German Prime Retail

Part 7. Due Diligence: The €50,000 That Protects €10 Million

In 2018 a group of our clients was ready to buy a Netto discount store in the heart of Mannheim. The location was superb, the footfall extraordinary, the advertised yield attractive. Then a tax adviser in Stuttgart read the lease — and the investment case collapsed. Due diligence is not a formality that follows the decision to buy. It is the process that tells an investor whether the asset is what the brochure says it is.
Key takeaways
• Full due diligence on a single supermarket costs €30,000–50,000 in our experience — 0.3–0.5% of a €10 million price and a fraction of the real estate transfer tax alone, which runs at 3.5–6.5% depending on the state.
• The lease is the asset: its term, cost allocation, indexation and the completeness of its documentation determine the real yield.
• Beyond the lease, heritable building rights (Erbbaurecht), soil contamination and planning restrictions are the issues most likely to turn a good location into a poor investment.
• For a new store let long-term to a major chain, the retailer's own location analysis is a strong signal for the term of the lease — but no substitute for legal and technical review.

Four workstreams test the price; skipping one rarely pays

Due diligence answers a single question — does this asset deliver the return and the risk profile the price implies? — through four workstreams. Institutional buyers commission all four as standard. Private investors sometimes skip one or two to save time or money. In our experience, that saving is rarely worth it — with one defensible exception: the location study for a new store let long-term to a major chain.
Exhibit 1. Each workstream tests a different risk, and legal work typically costs most
Workstream
Core questions
Typical cost
Legal
Who owns the land and with which encumbrances? Is the building permitted? What exactly does the lease say?
€12,000–25,000, incl. contract negotiation and closing
Financial and tax
Does the rent roll match the leases? What are the real costs? How will the structure be taxed?
about €5,000 for a single store
Technical
What is the condition of roof, structure and installations? What will they cost over the hold?
from €5,000
Location
Will the catchment support the store for the full lease term and beyond?
€5,000–15,000

Legal risk hides outside the land register and inside the lease

Title and encumbrances. The land register does not show every burden on a site. It records the owner (section I), rights of way, easements and pre-emption rights (section II) and land charges and mortgages (section III). Public-law encumbrances (Baulasten) — obligations towards the building authority for access, parking spaces or setback areas, often on a neighbour's plot — sit in a separate register, kept by the building authority or, in Baden-Württemberg, by the municipality, in every state except Bavaria, which secures such obligations through easements in the land register instead. The contaminated-sites register must be checked separately; under German law the current owner can be held responsible for remediating soil contamination (§ 4(3) BBodSchG). A former petrol station or workshop on a supermarket site is a classic warning sign.
Public charges are a further blind spot. Development contributions for access roads (Erschließungsbeiträge) and, under state law, connection charges for water and sewerage rest on the land as a public charge, and the bill generally goes to whoever owns it when the assessment is issued — even for works completed before the sale (§ 134 BauGB and state charges acts). A municipal certificate on charges paid and pending, and a clause allocating them by the completion date of the works, contain the risk.
Permit and planning. The building permit must cover the store as built and as used: sales area, use, parking. Large-scale retail is tightly controlled in Germany (see Part 5), so an extension or a change of use may require a new planning process.
The lease. In food retail the lease is the asset. On registration the buyer steps into it by law, on its existing terms and for the period of its ownership (§§ 566, 578 BGB) — favourable or not. Lawyers therefore review its term and extension options, the indexation clause, the allocation of maintenance and operating costs (Part 10), the tenant's rights to sublet or assign, competition and exclusivity clauses, and any special termination rights. They also establish who actually signed — a group company (at EDEKA a regional company, at REWE usually REWE Markt GmbH) or an independent merchant under its brand (Part 2) — and whether a guarantee from a group or parent company turns the brand into a credit.
The lease must also be complete. A lease for more than one year that does not meet the statutory form is deemed concluded for an indefinite period — and either party, the tenant included, may then terminate it on roughly six months' notice (§§ 550, 578(1), 580a(2) BGB).
Text form — an exchange of e-mails will do — has sufficed for new commercial leases since 1 January 2025 and for older ones since the transitional period ended on 1 January 2026, or from any amendment agreed after 2024 (§ 578(1) sentence 2 BGB, as amended by the Fourth Bureaucracy Relief Act). That eases the old trap of missing signatures and loose annexes, but the form requirement itself remains. An agreement on an essential term that was never put in text form — a rent increase agreed by telephone, say — still exposes a 15-year lease to that risk, and a form defect is a well-known lever for reopening the rent. The complete chain of lease documents, every e-mail amendment included, therefore remains a core item.

Heritable building rights erode in value as the term runs down

Some excellent retail sites are available only under a heritable building right (Erbbaurecht) — and such a right behaves more like a wasting asset than like classic real estate. The investor owns the building but not the land, which typically belongs to a church, a municipality or a large institution, and pays an annual ground rent (Erbbauzins). The right itself is granted for a fixed term, in our experience commonly 50 to 99 years.
Three contract terms decide what the right is worth. When the right expires, the building passes to the landowner, who must pay compensation — unless the contract limits or excludes it, which German law permits (§ 27 ErbbauRG). Sale or encumbrance of the right frequently requires the landowner's consent (§ 5 ErbbauRG). And the contract may contain reversion clauses that allow the landowner to reclaim the right early in defined cases (§ 2 no. 4 ErbbauRG).
Stores held under a heritable building right can be priced attractively, but their value erodes as the remaining term shortens, towards whatever compensation the contract provides, and lenders want the right to run well beyond the loan. Most private investors prefer to own both land and building, so the first question about any site is whether it is held under such a right. The land register answers it at a glance: a heritable building right has a register sheet of its own, the Erbbaugrundbuch (§ 14 ErbbauRG).

