5 Legal Issues Foreign Developers Struggle with in German Real Estate Market
When consulting foreign real estate developers on German real estate and construction law, a couple of legal issues are most likely to be subject of intense discussion. Many questions arise and the answers often activate disbelieving stares. We sometimes here from developers in the middle of a building process “we underestimated the strength of German consumer protection law”. Some of our clients would probably act differently, if only they had known beforehand.
Here are the examples we are referring to:
- Formalistic Legal System
- Strong Consumer Protection Law
- Securities – “§ 648 a BGB”
- Validity/Invalidity of General Terms and Conditions
- Current Real Estate and Construction Market
Problem Number 1: Formalistic Legal System
Some may say “formalism” forms part of Germany’s culture, but regardless of whether this is true or not, you will at least find the German legal system in general to be more formalistic as opposed to other systems you are used to. German construction law is full of formalistic requirements which can only be met when technical and legal experts work closely together.
Here is an example, Sect. 6 VOB/B (General Conditions of Contract Relating to the Execution of Construction Work) states:
If the contractor considers that he is being hindered in the proper execution of the work, he shall inform the client of this in writing without delay. If he fails to make such notification, he shall only be entitled to Claim allowance for the hindrance of the work if its cause and effect were obvious to the client.
This provision is seemingly more in favour of the developer than of the contractor and many contractors activate an intense claim management system on the basis of this provision. The consequences are detrimental since any impediment can give rise to claims for extra costs and time extension. Professional companies will send you numerous written notices on any possible (or even hypothetical) impediment on your construction site: This procedure requires the developer to reject the notices in detail, which over stretches the capacities of real life. The solution here is a decent anti-claim management which requires permanent and quick professional help from technical and legal experts alongside the building process.
Keep in mind: This is just one (!) example.
Problem Number 2: Strength of German Consumer Protection Law
When developing residential buildings for consumers in Germany you will not be able to circumvent the MaBV (“Makler- und Bauträgerverordnung”), which translates as “Brokers’ and commercial developers’ ordinance”. This law governs the relationship between a developer and a buyer (which is a consumer).
To make it short and simple:
Unlike in many other jurisdictions, the first installment you can ask a buyer to pay is no more than 30% of the purchasing price. In addition, the precondition for the maturity of this claim is that excavation works have begun. It also requires that the contractual installment plan for the other installments fully complies with the law. If you made one mistake in the contract regarding the installments, the effect will be detrimental: the installment plan will be invalid and therefore unenforceable. The full purchasing price will only been due after the completion of all works and removal of all significant defects, here you will need legal experts that will create the contract for you.
Furthermore, the final installment is a never-ending story. Here, the consumer protection and the great number of technical norms work “against” the developer: Building a house in Germany without any defect is, factually, close to impossible. Even if you fully comply with all technical norms, if you are looking for it, you will find a norm that either does not reflect the current technical standards or is sufficiently unclear to at least argue about defects. And now the consumer protection law comes into play: The final installment (3.5%) is only due once all defects have been removed, regardless of their significance, moreover, if there are significant defects, another installment (5%) cannot be asked for. If that is not enough, let me tell you that the legal debate surrounding the final installments is disputed among German courts. Even Germany’s Federal Supreme Court of Justice (Bundesgerichtshof, in short: “BGH”) is vague in it’s statements regarding the MaBV here.
To sum up: Do not count on quick payment of at least 8.5% of the purchasing price in the end of your project.
The German consumer protection law is strong and Germany’s courts act mostly in favour of the consumers. This law is nearly insurmountable, but it is worth considering each individual project beforehand.
Problem Number 3: Securities – “§ 648 a BGB”
The variety of securities in a construction project in Germany is broad: A contractor will have to provide securities for:
- the execution of works;
- any advanced payment; and
There is one security, however, which is specifically perfidious for the developer: The so-called “648a-Security”, which refers to Sect. 648 a of the BGB. The BGB is the German Civil Code (“Bürgerliches Gesetzbuch”) which governs most of the private legal relationships. Section 648 a of the BGB deals with the security which a contractor the principal for. If you would like to have a look at the relevant parts for German Construction Law in the BGB in English, you can read it here in my blog.
To keep it short and simple: A contractor can at any point after signing the contract ask the principal / developer for a security, usually a bank guarantee, in the full amount of the remuneration owed by the principal for the entire project. There is nothing the principal can do about it. If not considered this beforehand, this provision can ruin the financial element of the project.
An immunity against this rule is nearly impossible, as most of the contractual terms which amend this provision will be invalid (also see problem no. 4). Some legal terms can modify the proceedings when asking for the security.
Problem Number 4: Validity/Invalidity of General Terms and Conditions
EU developers will be familiar with Laws governing General Terms and Conditions.
In Germany, this set of rule comes with a strong consumer protection, which courts also often transfer to B2B contracts. In short, any term which constitutes an unreasonable disadvantage for the contracting party and which has not deemed the contract invalid under German law. This means, the unfair term is unenforceable and instead a statutory rule will enter into force. Of course, the statutory provision is most likely to be a disadvantage for the developer.
So far, so good … An extensive jurisprudence on the unfair terms law has developed a idiosyncratic “regime” of standards which makes it hard to, first of all, oversee what is fair and what is not, and secondly to even declare some of the rules invalid and unenforceable which are in the officially provided General Conditions of Contract Relating the Execution of Construction work, the VOB/B. Again: A set of rules which is provided by an official institution and is meant to be the standard contract for construction projects contains invalid (!) clauses.
As a solution to this problem, you will need legal experts that know the relevant jurisprudence in depth and that will create you a contract which will comply with the law but will in your favour.
Problem Number 5: Current Real Estate and Construction Market
The final issue is less a legal one than an economical one: Especially when developing in Berlin, you will shortly notice that it is hard to find the proper plot of land and to find suitable and willing construction companies. The current real estate market is tight, the prices are still attractive, but every undeveloped plot of land comes with numerous competitors. Acting quick and being sociable is essential.
Secondly, construction companies order books are full, if not overbooked. You will find companies that will accept your conditions, but you will very likely have to argue about time and money at some point in the building process.
Rechtsanwalt (Bau- und Immobilienrecht)
Attorney at Law (Construction and Real Estate Law)