be affected by the draft bill in its present form. After all, both project developers as well as investors very often use project companies for the realisation of their construction projects or for their purchases and sales, whose sole purpose is the administration of a single property or whose main asset is the property. In all these transactions – according to the will of the Berlin Senate – the municipalities could in future have a more frequent say nationwide.
What happens next
It remains to be seen whether the extension of municipal pre-emption rights to such transactions will help to achieve urban development goals and, in particular, to combat the housing shortage – as well as the further legislative process. The Bundesrat has not yet discussed the draft bill proposed by the Berlin Senate. We will continue to monitor further developments for you.
Dr. Christian Thiele
+49 (0)40 696 39 15-24
Dr. Constanze Kugler
+49 (0)40 696 39 15-19