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CMS 20 Questions on Real Estate

Editors: Nick Hadley
 
Nick Hadley
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Introduction
CMS Real Estate Guide: 20 Questions for Potential Investors
CMS Real Estate and Construction Group
Legal terminology and the practice which operates in the buying and selling of investment real estate is not uniform across all jurisdictions. Any potential investor wishing to buy and sell real estate outside the investor’s “home” jurisdiction will need to be familiar with potentially different legal interests, terms and phrases and the differing laws which may apply.
As an aid to assisting with this understanding the CMS real estate group have prepared answers to the 20 most frequently asked questions which an investor in a new jurisdiction is likely to ask. This interactive guide provides a straightforward overview of the law and practice which applies in a wide-ranging number of jurisdictions where CMS are able to provide legal advice. This guide provides an answer to each of the 20 questions for each jurisdiction.
We welcome feedback and comments to enhance the usefulness of this guide – please contact me, or any of my colleagues named in the guide.
Pranai Karia
Editor
Partner
CMS Cameron McKenna LLP
pranai.karia@cms-cmck.com
+44 20 7367 2742 ( direct )
+44 7771 674385 ( mobile )
+44 20 7367 2000 ( fax )
Contacts
(Click on the name to get more information.)
Austria
PART A - PARTIES AND INTERESTS
1. Parties - Who can own real estate?
Both natural persons and legal entities can own real estate. Legal entities are incorporated companies, such as public companies and private limited companies, and also incorporated persons, associations, such as foundations or institutions.
Owners of commercial real estate include private developers, insurance companies, pension funds, banks and other financial institutions, private or public property companies, charities, trusts, the government, local authorities and open-end or closed-end real estate funds. The legal framework for open-end real estate funds was laid down in the real estate fund act (Immobilien-Investmentfondsgesetz).
The law concerning the purchase of real property by foreigners (Ausländergrunderwerbsgesetz), which is different in each Austrian province, has to be observed when acquiring property. Citizens of Austria do not require any permission according to this law. Persons with a EU or EEA citizenship usually need a so-called negative confirmation, otherwise acquisition proceedings are notifiable or subject to approval according to the law concerning the purchase of real property by foreigners. However, the Austrian Supreme Court recently decided that the need for a so-called negative confirmation (Negativbestätigung) contravenes EU law.
2. Property - What property interests are currently sold?
Property in Austria is defined as the right of the owner to use the substance of a property according to his own discretion and exclude any other party from the same. This involves an almost unlimited right of dominion over a property, that is protected against any other party. Ownership of a property also comprises ownership of the ground underneath the real estate and the air above it.
Ownership of an apartment is a right in rem granted to a joint owner of a property to use an independent apartment or any other independent space exclusively and to dispose of it alone.
Besides residential property, there are other rights in rem, such as easements and servitudes. These involve limited real rights of use of third party properties. Basically, there are easements (or real servitudes) and personal servitudes:
  • The most common easements are those relating to access and supply lines
  • Examples of personal servitudes are usufructuary rights (the right to use a third-party object without any limitation except conserving the substance) and residential rights (the right to use a dwelling)
By incorporating a limited tenancy into the land register such tenancy can become a quasi-real right. The legal relationships can be concluded for either an unlimited or a limited period of time.
An option can be granted on all legal transactions and all legal transactions can be conclude d as preliminary contracts.
3. Ownership - What types of ownership are there?
In Austria property can be acquired by:
  • Original acquisition - this means that the property right is immediate and new on purchase independent of the rights of a predecessor, e.g. treasure trove, where there is no contractual relationship between the property owner and the finder, or acquisition by prescription, i.e. acquisition of a right by means of qualified possession as owner for the legally determined period of time. With real property this period is 30 years and is not affected by the entries in the land register
  • Derivative acquisition - this is an acquisition derived from the rights of the predecessor
  • Bona fide acquisition of property - with regard to real property, the acquisition is based on the principle of material publicity (principle of confidence) of the Land Register according to which a bona fide person who trusts in the correctness and completeness of the entries in the Land Register is protected. A purchaser is regarded as being bona fide if he acts without any fault or negligence on his part
Residential property in the form of apartments and other independent spaces and parking spaces must not comprise areas of the property which are determined for general use, such as stairwells, corridors and paths.
There is also the possibility of establishing a right to build. This is the alienable and inheritable right in rem to have a building on or below the surface of a piece of land belonging to a third party. However, this right cannot be established for less than 10 and more than 100 years. It can be established also in the form of the right to erect a residential building.
A similar form of the acquisition of property is the erection of independent structures on third-party land. Different from the right to build, such structures are erected on third-party land with the intent that they will not remain there permanently.
4. Matters burdening or benefiting real estate - What matters can affect real estate?
  • Easements - as mentioned in section 2, there are basically easements or real servitudes and personal servitudes. The first are rights of supply lines and rights of way, the second are usufructuary and residential rights
  • Tenancy rights limited in time can also be entered into the Land Register
  • Pre-emption and option to repurchase - pre-emption means that the real property is sold under the condition that, if the purchaser wants to resell it, he has to offer it to the seller for payment. The option to repurchase means that the seller is granted the right to buy the property back at a specified price
  • Restraints on encumbrance and alienation - restraint on encumbrance means that liens and real rights of use must not be the granted, while restraint on alienation means that the property must not be transferred. As a rule, restraints on alienation granted in the context of a legal transaction only have obligatory effect. A disposition in rem contrary to the restraint is valid in relation to the third party. However, a restraint becomes effective in rem, if it is established between spouses, parents and children, adoptive children, foster children or stepchildren or their spouses and entered into the Land Register
Payment obligations under public law and charges in terms of building law or other charges under public law can also be entered into the Land Register.
5. Occupation of real estate - Who may occupy real estate?
Real estate is usually occupied by one of the following categories of person:
  • Owners – those persons with a freehold interest in the property
  • Tenants – those persons with a lease of the property or part of it. It is possible for any number of leases to be created in relation to the same property. Normally, however, a restriction will be contained in the first lease created limiting the number of subsidiary leases that may be created out of it. Tenants of business premises sometimes have statutory rights to renew their leases when the contractual term ends
  • Persons who hold a property in their qualified possession although they are not the entitled owners and who do so beyond the period of time set for this by law
  • Holders of a wayleave – a contractual right of occupation usually given to companies supplying utility services. Holders of wayleaves often have statutory rights to remain in occupation even if the wayleave agreement terminates
6. Brokers - What is the broker’s role?
Brokers generally fall into five categories:
Investment
Valuation
Buildings
Management
Rent Review
They are employed by any party to any transaction involving real estate. Their role may include:
  • acting for a seller to find a buyer for a sale property, including marketing the property for sale
  • acting for a landlord to find a tenant for a leasehold property, including marketing the property
  • acting for a buyer to find a property to buy
  • acting for a tenant to find a property to lease
  • acting for any party to a transaction drafting and negotiating heads of terms
  • valuing a client’s existing and target properties
  • day to day management of property owned by clients, including managing maintenance programmes and landlord and tenant work and
  • project management of development of new buildings or refurbishments
Brokers available in the market range from those employed by major international organisations to specialised advisers providing advice on a more restricted basis
7. Employees - What employment issues affect real estate acquisitions?
Pursuant to Council Directive 77/187/EEC on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of businesses, rights and duties of a transferor of a business resulting out of an employment contract are passed to the transferee of the business upon transfer.
The Austrian Employment Law Harmonisation Act (Arbeitsvertragsrechtsanpassungsesetz) was passed in order to implement the Council Directive 77/187/EEC and applies when a transfer of a business or of parts of a business takes place.
Main elements of the Employment Law Harmonisation Act are that:
  • employment obligations pass to a purchaser as a matter of law
  • there is a one year cushion against making employment
    conditions less beneficial in certain cases
  • works agreements remain valid after the transfer of the
    business and
  • there is joint and several liability of the transferor and transferee for
    obligations of the employment contract, which is particularly
    important with respect to entitlements for pension and severance payments
The transfer of a part of the business as stated in Directive 77/187 and the case law of Austrian Courts depends upon:
  • the existence of a part of the business
  • the maintenance of the part of the business during the change
    of the operator
  • the maintenance of the previous business activity in the part
    of the business or
  • the restart of the business after a short or conditional interruption
The concept of transfer relates to cases in which an economic entity - that is to say an organised group of persons and assets facilitating the exercise of an economic activity which pursues an objective specific to it - retains its identity following the transaction in question. This will not apply to all real estate transactions.
As a matter of general principle, a transfer of a business to another owner will not affect the employment relationship. The transferee takes over by operation of law the existing employment relationships together with all rights and obligations existing on the date of the transfer.
The previous employment conditions must remain the same, unless the provisions dealing with collective bargaining agreements, corporate pension promises or the validity of work agreements state differently.
PART B - PROCEDURE AND TERMS
8. Procedure - What are the steps in a sale and purchase transaction?
Transactions formally start when proposed heads of terms are drafted, negotiated and agreed by the brokers for the seller and the buyer. The heads of terms (or memorandum of understanding or letter of intent) set out the principal terms agreed between the parties and are generally expressed to be “subject to contract”. They form the basis of the documents to be drafted by the lawyers.
The buyer, when purchasing real estate and buildings, normally has his lawyers draw up a due diligence report concerning not only technical aspects, but also the legal aspects of the real estate transfer. At the same time negotiations are likely to take place concerning the principle terms. The intermediate or final result of the due diligence check will form part of these negotiations. An agreement is then reached which frequently provides for a variety of other conditions, particularly in the case of large transactions.
The next step will be for the contract to be exchanged, followed by fulfilment of any relevant conditions. A transfer of assets will then be executed and registered in the Land Registry; such registration is not required in the case of share sale transactions.
9. Other common contract terms - What other provisions does a real estate sale contract commonly contain?
An agreement for the sale and purchase of land is commonly in writing and contains or clearly refers to all main terms and conditions, and is in a form in which one part is signed by both the seller and the buyer.
Very often a fiduciary settlement with the help of a trustee (barrister or notary public) is agreed in the context of the transfer contract. Various legal constructions and securities can be chosen in determining the trust conditions.
The trustee is subsequently responsible for ensuring that the trust payment in his possession is not made to those authorised until all prerequisites provided for and agreed on have been fulfilled. Appropriate evidence of this is to be submitted to the trustee.
After all the agreed prerequisites have been fulfilled, the trustee makes the payment to the authorised party.
Because the buyer has the opportunity of conducting full title investigation or due diligence before exchanging agreements, the buyer is usually prohibited from making any objection to any matter of title after the date of exchange.
Provisions relating to value added tax will be included where relevant to ensure the agreed tax position.
If the property being sold is in the course of construction, the contract for sale will incorporate provisions dealing with the obligations of the seller to construct in accordance with an agreed specification and to provide to the buyer separate deeds of warranty from the building contractor and persons such as the architect in order to safeguard the buyer against defective design or workmanship.
10. Due Diligence - What investigations does the buyer normally make?
Pre-exchange of agreements
The buyer is likely to commission a survey of the building and in appropriate cases, soil and geological investigations, plant and machinery tests, and environmental investigations. There are three limbs to the pre-exchange due diligence by the buyer’s lawyers.
Firstly, title to the property will be investigated. The buyer’s lawyers will consider the entries on the Land Register and relevant historic title documents. Where title to the property is not registered at the Land Registry, the buyer’s lawyer will consider the unregistered deeds to satisfy that the seller has a sufficient title to the property.
Secondly, the buyer’s lawyers will commence their due diligence, which will include the position regarding municipal and zoning consents, environmental matters, utilities serving the property, financial encumbrances etc. Where the seller is a company, the buyer’s lawyers will also conduct searches of the seller’s name at the Companies Registration Office to ascertain whether the company is solvent and therefore able to dispose of its assets freely. Where the search result refers to security, the buyer’s lawyers will ask for confirmation that such matters do not encumber the property and that no third party consents are required for the transaction to proceed.
Thirdly, during the due diligence process the buyer may often arrange that a survey of the property is carried out.
Pre-completion
Requisitions deal with completion formalities such as the seller’s lawyers’ bank details etc. The buyer’s lawyers will also conduct pre-completion searches including a priority search of the Land Registry.
Reporting to the client
Before exchange of agreements the buyer’s lawyers usually report their due diligence findings to their client, raising any matter of particular importance or concern.
11. Terms implied by law - What provisions are implied by Statute, Code or otherwise?
Some of the most significant are as follows:
Buyer Beware (Caveat Emptor)
The buyer must satisfy itself in all respects as to the nature of the property it is acquiring. However, this does not absolve the seller from the obligation to provide truthful replies to enquiries raised by the buyer’s lawyers. Warranty rights outside consumer protection can be modified by contract.
Land Register
All property and lien entries in the Land Register have a legally binding effect and the entries in the Land Register are deemed to be correct and complete.
Misdescription and misrepresentation
There are both statutory and common law rules which protect against clear misrepresentations or misdescriptions of fact made by the seller to the buyer which have the effect of inducing the buyer to enter into a transfer of land. In such cases, damages may be payable to the buyer and the buyer may be entitled to withdraw from the transaction.
Unfair terms
Agreements for sale that include exemption clauses, which seek to allocate risk, can be subject to section 879 ABGB (Austrian Civil Code). The Austrian Supreme Court of Justice, however, generally upholds clauses agreed upon between companies.
12. Registration and Notarisation of real estate - What are the basic requirements?
According to Austrian law, the ownership of real property and easements etc. is acquired only by the entry of the right into the Land Register.
It is therefore necessary to have at least the signatures of all agreements concerning such rights attested by a notary public, if attestation by a notary public is not otherwise compulsory.
Moreover, the agreement must contain a declaration (consent to the transfer) made by the seller in which he consents to the implementation of this agreement in the Land Register. This declaration can also be made outside the contract. In this case, the signature of the person who makes the declaration has also to be attested by a notary public.
The entry into the Land Register is an essential element for the acquisition of the property right to real property and easements etc. According to Austrian civil law and the land register law, the original of the agreement as the basis for registration and original ancillary certificates specified by law (clearance certificate furnished by the tax office, proof of citizenship etc.) are to be submitted to the competent land register court. After positive examination of the certificates by the registrar at the land register court, the entry is made into the Land Register. Thus the acquisition of the property right takes effect.
13. Disputes - How are they dealt with and resolved?
Conflicts can either be solved by obtaining a court decision or by way of a contractually agreed arbitration. It is to be noted that in the Austrian legal system the possibilities of contesting an arbitration award are limited.
When choosing a method of resolving disputes, the parties will have regard to various issues, including the following:
  • The domicile/nationality and governing law of the contracting parties and any relevant statutory limitations which may inhibit such choice or the effectiveness of such a choice
  • Can awards be enforced in the relevant jurisdictions? For example, is there an international treaty that will allow enforcement of an award in a particular jurisdiction? If such a treaty does exist, does it recognise arbitration awards and agreements arising out of a mediation process?
  • If the remedy sought is the transfer of an interest in land, rather than payment of money, a consideration is whether or not the particular system of law, jurisdiction or method of dispute resolution permits such an award
  • If technical know-how is required, the need to seek an expert’s opinion
PART C - PERMITS INSURANCE AND ENVIRONMENT
14. Permits - What permits are required for the use and occupation of real estate and are they personal?
Any proposed development of property must always correspond to the planned use and the provisions of the land development plan.
If applicable, a notice of proposed building is made. In other cases, a building permit can be applied for. The building permits granted are regarded as being invalid if the building operation has not started within 4 years or the building is not finished within 4 years after the start of construction.
After completion of the construction project, the building structure is inspected for compliance with the building permit. Thereupon, a licence for use is granted by the authority following submission of a statement of completion. Apart from the procedures required under the building regulations, the business or trade to be run in the building requires a relevant commercial licence to be obtained.
For the business location itself, a permit for the operating equipment (Betriebsanlagengenehmigung) may be necessary according to the Austrian Industrial Code (Gewerbeordnung).
In the course of the building operation, architectural conservation requirements and limitations have to be observed, particularly in the urban centres and in protected zones contained in a land development plan. Compliance must also be made with the regulations concerning the respective interests of adjoining owners during the carrying out of building operations.
15. Insurance and Risk - What insurance will the parties effect and when does the insurance risk pass at the time of sale?
Before a sale is contemplated, insurance is generally the responsibility of the owner of the freehold interest in a property. The seller always bears the risk prior to the conclusion of the contract of sale. The transfer of risk from the seller to the purchaser is specified in the contract of sale. The purchaser bears the risk after the contractually agreed date.
The purchaser is always obliged to take over existing insurance contracts. However, he has the right to terminate the insurance relationship within one month after purchasing the property.
The insuring party should have a fully comprehensive buildings insurance policy to protect the structure and fixtures and fittings of the property in the event of damage or destruction by any of a comprehensive list of insured risks, such as storm, lightning, fire and water damage. The policy may also cover additional special heads of cover such as subsidence, heave, earthquake and, if applicable, terrorism.
Insurance policies (the insurance contracts containing the contractual terms between the insurance company and the insured) may either comprise a single policy for one particular property or a block policy designed to cover a portfolio of properties. Larger institutional investors may self-insure.
Occupying owners generally have separate policies to cover the contents of the property, especially if the property includes costly plant and machinery
16. Environmental - What are the common environmental issues?
The liability for pollution of real estate and its removal is basically regulated according to the principle of causal responsibility. The buyer as owner of the real property is secondarily liable for pollution.
Due diligence as part of the acquisition process may involve the appointment of environmental consultants to consider documentary information and to carry out a site visit (Phase I). If considered necessary, further more intrusive investigations (Phase II) may then be undertaken. It is important to identify potential problems early so that there can be negotiation on price, the need for and scope of any remediation and/or the need to put in place protection in respect of any existing contamination related losses that may arise in the future. Such protection may take a number of forms, including obligations to remediate any contamination discovered post-acquisition, indemnities in respect of third party claims, or environmental insurance to cover these risks.
PART D - FINANCE AND TAXES
17. Pricing/Valuation - What sets the price/valuation of real estate?
Pricing of real estate investments is a combination of the aggregate rent being paid by occupational tenants of the property and the value that investment buyers consider that a property of the specific type and location is worth at the time of valuation taking into account that income.
The rent for a particular property is likely to be assessed by multiplying the area of the property by the market rental value per square metre. The market rental value will take into account factors such as the location of the property, its type and condition, and the length of the lease term.
In the case of retail shops, it is common for the rent of the property to have differential values according to the positioning of the floor space – that nearest to the frontage is the most valuable. The rental values of the various areas will be added together to provide an overall rental value for the property.
The value of a piece of land is determined according to the property evaluation law (Liegenschaftsbewertungsgesetz) and the evaluation methods detailed in that law. Accordingly, if the law or the legal transaction do not stipulate otherwise, the market value of the property is to be determined. This is the price that can normally be achieved by sale in a business transaction. Value ascertainment methods are to be used for the evaluation. These are the method of comparison, the gross rental method and the asset value method.
Investment properties are commonly referred to as being sold on a particular yield, meaning the investment return that will be gained from the capital sum which it is necessary to pay to buy the property. For example, where a property with an aggregate rent of € 10.000,00 is sold for € 200.000,00 it will have a yield of 5%. Conversely, the interest can be said to have been sold at a YP (years’ purchase) of 20.
18. Financing - How is a real estate acquisition financed?
The principal ways in which real estate acquisition is financed are:
  • Through the purchaser’s own cash resources or general corporate banking facilities
  • By using the capital value of the property to raise specific finance secured on the property
Normally, the financing banks or other financiers hedge themselves with an appropriate lien that is entered into the land register for the property. If the borrower should become insolvent, the financer can receive preferential satisfaction as the pledgee with regard to the lien. This means that a so-called preferential right to the bankrupt’s estate ensues in favour of the pledgee.
Lenders require floating or fixed interest rates.
Here the interest rate is usually fixed by reference to the nearest equivalent government stock plus a spread or margin
19. Security over real estate - How is security over real estate created and protected?
As a rule, an agreement in the form of a pledging deed (Pfandbestellungsurkunde) is concluded between the financer and the real estate owner to hedge the financer. In normal case the financer is given the real estate in pledge as security for the sum of money financed.
Under Austrian law, however, the lien to real property is only established with an entry being made into the Land Register.
For this reason, the pledging deed has to be drawn up in compliance with the requirements for deeds pursuant to the land register law. In particular, this means that the contracting party’s signatures must be attested by a notary public and that the pledgor has to make a declaration of consent called Aufsandungserklärung for the Land Register.
There is a right to secure the pledge in the case of insolvency. If several liens are entered, satisfaction of the pledgees is not in equal parts, and the assets will be allocated firstly to satisfy the claims of the pledgees of first priority. The remaining assets, if any, will be used to satisfy the claims of the pledgees of secondary priority and so on. The liens are entered into the Land Register according to the principle of priority, so that the pledgee entered into the Land Register at an earlier date enjoys priority over those entered later. The date of submission to the court is decisive.
20. Taxes and Costs - What are they and who pays them?
Generally, please refer to our CMS transaction costs guide as to the nature and amount of the taxes and costs.
With regard to taxation, the transfer of property is subject to real property acquisition tax amounting to 3.5 % of the purchase price. The real property acquisition tax is not normally levied in case of a share deal.
A further fee of 1% of the purchase price is charged for the entry of the right into the Land Register.
Pursuant to the Turnover Tax Law (UStG), sales of property are fictitiously exempted from the turnover tax. However, a buyer has the option of treating the transaction as subject to the tax payment. This is to be recommended if input tax charges are to remain deductible or if a correction of input tax charges already asserted is to be avoided. However, it needs to be noted that the turnover tax (20%) added increases both the purchase price and the real property acquisition tax.
During the due diligence for the acquisition, the buyer will also pay the costs of conducting searches, including in particular of the local authority (which includes zoning matters, building regulations and general municipal consents, notices, etc), and, if relevant, companies providing utilities, the local waterways boards, the Environment Agency, railway operators, and coal authority. The buyer will also pay for any valuations and surveys of the physical state of the property and for any environmental audits or desktop studies.
Occasionally, the negotiated heads of terms for a transaction will provide for one or other party to pay the other’s costs. Generally, each party pays its own expenses. If the property is leasehold, the seller is usually responsible for paying the costs of obtaining any consent required from any landlord in order to sell.
Finally, the buyer will be responsible for the payment of the Land Registry fees associated with registration of the transfer to the buyer.
Belgium
PART A - PARTIES AND INTERESTS
1. Parties - Who can own real estate?
Any legal person can own real estate.
As to legal capacity, Belgian law distinguishes between individuals, legal entities and foundations.
Legal entities may either be private law entities (such as non-profit making associations, commercial companies or organisations of economic interest), or public law entities (such as the State, communities, regions, public establishments or public autonomous companies).
Foundations are patrimonies allocated to one or several individuals or legal entities for altruistic purposes. They can be of public or private use.
Owners of real estate therefore include private developers, insurance companies, banks and other financial institutions, private or public companies, government and local authorities, etc.
There is no restriction on real estate ownership based on the citizenship of the owner.
2. Property - What property interests are currently sold?
In Belgian law, patrimonial rights are divided into two categories: real rights (rights in rem) and personal rights (rights in personam).
In property law, rights in personam essentially originate from the relationship between landlord and tenant pursuant to the lease agreement.
There are four types of property lease under Belgian law: the standard (civil) lease, the retail lease (often misleadingly called “commercial lease”), the residential lease and the agricultural lease. Business leases are governed by the rules applicable to standard (civil) leases.
In contrast to rights in personam, there are a limited number of rights in rem. Under Belgian law, the following are considered real rights:
  • Ownership
  • Usufruct
  • Rights of usage
  • Rights of residence
  • Emphyteotic lease
  • Right of superficies (also referred to as building right)
The most absolute right in rem is the right of ownership.
Real estate ownership entails all the rights and privileges afforded to the owner, which includes the right to use the property, the right to receive all revenues flowing from the property and the right to abuse the property (including its destruction), subject to restrictions imposed by any applicable laws and regulations and subject to sanctions arising pursuant to the rules of civil liability when the owner is either causing damage to others through his/her fault or, through no fault, is causing abnormal damage to neighbouring properties.
In addition, ownership of land includes ownership of the ground and of the subsoil, together with all the proceeds and income deriving therefrom.
Pursuant to the principle of accession, ownership of land automatically brings with it ownership of all that is erected on it. Accession is therefore a method of acquiring ownership whereby the owner of a principal asset becomes the owner of all that is incorporated therein.
According to this principle, the owner of a plot of land automatically becomes the owner of any construction erected on the land, regardless of the identity of the person who erected the building and/or the ownership of the building materials, unless otherwise agreed with that person. It is possible for the owner to waive its right of accession. Such waiver results in the builder becoming owner of the building and is generally construed as giving rise to a right of superficies or an emphyteotic right (long lease) which, by law, are limited to 50 years (superficies) or 99 years (emphyteotic).
Rights in rem (other than the right of ownership) over property are from time to time created to grant a right of use over property. Usufruct, emphyteotic lease and the right of superficies are all examples of this. For the “lessee” they usually offer more stability than a mere lease. For the “lessor” they usually guarantee income over a long period of time.
Moreover, in certain circumstances, the acquisition of rights in rem can be considered as an alternative to a purchase. Rights in rem are usually granted for a very long period (up to 99 years), and procure extensive rights for their holder.
Transactions having the effect of transferring title to a real estate property or of creating a right in rem encumbering such a property may be recorded at the Mortgage Registrar Office. Such registration is required in order to have a title good against all third parties, who may take precedence in the absence of registration (see section 12).
3. Ownership - What types of ownership are there?
Ownership is either private or public, depending upon the whether the person with title to the property is a legal person under private law or a legal entity in public law (State, regions, communities, provinces, municipalities, etc.).
Private ownership can also be either individual or plural, according to whether the legal person with title is an individual or a group of individuals, e.g. co-ownership. Co-ownership describes the situation where two or more people each have a portion of legal ownership of the same thing. The co-owner can encumber its portion of the rights in rem (e.g. mortgage).
The Belgian law of 30 June 1994 governs the regime for enforced co-ownership, in particular the enforced co-ownership of buildings such as apartment blocks.
It is to be noted that Belgian law draws a distinction between ownership and possession. Possession is where a person behaves as the owner of the thing regardless of the question of whether the possessor is the owner or not. Belgian law, in the field of real estate, offers protection to a person in possession, granting him possessory actions permitting him to defend himself quickly, at little cost, against each person interfering with his possession.
A person in possession for a certain period can, subject to compliance with certain conditions, become the owner. This mechanism is known as adverse possession. In this regard, article 2262 of the Civil Code stipulates that a real property is “adversely possessed” after 30 years, meaning that the ownership of a property will only be acquired by adverse possession after 30 years have elapsed.
