Until the end of 2021, Berlin as a whole was still considered a pioneer in the area of exercising municipal pre-emption rights. This applied to the areas of the German capital that belong to the social conservation areas. But then the Federal Administrative Court in Leipzig put a stop to this instrument. The ruling dates from November 9, 2021 and related to the right of first refusal, which is enshrined in the German Building Code.
What is the right of first refusal when selling real estate?
There are different forms of pre-emption rights. Basically, this term refers to the right of a person or a municipality to push ahead of other interested parties in the sale of a property and deprive them of the right to purchase the property.
Section 463 of the German Civil Code states that this right of first refusal can only be exercised if the seller has concluded a purchase agreement with a buyer. This means that the person or municipality holding the right of first refusal can veto the sale if the seller and buyer have signed a legally binding purchase agreement. The buyer is ousted from the purchase agreement and the person with the right of first refusal takes their place. It makes no difference whether the property is a condominium, apartment building, single-family home or plot of land.
However, it is important to note that the right of first refusal can only be exercised if the property is actually to be sold. If it is a gift, an inheritance or even a foreclosure, the right of first refusal cannot be exercised.
What is behind the right of first refusal under public law in Berlin's milieu protection areas?
The right of first refusal, as it applies in the milieu protection areas of Berlin, is legally regulated in Section 24 (1) sentence 1 no. 4 BauGB. As soon as an owner in one of the German capital’s milieu protection areas announces that they wish to sell their property, the districts can exercise their right of first refusal within two months. They can either buy the property themselves or commission a third party to do so. In most cases, this is one of Berlin’s six municipal housing associations.
This can be circumvented if the buyer of a property signs an avoidance agreement. This obliges the new owner to comply with all of the district’s requirements and, for example, not to subject the property to any modernization measures that are not planned by the district.
How was the right of first refusal applied by the Berlin districts?
The aim of milieu protection is to preserve the social composition of districts and maintain the cityscape. If an apartment, house or plot of land is to be sold, the district examines whether the common good and the objectives with regard to urban development are jeopardized by the purchase agreement. If this is the case, the district considers it necessary to exercise its right of first refusal in order to protect the common good and urban development objectives.
Of course, the district must review each individual case. This is done with the help of a site inspection. An urban planning assessment is carried out, as well as a market value appraisal and a technical appraisal. The economic viability is assessed on the basis of these checks. The latter is particularly important, as the district will not exercise its right of first refusal for an unprofitable property.
Avoidance agreements: What were the consequences of the right of first refusal for first-time buyers?
The focus for the district is not actually on exercising its right of first refusal. Instead, the aim is to encourage the buyer of a property to sign the avoidance agreement. If the buyer of a property undertakes to implement the district’s conservation objectives, then he must also have the financial means to realize them. If this can be ensured, then there is no reason for the district to exercise its right of first refusal.
This right of first refusal offers security for tenants of a condominium. By signing the agreement, the new owner undertakes not to have any rent-increasing modernization work carried out. They cannot transform the apartment over a long period of time and, for example, combine two apartments.
If the new buyer does not agree to the avoidance agreement, the district must exercise its right of first refusal to ensure compliance with the milieu protection. The district then tries to persuade a third party to buy the property. Possible third parties include cooperatives, foundations or tenant associations. Cooperation with the state-owned housing associations is particularly popular. In this way, the property is protected from speculation in the long term and affordable housing can be preserved.
Housing associations also carry out an economic assessment. After all, they have to ensure that the costs of purchasing a property are covered by the rental income. If this does not happen, the housing stock of the state of Berlin will be jeopardized in the long term. An imbalance in the housing associations must be prevented at all costs.
If the purchase price is too high for the housing association, it can apply for a state subsidy. This is done at the Senate Department of Finance, the subsidy comes from taxpayers’ money. The Senate Department of Finance reviews the application according to a standardized list of criteria. Care is taken to ensure that the purchase of this property protects low-income households. The purchase price must not be subject to speculation and the rental prices should be in line with the average for the area. Overall, it should also be ensured that it is a property that supports the conservation objectives.
If no third party can be found, but the district still wants to press ahead with the pre-purchase, it must finance it from its own district coffers.
Berlin's pre-emption practice in figures from 2017 to 2021
A total of between 2017 and 2021, over 800 cases of the right of first refusal in Berlin were examined. In 90 cases, the districts’ right of first refusal was actually exercised following a detailed examination. There were 376 cases in which the buyers agreed to sign the avoidance agreement. In a total of 348 cases, the property was sold even though the buyer did not sign the avoidance agreement.
What did the Federal Administrative Court decide in November 2021 and what does the ruling mean for Berlin's pre-emption practice?
Until recently, the districts of Berlin automatically assumed that the sale of a property posed a threat to the conservation objectives at the heart of neighborhood protection. However, the Federal Administrative Court ruled in 2021 that a blanket endangerment can no longer be assumed. It must be examined individually whether the fulfillment of the objectives of milieu protection are actually at risk, which makes it much more difficult for the districts to enforce the right of first refusal. In practice, the number of cases has fallen sharply since the ruling was handed down.
What are the next steps in Berlin's pre-emption practice in neighborhood conservation areas?
The Berlin state government is currently led by the SPD. It wants to push through an amendment to the Building Code (BauGB) so that a right of first refusal is also protected at federal level. This would entitle the districts in Berlin and other cities to exercise their right of first refusal when housing in social conservation areas is to be sold. The Greens and the SPD also support this plan at federal level. However, the FDP is keeping a low profile and is not commenting on the draft legislation.
Conclusion
The right of first refusal in protected neighborhoods serves to ensure compliance with the conservation objectives. The districts concerned try to motivate a third party to purchase a property if a buyer refuses to sign the agreement to avert. If no cooperative or foundation can be persuaded to buy the property, the district must raise the purchase price from its own district coffers. It is important here that a property is profitable and can offset the purchase price in the long term through reliable rental income.
Until recently, the districts opted across the board to exercise their right of first refusal if buyers of properties decided not to sign the avoidance agreement. However, this changed following a court ruling in 2021. Properties are now examined much more individually to determine whether the sale would jeopardize compliance with the milieu protection goals. If this is not the case, nothing stands in the way of the sale.
