Building on someone else's land: 7 frequently asked questions about hereditary building rights

What is the difference between hereditary building rights and ground leases?

The term hereditary building right refers to the right that allows the right holder to erect a building on the right giver's land. This right is regulated by a heritable building right contract and, as the name suggests, can be inherited. For the right to build a house on someone else's land, the right holder must regularly pay the so-called ground rent to the owner of the land. The legal basis for the ground lease is laid down in the Ground Lease Act (Erbbaurechtsgesetz, ErbbauRG). The term "Erbpacht" is often mistakenly used synonymously, but it refers to a form of land ownership that has been abolished in Germany since 1947.

Ownership of the building on another person's land

Normally, a landowner also owns the erected buildings and structures on his or her property. In the case of heritable building rights, this is different: here the landowner still retains his land, but the property built on it is the property of the rightsholder for the duration of the heritable building right contract.

Building on land owned by others - compensation

Contracts regulating heritable building rights between two parties are usually limited in time. The term of the contract is often 99 years, but the exact length can be determined individually by the parties and is not subject to any legal restrictions. When the contract expires, ownership of the structure usually reverts to the landowner. In return, however, the owner must pay compensation to the rightsholder.

What does reversion mean in inheritable building rights?

If the right holder acts contrary to the contract, for example by not paying ground rent, the heritable building right and thus ownership of the building can revert to the land owner before the end of the contract term. This is known as reversion.

Building on land owned by others - contract

At this point, we will try to briefly explain what we consider to be the most important contents of a heritable building rights contract:

• Creation of the heritable building right and status in the land register: This part of the contract usually regulates the appointment of the heritable building rights and records the current status of the land register. Also to note, a heritable building rights contract must always be concluded with a notarial deed.

• Usage agreement: In the usage agreement, the parties usually agree on how the rightsholder may use the land and his building.

• Duration of use: In this section, the parties agree on the duration of the contract. This is to ensure that the construction is profitable for the rightsholder, while the land owner has the security that the structure will be permanently and stably built on his land.

• Maintenance obligation and insurance: The type and scope of maintenance measures are also contractually agreed upon. In this way, the landowner can be sure not to take over a dilapidated property after the expiry of the contract. It may also be stipulated that the leaseholder must insure the building against fire damage or other risks.

• Load bearing: This section of the contract usually stipulates that the leaseholder, as the beneficial owner, must pay for costs such as property tax, charges and other encumbrances.

• Consent of the owner of the land: If the right holder wishes to dispose of his heritable building right, for example, by planning further building measures, he usually needs the consent of the right holder. This is also often regulated by contract.

• Reversion: This part of the contract lays down the modalities to be followed in the event that the holder of the leasehold rights acts in breach of the contract, for example by not paying the ground rent or by not fulfilling the maintenance obligation.

• The prior right of renewal: This section of the contract determines whether the leaseholder has a priority right if the landowner decides to renew the lease at the end of the term of the contract.

• Ground rent: This part of the contract regulates the ground rent to be paid by the leaseholder to the landowner. This is determined individually between the parties and is not limited by law. Often this interest is between 3 and 5 % of the value of the land.

What are the possible advantages and disadvantages of the heritable building rights?

+ Rightsholders may benefit from a lower financial burden, as they do not have to buy a plot of land before building the property.

+ The landowner usually benefits from interest income secured by the land register and from the fact that they retain ownership of the land, including any increases in value.

- Possibly little room for manoeuvre for rightsholders, as the consent of the land owner is required for essential decisions.

- Possibly more difficult to resell: the duration of the contract and the fact that the building subsequently reverts to the landowner deter many potential buyers.

Conclusion: For whom could the ground lease be worthwhile?

A leasehold contract can offer future builders a comparatively inexpensive start to real estate construction. Since an expensive plot of land does not have to be acquired first, the capital can flow into the construction of the actual property. However, due to the time limit on ownership and the resulting low attractiveness for resale, the heritable building right is not free of stumbling blocks. Anyone wishing to build their property on someone else's land should therefore weigh up the options carefully in advance.