Switzerland: Real Estate

The Swiss Confederation consists of 26 Cantons.

Each Canton is responsible for operating its own land registry(ies) under the ultimate surveillance of the Confederation. Each Canton has one or several land registries together covering the entire territory of such Canton. Any real estate in Switzerland, more specifically any plot of land and any right in rem on such real estate, is registered with the competent land registry where the real estate is located. Only public domains, such as roads, highways, etc., may not be registered at the land registry.

All possible rights in rem under Swiss law, such as ownership, easement, encumbrance or lien, are exhaustively provided by the Swiss Civil Code.

The Swiss Civil Code is the main legislation relating to real estate ownership. It provides for all possible rights in rem such as ownership, easement, encumbrance or lien.

It governs all private law issues relating to a plot of land and the neighbouring rights, in particular which type of property rights may be registered in the land registers or which neighbouring rights an owner may have to accept. The Swiss Civil Code also regulates the general terms of the organisation of the land registry, as well as the legal scope of the rights and information which can be registered. The details of such organisation are contained in the Ordinance on the land registry.

The Swiss Code of Obligations governs the contractual aspects of the sale and lease of real estate.

The proof of ownership of any real estate is solely given by the registration contained at the competent land registry. Land registries provide, upon request, official excerpts of the land register for any specific plot of land. Apart from the name of the owner(s) and the type of ownership, such excerpts will notably contain the registration number of the plot, its location and size, as well as any easement, encumbrance and/or lien, such as any mortgage, registered on such plot. Plans of the land plot, and in most cases of any building contained on such plot, are also available at the land registry.

The acquisition of commercial real estate by foreigners is not restricted. Any foreigners, whether domiciled or not in Switzerland, as well as any foreign companies, can freely acquire commercial real estate for their own use or for the sole purpose of investment. On the other hand, the acquisition of residential real estate is controlled and restricted by the Swiss law on the acquisition of real estate by foreigners (the so called Lex Koller). It must be noted that apartment buildings commercially leased to third party tenants are not considered as commercial real estate. Therefore, such buildings cannot be acquired by foreigners or by foreign companies, within the meaning of the Lex Koller.

The most common form of ownership is the freehold interest, which includes the ownership of the ground of a specific plot of land and of any construction on such plot. Such type of ownership is unlimited in time. There can be either one sole owner or several co-owners who own such real estate jointly and proportionally to their percentage of co-ownership.

The condominium type of ownership, the so-called Propriété par étage, is another common form of freehold ownership for apartments or mixed-use buildings that permits different owners to jointly own a specific plot of land, but with exclusive rights of ownership on specific parts of the building(s) constructed on such plot. It is commonly used by promoters to conduct large real estate developments as it permits the separate sale of each apartment, office and/or commercial space of a building to different buyers.

Finally, the building lease ownership (droit de superficie) is also a possible form of ownership but it is much less common in practice. It permits the dissociation of the ownership of the ground of a specific plot of land from the ownership of any construction on such plot, in a similar way to the leasehold ownership as it is known in Common law countries. The building lease ownership is limited in time. It is a long term easement registered on a specific plot in the land registry, which allows the beneficiary of such easement to construct and own a building on a plot of land owned by a different owner. If a building lease right is granted by the owner of a plot for a period exceeding thirty years, the building lease right can be registered at the land registry as a specific real estate independently from the plot on which the right is granted. This type of ownership is mostly used in industrial development zones for plots owned by the Confederation or other public authorities to support the development of certain industries in such zones.

In a freehold ownership, the ownership of a building located on a specific plot of land automatically follows the ownership of such plot. This is also the case, to a certain extent, in the condominium type of ownership, where each owner of an apartment or of part of the building is also a co-owner of the plot of land on which the building is constructed.

On the other hand, in the building lease ownership, the land and the building on it will have different owners.

Commercial real estate can be acquired and owned either by individuals or by legal entities. However, in practice, it is much more common to own commercial real estate through legal entities than directly by the ultimate individual owner.