4. Matters burdening or benefiting real estate - What matters can affect real estate?
Common matters affecting real estate include:
MatterEffectExampleEasements Charge imposed over property for the benefit of other property The owner of the servient tenement, under an obligation to bear the easement, cannot do anything that seeks to reduce its usage or render it less convenient. Thus, it cannot change its location, nor can it move the easement from its original locationRights of passage, servitude providing right of support from an adjoining building, servitude not to buildAdverse possession Mechanism conferring a right in rem to those exercising it for an uninterrupted period without any action on the part of the title holderA right of ownership exercised for more than 30 yearsMortgageSecurity over an immovable property permitting the mortgagee to be repaid the sale price of the encumbered property, regardless of whose hands it is in, over and above the other creditors The mortgage permits the mortgagor to use, enjoy and even freely dispose of the property. In doing so, however, it cannot interfere with the security to which it has consented Financing the purchase of a property is usually secured by a mortgage granted over a property. It is required that the mortgagor owns the property for it to mortgage it, but the owner of the land may grant a mortgage over buildings in the course of being erected or which could be erected on the land in the futureMortgage mandateUsed in order to avoid the payment of taxes and fees. A mortgage mandate does not give any security to the creditor; it is merely a tool for the creditor which enables it, where necessary, to enter into an effective mortgage before a notaryContractual rightsContractual rights for a determined period exercisable by one party over the property of anotherOption agreement or right of pre-emption
Matter
Effect
Example
Easements
Charge imposed over property for the benefit of other property

The owner of the servient tenement, under an obligation to bear the easement, cannot do anything that seeks to reduce its usage or render it less convenient. Thus, it cannot change its location, nor can it move the easement from its original location
Rights of passage, servitude providing right of support from an adjoining building, servitude not to build
Adverse possession
Mechanism conferring a right in rem to those exercising it for an uninterrupted period without any action on the part of the title holder
A right of ownership exercised for more than 30 years
Mortgage
Security over an immovable property permitting the mortgagee to be repaid the sale price of the encumbered property, regardless of whose hands it is in, over and above the other creditors

The mortgage permits the mortgagor to use, enjoy and even freely dispose of the property. In doing so, however, it cannot interfere with the security to which it has consented

Financing the purchase of a property is usually secured by a mortgage granted over a property. It is required that the mortgagor owns the property for it to mortgage it, but the owner of the land may grant a mortgage over buildings in the course of being erected or which could be erected on the land in the future
Mortgage mandate
Used in order to avoid the payment of taxes and fees. A mortgage mandate does not give any security to the creditor; it is merely a tool for the creditor which enables it, where necessary, to enter into an effective mortgage before a notary
Contractual rights
Contractual rights for a determined period exercisable by one party over the property of another
Option agreement or right of pre-emption
5. Occupation of real estate - Who may occupy real estate?
Real estate is usually occupied by the following categories of person:
  • Owners
  • Title holders of rights in rem (other than the right of ownership). As outlined in section 2, besides the right of ownership, several rights in rem exist in Belgian law by virtue of which real estate may be occupied : e.g. the usufruct, right of usage, right of residence, the emphyteotic lease and the right of superficies
  • Tenants and sub-tenants. As regards standard leases, in the absence of any provision to the contrary the tenant is free to sublet the lease to other parties; it is for this reason that landlords frequently require that a lease prohibits sub-letting. Specific rules in relation to sub-letting also apply to residential leases
  • Contracting parties. A contractual right of occupation may be given by one party to another, not exceeding the extent of the rights enjoyed by the grantor
6. Brokers - What is the broker’s role?
The role of the broker is, most frequently, to put at the client’s disposal its methods of advertising, its contacts and business experience with a view to entering discussions with candidates for the completion of the envisaged property transaction, be it a sale or a lease.
Its initial role, therefore, is to search for and put into contact candidates for contracts relating to immovable property.
This basic role can, however, be extended to include other services such as participation in the negotiations, drafting the contract, obtaining funds/credit, etc
7. Employees - What employment issues affect real estate acquisitions?
Employment issues are not common in relation to the acquisition of real estate. Those which may be relevant to real estate transactions typically concern the transfer of undertakings and redundancies.
Transfer of undertakings – TUPE
TUPE is likely to have significant consequences on employment issues. TUPE applies when there is a change of employer. There is no change of employer when the operation only consists in the change of shareholder. It may apply when there is the sale or transfer of a business or, for example, the outsourcing of the management of a property to a third party. This might occur in the sale of a shopping centre having its own management and security staff. The broad effects of TUPE are that:
  • the employment contracts are automatically transferred from the transferor to the transferee
  • the working conditions (seniority, salary, responsibilities, working time, etc.) and collective bargaining agreements (working hours, thirteenth month, salary, etc.) existing with the transferor have to be maintained, except in principle for the old-age, invalidity and pension benefits payable under schemes supplementing the official social security system
  • transferor and transferee are in principle jointly liable for the debts resulting from the employment contracts existing at the time of the transfer
  • dismissal for a reason connected to the transfer is automatically unlawful - unless for an “economic, technical or organisational reason entailing changes in the workforce”
  • employees’ representatives must be informed and consulted about the transfer prior to the transfer (if there are no employees representatives, the employees concerned by the transfer will have to be informed)
Although the legal effects of TUPE cannot be avoided, it is possible to apportion TUPE liabilities by agreement between the transferor and the transferee. Normally the transferor will agree to be responsible for all claims and liabilities relating to employees up to the date of transfer, and the transferee will take on all post-transfer employment liabilities. Such an agreement concluded between the transferor and transferee has no effect as against third parties.
Redundancies
Redundancies may arise on the closure of a business or part of a business or where there is a reduction in the number of employees required, for example on the merger of two businesses or a TUPE transfer. Care should be taken to ensure that the redundancies are carried out according to a strict procedure which entails consultation with the employees or their representatives before any decision is taken.
PART B - PROCEDURE AND TERMS
8. Procedure - What are the steps in a sale and purchase transaction?
The direct acquisition of a property is made by the seller and the buyer entering into a contract of sale. The contract of sale is concluded when there is an agreement between them on the property being sold and on the price.
The contract of sale is documented in writing. This written contract may be drafted privately, i.e. without the intervention of a public notary. It is then commonly called a compromis de vente/verkoopscompromis.
The compromis de vente/verkoopscompromis is only enforceable between the seller and the buyer.
For the purpose of making the transfer of title enforceable against third parties, the sale must be recorded on the land register maintained by the Mortgage Registrar (see section 12). This formality is called the transcription/overschrijving.
For the purpose of recording the sale in the land register, the seller and the purchaser must normally sign a notarial deed with a public notary.
The public notary takes care of recording the deed with the Mortgage Registrar.
In practice, the compromis de vente/verkoopscompromis is signed in a first phase. The signature of the notarial deed takes place in a second phase, not exceeding four months. The transfer tax (see section 20) is due prior to recording the deed with the Mortgage Registrar and no later than four months after the signature of the compromis de vente/verkoopscompromis.
The public notary must notify the tax authorities of the sale transaction at least 12 business days prior to the execution of the notarial deed. If taxes are due by the seller, they will be deducted by the notary public from the purchase price.
Certain formalities, which may include an environmental survey and/or the delivery of information in respect the energy performance of the building, must be carried out in order to validly complete the sale of the property.
9. Other common contract terms - What other provisions does a real estate sale contract commonly contain?
A contract of sale, as mentioned in section 8, is at the outset an agreement between the seller and the buyer, and is called a compromis de vente/verkoopscompromis.
This contract is made in writing and contains agreement on the property sold and on the price.
By the signature of the compromis de vente/verkoopscompromis, the sale is perfected between the seller and the buyer. It is definitive. The seller is under the obligation to transfer the property to the buyer and the buyer must pay the price to the seller. The agreement must provide for the timing and means of transfer. Normally, the transfer takes place at the signing of the notarial deed.
The parties can, however, postpone the definitive character of the compromis de vente/verkoopscompromis and defer its effects by way of conditions precedent.
A real estate sale agreement commonly contains, whatever the nature of the property sold, provisions concerning the identification of the parties and the property being sold and the state of the property. Since the buyer buys the property in its current condition at the moment of the transfer of title and such transfer is usually deferred until the signature of the notarial deed, if damage occurs between the compromis de vente/verkoopscompromis and the signature of the notarial deed, the seller will have to make reparations. The parties do, however, have the ability to provide for other arrangements.
Every easement on the property being sold and known by the seller or which appears on the title deeds of the property will be mentioned in the agreement.
As the price is an essential element of the contract of sale, it has to be established with a certain degree of certainty. In the majority of the cases, the price will be paid on the day of execution of the notarial deed. A deposit, normally 10% of the total sale price, is usually paid on signature of the compromis de vente/verkoopscompromis.
The compromis de vente/verkoopscompromis and the notarial deed usually contain a clause discharging the seller of all its obligations due to any hidden flaws (but only those the seller was not aware at that time).
It is usual for the seller to declare that the property is insured against fire and other connected risks until the notarial deed is signed. By law, this cover extends for a period of 3 months following the sale.
The agreement contains a discharge for the property concerning charges and mortgages and the notary will carry out the necessary steps to that effect.
In Belgium, the town planning legislation is very strict in some areas. The contract of sale will provide for some general clauses concerning the conformity of the property sold with this legislation. Similarly, the contract for sale will also contain clauses dealing with conformity with environmental legislation.
10. Due Diligence - What investigations does the buyer normally make?
Before signing the compromis de vente/verkoopscompromis
The prudent buyer is likely to commission a survey of the building and in appropriate cases, soil and geological investigations, plant and machinery tests, and environmental investigations.
In the context of the pre-acquisition due diligence, the buyer’s lawyers will investigate the title to the property. The buyer’s lawyers will consider the entries in the land register maintained by the Mortgage Registrar and all relevant historic title documents.
In practice, the buyer’s lawyers will order a mortgage certificate from the Mortgage Registrar. The certificate will confirm whether or not the title is registered. Additional details of all other registered interests of the seller need also to be obtained from the Mortgage Registrar.
Where the property is leasehold, or subject to leasehold or other occupational interests, the terms of the relevant occupational documents need to be considered carefully to ensure they are not contrary to the buyer’s intentions for the property. The buyer’s lawyers will also need to check whether these documents require the consent of any third party to be given to the transaction.
The buyer’s lawyers will also conduct various searches to check the position regarding municipal and zoning consents, environmental matters, easements, works carried out, etc. Where the seller is a company and the sale relates to its business or activities, the buyer’s lawyers will also conduct searches regarding all properties owned or occupied by the company in relation to its business or activities. A search will also be done to ascertain whether the company is solvent and may dispose of its assets freely.
The buyer’s lawyers will then raise any particular matter of concern with the seller.
The seller generally gives replies, which may be actionable if wrong or misleading.
Reporting to the client
Before the execution of the agreement the buyer’s lawyers usually report their due diligence findings to their client, raising any matter of particular importance or concern. This may lead to the negotiation of specific indemnity clauses.
Pre-completion
Before completion (normally on the execution of the notarial deed), the buyer’s lawyers will usually ask the seller to divulge any further information that has arisen since the signature of the compromis de vente/verkoopscompromis..
11. Terms implied by law - What provisions are implied by Statute, Code or otherwise?
The Civil Code provides for two guarantees : a guarantee in respect of hidden defects affecting the property and a guarantee in respect of the title to the property.
The guarantee in respect of hidden defects is generally waived by the buyer. Such waiver does not, however, cover defects of which the seller was aware at the time of the sale.
12. Registration and Notarisation of real estate - What are the basic requirements?
In Belgium, the land register is maintained by the Mortgage Registrar (Bureau de la Conservation des Hypothèques/Kantoor van Bewaring der Hypotheken).
Belgium has a Mortgage Registrar for each judicial district.
Registration of title with the Mortgage Registrar is required in order to have enforceable title vis-à-vis third parties who are entitled to rely on the absence of public registration in the register. Only persons legally succeeding to the owner and persons acting mala fides are deemed to have knowledge relating to the title of the owner even if the transaction relating to the transfer of title has not been recorded with the Mortgage Registrar.
Transactions having the effect of transferring title to a property, or of creating a right in rem encumbering such a property, such as a right of superficies, may be recorded with the Mortgage Registrar but only if they occur pursuant to a contract between living persons. Transfer of title occurring following the death of a person or pursuant to the law (such as by way of accession) may not be recorded with the Mortgage Registrar.
Recording the relevant transactions must occur as soon as possible in order to render the transfer of title enforceable vis-à-vis third parties.
The costs of registration consist of the notarial fees and the fees of the Mortgage Registrar. These fees are fixed by royal decree and depend on the type of transaction and the amount involved. They are usually based on a scale or on a percentage of the amount involved in the transaction.
13. Disputes - How are they dealt with and resolved?
The ordinary method to resolve any disputes between contracting parties is through the courts, although methods of dispute resolution could also include arbitration, mediation or conciliation.
The choice should be stated expressly in the contract.
PART C - PERMITS, INSURANCE AND ENVIRONMENT
14. Permits - What permits are required for the use and occupation of real estate and are they personal?
Planning/Zoning permit
In general, a building permit will be required for the construction of a new property or for the re-building (i.e. refurbishment or amendment of an existing use) of an existing building.
The Flemish, Brussels and Walloon Regions are mainly responsible for developing and setting up the town planning policy. In each Region, the municipal authorities (Collège des bourgmestres et échevins/College van Burgemeester en Schepenen or Council of the Mayor and his Aides) are competent to deliver the building permits.
When deciding on the issue of a building permit, the municipal authorities will first examine whether the intended construction or re-construction complies with the applicable zoning plans, if any, which have been adopted at the regional and/or municipal levels. The municipal authorities will also consider the general interest of the public and the interest of the so-called good town planning.
Moreover, for most of the building projects, a prior evaluation of the building project’s effect on the environment is to be provided by the permit applicant at the time of application. For specific projects, a study of such effects must be performed by agreed bodies and will give rise to a public inquiry.
If the building permit application requires derogation from an applicable zoning plan or if no zoning plan applies to the construction in question, the delivery of the building permit will be subject to the prior advice of the so-called public officer (fonctionnaire-délégué/gemachtigd ambtenaar).
After completion of construction, the competent authority will verify whether construction was made in accordance with the provisions of the permit granted.
A different type of specific permit is required for construction works related to historically or architecturally important buildings or landscapes. In execution of the (old) law of 7 August 1931 on the protection of monuments and landscapes, the Flemish, Brussels and Walloon Regions have adopted Decrees which set up an inventory of such protected monuments or landscapes in the property of each Region.
Socio-economic permit
In addition to a building permit, the Act of 13 August 2004 on Commercial Exploitations provides that projects relating to commercial developments of certain sizes are subject to the issue of an authorisation from the competent municipal authority.
Environmental permit
In relation to environmental issues, the municipal authorities are responsible for issuing low level environmental permits.
High level environmental permits have to be issued by the provincial authorities or, in the Brussels region, by a special body: the Brussels Institute for Environmental Management (IBGE/BIM).
In the Flemish Region, environmental permits are governed by the Decree of 28 June 1985 regarding environmental permits (“Environmental Permit Decree”). The Environmental Permit Decree has introduced a comprehensive environmental permitting system for listed facilities in this region. The Environmental Permit Decree was implemented by the Flemish governmental Decree of 6 February 1991 (commonly referred to as VLAREM I). The Environmental Permit Decree applies to so-called installations and/or activities which are considered to be harmful to human beings or the environment.  The Decree distinguishes between three classes of installations: Class 1 and 2 installations require a prior environmental permit whilst Class 3 installations only need to be notified to the municipal executive board. An application must be filed with the municipal executive board (Class 1 installations) or the provincial executive board (Class 2 installations). The holder of the permit granted under the Environmental Permit Decree must comply with any applicable environmental regulations, such as, but not limited to, those contained in the Flemish governmental Decree of 1 June 1995 (commonly referred to as VLAREM II).
In the Brussels Region, environmental permits are governed by the Regional Act of 5 June 1997 on environmental Permits (BRAEP). The BRAEP introduces a comprehensive environmental permitting system for listed facilities in the Brussels region. The BRAEP applies to installations and/or activities that are deemed to be harmful to human beings or the environment. Listed installations are classified into four categories: class IA, class IB, class II and class III. Class IA and class IB installations require a prior environmental permit to be obtained from the Brussels Institute for Environmental Management (IBGE/BIM). Class II installations require a permit from the municipal executive board. Class III installations need only to be notified to the municipal executive board. The holder of the permit granted under the BRAEP must comply with any applicable environmental regulations.
In the Walloon Region, environmental permits are governed by the Regional Act of 11 March 1999 on Environmental Permits (WRAEP). The WRAEP has introduced a comprehensive environmental permitting system for listed facilities in this region. The WRAEP was implemented by the Walloon governmental decrees of 4 July 2002. The WRAEP applies to so-called installations and/or activities that are considered to be harmful to human beings or the environment. The WRAEP distinguishes between three classes of installations: Class 1 and 2 installations require a prior environmental permit whilst Class 3 installations need only to be notified to the municipal executive board. An application must be filed with the municipal executive board (Class 1 and 2 installations). The holder of the permit granted under the WRAEP must comply with any applicable environmental regulations.
It is to be pointed out that environmental permits related to risk activities are issued in compliance with the IPPC regulation.
In the three Regions, the building permit will only become effective once an environmental permit has been obtained and vice versa
15. Insurance and Risk - What insurance will the parties effect and when does the insurance risk pass at the time of sale?
The owner of a property will in most cases be responsible for the insurance of the property prior to a contemplated sale.
However, where the property is subjected to a lease, the terms of the lease will determine which party has the responsibility to insure the property. Often, commercial or residential lease agreements provide that the tenant is held liable for insuring the content of the leased property, whereas the lessor remains responsible for the outside of the building and for construction-related damage.
With regard to buildings which are under construction, it is important that parties arrange clearly for the changeover of the insurance responsibility from the constructor to the buyer. During the construction of the property, the contractor (unless the parties agree otherwise) remains liable for all risks related to and damages caused by or in the process of construction. As from the delivery of the buildings to the buyer (or tenant), the construction policy will no longer apply and the buyer (or tenant) will need to take out other insurance.
Insurance policies are contracts intuitu personae, implying that their conclusion and existence depend on the personal qualities or capacities of the contracting party. Insurance policies are therefore not transferable on the sale of a real estate property. In larger real estate transactions it is often contractually provided that the seller of the property undertakes, during a certain time after the closing of the sale, to maintain and hold the insurance policies applicable to the property. This allows the buyer some time to arrange for the required insurance transition.
16. Environmental - What are the common environmental issues?
Note: Besides soil contamination, the presence of all required and valid environmental permits/socio-economic permits (see section 14) is also an important issue in real estate transactions.
Soil contamination
Following the Flemish Soil Decree of 27 October 2006 (replacing an earlier decree), every owner of land located on Flemish territory must, prior to any transfer of land, request a soil certificate from the Flemish Waste Administration (OVAM) and inform the prospective acquirer of the land about the content of this certificate. The content of said soil certificate must also be copied into the private and notarial transfer deed.
“Transfer” is broadly defined in the Decree. It includes the transfer of ownership as such, the establishment of any rights in rem on land, and mergers, etc. Share transactions do not, however, qualify as a transfer under the legislation. Transfers of properties that fall under the regime of co-ownership are also excluded.
Failure of the owner to comply with the obligation set out above carries fines. Moreover, the purchaser and/or OVAM may nullify the transaction.
The soil certificate does not constitute a guarantee that there is no pollution on the transferred land. It only reflects the data available in OVAM’s registers of contaminated land as to the state of contamination of the land.
In the Brussels Region, a Decree on soil pollution was adopted on 5 March 2009 (replacing an earlier decree). The Decree has entered into force on 1th January 2010. The procedural rules provided by this Decree in respect of property transfers do not substantially differ from those of the Flemish Decree of 27 October 2006. The Decree provides for the creation of an inventory of contaminated soils and soils where there is a strong presumption of pollution. In this inventory, the name of the owner is recorded. To delete the polluted character of a site, remediation may be needed at the cost of the seller. This inventory is public and constitutes a source of information for a prospective buyer.
In the Walloon Region, a Decree on soil pollution was adopted on 5 December 2008 (also replacing an earlier decree). The Decree has entered into force on 16 June 2009, with the exception of its provisions on transfers of properties which will into force at a later date (to be determined by the government).
PART D - FINANCE AND TAXES
17. Pricing/Valuation - What sets the price/valuation of real estate?
The price must be certain, be it determined or determinable (specified by the square metre or according to expert opinion.) Furthermore, the price must be real, i.e. not simply nominal. It may be that a nominal price is an attempt to disguise a gift. A gift will be upheld at law.
The determination of the price cannot turn on the will of one of the parties or upon the conclusion of an agreement post-sale.
Pursuant to article 1591 of the Civil Code, the price is, in principle, fixed by the parties.
Article 1592, however, envisages that the price can be determined by a third party expert. The third party may play either an ancillary or a principal role. In the former case, the parties decide on the basic sum, and the exact price is calculated by an expert. The contract governs the actions of the expert. Alternatively, the determination of the price could be left to the discretion of the expert, through an express clause in the contract. In these circumstances, the sale will only be complete and the property transferred once the expert has fixed the price.
The choice of expert can be agreed upon after the sale in some cases (see below). Should the parties be unable to reach agreement, the judge can only intervene to replace the expert where this is provided for in the contract. If the parties cannot agree on an expert, the sale will be void. If one of the parties refuses to choose the expert, the other party cannot force him to participate, the sale will be void, but damages can be claimed from the unco-operative party.
When the parties decide that an expert will set the price but do not appoint an expert, for the price to be determinable, they must have agreed upon the criteria to be taken into consideration when making the valuation. Where the expert has been appointed, this appointment is in itself sufficient to render the price determinable.
18. Financing - How is a real estate acquisition financed?
Financing the purchase of a property is usually achieved by the following means:
Mortgage
A mortgage can be granted over a property to raise specific finance. The mortgagor must own the property for it to mortgage the same but the owner of the land may grant a mortgage over buildings in the course of being erected or which may be erected in the future on the land.
Mortgaging a property triggers the payment of the certain taxes, namely a registration tax of 1% of the debt secured and a mortgage tax of 0.3% of the debt secured . Various fees must also be met, notably public notary fees and the fees of the Mortgage Registrar.
Mortgage Mandate – Conversion into a mortgage
Due to the fact that recording a mortgage triggers the payment of taxes and fees, the practice of using a mortgage mandate, instead of an effective mortgage, has developed in Belgium. This practice is appropriate when an assessment of the credit risk of the debtor indicates that it would be unlikely that the creditor would have to resort to the enforcement of the mortgage for reimbursement of the debt. This is due to the fact that a mortgage mandate does not constitute security; it is merely a tool for the creditor, enabling it, where necessary, to enter into an effective mortgage before a notary and to perfect the mortgage through filing the summary statement with the Mortgage Registrar.
The main reason why mortgage mandates are used rather than a mere undertaking from the debtor to grant a mortgage is that it is generally considered that the debtor’s undertaking to grant a mortgage cannot be enforced in court to obtain a mortgage.
The main peculiarities of a mortgage mandate are that:
  • it is preferable that the mortgage mandate be conferred by the debtor to persons or entities which are not the creditor itself
  • as long as the mortgage mandate has not been converted into an effective mortgage recorded with the Mortgage Registrar, there is no effective mortgage, hence the creditor has no security on the property
  • it follows that the creditor can lose all protection if prior to the execution and recording of the mortgage:
    • the debtor sells the property
    • another creditor seizes the property
    • a mortgage is recorded on the property to secure debts owed to another creditor
    • the debtor is declared bankrupt or enters into liquidation
  • if the mortgage is executed and recorded prior to the declaration of bankruptcy but during what is known as a suspect period preceding such declaration, the mortgage will be set aside to the extent that it secures debts outstanding at that time (which is highly likely to be the case)
  • the mortgage mandate must contain a clear description of the property to be mortgaged and of the debts to be secured and should describe the terms and provisions which would need to be set out in the mortgage deed to the extent that they would be unusual.
The mortgage mandate requires therefore an appropriate level of comfort and trust with respect to the debtor and a constant monitoring of the debtor’s financial situation so as to act in a timely manner to convert the mortgage mandate into an effective mortgage.
The mortgage mandate cannot be assigned by the proxy holder to another person without the consent of the person who granted the mortgage, unless the contrary is specifically provided for in the mortgage mandate.
In order to transfer the benefit of the mortgage mandate to the purchaser of the portfolio, the purchaser needs the consent of the principal who gave the mandate.
It should be noted that a mortgage mandate, like any other mandate, is automatically terminated in the case of bankruptcy or insolvency of the proxy holder.
Private funds
Some individuals and businesses will have sufficient cash resources and banking facilities to acquire real estate.
19. Security over real estate - How is security over real estate created and protected?
Mortgage
A mortgage is created by a contract between the mortgagor and the mortgagee executed as a deed before a public notary. The contract must identify, in detail, the property over which the mortgage is granted and its owner, the creditor, the debt and the maximum amount secured by the mortgage. The mortgage can secure a specific debt or all debts which exist or may arise in the future between the mortgagor and the mortgagee, provided the debts are determined or determinable at the time the mortgage is created.
The mortgage only becomes effective and enforceable as against third parties from the date of the submission of a summary statement (bordereau d’inscription/borderel van inschrijving) to the Mortgage Registrar, by the notary who executed the notarial deed of mortgage. Upon registration, the mortgage is enforceable vis-à-vis third parties. If the mortgage is void, it remains void regardless of its registration and if the registration is void, the validity of the mortgage is unaffected. The mortgage is valid for 30 years from the date of recording unless renewed in the meantime.
The public do not have direct access to the Mortgage Registrar’s register. Anyone seeking information on the charges to which a property is subject are obliged to send a written request to the Mortgage Registrar, who will in return deliver the relevant part of the register (charges register/état de charges).
No third party consent is required to create a mortgage unless title to the property states that the consent of a specified third party is needed.
Tax authorities must be notified by the public notary at least 12 business days prior to the execution of the deed creating the mortgage.
Mortgages attract a registration duty of 1% of the debt secured and a mortgage duty of 0.3% of the debt secured.
Seller’s lien
Another form of security is the registration of a seller’s lien over the property. The lien secures the payment of the purchase price and can be perfected through recording the notarial deed of sale with the Mortgage Registrar and mentioning that the price has not been (fully) paid. The Mortgage Registrar will automatically enter the lien in the register unless this right has been expressly waived in the notarial deed of sale. The seller’s lien will then take preference over the mortgage granted by the buyer.
Mortgage Mandate
A mortgage mandate is a potential form of security but is not, in itself, a form of security for the creditor (see section 18). A mortgage mandate is instead a means of enabling the creditor, where necessary, to enter into an effective mortgage before a notary and to perfect the mortgage through filing the summary statement with the Mortgage Registrar. Mortgage mandates do not attract a registration duty and consequently are often combined with mortgages as a way to reduce tax.
