Purchase of Real Estate by Judicial Sale in Germany
Real estate is the one most frequently mentioned areas of law that has the greatest divergence between jurisdictions today. For example, under Germany’s Civil Code, certain aspects of real estate are governed by other laws, e.g. The proceedings regarding registration in the land register by the land register regulation, and regarding judicial foreclosure in the Act on Judicial Foreclosure. Real estate may also be owned by individuals as well as legal entities, including local authorities and foreign companies. The adjudication of legal disputes over property restitution depends on the precise location in united Germany where the dispute took place, when it first occurred, and the current state of the law as interpreted by German federal courts. The need for such judicial proceedings has skyrocketed in recent years following the reunification of the German states, but the flood of claims has not been as severe as many observers initially expected, but many analysts suggest that some important reforms are needed in order to allow German courts to more effectively adjudicate real estate sales and to provide consumers and investors with more confidence and a better understanding of their rights and responsibilities in these cases. To this end, this study provides a critical review of the relevant literature to determine what types of judicial sales of real estate are currently practiced in Germany, how these judicial sales are typically adjudicated and to identify current and future trends for the judicial sale of real estate in Germany. A summary of the research and salient findings are presented in the concluding chapter.
Chapter 1: Introduction
Statement of the Problem
Purpose of Study
Importance of Study
Scope of Study
Rationale of Study
Overview of Study
Chapter 2: Review of Related Literature
Chapter 3: Methodology
Description of the Study Approach
Data-gathering Method and Database of Study
Chapter 4: Data Analysis
Chapter 5: Summary and Conclusions
Table 1. Typical provisions for leases of German business premises today
Table 2. Recap of current German economic indicators: Germany vs. world
Table 3. European outstanding residential mortgage debt as percentage of GDP:
Table 4. European real estate capital flows (pounds billion) 2004 estimated
Table 5. Recap of differences in real estate dispositions through judicial sale in selected EU jurisdictions
Table 6. Concentric circles of the German Civil Code
List of Figures
Figure 1. Recap of current German economic indicators: Germany vs. world…
Figure 2. German outstanding residential mortgage debt as percentage of GDP:
Figure 3. European real estate capital flows (pounds billion) 2004 estimated…
Figure 4. Types of German financial institutions surveyed by Iblher and Lucious…
Figure 5. Types of German banks studied by Iblher and Lucious
Figure 6. Number of employees working in innovative financing
Figure 7. Overall use of innovative instrumentation in German real estate markets…
Figure 8. Innovative instruments offered to German real estate transaction customers and used in such transactions
Figure 9. Cooperation with external consultants
The Purchase of Real Estate by Judicial Sale in Germany Today
In his study, “Of all areas of the law, real estate is the one most often mentioned as having the greatest divergence between jurisdictions. Even within the European Union, where convergence of laws in some areas is a reality, a common land law regime is a mere pipe dream” (p. 14). In this regard, while the United States and the United Kingdom share a heritage of the common law, Germany is a civil law jurisdiction rather than a common law jurisdiction. Under this civil law concept, the law is interpreted by the courts, which is especially true for the administration of real estate transactions such as the termination of leases for good cause or neighborhood rights (Kock & Hosenfeld, 2007). Under the German Civil Code, certain aspects of real estate are governed by other laws, e.g. The proceedings regarding registration in the land register by the land register regulation, and regarding judicial foreclosure in the Act on Judicial Foreclosure. Real estate may be owned by individuals as well as legal entities, including local authorities and foreign companies (Kock & Hosenfeld, 2007). According to Cranston and Goode (1997), “When the German Civil Code (Burgerliches Gesetzbuch or ‘ BGB’) came into force on 1 January 1900, it not only coincided with the beginning of a new century but also marked the end of the long process of the unification of the German state” (p. 2). In reality, though, it also marked the beginning of a new era in the adjudication of the sale of real estate in Germany, in a process that has created a convoluted but solid framework in which stakeholders can proceed to secure and protect their interests.
Statement of the Problem
Since 1900, civil law has basically derived from the Burgerliches Gesetzbuch, the civil code devised during the Second, Wilhelmine, Reich; however, over the course of a century, a number of additions and modifications have been made. According to Blacksell, Bohlander, and Born (1996), “Ironically, East Germany employed the same Burgerliches Gesetzbuch until 1976, when its own civil code was introduced, which better reflected the reality of civil relationships in a communist state. After reunification federal law – which, as far as civil matters were concerned, again meant the Burgerliches Gesetzbuch – was extended to cover all of the new German state, though with numerous transitional exceptions in the new Lander” (p. 198). Some exceptions have gradually been eliminated; however, the law itself, including the Law of Property, has continued to change through government-sponsored additions and the normal process of judicial rulings that have complicated issues even further (Blacksell et al., 1996).
The adjudication of legal disputes over property restitution depends on the precise location in united Germany where the dispute took place, when it first occurred, and the current state of the law as interpreted by German federal courts. According to Blacksell and his colleagues, “All of this amounts to a virtual quagmire for interpretation and to a potential source of endless litigation. For the most part, this potential has yet to manifest itself in property-restitution claims, but only because most of the more controversial and difficult cases have not reached the court” (Blacksell et al., 1996, p. 199).
The key to establishing a legitimate claim to land or property is having title recorded in the Land Registry. The register goes back to the Second Reich, in the early years of the twentieth century, but for various reasons records are often incomplete and inconclusive, especially in the new Lander. Many records were lost during World War II and its aftermath, and after its first few years in power the government of the GDR allowed the register to lapse. The East German state apparatus saw little reason to legitimize the bourgeois concept of private property by keeping the records current; based on the foregoing, the joint declaration by Kohl and Modrow in 1990 had at heart the creation of a hierarchy of Offices for the Settlement of Disputed Property Claims. Even in a somewhat simplified form, the process of submitting a claim is exceedingly intricate a basic distinction is made between residents of a property without any paper claim to the title and people who believe they have a legitimate claim on the basis of a formerly registered title. German residents may petition for title with the Land Registry provided they have received a certificate showing that the period allowed for registering a claim has elapsed and that there are no other outstanding claims from the Office for the Settlement of Disputed Property Claims; however, title claimants must also establish the legitimacy and relative merits of their claim compared to any other claims relating to the same piece of property, and the claim must be lodged within the time period allowed (Blacksell et la., 1996). These formal steps are absolutely required before an application for title be filed with the Land Registry. According to these authors, there is nothing in the formal claims process limits the right of a claimant to go to the courts to resolve a claim, although in real-world settings this has not been common, indicating a high level of acceptance of the formal German procedures involved in the administration of real estate sales (Blacksell et al., 1996).
In order to assess the geographical importance of the judicial process used for property restitution since German reunification, the authors provide an overview of the scale of the problem and the way in which it has evolved in recent years. According to Blacksell and his colleagues:
By the end of 1995 the several Offices for the Settlement of Disputed Property Claims across former East Germany had received a total of 1,228,598 separate claims (Bundesamt zur Regelung offener Vermogensfragen 1991-1996). A distinction exists, though, between the number of claims lodged and the actual number of individual items at issue: A single formal claim may include several properties or other elements. The number of items at issue – 2,463,077 – is more than twice the total number of claims and comprises more than 120,000 businesses and more than 2.3 million buildings and plots of land. If it can conservatively be assumed that a minimum of five persons are affected for each business and a minimum of two persons for each building, then some 5 million people are directly involved in property-restitution claims – nearly a third of the population of the new Lander. (Blacksell et al., 1996, p. 200)
Since December 1991, the number of claims filed with the courts has not been significantly greater, with the exception of fluctuations experienced in Brandenburg and Berlin; such fluctuations were attributed to the different methods of computer-based data collection in these two areas and by the subsequent standardization of the system throughout the new Lander (Blacksell et al., 1996). In reality, 92% of all claims for property restitution were timely filed within the first 15 months following the reunification of the two German states (Blacksell et al., 1996). The administrative burden that these claims placed on the Offices for the Settlement of Disputed Property Claims was enormous, particular since the offices only became active after October 1990, with no existing precedents concerning how they should be administered (Blacksell et al., 1996). These researchers report that, “The huge volume of claims in their first year of operation, intimidating enough in itself, also created an expectation that the final number would be even larger than it has turned out to be, because there was no way of knowing that the vast majority of claims would be registered so quickly” (Blacksell et al., 1996, p. 200).