There are many reasons for this, but the main one is obviously that commercial real estate is often acquired by companies to operate their own business activities. Furthermore, when commercial real estate is acquired by individuals for investment purposes, the choice for such individuals to acquire a commercial building through a real estate company is justified for practical and tax reasons, as well as to act as a protective shield against potential liabilities.

Commercial buildings are often leased to several different owners and require contracts with many different suppliers for administration, maintenance, security and other services. Therefore, in view of dealing with all aspects of a commercial building, it is easier from a practical point of view to have it owned and managed through a legal entity rather than directly by the individual who ultimately owns it. The legal entity also provides the ultimate individual owner(s) with a protective shield against the tenants and potential litigation.

Finally, the use of a legal entity for the acquisition and holding of commercial real estate can also have some tax benefits if it is properly structured.

The most common legal entities used for the acquisition of commercial real estate are companies limited by shares (public limited companies called Société anonyme) and limited liability companies (private limited companies called Société à responsbilité limitee). Both types of companies limit the liability of its shareholder(s)/partner(s) to the amount of the subscribed share capital.

There is no market standard process or form of reporting for the legal due diligence in respect of the acquisition of commercial real estate.

The due diligence process is conducted by counsel to the purchaser, generally with the assistance of the notary who will act for the signing of the deed of sale.

The starting point of a legal due diligence on commercial real estate is the review of the full excerpt from the land registry regarding the specific plot. Such excerpt and its appendixes will provide all the information in respect of such specific plot, notably regarding the ownership, the size of the land, the implantation of the building(s) constructed on such land, any easement (in favour of neighbours for example), encumbrance (in particular mortgages registered in favour of banks or financing institutions) and liens.

If the construction of the building(s) on the plot is relatively new (less than five years),  the due diligence process will also extend to the review of the contracts between the seller and the architect, engineers and construction companies that participated in the construction work, as all guarantees still existing with such contractors will generally be transferred to the buyer. In the case of new construction, the seller will also be required to provide a copy of the construction permit and of the permit of use which is delivered at the end of the construction work by the competent authority or by the architect (depending on the Canton). Should the plot be located in a region classified by the competent Cantonal authority as potentially at risk in respect of pollution and contamination, the seller may be requested to provide specific reports in respect of certain types of pollution and/or contamination.

On the other hand, if the acquisition of the commercial real estate consists of a bare plot of land with the intention to construct building(s) on such plot, the due diligence will also consist of – generally together with the architect in charge of the construction project – the full review of all laws and regulations applying to the plot, in particular in respect of zoning, construction, road, sanitary and safety regulations. Restrictions in such respect may apply and do not appear on the excerpt from the land registry.

Finally, the due diligence will also cover the review of all the lease agreements entered into by the seller with the tenants of the building, as well as all insurance agreements, as all such agreements will be transferred to the buyer with the sale of the real estate. Certain maintenance agreements linked to integral parts of the building may also pass, if not terminated, to the buyer with the sale of the real estate and will therefore need to be reviewed.

If the acquisition of the real estate is made through a share deal, a comprehensive due diligence will be conducted on all other aspects of the legal entity that has been acquired.

Apart from counsel’s fees and specific reports on potential contamination (the costs of the reports are generally paid for by the seller), there are no material costs for the conduct of a legal due diligence on a real estate.

Generally speaking, all legal issues are covered by a comprehensive legal due diligence process.

Only a very limited number of contributions due to public administrations may be secured by a lien on a real estate without being registered at the land registry and therefore do not appear on the excerpts of the land registry. The deed of sale will typically contain a representation from the seller in such respect.

The sale and transfer of a real estate is only valid if executed in the form of a public deed in front of a notary public. The notary public acts for both parties but is generally chosen by the buyer, as the notary’s fees are paid for by the buyer.

Any terms and conditions, such as representations and warranties, relating to the sale of a real estate must also be contained in the deed of sale. Any undertaking to buy real estate, subject to certain conditions, must also be signed in the form of a public deed. A promissory sale agreement which would be privately signed will not be enforceable against the seller should the latter default on selling the real estate after all the conditions have been met.

