Types of contracts in Germany

The German real estate market is a gold mine in the eyes many foreign investors. The significant benefits of buying a home in Germany make this step an investment that may be particularly profitable, an investment that is returned in a relatively short time, that may double and triple the original sum over the medium and long term. Many investors are concerned about the laws in Germany that tend to favor the tenant. However, there are many advantages to the German legal system, the foremost of which is the stability of the rental market that guarantees secure returns over time.

As potential property owners, it is important to be well informed about the legal procedures in Germany, which are different from the procedures in Israel. Germany is a highly organized country when it comes to real estate and taxation transactions, with a “no surprises” policy. We at Nadlan Germany offer service that is based on experience in dealing with the German authorities, which may not be easy or simple for an investor who is unfamiliar with this market. It is important to us that you also have all the relevant information regarding your investment in Germany. The system of laws in Germany is organized and orderly. In the next section, we will look at the types of contracts and rental agreements in use in Germany, and the conditions for raising the rent in order to increase the profits from your investment over the years.

Conditions for raising the rent

The German legal system, as mentioned, operates in an orderly and organized manner, according to a clear and stable policy, which among other things safeguards tenant rights and supervises foreign investment. For instance, there are laws that restrict increases in rental prices. However, it is important to note that these laws do not work against investors, but rather protect citizens and their welfare. These laws do not impede your profits as homeowners – in fact, they provide the stability and viability of real estate investment in Germany. In the long run, Germany is considered an attractive destination for real estate investments, and if the investor chooses to make the investment through a holding company, the company will accompany him/her throughout, and will most likely open doors for additional investments. Determination of the initial rent is, according to German law, at the sole discretion of the homeowner. However, any subsequent rent increase is regulated by law. In cases of a restricted contract, the property-owner may be fined for any rent increase of over 20 percent over the existing rent. Determining how rent is raised is –
  • Based on a contract clause that stipulates a fixed, gradual increase in rent each year
Or
  • Linked to the legal price index
If the type of rent increase is gradual and fixed (in accordance with the legal index), the increase can only be implemented after a period of at least one year. It is mandatory to notify the tenant in advance and in writing about any rent change. When there is no contractual clause that stipulates a fixed annual increase, the property-owner can charge the tenant a higher rent based on the average prices in the neighborhood where the property is located. This can only be done if at least 15 months have elapsed since the previous rent increase. In general, the law in these cases states that this type of rent increase is limited to 20% over a three-year period. In accordance with German law of obligations, the property-owner is required to state the reasons for the rent increase. The property-owner is required to present, through an expert opinion, three examples of rents charged for similar properties, or to present an official register of the city’s rent (qualifizierter mietspiegel). This table is a statistical measure of the rent in the city that is provided by the municipality and approved by the Association of Landlords and Tenants.. After the rent increase attains legal approval, two months’ advance notice must be given to the tenant. Should the tenant fail to comply, the property-owner is entitled to sue him/her.

Insurance and deposit laws

The contract must be very detailed and accurate regarding the type of services the tenant must pay (water, electricity, etc.). If the responsibility for using the services does not explicitly transfer the payment obligation to the tenant, the property-owner is obligated to pay them. Insurance is simple and very accessible in Germany. You can take out insurance (hausratversicherung) for the property itself and its contents. This insurance covers damage to furniture, clothing, valuables and more, in cases of fire, weather damage, burglary and vandalism. The property-owner is responsible for purchasing this insurance. Tenants can also take out insurance for their personal belongings, yet this insurance does not cover damage to items in the apartment that do not belong to the tenants – and so insurance is the responsibility and duty of every cautious property-owner. The deposit amount cannot exceed the sum of three months’ rent. The deposit amount must be deposited in a joint savings account with interest, that ends three months after the contract is terminated.

Types of contracts in Germany

There are two types of contracts in Germany that determine the period of use of the property by the tenant –
  • Unlimited contract – a standard contract that can be renewed periodically and is the most widely accepted contract.
  • Limited contract– a contract that is limited to a certain period, but only with a satisfactory reason indicated by the property-owner for this limit. For example, the property-owner wishes to use the property personally at the end of the contract, either for him/herself or his or her family, or plans to renovate the property at the end of the contract. There is no legal restriction regarding how long the limited period can be, but in theory, in this type of rental, the contract cannot be renewed (a condition that protects the tenant). Any limited contract longer than one year must be made in writing.
There are two types of property vacating notices in Germany –
  • ‘Regular’ vacating of the property can only occur in the case of an unlimited contract.
  • ‘Immediate’ vacating must be due to a specific breach of a contract clause by the tenant, such as non-payment of rent. In such cases, the contract is terminated immediately.
The property-owner is entitled to give a ‘regular’ vacating notice in the following cases-
  1. Tenant commits a gross breach of contract
  2. The property-owner needs to make use of the property for him/her or their family
  3. The contract prevents the property-owner from making economically justified use of his/her property
In the case of ‘regular’ vacating, the tenant may object to eviction and demand continued use of the property if the termination of the contract causes damage to him/her and their family in an unjustified manner, even if the property-owner’s reasons are legal and legitimate. The vacating notice period can be from nine months (if the tenant has lived in the property for a long period) up to three months. A tenant is under no obligation to give a reason for the decision to vacate the property. In most cases, the tenant is only required to give three months advance notice.

The Importance of Rental Laws in Germany

Germany is one of the most orderly countries in the world that has a well-regulated real estate market, including foreign investment and local rentals, and it demands uncompromising and full compliance with all the conditions stipulated by law. The best and safest way to deal with Germany’s laws and rigid bureaucracy is to work with experts in the field, who have the training, knowledge and experience required to draft contracts properly. Our years of expertise in the real estate investment market in Germany make us a leader in the field. We have accumulated extensive experience over years of making great deals for our investors. This experience allows us to make responsible, considered decisions that yield high returns.

Would you like to hear more about the real estate acquisition processes in Germany?The Nadlan Germany team will be happy to assist you. Just click here and leave us your contact details, and a member of our team will get back to you with more information about buying real estate in Germany.