Buying on someone else’s land.

What a heritable building right is

The heritable building right is governed by the German Heritable Building Rights Act (ErbbauRG). It gives the holder the right to have and use a building on someone else’s land. The land itself stays with another owner, often a municipality, a church or a foundation. You become the owner of the building.

The right is created by notarised contract and entered in the land registry, in a separate heritable building right register. It is a right in rem that can be sold, inherited and mortgaged. The colloquial German term for it is Erbpacht; in law it is always the Erbbaurecht.

The ground rent and its adjustment

For using the land you pay the owner an ongoing ground rent. It is usually agreed as an annual percentage of the land value and paid over the entire term. The ground rent is secured in the land registry as a charge and runs independently of your financing.

The adjustment clause is important. Almost every contract contains a value-protection clause that links the ground rent to price developments at set intervals, often to the consumer price index. The rent can therefore rise over the years. Check closely how often and by what measure it may be adjusted, because this clause determines your ongoing burden for decades.

Effects on the financing

The advantage first: because you do not buy the land, the purchase price is lower and the capital required falls. That can ease the entry into ownership. At the same time, banks assess properties on leased land more cautiously.

Two points are central. First, the remaining term: banks want the heritable building right to clearly outlast the loan term, because otherwise the building could revert to the landowner. If the remaining term is short, the mortgage lending value falls and the loan-to-value ratio comes out lower. Second, the mortgage: to secure your loan, the landowner must consent to the entry and usually declare that they will step back or hold still in an enforcement scenario. Without these declarations, many banks will not finance.

In practice this means: a heritable building right is financeable, but the terms and the achievable loan-to-value depend heavily on the specific contract. An early look at the remaining term, the ground rent and the owner’s consent declarations prevents nasty surprises shortly before the notary appointment.

Reversion and the end of the term

Two terms decide the risk in the contract. Reversion (Heimfall) describes the premature return of the heritable building right to the landowner, for example in the case of serious arrears on the ground rent or of use contrary to the contract. The contract sets out which grounds trigger a reversion and what compensation you receive in that case.

If the contract runs out regularly, it can be extended, or the building reverts to the owner. Compensation is provided for this, and its amount is set out in the contract. It is often only a portion of the building’s value, not the full value. For your calculation and for later financing, how high this compensation is and whether an extension option is agreed are decisive.

Advantages and disadvantages at a glance

Whether a heritable building right fits depends on your situation. The main arguments on both sides:

• For: a lower purchase price, less capital required and therefore an easier entry into home ownership, especially in expensive locations.
• For: predictable ongoing costs, as long as the adjustment clause is moderate.
• Against: the ground rent runs permanently in addition to the financing and can rise.
• Against: the land is not yours, so any increase in land value benefits the owner.
• Against: a later resale is harder with a short remaining term, because the next buyer also needs financing.

The most common pitfalls

A heritable building right is not a bad model, but the details are in the contract. These points are overlooked most often:

• Short remaining term: if the right stays clearly shorter than the loan term, it complicates financing and resale.
• Ground rent adjustment: an aggressive value-protection clause can noticeably raise the ongoing burden over the years.
• Reversion: broadly defined reversion grounds increase the risk of losing the right prematurely.
• Compensation:if it is well below the building’s value, you bear part of the loss in value at the end.
• Consent reservations: if sale or mortgaging is only possible with the owner’s consent, that limits your flexibility.

What to check before buying

Before signing, an orderly review pays off. This sequence has proven useful:

1. Read the heritable building right contract and the remaining term and match them against your planned loan term.
2. Check the ground rent and the adjustment clause: amount, rhythm and measure of adjustment.
3. Assess the reversion grounds and the agreed compensation at the end of the term.
4. Clarify the consent requirements for sale, mortgaging and the land charge.
5. Discuss the financing early with your adviser, including the owner’s consent to the mortgage.
6. Inspect the heritable building right register and clarify open questions with the notary and, for tax matters, with a tax adviser.

How the bank determines the value of your desired property in the first place is explained in the guide Property valuation by the bank. How much equity you need is covered in the guide Equity for property financing.