20. Taxes and Costs - What are they and who pays them?
Generally, please refer to our CMS transaction costs guide as to the nature and amount of taxes and costs.
Transfer tax
The transfer or exchange of real estate located in Belgium is as a rule subject to a 12.5% or 10% (depending upon whether the property is located in Brussels/Wallonia or Flanders) transfer tax (droit d’enregistrement/registratierecht) calculated on the higher of the sale price and the market value of the property. The market value of a property is defined as the selling price that could be obtained in the open market from a potential purchaser fully aware of all the circumstances. The transfer tax is normally payable by the buyer unless otherwise agreed between the parties.
Reduced rates are applicable in some cases. For example, the transfer tax rate is reduced to 5% when the buyer is a property dealer whose business activities involve the buying and selling of properties, provided that the property is resold within 10 years from the date of purchase. In order to benefit from the property dealer status, the buyer will have to provide a guarantee to the tax authorities. In order to maintain such status, the dealer has to sell a number of properties within the 5 years following the acquisition of the status.
Where the selling price is proven to be lower than the market value, the tax authorities are empowered to impose a penalty on the purchaser and on the seller equal to the amount of the tax evaded.
The transfer tax can be partially recovered when a property is resold within 2 years of its acquisition in certain circumstances.
VAT
The transfer of buildings is, under certain conditions, subject to value added tax (VAT) at a rate of 21%. In such a case, no transfer tax will be due, except on that part of the purchase price relating to the land. According to recently enacted legislation (30 December 2009), as from 1st January 2011, the transfer of land taking place together with a “new” building will, under certain conditions, be subject to VAT and exempt from transfer tax.
The VAT regime applies to sales of buildings where (i) the seller is either a real estate contractor or has opted to sell the building with VAT and (ii) the building is “new” within the meaning of the VAT legislation. A building is considered new for VAT purposes until December 31 of the year following the year in which the real estate tax was levied for the first time. The real estate tax is normally levied for the first time during the year following the year in which the building has been used for the first time. Accordingly, a building is as a rule new for VAT purposes for a period of 2 to 3 years following its first occupation.
If the acquisition is made under the VAT regime, the purchaser will be entitled to deduct in whole or in part the input VAT insofar as it uses the building for economic activities that are subject to VAT.
According to the Belgian VAT Code, the supply of immovable property (other than “new” as defined above) and the letting thereof are VAT-exempt transactions. If buildings that have been constructed or have been acquired with VAT are rented (which is an activity exempt from VAT under Belgian VAT legislation), the VAT paid will not be recoverable. If a real estate finance leasing agreement which meets the conditions of Royal Decree n°30 is entered into for a newly constructed building, such leasing will be subject to VAT and therefore the input VAT on the buildings will be recoverable.
Income tax and real estate withholding tax
For income tax purposes, a deemed income (the so-called revenu cadastral / kadastraal inkomst) is calculated for all properties located in Belgium. This income is determined by assessing the “normal” net annual rental income of the property, or of the equipment which is regarded as immovable property.
Based on this deemed income, a real estate withholding tax (précompte immobilier/onroerende voorheffing) is levied each year by way of assessment against the owner, emphyteotic lessee or the holder of a right of usufruct. The rate varies depending on where the property is situated. The aggregate real estate withholding tax often amounts to about one third of the deemed income.
The real estate withholding tax is always assessed in the hands of the person who owns the property, or of the holder of a right in rem thereover, on 1 January of the year in question. If the property is transferred after that date, the purchaser will not have to bear that charge for the first year, unless otherwise agreed between the parties.
The Belgian real estate withholding tax is to be considered as a once-and-for-all tax, as it will not be refunded and cannot be credited against corporate tax. It is, however, deductible from a company’s taxable income as a business expense.
Corporate income tax
A real estate company is subject to normal corporate income tax at the current rate of 33,99%. The taxable income is determined on the basis of the company’s annual accounts subject to certain tax adjustments, such as the disallowance of certain expenses and the taxation of certain provisions for future charges or for bad debts.
The company’s net income will therefore be calculated by deducting from the income the expenses connected with the property, such as depreciation of buildings, repairs, maintenance, renovation and similar costs, interest on loans taken out to finance the acquisition of real estate, real estate withholding tax, etc. Office buildings may be depreciated at the rate of 3% and industrial buildings at the rate of 5%. Depreciation of land is in principle not possible. The transfer tax or the non-recoverable part of input VAT on a property acquired can either be deducted in the year of acquisition or can be depreciated over the depreciation period of the building or over a shorter period of time (e.g. 3 or 5 years).
Foreign companies may be subject to a special withholding tax on the sale of Belgian properties. This withholding tax, which constitutes a pre-payment that may be offset against the final corporate tax bill, is collected by the civil law notary when the deed is signed. This special withholding tax (33.99 %) is calculated on the amount of the capital gain realised by the foreign company, without any deduction of losses carried forward.
Fees
All costs associated with the sale of a property are met by the purchaser on the date the notarial deed of sale is signed.
The main costs include the transfer tax, VAT, and the fees of the Mortgage Registrar and the notary.
England and Wales
PART A - PARTIES AND INTERESTS
1. Parties - Who can own real estate?
Any legal “person” may own real estate. This will include individuals, companies, entities established by statute and certain charitable bodies.
Bodies which are not legal persons, such as unincorporated associations or partnerships cannot own real estate directly. However, legal persons acting as trustees can own real estate on behalf of such bodies; as a rule of law, a maximum of four trustees can own any particular interest in real estate at any one time.
Owners of commercial real estate include private developers, insurance companies, pension funds, banks and other financial institutions, private or public property companies, charities, trusts, the government and local authorities.
There are no restrictions preventing foreign nationals or companies from owning real estate.
2. Property - What property interests are currently sold?
Property in England and Wales is classed as either freehold or leasehold. Freehold is the best class of title and is as near to absolute ownership as is possible at law. There are no restrictions in England and Wales on how long leases can be. Freehold or leasehold title will be acquired depending on the circumstances of the acquisition transaction.
Freehold is a real right (a right in rem.). Technically, a leasehold is a personal right (right in personam) though in practice leasehold has many of the attributes of freehold. Legislation has recently been passed for the creation of a derivative freehold estate known as commonhold, which will also create a real right, similar to the North American condominium interest. Title to freehold land and most leases must be registered at the Land Registry on completion of a purchase.
The most common lengths of institutionally acceptable leases tend to be 10, 15 or 25 year terms and provide for the payment of a market rent. They are called institutional leases, FRI leases or rack rent leases. Long leasehold interests tend to be for 99, 125, 150 or 999 year terms; such leases are normally granted on payment of a premium with only low or nominal rents payable.
Property interests which exist in England and Wales include:
  • Freehold interests - the best type of ownership and now expanded to incorporate commonhold
  • Leases
  • Licences – contractual arrangements not creating any estate in land
  • Options and pre-emptions – rights to buy or first refusal
  • Easements – such as rights of way or for the use of services
  • Wayleaves – contractual rights to use land for limited purposes such as to site telecommunications equipment
Unless the property is to be sold “as seen” the parties must make it clear whether the fixtures and fittings at the property are to be removed prior to the sale or are to form part of the purchase. If items are fixed to the property, the presumption is that they form part of it and belong to the freehold owner of the property.
Ownership extends to buildings on or beneath the land and the airspace above it, unless interests are described horizontally rather than vertically. Reference to “land” generally includes the buildings and structures on that land – similarly “property” includes both land and buildings unless limitations are created.
3. Ownership - What types of ownership are there?
Legal ownership of property in England and Wales is classed as either freehold (including commonhold) or leasehold.
Normally title to either interest will be registered at the Land Registry which confers three different classes of title:
  • Title Absolute - this is the best quality ownership and can apply to freehold and leasehold interests
  • Good Leasehold title – this is granted where a lease is registered without the underlying freehold title being presented to the Land Registry
  • Possessory title - this occurs where there is no paper evidence of title, but the Land Registry recognise that a person by virtue of occupation for the relevant period prescribed by statute has the best claim of which they are aware
All land in the UK is ultimately owned by the Crown and passes back to the Crown if there is no owner. For example, where being a company is wound up without its land being transferred to a third party, the land will automatically pass to the Crown as bona vacantia (vacated property).
Land may also be held on trust by a legal owner for a beneficiary. Also, where more than one person has ownership they will hold their interests in one of two ways:
  • Tenants in common – where their respective interests are distinct without the right of survivorship enjoyed by joint tenants
  • Joint tenants – where if a person dies his interest will pass automatically to the survivors – this is known as the right of survivorship. Such trusts are generally used for domestic purposes where a dwelling is owned jointly
It is also possible to acquire rights over land (such as a right of way) by exercising the right for a relevant period, normally twenty years.
4. Matters burdening or benefiting real estate - What matters can affect real estate?
Common matters affecting real estate include:
MatterEffectExampleEasementsRights which burden one piece of land and benefit another. They are not personal but attach to the land itself. They do not permit the owner of the benefited land to remove anything from the burdened landA right of way; a right to deposit rubbish; a right to light; a right to use pipes and cablesCovenants Express or implied promises which can be positive or restrictive. Positive covenants are personal and may not burden the land after the person who gives the covenant no longer owns the property. Restrictive covenants “continue to run with the land” and burden that land after a change in ownershipPositive: a covenant to repair a fence. Restrictive: a covenant not to use the land for a particular purposeWayleavesContractual rights for a temporary period or temporary purpose, exercisable by one party over the land of another, normally given to companies supplying utility servicesA right to run a telephone or electricity cable or erect telecommunications equipmentOverriding interestsSpecial limited categories of rights, powers and encumbrances in favour of a third party over another’s registered land, which burden the land even though not specified on the title registerA lease under 7 yearsLand chargesLand charges generally affect land with unregistered title and include agreements for sale, restrictive covenants, and equitable charges. To burden subsequent owners of the land they must be registered at the Land Charges RegisterAn agreement giving another person the right to buy the landAdverse possessionWhere one party makes a claim to a piece of land that is contrary to another’s assertion of ownership. Ownership claimed by adverse possession needs to satisfy certain legal requirements before being accepted as validOccupation of land for more than 10 (or in some cases 12) yearsPrescriptive rightsWhere a legal right over land belonging to another person is acquired by long usageA right of way exercised for more than 20 years
Matter
Effect
Example
Easements
Rights which burden one piece of land and benefit another. They are not personal but attach to the land itself. They do not permit the owner of the benefited land to remove anything from the burdened land
A right of way; a right to deposit rubbish; a right to light; a right to use pipes and cables
Covenants
Express or implied promises which can be positive or restrictive. Positive covenants are personal and may not burden the land after the person who gives the covenant no longer owns the property. Restrictive covenants “continue to run with the land” and burden that land after a change in ownership
Positive: a covenant to repair a fence.
Restrictive: a covenant not to use the land for a particular purpose
Wayleaves
Contractual rights for a temporary period or temporary purpose, exercisable by one party over the land of another, normally given to companies supplying utility services
A right to run a telephone or electricity cable or erect telecommunications equipment
Overriding interests
Special limited categories of rights, powers and encumbrances in favour of a third party over another’s registered land, which burden the land even though not specified on the title register
A lease under 7 years
Land charges
Land charges generally affect land with unregistered title and include agreements for sale, restrictive covenants, and equitable charges. To burden subsequent owners of the land they must be registered at the Land Charges Register
An agreement giving another person the right to buy the land
Adverse possession
Where one party makes a claim to a piece of land that is contrary to another’s assertion of ownership. Ownership claimed by adverse possession needs to satisfy certain legal requirements before being accepted as valid
Occupation of land for more than 10 (or in some cases 12) years
Prescriptive rights
Where a legal right over land belonging to another person is acquired by long usage
A right of way exercised for more than 20 years
5. Occupation of real estate - Who may occupy real estate?
Real estate is usually occupied by one of the following categories of person:
  • Owners – those persons with a freehold interest in the property
  • Tenants – those persons with a lease of the property or part of it. It is possible for any number of leases to be created in relation to the same property, so creating a chain of interests. Normally, however, a restriction will be contained in the first lease created limiting the number of subsidiary leases that may be created out of it. Tenants of business premises usually have statutory rights to renew their leases when the contractual term ends
  • Persons claiming ownership by adverse possession – where they have occupied the property for a long period of time without having any legal rights to do so, but without challenge by the owner of any freehold or leasehold interest
  • Franchisees, holders of concessions and licensees – contractual permissions to occupy rather than interests in the property itself. Normally, the rights are personal to the person to whom they are granted and are not capable of being transferred to a third party
  • Holders of a wayleave – a contractual right of occupation usually given to companies supply utility services. Holders of wayleaves often have statutory rights to remain in occupation even if the wayleave agreement terminates
6. Brokers - What is the broker’s role?
Brokers in the UK, also referred to as surveyors or agents, generally fall into five categories:
Investment
Valuation
Buildings
Management
Rent Review
They are employed by any party to any transaction involving real estate. Their role may include:
  • acting for a seller to find a buyer for a sale property, including marketing the property for sale
  • acting for a landlord to find a tenant for a leasehold property, including marketing the property
  • acting for a buyer to find a property to buy
  • acting for a tenant to find a property to lease
  • acting for any party to a transaction drafting and negotiating heads of terms
  • preparing heads of terms for documenting and liaising with lawyers
  • valuing a client’s existing and target properties
  • day to day management of property owned by clients, including managing maintenance programmes and landlord and tenant work
  • project management of development of new buildings or refurbishments and
  • negotiating rent reviews of existing properties
Brokers available in the market range from those employed by major international organisations to specialised advisers providing advice on a more restricted basis
7. Employees - What employment issues affect real estate acquisitions?
Typical employment issues which may be relevant to real estate transactions include the transfer of undertakings, redundancies and changing terms and conditions of employment.
Transfer of undertakings – TUPE
The Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) are likely to be the most significant employment issue. TUPE applies when an undertaking or business (or part of one) is transferred from one party to another or where there is a service provision change (either an outsourcing, change of provider or in-sourcing). It may therefore apply when there is the sale or transfer of a business or lease of a property or the outsourcing of the management of a property to a third party. For example, this might occur in the sale of a shopping centre having its own management and security staff.
The broad effects of TUPE are that:
  • with effect from completion of the transfer, the buyer or new service provider assumes responsibility for employees working in the business or services transferred
  • accrued continuity of employment is preserved
  • dismissal for a reason connected to the transfer is automatically unfair - unless for an “economic, technical or organisational reason entailing changes in the workforce”
  • employees transfer with their existing terms and conditions intact, except, at present, in relation to occupational pension scheme rights
  • if the buyer/ new provider changes terms and conditions by reason of the transfer, these changes generally are ineffective, even where the employee’s agreement is obtained
  • employees’ elected representatives must be informed and, where appropriate, consulted about the transfer
  • if the seller recognises a trade union, the buyer will be bound to recognise that union until detailed de-recognition procedures are completed and
  • any attempt to circumvent the effect of TUPE is void
Although the legal effects of TUPE cannot be avoided, it is possible to apportion TUPE liabilities by agreement between the seller and the buyer (or outgoing and incoming service provider). Normally the seller (or outgoing service provider) will agree to be responsible for all claims and liabilities relating to employees up to the date of transfer, and the buyer (or incoming service provider) will take on all post-transfer employment liabilities.
Redundancies
Redundancies may arise on the closure of a business or part of a business or where there is a reduction in the number of employees required, for example on the merger of two businesses or a TUPE transfer. Care should be taken to ensure that the redundancies are carried out in a procedurally fair manner, with particular regard to any applicable collective consultation requirements.
Terms and conditions of employment
An employer may decide to change or harmonise terms and conditions of employment on the acquisition of a new business. This can be a difficult process, especially where there has been a TUPE transfer (see above).
PART B - PROCEDURE AND TERMS
8. Procedure - What are the steps in a sale and purchase transaction?
Transactions formally start when proposed heads of terms are drafted, negotiated and agreed by the brokers for the seller and the buyer. The heads of terms (or memorandum of understanding) set out the principal terms agreed between the parties and are generally expressed to be “subject to contract” and not legally binding. They form the basis of the documents to be drafted by the lawyers.
Once the heads of terms have been finalised, they are sent to the parties’ lawyers. The seller’s lawyers will usually collate all information relating to the property and send it to the buyer’s lawyers together with a draft sale and purchase agreement (contract). The form of the sale agreement will vary according to whether the property being sold is under construction or already built and the extent to which leases to tenants have already been granted.
The buyer’s lawyers consider and suggest amendments to the draft sale agreement and at the same time will undertake general due diligence investigations (see section 10).
Once the sale agreement is in an agreed form, the seller’s and buyer’s lawyers will “exchange” agreements signed separately by the seller and the buyer. Normally exchange is carried out over the telephone by the respective lawyers for the seller and the buyer in accordance with the procedures set out by the Law Society.
After exchange of agreements, the buyer’s lawyers will raise “requisitions on title” of the seller’s lawyers to check that the previous replies given to any enquiries made of the seller’s lawyers are still correct and to agree procedures for legal completion (or closing).
The buyer’s lawyers will also conduct pre-completion searches, including a protective search at the Land Registry, and, in the case of unregistered land, a search of the register of companies (if the seller is a company) to ensure that there are no financial encumbrances affecting the property and a search of the Land Charges Registry.
If the seller is a foreign registered company, generally the buyer will require an opinion letter from an approved lawyer practising in the same jurisdiction confirming that the company is properly incorporated, has power to sell and has carried out appropriate authorisation procedures.
Legal completion of the sale and purchase transaction may occur in person at a completion meeting or by telephone between the parties’ lawyers. Completion may take place at the same time as exchange, depending on the acquisition timetable. Where the purchase is made with borrowed finance a charge over the property will be completed at the same time. The lender of the finance may instruct its own lawyers to carry out due diligence procedures on its behalf and negotiate security documentation.
Following completion, the buyer’s lawyers need to deal with registration of the transfer documents (and any charging documents) at the Land Registry and payment of stamp duty land tax (SDLT), which is assessed on the price paid for the property
9. Other common contract terms - What other provisions does a real estate sale contract commonly contain?
An agreement for the sale and purchase of land must be in writing, must contain or clearly refer to all main terms and conditions, and must be in a form in which either one part is signed by both the seller and the buyer or, and this is the usual case, must be in two identical parts, each signed by one party and then exchanged.
It is common for the sale and purchase agreement to provide for a deposit of between 5-10% of the purchase price on exchange of agreements, where there is to be a gap between exchange and completion. The seller’s lawyers usually hold deposits, either as agents or stakeholders. If held as an agent, it means that the lawyers can deal with the monies on their client’s instructions alone, normally involving the deposit being sent to the client. If they hold it as stakeholder, they have to take concurring instructions from both the seller and the buyer before being able to deal with the money. It is therefore preferable for a buyer to require that the money is held by a stakeholder.
Because the buyer has the opportunity of conducting full title investigation or due diligence before exchanging agreements, the buyer is usually prohibited from making any objection to any matter of title after the date of exchange.
Where timing is crucial to the agreement, there may be a provision stating expressly that “time is of the essence”. This means that any breach of the time limits in the agreement will be deemed to be a repudiatory breach, subject to a claim for damages. Normally, time is not of the essence and may only be made so by one party to the agreement serving notice on the others to make time of the essence.
Where there are matters of title affecting the property, such as restrictive covenants, the seller may require reciprocal obligations from the buyer and an indemnity in respect of any liability the seller may still have following completion of the transaction.
Real estate contracts commonly incorporate standard terms published by the Law Society, in the case of commercial property usually being the current version of the Standard Commercial Property Conditions. Where incorporated, the conditions will apply unless the contract expressly provides otherwise.
Provisions relating to value added tax will be included where relevant to ensure that the agreed tax position is preserved between exchange and completion.
Contracts for sale of property subject to occupational interests such as leases will include clauses to cover ongoing management matters, and provide for apportionment of occupational income and outgoings on completion of the transfer of ownership in the property.
If the property being sold is in the course of construction, the contract for sale will incorporate provisions dealing with the obligations of the seller to construct in accordance with an agreed specification and to provide to the buyer separate deeds of warranty from the building contractor and persons such as the architect in order to safeguard the buyer against defective design or workmanship
10. Due Diligence - What investigations does the buyer normally make?
Pre-exchange of agreements
The prudent buyer is likely to commission a survey of the building and in appropriate cases, soil and geological investigations, plant and machinery tests, and environmental investigations. There are three limbs to the pre-exchange due diligence by the buyer’s lawyers.
Firstly, title to the property will be investigated. The buyer’s lawyers will consider the entries on the Land Register and where relevant historic title documents. Where title to the property is not registered at the Land Registry, the buyer’s lawyer will consider the unregistered deeds to satisfy himself that the seller has a good and sufficient title to the property.
By submitting a plan of the property to the Land Registry, the buyer’s lawyers will receive confirmation of whether or not the title is registered. Additional details of the registered interests then need to be obtained from the Land Registry.
Where the property is leasehold, or subject to leasehold or other occupational interests, the terms of the relevant occupational documents need to be considered carefully to ensure they are not contrary to the buyer’s intentions for the property. The buyer’s lawyers will also need to check whether these documents require the consent of any third party to be given to the transaction.
Secondly, the buyer’s lawyers will commence their own due diligence, which will include the conducting of various searches to check the position regarding municipal and zoning consents, environmental matters, utilities serving the property, financial encumbrances etc. Where the seller is a company, the buyer’s lawyers will also conduct searches against the seller’s name at the Companies Registration Office to ascertain whether the company is solvent and therefore able to dispose of its assets freely. Where the search result refers to security, the buyer’s lawyers will ask for confirmation that such matters do not encumber the property and that no third party consents are required for the transaction to proceed.
Thirdly, the buyer’s lawyers will raise pre-contract enquiries (“preliminary enquiries”) of the seller’s lawyers to obtain information regarding a large number of practical mattes which may affect the property and ask any relevant questions in relation to the title to the property. Whilst a seller must not knowingly or negligently mislead a buyer the general rule is “caveat emptor” (buyer beware). The seller generally gives replies, which may be actionable if wrong or misleading. During the due diligence process the buyer may often arrange that a survey is carried out at the property.
Pre-completion
After exchange of agreements and before completion the buyer’s solicitors will raise requisitions. These ask the seller to confirm that replies to pre-exchange enquiries remain correct and to divulge any further information that has arisen since exchange. The requisitions also deal with completion formalities such as the seller’s lawyers’ bank details etc. The buyer’s lawyers will also conduct pre-completion searches including a priority search of the Land Registry or Land Charges Registry.
Reporting to the client
Before exchange of agreements the buyer’s lawyers usually report their due diligence findings to their client, raising any matter of particular importance or concern.
Occasionally, and normally only where the buyer is acquiring property as a result of the acquisition of a company, instead of due diligence being carried out by the buyer’s lawyers, the seller’s lawyers provide a certificate of title addressed to the buyer and any lender to the buyer. This may occur where the sale has been planned for some time and the parties wish the transaction to proceed quickly.
11. Terms implied by law - What provisions are implied by Statute, Code or otherwise?
Some of the most significant are as follows:
Buyer Beware (Caveat Emptor)
The overriding point of principle under common law is “caveat emptor” - let the buyer beware. The buyer must satisfy itself in all respects as to the nature of the property it is acquiring. However, this does not absolve the seller from the obligation to provide truthful replies to enquiries raised by the buyer’s lawyers.
Title guarantee
The use of certain specified words (for example “with full title guarantee”) in a transfer of property imports various statutory obligations on the part of the seller in relation to the quality of the title being sold. The seller is also under a general obligation to be truthful in relation to matters affecting his title to the property.
Unregistered interests
Where a registrable interest is not registered against a property’s title number at the Land Registry, a buyer will take the property without being subject to it.
Misdescription and misrepresentation
There are both statutory and common law rules which protect against clear misrepresentations or misdescriptions of fact made by the seller to the buyer which have the effect of inducing the buyer to enter into a transfer of land. In such cases, damages may be payable to the buyer or the buyer may be entitled to withdraw from the transaction.
Unfair terms
Agreements for sale that include exemption clauses, which seek to allocate risk, are subject to the Unfair Contract Terms Act 1977. The Act operates to restrict or render void the effect of clauses that unreasonably attempt to exclude liability.
Standard conditions
Contracts for the sale and purchase of land invariably incorporate by reference Standard Conditions of Sale published by the Law Society, which cover a variety of largely technical matters and which are the subject of appropriate variation by the express wording of the contract.
12. Registration and Notarisation of real estate - What are the basic requirements?
The United Kingdom has a central land register. The Land Registry is run through regional district land registries which are responsible for specific areas of the country. Registration of land is now compulsory throughout England and Wales and to the extent that land is unregistered, once it has been sold or charged it must be the subject of an application for first registration. Large areas of land still remain unregistered, although an application for voluntary registration may be made by an owner at any time.
When a party acquires a registrable interest in land, it must apply for registration of that interest at the appropriate district land registry. Only when the registration is complete can the party properly prove its right of ownership.
To protect a buyer pending registration, the buyer’s lawyers carry out a protective search of the Land Registry prior to completion. This search gives the buyer a short period (generally 60 days) of “priority” during which time the Land Registry will not make any other changes to the relevant title pending registration of the buyer’s interest.
The Land Registry has the benefit of a state backed guarantee of accuracy. It is the definitive record of who owns what land, the nature of the interest and any registrable matters affecting that land. The title register for a particular property comprises the following parts, namely:
  • the Property register, which gives a description of the property together with any rights benefiting the property
  • the Proprietorship register, which gives details of the registered owner of the property and the price paid for the property by the current owner and
  • the Charges register, which lists all registrable matters that encumber the property such as rights benefiting other property, covenants, financial charges, contracts and registrable leases
The Registers may also contain, where appropriate, special entries that restrict the registered owner’s ability to deal with its title without obtaining the consent of another person.
Where title to the property is unregistered, the buyer’s search at the Land Charges Registry will provide a priority period similar to that for a search of the title register at the Land Registry. Again, this will protect the buyer from having a third party register an interest against the property for a limited period of time.
There is no requirement for notarisation of title in England and Wales. Contracts for the disposal and acquisition of interests in real estate are simply signed by or on behalf of the parties. Instruments effecting the disposition of the interest itself have to comply with certain formalities relating to execution and are known as deeds.
13. Disputes - How are they dealt with and resolved?
English law permits considerable freedom of contract and the parties must give careful thought to which law they want to govern the contract, in which jurisdiction they would prefer that any disputes are resolved and what method of dispute resolution they would prefer. Methods of dispute resolution could include court proceedings, arbitration (whether domestic or international), reference to an independent expert or a mediation process. This freedom of contract is not absolute, however, and can in certain circumstances be circumvented if statute (or more rarely, the common law) requires.