Nevertheless, for the sale of commercial real estate, in practice the parties will often start by signing a letter of intent providing the buyer with a certain period of time to conduct its due diligence process and confirm its intention to acquire the real estate. During such period, the seller will generally give an exclusive right to the buyer to acquire the real estate at a certain price. Should the seller default on selling the real estate to the buyer at the end of the exclusivity period, letters of intent often contain penalty provisions. At the end of such period, should the buyer confirm its intention to acquire the real estate, the parties will sign a deed of sale, a deed of deferred sale or a deed of promissory sale (as the case may be) in front of a notary.

Generally, a commercial real estate transaction will go through the following steps:

The sale and transfer of commercial real estate can be made either in the form of an asset deal or a share deal, should the seller own the real estate through a legal entity. Both forms are commonly used in practice. The choice of one form or the other will depend on tax, liability and commercial issues.

It will often take the form of a share deal when the real estate is used in the business activities of the seller and the business is also acquired by the buyer along with the real estate. In such case, the seller, being a company owning commercial real estate and having a commercial activity other than leasing its real estate to third parties, is considered for tax purposes as a commercial company, as opposed to a real estate company. By selling the shares of a commercial company (owning real estate for the conduct of its own commercial activities), no real estate capital gain tax or real estate transfer tax will be levied. These are the clear advantages of a share deal in the case of commercial companies. Nevertheless, because of liability issues and deferred real estate capital gain tax for the buyer, even in the case of a commercial company, buyers may prefer acquiring the commercial real estate and the business activities of the seller through an asset deal.

If the sole purpose of a company is the leasing of its real estate to third-party tenants, the company will be considered as a real estate company for tax purposes. By selling the shares of a real estate company (depending on the Canton), the buyer may avoid the real estate transfer tax, which is significant. On the other hand, the real estate capital gain tax will generally be due even in the case of a share deal, in which case the company is considered a real estate company.

Any lease agreement on the whole or part of the real estate, such as a lease of the entire building or office or parking spaces, is transferred to the buyer in case of the sale of such real estate. The lease agreement will continue with the new owner under the same terms and conditions, but the new owner is entitled to terminate the lease agreement for the next legal term, should the new owner be able to demonstrate an urgent need of such building for the conduct of its own commercial activities. In such case, an indemnity may be due to the tenant by the previous owner.

There are no specific formalities for such transfers. Any real estate lease agreement will be mentioned in the deed of sale and the parties will acknowledge that such lease agreement is transferred to the buyer with the sale of the real estate. Any rent will be due to the buyer as from the day of the registration of the deed of sale with the land registry, if no other date has been agreed between the parties in the deed of sale.

Common rights, interests and burdens, such as easements, construction rights, rights of light, rights of way or pipe routes, may be created over real estate, either in favour of a neighbouring plot or in favour of any individual or legal entity. Such rights may only be created by way of public deed executed in front of a notary and must be registered at the land registry. The sole exceptions are public law rights which may be valid without being registered at the land registry.

The Swiss legal system does not know the trust as it is commonly known in Common law jurisdictions. Nevertheless, trusts are recognized in Switzerland according to the Hague Trust Convention. Consequently, it is possible to register trust relationships in public registries and in particular in the land registries.

Therefore, the trustee of a trust holding real estate in such a capacity will be registered as the legal owner of the real estate, but can have the trust relationship specifically mentioned in the land registry. Trust relationships which are not specifically mentioned in the land registry are not opposable to bona fide third parties. Consequently, third parties can rely on the legal ownership as registered at the land registry without having to enquire about any potential trust relationship.

The direct ownership of real estate is a public information. Depending on the Canton, one can access such information on-line or through a specific request to the competent land registry. On the other hand, commercial real estate can be acquired through a Swiss or foreign company. In such case, solely the name of the company owning directly the real estate will be publicly accessible. There is no requirement to provide the identity of the beneficial owner(s) of such company to the land registry or to any other authority. Hence the name of the beneficial owner(s) is not a public information.