The differences in the number of claims among the five Lander and Berlin, spanning the range from 122,981 in Mecklenburg-Vorpommern to 281,473 in Brandenburg, suggest there are significant differences in area and population, certainly, but these trends also suggest that differences in the scope for actually making such claims are taking place because of the specific socioeconomic conditions in the different Lander (Blacksell et al., 1996).
An old adage in real estate suggests that location is the key, and this has been the case with German real estate sales in recent years; for example, Berlin, as the future capital of the unified Germany was quickly seized upon by investors because of the high level of interest in reclaiming property there, and this investment interest has also affected the surrounding state of Brandenburg, where cities such as Potsdam are effectively part of the Berlin greater metropolitan area (Blacksell et al., 1996). Likewise, Sachsen creates the core of Germany’s major eastern industrial region, based around the cities of Leipzig, Dresden, and Chemnitz; by sharp contrast, Mecklenburg-Vorpommern is more isolated and rural, with a smaller population engaged in agriculture rather than industry as the drivers of its economy (Blacksell et al., 1996). Fewer property claims have been experienced in these regions, largely because much of what is being reclaimed in this most northerly of the Lander are individual farms, rather than housing and urban businesses; the same factors also apply to Sachsen-Anhalt, which is also largely rural in character, though not featuring the same large estates that characterize Mecklenburg-Vorpommern (Blacksell et al., 1996). Finally, there is also an emerging north-south division taking place in the former East Germany, with the majority of the population and industry being situated in the southern region, an unevenness that is also clearly reflected in the distribution of property-restitution claims (Blacksell et al., 1996).
If the claims are divided into subgroups, regional variations among the Lander are even more marked. Most obvious is the predominance of claims involving property and land. They range from 89% of all claims in Brandenburg to only 63% in Mecklenburg-Vorpommern and Berlin. Although the total number of businesses subject to a claim is little more than 5% of the total, the regional distribution is noticeable, with Mecklenburg-Vorpommern very much in the vanguard (Blacksell et al., 1996). While there remains a paucity of timely information to help explain these trends, these events suggest that there are a large number of farms that are being reclaimed and withdrawn from the collective farms of the communist era; in this regard, the distribution in the former East Berlin is also most apparent (Blacksell et al., 1996). “In comparison with the five Lander,” the authors advise, “fewer claims involve property and land, and proportionately more involve money. The reason for this is the peculiar conditions stemming from Berlin’s status as a divided city, which made it easier to resist straightforward state requisition by the East German regime, so that most claims are for financial compensation for an inadequate purchase price” (Blacksell et al., 1996, p. 201).
Given the enormous number of property claims experienced by these offices in recent years, it is not surprising that settling them has been a slow process, especially in view of the repeated recent changes in German property laws. Nevertheless, by 30 June 1995, 95,715 (52.9%) claims involving businesses and 1,351,459 (51.4%) of all other claims had been adjudicated; furthermore, the rate at which claims are being settled has shown a steady improvement of about 3% a quarter, with a notable spike in the rate at which claims involving land and property are being resolved most recently (Blacksell et al., 1996). Although many observers did not expect the system to work as well – or at all — immediately following reunification in 1990 and 1991, and the expectations that resolution of claims would not be completed until today do not appear to have been realized. The authors conclude that, “The end appears to be in sight, despite the marked regional variations. The overall figures on the settlement of claims are somewhat misleading because, as we have already pointed out, each claim may incorporate several distinct elements and because the range of outcomes is wide” (Blacksell et al., 1996, p. 198).
Purpose of Study
Given the enormous changes that resulted from the reunification of the two German states, as well as the need to better understand how precedential cases and the current applications of the German Civil Code in an increasingly Europeanized environment will affect the interests of the stakeholders involved, the purpose of this study was three-fold, and was guided by the following research questions:
What types of judicial sales of real estate are currently practiced in Germany?
How are these judicial sales typically adjudicated?
What are the current and future trends for the judicial sale of real estate in Germany?
Importance of Study
Today, Germany represents one of the most important economies in the world, and the country has assumed a new leadership role in European affairs in recent years that will likely continue to guide the European Union in its efforts to forge an improved alliance from legal, military, social and political perspectives. Because all of the European nations have their own respective – and sometimes unique – types of laws to administer the sale of real estate through the courts, and because these laws are frequently complicated and convoluted from the outset, sifting through the morass of legalities has assumed new importance in recent years. According to one authority, compliance with the formalities for assuming an obligation to transfer real estate of 313 of the Civil Code are required to provide proof of the obligation and to caution the parties themselves because real property is regarded as an extremely important asset (Gordley, 2001).
Scope of Study
Notwithstanding the differences between the laws that control the sale of real estate by the courts in European and U.S. courts are similar, and in some cases identical. Therefore, the scope of this study extended to all such relevant discussions in the peer-reviewed and scholarly literature with a specific focus on real-world examples of how these processes have played out in recent years in the recently reunified German state.
Rationale of Study
Because many real estate laws are designed to help people protect their rights and interests, it just makes good sense to determine what can take place when international investors and German consumers alike are confronted with the complex laws that surround the adjudication of real estate sales in general, and in Germany in particular. In this regard, differences in judicial sales of real estate represent a matter of some importance “when major domestic investors in one jurisdiction look beyond their own borders to expand their portfolios and spread risk, as they now do almost as a matter of course” (Fordhan & Wiemann, 2006, p. 13).
Overview of Study
This study used a five-chapter format to develop the background and resources needed to answer the above-stated research questions. Chapter one introduced the topic and provided a statement of the problem under consideration. A discussion concerning the purpose of the study, its importance and scope was followed by supporting rationale. Chapter two of the study provides a critical review of the peer-reviewed and scholarly literature concerning the judicial sale of real estate in Germany today, but given the paucity of such timely studies in these sources, online governmental and organizational resources were also consulted.
Chapter three describes more fully the methodology used in the study, as well as a description of the study approach used and the data-gathering method and database of study consulted. Chapter four provides an analysis and synthesis of the data developed during the research process and chapter five provides a summary of the research, salient conclusions and recommendations for future research.
Definition of Terms
Civil law. This term refers to the “body of law which every particular nation, commonwealth, or city has established peculiarly for itself; laws concerned with civil or private rights and remedies, as contrasted with criminal laws” (Black’s Law Dictionary, 1990, p. 246).
Execution sale. This term refers to the sale by a sheriff or other ministerial officer under the authority of a writ of execution which has been levied on the property of a debtor (Black’s Law Dictionary, 1990, p. 568).
Foreclosure sale. This term refers to the sale of mortgaged property to obtain satisfaction of the mortgage out of the proceeds whether authorized by a decree of the court or by a power of sale contained in the mortgage (Black’s Law Dictionary, 1990, p. 646).
Judicial sale. This term refers to a sale conducted under a judgment, order or supervision of a court as in a sale under a petition for partition of real estate or an execution or a foreclosure sale. Such judicial sales must be based upon an order or a decree of a court directing the sale. Likewise, a sale in a bankruptcy proceeding is a “judicial sale,” as distinguished from a foreclosure sale or execution sale as defined above (Black’s Law Dictionary, 1990, p. 849).
