Pre-emption rights of municipalities in real estate transactions

Statutory pre-emption rights to real estate are common and can pose an obstacle to real estate transactions. Statutory pre-emption rights of municipalities to combat the housing shortage and create affordable housing are becoming increasingly important.

Today's statutory pre-emption rights to real estate take many forms. Cantonal pre-emption rights to combat housing shortages, promote affordable housing or fulfill other public interests are gaining in importance. Politicians have already been looking into this issue for some time. On 15 January 2014, the Federal Council gave a mandate to examine a right of first refusal for municipalities and has since referred to this report in various political initiatives (see popular initiative "More affordable housing" of 18 October 2016). It was only on 13 February 2024 that the "Action plan against housing shortages" was published, in which the pre-emption right for municipalities was once again taken up as a measure. To date, this issue has not been pursued further at federal level, because, among other things, the cantons already have the authority to introduce such pre-emption rights, additional costs for the municipalities would result and real estate transactions would become more difficult. A few cantons have taken action and introduced such pre-emption rights (e.g. Geneva or Vaud).

Such cantonal pre-emption rights can lead to complications, delays and uncertainties in real estate transactions. For this reason, this issue should always be clarified as early as possible so that transactions do not remain in a legal limbo for longer than necessary. This issue can be exacerbated where transactions involve several properties in different cantons. It is not advisable to try to circumvent these laws by engaging in legal transactions that are economically equivalent to a sale, as these can also trigger pre-emption. At the latest when the application for the land register is made, the surprise is likely to be great, as the registrars are obliged to cooperate in the enforcement of such laws and to report findings to the relevant authorities. In our view, it is better to have a proactive dialogue with the relevant authorities, as this can create clarity and legal certainty for a transaction.

As a general rule, the party entitled to pre-emption may exercise this right under the same conditions as the third party. Certain cantonal regulations, however, also stipulate the conditions for exercising the pre-emption right (e.g. at cost price). In larger real estate transactions, it is often the case that the purchase price is not settled solely by a cash component. In our experience, such an agreement on how the purchase price is to be settled is almost always an essential part of the transaction. Where the third party's conditions apply, the pre-empting authority may not be able to fulfil them. In our opinion, the pre-empting authority is not entitled to claim that the purchase price can be settled in a way that deviates from the parties' agreement. However, if the conditions for exercising the pre-emption right are already stipulated in the law, the municipality entitled to pre-emption may invoke them. For this purpose, the municipality is not dependent on the entry of the statutory pre-emption right as a note in the land register. This merely serves to inform the public of the pre-emption right, but has no effect on the legal existence of said right. Liaising with the relevant authorities can help to create clarity and certainty for a transaction.

In the event of a pre-emption case, the contract can be signed, but its execution should be postponed and made subject to certain conditions (e.g. the existence of a waiver by the municipality). In our experience, in more complex transactions, the parties are well advised to make further provisions in the contract if there are statutory pre-emption rights. For instance, in the case of the disposal of real estate portfolios, a portfolio surcharge is often agreed, as the properties as a package can offer certain synergies and are therefore more valuable than if only the individual properties are considered. But what are the consequences for a transaction if the pre-emption right is exercised only for individual properties in a portfolio? If the buyer is only prepared to acquire the portfolio as a whole, this can lead to the entire transaction being canceled. Where the buyer is prepared to acquire only part of the portfolio, the parties should define a mechanism for adjusting the purchase price.

From our perspective, the Federal Council was correct in its assessment that the introduction of statutory pre-emption rights for municipalities will make real estate transactions more difficult. The current vacancy rate as at 1 June 2023 is 1.15%, which is still slightly higher than in 2014. Only time will tell how this issue will develop at cantonal and national level in the future.