Heritable Building Rights (Erbbaurecht) in Germany

What are heritable building rights?

Heritable building rights have been part of German land law for more than a century and are again in demand. A heritable building right (Erbbaurecht) is a right in rem that burdens a plot of land: the holder has the transferable and inheritable right to have a building on or under the surface of the land (§ 1(1) ErbbauRG). The landowner keeps ownership of the land; the holder owns the building, which is treated as an essential component of the heritable building right rather than of the land (§ 12 ErbbauRG). In economic terms, the institution works like a very long ground lease with property-law protection.

The Heritable Building Rights Act (Erbbaurechtsgesetz, ErbbauRG) governs the institution. Such rights are typically granted for 50 to 99 years. Landowners include churches, foundations, municipalities and the federal and state governments, as well as private owners who want to keep land in the family while generating income. For developers and investors, a heritable building right avoids the cost of buying land; for municipalities, it is a tool of land policy that retains long-term control.

Under § 11 ErbbauRG, the rules on land apply to the heritable building right with certain exceptions, which means it can be sold, inherited and encumbered with land charges much like land. A contract to grant or acquire a heritable building right requires notarial recording (§ 11(2) ErbbauRG in conjunction with § 311b(1) BGB).

Structure and registration

A heritable building right is created by agreement between the landowner and the holder and registration in the land register. Three features of its structure deserve attention:

• First rank: the right can only be created with exclusive first rank on the land, and that rank cannot be changed (§ 10(1) ErbbauRG). This protects the holder against enforcement by the landowner's creditors. Existing encumbrances on the land must therefore step back or be removed before creation, subject to limited state exceptions.
• Own folio: on registration, the land registry opens a separate heritable building right folio (Erbbaugrundbuch) (§ 14 ErbbauRG). The holder appears there as "owner" of the right, and land charges securing the holder's financing are registered in its third section.
• No resolutory conditions: the right cannot be limited by resolutory conditions (§ 1(4) ErbbauRG). Instead, the parties use the reversion mechanism described below.

The right can extend to parts of the plot not needed for the building, provided the building remains economically predominant, but it cannot be limited to part of a building, such as a single storey (§ 1(2), (3) ErbbauRG). For multi-unit buildings, a heritable building right can be divided into heritable residential or commercial units.

Contractual content with in-rem effect

A distinctive feature of the Erbbaurecht is that many contractual agreements between landowner and holder can be made part of the "content" of the right and therefore bind every future holder. § 2 ErbbauRG lists the matters, including:

• construction, maintenance and use of the building;
• insurance of the building and rebuilding after destruction;
• bearing public and private charges;
• an obligation to transfer the right to the landowner if certain conditions occur (reversion, Heimfall);
• contractual penalties;
• a preferential right of the holder to renewal after expiry;
• an obligation of the landowner to sell the land to the holder.

These provisions make the heritable building right agreement the central document in due diligence. Use restrictions, for example limiting the building to residential use or to specific social purposes, can significantly affect value and financing.

Ground rent and its adjustment

The consideration is usually a ground rent (Erbbauzins) payable in recurring instalments. The rules on real burdens (Reallasten) apply (§ 9(1) ErbbauRG). The ground rent is registered as a real burden on the heritable building right and can be agreed to survive a forced sale (§ 9(3) ErbbauRG), which protects the landowner and is today standard practice.

Long terms make adjustment clauses essential. Value protection clauses typically link the ground rent to a consumer price index. For residential buildings, § 9a ErbbauRG limits increases: a claim to increase is only valid if it is not inequitable, and an increase is generally inequitable to the extent that it exceeds the change in general economic conditions since the contract was concluded. For commercial heritable building rights, the parties have more freedom, but index clauses must comply with the Price Clause Act (Preisklauselgesetz), which permits certain index clauses in long-term contracts.

Consent requirements and transferability

The parties can agree that the holder needs the landowner's consent to sell the heritable building right or to encumber it with mortgages, land charges or real burdens (§ 5 ErbbauRG). Most agreements contain such clauses. They give the landowner control over who holds the right and how much debt is secured on it.

