In a landmark decision on 9th November, Germany’s Federal Administrative Court (BVerwG – Bundesverwaltungsgericht) has outlawed the state of Berlin’s exercise of pre-emptive rights to purchase properties located in a conservation area (Milieuschutzgebiet) on the mere assumption that the purchaser will at some point use the property for purposes not in compliance with the objectives of such protection. Various Berlin districts had exercised pre-emptive rights on this basis in numerous cases over recent years. The BVerwG has now put a stop to this practice.
The case was brought by a real estate company which had acquired a property in a milieu protection area in the Berlin district of Friedrichshain-Kreuzberg. The property comprises a multi-family apartment building constructed in 1889 with 20 rental apartments, which was the subject of a pre-emptive right to purchase in favour of a state-owned housing company. The district authority exercised the right in order to prevent residents from being displaced if - following the sale - apartments were refurbished or converted into condominiums or rents were increased. Effectively the right has been used as a tool to prevent gentrification of traditional neighbourhoods.
The exercise of pre-emptive rights to purchase is thus deemed unlawful, citing Section 26 No. 4 of the German Building Code (BauGB - Baugesetzbuch), according to which the exercise of pre-emptive rights is excluded if the property is built and used in accordance with the stipulations of the development plan and the buildings on site do not show any significant deficiencies or dereliction. According to the BVerwG decision, this applied to the case at hand.
“The ruling takes the pre-emptive right to purchase back to its core,” explains Mathias Hellriegel, whose Berlin law firm won the ruling for real estate investor Pohl & Prym. Contrary to widespread municipal practice, the right is intended to be used to plug gaps in urban development between buildings and solve problems caused by development and use not in compliance with protection status. “It cannot apply to properties where everything is as it should be.”
The ruling also has an impact well beyond Berlin: cities such as Hamburg and Munich are also increasingly relying on pre-emptive rights. Munich combines the right in combination with a rent cap. With regard to the city councils, lawyer Katharina Feddersen from the Hamburg office of Osborne Clarke sees the decision as a signal to leave well alone “if neither criteria for a pre-emptive right described in the Building Code is fulfilled nor is there an acute danger of persons being displaced.”
Michael Schultz of Müller Radack Schultz emphasises the positive psychological effect of the judgement on investors: “The overall suspicion is no more, as are the months of trepidation as to whether or not a purchase agreement will take effect or not.” Henceforward, the cities will need to issue a negative test to owners clearing the way for deals to be completed. And experts are also of the view that it may be time to tighten the wording in the relevant sections of the Building Code.
Further spotlight has been thrown on the issue of pre-emptive rights after the first instance of the right being exercised in the case of a share deal, which had been viewed by authorities as a way not only to avoid real estate transfer tax but also to avoid pre-emption. The legal decision could yet open up a whole new can of worms for the future.