The choices should be stated expressly in the contract. If it can be avoided, these matters should not be left to the courts to decide, since the uncertainty of law and jurisdiction shopping will be costly to all parties and can mean that any dispute is likely to take a very long time to resolve. The parties can agree to leave any or all of these matters fluid to be resolved at the time any dispute arises, but this can create its own problems.
Different types of dispute are often resolved in different ways. For example, rent reviews are often dealt with by arbitration only; disputes of fact (or under particular clauses or in respect of particular aspects of the contract) are often dealt with by expert determination. Disputes of law should preferably be referred to court, or to an arbitrator who is an appropriately qualified lawyer, otherwise the results of arbitration/mediation by a non lawyer could be eccentric or unpredictable.
When choosing a method of resolving disputes, the parties will have regard to various issues, including the following:
  • The domicile/nationality and governing law of the contracting parties and any relevant statutory limitations may inhibit such choice or the effectiveness of such a choice
  • Can awards be enforced in the relevant jurisdictions? For example, is there an international treaty that will allow enforcement of an award in a particular jurisdiction?. If such a treaty does exist, does it recognise arbitration awards and agreements arising out of a mediation process? Many jurisdictions will not enforce awards that have not arisen through the consideration and final judgment of a court/judge
  • If any remedy that could be sought is an interest in land, rather than payment of money, a consideration is whether the particular system of law, jurisdiction or method of dispute resolution will permit such an award. Under English law, an arbitrator would not usually have the power to order the transfer of land from one party to another in a title dispute
  • Obtaining the decision of an expert may be faster and cheaper than obtaining one from an arbitrator
If the parties are not satisfied by the decision of the independent person, different remedies and courses of action apply depending upon whether that person acted as an expert or as an arbitrator.
PART C - PERMITS INSURANCE AND ENVIRONMENT
14. Permits - What permits are required for the use and occupation of real estate and are they personal?
Applications to obtain planning permission to “develop” land must be made to the local government authority which has the responsibility for controlling the use and development of land in its area. Local government authorities have statutory time periods within which a decision must be made as to whether or not planning permission should be issued. There are various statutory rights in relation to appeals, which can be made if an application is refused or not determined, and rights of challenge regarding the validity of any permission granted. For developments that are likely to cause significant environmental impacts, an Environmental Statement will need to be submitted with the application for planning permission, explaining the likely environmental impacts of the development.
Generally, planning permission will be required for the construction of a “new build” property, work that is proposed for refurbishment of an existing building, and where an existing use (for example office space) is to be changed to another distinct use (for example retail or licensed premises). Planning permission, when granted, benefits the land (although there are occasions when it can be personal) and will contain conditions which will regulate the impact of the development, for instance controlling hours of opening for a licensed premises or requiring landscaping surrounding a car park. Under the Planning legislation the terms “develop” and “development” have a much wider meaning than the construction or replacing of buildings. Minor building works or simple changes of use may amount to “development” requiring planning permission.
A different type of permit (called a “listed building consent”) is required when it is proposed to do work to historically or architecturally important buildings. Normally, planning permission will also be required, but listed building consent may be required even where planning permission is not (for example where works are not “development” but still affect the importance of the building as a heritage asset.
Larger districts or areas of buildings (called “conservation areas”) that have architectural or historical importance may also be subject to a separate regime of control that requires conservation area consent to be obtained before work is carried out that would damage the character and appearance of the area that the local government authority wishes to preserve and enhance.
During the consultation period that the local government authority must undertake when considering a development, third party groups are able to put forward objections (or support) that should be considered by the authority before deciding whether or not a permission should be granted. In addition, even after a permission has been obtained, there will be a 3 month period within which a third party group is entitled to challenge the validity of granting the permit and this should be kept in mind by lawyers and agents acting for the developer, before any work undertaking the development begins.
In addition to a planning permission, the building must also have approvals confirming that construction has taken place in accordance with applicable building regulations and health and safety legislation. Certain types of building may also have other kinds of certificate issued by independent bodies in relation to building or construction matters generally, such as BREEAM or NHBC certification.
In relation to operations and activities on the property, various environment related permits may be required. This will depend upon the nature of such activities and operations. Most commercial activities will require a trade effluent consent or agreement with the local sewage undertaker. Where prescribed industrial or commercial activities are undertaken, environmental permits may be required from the Environment Agency or the local authority.
15. Insurance and Risk - What insurance will the parties effect and when does the insurance risk pass at the time of sale?
Before a sale is contemplated, insurance is generally the responsibility of the owner of the freehold interest in a property. However, where such property is the subject of a lease or the property is a leasehold interest, the terms of the lease will prescribe which party has responsibility to insure. It is common for owners of long leasehold interests to insure rather than the landlord/freehold owner. Whatever the length of the lease, the tenant will generally insure the contents of the property belonging to the tenant and in some cases certain parts of the property for which the tenant is contractually responsible, such a plate glass.
The insuring party should have a fully comprehensive buildings insurance policy to protect the structure and fixtures and fittings of the property in the event of damage or destruction by any of a comprehensive list of insured risks, such as storm, lightning, fire and water damage. The policy may also cover additional special heads of cover such as subsidence, heave, earthquake and, if available, terrorism.
Generally it is the buildings, and not the land, which are insured for the reinstatement cost rather than the reinstatement value.
Insurance policies (the insurance contracts containing the contractual terms between the insurance company and the insured) may either comprise a single policy for one particular property or a block policy designed to cover a portfolio of properties. Larger institutional investors may self-insure.
Occupying owners generally have separate policies to cover the contents of the property, especially if the property includes costly plant and machinery. They will ordinarily have public liability insurance to cover liability to third parties arising from the property. These public liability policies will exclude most pollution and contamination risks (except those caused by a sudden and accidental event). Whilst not common, it is possible to purchase specialist cover for pollution and contamination risks.
Where the property is subject to an old restrictive covenant and the property owner does not know whether it is still enforceable, a special restrictive covenant indemnity insurance policy may be taken out to insure against enforcement of the covenant by third parties. Similar policies can be taken out if there is some specified defect in the title to the property. The benefit of such insurances may usually be claimed by subsequent owners of the property and tenants.
Insurance policies (except restrictive covenant and title policies) are personal and not transferable on sale. Where a sale is taking place, timing of the transfer of risk is normally prescribed by the sale agreement. Agreements for sale of leasehold land will still be governed by the insurance terms of the lease. It is common market practice for the parties to agree that the seller will continue to insure occupied property until completion.
16. Environmental - What are the common environmental issues?
Considerable change is occurring. Environment related sustainability issues are rapidly rising up the agenda. Currently, the most prevalent of these is the extent of greenhouse gas emissions attributable to the use of buildings (estimated at c50% in the UK and c40 % in the EU) and the potential impact of climate change on buildings. Current law is widely seen as ineffective. Considerable new legislation, policy and voluntary commercial measures are being implemented. There is a consensus that these are likely to have potentially far reaching impacts on development and retrofit, although there is no consensus yet on whether there will be a significant impact on investment values of new and/or existing building stock.
Traditionally, the prime environment consideration has been potential soil and groundwater contamination as a result of current and former uses. Applicable environment law is a mix of common law and statutory law. Strictly, it is not unlawful for land to be contaminated and there is no absolute obligation to remediate contamination. Generally, legal obligations will attach if the contamination is causing, or has the potential to cause, harm or damage at particular levels (and these differ depending upon the applicable law). In principle, legal responsibility follows the “polluter pays” principle (i.e. the person who spilled, released or discharged the offending substance will normally be liable) but there are important qualifications to this. Environment laws may operate to make future owners and occupiers liable for contamination already present at the real estate when they acquire it. For instance, this may occur if the new owner fails to remediate harmful contamination of which it is aware or should be aware, if the original polluter can no longer be found or, by statute or contract, the risk is transferred by one party to another.
Acquisition due diligence may involve the appointment of environment consultants to consider documentary information and to carry out a site visit (Phase I). If considered necessary, further, intrusive investigations (Phase II) may then be undertaken. It is important to identify potential problems early so that there can be negotiation on terms and/or price and the need for and scope of any remediation. Negotiation of terms may take many forms, including contractual allocation of risks, obligations to remediate (contamination discovered pre or post-acquisition), indemnities in respect of first party loss or third party claims, or purchasing specialist historic liabilities environment insurance to cover any of these risks. If development is proposed, then planning permission may be made conditional upon the proper investigation and remediation, if necessary, of potential historic contamination.
If planned development is of a type considered potentially detrimental to the environment, the application for planning permission may need to be supported by an assessment of the development’s likely future environmental impact.
The presence of nuisance weeds (such as Japanese Knotweed) or protected species (such as badgers or newts) are due diligence and potential planning issues. They may impede on-site activities, have cost implications and impact on the duration of development.
Those who have control of places of work have a duty to assess the risk of asbestos being present in the fabric of the building and to manage the human health risks posed by any asbestos found. Buildings built before 1999 are presumed to contain asbestos unless there is good evidence (such as building plans) to the contrary.
PART D - FINANCE AND TAXES
17. Pricing/Valuation - What sets the price/valuation of real estate?
Pricing of real estate investments is a combination of the aggregate rent being paid by occupational tenants of the property and the value that investment buyers consider that a property of the specific type and location is worth at the time of valuation taking that income into account.
The rent for a particular property is likely to be assessed by multiplying the area of the property by the market rental value per square metre (although in the UK square feet are still used as an alternative measurement). The market rental value will take into account factors such as the location of the property, its type and condition, and the length of the lease term. The area of the property will be calculated by reference to the RICS Code of Measuring Practice, which uses generally accepted methods of calculation by reference to several core definitions, the most common of which are Gross Internal Area (used, for example, in relation to warehouses and industrial buildings) and Net Internal Area (used, for example, in relation to offices and shops).
In the case of retail shops, it is common for the rent of the property to have differential values according to the positioning of the floor space – that nearest to the frontage is the most valuable and will be described as “Zone A”. The rental values of the various areas will be added together to provide an overall rental value for the property.
The value of the property for investment purposes will generally be assessed by reference to the methodology laid down in the RICS Appraisal and Valuation Standards manual, universally known as the “Red Book” as a result of the colour of its cover. This governs the way in which a valuer will calculate the value, on the basis of a list of accepted assumptions according to the statements of practice. These apply to the specific use for which the valuation is made and in the case of investment property the valuation will be of “Market Value” as defined.
Investment properties are commonly referred to as being sold on a particular yield, meaning the investment return that will be gained from the capital sum which it is necessary to pay to buy the property. For example, where a property with an aggregate rent of £100,000 is sold for £2,000,000, it will have a yield of 5%. Conversely, the interest can be said to have been sold at a YP (years’ purchase) of 20
18. Financing - How is a real estate acquisition financed?
The principal ways in which real estate acquisition is financed are:
  • Through the purchaser’s own cash resources or general corporate banking facilities
  • By using the capital value of the property to raise specific finance secured on the property
A typical security package will involve entering into a mortgage debenture, which includes the grant of a mortgage (also known as a legal charge) over the real estate itself together with a supporting floating charge over all of the other assets of the purchaser where the purchaser is a company. Floating charges cannot be created by individuals.
Prior to the Enterprise Act 2002 coming into force, where the security which a secured lender had from a company over the whole or substantially the whole of its assets included a floating charge, the lender could appoint an administrative receiver of the company to enforce its security if the borrower were to default. By doing so the secured lender could block the appointment of an administrator and so prevent the company from going into administration. Administration is the UK equivalent of Chapter XI insolvency in the United States and provides a moratorium in respect of the enforcement of any security, or any legal proceedings and is intended to allow the company breathing space whilst it restructures its debt.
The provisions of the Enterprise Act 2002 now operate to limit the appointment of an administrative receiver save in respect of floating charges created prior to a specified date (15 September 2003) and in certain key exceptions such as PFI/PPP (public private partnership), project finance, capital markets, utilities, social housing and financial markets. However, a secured lender who has security which includes a floating charge from the company over the whole or substantially the whole of its assets will be able to appoint its own administrator and block the appointment of an administrator on an application by the directors or the company.
It was thought that a lender may prefer to appoint an administrative receiver (rather than an administrator) where this is possible because, as the lender’s appointee, an administrative receiver will place more emphasis on realising the company’s assets to recoup the lender’s money. An administrator’s primary purpose, on the other hand, is to rescue the business as a going concern and to have regard to the interests of the creditors as a whole.
It is still possible for a secured lender to appoint what is known as a fixed charge receiver to manage and sell the mortgaged property, although such a person cannot be appointed (or can be required to vacate office) where the company goes into administration.
In the recent period, where lenders have been enforcing their security, it has been unusual for them to appoint an administrative receiver even where they have been entitled to do so, and more usually an administrator or fixed charge receiver has been appointed.
Lenders typically require floating interest rate borrowings to be hedged under separate interest rate hedging arrangements so that the interest cost is effectively fixed.
  • Raising finance by bond/debenture stock issue
Here the interest rate is usually fixed by reference to the nearest equivalent government stock plus a spread or margin.
The required security package is likely to be equivalent to that in relation to secured bank debt.
19. Security over real estate - How is security over real estate created and protected?
A fixed security interest over land is generally created under a document called a “mortgage” or “legal charge”. A “mortgage debenture” or “debenture” which incorporates a full range of fixed and floating charges over all of the assets of the borrowing company may be required as an alternative.
All financial security, including legal charges, mortgages and debentures in the case of companies, must be registered with the Registrar of Companies within 21 days of legal completion. In the case of land to which the title is registered at the Land Registry, all charges must be registered in the charges register of the relevant title by making the appropriate application to the Land Registry. For unregistered land, certain types of charge already entered into may be registered as land charges at the Land Charges Registry. The creation of a new legal charge gives rise to a requirement for the land to be registered at the Land Registry.
In the case of the acquisition of a leasehold interest, it is important for the lender to check whether the consent of the landlord is required to the creation of the mortgage/legal charge and if so to obtain this prior to the creation of the security and to give notice of the security to the landlord as required under the terms of the lease.
In the case of investment property, some lenders require all rental income (excluding service charge receipts) to be paid into a specific account charged to the lender and will restrict withdrawals from that account to the making of payments in respect of the financing costs and repayment of the principal sum secured on the property.
In the case of a property where a managing agent collects the rents on behalf of the owner, it is usual for notice of the mortgage/legal charge to be given to the managing agent, for the managing agent to enter into a duty of care arrangement with the lender in relation to the collection of rent and to agree to collect the rent and pay it into a specific rent collection account charged to the lender. The managing agent usually administers the service charge and the collection and payment of any applicable VAT.
20. Taxes and Costs - What are they and who pays them?
Generally, please refer to our CMS transaction costs guide as to the nature and amount of the taxes and costs.
The main tax on acquisitions is stamp duty land tax (SDLT) at a top rate of 4% of the purchase price. This is calculated as a percentage of the acquisition price and must be paid by the buyer within 30 days of completion of the acquisition. Failure to pay within the prescribed time is subject to significant penalties and interest. SDLT must be paid before the Land Registry will process the buyer’s application for registration. If the interest being sold is the creation of a new lease, extra duty will be payable according to the amount of rent payable under the terms of the lease.
Value added tax (VAT) may also be payable, where the property is the subject of a valid option to tax. The buyer may exercise the option immediately prior to or upon completion. An advantage of opting to charge VAT on property is that the parties may be able to recover any VAT on professional fees associated with the transaction.
The exception to the rule that VAT is payable on the sale of an opted property is where the transaction constitutes a “transfer as a going concern”, where the property is let and operated as a business unit. Subject to satisfying certain conditions, this will usually mean that no VAT is paid on the sale of a property which is subject to leases granted to occupiers.
During the due diligence for the acquisition, the buyer will also pay the costs of conducting searches, including in particular of the local authority (which includes zoning matters, building regulations and general municipal consents, notices, etc), and, if relevant, companies providing utilities, the local waterways boards, the Environment Agency, railway operators, and coal authority. The buyer will also pay for any valuations and surveys of the physical state of the property and any environmental audits or desktop studies.
The seller will pay the commission of any land agent or broker employed to find a purchaser.
Occasionally, the negotiated heads of terms for a transaction will provide for one or other party to pay the other’s costs. Generally each party pays its own expenses. If the property is leasehold, the seller is usually responsible for paying the costs of obtaining any consent required from any landlord in order to sell.
Finally, the buyer will be responsible for the payment of the Land Registry fees associated with registration of the transfer to the buyer. As no notarisation is required, no notary fees are payable.
Bosnia and Herzegovina
PART A - PARTIES AND INTERESTS
1. Parties – Who can own real estate?
Any physical person or legal entity may own real estate. This definition includes individuals, companies, entities established by statute, (e.g. associations of individuals and/or legal entities, associations accumulating property for a given purpose, units of local self-government/self-administration), the state of Bosnia and Herzegovina, the Brčko District and the cantons of the Federation of Bosnia and Herzegovina.
Bodies that are not legal entities, such as unincorporated associations, cannot own real estate directly. Potential owners of commercial real estate include private developers, insurance companies, banks and other financial institutions, private or public property companies, the state, the Brčko District, the cantons and local authorities.
In the Federation of Bosnia and Herzegovina foreign persons (persons who are not Bosnian-Herzegovinian citizens) can acquire ownership over real estate, buildings, apartments or land for building by succession or if they have a permanent residence in the Federation of Bosnia and Herzegovina, unless it is otherwise stipulated in an international treaty. Foreign persons and legal entities (legal entities which do not have a registered office in Bosnia and Herzegovina) which perform a commercial activity in the Federation of Bosnia and Herzegovina are allowed to acquire ownership over business premises, buildings, apartments and construction land on which the objects are constructed or will be constructed. The rights of persons and legal entities can be limited by reciprocity.
2. Property – What property interests are currently sold?
Bosnian-Herzegovinian law recognises several forms of interest in property. These include:
  • Ownership
  • Rights of possession
  • Limited property rights including mortgages, easements, land debts, rights to build and rights based on long term lease agreements
However, current practice dictates that only ownership interests are sold. The assignment of rights and transfer of obligations under occupational leases are relatively rare with subletting being favoured.
Most commercial property is sold by way of a share rather than an asset sale, where the real estate is owned by a special purpose vehicle and the shares in it sold. In general these sales are used to avoid real estate transfer taxes and the risk of termination of occupational leases by tenants after a transfer.
A “lawful possessor” is a possessor whose possession is based on a legal title that is required for the acquisition of ownership and who did not gain this possession by use of force, fraud or abuse of reliance. A “bona fide possessor” is a possessor who does not know or is not able to know that the property which she/he possesses is not in her/his rightfull ownership. If a person who is at the same time a lawful and bona fide possessor possesses real property for a 10 year period, or if a person who is only a bona fide possessor possesses real property for a 20 year period, she/he might acquire ownership of the real estate by virtue of adverse possession (“usucaptio”).
As in some other civil law jurisdictions, leases under Bosnian-Herzegovinian law do not create a property interest, but merely create a contractual right to use property. The period for which a lease can be entered into is not limited by law, and depends on the agreement of the parties. Long-term tenancy rights (i.e. of at least 5 years) can be registered at the Land Book Registry.
Generally, there are two types of leases recognised under Bosnian-Herzegovinian law:
  • Leases of property in general
  • Leases of business premises, particularly regulated by the Law on Lease of Business Premises (Official Gazette of Socialistic Republic of Bosnia and Herzegovina no. 33/77, 2/87 and 30/90)
The Law on Lease of Business Premises governs only leases of business premises, i.e. of buildings and parts of a building where a commercial activity is predominantly performed.
It should be noted that in relation to leases, upon a change in the owner of the reversionary interest, a tenant is entitled to terminate its lease agreement. Such a provision is applicable to leases of business premises only if it is expressly agreed by the parties.
3. Ownership – What types of ownership are there?
Ownership is the highest title a person or a legal entity can hold in relation to property under Bosnian-Herzegovinian law. Real estate in Bosnia and Herzegovina is subject to registration at the Land Book Registry. All land and buildings/constructions must be registered.
Ownership is freely transferable unless restricted by other contractual obligations in connection with the property in question, such as pre-emption rights. Agreements on the transfer of ownership must be entered in the Land Book Registry. Ownership title passes upon execution of the decision of the Land Book Registry but the decision takes effect retrospectively from the date on which the application to register the transfer was filed.
As mentioned above, ownership may also be acquired by possession. For this to occur, the property must be (a) in the possession of a person who is at the same time a lawful and bona fide possessor for an uninterrupted period of 10 years or (b) in the possession of a person who is only a bona fide possessor for an uninterrupted period of 20 years.
It should be noted that under Bosnian-Herzegovinian law the owner of a building is not necessarily the owner of the land beneath the building, as it is possible to have separate ownership of a building and the land plot on which it is constructed. Care must be taken to establish whether ownership of a property has been split in this manner.
Bosnian-Herzegovinian law distinguishes between exclusive ownership, co-ownership and joint ownership of land and buildings. This means that a condominium style ownership is permitted where, for example, a person may be exclusive owner of a part (unit) of a building and joint owner with other unit owners of the common areas, the structure and the land on which the building stands. Alternatively, more than one person may own the entire building and/or plot of land. In each case, the co-owner is said to have an “ideal” share in such common parts or the whole of the building or land plot. A co-owner of a building, apartment, construction land, agricultural land and forest land in the Federation of Bosnia and Herzegovina has a “pre-emption right” in case of a sale of the other co-owned part of the real estate in question i.e., the “ideal” share of the real estate. In regard to business premises, the co-owners as well as the tenants who lease the business premises in question for an uninterrupted period of at least 5 years have a “pre-emption right”.
4. Matters burdening or benefiting real estate – What matters can affect real estate?
Common matters affecting real estate include:
MatterEffectExampleEasementsUnder Bosnian-Herzegovinian law, easements can be personal (in personam) or connected with the ownership of real estate (in rem). A personal easement exists when a property is encumbered in favour of a person. This right cannot be transferred and usually expires on the death of the entitled person. This easement runs with the property when ownership is transferred An easement must be entered in the Land Book Registry to existA right of way; a right to use pipes and cables; the right of usufructMortgageA mortgage is established either on the basis of:<ul><li>a written contract</li><li>a decision made by the court</li><li>law</li></ul>A mortgage established on the basis of a written contract (which has to be notarised) must be entered in the Land Book Registry to become effective, and once registered will give the mortgagee priority over unsecured creditors of the borrowerMortgage securing receivables arising out of a loan agreementAdverse possessionAcquisition of ownership to real estate based on long term lawful and bona fide possessiona) Lawful and bona fide possession of real estate for more than 10 years b) Bona fide possession of real estate for more than 20 yearsBuilding lawRight of a person to build premises on or under the land plot of a third person, where the land plot owner has to accept the construction on his land plotContractual rightsLeases (see above). Contractual right to use the propertyLease of land, buildings, flats, business premises
Matter
Effect
Example
Easements
Under Bosnian-Herzegovinian law, easements can be personal (in personam) or connected with the ownership of real estate (in rem). A personal easement exists when a property is encumbered in favour of a person. This right cannot be transferred and usually expires on the death of the entitled person. This easement runs with the property when ownership is transferred
An easement must be entered in the Land Book Registry to exist
A right of way; a right to use pipes and cables; the right of usufruct
Mortgage
A mortgage is established either on the basis of:
  • a written contract
  • a decision made by the court
  • law
A mortgage established on the basis of a written contract (which has to be notarised) must be entered in the Land Book Registry to become effective, and once registered will give the mortgagee priority over unsecured creditors of the borrower
Mortgage securing receivables arising out of a loan agreement
Adverse possession
Acquisition of ownership to real estate based on long term lawful and bona fide possession
a) Lawful and bona fide possession of real estate for more than 10 years
b) Bona fide possession of real estate for more than 20 years
Building law
Right of a person to build premises on or under the land plot of a third person, where the land plot owner has to accept the construction on his land plot
Contractual rights
Leases (see above). Contractual right to use the property
Lease of land, buildings, flats, business premises
5. Occupation of real estate – Who may occupy real estate?
Real estate is usually occupied by one of the following categories of persons:
  • Owners – persons with an ownership right to the property
  • Tenants – persons with a lease of the property or part of it. It is possible to create a sublease to a leased property. A lessee is allowed to sublease the leased property, unless otherwise agreed between the lessor and the lessee. A sublease of business premises is (usually) subject to approval of the owner
  • Lawful and bona fide possessors – persons who have occupied the property for a prescribed period of time (10 or 20 years)
  • Persons benefiting from the right of easement – persons who may use the property on the basis of rights in personam (personal) or in rem
6. Brokers - What is the broker’s role?
There are currently no special legal provisions about real estate brokers in Bosnia and Herzegovina. In practice, brokers in Bosnia and Herzegovina follow instructions of any party to any transaction involving real estate. Their role usually includes some of the following tasks:
  • acting for the seller to find a buyer for a property sale, including marketing the property for sale
  • acting for the landlord to find a tenant for a leasehold property, including marketing the property
  • acting for a buyer to find a property to buy
  • acting for a tenant to find a property to lease
7. Employees - What employment issues affect real estate acquisitions?
Typical employment issues which may be relevant to real estate transactions include the transfer of the shares of the company vehicle that owns real estate (share deal). In the event of the transfer of shares of the company vehicle that owns real estate, the “employer” remains unchanged and as consequence the rights and duties of “employees” remain unchanged. Bosnian-Herzegovinian law does not contain legal provisions about the transfer of the business enterprise of a company (asset deal). It is only possible to transfer individual properties of a company, (e.g. real estate) to another company. Such individual property transfer does not affect the employment relationships between the seller as employer and the employees of the seller.
PART B - PROCEDURE AND TERMS
8. Procedure - What are the steps in a sale and purchase transaction?
Commercial real estate transactions usually start when proposed terms are drafted, negotiated and agreed by the seller and the buyer. The terms (or letter of intent or memorandum of understanding) set out the principal terms agreed between the parties and are generally expressed to be “subject to formal contract” and are not legally binding. They form the basis of the documents to be drafted by lawyers.
Once the terms have been finalised, they are sent to the parties’ lawyers. The seller’s lawyers will usually collate all information relating to the property and send it to the buyer’s lawyers together with a draft of an agreement to conclude a future transfer agreement (future agreement) with the form of transfer agreement attached. A future agreement is not required if there are no conditions to the purchase, in which case the parties proceed directly to the transfer agreement. The buyer’s lawyers undertake thorough due diligence of all legal documents relating to the property (see section 10). If the purchase is made with borrowed finance, the lender of the finance may instruct its own lawyers to carry out due diligence on its behalf and negotiate loan and security documentation.
The seller arranges for the property to be appraised by a court appointed appraiser for real estate.
Once the form of future agreement and transfer agreement are agreed, the seller and the buyer sign the future agreement. Once the conditions to the purchase (if any) are satisfied one party will invite the other to conclude the transfer agreement.
Before signing the future agreement and the transfer agreement, the buyer’s lawyers will conduct a search at the Land Book Registry to ensure that the seller still owns the property and that there are no new encumbrances affecting the property.
