On January 1, 2024, the German Partnership Law Modernization Act (Personengesellschaftsrechtsmodernisierungsgesetz - MoPeG) will largely come into force. The new legal regulations not only affect the formation of new civil law partnerships (Gesellschaften bürgerlichen Rechts - GbR), but may also trigger a need for action for partners in existing partnerships, especially those with real estate.
The main new statutory regulations are summarised below and their effects, particularly on civil law partnerships with real estate, are outlined. Finally, possible alternatives to the civil law partnership will be presented.
- Company register for civil law partnerships / de facto registration requirement
From January 1, 2024, a new register for German civil law partnerships will be created, which will be kept by the local courts, which are also responsible for the commercial registers, etc. Upon entry in the company register, the civil law partnerships is obliged to use the terms "eingetragene Gesellschaft bürgerlichen Rechts" (registered civil law partnership) or "eGbR" as a suffix to its name. The registration has the effect that the protection of good faith under Sec. 15 of the German Commercial Code (Handelsgesetzbuch – HGB) applies accordingly to the registered civil law partnership, in particular with regard to the information to be entered on the partnership, the partners and their power of representation. This makes it easier for the registered civil law partnership to participate in business transactions.
In principle, the entry of existing or new civil law partnership in the company register is voluntary. However, according to the new version of Sec. 47 para. 2 German Land Register Ordinance (Grundbuchordnung – GBO), a right shall only be entered in the land register for a civil law partnership if the partnership is entered in the company register. Changes in the land register - whether changes in the partner structure or in the right recorded in the land register - also require the prior entry of the civil law partnership in the company register and the pre-entry of the registered civil law partnership in the land register. This will result in a de facto registration requirement for civil law partnerships with real estate in the future. The same applies to civil law partnerships that are or are to be registered as shareholders in the commercial or company register, in the shareholder list of a limited liability company (GmbH) or in the stock register.
In order to be entered in the company register, an application signed by all partners in publicly certified form must be submitted to the registration court in whose district the partnership has its registered office. Civil law partnerships entered in the company register can choose their contractual domicile differently from the actual administrative domicile, which gives them greater local freedom of movement than non-registered companies. The registration must contain the necessary information about the partnership (name, registered office, address) and about each partner (name, date of birth and place of residence or business name, legal form, registered office and, if applicable, register and registration number), about the partners’ power of representation and the assurance that the partnership is not already registered in the commercial or partnership register. Changes must be recorded in the register.
As a public register, the company register can be inspected by anyone free of charge. Publicity in the register creates transparency regarding the existence and identity of a civil law partnership and its partners.
- Expanded opportunity for the registered civil law partnership to participate in conversions according to the German Conversion Act
Until now, a civil law partnership could only participate in conversions as the target legal entity of a change of legal form within the meaning of the German Conversion Act (Umwandlungsgesetz). In contrast, registered civil law partnership will in the future have the opportunity to be the permissible source and target legal entity for mergers, divisions and changes of legal form within the meaning of the German Conversion Act.
- Check the need for adjustments to existing partnership agreements!
When the German Partnership Law Modernization Act (MoPeG) comes into force on January 1, 2024, some regulations of the German Civil Code (BGB) will also change, which may require selective adjustments to existing partnership agreements:
For example, according to the previous legal regulations, the partners are entitled to voting power, share of the result and liquidation proceeds on a per capita basis, i.e. in equal shares, unless otherwise agreed in the partnership agreement. In the future, the legal rule will be that these partners’ rights are primarily based on the agreed shareholdings (Sec. 709 para. 3 sent. 1 German Civil Code future version).
Furthermore, until now death, termination and insolvency of a partner lead to the dissolution of the partnership by law. If the partners did not want the partnership to be dissolved, but rather to continue the partnership with the remaining partners, an express provision in the partnership agreement was necessary. According to Sec. 723 para. 1 German Civil Code future version, from January 1, 2024, the legal rule is that the partner in question shall leave the partnership and therefore the partnership continues to exist with the remaining partners.
If an adjustment to the partnership agreement is necessary as a result of the legal changes, the partners would have to take action accordingly. Partners who do not want the new regulations to apply to their partnership agreement can request the application of the previous rules in writing from the partnership by December 31, 2024, before a reason leading to the dissolution of the partnership or the departure of a partner arises within this period (Art. 229, Sec. 61 German Introductory Act to the Civil Code - EGBGB). The request can be rejected by a partners’ resolution.
- Entry in the company register leads to an obligation to report to the transparency register
According to Sec. 20 para. 1 sent. 1 of the German Money Laundering Act (Geldwäschegesetz - GwG), the registration of a civil law partnership in the company register leads to the obligation of the partnership to obtain, store and keep up to date information on the beneficial owners and to immediately submit the information to the registering authority to enter them in the transparency register. According to Sec. 20 para. 1 sent. 2 of the German Money Laundering Act, this obligation should also apply if the registered civil law partnership has its administrative seat abroad, i.e. in particular if it holds ownership of a property located in Germany or undertakes to acquire such property, etc.
A real estate civil law partnership operated for the purpose of acquiring and renting out residential or commercial space can initially avoid this obligation of transparency and thus keep its circle of partners confidential by not exercising the registration option of Sec. 707 para. 1 German Civil Code future version. However, due to the de facto registration requirement described above in the event of impending changes in the number of partners or in the partnership’s rights recorded in the land register, transparency is ultimately ensured about the respective beneficial owners in the transparency register.
- Will the leasing of real estate only be possible in the future through a registered civil law partnership?