Review of the Related Literature
Background and Overview.
The body of research concerning the return on real estate investments generally suffers from a number of constraints when it is compared to returns series for stocks and bonds, as a number of observers have noted in recent years. In particular, stocks and at least some bonds trade in continuous auction markets that are characterized by large volume, many informed traders and low transaction costs (Grauer & Hakansson, 1995). The paucity of these factors in real estate transactions and the necessary reliance on appraisals are widely regarded among international observers as resulting in smoothed returns data, understating the risks associated with real estate investment. In this regard, Grauer and Hakansson (1995) estimate that real estate risk, as measured by the standard deviation of annual returns, lies somewhere “between that of stocks and bonds, in the 9% to 13% range” and comparable findings have been obtained by others as well (p. 117).
Today, asset securitization is used primarily with regard to obligations owing to the debtor, including accounts receivable, mortgages, student loans, credit card receivables, and commercial loans; however, empirical evidences emphasizes that any income-producing asset can be securitized, including, as Lopucki (1996) suggests, “office buildings, shopping centers and other commercial real estate [as well as] computer, automobile, equipment, and other leases” (Lopucki, 1996, p. 91). In this regard, the author adds that, “previously constructed and operational infrastructure projects such as power plants” can be securitized” and notes that securitization techniques have even been applied to assets such as inventories that do not themselves produce a cash flow but will be converted later into assets that do (Lopucki, 1996, p. 90). In sum, “Transaction costs are probably the only limit on what may be the subject of securitization. By selling any asset to a bankruptcy-remote entity and leasing it back, the debtor can transform it into an ‘income-producing’ asset that can then be securitized. Even a debtor’s bank account, which is both an account and an income-producing asset, might be included (Lopucki, 1996). To illustrate this point, the author cites the example wherein it is assumed that property has a market value of $100, but would sell for $70 in a judicial sale. “By granting a mortgage against the property in the amount of $75, the debtor creates a judgment-proof structure. That is, if judgments are later entered against the debtor, the alliance of debtor and secured creditor can control the property by purchasing it at sale for $75.00” (Lopucki, 1996, p. 91).
Even in the event the United States will able to modify its rule to make shareholders liable for the debts of their corporations, at least some other countries would decline to do so. For example, assuming that some country such as Germany, retained shareholder limited liability, strategic investors in that country could invest in U.S. companies without exposing their assets to tort liability. The German investor who held the assets would form a German corporation, and transfer the funds to be invested to it. The German corporation would use the entire amount to purchase shares in a single U.S. corporation. When the U.S. corporations incur liability beyond their ability to pay, the author emphasizes that such liability would subsequently inure to the German corporation as shareholder (Lopucki, 1996). In these types of cases, U.S. courts would likely not exercise jurisdiction over the German corporation in order to enforce its shareholder liability; furthermore, even in the event that the U.S. courts did, the action would apply only the assets of the German corporation, which at that point would already be worthless. “German law would control the relationship between the German corporation and the German investor, and that law would not impose shareholder liability” (Lopucki, 1996, p. 91).
This strategy would create a class of foreign investors in U.S. corporations who would not be subject to shareholder liability. This author demonstrates that in modern capital markets, those investors could outbid U.S. investors for the shares of U.S. corporations, and predicts that the change in stock prices would be de minimis. The necessary implication is that shareholders would not pay significant amounts of corporate liability because they overwhelmingly would be judgment proof – principally by reason of their foreign location. The effect of the U.S. rule of unlimited shareholder liability would not be to force shareholders to pay the debts of U.S. corporations, but only to substitute German investors for U.S. investors.
Substitution of foreign investors would be more difficult for closely held companies, but perhaps not impossible. U.S. investors could own a German corporation that owned their American corporation. Once revealed, such a simple structure might not withstand legal attack, but the need for attack and revelation might be enough to deter many plaintiffs. (Lopucki, 1996, p. 91). Critics suggest that an alternative that amounts, in essence, to a limit on the proportion of investment in U.S. corporations that can come from poorly capitalized foreign investors might be preferable; in response, others argue that poorly capitalized foreign investors could evade such a restriction by investing in poorly capitalized domestic investment intermediaries that in turn invest in the U.S. corporation (Lopucki, 1996).
German Civil Code and Real Estate Sales.
As noted above, Germany is a civil law jurisdiction rather than a common law jurisdiction. Under this concept the law is interpreted by the courts. This is particularly true for e.g. termination of leases for good cause or neighborhood rights. Further to the Civil Code, certain aspects of real estate are governed by other laws, e.g. The proceedings regarding registration in the land register by the land register regulation, and regarding judicial foreclosure in the Act on Judicial Foreclosure. Real estate may be owned by individuals as well as legal entities, including local authorities and foreign companies (Kock & Hosenfeld, 2007).
Today, there is no bar to foreign individuals or foreign companies acquiring property in Germany. The rights over land are:
Title/ownership (also in the form of a co-ownership of more than one person).
Heritable building right: a property may be encumbered by a heritable building right; the beneficiary of such right is entitled to have a building on the property owned by a separate owner. The right may be extended to the parts of the property which are not necessary for the building (if the building is commercially the essential part of the property, the heritable building right is a right to use the property of another owner (in certain aspects similarly to a contractual lease agreement) with the specific characteristic that the building belongs to the beneficiary of the heritable building right).
Land servitude: properties may be encumbered in favor of the owner of another property, with such owner being granted the right to use the encumbered property in a certain way, thus prohibiting certain acts being carried out on the encumbered property, or prohibiting the exercise of certain rights.
Restricted personal easements: properties may be encumbered in favor of specific persons as well as partnerships, who use the encumbered property in certain relations or so that the beneficiary of such easements is entitled to the same rights which may be subject to a land servitude.
Usufruct: properties may be encumbered in such a way that another person (separate from the owner) may be entitled to the beneficial use of the encumbered property.
Ground rent: properties may be encumbered in favor of specific persons, as well as a partnership having legal capacity, or the respective owner of another property, to provide for recurring benefits; such benefits have to be conceded from the property, i.e. they have to be convertible into money claims, e.g. payment of rent, delivery of food or water, etc.
Mortgage, land charge, rent charge:
Mortgage: properties may be encumbered in such a way that the beneficiary is entitled to payment of a certain sum for the fulfillment of an underlying claim, i.e. The property provides security for the payment of a certain sum payable. The mortgage is an accessory to the underlying claim; i.e. If the underlying claim ceases to exist, the mortgage may not be enforced anymore.
Land charge: a property may be encumbered in such a way that the beneficiary is entitled to payment of a certain sum. The land charge is not an accessory to a specific claim.
A iii) Rent charge: properties may be encumbered in such a way that a specific sum of money is payable on a regular recurring date.
These rights are rights in rem. Pre-emption rights may also be agreed in purely contractual form. Leases are purely contractual; however, they may be safeguarded by an accompanying easement. Title is transferred to the new owner upon the registration of the new owner in the land register.
There are no significant reform plans; however Germany is discussing the introduction of REITS (Real Estate Investment Trusts). There is a certain likelihood that a new government established after the general election will, amongst other things, increase the rate of VAT and eventually change the taxation of gains upon the disposal of a property (Kock & Hosenfeld, 2007).
The typical lease provisions for German business premises are set out in Table 1 below.
Typical provisions for leases of German business premises today.
Length of term.
A business lease is usually provided for an initial fixed term with certain extension options for the tenant. The maximum time of a fixed term for the tenant is 30 years. Irrespective of another provision in the lease agreement, either party may terminate the lease agreement after the expiry of 30 years within the statutory termination period.
It is common to agree on an adjustment of rent according to the change of the cost of living index issued by the Federal Statistical Office. The adjustment will be upwards as well as downwards.