The transfer agreement, must be notarised. The future agreement and transfer agreement may be signed in English with a certified Bosnian-Herzegovinian translation of the transfer agreement prepared for registration purposes, although in practice it is better to also sign the Bosnian-Herzegovinian version of the transfer agreement for registration purposes.
Following conclusion of the transfer agreement, the lawyers need to deal with registration of the transfer documents at the Land Book Registry and the seller needs to arrange for payment of the real estate transfer tax.
9. Other common contract terms - What other provisions does a real estate sale contract commonly contain?
An agreement for the sale and purchase of property must be in writing, must contain all main terms and conditions as specified by the law, and must be signed by both the seller and the buyer; an agreement for the sale and purchase of property must be notarised.
Provisions relating to value added tax will be included where relevant to ensure that the agreed tax position is preserved. Besides the essential terms of the sale and purchase agreement, such as the exact specification of the property and price, the document should also mention the following:
  • the title document under which the seller acquired ownership
  • all liabilities burdening the property (mortgages, easements, pre-emptive rights, leases)
  • the conditions of payment of the purchase price
  • a date for the handover/takeover of the property
  • a provision indicating which of the parties will pay the real estate transfer tax
  • a provision indicating which of the parties will file the petition for the change of ownership
  • the conditions on which any party will be entitled to withdraw from the agreement
  • a seller’s warranty that it is the sole unrestricted owner of the property and that the real estate is and will remain in the (legal and actual) condition described in the agreements until registration of the transfer’s title in the Land Book Registry
10. Due Diligence - What investigations does the buyer normally make?
Every careful buyer that has an intention of buying a property should conduct an extensive due diligence of all the obtainable documentation and evidence concerning the property in question.
Firstly, it is necessary for the buyer’s lawyers to conduct a thorough investigation of the ownership title of the property held by the seller. This will include an extensive investigation of the Land Book Registry and the entries that can be found in it, as well as, if necessary, historical documents and deeds, that will provide more information regarding the property.
In order to obtain this information, the buyer’s lawyers firstly need to acquire an extract from the Land Book Registry which will contain information concerning the size of the property, as well as the title of ownership of it and all the encumbrances and limitations (easements, mortgages, pre-emptive rights) which exist over the property. This document will act as a confirmation of the seller’s registered ownership right, as well as provide important information such as whether the property is subject to a long-term lease (if it has been registered) or other occupation interests, or is subject to a mortgage or a land debt etc, all of which can have a significant impact on the Buyer’s intention and final decision to purchase the property. It is also advisable for the buyer’s lawyers to acquire an additional Land Book extract or make an enquiry with the Land Book Registry before the conclusion of the transfer agreement to check whether additional interests over the property in question have been added or whether procedures have been started for recognition of pending interests, which may endanger the buyer’s intentions for the property.
Secondly, the buyer’s lawyers should conduct due diligence searches in order to check whether or not there are unresolved issues concerning the Municipality rights (land use and zoning plans), any relevant environmental matters, or any financial burdens that exist over the property. If the seller is a registered company in the territory of BiH, the lawyers also need to conduct an extensive search of the information provided in the competent court’s Companies Register. Since these, in accordance with the Law on Registration of Business Entities, represent public books available for access to the wider public, an extract regarding a company is easily obtainable which will contain important information such as:
  • the registered name and corporate office
  • persons authorised to represent the company
  • information regarding its subsidiary companies
It is necessary to submit a request to the competent court to receive confirmation that a bankruptcy procedure has not been initiated against the seller’s company or that a bankruptcy procedure has not been opened against the seller’s company. In the event that any of these actions have been taken against the company, the court will issue a Resolution confirming this and also state that the rights of the debtor to manage and freely dispose of the company assets, which now becomes bankruptcy assets, now belong to the bankruptcy officer. Once this procedure has been initiated/opened the public registers such as the Companies Register will be notified of this and be requested to insert a notification confirming the changes.
11. Terms implied by law -What provisions are implied by Statute, Code or otherwise?
Registration of ownership
To complete the process of the change of ownership, the transfer agreement must be filed with the Land Book Registry. Ownership title passes upon fully-effected registration with the Land Book Registry.
The registered right in the Land Book is considered to be correct and it is presumed that any right deleted from the Land Book does not exist. If third parties, who in good faith rely on the existence of real estate or a right over the real estate acquire such a right, the contents of the Land Book are considered correct if it is not disputed through registration of an objection or if the third party is not acquainted with the flaws in the Land Books.
12. Registration and Notarisation of real estate -What are the basic requirements?
Registration of real estate is done with the competent Land Book Registry. In accordance with the new Law on Land Books F BiH (Official Gazette no. 58/02, 19/03, 54/04) and RS (Official Gazette no. 74/02, 67/03, 46/04, 109/05, 119/08) the competent courts for managing land book registries are the Municipality courts. A Land Book is a public book and a register of all property rights over real estate and other rights, which, in accordance with the law, are prescribed to be registered. The registration procedure is initiated on the basis of an application for registration. Together with the application form, it is also necessary to submit the documentation on the basis of which the application for registration is founded. Upon a complete and satisfactory registration application, registration is done on the basis of a Resolution on registration which is brought by the Land Book referral office.
Interests that can be registered in Land Books are:
  • Ownership, co-ownership and joint ownership
  • Mortgage and land debt
  • Court pledge rights and a right over a pledge
  • Long-term lease rights, pre-emptive rights and redemption rights
  • Servitude rights
  • Usufruct rights
  • Real encumbrances
  • Rights of use
The Land Book excerpt consists of three different sections, Parts A, B and C:
  • Part A contains the number of the cadastre parcel, name, description and the type of the catastar parcel, the size (surface) of the catastar parcel, merger or division of the Land Book subject, and real rights established in favour of the land-book subject
  • Part B contains the legal basis for registration, the name of the owners of the land-book subject, in case of ownership by different entities the statement whether it is joint or co-owned property, the limitations on the owner’s rights on dealing with the land-book subject as well as notes regarding the ownership
  • Part C contains the encumbrances and limitations, as well as the legal basis for registration, the rights which burden the land-book subject and notes regarding those encumbrances, and the holder(s) of the rights. It also contains information regarding mortgages or monetary land debts, (the mortgage debt amount), interest rates, amounts of ancillary monetary claims, as well as notes regarding the mortgage or land debt, and information on acceptance of direct execution
Since April 2007, a requirement for notarisation has been introduced to BiH which has had a significant impact on different aspects of providing legal services, sale and purchases and the transfer of property rights. All legal dealings whose subject is the transfer or acquisition of ownership or other property rights over real estate need to be notarised. This has made the process of acquisition and transfer of real estate as well as any changes to the Land Book Registry significantly faster and more efficient.
13. Disputes - How are they are dealt with and resolved?
In event of a dispute arising between two parties that have concluded an enforceable contract on, for example, the transfer of real estate, the method of resolving the dispute is left to the parties in accordance with the terms of their agreement as well as the jurisdiction of the competent court.
The standard dispute resolution procedure in BiH is through court proceedings and litigation.
The normal timeline for all of the procedures, in accordance with the Law on litigation proceedings is:
  • First instance procedure - upon filing a claim the competent court will primarily determine whether the claim complies with the relevant legal requirements and send it out for a Response of the defendant
  • The defendant has 30 days to provide its Response and it is then sent to the Plaintiff. Upon 30 days after the receipt of the defendant’s Response the court has to schedule the Preliminary Hearing with the purpose of identifying all the evidence and preparing for the Main Hearing
  • The Main Hearing takes place 30 days after the Preliminary Hearing. The Court decision should be delivered 30 days after the Main Hearing
The litigation procedure should not last more than 4 months. However, in practice, due to various procedural issues that may occur, the procedure may take up to one or more years.
After the court decision the defendant may appeal and regardless of having grounds or not, it may prolong the procedure for one or two additional years.       
In an event of a court decision resolving the dispute over the real estate in question, the enforcement procedure consists of the following phases:
  • Filing Enforcement Petition to the competent court
  • Recording of enforcement proceeding in the Cadastral/Land Registry
  • Evaluation of real estate
  • Selling real estate
  • Satisfaction of creditors
The enforcement procedure over movable assets and real estate lasts ideally up to 6 months, but in practice it lasts more.
PART C - PERMITS INSURANCE AND ENVIRONMENT
14. Permits -What permits are required for the use and occupation of real estate and are they personal?
Permits for construction, use and occupation of real estate are governed at the Cantonal level in the Federation of BiH and at the entity level in the Republic of Srpska. Approval of construction requires obtaining urban, construction and use permits.
Urban permit
An urban permit is the first step in fulfilling an intention to build on real estate and a way to verify whether it is possible to carry out such construction in the requested locality. The permit represents an administrative document and acts as evidence that the construction is in accordance with the document of environmental planning and other conditions prescribed for that particular locality.
The competent body is under a duty to pass the resolution for approval of the urban permit within 30 days from the submission of an application form and the permit is valid for a period of one year from the date it enters into force. However, obtaining an urban permit does not mean that the construction can begin. This only means that the required technical conditions have been determined, and represents a pre-condition for submission of an application for obtaining a construction permit.
Construction permit
Construction cannot begin before obtaining a resolution for approval of a construction permit. Once the urban permit, as explained above, becomes enforceable and after the project documentation has been drafted in accordance with the conditions of the urban permit within the one year period, an application form for the construction permit is submitted.
A construction permit is necessary to be obtained for newly-built buildings, reconstruction, additional construction, a change in the use of the building, (residential to office space or vice versa), as well as changes in the activities in the office space if this change significantly affects the conditions of use of the building, the surrounding buildings and space, or if it significantly changes the conditions of use of the building, the surrounding buildings, traffic and preservation of the environment.
As with the urban permit, the competent authority is required to pass a resolution for approval of the construction permit within 30 days from submission of the requested documentation. The construction permit ceases to be effective if the construction works have not begun within the deadline stated in the resolution.
The validity of the construction permit can be extended on request for another one year period if the conditions under which it was issued originally have not been changed.
Other necessary approvals
Upon receipt of a binding construction permit, the owner or the builder is under a duty to notify the relevant Municipality building inspector of commencement of works 8 days before the works commence.
Moreover, it is also necessary to acquire a “principal” permission for construction for complicated buildings. It identifies the parts of the complicated construction, the functional and technological connections between the different parts of the construction, and the timeline for issuing the construction permit.
After all of the above have been obtained it is necessary to ensure that the building has been constructed in accordance with the construction permit. This will be done through a technical acceptance inspection organised by the Municipality which issued the construction permit.
Once the technical acceptance inspection has been conducted, the use permit can be applied for. The time frame during which the use permit has to be issued is 30 days. Only upon receipt of the use permit can the constructed building be used or put into operation.
Finally, after issuance of the use permit, it is necessary to submit a Request for recording the building and to obtain a notification document at the Service for land surveying, legal-property actions and the Land Book Registry as well.
The constructed building has to then be registered in the Land Books. In order for the owner to register the building into the Land Books it is necessary to submit to the Land Book Registry of the relevant court the above mentioned notification document as well as the fully binding resolution of issuance of a use permit.
15. Insurance and Risk - What insurance will the parties effect and when does the insurance risk pass at the time of sale?
Before completing the sale, insurance is generally the responsibility of the owner of the property. Insurance can be acquired for structures of the buildings and fixtures and fittings in the event of damage or destruction by any of a comprehensive list of insured risks, which will mostly depend on the requirements of the party seeking insurance and the insurance company. Insurance policies are not personal and not transferable on sale. Once the buyer is registered as the rightful owner of the property in the Land Books, the buyer can acquire insurance over that property and this is also the point at which the risk for the property passes to the buyer
16. Environmental - What are the common environmental issues?
The legislation provides that primary responsibility is imposed on the polluter though the principle of “polluter pays”. This principle states that the polluter will pay all the expenditures of controlling and preventing pollution, (notwithstanding whether these expenditures have been incurred as a result of imposing liability for pollution emission), as well as compensation determined by corresponding financial instruments and obligations determined in accordance with the relevant regulations regarding environment pollution.
The environment user is responsible for all of its activities which have an impact on the environment, in accordance with the relevant environmental legislation.
In accordance with this principle, in the event that the real estate in question in any way contaminates or causes damage to the environment, the present owner of that property will incur the liability.
Moreover, during the procedure of issuing an urban permit, as mentioned above, the owner whose project is considered to have a negative impact on the environment is also obliged to acquire an environmental permit. The object of this permit is to ensure that a satisfactory level of protection of the environment is maintained. It is an integral document which prescribes the measures of protection of all aspects of the environment, including water, air and soil. It is important to note that the relevant body will not issue the urban and other necessary permits for projects which require an evaluation of the impact on the environment unless the environment permit has been attached.
The types of construction that need to have an environmental permit are plants within the energy, chemical, metal, mineral industries as well as infrastructure projects, (e.g., construction of motorways and railways). This group also encompasses construction for waste and water management and extractive industry, farming, food industry and infrastructure and other projects (including, but not limited to ski slopes, lifts, pipelines for gas, oil and similar chemicals.)
Certain planned construction in the above mentioned industries needs to go through a procedure of evaluating its impact on the environment before obtaining an environmental permit. This represents a procedure of determination of the acceptability of the project bearing in mind the environment as well as determining measures for environment protection, in order to ensure that the negative effects have been decreased to the smallest possible amount and that a high level of environment protection has been ensured.
This procedure is conducted into two different phases. Firstly, it is necessary to conduct an initial evaluation of the impact on the environment and secondly, conduct a study on the impact on the environment. Once a study on the impact on the environment has been issued and cleared, the Ministry for planning and environmental protection issues a Resolution on approval of the study on the impact on the environment. The investor is authorised to then submit an application for acquiring the environmental permit. The standard procedural timeframe for obtaining an environmental permit is 120 days from the submission of the application. However, if the procedure for evaluation of the impact on the environment preceded the application for an environmental permit, the deadline of using this permit is 60 days from the submittal of the application form. Once issued, the environmental permit is valid for a period of 5 years. The Resolution on approval of the environmental permit will also prescribe the conditions under which the permit can be re-examined before the expiry of its duration.
All of the above mentioned factors should be taken into account when determining whether to construct or purchase any type of property and /or decide to subsequently build new additions to it. These procedures are administrative and highly bureaucratic and could postpone the real estate acquisition process for a significant amount of time, if the applications submitted are not complete and in accordance with the relevant laws.
PART D - FINANCE AND TAXES
17. Pricing/Valuation -What sets the price/valuation of real estate?
If the property that is being considered for purchase is newly-built, the valuation and the price will depend upon the intention of the seller in imposing the sale price as well as the negotiations between the parties as to the transfer price. Once the price is agreed between the parties, it will be incorporated into the transfer contract. The transfer price of the property will also depend on the location, area, type and condition of the property as well as the encumbrances that are on the land below the building etc.
If the property is one which is already constructed, the transfer price may depend on the evaluation by an expert of its value as well as the agreement between the contracting parties as to the price of the property.
In case of land, the transfer price will depend on the market value of the land at the time of the sale and the negotiations of the contracting parties, who will incorporate the agreed price into the transfer agreement
18. Financing - How is a real estate acquisition financed?
The most common ways to finance real estate acquisitions are through:
  • the buyer’s own cash resources
  • using the capital value of the property to raise specific financing secured on the property
Obtaining a loan from a commercial bank through allowing a mortgage to be imposed over a property is a typical way of securing funds in the latter case. BiH has a developed system of pledges whereby it allows creation of pledges over the assets in the ownership of the debtor as well as on the things which the debtor will acquire immediately after the conclusion of the contract on pledges.
19. Security over real estate - How is security over real estate created and protected?
Security over real estate is normally created by way of a pledge. The pledge can secure one or more of the existing or future monetary obligations which represent the obligation of the debtor or some other entity.
Pledges are created with the existence of the following four conditions, irrespective of the order in which they are fulfilled:
  • the registration of a pledge in the Pledges Register
  • the conclusion of a contract for a pledge between the pledge debtor and the pledge creditor
  • the registration of the pledge debtor as the owner of the things which are the subject of the pledge contract
  • the pledge creditor has issued credit to the registered debtor
Pledge execution proceedings are started at the request of the pledge creditor after the pledge debtor has in some way violated the obligations from the pledge contract. The execution can only be implemented if the pledge creditor submits to the court the contract on pledges as well as confirmation of the pledge registration. The latter acts as the basis for execution for which the relevant court can order:
  • taking away, (seizing) the subject of pledge in order to effect sale for the benefit of the pledge creditor
  • the court executor to take away and sell the subject of the pledge.
20. Taxes and Costs -What are they and who pays them?
In the Federation of BiH, tax on real estate transfer is governed by legislation at the cantonal level. The legislation considers real estate transfer as the transfer of right of ownership over real estate with compensation, as well as replacement of one real estate object for another. For the purpose of these laws, land and fixed construction objects are normally considered as real estate. The person who is responsible for payment of taxes is the seller. The standard basis for calculating the tax rate is the transactional value of the real estate and the rights. In the event that the real estate and rights are exchanged, the difference between the value of the real estate property and rights will represent the basis for calculating the tax rate, and in the case of a forced public sale of real estate e.g., in a liquidation procedure, the sale price achieved in the procedure of public sale will be used in calculating the tax rate.
In the Republic of Srpska, the basis for calculation of tax over real estate property will be the market value of the assets on 31 December of the previous year. The taxpayers are the owners of the property or its co-owners. This law prescribes that the tax rate cannot be less than 0.05% of the estimated value of the real estate property, nor larger than 0.50% of the same value. Moreover, this tax is to be paid in two parts, the first part being due by 30 June and the second part being due by 31 December in that tax year, bearing in mind that the payment of the first part cannot be less than 50% of the total tax amount in accordance with the tax calculations.
Value Added Tax (VAT) is payable for transfer of, amongst other things, goods which are made by the taxpayer entity trading in the territory of BiH. It is also important to mention that the Law on VAT BiH (published in the Official Gazette BiH no. 9/05, 35/05, 100/08) also covers transfer of property in the process of liquidation. Transfer of goods in the sense of this Law is defined as transfer of a right to deal with the items to an entity that can then deal with those items/goods as a rightful owner.
Transfer of all or part of the taxpayer’s property cannot be considered as the transfer of goods, which is subject of VAT, if all of the following conditions are met:
  • the taxpayer is a separate business entity
  • the buyer is a taxpayer or with the acquisition becomes a taxpayer
  • the buyer continues to perform the same activities
  • the buyer has received, or will receive, the same rate for deduction of the registration tax as was imposed on the seller
Moreover, every further transfer of real estate and parts of that real estate after the sale of a newly-built property will be relieved from payment of VAT. However, the obligation to pay VAT in all other transfers referring to newly-built property will become the obligation of the entity to which the property is transferred.
A lease or sublease of real estate for residential purposes is also relieved of payment of VAT, but leasing property for any other purpose is subject to VAT.
VAT is calculated on a monthly basis for the determined tax period and on the basis of the total transfer of goods shown in the invoices for that tax period. The standard VAT rate to the taxable transfer of goods in BiH is 17%.
China
PART A - PARTIES AND INTERESTS
1. Parties – Who can own real estate?
Any individual or legal entity may own real estate. A legal entity includes the State Treasury, limited liability and joint stock companies, state-owned enterprises, foundations, societies and other entities that are granted a legal personality by the law. In addition, real estate may be owned by certain entities without legal personality, which can legally be the subject of rights and obligations, such as registered partnerships and limited partnerships.
Under PRC law, it is possible for several people to be owners of the same real property in one of two forms of co-ownership. The first, and most common commercial form is co-ownership in shares. The second is joint co-ownership, which exists solely when provided for by law (such as spousal relationships).
There are restrictions on foreign individuals or companies owning real estate in China. A subsidiary or representative office of an overseas-registered institution based in China (except for an enterprise that has been approved to engage in real estate operational management) or a foreigner that has worked or studied in China for more than 1 year may only purchase a commercial property for personal use or accommodation. A resident in Hong Kong, Macao or Taiwan, or a Chinese citizen resident overseas, may purchase property for personal accommodation in China, subject to a restricted quota regime.
2. Property – What property interests are currently sold?
PRC law defines all property interests in land. The exact scope of a given interest is specified in a contract or in a deed of establishment.
The PRC legal system recognizes the following key interests in real property:
  • Absolute ownership
  • Perpetual usufruct (occupation and use of a property owned by a third party)
  • Usufruct
  • Servitude (a limited right to use another person’s real property, an easement)
  • Mortgage
The absolute ownership and perpetual usufruct interests in a property are transferable. Mortgages can generally be assigned along with the debt.
It is a general rule that buildings, other structures and installations are “integral parts” of the land, provided that they are both objectively and subjectively “permanent”. Such integral parts are subject to the same legal regime that governs the land. A temporary structure does not qualify as an integral part and belongs to its owner, independently of his title to the land.
There are some exceptions to this rule. The most common one is in the case of land subject to perpetual usufruct, where the ownership of the buildings belongs to the perpetual usufructee and not to the owner of the land (the owner being either the State, local government or administrative units).
In China, leasehold is classified as a contractual right and although transferable, it is not mortgageable.
3. Ownership – What types of ownership are there?
Absolute ownership is the only type of unrestricted legal ownership in China. The other property interests – usufruct, servitude, right of superficies and apartment right restrict the absolute ownership, and are called restrictive rights. Both ownership and restrictive rights are transferable.
Some rights are registerable with the competent authorities. According to PRC law, the types of interests in real estate that are registerable at the Land Registry are:
  • Ownership right (similar to the common law concept of freehold) – an absolute right which includes the right to possess the property; the right to use and collect the proceeds from the property; the right to transfer possession or use of the property; the right to encumber or transfer title to the property and the right for the ownership to be protected
  • Beneficial usage right (or “usufruct”) – the limited right of a natural or legal person to occupy and use a property owned by another and to collect the proceeds from such property
  • Use right – the limited right of a natural or legal person to use a property owned by another for a definite or indefinite period of time
  • Land use right – a right conferred upon the owner of a building to use and build on the plot on which the building is situated and to collect the financial proceeds from such plot
  • Servitude – a limited right to use another person’s real property, such as a right of passage. In order to grant a right of servitude, the regulations of the establishment of beneficial usage right apply. The servitude, if based on a contract, should therefore be registered with the competent authorities to enable the beneficiary to defend his right against any challenge by a third party
4. Matters burdening or benefiting real estate–What matters can affect real estate?
Common matters affecting real estate include:
MatterEffectExampleUsufruct Usufruct grants a usufructee full economic rights over a property owned by a third party. Such rights are created by a usufruct contract, must be registered and can be transferred to a third party by contract and subsequent registrationA right given to a usufructee to use and collect income from property in compliance with a usufruct contract (registered with the competent authority). The owner is not obliged to make any improvements or repairs to the property, all such responsibilities belonging to the usufructeeServitudeA statutory or contractual right established for the benefit of the owner or perpetual usufructee of land (“dominant”) creating a corresponding burden on another piece of land (“servient”). Servitude is a right that attaches to the land rather than the individual, so is transferred with the real property (whether dominant or servient)The dominant property owner bears the obligation to finance, maintain and repair any installations necessary to exercise the easement Positive: road easement. Restrictive: not to build closer than x metres to the perimeter of a propertyMortgageSecurity of a prescribed debt or a capped amount of security over an unknown debtContractual or forced mortgage. Ordinary or capped mortgagePre-emption rights These are rights that are triggered by a conditional or preliminary sale agreement, or by an offer to sell. If registered on the land and mortgage register in advance, such rights are enforceable against a third party buyer. In some instances, violation of pre-emption rights results in the sale contract with a third party buyer becoming voidAn individual, such as a residential tenant, may be granted a right of pre-emption, which becomes exercisable when the absolute owner wishes to dispose of the premisesExpropriation for public purposesA property owner is obliged to sell his property in return for an indemnity from the relevant public authority to cover his loss. Prior to the expropriation, a public investigation is undertaken in order to justify the expropriationExpropriation by a public authority may be for public or social purposes
Matter
Effect
Example
Usufruct
Usufruct grants a usufructee full economic rights over a property owned by a third party. Such rights are created by a usufruct contract, must be registered and can be transferred to a third party by contract and subsequent registration
A right given to a usufructee to use and collect income from property in compliance with a usufruct contract (registered with the competent authority). The owner is not obliged to make any improvements or repairs to the property, all such responsibilities belonging to the usufructee
Servitude
A statutory or contractual right established for the benefit of the owner or perpetual usufructee of land (“dominant”) creating a corresponding burden on another piece of land (“servient”). Servitude is a right that attaches to the land rather than the individual, so is transferred with the real property (whether dominant or servient)
The dominant property owner bears the obligation to finance, maintain and repair any installations necessary to exercise the easement

Positive: road easement. Restrictive: not to build closer than x metres to the perimeter of a property
Mortgage
Security of a prescribed debt or a capped amount of security over an unknown debt
Contractual or forced mortgage.
Ordinary or capped mortgage
Pre-emption rights
These are rights that are triggered by a conditional or preliminary sale agreement, or by an offer to sell. If registered on the land and mortgage register in advance, such rights are enforceable against a third party buyer. In some instances, violation of pre-emption rights results in the sale contract with a third party buyer becoming void
An individual, such as a residential tenant, may be granted a right of pre-emption, which becomes exercisable when the absolute owner wishes to dispose of the premises
Expropriation for public purposes
A property owner is obliged to sell his property in return for an indemnity from the relevant public authority to cover his loss. Prior to the expropriation, a public investigation is undertaken in order to justify the expropriation
Expropriation by a public authority may be for public or social purposes
5. Occupation of real estate – Who may occupy real estate?
Real estate may be occupied by any of the following categories of persons:
  • Owners – those persons with absolute ownership of the property
  • Tenants – those persons with a lease of the property or part of it. A subtenant may also occupy a property by means of an agreement with the tenant, subject to obtaining the consent of the landlord where required
  • Holders of rights of usufruct, use or habitation – such rights are normally acquired by succession or as part of an arrangement within a family
  • Usufructee – a person who has a right to use the property and to collect any economic benefit it produces
  • Possessors – they may establish occupation rights over a property where it has been occupied or used for a long period of time, as if they were legally entitled to do so, without being challenged by the rightful owner of the property. A Possessor will not, however, be able to establish absolute ownership over the property in this manner
  • Persons entitled to occupy property based on contractual permissions - such rights are personal and are not capable of being transferred to a third party without the consent of the owner of the property. An example is a concession right granted over state-owned land upon which housing for low-income families has been constructed.
6. Brokers – What is the broker’s role?
The activities of real estate brokers in China are confined primarily to brokerage. Large companies also carry out market research, land and premises valuations and, in some cases, project development and management.
