Exclusion of the municipal right of preemption despite feared luxury redevelopment in the area of a milieu protection statute

Municipal right of preemption - Quo vadis? - A consideration of the German Federal Administrative Court (Bundesverwaltungsgericht) ruling of November 9, 2021

With its decision of November 9, 2021 (file no. 4 C 1.20), the reasons for which are now available, the German Federal Administrative Court (Bundesverwaltungsgericht) has caused surprise among most observers. The decision is likely to pose considerable challenges for many municipalities. What happened?

Facts

A real estate company acquired a plot of land located in the Berlin district of Friedrichshain-Kreuzberg, which is built on with an apartment building dating back to 1889. The property is located within the scope of an ordinance that serves to protect the preservation of the composition of the residential population for special urban development reasons (so-called milieu protection statute or Milieuschutzsatzung).

The district authority then exercised the right of preemption in favor of a state-owned housing association, according to its own statements in order to counter the danger that part of the residential population would be displaced from the area if, following the sale, the apartments were upgraded and the rents increased or the rental apartments were converted into condominiums.

In its lawsuit, the purchaser challenged - successfully only in the final instance - the exercise of the municipal right of preemption and sued for the negative certificate to be granted.

Summary

The Federal Administrative Court has ruled that the municipal right of preemption cannot be exercised for a plot of land that lies within the scope of a preservation statute / milieu protection statute if the plot of land is built on and used in accordance with the objectives or purposes of the urban development measures and a building structure erected on it does not exhibit any deficiencies or defects within the meaning of Section 177 (2) and (3) sentence 1 of the German Construction Code (Baugesetzbuch, BauGB).

Contrary to the view of the lower courts, the municipality could not exercise the right of preemption on the basis of the (mere) assumption that the purchaser would in future pursue intentions of use contrary to preservation, since Section 26 No. 4 BauGB, according to its wording, clearly refers to the actual circumstances at the time of the last decision of the authorities on the right of preemption.

An interpretation in the sense that the provision does not apply to pre-emptive rights for properties within the scope of a preservation statute (as the municipality had argued) was out of the question. Also - contrary to the opinion of the Higher Administrative Court - it was not of importance according to the relevant legal regulation whether in the future intentions of use contrary to the preservation statutes were to be assumed.

Excursus: Municipal right of preemption

According to the regulations of the German Construction Code (Sections 24 et seq. BauGB), a municipality has the right in certain cases to acquire a property itself under the conditions defined in a purchase agreement between a seller and a buyer or to exercise the right of preemption in favor of a third party.

A general right of preemption can be exercised in accordance with Section 24 BauGB, in particular in the case of the purchase of developed and undeveloped land

• within the scope of a development plan (Section 30 BauGB);
• in a formally defined redevelopment area and urban development area (Sections 136, 165 et seq. BauGB); and
• in the area of application of a preservation statute (Section 172 BauGB).

However, according to Section 24 (3) BauGB, the right of preemption may only be exercised if the public good justifies it; in exercising the right of preemption, the municipality must state the intended use of the property.

Limits to the exercise

The exercise of the municipality's right of preemption may be excluded under Section 26 BauGB in certain constellations, e.g.

• if the land is sold to the spouse or to close relatives (Section 26 No. 1 BauGB); or
• if the property is built on and used in accordance with the provisions of the development plan or the objectives and purposes of the urban development measure and a building structure erected on it does not show any defects or deficiencies within the meaning of Section 177 (2) and (3) sentence 1 (Section 26 no. 4 BauGB).

The question of the applicability of the latter exclusion according to Section 26 No. 4 BauGB (also) in the context of a milieu protection statute has been one of the most important issues in the present legal dispute.

Decision of the District Office

The buyer's application for a negative certificate was rejected by the responsible district office in Berlin. Instead, the district office declared the exercise of the right of preemption in favor of a state-owned housing association. In justification, the district office stated that the exercise of the right of preemption served the general welfare and that the ground for exclusion of Section 26 No. 4 BauGB did not apply to rights of preemption pursuant to Section 24 (1) No. 4 BauGB.

I. Instance - Berlin Administrative Court

In the first instance, the Berlin Administrative Court dismissed the action of the real estate company against the exercise of the pre-emptive right and for the granting of the requested negative clearance in its judgment of May 17, 2018. In this regard, it took the view that the reason for exclusion pursuant to Section 26 No. 4 BauGB was applicable according to the "obviously clear" wording, i.e. the right of preemption was excluded, but from the point of view of the administrative court, taking into account the legislative history, there was a so-called unplanned regulatory gap.