Tenant’s right to sell or sub-lease lease agreement cannot be sold by the tenant under German law. The parties may only agree on a third party entering the existing lease agreement as tenant. The tenant is not entitled to sub-let the premises without the prior consent of the landlord. It is not unusual however that the landlord consents to sub-letting to certain third parties, e.g. another company within the same group.
Change of control of the tenant. In the absence of any change of control clause, the lease remains with the tenant as the legal identity does not change.
Transfer of lease as a result of a corporate restructuring (e.g. merger).
If the new entity arising under the corporate restructuring is the legal successor of the tenant, the lease agreement remains with the new entity.
Repairs are subject to negotiation power. It is common that the landlord provides for repair of the roof and structure whereas the tenant takes over any other repairs of the leased premises. Business leases are usually terminated by lapse of time, on default or mutual agreement. Extension options are regularly included in leases. The Civil Code contains rules for compensation as a result of termination. Statutory law provides for a lease of unlimited time which may be terminated by either party within the statutory termination period. Usually a lease includes an initial fixed term with certain extension options for the tenant. Then the landlord may only terminate the lease for a good cause (e.g. termination by the tenant, if the tenant is not granted the contractual use of the premises; or termination by the landlord if the tenant does not pay the rent).
Source: Kock & Hosenfeld, 2007.
Unjustified Enrichment as a Concomitant of Judicial Sale.
Concerns over unjustified enrichment from the sale of real property in any circumstance arise, for example, in relation to the general principle against unjustified enrichment set out in 812 (1), first sentence, of the German Civil Code: “Someone who obtains something without legal ground through performance by another or in another way at his expense is bound to make it over to him” (“Wer durch die Leistung eines anderen oder in sonstiger Weise auf dessen Kosten etwas ohne rechtlichen Grund erlangt, ist ihm zur Herausgabe verpflichtet”) (quoted in (Johnston & Zimmerman, 2002, p. 240). According to Johnson and Zimmerman, though, this conceptualization introduces some constraints to equitability because it is excessively broad: “It is not the case that everything that one has without a legal ground (ohne rechtlichen Grund) as a result of performance by some other or in another way at his expense can be recovered. The task for German jurisprudence was to identify cases falling within the general principle where the claimant actually did have a cause of action” (Johnston & Zimmerman, 2002, p. 377).
The four following cases, identified from the wording of the first sentence of 812(1), are now widely accepted:
The claimant rendered a performance (Leistung) to the defendant which was without a legal basis;
The defendant encroached on the claimant’s property (Eingriff);
The claimant incurred expense in improving the defendant’s property (Verwendungen); and,
The claimant paid the defendant’s debt (Ruckgriff).
German law has therefore refined and confined its broad principle so as to cover only particular situations in which such cases of enrichment occur. Of these four types of cases, the first is based on the words ‘through performance’ (durch die Leistung), while the remaining three are sub-categories of enrichment ‘in another way’ (in sonstiger Weise). These authors suggest that it is worth emphasizing that category (2) addresses real estate cases described above of enrichment by wrongs: “Clearly, different considerations may arise in that case from those that do where no wrong is involved” (Johnston & Zimmerman, 2002, p. 240).
In some cases, then, there are instances where it should not be a major concern that the defendant is not enriched because, “He may have purchased the plaintiff’s goods from a third party, committed a wrong, or voluntarily accepted plaintiff’s performance, or voluntarily hired a third party for whom he should be responsible. In other cases, however, the plaintiff has done none of these things, and we should resist the temptation to allow the plaintiff to recover” (Johnston & Zimmerman, 2002, p. 240).
Citing the results of one American case in which the plaintiff delivered a carload of coal to the wrong recipient, the defendant, who ultimately consumed it; the market value of this delivery of coal was $6.85 a ton but the defendant had a contract with another supplier to purchase coal at $3.40 a ton. In this case, the plaintiff was allowed to recover only $3.40 a ton but these authors suggest that this type of case is different, because a mistake like this “carries one beyond the realm of contract, even the illusion of contract. In other words, the defendant never decided to acquire coal at such a price, and so it mattered, to this court, whether he was actually enriched” (Johnston & Zimmerman, 2002, p. 240).
The purpose of the above-cited example is to illustrate a fundamental difference between practices in the United States and Germany that may affect the adjudication of real estate through judicial sale. In the instant case, the authors were uncertain why the defendant should only have had to pay the lower price. “Why? What reason could there be for him to owe the plaintiff money except that he was enriched? Indeed, we do not see why the defendant who has not been enriched should pay even if his role was a more active one than simply to burn the coal the plaintiff delivered. In a celebrated American case, the defendant hired the plaintiff to build him a Turkish bathhouse. Due to an architect’s error, the defendant expected to pay about $23,000, which was approximately what the bathhouse added to the value of his land, and the defendant expected to charge about $33,000, which was approximately the fair value of the work” (Johnson & Zimmerman, 2002, p. 377).
The American court permitted the plaintiff to recover the higher figure, but the authors suggest that this decision would not have been reached under German law. For example, Johnson and Zimmerman cite the results of a German case in which an officer, who was immune from suit, seized and sold to satisfy a judgment for goods that belonged to the plaintiff rather than the judgment debtor. When the plaintiff sued the judgment creditor who had received the proceeds, the creditor was allowed to deduct the costs of the judicial sale (Johnston & Zimmerman, 2002). Likewise, another case cited by the authors involved a German case in which the lessee of the plaintiff’s land, without authority to do so, agreed to sell the defendant a right of way so he could build a private railway leading from his industrial plant to the autobahn. “When the owner sued for unjust enrichment, the defendant was allowed to set off its expenses constructing and maintaining the railway. The results would be different in the United States” (Johnston & Zimmerman, 2002, p. 377). These different outcomes would be reached because American courts have not applied the defence of change of position unless the defendant altered his position after being enriched; in this regard, at least, the authors agree with the way German law would resolve all of these cases: “I do not see why the defendant should be held for more than he ever agreed to pay unless he was enriched by that amount” (Johnston & Zimmerman, 2002, p. 240).
A defendant in a German cause of action over real estate that is required to buy or sell at a price fixed by an appraiser will not be left indifferent by a liability in restitution; however, such an accounting is considered too rigid by Johnston and Zimmerman and suggest that the adjudged liability must not exceed adjudged benefit, while ignoring in many instances the transaction costs of the remedy. In this regard, the authors emphasize that:
Liability in respect of non-money benefits often requires the defendant to pay on the basis of an appraisal. Nor are the forced-exchange remedies unique in their potential requirement that an innocent recipient reach into his pocket to pay cash for unrequested benefits conferred. A vendor of land may be obliged to pay for the purchaser’s improvements when the transaction is later set aside. An owner who recovers land previously conveyed under an invalid judicial sale may be liable for improvements by the purchaser. The contract doctrine of ‘substantial performance’ disguises a claim in restitution that may likewise require an innocent recipient to pay for something he did not want. (Johnston & Zimmerman, 2002, p. 378)
With regards to liability of non-money benefits, these actions frequently require a defendant to pay on the basis of an appraisal; such forced-exchange remedies are not uncommon in their potential requirement that an innocent recipient pay for any unrequested benefits provided (Johnston & Zimmerman, 2002). According to these authors, “A vendor of land may be obliged to pay for the purchaser’s improvements when the transaction is later set aside. An owner who recovers land previously conveyed under an invalid judicial sale may be liable for improvements by the purchaser. The contract doctrine of ‘substantial performance’ disguises a claim in restitution that may likewise require an innocent recipient to pay for something he did not want” (Johnston & Zimmerman, 2002, p. 378). More directly, such claims for unjust enrichment asserted in terms by a party in breach of contract may place an innocent defendant to the same necessity, and at the instance of a contractual violator as well (Johnston & Zimmerman, 2002).
