2 IFLR/September 2010 www.iflr.com

Co-published section: Real estate

Despite the worldwide financialcrisis and economic outlookremaining highly volatile,Switzerland’s real estate market

has turned out to be quite robust. It hasremained astonishingly stable throughoutmost of the last 30 months. Even in areasthat experienced a substantial increase ofprice levels over the last five to ten years (suchas the Zurich or Geneva regions) pricecorrections, if any, were quite moderate andbelow what had been predicted by real estateexperts and feared by some real estateowners. Even pricing for office space inattractive locations has not decreasedsignificantly, although the demand for officespace declined moderately in 2009.

There are three main factors for therelative strength of the Swiss real estatemarket. Firstly, the Swiss economy has beenless affected by the current economic crisisthan other economies. This had a directpositive effect on the Swiss real estatemarket as a whole and the market demandfor commercial property in particular.Secondly, in view of the still comparativelyattractive labour market in Switzerland, theresidential market continues to bepositively influenced by the ongoing andrelatively high levels of inflow of foreignemployees and their families. Thus pricesfor residential properties have – eventhough quite high in suburban areas and inparticular around Zurich and Geneva –remained stable or even further increased.Thirdly, interest rates in Switzerland formortgages remain at rock-bottom levelsand there are not yet any concrete signs ofan imminent rise. On account of the strongSwiss franc, the Swiss National Bank isunlikely to raise interest rates in the comingmonths. A recent report by a Swissconsumer rating agency showed thataverage mortgage rates, although alreadyquite cheap, fell even lower in the secondquarter of 2010 from the previous three-month period and have now reached ahistoric 30 years low. Officials of the SwissNational Bank, however, recentlycautioned against an unreflecting rush intoinvestments in real estate and expressed

their wariness of a new real estate bubblebeginning in view of the still increasinglevels of residential properties inSwitzerland. In view of these currenttrends, no short term changes are expectedregarding real estate development projects,even though the number of buildingpermits decreased significantly in 2009.

Rights over landOwnership is the most comprehensive legaltitle with regard to a given asset but there arealso other rights in rem, namely servitudesand easements and liens or mortgages, aswell as rights annotated in the land register.Under Swiss law ownership rights can bedivided into three categories: individualownership, joint ownership and co-ownership. In cases of individual or soleownership, the property is held by oneindividual or legal entity. Joint ownership isbased on an underlying personal orcontractual relationship (eg, a communityamong heirs or a partnership); the jointowners may only unanimously dispose ofthe property ie, the individual joint ownerscannot dispose of their own share and areonly entitled to a share of the net liquidationproceeds or an alienable proportionedinterest in the property itself if and when thejoint ownership relationship has come to anend. Co-ownership is based on an agreementof the co-owners. Each co-owner owns amathematical fraction of the property withindividual rights and obligations of anowner for such share of the property whilethe property itself is not divided up. Absentspecial provisions, all co-owners may disposeof their share in the property individually.

Specific regulations govern thecondominium ownership which is a specialform of co-ownership of the landsupplemented by the right to exclusivelyuse a particular part of the building whichmust be self-contained and have its ownentrance or access (eg, an apartmentincluding ancillary rooms or a whole floorin a building). Each condominium owner’sshare in the entire property is indicated inhundredths or thousandths and recorded inthe real estate register. The condominium

owners form a condominium associationand each owner has to contribute to arenovation fund for the entire property.The condominium association is in chargeof all decisions about the building as awhole and the land; it is represented ininternal and external matters by an electedadministrator or condominium owner. Tosplit a building up into condominiumproperty, a public deed is required andcondominium association regulations needto be drawn up which set forth the rulesapplicable among the several condominiumowners and detail the exclusive rights ofeach condominium owner.

Servitudes and easements to which aproperty owner may agree in favour of athird party include, among others, theusufruct, the right of residence or life estate(Wohnrecht) and the building lease orleasehold (Baurecht) ie, the right to buildon a parcel of land or part of it. Such rightsare entered in the land register in mostcases in order to give the holder of suchright an absolute entitlement which can beenforced against any third party and thusprotect them against any transfers of theencumbered property without assumptionof the respective obligations by the newowner. While the usufruct entitles thebeneficiary to use the property (includingrenting it to a third party), the right ofresidence allows an individual to inhabit ahouse or a part of a house itself, in mostcases, for the lifetime of the holder of theright. The leasehold grants the holder theright for a specified period of time to use aparcel of land and to construct a building,use such building and, to the extent theleasehold is transferable, dispose of itwithout acquiring and thus owning theland on which the building is built. Inreturn the holder of the leasehold has topay a ground rent to the owner of the land.Leaseholds can be created for a period of upto 100 years, and to the extent granted forat least 30 years (and not connected to aspecific property or a specific person) theycan be entered into the land register as aseparate folio. Upon expiration of thecontractually agreed period of theleasehold, the right to build lapses and thebuilding reverts automatically to the ownerof the land against payment of acontractually agreed consideration. Sincethe statutory provisions only provide thatthe holder is entitled to a fair considerationwithout giving any guidance on how todetermine such fair consideration, it isimportant that the leasehold agreement setsforth how to determine such considerationin detail.