As in the past, a civil law partnership as such can only conclude contracts, including rental agreements for property, if it can acquire rights and enter into liabilities itself. This is the case with the civil law partnership with legal capacity within the meaning of Sec. 705 para. 2 var. 1 German Civil Code new version, whereas the internal partnership (Innengesellschaft) without legal capacity cannot be a party to a rental agreement.
If a partnership with legal capacity is newly founded for the purpose of acquiring, holding and leasing real estate after January 1, 2024, it must first be entered in the company register in accordance with the de facto registration requirement described above due to the new regulation in Sec. 47 para. 2 German Land Register Ordinance (GBO), before it can then acquire ownership of a property in the land register (and then rent it out).
In the case of existing civil law partnerships with real estate, regardless of whether it was already rented out before January 1, 2024 or is only to be rented out afterwards, there is no obligation to enter it in the company register simply because of the (intended) rental. From Sec. 12 para. 2 no. 1 German Money Laundering Act new version, a de facto registration requirement is occasionally justified with the argument that in order to collect the rent it is essential for the partnership to open a current account with a credit institution, but that a credit institution must first collect and check the legally required information about the civil law partnership with legal capacity on the basis of an extract from the company register. However, the existing civil law partnership may already have a corresponding account, so further verification is not readily necessary. Furthermore, the verification of the relevant information is also permitted in accordance with Sec. 12 para. 2 no. 2 German Money Laundering Act on the basis of founding documents or equivalent evidentiary documents. However, if changes in the number of partners occur after January 1, 2024 or if changes affect the rights of the civil law partnership in the land register, the pre-entry requirement in the company register as described above remains.
It is therefore advisable to register a civil law partnership with real estate in the company register in order to keep the company capable of acting.
- Risks when renting out living space, if the possibility of claiming personal use is to be preserved, and in the case of temporary rental contracts for living space
Sec. 573 para. 1 sent. 1 German Civil Code limits the landlord's right to properly terminate a residential tenancy to the existence of a legitimate interest. A legitimate interest exists in particular if the landlord requires the rooms as accommodation for himself, his family members or members of his household (so-called personal use).
Until now, the highest court ruling (BGHZ 213, 136) have recognised the right of partners in a civil law partnership to claim personal use, even though a partnership by its nature cannot "live" itself and also has no "family or household members". However, some in the literature on tenancy law doubt that the previous case law on termination for personal use can be upheld once the German Partnership Law Modernization Act (MoPeG) comes into force since the legal capacity of the civil law partnership and the independence of the partnership's assets vis-à-vis the partners are now legally established and thus the basis for the corresponding application of Sec. 573 para. 1 sent. 1 German Civil Code to the partnership with legal capacity no longer applies in the future. This means that there is a risk that, from January 1, 2024, a termination for personal use of a partner of a civil law partnership could be ruled out by a court on these grounds.
The reasons for the previous authorisation of a termination for personal use by the partners of a civil law partnership apply accordingly to the conclusion of temporary rental agreements within the meaning of Sec. 575 para. 1 sent. 1 no. 1 German Civil Code. Should it therefore be established by a court in future, in line with the above-mentioned opinion, that a termination for personal use by partners of a civil law partnership with legal capacity is excluded under the new law, the conclusion of a temporary rental agreement within the meaning of Sec. 575 para. 1 sent. 1 no. 1 German Civil Code by a civil law partnership should also be ruled out. It remains to be seen whether even existing temporary rental agreements could then be "overturned" with the result that they are deemed to have been concluded for an indefinite period in accordance with Sec. 575 para. 1 sent. 2 German Civil Code.
- Possible alternatives to the registered civil law partnership for partnerships with real estate
As pleasing as the legal certainty in legal transactions with civil law partnerships that the German Partnership Law Modernization Act (MoPeG) aims to achieve is, there may well be cases in which the parties involved shy away from the bureaucratic effort associated with the de facto registration obligation and the disclosure of their personal data in a company register that can be inspected by anyone, which may lead to conclusions about this existing real estate assets. This applies in particular to married couples or non-married partners who have acquired real estate in the form of a civil law partnership.
For these persons, a change to a fractional ownership (Bruchteilsgemeinschaft) may be an alternative to the registered civil law partnership (eGbR). This would require the existing civil law partnership to be dissolved. This can be done, for example, by a resolution of all partners to dissolve the partnership. The partnership’s assets would then have to be divided among the partners. The existing real estate can be transferred to the partners in proportion to their economic interest in fractional shares in the course of the division of assets, with the result that they would be entered in the land register as co-owners. Compared to the civil law partnership, co-ownership has the potential disadvantage that each co-owner can freely dispose of their co-ownership share at any time. However, the co-owners can enter into legally binding agreements on the management and use of the co-ownership or also exclude the right to demand the cancellation of the community for good or for a limited period of time. Such a co-ownership agreement also applies to the special successor of a co-owner if it is entered in the land register in accordance with Sec. 1010 German Civil Code.
Particularly in the case of partnerships with only two partners, such as spouses' civil law partnerships, it is also possible to transfer the property to one of the two partners by one partner leaving the partnership. As part of a withdrawal agreement, for example, the partners can stipulate that the partnership will cease to exist without liquidation and that the share of assets of the departing partner will accrue to the other partner. The latter would have to be entered in the land register as the sole owner by way of a land register correction.
There are no reporting obligations to the company or transparency register for co-owners or sole owners of real estate. Similarly, renting out property by co-owners or sole owners is of course possible without further ado. There can then also be no doubt about the basic authorisation to assert personal use as a landlord or to conclude fixed-term rental agreements if the other legal requirements are met. Whether the one-off higher notary and land registry costs resulting from the change to fractional ownership or sole ownership are justified is something the parties involved must decide for themselves. In any case, the parties involved are advised to seek prior tax advice on the consequences of the change to fractional or sole ownership.
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