Right of residence and usufruct – how do these rights affect property value?
Lifelong rights can have a considerable effect on the value and marketability of a property. What matters are the scope of the right, the beneficiaries and its economic effect.
What is a right of residence?
A right of residence entitles a particular person to use a building or part of it as a home. Legally, a right of residence under § 1093 of the German Civil Code (BGB) is a limited personal easement. A typical case is the transfer of a house to the next generation while the previous owners retain a lifelong right of residence.
Personal and often lifelong
A right of residence is granted to specific persons and is often tied to their lifetime. The age of the beneficiaries therefore plays a significant role. The valuation is not based on individual health or lifespan, but on statistical mortality and survival probabilities.
What applies to spouses?
A right of residence can be held by several persons. What matters is when it ends: on the death of the first beneficiary or only on the death of the last survivor. With joint life interests, the combined survival probabilities must be taken into account. A larger age difference can have a considerable effect on the capital value.
How much does a right of residence reduce the property value?
An existing right of residence granted free of charge is in principle an economic burden for the owner. The owner can neither use the area concerned personally nor let it free of the right. How much effect this has depends largely on the scope of the right and the property concerned.
Life annuity present value factors
For rights tied to a lifetime, the annual benefit forgone is capitalised using life annuity present value factors. These take into account in particular the age and sex of the beneficiaries, statistical mortality and survival probabilities and the interest rate applied. The recurring annual economic disadvantage is thus converted into a capital value as at the valuation date.
Which interest rate?
The capitalisation rate also has a considerable effect on the present value. The ImmoWertA generally provides for the rate to be based on the property yield adjusted to the specific property. The valuation therefore does not simply consist of reading off a life expectancy from a table.
A right of residence and usufruct are not the same
Usufruct is generally the more comprehensive right. With a right of residence, the focus is essentially on personal residential use. Usufruct, by contrast, generally entitles the holder to take the benefits of the property – which usually includes letting it and collecting the rental income.
Costs and charges
It must also be checked who bears operating costs, maintenance, extraordinary repairs and public charges, whether the right is granted for payment or free of charge, and whether there are any supplementary agreements. Two apparently identical rights can therefore have different economic effects.
Present value and reduction in value are not necessarily the same
The capitalised economic disadvantage is a key valuation input. However, it does not follow that this present value corresponds to the cent to the reduction in value of the encumbered property. It must also be assessed how the property market actually takes the specific encumbrance into account.
Conclusion
A right of residence and usufruct do not affect property value by a flat-rate percentage. The age and number of beneficiaries, the scope of the right, market rent, cost arrangements, the interest rate and the specific contractual terms can all have a considerable influence.
Professional basis: §§ 46 and 47 ImmoWertV, ImmoWertA and §§ 1030 and 1093 BGB.
Such rights often become relevant in connection with an inheritance – more on this under property valuation for inheritance. In a full market value report, their effect on value is derived in detail.