Securities interests in real property may

Growing certaintyWolfgang Müller and Alexander Vogel assess recent amendments to Swiss real estate law

www.iflr.com IFLR/September 2010 3

be established in the form of a simplemortgage registration (Grundpfandver-schreibung) or a mortgage note. The debtorremains personally liable for the secureddebt in both cases. A simple mortgageregistration is created by a securityagreement in the form of a notarized deedand an entry of the mortgage into the landregister. While the secured creditor canrequest an extract from the land register,such extract only serves as evidence of thesecurity interest (but not the claim) anddoes not constitute a negotiableinstrument. For the same reason claimssecured by a simple mortgage registrationneed to be transferred by way of a writtenassignment. Conversely, mortgage notes arenegotiable and transferable instruments (inbearer or registered form) which serve asindependent and abstract evidence of theowner’s debt. Mortgage notes serve assecurity, either in the form of a pledge(Faustpfand) by way of delivering themortgage note to the secured lender or inthe form of a transfer for security purposes(Sicherungsübereignung), which leads to anoutright transfer of the mortgage notes tothe secured lender with the obligation toretransfer such mortgage notes after fullsatisfaction of the secured obligations.Since an outright transfer to the securedlender or the security agent has certainadvantages for the latter in the case of thebankruptcy of the security provider, or insyndicated lending transactions, and inparticular in lending transactions involvingmultiple lenders or cross-border facilities,an outright transfer of mortgage notesrather then a pledge of the mortgage notes,is the preferred option in such situations. Ifthe mortgage note has been issued inregistered form, the granting of a pledge oran outright transfer require a validendorsement by the holder in favour of thesecured lender or the security agent.

Certain rights are similar to rights in remif they are annotated in the land register:option rights to buy or repurchase realproperty, the right of first refusal, and theright to rent or lease the property.

Transfer of ownershipWhile the creation, transfer, lapse andregistration in the land register of differentforms of ownership and other rights in remin real estate (including certain statutorypreemptive rights connected to such rightsin rem) are set forth in the Swiss Civil Code,the sale of real estate and the creation ofcontractual call or put options andcontractual pre-emption rights are governedby the Swiss Code of Obligation. A sale ofreal estate and the grant of call or put

options or pre-emption rights (to the extentfixing a specific exercise price) require apublic deed drawn up by a notary public.The transfer of title, except in the case of amerger, demerger or transfer of assets andliabilities under the Swiss Merger Act, onlybecomes effective with the registration of thenew owner in the land register. Theregistration fees for a transfer are (withparticular exceptions such as transfers thatare part of a restructuring, ie, merger,demerger, etc) based on the market value ofthe real estate to be transferred. Further, inmost cantons, the transfer of real estate issubject to real estate transfer taxes and to realestate gain tax or corporate tax.

Restrictions for non-SwissinvestorsThe acquisition of Swiss real estate by non-residents (hereafter referred to as personsabroad or foreigners) is restricted accordingto the Swiss Federal Act on Acquisition ofReal Estate by Persons Abroad (Lex Koller).Persons abroad include foreigners domiciledabroad and foreigners domiciled inSwitzerland except EU/EFTA nationals andexcept persons having a permanent residencepermit (C permit). Legal entities areconsidered to be persons abroad if they aredomiciled abroad or if persons abroad hold adominant position (more than one third ofthe capital or the voting rights) within suchlegal entity or where the entity has receivedfinancing from persons abroad exceedingcertain maximum thresholds. The LexKoller requires persons abroad to obtain a

permit from the cantonal and federalauthorities to acquire Swiss real estate unlesssuch real estate serves as permanent businessestablishment for the exercise of aneconomic activity. Economic activities in thesense of the Lex Koller include industrialproduction, trading or service activities.Further, real estate pertaining to apermanent business establishment may, asan exception, include residential property iffor example: such residential property isnecessary for the business, such as acaretaker’s flat; or a separation from thebusiness is impossible or unreasonable, orsuch residential property is mandatorypursuant to housing unit quotas underplanning or zoning regulations. Thebuilding, sale or rental of housing does notqualify as an economic activity in the senseof the Lex Koller.

