Right of first refusal for real estate: what you need to know

Right of first refusal house apartment plot

Are you intending to sell or buy a property and come up against the sword of Damocles of a possible right of first refusal for a third party? Then it makes sense for you to look into this topic in detail so that you understand all the legal consequences and avoid making any mistakes. The best time to do this is before the notary appointment, because a right of first refusal only comes into effect after a notarized purchase agreement has been signed and can still leave the first buyer empty-handed.

What is a right of first refusal?

Basically, a right of first refusal is very easy to explain. It regulates the right that a person entitled to pre-emption may acquire a plot of land or property before a buyer when selling it. The pre-emptive right holder must accept the notarized purchase agreement exactly as it was concluded between the seller and the original buyer. This means that the person with the right of first refusal must also pay the same purchase price for the land or property as the original buyer. There are various legal bases and structuring options for the right of first refusal for land and real estate, which we present to you below.

Depending on the situation, different types of pre-emptive right apply to a house or plot of land. The right of first refusal can be entered in the land register(right of first refusal in rem) or regulated contractually between the parties(right of first refusal under the law of obligations). However, statutory pre-emption rights, which do not require a contract, also come into play (statutory and public law pre-emption rights).

The right of first refusal in rem

The right of first refusal in rem is always entered in the land register as a priority notice and can only be created for immovable property, i.e. developed or undeveloped land. The entry in the land register creates an automatically effective block on disposal in the event of a sale. The first purchaser cannot be entered in the land register as the new owner until the entitled party announces the waiver of their pre-emptive right.

The right of first refusal under the law of obligations

In contrast to the right of first refusal in rem, the right of first refusal under the law of obligations applies to movable property such as houses and apartments as well as immovable property such as land. In contrast to the right of first refusal in rem, it is not entered in the land register but is regulated by contract between the two parties. As a result, the party entitled to pre-emption cannot reverse the entry of the first buyer as the new owner in the land register, even if they have not been informed of their pre-emptive right. In this case, however, the person entitled to pre-emption would have a claim for damages against the seller.

Procedure for sale with a right of first refusal in rem or under the law of obligations

The sale of real estate or land encumbered with a right of first refusal in rem or under the law of obligations usually proceeds as follows:

Purchase contract

The owner concludes a notarized purchase agreement with the first buyer. The conditions contained therein are agreed between the owner and the first buyer and do not have to take into account the interests of the person entitled to pre-emption.

Notification obligation

Once the contract has been concluded, the buyer must inform the person entitled to pre-emption of the real estate purchase contract without delay. In the case of a right of first refusal in rem, this is automatically carried out by the executing notary.

Explanation

The pre-emptive beneficiary must declare within a certain period of time whether he will exercise his right or waive it. The declaration period has either been contractually agreed or the statutory period of two months applies. If the pre-emptive right holder exercises his pre-emptive right, a new purchase agreement is drawn up with the same conditions as for the original purchaser.

Statutory and public law right of first refusal

The statutory right of first refusal and the right of first refusal under public law for real estate and land are not entered in the land register or contractually agreed. The requirements for these types of pre-emptive right are regulated in the German Civil Code (BGB) and the German Building Code (BauGB). The statutory right of first refusal and the right of first refusal under public law apply in the following cases, for example:

Rental properties (Section 577 BGB)
If a rented apartment is converted into a condominium after being transferred to a tenant and sold by the owner to a third party, the tenant has a right of first refusal. However, this right of first refusal does not apply if the landlord sells the apartment to a family member or a member of his household.
Community of heirs (Section 2034 BGB)
Each member of a community of heirs has the right of first refusal for the other shares. If a co-heir wishes to sell their share, they are obliged to offer it to the other co-heirs first. [You can find out what you should know when selling an inherited property here]
Monument protection
In accordance with Section 22 of the German Monument Protection Act (DSchG), the federal states have the legal right of first refusal for properties with listed cultural assets.
Municipalities and local authorities
Section 24 of the German Building Code (BauGB) grants municipalities a right of first refusal in certain cases to secure public urban land-use planning.

The granting of a right of first refusal

You can assign the right of first refusal to a house or plot of land to any person. Exactly how the right of first refusal is granted depends on the type of right of first refusal in question. In the case of a pre-emptive right under the law of obligations, it is necessary to draw up a corresponding contract. The most important elements of such an agreement include

Name and address of the contractual partners
Description of the land or property
Time limit on the right of first refusal, if applicable
Determination of the deadlines for the acceptance or non-exercise of the right of first refusal
Regulations on possible contractual penalties
Provision on the inheritability of the right of first refusal
Date and place of the contract
Name and signature of the contracting parties

Please note: The contract should always be notarized. Notarization serves to protect the person entitled to pre-emption. If they are not informed in the event of a property sale, they can take appropriate legal action and claim damages.

When does the right of first refusal expire for real estate?

The right of first refusal is a personal right that lasts for life and cannot be inherited. As a rule, it only lapses if the person entitled to pre-emption withdraws from their right or the property is transferred to a new owner for reasons other than a regular sale. These special cases include a gift, a forced sale due to the owner's insolvency or a sale to legal heirs. As already mentioned, the latter are always granted a right of first refusal.

Conclusion

Whether in the event of inheritance, for the protection of tenants or for the implementation of municipal planning: If a property encumbered with a right of first refusal is to be sold, the first buyer and the seller must follow clear rules. The party with the right of first refusal has the right to receive the purchase contract promptly. If these regulations are ignored, this can result in severe claims for damages. To avoid any pitfalls and complete the property sale smoothly, we recommend that you seek advice from a professional real estate agent.

At Isar Estate, we have many years of experience and extensive expertise in all aspects of real estate sales and pre-emption rights.

Feel free to contact us - we are at your side as a reliable partner!

+49 (0) 89 901 697 46

info@isarestate.de

Disclaimer

Despite careful research and checking of the sources, the author assumes no liability for the accuracy and completeness of the information presented. In case of unclear legal and tax questions, it is advisable to consult a lawyer and/or tax advisor for clarification.

Author: Dipl.-Kfm. Christian Dürr

Picture credits: Adobe stock photos, Butch, 136301679