In all such cases, the hardship to the defendant involves being obligated to submit to a forced exchange of what are objectively determined to be equivalent values. In this regard, Johnston and Zimmerman point out that:
Restitution will sometimes impose this much cost on the defendant where the alternative would be very much more costly to the plaintiff. Even the unquantifiable costs of the forced-exchange remedy are taken into account in determining the relief to which the plaintiff is entitled. This accounting may be observed, in the mistaken-improvement cases, in the fact that the availability of a remedy depends a great deal on what might be called the equities of the parties. So a mistaken improver who has acted negligently – not even bothering to obtain a proper survey before building his cabin, for instance – is much less likely to obtain relief in restitution than one who paid for a survey that was erroneously performed. This sounds like common sense, but in a restitution context the distinction is less obvious than it seems. Note that the position of the landowner (including the extent to which he may be enriched by the improvement) is prima facie identical in the two cases supposed above (mistaken cultivation of wilderness and mistaken construction of a garage). And yet the cases make it clear that the success of the improver’s claim depends not simply on the fact of benefit to the landowner, but on the improver’s own equitable position (Johnston & Zimmerman, 2002, p. 380)
Moreover, contracts for real property under the German Civil Code that are binding for a very long time can offend common decency and therefore be void according to 138(1); in this regard, common decency is defined as “the beliefs of those whose thinking is proper and just. For common decency to be violated, there must be an extreme limitation of a person’s economic liberty” (Gordley, 2001, p. 291).
There has also been a discernible lack of differentiation between property and possession, a trend that has been further exacerbated by the difficulty of identifying the very core of property rights. In this regard, Steiger (2006) reports that, “Focusing on the use of the resource land, why is ‘having’ all property rights in the land is not necessarily the equivalent of being entitled to till a parcel of land. This can only be explained by the fact that some persons ‘own’ the rights to land as a common set while others only ‘own’ a subset of these rights” (p. 183). All and any assets have one characteristic in common: that of being “owned” by a proprietor and a possessor. And it is their rights that are different, not necessarily the persons to whom the rights are assigned. In the case of land, the right of property, the right to its encumbrance and alienation, and the right of possession, the right to till — to physically use the land — can be assigned to one and the same person; however, both such rights can also be assigned to different persons, for example, when the proprietor of the land rents it to a tenant. In the latter case, the rights imbue to the possessor of the land while the former remains its proprietor (Steiger, 2006). In sum, this author concludes, “The example also reveals that no possessory right can exist that is not related to a property right. Therefore, the right to change the form and substance of an asset, a possessory right, can always be restricted by the proprietor, for example, in the case of the lease of a house or flat” (Steiger, 2006, p. 183).
To help illustrate the differences and similarities among various European jurisdictions concerning real estate sales, Gordley (2001) provides the example of a fictitious company, “Realty,” a company competing in the real estate industry that was seeking an appropriate site for a new building. The company advised a property owner, “Simon,” that it might be interested in purchasing a lot that he owned; however, the company stated that it would require additional time in which to conduct a study. Gordley prefaces this case study example by stating, “Without charging anything, Simon promised that he would sell his land to Realty for a fixed price (a) if Realty chose to buy it at any time within the next month, (b) if Realty chose to buy it at any time within the next two years, or – when Realty completed its study of the land, unless, in its sole and absolute judgment, Realty thought the economic prospects were unsatisfactory, in which case Realty had the option to withdraw. Realty accepted. Is the promise binding? Does it matter if there was an abrupt rise in the market price, and Realty wants to buy the land, not for a building, but for immediate resale?” (Gordley, 2001, p. 291)
In these types of cases, the author reports that the promise is not binding without compliance with the formalities for assuming an obligation to transfer real estate of 313 of the German Civil Code; the author also notes that contracts that require one party to transfer or acquire real property must also be recorded by a notary but the absence of this formality is immaterial if the real property has actually been transferred (Gordley, 2001). Such extensive formalities are required to provide proof of the obligation and to provide caution to the parties themselves because real property is regarded as an extremely important asset in Germany (Gordley, 2001). Because Realty can choose freely whether to buy or not, a contract is an option; an option is not deemed to be a gift and is valid under the German Civil Code even if nothing was paid for it. Consequently, promise is binding and it does not matter if the market price has increased. (Gordley, 2001)
The question of what Realty wants to do with the land merely concerns Realty’s motives. They are not part of the contract as long as it does not prohibit an immediate resale. The only difference is the duration of the option. In general, contracts that are binding for a very long time can offend common decency and therefore be void according to 138(1) of the Civil Code. 38 Here again, common decency is defined as the beliefs of those whose thinking is proper and just. For common decency to be violated, there must be an extreme limitation of a person’s economic liberty. A promise (Rechtsgesch ft) which offends common decency is void (Gordley, 2002, p. 291).
Therefore, Realty can legally refuse to purchase the real estate if, in its ‘sole and absolute judgment’, it thinks the economic prospects of the property are unsatisfactory; however, if a contract provides that the buyer has the right to examine goods or real estate, the contract is deemed to be concluded already but subject to the condition that the buyer approves the goods. In the absence of an explicit contractual provision to the contrary, the buyer is absolutely free in his decision to approve the goods according to 495 of the Civil Code (Gordley, 2002). In this regard, the motives of Realty and the increase in the market price remain irrelevant provided they are not explicitly included in the contract. According to Gordley, “It would not be a violation of good faith even if Realty did not tell the truth about its motives since under 495 of the Civil Code the buyer is not even obliged to disclose his motives. Because the law provides that the buyer has this right, his exercise of it would be held to violate good faith (242 of the Civil Code) only under very exceptional circumstances. They would have to be much more compelling than they are here” (2001, p. 292).
Description of the Study Approach
To gain a better understanding of the legal processes involved in the judicial sale of real estate in the reunified Germany today and current trends in real estate processes and transactions, this study used a critical review of the peer-reviewed and scholarly literature, together with reliable online governmental and organizational resources. According to Gratton and Jones (2003), a critical review of the timely literature is an essential component of all research: “No matter how original you think the research question may be, it is almost certain that your work will be building on the work of others. It is here that the review of such existing work is important. A literature review is the background to the research, where it is important to demonstrate a clear understanding of the relevant theories and concepts, the results of past research into the area, the types of methodologies and research designs employed in such research, and areas where the literature is deficient” (p. 51). As to the critical review of the literature, Wood and Ellis (2003) identified the following as important outcomes of a well conducted literature review:
It helps describe a topic of interest and refine either research questions or directions in which to look;
It presents a clear description and evaluation of the theories and concepts that have informed research into the topic of interest;
It clarifies the relationship to previous research and highlights where new research may contribute by identifying research possibilities which have been overlooked so far in the literature;
It provides insights into the topic of interest that are both methodological and substantive;
It demonstrates powers of critical analysis by, for instance, exposing taken for granted assumptions underpinning previous research and identifying the possibilities of replacing them with alternative assumptions;
It justifies any new research through a coherent critique of what has gone before and demonstrates why new research is both timely and important.
Data-gathering Method and Database of Study
The study used a variety of sources to develop its findings, including public and private libraries, online sources such as Questia and EBSCO, as well as relevant German governmental Web sites.
Chapter 4: Data Analysis recapitulation of relevant demographic and economic indicators for Germany and selected European jurisdictions is provided below, followed by an assessment of various aspects of judicial sales of real estate in Germany today.
Recap of current German economic indicators: Germany vs. world.
Ease of 2006 rank
Change in rank
Starting a Business
Dealing with Licenses
Trading Across Borders
Closing a Business
Source: World Bank: Income category: High income (2007).
Figure 1. Recap of current German economic indicators: Germany vs. world.