Moreover, persons abroad may purchasereal estate with land reserves without apermit as long as such land reserves, as arule, do not exceed one-third of theproperty surface. Land for developmentpurposes may be acquired by personsabroad, provided construction works onbuildings to be used for economic activitiesbegin within approximately one year. Also,a person abroad may acquire residentialproperty by way of a merger with, oracquisition of, a company whose mainbusiness purpose is not the acquisition,holding and sale of residential property andprovided the value of the residentialproperty amounts to less than 30% of thecompany’s assets.

Alexander Vogelmeyerlustenberger

Alexander Vogel is a partner and he heads meyerlustenberger’s

M&A/corporate group. He regularly advises companies and

financial institutions on cross-border mergers and acquisitions,

public takeovers, banking and finance, corporate governance

and real estate transactions. Alexander Vogel graduated from

the University of St Gallen and obtained a Master of Laws from

Northwestern University School of Law. He is a member of the

Swiss and New York Bar and is a notary public (civil law).

Wolfgang Mullermeyerlustenberger

Wolfgang Muller is a partner in meyerlustenberger’s capital

markets/corporate group. He specializes in capital markets, in

particular equity capital markets, and M&A and real estate transac-

tions. Wolfgang Muller graduated from the University of Zurich and

obtained his MBA at the Australian School of Business, the

University of New South Wales, Sydney and the University of

Michigan Business School in Ann Arbor, USA. He is a member of

the Swiss Bar and the International Bar Association.

Author biographies

Co-published section: Real estate

4 IFLR/September 2010 www.iflr.com

Besides the direct purchase of real estate,the Lex Koller also covers transactionswhich give persons abroad actual controlover real estate, for example through theacquisition of rights in rem (in particularleaseholds) or the granting of financing.

Since April 1 2005, shares of companiesholding residential property may bepurchased without a permit by personsabroad if such shares are listed on a Swissstock exchange.

Revision of the real estate andland registry lawIn June 2000, the Swiss Federal Governmentstarted preparations for a partial overhaul ofSwitzerland’s real estate law. It is the farthestreaching revision since 1912 when the SwissCivil Code entered into force. Eventually, inDecember 2009, the Federal parliamentapproved the final version of this partialrevision. The revised provisions, and theimplementing provisions in the land registryordinance that are still being revised, areexpected to enter into force on January 12012, The partial revision will introducesome important changes.

Paperless mortgage notes The most important change is theintroduction of the paperless mortgage note(e-registered mortgage note). To datemortgage notes have been issued as physicalsecurities (paper mortgage notes). Thesafekeeping, transfer and transport ofmortgage notes can lead to significant costs,in particular when mortgage notes are notproperly transferred (e.g. missing orincomplete endorsements) or lost, whenendorsements of former transferors have tobe amended or a time-consuminginvalidation process must be started.

With the amendment of the relevantprovisions, a mortgage note can in thefuture either be issued as a paperless e-registered mortgage note or in itstraditional form as a paper mortgage note.Old paper mortgage notes can be convertedinto paperless mortgage notes on thewritten request of the property owner andthe beneficiary of the mortgage note.

The paperless mortgage note isestablished with its entry in the landregister. It is either registered in the nameof the creditor or the property owner (thelatter also referred to as an owner’smortgage note). Transfer takes place byentering the new creditor in the landregister on the basis of a written declarationby the former creditor. Compared to thecurrent law, this requires a filing with theland register, but also increases legalcertainty and transparency regarding the

secured creditor. Under the current law, thename of the secured creditor is entered onthe mortgage note and in the creditors’register only when the mortgage note isissued, while the endorsement insubsequent transfers (if necessary at all) canbe in blank, and registration of thetransferee in the creditors’ register ispossible at the request of the transferee butnot mandatory; thus such entry may not beaccurate anymore. The pledging of apaperless mortgage note (or the granting ofa usufruct) by the secured creditor alsoneeds to be entered in the land register. Asa result, in future only the land register willserve as the basis for the issue, contents,transfer and pledging of a paperlessmortgage note.

