Buying in Germany:Do you know your German tenancy laws from your reservation fees? You need a good lawyer if buying in Germany, says Nicolas Zimmerin Berlin

Many private investors from Ireland are buying property in Germany, and especially in Berlin where the prices for real estate and flats are still significantly lower than in other European capitals. Attracted by possible gains and a quite competitive return on investment, most buyers are surprised by the complexity of the German legal system.

Nourished by the growing number of investors, more and more real estate agents are focusing on potential foreign customers. And when looking for suitable investments, many investors rely on the services of intermediaries.

But a German Makler is seldom acting as the exclusive agent for a vendor or has the authority to do more than advertise a property or arrange a viewing. Hence it is possible for a vendor to have two or three agents at the same time. Under German law, agents earn commission when a contract is closed due to their activities regardless of the quality of their efforts. The commissions are usually paid by the purchaser, being around 5 per cent of the agreed price plus Vat.

Dealing with an agent could actually mean wasting money: some agents ask for a "reservation fee" of up to €3,000 on a property but in a significant number of cases, dubious agents are just trying to earn some extra cash this way - without the intention of forwarding those monies to the seller. Payments of funds should only be made to the vendor directly - who will hardly ever demand something like a "reservation fee". The conveyancing procedure is fundamentally different from that in common law jurisdictions. The transfer is not carried out by solicitors or conveyors but by a notar, who certifies and handles the purchase contract with the authority of the German state he or she was appointed by.

The notar is acting impartially and will basically certify anything the purchaser and the vendor agree upon, unless it is obviously against the law.

So it is essential to understand the contract and its meaning; investors not having a sufficient command of German and knowing the basics of the German legal system must demand an English translation of the contract in advance and should involve an independent English-speaking lawyer to avoid unpleasant surprises.

Apart from disadvantageous provisions for payments, change of possession or public duties associated with the property, there is also a potential risk of liabilities. Buying a property means inheriting its encumbrances - so the land register must be checked for charges and the contract must include a clause that the vendor guarantees the discharging of any mortgages. If the apartment is tenanted, the tenancy agreement will be transferred with the purchase so it should be included in a legal due diligence as well.

Investors may encounter vendors demanding down payments in cash when signing the contract. If the vendor should become insolvent before a priority notice in the name of the purchaser is entered on the land register, the money and the prospective property would be lost in this case. For reasons of security, the escrow account service provided by the notar should be used instead.

This makes sure that the funds paid by the purchaser are only distributed to the vendor after the notar has ascertained that all prerequisites for the transfer of ownership are satisfied.

Germany is still a country of red tape and therefore a considerable amount of patience will be needed until completion. It may take some months for the ownership of a freehold estate to be established finally in the land register (Grundbuch) after stamp duty land tax (4.5 per cent in Berlin and 3.5 per cent elsewhere) and notar and land registry fees (approximately 1.5 per cent) are paid. So it must be included in the contract that the buyer is already entitled to utilise the property after the vendor was paid to avoid unnecessary delays.

A lot of investors are puzzled by duties imposed on them by German law, especially when buying a flat. With the purchase, they become a mandatory member of the Commonhold Association (Wohnungseigentümergemeinschaft).

The Commonhold Association is a statutory company of all owners which administers common facilities like staircases or heating systems; it is impossible to resign from it unless the flat is sold.

The Commonhold Association appoints an administrator who takes care of the management and charges the monthly housing fees from the owners.

The members resolve issues like restrictions of use and common investments by majority vote, so the property can be significantly influenced and debts can be incurred without an owner's consent. It is essential for investors to exercise their rights in the Commonhold Association's meetings.

If an apartment is tenanted, owners should be aware of the formidable obstacles formed by the German Civil Code when quitting a rental contract.

It is a common joke amongst German lawyers that it is easier to get divorced than to terminate a tenancy agreement; and there is a lot of truth in it.

The German civil code grants landlords the right to terminate the contract only in a number of cases, e.g., the tenant does not pay the rent for two months. But if the tenant or the social welfare pays the rent within one month after the commencement of eviction proceedings the termination becomes ineffective. The German tenancy law is also called a "social law". So the mere fact that a higher rent could be obtained with other tenants is explicitly not accepted by the law as a reason for giving notice.

And even if a termination is possible, the notice period for both sides depends on the duration of the contract. Since a buyer steps into existing tenancy agreements, the time the tenant spent in the apartment with the former owner counts as well. The minimum period is three months and after five, eight and 10 years, the period is extended for an additional three months respectively.

From this overview alone, it's obvious that Irish investors in the German property market should be sure to make an informed decision which also takes into account a different legal culture.

Nicolas Zimmer is a solicitor (Rechtsanwalt) in Berlin

www.zimmerlegal.com

What investors need to know:

• Estate agents are seldom entitled to receive "reservation fees" - monies should always be paid to the vendor, but a seller is unlikely to ask for such a fee.

• The contract is carried out by a notar who will basically certify anything which is not against the law.

• Investors should demand an English translation of the contract draft.

• Buyers must make sure not to inherit liabilities and risks: always check the land register, public duties and tenancy agreements.

• Vendors may become insolvent before completion;buyers should use a notar's escrow account to make sure all prerequisites for completion are satisfied before funds are forwarded to the seller.

• Completion may take months because of the land registry; investors should be entitled in the contract to utilise the property immediately after payment.

•Owning an apartment means becoming a member of the Commonhold Association - investors may be bound by resolutions without their consent, so general meetings of the association must be attended.

• Being a landlord means being subject to German "social tenancy law" - investors cannot terminate a tenancy agreement just to obtain a higher rent.