Overview and Factual Background
The judgment of the Federal Court of Justice (Case No.: VIII ZR 305/20; Date of Decision: 13.12.2023), published on 26 February 2025, deals with the scope of the statutory pre-emption right of a tenant in the sale of a rented condominium pursuant to Section 577 of the German Civil Code (BGB). The proceedings focused on the admissibility of contractual purchase price arrangements which resulted in a disadvantage to the tenant entitled to the pre-emption right.
According to Section 577 BGB, the tenant of an apartment in certain cases has a pre-emption right if, during the existing tenancy, the rented apartment is converted into condominium ownership and subsequently sold. The judgment examines the extent to which sellers and buyers may structure the purchase price and other agreements in such a way that they have an economic disadvantage for the tenant, and what requirements are to be set for transparency and fairness within the scope of the pre-emption right.
Statutory Basis of Tenants’ Pre-Emption Rights
The pre-emption right under Section 577 BGB is designed to enable the tenant to acquire his apartment under comparable conditions to those offered to a third-party purchaser. This allows the tenant to enter into an existing purchase agreement between the owner and a third-party buyer and acquire the property on identical terms. The law thereby protects the tenant from price manipulations or arrangements that could make the exercise of the pre-emption right economically unattractive or impossible.
Issue: Impermissible Purchase Price Arrangements
Room for Structuring at the Time of Concluding a Purchase Agreement
Owners and buyers generally have broad discretion in agreeing to contractual terms. However, problems arise when certain agreements – especially regarding the purchase price or side agreements – are made only as a sham or are aimed at feigning a higher purchase price vis-à-vis the tenant than what was actually agreed upon between the parties. The goal of such arrangements may be to economically impede or prevent the tenant’s exercise of the pre-emption right.
Criteria for Invalidity
According to the judgment of the Federal Court of Justice, a purchase price agreement is invalid to the extent that it violates the interests of the tenant contrary to Section 577 BGB. Decisive is the congruent equal treatment of the tenant’s economic conditions with those agreed between seller and buyer. It is insufficient to merely include the tenant formally in the contract if concealed side agreements lead to an actual higher burden.
For example, arrangements on repayments, ‘kick-back’ payments or objectively excessive purchase prices, which are not reasonably related to the market value and are not seriously intended between seller and buyer, are to be deemed impermissible. The parties to a purchase agreement are not entitled to circumvent the pre-emption right by artificially inflated prices or hidden agreements.
Practical Effects on Real Estate Sales
The judgment applies to standard scenarios involving the sale of converted condominium ownership. Any arrangement that results in a disadvantage to the tenant in connection with the pre-emption right must be subject to judicial scrutiny. Factors may include the stated purchase price, the amount of the broker’s commission, ancillary services, possible restitution claims, or agreements regarding maintenance costs.
Significance for Practice
Requirements for Sellers and Purchasers
Sellers of condominiums and potential buyers must henceforth pay even closer attention when drafting contracts that all contract terms relevant to the pre-emption right are disclosed and genuinely agreed upon. Violations of the principle of equal treatment under Section 577 BGB can have significant legal consequences for sellers and purchasers and lead to judicial adjustment of the contract.
Control Options for Tenants
In exercising the pre-emption right, the tenant is entitled to comprehensive information regarding the entire contractual content between seller and buyer. This includes all agreements which influence the economic value of the transaction, but not merely incidental understandings without impact on the purchase price.
Case Law in Light of Ongoing Proceedings
The judgment of the Federal Court of Justice constitutes an important precedent, although it should be noted that further proceedings regarding comparable scenarios have not yet been concluded. The treatment of similar cases remains potentially subject to developments in the lower courts and the Federal Court of Justice. Readers are advised to always assess the present decision in the context of evolving case law.
Summary and Outlook
The Federal Court of Justice judgment emphasizes that the tenant’s pre-emption right as a protective instrument may not be undermined by deviating or concealed arrangements between seller and buyer. The seller is obligated to offer the apartment to the tenant on exactly the same terms as agreed with the third-party purchaser – regardless of any ‘artificial’ purchase price arrangements. Strict adherence to this principle of equal treatment makes a decisive contribution to legal certainty in property transactions involving tenant purchase rights.
If you have specific questions regarding the handling of the pre-emption right under Section 577 BGB or the structuring of real estate purchase agreements, the Rechtsanwalt of MTR Legal, as a law firm operating nationwide, will be happy to review your concerns individually.