Statutory liensUnder the current law, statutory liens tosecure claims under cantonal public orprivate law (for example property tax,property gains tax, deed transfer tax andregistration fees) originate directly by lawand do not have to be entered in the landregister in order to be valid. In future,however, statutory liens for more thanCHF1,000 ($963) must be entered in theland register. If such liens are not registeredwithin four months of the due date of theunderlying claim, and at the latest withintwo years from the accrual of the claim, theycan no longer be invoked against a bona fidethird party.

Restrictions under public law Currently the cantons are free to issue ruleson whether, and to what extent, restrictionsunder public law must be entered in the landregister. Federal law does not, however, forcethem to do so. Consequently, while the landregister in most cases contains reliableinformation on the rights and encumbranceson a property existing under private law, itdoes not list restrictions under public lawthat might affect a particular property. Thepartial revision therefore aims to make thecantons (as well as the communes and theConfederation) note specific restrictions ontitle in the land register. This will only apply,however, to restrictions imposed by anadministrative decree after the entry intoforce of the partial revision, and it will alsoonly apply to permanent restrictions on useor disposal and to property-relatedobligations of the property owner. As aresult, and also because restrictions underpublic law that concern an area comprisingseveral properties will not be entered in theland register, the land register under the newlaw will still not reflect all restrictions underpublic law. In this context, we refer to the

ordinance on the register regardingrestrictions on title under public law. Thisregister shall comprise restrictions on titleunder public law that apply to an areacomprising several properties. The register ofrestrictions on title under public law iscurrently being established by some cantonsand should be introduced by all cantons by2019.

Contractor’s liensThe deadline for registering a contractor’slien will be extended from three months tofour months from the time the work on theproperty has been finalized.

In addition, the claim to a lien on tenantfittings, which has already been recognizedin practice in the past, has been explicitlyprovided for in the new provisions andexpanded to cover similar cases. Under thenew law, a contractor’s lien can also beregistered on work ordered by a tenant, alessee or another person who is entitled touse the property, provided that the propertyowner has approved the work. Therefore, inthe future, prudent contractors are welladvised to request proof of the propertyowner’s approval.

Servitudes and easementsUnder the new law, a contract on thegranting of easements, such as a right of way,must be drawn up as a public deed in orderto be valid, instead of just being recorded inwriting as until now. This new formalrequirement also applies to the certain otherservitudes and easements, in particular thecreation of a leasehold or mortgage for thebenefit of the owner himself.

Final remarkThe upcoming changes will generally lead toincreased legal certainty and the legalprovisions will better meet the needs of theplayers involved. It will, for example, also bepossible to agree on a majority vote (insteadof unanimity) for amendments of facilitiesusage and administrative rules for co-ownedproperties and condominium ownership.The procedure for updating and deletingland register entries will be subject toupdated rules. The Lex Koller, however, isnot affected by the current revision and willremain – despite certain efforts to abolish itin its entirety or at least partially – in forcefor the time being. Nevertheless, it ispossible that certain attempts to further easethe provisions of the Lex Koller may besuccessful in the nearer future. Two motionsto that extent are currently pending in theSwiss parliament.

Co-published section: Real estate

YOURLEGAL EXPERTS

meyerlustenberger �Attorneys at Law

Zurich �|� Zug �|� Geneva

Forchstrasse 452 �|� P.O. Box 1432 �|� CH-8032 Zurich

P +41 44 396 91 91 �|� F +41 44 396 91 92

zurich@meyerlustenberger.ch �|� www.meyerlustenberger.ch

meyerlustenberger is a leading Swiss business law firm,

established in 1975. We advise sophisticated clients

in a wide range of business law issues within Switzerland,

cross border and globally, support them in business

negotiations, complex transactions and critical situations

and represent their interests before courts and adminis-

trative authorities. With offices in Zurich, Zug and Geneva,

meyerlustenberger is present in the key business centers

in Switzerland.

Our Real Estate practice group offers comprehensive legal services in the areas of

– structuring of real estate transactions and developing

tax efficient structures by combining our real estate,

corporate and tax expertise

– advising on acquisition of real estate or real estate

portfolios, sale and lease back transactions, real

estate financing, real estate development projects or

general contractor and construction agreements

– M&A as well as capital market transactions of listed

real estate companies

– representing of clients before various authorities,

for example to obtain land register registrations,

Lex Koller approvals, building and planning permits

or tax rulings

– advising on lease, construction and environmental

law issues

Contacts:Dr. Alexander Vogel

Dr. Thomas Lustenberger

Dr. Wolfgang Müller

Dr. Armin Zucker