Source: Based on tabular data in World Bank: Income category: High income (2007).
According to Lapier (1998), “Throughout the decade between 1975 and 1985, the Federal Republic of Germany ranked as the world leader of outward direct real estate investment” (p. 161). Since the late 1970s, the expansion of German foreign direct investment increased from $2.1 billion in 1975 to $17.4 billion by 1990 and these trends continue today (Lapier, 1998). The impact of these investments on the real estate market in Germany has been profound, and the need for “living space” has always characterized the marketplace making most properties extremely valuable. Despite these constraints to home ownership, German citizens continue to pursue home ownership as a high priority, and these trends are reflected in Table 3 and Figure 2 below.
European outstanding residential mortgage debt as percentage of GDP: 1990-1999.
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Denmark n.a. n.a. 63.1-60.4-60.9-58.7-58.5-66.5-69.4-68.4
Finland 31.7-32.0-33.9-38.1-37.2-32.4-31.1-29.5-30.3 n.a.
Source: Charlier & Van Bussel, 2003, p. 165.
Figure 2. German outstanding residential mortgage debt as percentage of GDP: 1990-1999. Source: Based on tabular data in Charlier & Van Bussel, 2003, p. 165.
Local banks and other financial institutions in Europe are increasingly following their customers abroad in an effort to provide real estate acquisition financing; in fact, some countries, such as Germany, have their own commercial drivers to do so, such as the flood of money from the German mortgage banks into the London market which emerged in response to German investor demand which was frequently made using bank-related investment funds (Fordham & Wiemann, 2006). According to these authors, “It is only relatively recently (the early 1990’s onwards) that this has happened on any scale” (Fordham & Wiemann, 2006, p. 15). The estimated figures for private real estate capital flows (including for investment vehicles) into the UK, France, Germany, Italy and Spain, showing the split between debt and equity for 2004 are shown in Table 4 and Figure 3 below.
European real estate capital flows (pounds billion) 2004 estimated.
Commercial banks and other lending institutions
German mortgage banks
Figure 3. European real estate capital flows (pounds billion) 2004 estimated.
Source: Based on tabular data in Fordham & Wiemann, 2006, p. 14.
These authors suggest that the level of cross-border real estate debt can be expected to increase still more in the future, as many markets previously regarded as “out of bounds” have become stable and accessible – e.g. In central and Eastern Europe. Given the divergence between countries’ basic real estate law, it is not surprising that there is a corresponding dearth of uniformity when it comes to taking land as security for debt and subsequently enforcing it if required (Fordham & Wiemann, 2006).
Differences and Similarities in Judicial Sales in Europe Today.
In May 2002, the EU promulgated an insolvency regulation (Council Regulation (EC) No. 1346/2000) with the goal of establishing common rules on cross-border insolvency proceedings, based on principles of mutual recognition and cooperation; however, this initiative was not an effort to introduce a single European insolvency law (Fordham & Wiemann, 2006). According to these authors, “One specific provision is that, subject to certain exceptions, the opening of insolvency proceedings in one Member State does not affect the “rights in rem” (broadly, mortgages and charges) of creditors or third parties over assets belonging to the debtor which are situated within the territory of another Member State at the time of the opening of the insolvency” (p. 16).
By opting for alternative security packages now available through some European financial institutions, lenders are able to achieve some flexibility when it comes to enforcement of the share pledges given by the shareholders in the borrower, so that the lender can acquire the shares and conduct a controlled sale of the real estate or of the shares in the borrower; or enforcement of the mortgage/land charge over the real estate (Fordham & Wiemann, 2006). Which alternative is regarded as being the best suited for the purpose will therefore differ according to the jurisdiction of incorporation of the borrower and the circumstances at the time of enforcement, as well as the likely tax treatment of a disposal. While it is deciding on its strategy the lender can in most cases, where relevant, intercept the rental payments from current tenants to ensure continuity of debt servicing efforts (Fordham & Wiemann, 2006).
The highlights of differences between selected EU members, including Germany, in this regard, are set out in Table 5 below.
Recap of differences in real estate dispositions through judicial sale in selected EU jurisdictions.
Although the lender will often have taken a pledge of the shares in the borrower SPV, in practice the lender might not want to enforce that security and vest the shares in itself, as it will become the owner of a company in financial difficulties. Indeed, having defaulted on the loan, the borrower may undergo a ‘cessation de paiements’ (i.e. It cannot satisfy its outstanding liabilities – being its due and payable debts, the recovery of which is actively sought by the creditor – with its available assets) and therefore be subject to court insolvency proceedings. (Filing for the commencement of insolvency proceedings is a legal duty for directors of a company when the cessation des paiements test is positive.) Beginning January 1, 2006 a new law came into force allowing directors to initiate safeguard proceedings (sauveguarde) before the insolvency test is positive. The enforcement procedure might take approximately two years in the first instance, plus a further one to two years if appealed. By the time such proceedings are terminated, there may no longer be any interest in controlling the SPV, especially if insolvency proceedings have commenced and resulted in the sale or liquidation of the SPV’s assets. When the debtor company is solvent, enforcement of a real estate mortgage and distribution of the proceeds can typically require a year to process, and in complex cases it can require much longer. If insolvency proceedings are commenced against the debtor company, or the new ‘safeguarding’ proceedings are initiated, a moratorium on enforcement of security on the debtor’s assets will automatically come into effect until a final decision is made by the court.
Germany pledge over shares in a German SPV is enforced by public auction of the shares. More commonly, however, the lenders themselves will enforce their land charges. The enforcement of a German land charge is effected either by way of public auction of the property (Zwangsversteigerung) or by way of sequestration of the property (Zwangsverwaltung). The enforcement requires there to be an enforceable title which can be a judgment in regular proceedings or – most commonly – the debtor’s consent to immediate enforcement into the charged property (sofortige Zwangsvollstreckung). In case of sequestration the enforcing creditor is entitled to the rental income. If banks enforce the courts will appoint the administrator nominated by the bank (Institutsverwalter).
Both the public auction and the sequestration of a property must be initiated by the creditor filing an application with the local court having jurisdiction over the enforcement. The court will then decree the public auction or sequestration by court order. The property is seized following the service of that order on the debtor or, in case of sequestration, upon the appropriation of the property by an administrator appointed by the court. Following seizure of the property, any purported disposal of the property by the borrower is ineffective as against the lender. It typically takes between one and three years to enforce a charge that is immediately enforceable. In the event of insolvency of the chargor, the chargee is entitled to a preferential and therefore prior-ranking repayment from the proceeds of sale of the property; however, following the enforcement of the land charge by way of public auction or sequestration of the property, the costs of the relevant process are deducted before distribution to the chargee.
Under Italian law, mortgage loans may be made either under the ordinary regime set out in the Italian civil code, or under special legal regime (the Credito Fondiario regime). A mortgage loan would qualify for the Credito Fondiario regime if it is made available by Italian or EU banks, has a term in excess of 18 months, is secured by a first ranking mortgage and the loan to value ratio does not exceed 80%. The main advantages of the Credito Fondiario rules include certain protections against claw-back by a receiver appointed in the insolvency of the borrower, as well as certain favourable rules with regard to the enforcement of the security. The main disadvantages include a significant restriction on the ability of the creditor to terminate the facility in the event of non-payment, and the right of the borrower to demand a reduction of the amount secured under the mortgage in the event of prepayment. By contrast, no options such as the right to pre-pay, the right to reduce, or limits to termination are provided by law for ordinary mortgage loans, and their enforcement will not benefit from the Credito Fondiario regime. Instead, the general rules set out below apply.
Prior to and as a condition of the commencement of compulsory enforcement (esecuzione forzata) against any Italian real estate, a lender will have to seek a court order or injunction for payment in the form of an enforcement order (titolo esecutivo) from the court in whose jurisdiction the mortgaged property is located. This must be served on the debtor. If the mortgage loan was executed in the form of a public deed, and if certain formalities are complied with, the need for a court order can be avoided.
