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16 November 2018
A fundamental principle of German civil law is that the ownership of real estate does not change on conclusion of a contract for sale under the law of obligations. Rather, it requires further legal acts – namely, the agreement in rem (conveyance) and the buyer's entry in the land register.
A real estate purchase contract under the law of obligations requires notarisation in order to be effective. In the event of non-compliance, a real estate purchase contract is generally null and void. The notarisation requirement serves to protect sellers from rashly surrendering real estate and purchasers from an overhasty acquisition and entry into obligations on unreasonable terms. The parties are provided with expert advice through notarial certification and the form serves as proof of the agreement reached. However, the law provides that a contract concluded without observing the required notarial form becomes valid in its entirety if the conveyance and the entry of the change of rights in the land register take place.
Conveyance also requires a special form. It must be declared before a competent authority in the presence of both parties. As a rule, this is a notary, which in practice leads to its notarisation. In the practice prevailing today, conveyance is therefore already included in the real estate purchase contract deed, which has to be notarised anyway.
In the period between conveyance and registration, a need may arise on the part of the parties to amend the real estate purchase contract under the law of obligations.
In its 14 September 2018 ruling (V ZR 213/17), the Federal Court of Justice had to decide whether changes to a real estate purchase contract after conveyance were possible without any formalities having to be met or whether they required notarisation, like the originally concluded real estate purchase contract. In the case on which the judgment was based, the Federal Court of Justice had to decide on the validity of a contract on the reduction of the purchase price that had been entered into and simply signed by the parties (without notarisation) after notarised conveyance had been declared.
The court held that although in principle later changes to an already notarised real estate purchase contract also had to be notarised, this principle does not apply if the conveyance has become 'binding' in the sense of Section 873(2) of the Civil Code. It explained that this was the case, for example, if the conveyance had been notarised. Following the notarised conveyance, the obligation to transfer ownership had been fulfilled and therefore no longer existed. Consequently, the purchase price reduction agreed between the parties was effective in the Federal Court of Justice's opinion.
With this decision, the Federal Court of Justice confirmed previous case law in relation to the predecessor provision of the applicable statutory form provision. This historically-based case law had been rejected in legal literature and sometimes in the case law of the lower courts. The main argument against this case law was that the model adopted by the historical legislature, according to which conveyance was declared only when all mutual obligations of the real estate purchase contract had been fulfilled and thus conveyance was a kind of final point of the real estate transaction, was no longer in line with current practice. For practical reasons, and in order to save fees, conveyance is regularly included in the deed of sale. To compensate for this, other mechanisms ensure that a transfer of ownership takes place only once the purchase price has been paid in full. For this reason:
The notarisation requirement's aims were therefore still relevant for both parties, even after conveyance had declared when the real estate purchase agreement had been concluded.
The Federal Court of Justice rejected this argument in its recent judgment. Despite the changed practice, it recognised that the formal requirement of notarisation's aims were sufficiently safeguarded and saw no clearly predominant or compelling reasons for a departure from its previous case law. The court also found that the parties no longer needed the protection secured by the execution of the notarisation procedure, in particular by the audit and instruction obligations imposed on the notary by law, after the conveyance had become binding, since the purpose of the notarisation procedure had been achieved. Further, by making the declarations under the law of obligations and in rem in notarised form, the contracting parties had irrevocably performed their respective acts of performance and thus set an automatic process in motion. The court also stated that it made no difference that the conveyance was already contained in the notarised real estate purchase contract. The occurrence of a successful performance (ie, the entry of the legal change in the land register) was not decisive for the question of the need for form of contractual changes. Finally, the court maintained that the registration was not part of the owed act of performance, since it was an official activity which the contracting parties could not obtain for legal reasons.
In addition, the Federal Court of Justice cited considerations relating to the clarity and security of legal transactions in the grounds for its decision. It found that the lack of form in the case of subsequent amendments of the real estate purchase contract would result in the presumption that the nullity of the amendment in case of doubt would affect the entire real estate purchase agreement. It contended that although this could be refuted by the special circumstances of the case, this would require an actual assessment. Further, until this question had been clarified, there would be uncertainty as to the validity of the contract for the sale of real estate under the law of obligations, which would be detrimental to clarity and legal certainty in legal transactions. Finally, the court stated that if a change after conveyance were subject to the notarial form, the (already effected) conveyance and the subsequent registration could not remedy a potential invalidity of the entire contract since the (earlier) conveyance could not have taken place in fulfilment of the later contract invalid on the grounds of form.
Federal Court of Justice case law suggests that in principle the parties to a real estate purchase contract can immediately change its content without having to comply with notarial form requirements after the notarial certification of the real estate purchase contract containing the conveyance has been concluded. The court's decision is to be welcomed in the interests of the continuity of its case law and in view of the increasingly inconsistent case law of the lower courts in the past.
However, the Federal Court of Justice decision cannot be applied to:
In these circumstances, the requirement that changes to a contract are notarised continues to exist and with it the risk that an entire real estate purchase contract under the law of obligations will become null and void due to a change in contract after conveyance and that a remedy pursuant to statutory law cannot be considered.
In light of this, it remains important to carefully examine which legal consequences are associated with changes to a real estate purchase contract, when they are made and whether the conveyance was already binding for the parties when the contract was changed.
For further information on this topic please contact Alexander Mühleisen and David Zafra Carollo at Noerr LLP by telephone (+7 495 799 56 96) or email (email@example.com or firstname.lastname@example.org). The Noerr LLP website can be accessed at www.noerr.com.
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David Zafra Carollo