Tenant right of first refusal

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basic rule

If rented residential premises, in which residential property has been or is to be established after being handed over to the tenant, are sold to a third party, the tenant is entitled to pre-purchase, § 577 para. 1 BGB. So three conditions are necessary:

  1. The lease is concluded at a time and the tenant has moved in at a time when the house is still undivided.
  2. The house is being divided into condominiums or is to be divided. This means the implementation in the land register, but in any case the certification of the declaration of division and application to the land registry for the purpose of division.
  3. Then it is “sold to a third party”.

The division as such does not lead to the tenant being able to buy, but the sale of his apartment to an external third party must also occur; External because the right of first refusal does not exist in exceptional cases if the landlord sells the living space to a family member or a member of his household. Transfers within the family or those in the closest personal environment should not be affected by the right of first refusal, regardless of whether something is paid for them or not. In such constellations, one cannot assume that the agreed price is in line with market practice. There is no apparent reason to grant the tenant pre-emption on terms that are based on a special close relationship between the landlord and his family or household.


Why does the law grant the “shared” tenant a right of first refusal?

The considerations are of a socio-political nature, but also take into account the change in the risk situation for the tenancy through the division and subsequent sale. Because if the tenant had previously had a landlord who owned an entire apartment building, he may have a landlord who only owns this one apartment. The risk of being terminated for personal use is then much higher. The right of first refusal allows the tenant to absorb the risk right from the start by becoming the buyer and subsequently the owner of the apartment.

For the owner who divides it up, there is (in theory) no disadvantage: whether an external third party buys the apartment or the tenant living in it may not matter to the selling landlord if the conditions are otherwise the same.

In practice, of course, there is a disadvantage associated with the right of first refusal, because it restricts the circle of buyers. If you want to buy a rented apartment as a capital investment, you will normally not (be able to) do so with 100% equity, but finance it with a bank. Under certain conditions, you can revoke the loan agreement up to 2 weeks after signing it - no longer after that, then you must accept the loan. If you do not do this, you owe the bank commitment interest or prepayment penalty, depending on whether you continue to hold the loan agreement or cancel it. This can involve significant sums of money. The consideration period for exercising the right of first refusal by the tenant is longer, namely 2 months (see here). As a result, buyers who are unwilling or unable to take the risk of sitting on an uncallable loan agreement will not consider the home. This in turn pushes the price down.

That being said, first refusal is a good thing as it allows previous tenants to become homeowners. As apartment owners, they can neither be terminated nor can their rent be increased, and from now on they are much more free to design their own four walls. The right of first refusal thus promotes their autonomy and their retirement provision in equal measure.

In this respect, it is not only positive if the prohibition on allocation (§ 250 BauGB) prevents the development of condominiums, which then also prevents tenants from becoming owners. Instead of banning divisions, one could encourage them and enable as many people as possible to take advantage of the opportunity offered to them here through equity-replacing loans and exemption from real estate transfer tax.

How does this work in practice?

As a notary, I can use the land register to see when the property was divided and whether or how often it has been resold in the meantime. If it has not been resold since the division, the next step is to review the rental agreement. If it was concluded before the division and the purchaser is not a family or household member of the seller, the right of first refusal must be observed.

In the purchase contract, I point out to those involved that the contract exists and that the contract can only be completed after the tenant's reflection period of 2 months (see here) has expired or he has declared a waiver. Furthermore, the contract must provide for a right of withdrawal in the event that the tenant exercises his right of first refusal. Otherwise there would otherwise be 2 contracts, of which the seller could only fulfill one. Instead of the right of withdrawal, the initial contract could also be made subject to a condition subsequent, ie it would automatically cease to exist if the tenant exercises his right of first refusal. But then it cannot be reactivated if the second purchase contract fails, for example if the tenant does not pay the purchase price and the seller ultimately has to withdraw from the second purchase contract for his part. If the initial purchase contract has not been terminated by a condition occurring but is dependent on a rescission and this has not yet been declared, it still exists and it could be continued with. Otherwise, everyone involved would have to start from scratch, which creates new costs and can also have other disadvantages.

Following the certification, I, as a notary, send a copy of the contract to the tenant, inform him about the sale and his right of first refusal and ask him to explain himself. If the tenant does not exercise, further processing can take place.

If, on the other hand, the tenant exercises, a second contract with the same content is concluded with him. This is already done through the tenant's letter of exercise (see here). However, he still has to go to the notary himself so that the declaration of conveyance can be made to him, because there is no such thing in the first purchase contract (only one in favor of the first buyer). Because of the principle of abstraction in German civil law, there is no other way of doing this.

Interesting legal questions

It gets interesting when things get more complicated. examples are

  • only one of several tenants exercises;
  • there were tenant changes with contract supplements or through inheritance; the current tenants weren't there before the split, but the lease itself is older;
  • one of the tenants has moved out, his address is unknown;
  • the unit sold is legally an apartment according to the declaration of division and the land register; however, a wall was erected and the resulting halves were in fact rented out separately;
  • several apartments are sold at an undivided total price (package sale);
  • several apartments are sold as a package and individual prices are shown; the square meter price of the apartment with the right of first refusal should be twice as high as the square meter price of the others;
  • several apartments are merged into one legal unit under the land register and then sold as a whole.

It is also important for brokers involved to ensure that they receive their commission even if the right of first refusal is exercised. According to the BGH, it is possible to provide for a corresponding agreement in the purchase contract, which also binds the pre-buying tenant (although the lower courts occasionally oppose this). But that is a topic for a separate post.