In a landmark decision rendered on 9 November 2021 (Case reference: 4 C 1.20), the German Federal Administrative Court (Bundesverwaltungsgericht – BVerwG) has outlawed the Berlin pre-emptive rights practice in milieu protection areas. According to the ruling, pre-emptive rights for properties in milieu protection areas must not be exercised on basis of the mere presumption that the future owner might use the property in a way detrimental to the objectives of the milieu protection area. Berlin districts had exercised pre-emptive rights on this basis in numerous cases in recent years. The BVerwG has now put a stop to this practice. The decision is final and cannot be appealed. So far, only the key deliberations of the decision have been published, not the complete recitals.

The case was brought by a real estate company that had acquired a property in a milieu protection area in the Berlin district of Friedrichshain-Kreuzberg. The property contains a multi-family house built in 1889 with 20 rental apartments and two commercial units. The local district authority exercised a pre-emptive right in favour of a state-owned housing company. By doing this, the district authority intended to mitigate the risk that residents might be displaced if, following the sale, apartments were refurbished or converted into condominiums or rents were increased.

The BVerwG did not follow this approach – as opposed to the previous instances of the Administrative Court of Berlin (judgment of May 17, 2018 - 13 K 724.17) and the Higher Administrative Court of Berlin-Brandenburg (judgment of October 22, 2019 - 10 B 9.18). Instead, it declared such exercising of pre-emptive rights to be unlawful since it was precluded by Sec. 26 No. 4 Alt. 2 of the German Building Code (Baugesetzbuch – BauGB). According to this provision, exercising pre-emptive rights is excluded if (i) the concerned property is used in accordance with the objectives of the respective urban development measures and (ii) the buildings on the property do not have any significant deficiencies or are derelict. According to the BVerwG, these requirements were met in the case at hand. In support of this, the judges argued that Sect. 26 No. 4 Alt. 2 BauGB according to its wording refers to the actual status of the property at the time the district authority takes its last decision on exercising of the pre-emptive right. Consequently, in the eyes of the judges the Berlin practice to consider the mere presumption that the future owner might use the property in a way potentially detrimental to the goals of the milieu protection area is not enough to justify the district’s exercising of statutory pre-emptive rights.

With this decision, the Berlin pre-emptive rights practice has been overturned. The judges have clarified that widespread exercising of pre-emptive rights in milieu protection areas on grounds of merely presumed intentions of the future owner are inadmissible. Berlin districts will therefore have to be considerably more cautious when exercising pre-emptive rights in the future. With regard to past cases where pre-emptive rights have been exercised or so-called avoidance agreements (Abwendungsvereinbarungen) have been concluded, property owners may want to review on a case-by-case basis whether the BVerwG’s ruling may have opened up new strategic options. This applies in particular to cases where the public orders exercising the pre-emptive right have not yet become legally binding (bestandskräftig). In addition, it will need to be analysed whether avoidance agreements concluded under the threat of potential exercising of pre-emptive rights may be challenged and if costs incurred due to an exercised pre-emptive right may be recovered.