As mentioned previously, the acquisition of residential real estate is controlled and restricted by the Lex Koller. Should the acquisition be made through a Swiss company (foreign companies not been allowed to acquire residential real estate), the identity of the ultimate beneficial owner(s) will need to be disclosed to the public notary acting for the transaction to confirm that the acquisition is permitted under the Lex Koller. However, even in such case, the identity of the beneficial owner(s) will not be publicly disclosed but strictly kept confidential by the public notary.

The sale and transfer of real estate is subject to a transfer tax paid by the buyer. As the transfer tax is a Cantonal tax, its rate varies from one Canton to another between 1% and 3.3% of the sale price. A privileged rate may apply in case of a gift, a succession or an exchange of plots between two owners.

Furthermore, the sale of real estate is subject to a real estate capital gain tax which is due by the seller. If the seller is an individual, the capital gain is defined as the difference between the cost of acquisition and improvement of the real estate and the net sale price. The rate of the real estate capital gain tax for individuals also varies from one Canton to another. Generally, the rate decreases from 50% to 0% depending on the holding period of the real estate by the seller. If the seller is a legal entity or an individual considered as a real estate professional, the capital gain is defined as the difference between the value of the real estate in the books of the seller, taking into consideration the annual amortizations and the sale price. Furthermore, in case of a legal entity or real estate professional, the capital gain will be taxed at the ordinary profit, respectively revenue, tax rate applying to the seller.

Real estate is also subject to a local annual real estate tax at a rate that varies between 0.02% and 0.2%. The real estate tax is levied on the value of the real estate as estimated by the local authority for tax purposes, the value of which is generally below the market value.

Moreover, real estate is subject to wealth tax, for individuals, and to capital tax, for legal entities, if applicable at the place of the location of the real estate. The revenues from the leasing of the real estate, or the deemed revenues in case of own use of the real estate by the owner, is subject to profit or revenue tax, as the case may be, at the place of the location of the real estate.

Finally, VAT may also apply to the sale and leasing of real estate but is mostly optional.

Leases are governed by the Swiss Code of Obligations which generally favours the tenants’ interests with mandatory provisions, for example relating to the maximum duration of fixed term leases and to minimum notice periods for termination. The parties may decide freely on non-mandatory provisions. For instance, they can decide on the amount of the rent, but the tenant may require a court to review it if he can prove an excessive return for the landlord.

A lease can be entered into for a fixed period of time, in which case it will automatically terminate at the end of such period, or for an indeterminate period, in which case they can be terminated by both parties with a minimum six month prior notice for the end of a quarter. Generally, commercial leases are entered into for a minimum initial period of five years, renewable for successive five year periods.

The rent may be fixed, in which case it may only be increased, or decreased as the case may be, at the end of a term, mainly based on the evolution of the average mortgage rate and on the Consumer Price Index (CPI). More commonly, commercial leases provide for an indexed rent to the CPI. Indexed rent is only possible if the duration of the lease is for a minimum five year period. Graduated rent is also possible for leases with a minimum three year period. However, graduated and indexed rents may not be combined. Finally, turnover rent is also possible, but is mostly used for tenants with activities in the hotel and food & beverage industry.

Both parties can terminate a lease of indeterminate duration for the end of a term. In case of termination by the landlord, the tenant may oppose the termination by filing with the competent court a request for an extension of the lease, up to a maximum of six years. Both parties’ interests will be taken into consideration by the court, but Swiss law and courts are generally in favour of tenants.

Leases can generally be assigned or sublet in whole or part by the tenant (who remains liable for the rent), provided the landlord cannot object for valid reasons. The landlord may impose a certain type of business occupation, in particular for retail premises.

General provisions of the Swiss Code of Obligations relating to maintenance costs provide that the tenant is only liable for small ordinary costs. Parties are free to agree on different terms in such respect. In case of leases of large commercial premises or entire buildings, triple-net leases (entire maintenance and repair duties to the tenant) may be agreed. Land tax and property liability insurance remain however at the landlord’s cost.