The broker’s role may be summarised as follows:
  • acting for a seller to find a buyer for a property, including marketing the property
  • acting for a landlord to find a tenant for a property, including marketing the property
  • acting for a buyer to find a property to buy
  • acting for a tenant to find a property to lease
  • valuing a client’s existing and target properties
  • project management of development of new buildings or refurbishment projects
  • reporting on rents of comparable commercial and/or residential property and other market research
Brokers are permitted to draft contracts or negotiate preliminary agreements or heads of terms. A broker may act for both the seller and the buyer (or lessor and lessee) and may demand a full commission from both parties unless he is expressly forbidden by contract to act for both or a conflict of interests arises. In practice, brokers inform the parties that they are acting for both at an early stage.
7. Employees – What employment issues affect real estate acquisitions?
Typical employment issues which may be relevant to real estate transactions include the transfer of an undertaking, redundancies and amending the terms and conditions of employment upon the purchase of a building.
Transfer of undertakings
This issue can arise when an undertaking or business (or part of one) is transferred from one party to another. The broad effects of such a transfer are that:
  • with effect from completion of the transfer, the buyer assumes responsibility for employees
  • employees working in the business are transferred
  • continuity of employment is preserved
  • dismissal for a reason connected to the transfer is automatically deemed an unfair dismissal, unless it can be shown that it was for an “economic, technical or organisational reason entailing changes in the workforce”
  • employees transfer with their existing terms and conditions intact
  • if the buyer seeks to change employees’ terms and conditions of employment by reason of the transfer, such changes are generally ineffective
  • the employees’ elected representatives must be informed and consulted about the transfer, and if there is a trade union, the trade union shall also be informed and consulted
Redundancies
Redundancies may arise on the closure of a business or part of a business, on a merger of two businesses or on a transfer of one undertaking to another. Both PRC Labour Law and Labour Contract Law provide employees with specific legal rights.
Changing terms and conditions of employment
An employer may decide to change or harmonise terms and conditions of employment on the acquisition of a new business. This can be a difficult process, as the rules applicable to the transfer of business generally also apply to the change of terms and conditions of employment.
PART B - PROCEDURE AND TERMS
8. Procedure – What are the steps in a sale and purchase transaction?
A set of heads of terms or a memorandum of understanding is not necessary in every sale transaction. Non-binding declarations of intent are often used on large transactions, such as for the sale of real estate.
For a purchase by individuals of residential property from real estate developers, the developer requires an irrevocable purchase order. The irrevocable purchase order obliges the buyer to pay a deposit on the property and provides a longstop date for conclusion of the sale contract. If the sale contract is not signed, the irrevocable purchase order ceases to be binding and the deposit will not be returned to the buyer.
It has become common practice for buyers to carry out due diligence so as to identify problem areas and seek remedy as soon as possible. On small transactions, the due diligence usually consists of an independent search of the property and/or land registries and a site visit, which can be conducted by the buyer or his lawyer. On large transactions, due diligence is conducted by a combined team of lawyers, architects and other professional consultants, as deemed appropriate.
In tandem with the due diligence process, negotiations are likely to take place concerning the principle terms of the sale agreement. The intermediate or final result of the due diligence will form part of these negotiations. Once the principle terms have been finalized and all the information relating to the property has been collected, a sale and purchase agreement is drafted based on a standard form provided by local real estate administrative authorities. For large transactions, lawyers representing each party will draft the contract.
Completion may take place when the competent property registration authority issues the property title certificate in the name of the buyer. This certificate may only be issued upon submission of the signed (or notarised) sale and purchase agreement and ancillary documents. Where the purchase is made with borrowed finance, a mortgage over the property will be granted at the same time. The lender may instruct its own lawyers and property evaluation institutions to carry out due diligence and evaluation procedures on its behalf and negotiate security documentation with the buyer.
9. Other common contract terms – What other provisions does a real estate sale contract commonly contain?
An agreement for the sale and purchase of property should be evidenced in writing and should contain or clearly refer to all the key terms and conditions of the sale agreement.
It is common for the sale and purchase agreement to provide for a deposit of between 10%-50% of the total purchase price to be paid by the buyer on exchange, with the remainder of the consideration to be paid once the application to the property registration authority for the title transfer has been made successfully. This deposit may also be deposited in an escrow account opened with a bank that has been jointly designated by the parties.
Where there are issues of title affecting the property, such as restrictive rights, the seller may require reciprocal obligations from the buyer and an indemnity of any liability the seller may still have following completion of the transaction. On the other hand, the seller should obtain the written consent for the sale from the restrictive right holder, such as the mortgagee.
There are standard terms published by local property administrative authorities for property transactions, most of which are incorporated in the sale and purchase agreement.
Contracts for the sale of property that is subject to occupational interests such as leases will include clauses to cover ongoing management matters and provide for the apportionment of occupational income and outgoings on completion.
If the property being sold is in its construction phase, the sale and purchase agreement shall incorporate provisions dealing with the obligations of the seller to construct in accordance with an agreed specification and to provide the buyer with warranties to safeguard the buyer against defective design or workmanship.
10. Due diligence – What investigations does the buyer normally make?
Pre-exchange of agreements
The prudent buyer is likely to commission a survey of the property and, to the extent necessary, soil and geological investigations, plant and machinery tests, and environmental investigations. There are three limbs to the pre-signing due diligence undertaken by the buyer’s lawyers.
Firstly, title to the property, the land use right of the land that the property occupies and existence of any encumbrance or restrictions on the property and the land use right, will be investigated. The buyer’s lawyers will consider the entries found on the land registry and the property registry and, where relevant, any historic title documents. Where titles to the property and the land use right are not registered, the buyer’s lawyer will advise the buyer to enter into a pre-sale or an option agreement pending completion of the registration, as no sale is permitted in cases where the property and the land use right are not properly registered. In cases where the property and the land have been sealed by court order, the lawyer is likely to advise the buyer not to purchase.
Where the property is leasehold, or subject to a lease or other occupational interests, the terms of the relevant occupational documents need to be considered carefully to ensure that they are not contrary to the buyer’s intention for the property. The buyer’s lawyer will also need to check whether these documents require the consent of any third party to be given to the transaction.
Secondly, the buyer’s lawyers will undertake general due diligence, including conducting various searches to check the qualification of the developer, the position concerning municipal and zoning consents, environmental matters, utilities serving the property, daily management of the property, relationships with neighbouring plots and financial encumbrances. Where the seller is a company, the buyer’s lawyers will also conduct searches against the seller’s name at the Administration of Industry and Commerce to ascertain whether the company is solvent and therefore able to dispose of its assets freely.
Thirdly, the buyer’s lawyers will raise additional enquires of the seller or its lawyers to obtain information regarding a large number of practical matters which may affect the property and ask any relevant questions in relation to the title to the property and management of it.
Pre-completion
Very shortly before the transfer of title by the property and/or land registration authority, the buyer’s lawyers will repeat searches with these registries to confirm that there are no proceedings pending regarding the property and that the seller has not been declared bankrupt. These searches should confirm that the information gained in the due diligence process remains unchanged or the problem areas have been remedied as promised in the sale and purchase agreement prior to the title transfer.
Reporting to the client
Before concluding any agreement, the buyer’s lawyer will report their due diligence findings to their client, raising any matter of particular importance or concern.
11. Terms implied by law – What provisions are implied by Statute, Code or otherwise?
The Real Right Law, the Contract Law, the Urban Real Estate Administrative Law and other applicable laws create a legal framework for real estate transaction. Some of the most significant legal concepts are as follows:
Buyer beware
The buyer must satisfy itself in all respects as to the nature of the property it is acquiring, in particular where the buyer is a foreign company or a foreign individual, since there are restrictions on owning real estate by foreign nationals or companies. However, this does not absolve the seller from the obligation to provide truthful replies to enquires raised by the buyer’s lawyers. The seller must give information to the buyer (even without enquiry of the buyer) if the seller knows that this information is essential for the buyer in respect to the buyer’s stated intentions.
Pre-sale qualification
A developer is not permitted to launch the pre-sale of a building unless the construction of the building has satisfied the statutory requirements and the property administrative authority has issued a pre-sale licence.
Registration of ownership
To complete the process of the transfer of ownership, the sale and purchase agreement must be registered with the property registration authority. Title passes upon the approval by the property registration authority and issue of a new title certificate. The issue date of the title certificate shall be that when the application for ownership transfer was filed.
Title guarantee
The seller is under a general obligation to be truthful in relation to matters affecting its title to the property. The seller should warrant that no third party might deprive the buyer of the property purchased. Since, however the property registration authority protects a buyer acting in good faith with regard to the entries on the registry, the role of such warranty is extremely limited. Once the buyer is registered with the property registration authority as the new owner, he is protected against claims brought by third parties that have not been registered. The buyer does not, therefore, have to revert to the seller with a claim.
12. Registration and notarisation of real estate – What are the basic requirements?
According to PRC law, the title to and security over the property will not come into force unless registered with the competent property or land registration authority. In accordance with the Real Right Law, which came into effect on 1 October 2007, the information recorded by the property or land registration authority shall be deemed the most accurate. Where there is a discrepancy between the information on the title certificate and that registered with the property or land registration authority, the latter shall prevail.
The notarisation of the sale and purchase agreement is not mandatory unless any of the parties is a foreign registered company or a foreign individual. If this is the case, the local public office notary shall notarize the sale and purchase agreement
13. Disputes – How are they dealt with and resolved?
PRC law provides for the exclusive jurisdiction of the court residing over the area in which the property is located.
The parties have the ability to choose arbitration as a dispute resolution mechanism instead of engaging court proceedings. However, the option of arbitration must be provided for in the sale and purchase agreement or in a supplementary agreement to it, otherwise the dispute will be automatically submitted to the appropriate court.
PRC law also provides that PRC law and the local rules and regulations of the place where the property is located shall exclusively govern any dispute over the ownership of the property.
PART C - PERMITS INSURANCE AND ENVIRONMENT
14. Permits – What permits are required for the use and occupation of real estate and are they personal?
PRC law provides detailed rules for the development of land. Planning and construction laws and regulations (which are governed by central government, provincial law and municipal law) need to be complied with.
The following main administrative approvals and permits are necessary to develop a new real estate project:
  • Land use right certificate
  • Construction site approval certificates
  • Opinion from the Planning Bureau and Land Administration Bureau on the selection of the construction site
  • Planning Bureau approval for the project
  • Construction and Administration Committee examination and approval of the project
  • Construction land use planning permits
  • Construction project planning and work permits
  • Project acceptance qualification/acceptance filing form (including without limitation certificates issued by authorities of planning, civil defence, fire prevention, construction and etc.)
  • Commodity building pre-sale permits (if any)
  • Approval certificate on use of selected name of the site (if any)
Additionally, certain additional decisions, permits and studies (such as public disclosure of the intended project, giving affected third parties the opportunity to object) should be obtained during the process of obtaining the above approvals and/or permits. Special approvals and permits are required when it is proposed to carry out work on historically or architecturally important buildings.
The above-mentioned approvals and permits are generally not transferable, but under restricted circumstances specified by law, some may be transferable to defined transferees.
For other real estate development projects, such as the conversion of the use purpose of a building, only a few of the aforementioned approvals and permits are required. Development of retail shops requires special consent to be issued by the local Economic Committee, which controls and overseas the distribution of retail shops and associated planning.
For use and occupation of real estate, a property title certificate, rent certificate (for state-owned real estate) or occupation certificate (for collective owned land use right) is necessary to justify an owner, user or occupant’s rights (respectively) and to defend against any third party claim
15. Insurance and risk – What insurance will the parties effect and when does the insurance risk pass at the time of sale?
Insurance is generally the responsibility of the owner of the freehold interest in a property. However, where such property is the subject of a lease, the terms of the lease will prescribe which party bears the responsibility to insure. It is common for landlords to insure rather than tenants. Whatever the term of the lease, the tenant will generally insure the contents of the property belonging to the tenant and in some cases certain parts of the property for which the tenant is contractually responsible.
The insuring party should have a fully comprehensive buildings insurance policy to protect the structure, fixtures and fittings of the property in the event of damage or destruction by any of a comprehensive list of insured risks, such as storm, lightning, fire and water damage. The policy may also cover additional special heads of cover such as subsidence, earthquake and, if available, terrorism. Generally it is buildings, and not land, which are insured for the reinstatement cost rather than the reinstatement value.
Insurance policies may either comprise a single policy for one particular property or a block policy designed to cover a portfolio of properties.
Insurance policies concerning real property are not transferable on sale. Termination options are defined in the general terms and conditions of these policies. On a sale, timing of the transfer of risk is normally prescribed by the sale agreement. If not prescribed in this way, the standard position is that the transfer of risk occurs simultaneously with the completion of the change of ownership of the property, once registered with the competent authorities.
16. Environmental – What are the common environmental issues?
For developments and activities that are likely to cause significant environmental impact (such as the establishment of a manufacturing company or the production of chemical products), an environmental assessment will need to be made. Such an assessment will explain the likely environmental impact of the development or activity.
Consequently, upon the sale of a majority stake in a manufacturing company, or a disposal of a manufacturing unit, it is also necessary to pass an environmental assessment procedure to obtain approvals from the environment protection bureau.
The responsibilities of the acquirer or the developer are laid down in an environmental conformity plan, the terms of which are negotiated between the acquirer or developer and the environmental authority. These may refer to both reduction and remediation measures.
The liability for pollution of real estate and its removal is regulated according to the principle of causal responsibility. The buyer as owner of the real property is secondarily liable for pollution, which means an entity or a person who becomes the owner of polluted real estate bears responsibility for its remediation from the day of taking possession, otherwise they shall become liable to financial penalties.
Due diligence, as part of the acquisition process, may involve qualified environmental consultants to consider documentary information and to carry out a site visit. If considered necessary, more intrusive investigations may then be undertaken. It is important to identify potential problems early so that the price can be negotiated, and so that reserves can be made for any potential losses that may arise in the future. Pre-acquisition protections for a buyer may be put in place in the form of imposing obligations on the seller to remedy any contamination discovered post-acquisition, indemnities in respect of third party claims, or environmental insurance to cover these risks.
PART D - FINANCE AND TAXES
17. Pricing/Valuation - What sets the price/evaluation of real estate?
Pricing of real estate investments is based on a combination of the aggregate rental income (if applicable) and the value that a buyer considers that a property of the specific type and location is worth at the time of valuation.
Rental value for a particular property is likely to be assessed by multiplying the floor area of the property by the market rental value, per square meter. The market rental value will include factors such as the location of the property, its type and condition, and the length of the lease term.
Another important factor that influences the price of real estate in China is the cost of acquiring the State-owned land use right. Most cities in China divide the land within their administrative territory into several grades and set a basic price for the right to use the land. A premium is then added to such basic price, to be paid by the developer, and is likely to be passed on to any future buyer. Such basic price is set and changed by the State Land Administrative Bureau and/or its local authorised authority from time to time.
18. Financing - How is a real estate acquisition financed?
  Financing the purchase of a property is usually achieved using one or both of the following:
  • Buyer’s own capital or reserves
  • Loans secured by mortgage
The buyer can apply to banks or any other lender for a loan that will be secured on the property by a mortgage in favour of the lender. The mortgagor usually must own the property for it to mortgage the same. It should be noted that the owner of the construction land use right might also grant a mortgage over buildings in the construction phase.
The amount of the loan that the lender will agree to grant depends on the value of the property and the borrower’s credit status and solvency. With commercial property, the expected profit from the relevant business to be undertaken will be an additional important factor for the lender.
Loans of up to 70% of the market value of a residential property may be granted to a first-time buyer. Loans secured by mortgages will attract an interest rate that is set by the lender based on the rate published by the People’s Bank of China, which may change from time to time.
PRC law will invariably govern the mortgage when the property in question is situated in the PRC, irrespective of the law that governs the accompanying loan documentation.
19. Security over real estate-How is security over real estate created and protected?
Under PRC law, real property may be pledged as security only in the form of a mortgage. Mortgages may only be taken over the entire property that is registered with the land and/or real estate registry.
A mortgage is considered valid only if evidenced in writing and registered with the land and/or real estate registry. A mortgage agreement must clearly identify the property over which the mortgage is granted and must refer to its specific location, construction area and current status, the debtor, the creditor, the debt, the term of the mortgage and the maximum amount secured by the mortgage. The mortgage can secure a specific debt or all debts that exist or may arise in the future between the creditor and the debtor, provided that the debts are determined or determinable at the time the mortgage is created.
Since the mortgage only becomes effective and enforceable as against third parties from the date of registration, in practice, the mortgagor and the mortgagee shall submit the mortgage agreement to the competent land and/or real estate registry as soon as possible after such agreement has been signed. Upon the submission of an application for mortgage registration, the land and/or real estate registry should complete registration within seven days and issue a mortgage registration certificate on which the main information related to the debt and the mortgage is recorded. The mortgagee holds the original of such mortgage registration certificate.
During the mortgage term, the pledged property remains in the possession of the mortgagor, who is entitled to use the property. However, the mortgagor must maintain such mortgaged property in good condition. In the event that the mortgagor, or a third person, risks the condition of the mortgaged property, the mortgagee is entitled to demand that the offending act be prohibited and that an order be issued to take the necessary measures to eliminate the risk. If any deterioration in the conditions of the mortgaged property jeopardizes the satisfaction of a claim, the mortgagee may demand replacement of the mortgaged property or security that corresponds to the degree of risk. Should the mortgagor fail to comply with any request of the mortgagee within the allotted time, the mortgagee is entitled to call in the loan and demand early repayment.
The same property may be subject to several mortgages as long as the total amount secured by the mortgages does not exceed the market value of the property. A registered mortgage has priority, as at the date of registration, over any subsequent mortgage that is registered. A mortgage remains effective as long as the underlying debt is valid; following satisfaction or cancellation of the debt, the mortgage is no longer effective.
The mortgaged property cannot be sold or transferred unless the mortgagee agrees with such sale or transfer, otherwise the buyer should first undertake to repay the debts or loans on behalf of the mortgagor.
20. Taxes and costs - What are they and who pays them?
Generally, please refer to our CMS transaction costs guide as to the nature and amount of the taxes and costs.
There are various taxes associated with real estate transactions in China, namely business tax, stamp duty, land value added tax, enterprise income tax, individual income tax and deed tax. Whether a tax liability arises depends on a number of factors, principally including the legal standing of the seller, the legal standing of the buyer, the location of the real estate and the nature of the real estate. The most important aspects of these taxes are briefly summarised below.
Business Tax
Generally, the transfer of property is subject to business tax amounting to 5% of the difference between the new selling price to be paid by the purchaser and the original purchase price already paid by the seller. The sale of ordinary residential property by individuals is exempt from business tax, unless such residential property is sold within a very short period of time after its acquisition. Local real estate administrative authorities define the time period and the meaning of ordinary residential property, according to their local real estate markets.
Stamp Duty
Both the seller and the buyer must pay stamp duty, in each case amounting to 0.05% of the purchase price.
Land Value Added Tax
The seller shall pay land value-added tax (“Land VAT”) on any profit derived from transfer of the State-owned land use right and the ownership of a property, after deducting the price originally paid, related costs and expenses and other deductible items stipulated under the Provisional Regulations of the PRC on Land Value Added Tax. Land VAT shall be levied in four progressive levels, namely 30%, 40%, 50% and 60%. The sale of ordinary residential property by individuals is Land VAT exempt. Local real estate administrative authorities, as mentioned above, issue the definition of ordinary residential property.
Enterprise Income Tax
Companies and various other Chinese corporate entities are liable to pay Enterprise Income Tax (“EIT”) on any gains derived from the sale of real estate, at a current rate of 25%. There is no specific capital gains tax in China.
EIT is levied on both domestic entities and foreign enterprises that have no institution or establishment inside China that generates income. It should be noted that the tax rate applicable to those foreign enterprises is 10%, not 25%.
Individual Income Tax
If an individual transfers his property, he has to pay individual income tax (“IIT”) at a rate of 20% on the gains made from the transfer of the property. When calculating the amount of such gains on the sale of a residential property, certain costs and reasonable expenses may be deducted from the original purchase price, including all costs and expenses incurred in relation to the initial acquisition. Note that where the sale of a sole residential property by a PRC individual takes place five years after acquisition, gains are IIT exempt. Deductions are not available where an individual sells commercial property.
Deed Tax
The transfer of real estate is subject to deed tax, which shall be paid by the buyer. The deed tax rate for ordinary residential property is normally 1.5% of the purchase price while the rate for non-ordinary residential property and non-residential property is 3% of the purchase price. The local real estate administrative authority shall issue the definition of ordinary residential property from time to time as mentioned above.
In addition, PRC tax authorities may challenge the purchase price and substitute the price paid with the actual market value of the property sold, if higher.
Fees
Both the seller and the buyer are equally responsible for the payment of transaction processing fees. The buyer is obliged to pay the registration fee and if applicable, the property maintenance fee. The specific rates of these fees vary between cities in China
Czech Republic
PART A - PARTIES AND INTERESTS
1. Parties – Who can own real estate?
Any legal “person” may own real estate. This definition will include individuals, companies, entities established by statute, (e.g. associations of individuals and/or legal entities, associations accumulating property for a given purpose, units of local self-government / self-administration) plus the Czech State itself.
Bodies that are not legal persons, such as unincorporated associations, cannot own real estate directly. Potential owners of commercial real estate include: private developers, insurance companies, banks and other financial institutions, private or public property companies, the Czech State and local authorities.
There are a number of legal restrictions preventing foreign nationals from acquiring real estate in the Czech Republic, and despite EU accession, pre-accession restrictions still apply to individuals who are neither Czech citizens nor have official residency status in the Czech Republic. However, a foreign national may acquire real estate in certain limited circumstances, including via the unapportioned co-ownership of a married couple where one spouse is a non-resident, by the exchange of real estate or by acquiring property from a spouse, parent or grandparent by inheritance. In order to avoid restrictions in respect of direct ownership of real estate by foreign nationals, acquisitions through a Czech-based company (LLC or similar) is often used.
Individuals who are citizens of EU member states may acquire all types of real estate in the Czech Republic; for acquisition of some of them they must satisfy certain conditions. Agricultural land and forestry land may only be acquired by EU citizens who are registered as entrepreneurs in agriculture and they have permanently resided in the Czech Republic for more than 3 years. Further, in case of acquisition of other property, including residential property, EU citizens must obtain an occupancy residency permit for EU citizens issued by the Czech Foreign Police. Citizens of Norway, Ireland, Liechtenstein and USA may acquire real estate in the Czech Republic under the same conditions as the EU citizens provided that they obtain a temporary residence permit or visa for a period no longer than 90 days.
Foreign companies cannot directly own real estate in the Czech Republic. There are, however, two ways in which such companies may indirectly acquire real estate. The first route is to acquire real estate through a company vehicle established and registered in the Czech Republic. The second is to acquire real estate through a foreign company that has a branch located and registered in the Czech Republic, or through one which locates its enterprise in the Czech Republic and is allowed to carry on business in the Czech Republic.
Foreign companies are not permitted to directly acquire forestry land or land forming part of the Agricultural Land Fund, as managed by the Land Office.
2. Property – What property interests are currently sold?
Czech law recognises several forms of interest in property. These include:
  • Ownership
  • Rights of possession and
  • Limited property rights - e.g. mortgages, easements, pledges and contractual rights, such as leases
However, current practice dictates that only ownership interests are sold. The assignment of rights and transfer of obligations under occupational leases is relatively rare with subletting being favoured.
Much commercial property is sold by way of a share rather than an asset sale, where the real estate is owned by a special purpose vehicle and the shares in it sold. In general such sales are used to avoid real estate transfer tax and the risk of termination of some of occupational leases by tenants after a transfer.
A person who treats property as his own or exercises such right for himself is deemed to be the possessor of the property in question. If a person, taking into account all the circumstances, possesses the real property in good faith for a 10 year period, he might acquire ownership of the real estate by virtue of adverse possession (“usucaptio”).
As in some other civil law jurisdictions, leases under Czech law do not create a property interest, but merely create a contractual right to use property. Rights created under leases are not registrable at the Cadastral Registry. The period for which a lease can be entered into is not limited by law, and depends on the agreement of the parties.
Generally, there are two types of leases recognised under Czech law:
  • Leases of property in general, regulated by the Civil Code
  • Leases of non-residential premises, regulated by Act No. 116/1990 Coll. on the Lease and Sublease of Non-Residential Premises (as amended) (Act on Leases) and by the Civil Code and the Commercial Code
In practice the Act on Leases governs only leases of non-residential (i.e. commercial) premises where only part of a building is leased, such as multi-let office buildings, shopping centres and the like, and not to a letting of a whole building or land. The Civil Code, on the other hand, applies to leases in general.
It should be noted that in case of leases governed by the Civil Code the Civil Code stipulates explicitly that on a change of the owner of real estate, a tenant is entitled to terminate its lease agreement. This much criticized provision unreasonably favouring the tenant is, however, applicable for non-residential only if expressly agreed by the parties.
3. Ownership – What types of ownership are there?
Ownership is the highest title a legal person can hold in relation to property under Czech law. Ownership of real estate can be equated to freehold title under Anglo-American legal systems.
Most of the real estate in the Czech Republic is subject to registration at the Cadastral Registry. All land and most developments must be registered.
Ownership is freely transferable. Agreements on the transfer of ownership title must be entered in the Cadastral Registry. Ownership title passes upon execution of the decision of the Cadastral Registry but the decision takes effect retrospectively from the date on which the application to register the transfer was filed.
Ownership may also be acquired via possession. For this to occur, the property must be in the possession of a so-called “rightful possessor” who believes in good faith that the property belongs to him for an uninterrupted period of 10 years.
It should be noted that under Czech law the owner of a building is not necessarily the owner of the land beneath the building, as it is possible to have separate ownership of a building and the land plot on which it is constructed. Care must be taken to establish whether ownership of a property has been split in this manner.
Czech law distinguishes between exclusive ownership and co-ownership of land and buildings. This means that a condominium style ownership is permitted where, for example, a person may be exclusive owner of a part (unit) of a building and co-owner with other unit owners of the common areas, the structure and the land on which the building stands. Alternatively, more than one person may own the whole of a building and/or plot of land. In each case, the co-owner is said to have an “ideal” share in such common parts or the whole of the building or land plot.
