New challenges for share deals – a recent decision on municipal pre-emptive rights

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Dr Peter Vocke
Heuking Kühn Lüer Wojtek, Düsseldorf

Fabian Schmitz
Heuking Kühn Lüer Wojtek, Düsseldorf


Share deals are still a common real estate transaction in Germany. In a real estate share deal, the object of purchase is not the real estate itself, but the shares of the company owning the real estate, often a limited liability company (Gesellschaft mit beschränkter Haftung). In the past, share deals were commonly used by the parties to evade real estate transfer tax (Grunderwerbssteuer), which led to increased pressure for the state to enact legislation subjecting share deals to mainly the same restrictions as asset deals. The recent jurisdiction of the Administrative Court of Berlin (VG Berlin)[1] on municipal pre-emptive rights relating to share deal brings further obstacles for real estate share deals and will definitely affect the drafting of corresponding agreements.

Pursuant to section 24 of the Federal Building Code (Baugesetzbuch – the ‘BauGB’), the municipality has a pre-emptive right to purchase real estate that is located in specific areas, in particular, in an area within the territorial application of a local development plan (Bebauungsplan), if the exercise of the pre-emptive right is justified by the greater good (Wohl der Allgemeinheit).

In times of empty public funds and vacant flats, municipalities have often not only waived their pre-emptive rights, but have also sold their flats to domestic and international investors. Today the bigger cities, such as Berlin, Frankfurt, Hamburg and Munich, are affected by increasing rents and a high demand for cheaper flats, however, which leads to a growing political pressure regarding the use of the pre-emptive right of the municipality in case of a real estate transaction. This has always been a major topic in the execution of an asset deal. Therefore, regularly each asset deal agreement contains as a due date condition the waiver of the statutory pre-emptive right by the respective authority, which needs to observed by the notarising public notary. However, pursuant to the wording of section 24(1)1 of the BauGB, only the purchase of real estate (Kauf von Grundstücken) is subject to the municipal pre-emptive rights, thus, municipal pre-emptive rights have never been a huge point in the execution of a share deal.

The recent jurisdiction of the VG Berlin extends the scope of section 24 of the BauGB to a share deal if it may be regarded as a circumvention of the municipal pre-emptive right (Umgehungsgeschäft), because it is from an economic vantage point similar to an asset deal and, thus, the person entitled to pre-emption may enter the transaction to safeguard its commercial interests, without affecting the conditions stipulated by the parties of the share deal.[2] According to the VG Berlin, the urban development aims protected by the municipal pre-emptive rights would be impaired if the pre-emptive right is not triggered by a share deal, even though the share deal is economically similar to a ‘normal’ asset deal.

The ruling is likely to lead to further problems during the negotiations and execution of real estate share deals. As there are only a few court decisions regarding the conditions for a circumvention of the municipal pre-emptive rights, the parties will often not be able to surely assume that the share deal does or does not trigger a municipal pre-emptive right, even though they may have conducted legal due diligence in the course of the share deal. From our view, the parties therefore have to implement provisions in the corresponding purchase agreement, pursuant to which the waiver of the pre-emptive right by the municipality or the lapse of the exercising period of two months[3] is a necessary closing condition. Furthermore, as the Federal Court of Justice (Bundesgerichtshof) has ruled for civil law pre-emption rights that a share deal might be regarded in particular as a circumvention if it has an identical economical outcome than a normal share deal, the parties might think about ‘raising’ the purchase price by keeping a larger amount of other assets, in particular money, in the target company. In any event, all the aforementioned issues need to be taken into account in the course of the schedule of the transaction and, in particular, its funding.

These are just a few arising from the recent jurisdiction of the VG Berlin, which will definitely affect the negotiation and execution of real estate share deals in the future. However, while the transaction practice is sure to cope with the limitations and risks arising from the recent decision of the VG Berlin in the purchase agreements, the political and legal pressure on real estate share deals and the intensity of due diligence and legal advice will – in any case – further rise in the future.

[1] VG Berlin, order of 13 December 2019 – 19 L 566.19.

[2] The Federal Court of Justice (Bundesgerichtshof – BGH) has already stated that a share deal might trigger a civil law pre-emption right (zivilrechtliches Vorkaufsrecht) pursuant to ss 463, 1094 et seq of the German Civil Code (Bürgerliches Gesetzbuch) if the share deal can be regarded as a circumvention (BGH, ruling of 27 January 2012 – V ZR 272/10).

[3] Pursuant to s 28 para (2) BauGB, the pre-emptive right can only be exercised within two months as of the notification of the relevant purchase agreement.