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07.01.2022 | KPMG Law Insights

Unlawful exercise of the right of first refusal in the area of a preservation statute

Municipalities and cities are increasingly making use of the possibility to preserve the urban or social character of an area or of individual properties by enacting bylaws and exercising the municipal right of first refusal. A new decision of the Federal Administrative Court is of utmost importance for this practice and restricts the municipalities’ room for maneuver.

So-called preservation statutes and milieu protection statutes find their legal basis in §§ 172 ff. BauGB. The law defines three protection goals that can justify the establishment of a preservation statute:

  • The preservation of the urban character
  • The composition of the residential population (milieu protection)
  • The support of urban restructuring

To the extent justified by the general welfare, the municipalities and cities in the affected areas shall have the right, pursuant to Sec. 24 para. 1 No. 4, para. 3 BauGB is entitled to a right of first refusal. It is common practice in cases of sale to conclude a so-called avoidance agreement with the purchaser of a property in such areas on the non-exercise of the right of first refusal. Such avoidance agreements regularly contain restrictions for the purchaser that go beyond the typical restrictions in preservation areas imposed by preservation statutes pursuant to Section 172 of the German Building Code (BauGB), for example with regard to reversions and conversions as well as changes of use. The Federal Administrative Court recently declared the practice of the City of Berlin to exercise the right of first refusal because no application agreement was reached and a use contrary to the objectives of the preservation statutes was feared to be unlawful (ruling of the Federal Administrative Court of November 9, 2021, Case No. BVerwG 4 C 1.20)

Facts

An apartment building built in 1889 with 20 rental apartments and 2 commercial units was sold by notarized purchase agreement in May 2017. The property is located within the spatial scope of a preservation ordinance issued by the district office of Friedrichshain-Kreuzberg, which is intended to serve as a so-called milieu protection statute to preserve the composition of the residential population. The purchaser of the property refused to conclude an avoidance agreement, whereupon the City of Berlin exercised its right of first refusal in favor of a state-owned housing association.

Decision of the Federal Administrative Court

The Federal Administrative Court ruled in this regard that the exercise of the right of first refusal by the City of Berlin was not lawful and obliged the latter to issue a certificate stating that the right of first refusal did not exist (negative certificate).

The City of Berlin shall only be entitled to a right of first refusal if this is in the public interest pursuant to Section 24 para. 3 sentence 1 BauGB justifies. § Section 26 of the German Building Code (BauGB) fleshes out the indeterminate concept of the general public interest by means of example cases, according to which the general public interest is not impaired under the conditions specified therein and the exercise of the right of first refusal is generally out of the question if such an example case exists. According to § 26 No. 4 BauGB, the exercise of the right of first refusal is excluded in particular if

  • the property is “built on and used” in accordance with the provisions of the development plan or the objectives and purposes of the urban development measure, and
  • a building structure erected on the land plot does not have any defects or deficiencies within the meaning of Section 177 para. 2 and 3 BauGB.

Both conditions were met in this case. In practice, the first requirement, which deals with the specific goals and purposes of urban development measures, is of particular importance. The property in question was located within the scope of a development plan and was used predominantly for residential purposes in accordance with its provisions. However, the City of Berlin feared that the use of the building, which currently complies with the urban development objectives, could be changed in the future as a result of the sale and that the urban development objectives could be violated and, following the failure of negotiations on an avoidance agreement, saw this as a reason to exercise the right of first refusal. However, the Federal Administrative Court has now clarified, in a discussion of the various opinions in the literature on this subject, that the examination of the grounds for exclusion under Section 26 No. 4 of the German Building Code (BauGB) is not to be based on any future violations, as was the case in the City of Berlin. Following the wording of the provision (in the present tense), according to the court’s ruling, only the actual circumstances at the time of the last decision of the authorities on the exercise of the right of first refusal are relevant. Possible future developments are also irrelevant in view of the designation as a “conservation” statute, as the Federal Administrative Court further explained in the decision.

Conclusion

Preservation areas are found in many cities and towns. For example, in Hamburg, at the beginning of 2021, there were already about 20 corresponding standards, which in turn designated several areas. In Munich, there are a total of 36 conservation statute areas (five new areas were designated in 2021), and in Berlin there are 12 milieu protection areas in the Mitte district alone. Residential real estate transactions therefore, in our experience, very often involve land located in a relevant area. Therefore, the content of the articles of association must be regularly taken into account already in the course of due diligence under real estate law. In particular, it must be examined to what extent the current development and use of the buildings corresponds or contradicts the goals of the preservation statutes. In the latter case, a purchaser is still required to conclude an avoidance agreement to avert the right of first refusal. In light of the above decision of the Federal Administrative Court, however, it should be noted that the exercise of a right of first refusal by the municipality is likely to be unlawful insofar as the current development and use of the building complies with the objectives of the preservation statutes and the property does not exhibit any deficiencies or structural defects. If the latter exist, it is probably advisable to eliminate them before the land transaction in order to preclude the exercise of the right of first refusal.

At the political level, efforts are already being made to amend the Building Code to make it possible in the future to use preemptive rights in areas with social preservation statutes with legal certainty, because the “modernization” of traditional population groups continues to be a thorn in the side of many municipalities. Thus, according to the coalition agreement, the parties of the traffic light government want to examine whether legislative action is required as a result of the aforementioned ruling of the Federal Administrative Court. It is therefore important to monitor further developments here, which we will keep you informed about. If you, as a seller or buyer, are planning a transaction involving real estate in the area of a preservation statute, we will be happy to advise you on the consequences of the new ruling of the Federal Administrative Court, on the drafting of an avoidance agreement, and on explaining your legal protection options against the statute or the administrative act of exercising the right of first refusal.

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