4. Matters burdening or benefiting real estate – What matters can affect real estate?
Common matters affecting real estate include:
MatterEffectExampleEasementsUnder Czech law, easements can be personal (in personam) or connected with the ownership of real estate (in rem). A personal easement exists when a property is encumbered in favour of an individual legal entity. This right cannot be transferred and usually expires on the death or winding up of the entitled legal entity. Easements which are connected with the ownership of real estate are similar to Anglo-American easements, as the property is encumbered with the rights of the owner from time to time of the other property in question. This easement runs with the property when ownership is transferred An easement must be entered in the Cadastral Registry to existA right of way; a right to construct a building on land in the ownership of a third party land; a right to use pipes and cablesMortgageA mortgage is established either on the basis of:a written contractan agreement on the settlement of inheritance which has been approved by the courta decision made by the courta decision made by an administrative authority orlawA mortgage established on the basis of a written contract must be entered in the Cadastral Registry to become effective, and once registered will give the mortgagee priority over unsecured creditors of the borrowerMortgage securing receivables arising out of a loan agreement Statutory mortgage of the Czech tax authority securing tax obligationsAdverse possessionAcquisition of ownership to real estate based on long term possession in good faithRightful possession of real estate for more than 10 years in good faith that the possessor is a rightful ownerContractual rights Leases (see above). Contractual right to use the property “Pre-emption right”, is a right of the seller to be offered purchase of the real estate in case the buyer wishes to sell the real estate to a third party in the future Pre-emptive rights can be established either as in personam or in rem rights. In personam pre-emptive rights cease to exist with transfer of the real estate to the third party In rem pre-emptive rights remain in place after a transfer of the property, and must be recorded in the Cadastral RegistryLease of land, buildings, residential and non-residential premises
Matter
Effect
Example
Easements
Under Czech law, easements can be personal (in personam) or connected with the ownership of real estate (in rem). A personal easement exists when a property is encumbered in favour of an individual legal entity. This right cannot be transferred and usually expires on the death or winding up of the entitled legal entity. Easements which are connected with the ownership of real estate are similar to Anglo-American easements, as the property is encumbered with the rights of the owner from time to time of the other property in question. This easement runs with the property when ownership is transferred
An easement must be entered in the Cadastral Registry to exist
A right of way; a right to construct a building on land in the ownership of a third party land; a right to use pipes and cables
Mortgage
A mortgage is established either on the basis of:
  • a written contract
  • an agreement on the settlement of inheritance which has been approved by the court
  • a decision made by the court
  • a decision made by an administrative authority or
  • law
A mortgage established on the basis of a written contract must be entered in the Cadastral Registry to become effective, and once registered will give the mortgagee priority over unsecured creditors of the borrower
Mortgage securing receivables arising out of a loan agreement
Statutory mortgage of the Czech tax authority securing tax obligations
Adverse possession
Acquisition of ownership to real estate based on long term possession in good faith
Rightful possession of real estate for more than 10 years in good faith that the possessor is a rightful owner
Contractual rights
Leases (see above). Contractual right to use the property
“Pre-emption right”, is a right of the seller to be offered purchase of the real estate in case the buyer wishes to sell the real estate to a third party in the future
Pre-emptive rights can be established either as in personam or in rem rights. In personam pre-emptive rights cease to exist with transfer of the real estate to the third party
In rem pre-emptive rights remain in place after a transfer of the property, and must be recorded in the Cadastral Registry
Lease of land, buildings, residential and non-residential premises
5. Occupation of real estate – Who may occupy real estate?
Real estate is usually occupied by one of the following categories of person:
  • Owners – persons with an ownership right to the property
  • Tenants – persons with a lease of the property or part of it. It is possible to create a sublease to a leased property. However, a sublease of the property is usually subject to approval of the owner of the property
  • Rightful possessors – persons who have occupied the property for a prescribed period of time in good faith
  • Persons benefiting from the right of easement – person who may use the property on the basis of in personam (personal) or in rem
6. Brokers - What is the broker’s role?
Brokers in the Czech Republic are employed by any party to any transaction involving real estate. Their role may include any of the following tasks, namely:
  • acting for a seller to find a buyer for a sale property, including marketing the property for sale
  • acting for a landlord to find a tenant for a leasehold property, including marketing the property
  • acting for a buyer to find a property to buy
  • acting for a tenant to find a property to lease
  • acting for any party to a transaction drafting and negotiating heads of terms
  • valuing a client’s existing and target properties
  • day to day management of property owned by clients, including managing maintenance programmes and landlord and tenant work
  • project management of development of new buildings or refurbishments
Brokers available in the market range from those employed by major international organisations to specialised advisers providing advice on a more restricted basis.
7. Employees - What employment issues affect real estate acquisitions?
Typical employment issues which may be relevant to real estate transactions include (i) the acquisition of real estate through the transfer of business enterprise of the company that owns real estate and (ii) the transfer of the shares of the company vehicle that owns real estate.
In the event of the transfer of a business enterprise of a company that owns real estate, rights and duties arising from employment relationships with employees of the enterprise pass from the seller to the buyer. The change in the entity of “employer” applies as a consequence of the transfer of enterprise.
In the event of the transfer of shares of the company vehicle that owns real estate, the “employer” remains unchanged and as consequence the rights and duties of “employees” remain unchanged.
In both cases above:
  • accrued continuity of employment is preserved
  • the buyer cannot unilaterally change the terms and conditions of employment agreements by reason of the transfer; the buyer can only agree on changes with the employee
  • elected representatives of the employees must be informed and consulted about the transfer of a business enterprise
Redundancies may arise as a result of a dismissal of employees where there is a reduction in the number of employees required. Care should be taken to ensure that the redundancies are carried out in a procedurally fair manner.
PART B - PROCEDURE AND TERMS
8. Procedure - What are the steps in a sale and purchase transaction?
Commercial real estate transactions usually start when proposed heads of terms are drafted, negotiated and agreed by the seller and the buyer. The heads of terms (or letter of intent or memorandum of understanding) set out the principal terms agreed between the parties and are generally expressed to be “subject to formal contract” and not legally binding. They form the basis of the documents to be drafted by the lawyers.
Once the heads of terms have been finalised, they are sent to the parties’ lawyers. The seller’s lawyers will usually collate all information relating to the property and send it to the buyer’s lawyers together with a draft of an agreement to conclude a future transfer agreement (future agreement) with the form of transfer agreement attached. A future agreement is not required if there are no conditions to the purchase, in which case the parties proceed direct to the transfer agreement. The buyer’s lawyers undertake thorough due diligence of all legal documents relating to the property (see section 10). If the purchase is made with borrowed finance, the lender of the finance may instruct its own lawyers to carry out due diligence on its behalf and negotiate loan and security documentation.
The seller arranges for the property to be valued by a court appointed valuer for tax purposes (as to which see below).
Once the form of future agreement and transfer agreement are agreed, the seller and buyer sign the future agreement. Once the conditions to the purchase (if any) are satisfied one party will invite the other to conclude the transfer agreement.
Before signing the future agreement and the transfer agreement, the buyer’s lawyers will conduct a search at the Cadastral Registry to ensure that the seller still owns the property and that there are no new encumbrances affecting the property.
The signatures of the parties on the transfer agreement (but not the future agreement) must be verified by a notary. The future agreement and transfer agreement may be signed in English with a certified Czech translation of the transfer agreement prepared for registration purposes, although in practice it is better to also sign the Czech version of the transfer agreement for registration purposes.
Following conclusion of the transfer agreement, the lawyers need to deal with registration of the transfer documents at the Cadastral Registry and the seller needs to arrange for payment of real estate transfer tax, which is assessed on the higher of the price paid and the valuation carried out by the court appointed valuer. It is common practice for the purchase price to be paid into escrow (bank or notary) to be released partly on registration of the buyer as the exclusive owner in the Cadastral Register free from encumbrances and partly (equal to the amount of the tax) when the real estate transfer tax is paid by the seller.
9. Other common contract terms - What other provisions does a real estate sale contract commonly contain?
An agreement for the sale and purchase of property must be in writing, must contain all main terms and conditions as specified by the law, and must be signed by both the seller and the buyer; signatures of the parties must be notarised.
Provisions relating to value added tax will be included where relevant to ensure that the agreed tax position is preserved. Besides the essential terms of the sale and purchase agreement, such as the exact specification of the property and price, the document should also mention the following, namely:
  • the title document under which the seller acquired ownership
  • all liabilities burdening the property (mortgages, easements, pre-emptive rights, leases)
  • the conditions of payment of the purchase price
  • a date of a handover/takeover of the property
  • a provision on which of the parties will pay the real estate transfer tax
  • a provision on which of the parties will file the petition for the change of ownership
  • the conditions on the basis of which any party will be entitled to withdraw from the agreement and
  • a seller’s warranty that it is a sole unrestricted owner of the property and that the real estate is and will remain in the (legal and actual) condition described in the agreements until registration of the transfer’s title in the Cadastral Registry
10. Due Diligence - What investigations does the buyer normally make?
General
The prudent buyer is likely to commission a survey of the building and in appropriate cases, soil and geological investigations, plant and machinery tests and environmental investigations. There are three limbs to due diligence by the buyer’s lawyers.
Firstly, title to the property will be investigated. The buyer’s lawyers will consider the entries on the Cadastral Register and, where relevant, historic title documents.
By submitting details of the property to the Cadastral Registry, the buyer’s lawyers will receive the relevant list of ownership for the seller and the property confirming whether the ownership right of the seller is registered. Additional details of the registered interests (easements, mortgages, pre-emptive rights) then need to be obtained from the Cadastral Registry. If the ownership list reveals a “P” (plomba) in the relevant section it means that there are pending proceedings regarding the property. More details about the pending proceedings can be found in the relevant Cadastral Registry.
Where the property is leased, or subject to other occupational interests, the terms of the relevant occupational documents (e.g. administrative permissions) need to be considered carefully to ensure they are not contrary to the buyer’s intentions for the property. The buyer’s lawyers will also need to check whether these documents require the consent of any third party to be given to the transaction.
Secondly, the buyer’s lawyers will carry out due diligence, which will include conducting various searches to check the position regarding municipal land use plan and zoning plans, environmental matters, financial encumbrances etc. Where the seller is a company, the buyer’s lawyers will also conduct corporate searches of the seller at the Companies Register to ascertain whether or not the company is registered or declared insolvent and / or bankrupt and therefore able to dispose of its assets freely, the current name and registered office of the company and who is entitled to act on behalf of the company.
Thirdly, the buyer’s lawyers will raise additional enquiries of the seller’s lawyers to obtain information regarding a large number of practical matters which may affect the property and ask any relevant questions in relation to the title to the property.
Pre-completion
Very shortly before completion the buyer’s lawyers will also conduct searches at the Cadastral Registry for confirmation that there is no pending proceedings regarding the property and at the Companies Registry for confirmation that the seller has not been declared insolvent and / or bankrupt. These searches should confirm that the information gained in the due diligence process remains unchanged just before execution of the transfer agreement.
Reporting to the client
Before the signing of agreements, the buyer’s lawyers usually report their due diligence findings to their client, raising any mater of particular importance or concern.
11. Terms implied by law – What provisions are implied by Statute, Code or otherwise?
Some of the most significant issues are as follows:
Registration of ownership
To complete the process of the change of ownership, the transfer agreement must be filed with the Cadastral Registry. Ownership title passes upon execution of the decision of the Cadastral Registry. The decision of the Cadastral Registry has legal force as of the date upon which the application was filed to make an entry.
The principle of reliability
The “principle of reliability” of the Cadastral Registry, which is explicitly stated in law, presumes that the information registered after 1 January 1993 is correct and can be relied upon by third parties, unless the third party had knowledge that the information registered was incorrect. Notwithstanding this, there remains the possibility that the information on the Cadastral Registry may be incorrect. There is a procedure for rectifying the records kept by Cadastral Registry to comply with the actual state of affairs. Notwithstanding this principle, the State is not liable for damage caused simply as a result of an incorrect entry in the Cadastral Register. An unlawful act on the part of the Cadastral Office would need to be established and then a link between the unlawful act and the damage. The information registered in the Cadastral Register before 1 January 1993 are deemed to be correct unless proven otherwise.
Change of landlord
It should be noted that the Civil Code explicitly stipulates that on a sale of property which is subject to leases, although the new owner takes on the position of a landlord vis-à-vis the tenants, a tenant is entitled to terminate its lease agreement. Unless the parties expressly agree so, this provision is not applicable for the lease of non-residential premises under the Act on Leases (as described above).
12. Registration and Notarisation of real estate - What are the basic requirements?
The Czech Republic has a central land register, the Cadastral Registry. The Cadastral Registry is run through regional district land registries which are responsible for specific areas of the country. The Cadastral Registry shows the legal status and details of the owners and other persons authorised in connection with the property. As the Cadastral Registry is accessible by the public, third parties are assumed to have knowledge of the contents of the records kept by the Cadastral Registry.
As mentioned above, the Cadastral Registry provides a record of who owns which property, the registrable rights benefiting or burdening the property and the title under which the seller acquired the property. The record is contained on an ownership list, which shows all property owned by a particular legal entity in a certain cadastral area, in relation to which:
  • Part A gives details of the registered owner of the property
  • Part B gives a description and location of the property by reference to land plots and identification numbers for buildings together with any rights benefiting the property and a note on protection of the property (for example national monument property). It should be noted that the street address of the property is not shown on the list of ownership for the property. It is sometimes difficult for lawyers to identify property and additional advice is taken from a “geodet”
  • Part C gives a description of rights encumbering the property, such as mortgage right or easement or pre-emptive rights
  • Part D can contain various pieces of relevant information relating to the property
  • Part E refers to agreements or documents on the basis of which the ownership as well as other rights registrable in the Cadastral Registry were created
The Cadastral Registry may also contain, where appropriate, a special note “P” (plomba), which might mean either a pending procedure concerning the property or a restriction of the owner’s ability to deal with its ownership title without obtaining the consent of another party.
13. Disputes - How are they dealt with and resolved?
Agreements on acquisition and disposal of property as well as agreements on rights registrable in the Cadastral Registry must be governed by the Czech law. The parties can choose what method of dispute resolution they would prefer. Methods of dispute resolution could include court proceedings or, in case of property (asset) disputes, arbitration. The choice should be stated expressly in the contract. If not, disputes will be determined by the relevant Czech court.
Arbitration may be conducted by the Czech Arbitration Court attached to the Economic and Agricultural Chamber of the Czech Republic in Prague, or by another permanent arbitration court or by any arbitrators chosen by the parties.
Czech courts are perceived to be slow and judges in some cases inexperienced, and therefore arbitration proceedings are favoured particularly in cross-boarder high volume transactions. Arbitration proceedings have the following advantages/disadvantages:
  • except in certain limited circumstances, it is not possible to appeal against the arbitral award rendered at the end of the proceedings. The arbitral award is also enforceable by ordinary courts
  • rapidity and considerably fewer formalities
  • possibility to appoint a selected arbitrator/specialist to decide on complicated/technical matters and
  • wide scope of enforceability of arbitration awards all over the world. In accordance with the relevant multilateral international conventions it is possible to enforce an arbitral award rendered in the Czech Republic in more than 120 countries world-wide
When choosing the method of resolving disputes, the parties will have regard to various issues, including the following:
  • The domicile/nationality and governing law of the contracting parties and any relevant statutory limitations which may inhibit such choice or the effectiveness of such a choice
  • Whether or not awards can be enforced in the relevant jurisdictions. For example, is there an international treaty that will allow enforcement of an award in a particular jurisdiction? Many jurisdictions will not enforce awards that have not arisen through the consideration and final judgment of a court/judge
  • The fact that obtaining the decision of an expert may be faster and cheaper than obtaining one from an arbitrator
The Czech legal system does not provide specific regulation for nor does it legally recognise mediation proceedings.
PART C - PERMITS INSURANCE AND ENVIRONMENT
14. Permits - What permits are required for the use and occupation of real estate and are they personal?
On 1 January 2007, a new Construction Act came into effect in the Czech Republic. It has partly changed the types of permits for the planning, construction and use of property as well as the procedure for their issue.
Structures or facilities and alterations thereto may be placed and their impact on the use of the area may be changed only on the basis of:
  • planning permit
  • planning consent
  • planning agreement between the applicant and construction authority or
  • if the structures or facilities are contemplated to be placed in built-up area, on the basis of a regulatory plan to the extent approved by regulatory plan, without specific planning permit
Applications to obtain a planning permit to develop land must be filed with the local construction authority, which has responsibility for controlling the use and development of land in its area. Local construction authorities have statutory time periods within which a decision must be made as to whether a planning permit should be issued. There are various statutory rights in relation to appeals, which can be made if an application is refused. The applicant does not necessarily need to be the owner of the land so anyone can apply for a planning permit in respect of land, provided that the applicant received the approval of the owner of the land on which the applicant intends to build. During the planning permit proceedings the relevant authority considers each application with regard to (i) compliance with the zoning plan of relevant territory (ii) protection of the environment and health and safety and (iii) the standpoints of other participants in the planning proceedings. A planning permit will contain conditions which will regulate the impact of the development of the land.
In certain cases, for example, where a structure does not require a building permit or notification, the construction authority may issue a planning consent instead of a planning permission. A planning consent is issued within 30 days of the date of notification (if the concerned authorities agree with the project).
The Construction act provides what kind of structures, technical infrastructure, pylons, aerials, facilities, conservatories or sheds, landscaping work, maintenance and construction works or alterations do not require neither building permit nor notification to the respective construction authority.
In some cases only notification to the construction authority is all that is required to construct, e.g. a residential house of up to 150m2 with one basement floor and a ground floor (assuming certain other conditions are met). Permission is automatic if the authority does not prohibit the construction within 40 days of the notice.
In remaining cases construction cannot commence until a valid, effective building permit has been issued. The construction authority determines the binding conditions for implementation and use of a development in the building permit. The conditions determined by the construction authority will ensure protection of public interests during construction and use of the building, its integrity, compliance with general technical building requirements, or other regulations and technical standards, and also compliance with the requirements set by the state administrative authorities concerned, primarily the exclusion or restriction or negative impact of the building and its use on the environment. A building permit generally ceases to be valid if construction has not commenced within two years of the date on which the building permit took legal effect, although a longer period may be granted by the construction authority, or the validity can be extended on request by the applicant.
Generally, a building permit will be required for the construction of a “new build” property and for work that is proposed for refurbishment of an existing building, and where an existing use (for example office space) is to be changed to another distinct use (for example retail premises).
A new type of professional was introduced, called Authorised Inspectors, whose main role is to certify plans for new constructions, especially when the developer wants to avoid traditional construction proceedings. Notification with specific certificate made by Authorised Inspector to construction authority will be sufficient instead of building permit where apart from other things:
  • the Authorised Inspector confirms that the proposed construction complies with the legislation and the planning permit
  • all affected authorities issue approving opinions and
  • all parties involved in the construction proceedings consent to the construction
Building permits can in some cases be replaced by the construction agreement between the applicant and construction authority.
If works are to be carried out to historically or architecturally important buildings, the investor must get a positive statement from the cultural heritage protection authority before a planning or building permit will be issued.
During the consultation period that the local construction authority must undertake, interested third parties are able to put forward objections (or support) that should be considered by the authority before deciding whether a planning permit or building permit should be granted. In addition, even after a permit has been obtained, there will be a period within which third parties are entitled to challenge the validity of permits granted and this should be kept in mind by lawyers and agents acting for the developer, before any work on the permitted development begins. Once a building has been constructed or construction works completed, an application must be made to the construction authority to issue an occupancy consent. The construction authority examines whether construction has been carried out in accordance with the planning and building permits and with applicable building regulations and health, safety and environmental legislation. The occupancy consent issued by the relevant construction authority then approves a use of a building for a particular purpose.
15. Insurance and Risk - What insurance will the parties effect and when does the insurance risk pass at the time of sale?
Before a sale is completed, insurance is generally the responsibility of the owner of the property. However, where such property is the subject of a lease, the terms of the lease can prescribe which party has responsibility to insure.
The insuring party should have a fully comprehensive buildings insurance policy to protect the structure and fixtures and fittings of the property in the event of damage or destruction by any of a comprehensive list of insured risks, such as storm, lightning, fire and water damage. The policy may also cover additional special heads of cover such as subsidence, earthquake and, if available, terrorism.
In certain areas of the Czech Republic, the policy usually also covers flood coverage but premiums and excesses are quite high, due to the number of claims made in recent years.
Insurance policies (the insurance contracts containing the contractual terms between the insurance company and the insured) may either comprise a single policy for one particular property or a block policy designed to cover a portfolio of properties. Larger institutional investors may self-insure.
In recent years, it has been possible to take out insurance if there is some specified defect in the title to the property. For an additional premium, the benefit of such policies may usually be claimed by subsequent owners of the property and tenants.
Insurance policies (except title policies) are personal and not transferable on sale. On a sale, timing of the transfer of risk is normally prescribed by the transfer agreement as being the date of filing the application to the Cadastral Register to register the transfer.
16. Environmental - What are the common environmental issues?
Real estate may be contaminated as a result of current and former uses. Primary legal responsibility follows the “polluter pays” principle: the person who spilled, released or discharged a substance will normally be liable for any ill-effects it causes. However, environment laws may also operate to make future owners and occupiers liable for contamination already present at the real estate when they acquire it. This can occur if:
  • the substance is causing, or there is still potential for it to cause, actual harm to humans, to real estate, to personal property, to protected ecosystems or pollution of groundwater or surface waters, as each owner is obliged to maintain its property in such a state so as not it cause any loss and damage to any third person or protected ecosystem or surface waters and
  • either the new owner knows about the presence of the substance but fails to take adequate steps to limit the harm it causes, or no person more directly responsible for causing or knowingly permitting the substance to be present at the real estate can be found (for example, because a more directly responsible company has since been wound up)
If development is proposed, then planning permission may be issued only after an environmental impact assessment of the construction on the environment is submitted to the building authority and the planning permission may set conditions under which the development may be carried out to prevent potential contamination.
Acquisition due diligence may involve the appointment of environmental consultants to consider documentary information and to carry out a site visit (Phase I). If considered necessary, further, intrusive investigations (Phase II) may then be undertaken. It is important to identify potential problems early so that there can be negotiation on price, the need for and scope of any remediation and/or the need to put in place protection in respect of any existing contamination related losses that may arise in the future. Such protection may take a number of forms, including obligations to remediate any contamination discovered post-acquisition, indemnities in respect of first party loss or third party claims to cover any of these risks.
PART D - FINANCE AND TAXES
17. Pricing/Valuation - What sets the price/valuation of real estate?
Pricing of real estate investments is a combination of the aggregate rent being paid by occupational tenants of the property and the value that investment buyers consider that a property of the specific type and location is worth at the time of valuation taking that income into account.
The rent for a particular property is likely to be assessed by multiplying the area of the property by the market rental value per square metre. The market rental value will take into account factors such as the location of the property, its type and condition, and the length of the lease term. There is no fixed code of measurement and international developers and investors active in the market tend to adopt the codes of their home countries.
In the case of retail units, it is common for the rent of the property to have an element based on the turnover produced in the unit.
Again, there is no fixed methodology for assessing the value of the property for investment purposes and the international developers and investors active in the market tend to use the methodology used in their home countries. Exchange rate risk is taken into account in valuation of leases, with leases, where the rent is quoted in Euro, even though payable in Czech Crowns, attracting a higher valuation.
Investment properties are commonly referred to as being sold on a particular yield, meaning the investment return that will be gained from the capital sum which it is necessary to pay to buy the property. For example, where a property with an aggregate rent of EUR 100,000 is sold for EUR 2,000,000, it will have a yield of 5%.
18. Financing - How is a real estate acquisition financed?
The principal ways in which real estate acquisition is financed are:
  • Through the buyer’s own cash resources or general corporate banking facilities
  • By using the capital value of the property to raise specific finance secured on the property
A typical security package will involve the grant of a mortgage over the real estate itself together with supporting pledges over the shares of the borrower, bank accounts, insurance policies, rental income from the property and the like. Floating charges used in common law jurisdictions are not recognised under Czech law. However, Czech law does have a concept of a pledge of an enterprise which in fact is similar to a floating charge, but it is not frequently used.
On 1 January 2008, a new Insolvency Act came into effect in the Czech Republic. Under the Act, if insolvency proceedings are commenced in the form of the bankruptcy of a borrower, an insolvency administrator is appointed by a court. A secured lender, who has security over a particular asset, may require that up to 100 % of the proceeds of the sale of such asset, less the costs of sale (no more than 5% of such proceeds) and administrative costs (no more than 4% of the proceeds), be paid to it. Set-off of receivables and liabilities from and to a bankrupt entity is permitted in some cases after the decision on insolvency is issued by the court. Set-off of receivables and liabilities from and to a bankrupt entity is permitted following the bankruptcy decision, provided that the statutory conditions for such a set-off were met before the decision on the method of dealing with the bankruptcy (i.e. prior to the declaration of bankruptcy, re-organisation or discharge from debts) is made. Final statement of profit and loss arising from the settlement of the transaction on the capital market is permitted to be set-off.
Lenders typically require floating interest rate borrowings to be hedged under separate interest rate hedging arrangements so that the interest cost is effectively fixed.
Raising finance by bond/debenture stock issue is unusual in the Czech Republic.
19. Security over real estate - How is security over real estate created and protected?
A fixed security interest over land or building is generally created under a document called a mortgage. A pledge over moveable assets, a pool of assets or over an enterprise, must be registered in the Pledge Register held by the Notary Chamber. In the case of land, buildings, apartments or other real estate property to which the title is registered at the Cadastral Registry, all mortgages must be registered in the Cadastral Registry by making the appropriate application to it. For non-registrable real estate such as minor building works, mortgages must be registered on the Pledge Register or the unregistered real estate must be handed over to the lender.
In the case of investment property, some lenders require all rental income (excluding service charge receipts) to be assigned by means of security and paid into a specific account charged to the lender and will restrict withdrawals from that account to the making of payments in respect of the financing costs and repayment of the principal sum secured on the property.
20. Taxes and Costs - What are they and who pays them?
Generally, please refer to our CMS transaction costs guide as to the nature and amount of the taxes and costs.
The main tax on acquisitions is real estate transfer tax (RETT) at the flat rate of 3% of the higher of the purchase price or the value of the property determined by a court appointed expert. RETT must be paid by the seller by the end of the third month following the month of completion of an acquisition. Calculation of the RETT must be included in a RETT Tax Return which must be submitted to the appropriate tax office. The seller is primarily liable to pay RETT, but the buyer guarantees payment if the seller fails to pay. It is therefore usual for an amount equal to RETT to be placed in escrow and only released to the seller when it produces evidence that the RETT has been paid. Failure to pay RETT within the prescribed time is subject to significant penalties and interest.
General value added tax (VAT) on the transfer of buildings is currently at the rate of 19%.
The transfer of the following buildings is VAT exempt: (i) those which are transferred 3 years after the first occupancy permit was issued and (ii) those which are transferred 3 years after the commencement of the first use of the respective building. Generally, the transfer of land is VAT exempt, unless the land is “building land” (i.e. undeveloped land with the benefit of a building permit) when the applicable rate of VAT is 19%.
If real estate has been acquired through a share purchase, there will be no VAT on the transfer of shares.
During due diligence for an acquisition, the buyer will also pay the costs of conducting searches. The buyer will also pay for any valuations and surveys of the physical state of the property and any environmental audits or desktop studies. The seller will pay for the valuation by the court appointed expert.