Financial and tax review tests whether the headline yield is real

Licensed tax advisers reconcile the rent roll with the leases, test the service-charge statements, model acquisition and running costs and design the holding structure (Part 9). They also check value-added tax, where an error can cost a six-figure sum years after closing.
On VAT, the buyer inherits the seller's position. The letting of a supermarket is often subject to VAT by option, which allows the landlord to recover input VAT. The sale of a let property is normally a transfer of a going concern and not subject to VAT (§ 1(1a) UStG), but the buyer then steps into the seller's ten-year input-VAT adjustment period, which the sale does not interrupt (§ 15a(1), (10) UStG): let part of the building VAT-free later — to a doctor's practice, say — and a share of the input VAT deducted on construction is clawed back. Because the going-concern test turns on facts, careful contracts add a precautionary VAT option, valid only if declared in the notarised deed itself (§ 9(3) sentence 2 UStG).

Case study: the Netto store in Mannheim

In 2018 our clients became interested in a Netto Marken-Discount store in central Mannheim, a city of 310,000 with neighbouring Ludwigshafen adding a further 170,000. The nearly thirty-year-old building enjoyed exceptional footfall from nearby schools and the university. The clients signed a letter of intent and commissioned full due diligence.
The tax adviser's report overturned the investment case. The newly signed 15-year lease, with three five-year extension options, contained no provision allowing the landlord to recover any operating or maintenance costs from the tenant — a sharp departure from market practice. The sales presentation therefore overstated the yield the owner would earn: every 10% of the rent that a landlord must absorb in costs takes 0.6 percentage points off a 6.0% headline yield.
The background emerged quickly. Netto had proposed a major modernisation tied to a new long-term lease, and the parties could not agree on how it would be financed. Netto paid for the works itself — and the new lease no longer contained even the partial cost recovery that the previous agreement had provided. Our clients withdrew.
The lesson: there is no standard German food-retail lease. Two stores of the same chain five kilometres apart can have entirely different economics, depending on the negotiating strength of whoever signed the lease.

Technical review prices capital expenditure and catches defects before claims expire

A technical adviser inspects roof, structure, façade, technical installations, fire safety and the car park, reviews the acceptance protocol and the list of open defects and estimates capital expenditure over the hold.
For new buildings, the most valuable inspection often comes later: about six months before the five-year limitation period for defects in building works expires — counted from acceptance, not from completion or purchase (§ 634a(1) no. 2, (2) BGB). At that point the developer is still liable for defects — provided the claim is secured in time. Under the German Civil Code (BGB) a letter of complaint does not stop the clock; negotiations, court-supervised evidence proceedings (selbständiges Beweisverfahren) or a lawsuit suspend it, and an acknowledgement by the contractor starts it afresh (§§ 203, 204(1) nos. 1 and 7, 212 BGB).
Where the store is bought from a previous investor rather than from the developer, the purchase contract must assign the seller's defect claims against developer and contractors — otherwise the buyer owns the defects but not the claims (§ 398 BGB). After expiry, repairs to roof and structure fall to the owner under a typical supermarket lease; tenant-owned equipment such as refrigeration, shelving and displays remains the tenant's.

The retailer's verdict on a site expires with its lease

For a newly built store let long-term to a major chain, an independent location study (€5,000–15,000) adds less than one might expect. The retailer has already analysed purchasing power, competition and the catchment in depth before committing to a 15- or 20-year lease, so its signature is a strong location signal — for the term of the lease. It says nothing about what the building will be worth, or to whom it could be re-let, when that term ends. That question belongs to the investor alone, and the tests in Part 5 — planning status, population trend, room to extend — answer much of it.
Opportunistic product is different: smaller discounters for second-tier operators, built on the edge of a village rather than at its centre, often on shorter leases. Here an independent location study is indispensable — or the investor should trust their instincts and walk away.

Implications for investors

1. Commission all four workstreams. Full due diligence costs €30,000–50,000 in our experience, 0.3–0.5% of a €10 million price; the one defensible saving is the location study for a new store let long-term to a major chain.
2. Treat the lease as the asset. Verify who signed, whether a group guarantee stands behind the brand, how costs are allocated and whether every amendment exists in text form — in Mannheim, one missing cost clause outweighed exceptional footfall.
3. Write the protections into the purchase contract. Allocate public charges by the completion date of the works, take an assignment of the seller's defect claims when buying from a previous investor, and declare a precautionary VAT option in the notarised deed itself.
Documents to request for due diligence — usually once a letter of intent opens the data room:
• current land register extract, the deeds behind each entry in section II (the register shows only a one-line reference to them) and, where applicable, the heritable-building-right contract;
• building permit, approved plans and acceptance protocol;
• the complete lease with all addenda and side letters;
• service-charge statements for the past three years and the current rent roll;
• extracts from the public-law encumbrances register (none exists in Bavaria) and the contaminated-sites register, plus the municipality's certificate on development charges;
• energy performance certificate and maintenance contracts for technical installations.
Sources: BGB §§ 203, 204, 212, 398, 550, 566, 578, 580a, 634a, 874; BauGB § 134; state municipal-charges acts (KAG); BbgBO § 84; ErbbauRG §§ 2, 5, 14, 27; BBodSchG § 4; UStG §§ 1(1a), 4 no. 12, 9, 15a; Fourth Bureaucracy Relief Act (BEG IV) of 2024; Gordon Real Estate Group transaction experience. Legal position as of October 2026.
Photo: Lucas Kepner / Unsplash
Cost ranges reflect our experience and vary by property and provider. This article is general information and not legal or tax advice.
2026-10-09 12:06