The German real estate market has changed dramatically over the last two years; big international investors have snapped up supermarkets and small shopping centres (besides residential and logistic portfolios). Prior to that, potential purchasers comprised small groups of doctors, dentists and architects building their pension schemes by investments in two or three shop units. Local German developers have seen their retail real estate rise in value by 30% or more in no time.

With the investors come consultants, mainly international property advisers and law firms, accompanied by international banks financing the venture – and herein lies a potential conflict. The requirements of the international investment community and their finance providers are well known and sophisticated – but typically they do not match the expectations and experience of domestic German developers, property owners and their local advisers. Many of these developers are very experienced entrepreneurs but their operations are run in a relatively informal way.

This clash of cultures needs to be understood by international investors and their legal advisers entering into the German property market, especially when buying small retail units from local developers. The size of the product and the fact that it is spread in small units all over the country is a result of Germany's federal structure, with a densely populated countryside where retail chains provide groceries and non-food products often for populations of less than 10,000 people. Obtaining building permits for larger, even medium-sized stores (800-2,500 sq metre sales area) is a painful process. The structure of the legal market is different to that of the UK or the US, with a large network of mostly generalist domestic practitioners dominating the local market.

The local developer's view

Imagine the scenario. You are a German developer in your 50s with nearly 30 years' experience and you want to do business with an international purchaser. You have a small portfolio of shop units to sell. A 'good' supermarket, in your view, is an attractive, properly-built property with a red roof and a reliable tenant who always pays his rent on time.

You exchange one or two letters and some telephone calls, and a broker shows up saying you have the chance of a lifetime. But once the deal gets going, a group of smartly-dressed lawyers and property consultants come in and start chasing you for building acceptance certificates from 1975 and the correspondence concerning a lease which has been in place for 20 years. Even worse, these requests are part of a 10-page due diligence request list (in German, if you are lucky) including documents you have never even heard of. After several hours in your office, or 'data room' as they call it, these guys tell you nearly everything you have done previously is unacceptable from a legal and financing standpoint.

Worse still, not one of the unknown decision-makers on the purchaser's side shows up, only advisers waving power of attorney documents. You are used to negotiating directly with your business partners (who you know personally) and, for you, business is best done through personal relationships. None of that seems to be possible here.

Consequently, you ask for help from the usual sources: your lawyer (a partner in a three-partner firm in the neighbouring municipality) or your tax adviser, who, in the past, always had an answer to all questions of life and business. These people are professional and good at what they do. However, their skills do not match the requirements of the deal in the eyes of the investor's lawyers.

The local lawyer's view

As a local lawyer in Germany, litigation is the main driver of your business – for a litigator, a dispute has to be won, while a transaction lawyer will do everything he can to avoid it. You have never needed to understand the finer points of investment or international finance to do business. Your client will be satisfied once a project is realised, which depends more on the building authority filing a building licence than whether a rating agency is happy with it under an abstract legal view.

Since your client has a strong, informal business relationship to his contractor, proving itself over many projects, why waste your client's time and money by proposing an up-to-date, market standard, 50-page building agreement instead of the five-pager which has worked in the past and which now makes arrogant City lawyers write devastating comments in their due diligence reports? And did these guys calling themselves lawyers – although they have never even seen the inside of a courtroom – really say that they need to check whether the deal is subject to merger control? Is this the Daimler-Chrysler merger or the purchase of a supermarket?

The international lawyer's view

You are a hotshot in a hot market, already at 130% utilisation and you can hardly remember your last holiday. You are sent to a place in the German countryside which your car's navigation system struggles to find. In the middle of this mess, you do not imagine the acquisition of a 5m shopping centre will be the decisive push on your way into partnership.

Once there, you meet a vendor who is friendly at first, but after your second request starts getting annoyed for no reason. However, you try to stay as professional as possible and fight your anger at this guy who fails to answer your e-mails.

The local law firm does everything to frustrate the deal – like questioning details of standard documents which comply with the market standard and ignoring the requirements of the senior finance facility which, in your view, are set in stone.

The files are a disaster and after 20 minutes, you wonder how to get this deal going if every lease lacks so-called 'legal form' (thanks to recent local court decisions). Then a building permit is presented for the project, but you are not sure whether it has any legal basis. To you, by the way, a 'good' supermarket is a properly licensed building with a lease in place that meets the sophisticated requirements of statutory law as to legal form.

A way through the culture conflict

Given the difficulties outlined above, it is likely the atmosphere will quickly cool, along with the probability of exchange of contracts. Experience of closing hundreds of real estate transactions in the past 18 months has illustrated some ways that we, as international legal advisers, can reduce this culture clash.

. Establish a rapport with the vendor – spend some time building up the personal relationship; which they see as a vital part of doing business.

. Show you respect the other side's point of view and try to find a balance between the comfort your client and his bank need and the limits of what you can real-istically expect from the vendor. Ask yourself – is every part of your standard procedure important for this deal? Can you tailor it?

. Explain why things are important to you; although it is part of your daily life, it is not obvious for the local adviser. Tell the vendors about the legal and commercial environment your client acts in.

. Offer solutions rather than criticism. Once the vendor trusts your advice, he and his legal advisers will start coming to you for guidance.

. Take the client with you. Even though he might not have a command over the German language, it shows he takes the deal seriously and helps cement the personal relationship.

. Appreciate the realities of doing business the vendor's way. Can you use fax and telephone if you find that someone is not used to the 100-plus e-mails-a-day madness that has became your everyday reality?

. Stay calm. What you criticise as legally problematic and unprofessional is part of the vendor's life.

As often is the case, the requirements for getting the deal through are one part technical and two parts emotional. If you do it right, you client will not only close his deal in a competitive market, the vendor will trust him and be happy to do business again in the future. |

Martin Guenther and Marc Werner are partners in the German real estate practice of Lovells.