Update on the municipal pre-emption right in real estate share deals in Germany

City of Hamburg ventures into unchartered legal waters

For the first time, the City of Hamburg is exercising its municipal pre-emption right in relation to sold shares of a land holding company. At the end of 2022, the Landesbetrieb Immobilienmanagement und Grundvermögen (LIG) which is a municipal company that belongs to the City of Hamburg’s fiscal office, initiated the pre-emption of a site in Hamburg-Harburg with a size of approximately 57,000 sqm called “Freudenberger Areal”.

The site is within the scope of municipal regulation issued in January 2020 to establish a special municipal pre-emption right. The pre-emption is intended to prevent undesirable urban development and enable orderly planning of key properties. At the end of February 2024, the City of Hamburg announced that it had reached an out-of-court settlement with the parties involved regarding the exercising of the pre-emption right. Questions arising from the exercise of a pre-emption right in a share deal remain unresolved, with regard to the calculation of the purchase price. Handling such pre-emption cases with legal certainty still seems impossible without a “settlement” like the one at hand.

Recommendation

The risk of municipal intervention in property share deals is increasing, particularly where municipal planning is already in place. This is now particularly true for places like Hamburg and Berlin. The risk profile of envisaged as well as ongoing share deals must be continuously monitored, and the contractual documentation may need to be optimised accordingly. Using contractual caveats to counter potential pre-emption attempts is advisable, for example regarding withdrawal rights.