The holder is protected against arbitrary refusal. If a sale does not materially impair or endanger the purpose of the heritable building right and the buyer's personality offers a guarantee of proper performance, the holder can demand consent (§ 7(1) ErbbauRG). Similar protection applies to encumbrances compatible with proper management. If the landowner refuses without sufficient reason, consent can be replaced by a court decision. In transactions, obtaining consent is a closing condition, and lenders often require the landowner's consent to the land charge, together with agreements on the treatment of the land charge in case of reversion.

Reversion and expiry

Reversion (Heimfall): the content of the right can include an obligation to transfer it to the landowner if certain conditions occur, such as non-payment of ground rent for a defined period, breach of construction or use obligations, or insolvency of the holder. If the landowner exercises the reversion claim, it must pay appropriate compensation for the heritable building right (§ 32(1) ErbbauRG). The amount and method of payment, or its exclusion, can be agreed – except for heritable building rights created to meet the housing needs of lower-income groups, where an appropriate payment cannot be excluded.

Expiry: when the right ends by lapse of time, the building becomes part of the land again, and the landowner must compensate the holder for the building (§ 27(1) ErbbauRG). The parties may agree the amount and method of payment or exclude compensation, but for heritable building rights serving the housing needs of lower-income groups, compensation must be at least two-thirds of the building's market value at expiry. The landowner can avoid paying compensation by offering to extend the right for the expected life of the building; if the holder refuses, the claim to compensation lapses.

For long-term investors, the residual term is a key value driver. As the remaining term shortens, financing becomes harder and the importance of the compensation clause increases. Many owners therefore negotiate extensions well before expiry.

Financing heritable building rights

Banks finance these rights by taking land charges on the heritable building right folio. Their key concerns are the residual term relative to the loan term, the landowner's consent to the land charge, the ranking of the ground rent and the treatment of the land charge in case of reversion. Because the ground rent is usually registered with priority and agreed to survive a forced sale, a buyer at auction takes the right subject to the ground rent, which lenders factor into valuation.

The reversion mechanism is particularly sensitive. If the landowner exercises reversion, encumbrances generally remain on the right, but the compensation due from the landowner may be reduced by them. Lenders therefore negotiate direct agreements with the landowner, for example on notice of default and the opportunity to cure or to find a replacement holder before reversion is exercised.

Municipal land policy and affordable housing

Many German cities have rediscovered the Erbbaurecht as an instrument of land policy. Instead of selling municipal land to the highest bidder, they grant rights to housing companies, cooperatives or developers, often through concept-based tenders in which the quality of the proposal, rent levels and social criteria count as much as the price. The ground rent may be reduced in return for commitments on affordable rents, occupancy or energy standards, which are then secured as content of the right or by separate obligations.

For developers, these models can make projects viable where land prices are high, but the commitments limit flexibility on exit and refinancing. The interaction with state aid rules and public procurement law also needs to be checked when a municipality grants land at below-market conditions or ties the grant to specific construction obligations.

Tax and due diligence points

The grant and transfer of heritable building rights can trigger real estate transfer tax, since heritable building rights are treated like land for transfer tax purposes. The tax base on creation is typically derived from the capitalised ground rent. Property tax treatment and income tax aspects, such as the deductibility of ground rent and depreciation of the building, also need to be considered with tax advisers.

Due diligence should cover the heritable building right agreement and all amendments, the land register folios for both the land and the heritable building right, the ground rent history and any pending adjustment claims, the status of consents, use restrictions, insurance and rebuilding obligations, reversion triggers, and the compensation clause on expiry. For acquisitions of property companies, the analysis is the same, because the heritable building right remains with the company.

How TRW & Co helps

We advise landowners, developers, investors and lenders on heritable building rights. We structure and negotiate new heritable building right agreements, including ground rent, use, reversion and compensation provisions, carry out due diligence in acquisitions and financings, obtain and negotiate consents, and handle disputes about ground rent adjustments, consents and reversion. Our work connects with our real estate transactions and lending and acquisition finance practices and our articles on the land register and share deals and asset deals. Please contact us. This article is general information and not legal advice.