The regulation of use, planning and zoning restrictions on real estate varies from one Canton to another. Federal law only provides for general principles. Each Canton then issues a master plan on zoning and territorial development, as well as rules for the applicable procedure. The Cantonal or local authority, as the case may be, issues a detailed plan providing for the zoning restriction on each plot. Such authority is also competent to authorise any real estate construction or heavy renovation. Only detailed planning and regulations are legally binding for the owner of a plot, as general planning is directed only to the local authorities. General planning can however have an important impact on the right of the owner of a plot in view of the interpretation of the detailed regulations.

Liabilities for environmental contamination are based on public law and cannot validly be excluded.

The primary liability for the contamination of a site lies with the operator of such a site who has personally caused the pollution. In case of several operators, the liability will be split according to their respective causal parts.

In practice, it may be difficult to identify the operator who is responsible for the contamination if the contamination took place years, or sometime decades, before it is discovered. Furthermore, it may be that such operator is no longer in operation and that, in the meantime, the legal entity has been liquidated or has gone bankrupt. In such cases, the Canton will bear most of the costs. Furthermore, the person who legally or concretely controls the site at the time the pollution is discovered may also have to bear a minor part of the costs, even if he did not cause the pollution. The person controlling is in most cases considered to be the owner of the plot, but in certain cases it can also be considered to be other persons, such as the owner of the building lease right of the plot.

In cases of the sale of real estate, in particular when the real estate is located in industrial zones, the deed of sale may provide for an indemnity in favour of the buyer should he be found partly liable for the contamination as the person controlling the site (for contamination which occurred before the sale of the real estate).

Expropriation of real estate is only possible if (i) it is based on a formal and clear legal basis, (ii) it is in the public interest, (iii) it complies with the proportionality principle and (iv) the same goal cannot be reached with any other reasonable measures. Compensation must be paid to the owner of the expropriated real estate, based on the market value of the property. Only the Confederation and the Cantons have the right to expropriate. The procedure of expropriation provides for judicial review both with regards to the legality and the valuation.

The creation of mortgages over real estate requires the execution, by the owner of the real estate, of a public deed in front of notary, as well as the registration of the mortgage by the notary with the land registry. Collective mortgages on several plots are also possible.

Mortgages may be created in the form of a security paper, a bearer or registered mortgage note, or in the form of a dematerialized security solely registered in land register.

A claim secured by a mortgage over real estate can either be enforced according to the ordinary collection procedure, for individuals, or to the bankruptcy procedure, for legal entities, or according to a specific debt enforcement proceeding limited to the forced sale of the mortgaged real estate. Such proceeding implies several procedural steps, which the debtor can oppose to postpone the execution of the mortgage and ultimately the forced sale by public auction. By law, the entire proceeding cannot be completed in less than six months, but in reality it very often lasts more than twelve months.

The costs, including taxes, notary and registration fees, in respect of the creation of a mortgage over real estate varies from one Canton to another, but are substantial.  They are generally between 0.5% to 2% of the amount of the face value of the mortgage.

Mortgages over the real estate of a debtor can be created in favour of a security trustee to hold such mortgages on trust for a syndicate of lenders.

For such purposes, mortgages in the form of security papers, either bearer or registered mortgage notes, are generally used. The ownership of the mortgage note(s) will be transferred for security purposes collectively to the lenders and their possession will be transferred to the security trustee for the account of the lenders on the basis of a security agreement. Therefore, it allows the lenders to collectively directly enforce their claims against the debtor and to request as co-owners the restitution of the mortgage notes in the event the security trustee defaults in its obligations towards the syndicate.

It is also possible to use mortgages in the form of a dematerialized security. In this case, the mortgages are either registered collectively under the name of the lenders or under the sole name of the security trustee. In the latter case, it is possible to pledge the mortgage in favour of the lenders by way of a specific mention in the land registry, which allows the lenders to collectively enforce their claims against the debtor after enforcement of the pledge in the event the security trustee defaults in its obligations towards the syndicate.