Enforcement of a mortgage in Spain is regulated by a court enforcement procedure culminating in a public auction of the property, with the proceeds of the sale applied towards the satisfaction of the liability. Under the new Spanish Civil Procedure Law, parties may also agree, in the mortgage deed, to a non-judicial sale of the mortgaged property through a notary public. In the case of a judicially administered public auction, the shortest procedure (in terms of administrative process) can be completed from between six months to one year, but this may require several months longer to be completed if problems are encountered. Sales completed through the notary public process can require up to six months to be completed.
Source: Fordham & Wiemann, 2006, pp. 17-8.
The administration of real estate transactions under the German Civil Code is not necessarily a straightforward enterprise. According to Cranston and Goode (1997), “Abstraction typically occurs in concentric circles within the German Civil Code” (p. 16). Citing the example of a sales contract, it is possible to differentiate at least seven circles of rules which can govern such a contract which are described more fully in Table 6 below.
Concentric circles of the German Civil Code.
German Civil Code “Circle”
This innermost circle is formed by specific rules on sales contracts, e.g. On when the risk passes to the buyer (usually when the seller hands over the goods to the buyer, paragraphs 446-7 BGB).
This circle involves cases where the buyer’s remedies are requested in cases in which the seller delays delivery, i.e. contracts where one party performs his part of the bargain for the sake of the other’s performance (gegenseitige Vertr ge), which will equally apply to delay by e.g. landlords, employees, or shippers. For parties to these contracts, paragraph 326 BGB provides the right to set a period of grace and, after it has lapsed, to claim damages for non-performance, or to avoid the contract. “This is similar to the English rules on ‘making time of the essence'” (p. 17).
When we discuss the sale of non-existing goods, we reach the fifth concentric circle, i.e. general rules on contracts. These rules apply to all contracts, including gratuitous contracts such as donations. 24 in our example, paragraph 305 BGB will provide the answer, since this provision makes a contract void the performance of which is impossible ah initio.
We leave the law of contract and move on to the fourth circle if we want to know how the buyer’s damages for breach of warranty are to be calculated, or whether the seller can plead a set-off with another claim. The applicable rules are common to the entire law of obligations. Paragraphs 249-54 BGB govern damages, regardless of whether they are authorized by the law of contracts or torts. Similarly, the right to declare a set-off (paragraphs 387-96 BGB) does not depend on whether claim or counterclaim are based in contract, negotiorum gestio, restitution, or torts. Other rules, common to the entire law of obligations, include those on performance in general; on assignment; interest; place and time of performance; and on plurality of debtors or of creditors; but also general provisions on delay and on impossibility of performance.
Even the law of obligations becomes too narrow when we turn to questions of illegality, e.g. whether a contract for the supply of arms is void for violation of a statutory prohibition. By now, we have to leave Book 2 of the BGB (the law of obligations) and take a closer look at Book 1, the General Part, and in particular at paragraph 134 BGB. This provision on illegality applies to any Rechtsgeschuft or legal transaction, including contracts, but also to transactions in property or family law as well as to wills, to name a few. The General Part of the BGB, it should be remembered, applies to all other areas of the Civil Code and indeed of private law. The law which is common to legal transactions is therefore the third concentric circle, which also comprises the rules on immorality (paragraph 138) and form requirements (paragraphs 125-9).
If we want to know whether a sales contract is affected by mistake, we arrive at the second concentric circle, the so-called Willenserkl rung or declaration of intention. This heading encompasses all those rules which are common to one-sided legal transactions (wills, acts of rescission or avoidance, notices to quit, the granting of consent, etc.) and to those declarations which make up a contract, i.e. To both offer and acceptance. The same circle also includes the rules on deceit, duress, and representation, and those on capacity to enter into legal transactions.
The first and widest circle is reached when we wish to know whom the seller should sue for the purchase price if the goods were sold e.g. To a football fan club. (of course, if the football club is ‘registered’, different rules will apply.) the answer is provided by paragraph 54 BGB: not the club, since it has no legal capacity, but the person who acted, or the individual members on behalf of whom the president of this club ordered the goods. This concerns Rechtsfuhigkeit, i.e. The capacity to be the subject of rights in private law; and it forms part of the first title of the first book of the Code which also tells us whether a baby which dies within hours after birth can acquire claims in tort (e.g. For medical malpractice) or a share in an estate. (the answer is positive in both cases.) This also shows that persons who have no contractual capacity of their own (the baby) will still have legal capacity so that they can acquire claims and rights. The same first circle also includes rules in paragraphs 90-103 BGB on what can be the object of a right.
Source: Cranston & Goode, 1997, pp. 17-8.
The first book of the BGB, the so-called Allgemeiner Teil or General Part, is therefore comprised primarily of various rules that English common law would consider in a contract course; however, German law, with its greater degree of logic, has placed on a higher level of abstraction and has generalized in such a way as to apply throughout the law of contract, restitution, tort, property, family, inheritance, company, and intellectual property law, as well as the other areas of private law (Cranston & Goode, 1997). In sum, these authors conclude that, “In particular, the General Part sets out the rules for formation of contract and policing of contract. The General Part is, therefore, mainly a product of the technique of abstraction in concentric circles” (Cranston & Goode, 1997, p. 18).
Administration of Real Estate Sales in Germany Today.
In their study, “Innovative Real Estate Financing in Germany – a Financial Desert?,” Iblher and Lucious (2003), report that, “A desert may be described as region with little or no vegetation. If one interprets innovative financing instruments as vegetation it is not far fetched to compare the German market for real estate financing to a desert” (p. 37). For a number of years, real estate financing in Germany has been dominated by traditional mortgage credits; in this environment, risk minimization has emerged as the most important issue (Iblher & Lucious, 2003).
To date, German banks have acquired a great deal of expertise and experience in recent years concerning real estate valuation and controlling which has been organized in specific real estate divisions. According to these authors, “The main objective of the banks appears to apply the knowledge in order to passively minimize risks and not to actively influence real estate management for an improvement of liquidity and return. Within this framework, traditional mortgages have proved to be the ideal minimal risk instrument to finance real estate projects. In contrast, the entrance of new lenders, the securitization of mortgages and the government’s changing role among other factors prompted real estate banks to develop innovative financing instruments” (Iblher & Lucious, 2003, p. 37). Although in the U.K. And American real estate markets, innovative financing instruments appear to be part of the standard set of tools being used, such instrumentation appears to be absent or underused in specialized institutes at German banks. Because there have been no scholarly studies regarding the use of innovative real estate financing conducted in Germany to date, these authors sought to examine the significance of innovative real estate financing instruments.
Based on the foregoing, the objectives of the Iblher and Lucious study were:
To obtain data on the use and structure of innovative real estate finance instruments;
To investigate motives for current practices; and,
To identify future trends in real estate financing.
The authors present their research in three sections; the first section presents the research design, the second section contains selected results and interpretations of the research and the final section provides a summary of the research results. In fact, they emphasize that, “this study is the first to be performed in Germany on the subject of innovative real estate financing instruments” (Iblher & Lucious, 2003, p. 83).
The survey adapted this selection for the making of the questionnaire. At the beginning of the questionnaire, a glossary provided brief definitions of the quoted instruments in order to ensure a common understanding of the financing products. As innovative real estate finance instruments are niche products, it was necessary to identify the specialists in charge. In a first step, 77 major national and international banks in Germany were contacted by telephone to announce the survey and to ask for cooperation. Out of the 77 banks 25 institutions do neither offer nor transact innovative financing and/or were not apt to cooperate because of organizational and data privacy considerations. In a second step, the questionnaire was sent to 52 institutions; the sample was designed to include the largest institutions of each bank type and is illustrated in Figure 4 below (Iblher & Lucious, 2003).
