Purchase of property through a property limited liability company

Risk of prior encumbrances when acquiring land through a ‘Vor-GmbH’

The client wishes to purchase a property. The buyer is to be a property-focused limited liability company (GmbH) yet to be incorporated. Both transactions are to be completed swiftly and within a single appointment with a notary.

We would like to quote from a very interesting article [1] on this subject and summarise it here.

In practice, it is often requested that a limited liability company (GmbH) should acquire real estate even before it is entered in the Commercial Register. This raises a number of questions due to the associated encumbrance on the company’s assets.

The author of the article [1] states:

The process of forming a GmbH is only complete once the company has been entered in the Commercial Register. Prior to this point, the limited liability company does not exist as such under section 11(1) of the German Limited Liability Companies Act (GmbHG), but rather as a so-called ‘pre-company’.

If the company now enters into legal transactions prior to its entry in the Commercial Register – for example, by establishing a subsidiary GmbH or concluding a property purchase agreement – it must be borne in mind that the conclusion of the property purchase agreement generally gives rise to a prior encumbrance due to the incidental costs of acquisition. An uncompensated prior encumbrance constitutes an obstacle to registration and results in liability on the part of the founders. If the purchase agreement is notarised immediately following the formation of the GmbH – and thus before the application for entry in the Commercial Register is submitted – the pre-existing liability existing at the time of application must be settled so that a valid managing director’s declaration can be provided. In the author’s opinion, the pre-existing liability should be settled by means of an additional cash contribution to the company’s assets. The safest and most practical approach is likely to be to make a settlement equal to the total incidental acquisition costs.

The author also highlights how this issue can be addressed: amongst other things, by including a settlement obligation for the founders in the memorandum of association, corresponding details in the managing director’s declaration, and an additional notarial instruction.

However, all these measures complicate the procedure, make it more expensive and increase the risk of delays to the project.
The author therefore concludes: “In some cases, it may turn out that the most practical approach is to wait until the company has been registered – or at least until the application for entry in the commercial register has been submitted – before having the property purchase agreement notarised.”

However, this would not really satisfy the client’s wishes.

There is, however, another way to skilfully implement the desired plan:

It is considerably simpler and carries less risk to take over a shelf company for the purpose of acquiring the property.

The shelf company is already registered in the commercial register and is therefore subject to limited liability.

The share capital has been paid up in full. There is therefore no liability arising from prior encumbrances or a negative equity position in respect of the ancillary costs associated with the purchase of the property.

By providing the director’s declaration, the director avoids any risk that the benefits may be attributed to the shares.
The shelf company already has the appropriate corporate purpose, namely ‘holding its own assets’.

The takeover of the company and the purchase of the property can be completed in a single appointment with a notary.

This makes the appointment with the notary considerably simpler and less complicated. Unintended liability risks and the risk of a delay or refusal of registration are minimised, and notary fees are lower.

You are bound to have further questions – please feel free to give us a call.

[1] Simon Koch: Vorbelastung des Gesellschaftsvermögens beim Grundstückserwerb durch die Vor-GmbH (DNotZ 2022, 332)