From handshake to pre-contract: no standard practice in Europe
The laws and practices governing real estate transactions vary widely in European countries. A verbal agreement, sealed with a handshake, no longer exists almost anywhere. In order to transfer a property from the owner to the buyer in a legally secure manner, a contract is required almost in all countries. In the non-more-EU country England, a simple written contract between buyer and seller is sufficient. And in Italy, even the preliminary contract can be legally binding, although this is followed by a formal purchase agreement concluded with a notary. Against this background, the German real estate purchase contract is considered to be complex, but at the same time extremely secure, not least because the contract must be notarized by a public official, the notary.
Nothing goes without the notary
The notarization of a property purchase contract is a mandatory prerequisite for its effectiveness. Notaries are lawyers and, depending on the federal state, work exclusively as notaries or are also licensed as lawyers at the same time. Within the scope of their notarial activities, they perform sovereign duties and enjoy a special level of trust in the legal community. Notarization is the highest formal requirement in the German legal system. In the case of real estate purchase contracts, it serves not only to facilitate evidence but also to protect against hasty dispositions of real estate which, by its nature, is unique and cannot be multiplied.
Land register: The memory of your property
In Germany, all real estate is recorded in land registers. The land registers are kept locally by departments of the responsible district courts. These departments are called land registry offices. In the land register, the property is uniquely identified. Each plot of land is assigned a land register sheet. All rights relating to the property are entered on this land register sheet. These entries may only be made by the land registry office and only on presentation of notarized documents. That is why the land register is particularly secure.
A special feature of the land register is that once data has been entered in the land register, it cannot be deleted. Thus, the land register sheet basically shows the entire history of rights to the property concerned. In addition to ownership, liens such as mortgages and land charges as well as priority notices are also entered in the land register. More detailed information on these land rights will follow in further articles.
Since so much sensitive information is stored in the land register, not everyone has access to all the land registers. Instead, a special interest must be proven for each individual land register page, for example through purchase negotiations with the owner.
The land register enjoys public faith, which means that whoever is entered in the land register as the owner is deemed to be the owner in legal transactions, even if he or she is not actually the owner. Therefore, it is important to pay attention to the correct entry in the land register. Conversely, one acquires ownership of a plot of land only at the moment when one is entered in the land register.
An important principle of the land register is the system of priority. The Land Registry processes applications strictly according to the order in which they are received. This means that the older application is processed first and entered in the land register first. Applications are entered in the electronic mark table by the land registry office after they are received and can be viewed there by the notary. The notary therefore knows when the purchase agreement is concluded whether there may still be unprocessed entries that could change the land register situation.
Condominium, plot of land, building. All the same?
Condominiums are sold in the same way as land plots, they also get their own land register sheet. Following blog post will discuss some of the peculiarities of condominium transactions.
Purchase contract design
Real estate transactions often involve large amounts of money. This makes it all the more important that the purchase contract guarantees that the transaction will be carried out correctly and that no damage can occur in the end. The notary plays a central role in this. He not only drafted the purchase contract, but also supervises its correct execution.
The contract of sale is drawn up in such a way that the ownership of the land in question is transferred only when the buyer has paid the purchase price and the seller has confirmed this to the notary.
In preparation for the purchase agreement, the notary first checks the land register and ensures that no unknown encumbrances are entered there. In principle, it is common to hand over the property free of encumbrances. For this purpose, it is necessary to obtain deletion permits from any rights holders who, in return, want to have their secured claim settled. In addition, the notary checks the electronic trademark table to see whether there are any unprocessed applications for the property that could jeopardize the transaction.
After conclusion of a contract and before payment, the notary public records a so-called priority notice (Auflassungsvormerkung) in the land register for the buyer. The priority notice protects the buyer from the moment of registration against a deterioration of the legal situation, such as the encumbrance of the property with a mortgage. The priority notice preserves the legal status at the time of registration. However, the priority notice does not yet entail any acquisition of ownership; rather, the priority notice merely represents a kind of reservation of the land. This practice ensures that neither party has to make advance payments without security.
After registration of the priority notice, the purchase price becomes due. The buyer pays the purchase price to the seller. As soon as the seller confirms receipt of payment, the notary effects the registration of the buyer as the new owner in the land register. With the registration, the transaction is completed.
Alternatively, the purchase price can also be paid via a so-called notary escrow account. The buyer then transfers the purchase price to the notary, who forwards it to the seller after the change of ownership has taken place. However, notary escrow accounts are only used in a few exceptional cases, such as when multiple banks are involved in the financing or when a property is in compulsory administration. The notary escrow account leads to higher fees and is therefore usually more expensive than securing payment by means of a bank guarantee. The costs are usually borne by the buyer. As is often the case, however, the parties can make other arrangements in the purchase agreement and split the fees, for example.