Figure 4. Types of German financial institutions surveyed by Iblher and Lucious.
Source: Iblher & Lucious, 2003, p. 83.
Of the 52 institutions to which the questionnaire were sent, 23 responded (providing the authors with a response rate of approximately 42%); just 22 questionnaires could be used for the statistical analysis though. In an effort to assure respondents with confidentiality and to provide a stimulus to respond, the executives were assured that their responses would be anonymous. For this reason, the responses can only be displayed in numbers of participating institutions and types of banks as shown in Figure 4 above; despite these constraints, because of the explorative nature of the study and the fact that all major banks were included in the survey, the research results can be assumed to generate a general indication of the German market for real estate finance (Iblher & Lucious, 2003).
The survey used by these researchers covered four areas as follows:
General characteristics of the financial institutions (type of corporation, number of employees);
Supply of innovative financing instruments (market penetration, offer, volume);
Demand for innovative financing instruments (demand in the last five years, current practices, future demand, advantages and disadvantages of instruments); and,
Process of financing and reimbursement structure.
In order to study the structure of the respondents, respondent banks were requested to identify what type they belonged to and how many employees were responsible for innovative real estate financing. The largest group was reported to be mortgage banks, representing almost half (45%) of the respondents. Another large percentage of real estate financing was being performed by commercial banks which comprised 27% of the universe (Iblher & Lucious, 2003). The former state-owned and now privatized state banks also play an important role for real estate development as they are mainly involved in larger transactions and some start to play a noticeable role in investment banking; both their percentage as well as those of savings and loan banks was reported to be 14% as shown in Figure 5 below.
Figure 5. Types of German banks studied by Iblher and Lucious.
Source: Iblher & Lucious, 2003, p. 84.
More than half of the institutes employ up to 20 persons for the task of innovative financing. In nearly every fifth bank up to 100 people cope with innovative instruments. In 14% of the universe the banks employ more than 100 persons as shown in Figure 6 below. Given the relatively small importance of innovative financing instruments on the German market to date, this number seems relatively large; consequently, additional studies would be required in order to examine which persons are included in these numbers and if innovative financing is executed in larger departments which are also responsible for other stints. According to these researchers, to date, “a tendency can be perceived, which illustrates that small specialized teams manage innovative financing activities” (Iblher & Lucious, 2003, p. 85).
Figure 6. Number of employees working in innovative financing.
Source: Iblher & Lucious, 2003, p. 85.
Following the results of the survey innovative real estate financing instruments are exclusively used for professional real estate development. Due to its complexity and the costs involved the instruments are not offered to private home builders. The participants in the survey were asked about their perception of the market structure concerning innovative real estate financing instruments in Germany. Figure 7 below clearly illustrates that innovative mortgage instruments, such as convertible (CM) and participating mortgages (PM), are seldom or not at all applied in the German market. The authors add that, “While project financing (PF) is a common instrument, mezzanine (M) and joint venture (JV) are applied less frequently but especially joint venture financing still plays a notable role in the market” (Iblher & Lucious, 2003, p. 86).
Figure 7. Overall use of innovative instrumentation in German real estate markets.
Source: Iblher & Lucious, 2003, p. 87.
The principal goal of the Iblher and Lucious study was to determine current experience with the described instruments among German financial institutions involved in real estate transactions today; a secondary goal was to identify what types of instruments were actually in use. The survey of financial institutions determined that at least half of the respondents have made experience with mezzanine capital (48%), project financing (71%) and joint venture financing (52%). The number of banks having not used any of the instruments at all in the past is at 10%. Compared to the banks not offering any instruments the number diminished by 20%. Regarding the bank types, especially mortgage banks show to have made use of a broad range of instruments. This type can produce experience with any of the instruments examined. Also the top four commercial banks and state banks display considerable expertise with each having used four out of the five instruments. The convertible mortgage remains to be the instrument the least popular in Germany with only mortgage banks having expertise. The second less popular tools are participating mortgages which already have been used by three types of banks.
Figure 8. Innovative instruments offered to German real estate transaction customers and used in such transactions.
Source: Iblher & Lucious, 2003, p. 89.
In sum, the authors conclude that, “When one compares the answers as to the question whether instruments have been offered to the one referring to having actually used them it becomes evident that the latter was confirmed more frequently. These findings suggest that banks have experience in a greater number of instruments than they offer their clients as a standardized service. Some other constraints identified by these researchers included the financing process typically used in German real estate transactions today. According to Iblher and Lucious:
Resources for modern forms of real estate financing at many banks seem to be rather limited or only in the process of development. When considering the financing process, it appeared of interest to learn who is involved in the respective real estate department apart from the specialists. The complexity of innovative instruments requires the involvement of the tax and legal departments at the banks. Only very few banks cooperate with external consultants. For the design of innovative instruments 58% do not have any ties with consultants from outside the bank (exhibit 13). Only 16% work in harness with consultants on a regular basis. If there is any collaboration it takes mainly place with certified public accountants, tax consultants and lawyers. Surveyors are also referred to in a few cases. (p. 90)
These respective cooperative rates are illustrated in Figure 9 below.
Figure 9. Cooperation with external consultants.
Source: Iblher & Lucious, 2003, p. 91.
Summary and Conclusions
This study provided a critical review of the relevant literature to determine what types of judicial sales of real estate are currently practiced in Germany, how these judicial sales are typically adjudicated and to identify current and future trends for the judicial sale of real estate in Germany. In this regard, the research clearly showed real estate investment and financing opportunities are on the rise throughout Germany today, but there remains a need to introduce more innovative instruments to help navigate the complex legalities involved in adjudicating real estate sales in general and through judicial sales in particular. To this end, Iblher and Lucius (2003) report that “In Germany, banks possess experience in mezzanine capital, project and joint venture financing and are optimistic regarding the future development of demand for these instruments” (p. 82). The research also showed that the economic and political environment in which these real estate financing mechanisms are emerging remains highly dynamic, and fundamental differences between jurisdictions remain a profound problem for private and corporate investors and financial institutions alike.
Further complicating matters is the lack of standardization and operationalization of the terms and the types of information being reported. For example, “The quality of data collection may vary because different thresholds exist for reporting information to national governments. Germany requires reports only from direct investors whose affiliates have total assets of DM500,000 or more” (Lapier, 1998, p. 214). According to this author, because just a few large multinational corporations tend to account for the majority of direct investment in German real estate, the total direct investment stock is rarely significantly affected by reporting thresholds; however, Lapier cautions that stock estimates for smaller industries such as real estate could be affected, particularly if a significant number of relatively small real estate investments below the reporting threshold were made in any given year.
Based on the foregoing, it is reasonable to conclude that the same forces that have driven the need for various standardized approaches to administration and adjudication throughout the European Union will continue to influence how various jurisdictions administer their respective real estate laws. Under Germany’s Civil Code, certain aspects of real estate continue to be controlled by still other laws, and there are some alternative approaches being developed by the EU that are not necessarily designed to replace these unique legal systems, but the hand-writing is nevertheless on the wall.
In Germany today, real estate can be legally owned by consumers as well as legal entities, including local authorities and foreign corporations. The adjudication of legal disputes over property restitution depends on the precise location in united Germany where the dispute took place, when it first occurred, and the current state of the law as interpreted by German federal courts. The need for such judicial proceedings has skyrocketed in recent years following the reunification of the German states, but the number of cases for these types of proceedings has not been as pronounced as some had feared, but the fact remains that important reforms are still required in order to facilitate the adjudication of real estate sales and to provide consumers and investors with more confidence and a better understanding of their rights and responsibilities in these cases.
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