Lease agreements and heritable building rights

What is a lease agreement?

A lease agreement sets out the transfer of a leased asset for a fixed or indefinite period. In return, the leaseholder pays a lease payment (Pachtzins) to the lessor. In its basic structure, a lease agreement resembles a rental agreement, but it goes further in one decisive respect: whereas a rental agreement only entitles the tenant to use the rented item, a lease agreement additionally grants the leaseholder the right of usufruct.

This means the leaseholder may keep the proceeds generated from the leased asset. The term derives from the Latin usus fructus and covers all types of proceeds – not only literal fruit. Where the leased asset is agricultural land or a farm, this can genuinely mean harvest yields. Leased rights, such as fishing rights, are likewise subject to usufruct.

Leasing in the property sector

In the property sector, lease agreements are typically concluded for plots of land, buildings, or entire businesses.

Lease agreements for land with a term of more than one year must be made in writing. For agricultural land, this requirement applies to terms of more than two years. If the written form is not observed, the agreement is treated as concluded for an indefinite period. You should therefore record all agreements in writing from the outset and have the contract signed by both parties.

Obligations of the lessor

The lessor is legally required to hand over the leased asset in a condition that allows the agreed use and usufruct. Where equipment is included in the lease (common for hospitality or agricultural businesses), and an item of equipment becomes unusable through no fault of the leaseholder, the lessor must provide a replacement. An exception applies to animals kept for profit-generating purposes.

Obligations of the leaseholder

The leaseholder must manage the leased asset properly and with the utmost care. Worn or damaged items must be repaired or replaced. When the lease ends, the leaseholder must return the leased asset in the condition in which it was received.

Terminating a lease agreement

Unless otherwise agreed in the contract, a lease agreement can be terminated with six months' notice, effective at the end of a lease year.

Worth knowing: Unlike a rental agreement, a lease agreement does not end on the death of the leaseholder. The rights and obligations pass to the heirs, unless a special right of termination is exercised.

Particular features and useful facts about lease agreements

Because lease agreements are typically designed for long terms, you should carefully weigh the advantages and disadvantages before signing.

Unlike tenancy law, there is no comparable statutory protection for leaseholders. Lease agreements are governed by the German Civil Code (BGB) and can largely be shaped freely by both parties. It is therefore advisable to seek legal advice before signing. The more precisely the contract is worded, the better it protects against future disputes. Payment terms, notice periods, the condition of the leased asset and any other agreed terms should all be clearly set out in the contract. 

Heritable building rights: Leasing land instead of buying it

A heritable building right (Erbbaurecht) – commonly referred to as Erbpacht – allows a person to build on land owned by someone else. Particularly in regions with a tight property market and high land prices, a heritable building right can be an attractive alternative to buying.

In return for the use of the land, the holder of the heritable building right pays a regular ground rent (Erbbauzins) to the landowner. Typical contract terms range from 60 to 99 years. The ground rent is based on the current standard land value (Bodenrichtwert) and typically amounts to between two and five per cent of the land value per year. Since most contracts include an adjustment clause, often linked to the consumer price index, the ground rent can rise over time. In regions where standard land values have increased sharply, you should factor this into your calculations.You can find out exactly what the standard land value is in our guide to thestandard land value.

What happens once the heritable building right expires?

Once the agreed term ends, the heritable building right generally comes to an end. There is no statutory right to an extension. However, if the contract includes a right of first refusal for renewal, the existing holder may, subject to the applicable conditions, be given preference when a new contract is granted. Compensation for the building erected on the land is governed by the statutory and contractual provisions relating to heritable building rights. The relevant legal basis is set out in the German Heritable Building Rights Act (Erbbaurechtsgesetz, ErbbauRG).

Heritable building rights as a municipal tool

Local authorities are also making increasing use of heritable building rights. Cities such as Munich and Hamburg prefer to grant municipal land under a heritable building right, in order to keep land in public ownership and support affordable housing.This trend is likely to bring heritable building rights further into focus in the coming years.

Lease or purchase? A guide to choosing

Whether leasing or buying is the better choice depends on your circumstances. If you want to use and build on a plot of land over the long term but cannot, or would prefer not to, raise the equity needed for a purchase, a heritable building right offers an attractive alternative. If, on the other hand, you want full ownership rights and to benefit from any increase in value, buying is generally the better option.

Engel & Völkers supports you either way – whether you are buying land, searching for a plot with a heritable building right, or having an existing property valued.