This gap was to be closed by way of teleological reduction and the scope of application of the regulation was to be limited to the effect that in the cases of a preservation statute pursuant to Section 172 (1) sentence 1 no. 2 BauGB, the focus was not on the current use in conformity with the ordinance, but on the future development in accordance with the objectives of the milieu protection statute.

From the point of view of the court of first instance, this meant that a ground for exclusion pursuant to Section 26 No. 4 BauGB did not exist, i.e. the right of preemption could be exercised, if, as a result of the sale of a property in the area of application of a preservation statute, a development contrary to conservation goals (in the sense of the composition of the residents) was to be feared, i.e. the fear that the purchaser would not observe the preservation objectives. The Berlin Administrative Court affirmed these conditions.

II. Instance - Higher Administrative Court of Berlin-Brandenburg

In its ruling of October 22, 2019, the Higher Administrative Court of Berlin-Brandenburg confirmed the first-instance decision and (also) took the view that the reason for exclusion pursuant to Section 26 No. 4 alternative 2 BauGB is not fulfilled "on a proper interpretation" of this norm.

In the context of the provision, argued the Higher Administrative Court, in deviation from the wording, not the present condition is of the essence, but the uses to be expected by the acquirer.

In the opinion of the Higher Administrative Court, it must be taken into account here that the intention of the legislator "cannot be sufficiently expressed from the wording of Section 26 No. 4 BauGB alone" and that a pure interpretation of the wording is not prescribed, whereupon the court made an interpretation deviating from the wording with the result described above.

III. Instance - German Federal Administrative Court

The appellate court expressly disagreed with the lower courts, overturned the judgment of the court of appeal and upheld the action brought by the real estate company.

In its reasoning, the German Federal Administrative Court stated that the municipality had not been allowed to exercise a right of preemption pursuant to Section 24 (1) No. 4 BauGB on the basis of the - intervening - exclusion clause pursuant to Section 26 No. 4 alternative 2 BauGB had not been allowed to exercise.

On the one hand - contrary to the opinion of the municipality - an interpretation in the sense that the provision does not apply to pre-emption rights for properties within the scope of a preservation statute is out of the question.

On the other hand, it is not evident that the legislator intended to take over the old legal situation according to the BBauG unchanged in the new regulation of the BauGB and that he merely "failed" to do so in the wording of the law. Section 26 No. 4 BauGB, according to its wording, rather clearly refers to the actual circumstances at the time of the last decision by the authorities on the right of preemption.

The examination carried out by the Higher Administrative Court as to whether intentions of use contrary to preservation are to be assumed in the future was ruled out from the outset, since the statutory provision had a "sufficiently clear and in this respect unambiguous wording", which - according to the appellate court - "could also not be overcome with the aid of other methods of interpretation".

The mere indication (of the Court of Appeal) that an interpretation correcting the wording of the law alone would lead to a regulation considered desirable and reasonable was not sufficient; the creation of such a regulation was a matter for the legislator.

Reactions

As expected, the reactions to the surprising and at the same time clear decision of the Federal Administrative Court were - depending on the point of view - very different, especially since the decision is of importance beyond Berlin. This is because other cities, such as Hamburg and Munich, have also tried in recent years to exert pressure on purchasers of real estate by means of the municipal right of preemption or by threatening to exercise it. The aim was, for example, to get the purchasers to "voluntarily" conclude so-called avoidance agreements in accordance with Section 27 BauGB, in which they agree to make concessions.

Outlook

On the basis of the current decision of the Federal Administrative Court, it will only be possible in exceptional cases for the municipality to make effective use of its right of preemption within the scope of preservation statutes, namely, for example, if the building is structurally unsound.

In any case, it will (no longer) be sufficient to rely on mere assumptions that a buyer may not adhere to the preservation goals. The practice of Berlin's district authorities will also have to be guided by this, at least until the legislature has, if necessary, defused the regulation in the interests of the municipalities, which is already being demanded. Whether and to what extent this will happen, however, remains to be seen.

At the same time, however, a completely different question arises, namely what effects the decision will have on avoidance agreements in accordance with Section 27 BauGB already made. For in most cases - when viewed objectively - there is unlikely to have been any basis for concluding such an agreement in the absence of a municipal right of preemption. Whether an avoidance agreement concluded by the purchaser - "for no reason" - is null and void, however, as is sometimes argued, or how the binding effect is otherwise to be legally assessed, is a matter for the courts to decide in cases of doubt.

In this respect, too, it may be worthwhile to subject each individual case to legal scrutiny, even and especially for potential purchasers of real estate. This applies all the more as the so-called Building Land Mobilization Act has introduced various legal tightenings which must be observed.

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_{Published: January 2022}