It is not uncommon on commercial acquisitions for seller and the buyer to have each appointed its own broker, to whom they will pay any commission due.
Generally each party pays its own expenses. The buyer will usually be responsible for the payment of the Cadastral Registry fees associated with registration of the transfer to the buyer.
The Netherlands
PART A - PARTIES AND INTERESTS
1. Parties - Who can own real estate?
Any legal “person” may own real estate. This will include individuals, companies, entities established by statute and certain charitable bodies.
Owners of commercial real estate include private developers, insurance companies, pension funds, banks and other financial institutions, private or public property companies, charities, the government and local authorities.
There are no restrictions preventing foreign nationals or companies from owning real estate.
2. Property - What property interests are currently sold?
Property interests which exist in The Netherlands include:
  • absolute ownership
  • right of usufruct
  • ground lease
  • easements
  • right of superficies
  • apartment right
Absolute ownership is the equivalent of freehold title in England.
Right of usufruct is the next closest class of title to absolute ownership as is possible according to Dutch law. The owner of the right of usufruct has all the rights and obligations of the owner, except the right to sell the property. The right of usufruct perishes when the owner of it passes away or the company is dissolved. If the beneficiary is a legal entity the maximum period for which usufruct may be created is 30 years.
A ground lease is a right to use and hold the land without owning it. There are no restrictions in The Netherlands on how long ground leases can be. The most common lengths of institutionally acceptable ground leases tend to be 10, 15 or 25 year terms and provide for the payment of a market rent. Long ground lease interests tend to be for 50 years or indefinite terms; such ground leases are normally granted on payment of a premium (yearly or as a lump sum) with only low or nominal rents payable.
An easement is a right which burdens one piece of land and benefits another’s registered land.
The right of superficies is a right to own a property in, on top of or above another property. If items are fixed to the property, the presumption is that they form part of it and belong to the owner of the property. By the use of a right of superficies this rule can be circumvented.
An apartment right divides a building into units giving entitlement to the exclusive use by the owner of an apartment right. The ownership of the building is exercised by all the owners of the apartment rights together.
3. Ownership - What types of ownership are there?
There is only one type of unrestricted legal ownership in The Netherlands: absolute ownership. The other property interests - usufruct, lease, easements, right of superficies and apartment right restrict the absolute ownership, and are called restrictive rights. The restrictive rights are transferable.
4. Matters burdening or benefiting real estate - What matters can affect real estate?
Common matters affecting real estate include:
MatterEffectExampleEasementsRights which burden one piece of land and benefit another. They are not personal but attached to the land itself. They do not permit the owner of the benefited land to remove anything from the burdened landA right of way; a right to deposit rubbish; a right to lightCovenants Express or implied promises which can be positive or restrictive. Positive covenants are personal and may not burden the land after the person who gives the covenant no longer owns the property. Restrictive covenants “continue to run with the land” and burden that land after a change in ownershipPositive: a covenant to repair a fence. Restrictive: a covenant not to use the land for a particular purposeRight of superficiesContractual rights exercisable by one party over the land or real estate of another, normally given to companies supplying utility servicesA right to run a telephone or electricity cable or erect telecommunications equipment or a buildingRestrictions of public lawRestrictions imposed on a property and/or its use by a public entity, often with a view to preserving the property and/or to give a right of pre-emption to the public entityRestrictions for renovation of listed buildings; a pre-emption right of the statePrescriptive rightsWhere a legal right over land belonging to another person is acquired by long usageA right of way exercised for more than 20 years
Matter
Effect
Example
Easements
Rights which burden one piece of land and benefit another. They are not personal but attached to the land itself. They do not permit the owner of the benefited land to remove anything from the burdened land
A right of way; a right to deposit rubbish; a right to light
Covenants
Express or implied promises which can be positive or restrictive. Positive covenants are personal and may not burden the land after the person who gives the covenant no longer owns the property. Restrictive covenants “continue to run with the land” and burden that land after a change in ownership
Positive: a covenant to repair a fence.
Restrictive: a covenant not to use the land for a particular purpose
Right of superficies
Contractual rights exercisable by one party over the land or real estate of another, normally given to companies supplying utility services
A right to run a telephone or electricity cable or erect telecommunications equipment or a building
Restrictions of public law
Restrictions imposed on a property and/or its use by a public entity, often with a view to preserving the property and/or to give a right of pre-emption to the public entity
Restrictions for renovation of listed buildings; a pre-emption right of the state
Prescriptive rights
Where a legal right over land belonging to another person is acquired by long usage
A right of way exercised for more than 20 years
5. Occupation of real estate - Who may occupy real estate?
Real estate is usually occupied by one of the following categories of person:
  • Owners – those persons with absolute ownership
  • Holders of restrictive rights – those persons with a restrictive right
  • Tenants – those persons with a lease of the property or part of it. It is possible for any number of leases to be created in relation to the same property, so creating a chain of interests. Normally, however, a restriction will be contained in the first lease created limiting the number of subsidiary leases that may be created out of it. Tenants of business premises usually have statutory rights to renew their leases when the contractual term ends.
  • Persons claiming ownership by adverse possession – where they have occupied the property for a long period of time without having any legal rights to do so, but without challenge by the owner
6. Brokers - What is the broker’s role?
Brokers in the Netherlands generally fall into five categories:
Investment
Valuation
Management
Rent Review
They are employed by any party to any transaction involving real estate. Their role may include:
  • acting for a seller to find a buyer for a sale property, including marketing the property for sale
  • acting for a landlord to find a tenant for a leasehold property, including marketing the property
  • acting for a buyer to find a property to buy
  • acting for a tenant to find a property to lease
  • acting for any party to a transaction drafting and negotiating heads of terms
  • valuing a client’s existing and target properties
  • day to day management of property owned by clients, including managing maintenance programmes and landlord and tenant work
  • project management of development of new buildings or refurbishments and
  • negotiating rent reviews of existing properties
Brokers available in the market range from those employed by major international organisations to specialist advisers providing advice on a more restricted basis. The role of the broker is decreasing, because of increasing professionalisation and transparency.
7. Employees - What employment issues affect real estate acquisitions?
In The Netherlands typical employment issues are not relevant to real estate transactions.
PART B - PROCEDURE AND TERMS
3. Procedure - What are the steps in a sale and purchase transaction?
Transactions formally start when proposed heads of terms are drafted, negotiated and agreed by the brokers or Dutch lawyers for the seller and the buyer. The heads of terms (or memorandum of understanding) set out the principal terms agreed between the parties and are generally expressed to be “subject to contract” and not legally binding. They form the basis of the documents to be drafted.
Once the heads of terms have been finalised and all information relating to the property is collected (through, for example, due diligence), a sale and purchase agreement (contract) is drafted. The form of the sale agreement will vary according to whether the property being sold is under construction or already built and the extent to which leases to tenants have already been granted.
Legal completion of the sale and purchase transaction must occur in person or by written authorisation at a civil law notaries office. Completion may take place at the same time as exchange, depending on the acquisition timetable. Where the purchase is made with borrowed finance a charge over the property will be completed at the same time. The lender of the finance may instruct its own lawyers to carry out due diligence procedures on its behalf and negotiate security documentation.
Following completion, the civil law notary needs to deal with registration of the transfer documents (and any charging documents) at the Land Registry and payment of tax, which is assessed on the price paid for the property.
9. Other common contract terms - What other provisions does a real estate sale contract commonly contain?
An agreement for the sale and purchase of land can be in writing or in any other form. An agreement with a private person to buy or sell a house should be in writing. It should contain or clearly refer to all main terms and conditions. When the sale and purchase transaction is completed at a civil law notaries office a written agreement is to be signed which can be registered at the Land Registry.
It is common for the sale and purchase agreement to provide for a deposit of between 5-10% of the purchase price on exchange of agreements, where there is to be a gap between exchange and completion. The civil law notary usually holds deposits.
Where there are matters of title affecting the property, such as restrictive rights, the seller may require reciprocal obligations from the buyer and an indemnity in respect of any liability the seller may still have following completion of the transaction.
Real estate contracts with private persons commonly incorporate standard terms. Where incorporated, the conditions will apply unless the contract expressly provides otherwise. When a private person is the buyer he has the possibility of annulment of the agreement within three days after the agreement is signed by both the buyer and the seller.
Provisions relating to value added tax or transfer tax will be included where relevant to ensure that the agreed tax position is preserved between exchange and completion.
Contracts for sale of property subject to occupational interests such as leases will include clauses to cover ongoing management matters, and provide for apportionment of occupational income and outgoings on completion of the transfer of ownership in the property.
If the property being sold is in the course of construction, the contract for sale will incorporate provisions dealing with the obligations of the seller to construct in accordance with an agreed specification and to provide to the buyer separate deeds of warranty from the building contractor and persons such as the architect in order to safeguard the buyer against defective design or workmanship.
10. Due Diligence - What investigations does the buyer normally make?
Pre-exchange of agreements
The prudent buyer is likely to commission a survey of the building and in appropriate cases, soil and geological investigations, plant and machinery tests, and environmental investigations. There are three limbs to the pre-exchange due diligence by the buyer’s lawyers.
Firstly, title to the property will be investigated. The buyer’s lawyers will consider the entries on the Land Register and where relevant historic title documents. Where title to the property is not registered at the Land Registry, the buyer’s lawyer will consider the unregistered deeds to satisfy himself that the seller has a good and sufficient title to the property.
By submitting a plan of the property to the Land Registry, the buyer’s lawyers will receive confirmation of whether or not the title is registered. Additional details of the registered interests then need to be obtained from the Land Registry.
Where restrictive rights are established on the property, the terms of the relevant occupational documents need to be considered carefully to ensure they are not contrary to the buyer’s intentions for the property. The buyer’s lawyers will also need to check whether these documents require the consent of any third party to be given to the transaction.
Secondly, the buyer’s lawyers will commence their own due diligence, which will include the conducting of various searches to check the position regarding municipal and zoning consents, environmental matters, utilities serving the property, financial encumbrances etc. Where the seller is a company, the buyer’s lawyers will also conduct searches against the seller’s name at the Companies Registration Office to ascertain whether the company is solvent and therefore able to dispose of its assets freely. Where the search result refers to security, the buyer’s lawyers will ask for confirmation that such matters do not encumber the property and that no third party consents are required for the transaction to proceed.
The investigation of existing lease agreements has become increasingly important. The lawyers investigate how these agreements affect the purchase price, because this price is often based on the rental income.
Thirdly, the buyer’s lawyers will raise pre-contract enquiries (“preliminary enquiries”) of the seller’s lawyers to obtain information regarding a large number of practical matters which may affect the property and ask any relevant questions in relation to the title to the property. Whilst a seller must not knowingly or negligently mislead a buyer the general rule is “caveat emptor” (buyer beware). The seller generally gives replies, which may be actionable if wrong or misleading. During the due diligence process the buyer may often arrange that a survey is carried out at the property.
Pre-completion
After exchange of agreements and before completion the buyer’s lawyers will raise requisitions. These ask the seller to confirm that replies to pre-exchange enquiries remain correct and to divulge any further information that has arisen since exchange. The requisitions also deal with completion formalities such as the seller’s lawyers’ bank details etc. The buyer’s lawyers will also conduct pre-completion searches including a priority search of the Land Registry.
Reporting to the client
Before exchange of agreements the buyer’s lawyers usually report their due diligence findings to their client, raising any matter of particular importance or concern.
Occasionally, and normally only where the buyer is acquiring property as a result of the acquisition of a company, instead of due diligence being carried out by the buyer’s lawyers, the seller’s lawyers provide a certificate of title addressed to the buyer and any lender to the buyer. This may occur where the sale has been planned for some time and the parties wish the transaction to proceed quickly.
11. Terms implied by law - What provisions are implied by Civil Code or otherwise?
Some of the most significant are as follows:
Buyer Beware (Caveat Emptor)
The overriding point of principle under civil law is “caveat emptor” - let the buyer beware. The buyer must satisfy itself in all respects as to the nature of the property it is acquiring. However, this does not absolve the seller from the obligation to provide truthful replies to enquiries raised by the buyer’s lawyers. It does not absolve the seller from giving information to the buyer (even without enquiry of the buyer) if the seller knows that this information is essential for the buyer in respect to the buyer’s stated intentions.
Unregistered interests
Where a registrable interest is not registered against a property’s title number at the Land Registry, a buyer will take the property without being subject to it. An exception to this rule is the presence of a right that is created by prescription, which will not be registered, but the buyer will be subject to it.
Misdescription and misrepresentation
There are statutory rules which protect against clear misrepresentations or misdescriptions of fact made by the seller to the buyer which have the effect of inducing the buyer to enter into a transfer of land. In such cases, damages may be payable to the buyer or the buyer may be entitled to withdraw from the transaction.
Unfair terms
Agreements for sale that include exemption clauses, which seek to allocate risk, are subject to evaluation in legal proceedings. Statutory provisions restrict or render void the effect of clauses that unreasonably attempt to exclude liability.
Standard conditions
Real estate contract with private persons commonly incorporate standard terms. Standardised contracts and conditions, issued by the NVM or GIW, are usually used.
12. Registration and Notarisation of real estate - What are the basic requirements?
The Netherlands have a central land register. The Land Registry is run through regional district land registries which are responsible for specific areas of the country. Registration of land is compulsory.
When a party acquires a registrable interest in land, it must apply for registration of that interest at the appropriate district land registry. Only when the registration is complete can the party properly prove its right of ownership.
The Land Registry has the benefit of a state backed guarantee of accuracy. It is the definitive record of who owns what land, the nature of the interest and any registrable matters affecting that land. The title register for a particular property comprises:
  • the Property register, which gives a description of the property together with any rights benefiting the property
  • the Proprietorship register, which gives details of the registered owner of the property and the price paid for the property by the current owner and
  • the Charges register, which lists all registrable matters that encumber the property such as rights benefiting other property, covenants, financial charges, contracts and registrable leases
The Registers may also contain, where appropriate, special entries that restrict the registered owner’s ability to deal with its title without obtaining the consent of another person.
There is a requirement for notarisation of title in The Netherlands. Contracts for the disposal and acquisition of interests in real estate are signed by or on behalf of the parties at a notary’s office. Instruments effecting the sale of the interest itself have to comply with certain formalities relating to execution.
13. Disputes - How are they dealt with and resolved?
Dutch law permits considerable freedom of contract and the parties must give careful thought to which law they want to govern the contract, in which jurisdiction they would prefer that any disputes are resolved and what method of dispute resolution they would prefer. Methods of dispute resolution could include court proceedings, arbitration (whether domestic or international), reference to an independent expert or a mediation process. This freedom of contract is not absolute, however, and can in certain circumstances be circumvented if statute (or more rarely, the common law) requires.
Different types of dispute are often resolved in different ways. For example, rent reviews are often dealt with by arbitration only; disputes of fact (or under particular clauses or in respect of particular aspects of the contract) are often dealt with by expert determination. Disputes of law should preferably be referred to court, or to an arbitrator.
When choosing a method of resolving disputes, the parties will have regard to various issues, including the following:
  • The domicile/nationality and governing law of the contracting parties and any relevant statutory limitations may inhibit such choice or the effectiveness of such a choice
  • Can awards be enforced in the relevant jurisdictions? For example, is there an international treaty that will allow enforcement of an award in a particular jurisdiction? If such a treaty does exist, does it recognise arbitration awards and agreements arising out of a mediation process? Many jurisdictions will not enforce awards that have not arisen through the consideration and final judgment of a court/judge
  • If any remedy that could be sought is an interest in land, rather than payment of money, a consideration is whether the particular system of law, jurisdiction or method of dispute resolution will permit such an award. Under English law, an arbitrator would not usually have the power to order the transfer of land from one party to another in a title dispute
  • Obtaining the decision of an expert may be faster and cheaper than obtaining one from an arbitrator
If the parties are not satisfied by the decision of the independent person, different remedies and courses of action apply depending upon whether that person acted as an expert or as an arbitrator.
PART C - PERMITS INSURANCE AND ENVIRONMENT
14. Permits - What permits are required for the use and occupation of real estate and are they personal?
Applications to obtain planning permission to develop land must be made to the local government authority which has the responsibility for controlling the use and development of land in its area. Local government authorities have statutory time periods within which a decision must be made as to whether or not planning permission should be issued. There are various statutory rights in relation to appeals, which can be made if an application is refused, and rights of challenge regarding the validity of any permission granted. For developments that are likely to cause significant environmental impact, an Environmental Statement will need to be submitted with the application for planning permission, explaining the likely environmental impact of the development.
Generally, planning permission will be required for the construction of a “new build” property, work that is proposed for refurbishment of an existing building, and where an existing use (for example office space) is to be changed to another distinct use (for example retail or licensed premises). Planning permission, when granted, benefits the licensee (but is transferable to the new owner of the property) and will contain conditions which will regulate the impact of the development. Under the Planning legislation the terms “develop” and “development” have a much wider meaning than the construction or replacement of buildings. Minor building works or simple changes of use may amount to “development” requiring planning permission.
A different type of permit is required when it is proposed to do work to historically or architecturally important buildings. Whilst some work to such buildings such as the removal of a stone pillar or a sundial may not require planning permission because it is not “development”, the removal of such items could be seen as affecting the building’s importance, and consent would then be required.
Larger districts or areas of buildings (called “beschermde stads- en dorpsgezichten”) that have architectural or historical importance may also be subject to a separate regime of control that requires consent to be obtained before work is carried out that would damage the character and appearance of the area that the local government authority wishes to conserve and enhance.
During the consultation period that the local government authority must undertake when considering the development, third party groups are able to put forward objections (or support) that should be considered by the authority before deciding whether or not a permission should be granted. In addition, even after a permission has been obtained, there will be a period within which a third party group is entitled to challenge the validity of granting the permit and this should be kept in mind by lawyers and agents acting for the developer, before any work on the permitted development begins.
In addition to a planning permission, the building must also have approvals confirming that construction has taken place in accordance with applicable building regulations and health and safety legislation. This is checked when a request for a planning permission has been put forward. Certain types of building may also have other kinds of certificate issued by independent bodies in relation to building or construction matters generally.
15. Insurance and Risk - What insurance will the parties effect and when does the insurance risk pass at the time of sale?
Before a sale is contemplated, insurance is generally the responsibility of the owner of the property. However, where such property is the subject of a lease, the terms of the lease will prescribe which party has responsibility to insure. Whatever the length of the lease, the tenant will generally insure the contents of the property belonging to the tenant and in some cases certain parts of the property for which the tenant is contractually responsible, such a plate glass.
The insuring party should have a fully comprehensive buildings insurance policy to protect the structure and fixtures and fittings of the property in the event of damage or destruction by any of a comprehensive list of insured risks, such as storm, lightning, fire and water damage. The policy may also cover additional special heads of cover such as subsidence, heave, earthquake and, if available, terrorism.
Generally it is the buildings, and not the land, which are insured for the reinstatement cost rather than the reinstatement value.
Insurance policies may either comprise a single policy for one particular property or a block policy designed to cover a portfolio of properties. Larger institutional investors may self-insure.
Occupying owners generally have separate policies to cover the contents of the property, especially if the property includes costly plant and machinery.
Where the property is subject to an old restrictive covenant and the property owner does not know whether it is still enforceable, a special restrictive covenant indemnity insurance policy may be taken out to insure against enforcement of the covenant by third parties. Similar policies can be taken out if there is some specified defect in the title to the property. The benefit of such insurances may usually be claimed by subsequent owners of the property and tenants.
In some cases (e.g. policies insuring the seller’s interest to maintain the property), rights under the insurance policy will automatically transfer on sale. However, the policy will expire if the new owner does not confirm to the insurer that the policy should continue within two months after the transfer, while the insurer has a right to terminate. In other cases insurance policies are personal and will not automatically transfer on sale. It is important to check each policy carefully to ascertain the precise position.
Where a sale is taking place, timing of the transfer of risk is normally prescribed by the sale agreement. Agreements for sale of leased land will still be governed by the insurance terms of the lease. It is common market practice for the parties to agree that the seller will continue to insure occupied property until completion.
Third party liability risks (e.g. environmental or personal damage) are intrinsic to almost every property. It is important to have third party liability insurance which properly covers these risks.
16. Environmental - What are the common environmental issues?
Real estate may be contaminated as a result of current and former uses. Primary legal responsibility follows the “polluter pays” principle: the person who spilled, released or discharged a substance will normally be liable for any ill-effects it causes. However, environment laws may also operate to make future owners and occupiers liable for contamination already present at the real estate when they acquire it. This can only occur if:
  • the substance is causing, or there is still potential for it to cause, actual harm to humans, to real estate, to personal property, to protected ecosystems or pollution of groundwater or surface waters; and
  • either the new owner or occupier knows about the presence of the substance but fails to take adequate steps to limit the harm it causes, or no person more directly responsible for causing or knowingly permitting the substance to be present at the real estate can be found (for example, because a more directly responsible company has since been wound up)
If development is proposed, then planning permission may be made conditional upon the proper investigation and remediation, if necessary, of potential historic contamination. If the planned development is of a type considered potentially detrimental to the environment, the application for planning permission may need to be supported by an assessment of the development’s likely future environmental impact.
Those who have control of places of work are obliged to assess the risk of asbestos being present in the fabric of the building and are obliged to manage the human health risks posed by any asbestos found.
Acquisition due diligence may involve the appointment of environment consultants to consider documentary information and to carry out a site visit (Phase I). If considered necessary, further, intrusive investigations (Phase II) may then be undertaken. It is important to identify potential problems early so that there can be negotiation on price, the need for and scope of any remediation and/or the need to put in place protection measures in respect of any existing contamination related losses that may arise in the future. Such protection may take a number of forms, including obligations to remediate any contamination discovered post-acquisition, indemnities in respect of first party loss or third party claims, or specialist historic liabilities environment insurance to cover any of these risks.
PART D - FINANCE AND TAXES
17. Pricing/Valuation - What sets the price/valuation of real estate?
Pricing of real estate investments is a combination of the aggregate rent being paid by occupational tenants of the property and the yield that investment buyers consider that a property of the specific type and location is worth at the time of valuation taking that income into account.
The rent for a particular property is likely to be assessed by multiplying the area of the property by the market rental value per square metre. The market rental value will take into account factors such as the location of the property, its type and condition, the length of the lease term and the quality and stature of the tenants.
In the case of retail shops, it is common for the rent of the property to have differential values according to the positioning of the floor space. The rental values of the various areas will be added together to provide an overall rental value for the property.
18. Financing - How is a real estate acquisition financed?
The principal ways in which real estate acquisition is financed are:
  • Through the purchaser’s own cash resources or general corporate banking facilities
  • By using the capital value of the property to raise specific finance secured on the property
A typical security package will involve the grant of a mortgage (also known as a legal charge) over the real estate itself together with a supporting floating charge over all of the other assets of the purchaser where the purchaser is a company. Floating charges cannot be created by individuals.
Under the current law, a secured lender who has security from a company over the whole or substantially the whole of its assets may appoint a receiver of the company to enforce its security if the borrower defaults.
  • Raising finance by bond/debenture stock issue
Here the interest rate is usually fixed by reference to the nearest equivalent government stock plus a spread or margin.
The required security package is likely to be equivalent to that in relation to secured bank debt.
19. Security over real estate - How is security over real estate created and protected?
A fixed security interest over land is generally created under a document called a “mortgage” or “legal charge”. A “mortgage debenture” or “debenture” which incorporates a full range of fixed and floating charges over all of the assets of the borrowing company may be required as an alternative.
In the case of land to which the title is registered at the Land Registry, all charges must be registered in the charges register of the relevant title by making the appropriate application to the Land Registry.
In the case of investment property, some lenders require all rental income (excluding service charge receipts) to be paid into a specific account charged to the lender and will restrict withdrawals from that account to the making of payments in respect of the financing costs and repayment of the principal sum secured on the property.
In the case of a property where a managing agent collects the rents on behalf of the owner, it is not unusual for notice of the mortgage/legal charge to be given to the managing agent, and for the managing agent to enter into a duty of care arrangement with the lender in relation to the collection of rent and to agree to collect the rent and pay it into a specific rent collection account charged to the lender.
20. Taxes and Costs - What are they and who pays them?
Generally, please refer to our CMS transaction costs guide as to the nature and amount of the taxes and costs.
The supply of immovable property which is situated in the Netherlands is exempted from 19% value added tax (VAT).
However, in the following three situations the supply of immovable property is subject to 19% VAT:
  • the supply of building land
  • the supply of buildings or parts of buildings, including the accompanying land, prior to, on, or two years after the moment the building has been taken into use (“newly constructed immovable property”) or
  • where the property is the subject of a valid election to waive the statutory exemption from the VAT regime. The buyer may make its own election immediately prior to or upon completion. An advantage of opting for VAT on property is that the parties may be able to recover any VAT on professional fees associated with the transaction
The exception to the rule that VAT is payable on the sale of an (elected) property is where the transaction constitutes a “transfer as a going concern”, where the property is let and operated.
Transfer tax (6% of the purchase price) is due where the purchaser acquires the legal ownership or the economic interest in an immovable property which is situated in the Netherlands. The acquisition of shares in a company is also subject to 6% transfer tax if:
  • 70% or more of the assets of the company consists of immovable property (or right in rem) which is situated in the Netherlands
  • the company has the intention to exploit immovable property and
  • the purchaser acquires at least 33 1/3 % of all shares in the concerning company
In principle, transfer tax will not be due in case of the supply of building land or a newly constructed immovable property (see above).
France
PART A - PARTIES AND INTERESTS
1. Parties – Who can own real estate ?
In France any “legal person” may own real estate. The Civil Code art. 1594 states that “All those to whom legislation does not forbid to do so may buy or sell”.
This includes individuals, companies, private legal entities such as companies, registered associations or associations classified as being of public interest and public legal entities such as state and local authorities and public corporations. Non- registered associations are not allowed to own real estate as although they exist in law they do not have legal capacity.
The main institutional investors include : real estate investment trusts (Société Civile de Placement Immobilier SCPI), property leasing companies, real estate development companies run on a lease-purchase basis (Sociétés de Crédit-bail) and real estate investment companies (Société d’Investissement Immobilières Côtées SIIC).
Foreign individual investors are permitted to directly own real estate. Foreign corporate investors may also directly own real estate provided that their legal personality is recognised in France.
2. Property – What property interests are currently sold?
An investor may not only purchase the land itself or a completed building, but also other real property rights governed by French law. Such rights offer the investor a right to build while the proprietary rights remain in the hands of the owner of the land.
They usually take the form of long term leases, with a duration ranging from 18 up to 99 years like the bail emphythéotique and the bail à construction. Under such leases the tenant may (bail emphythéotique) or is obliged to (bail à construction) erect buildings which will ultimately revert to the landlord. They offer a genuine real property right, which can be mortgaged, sold and transferred.
Property interests currently sold may therefore be either the land and buildings, long term leases or shares of companies such as sociétés d’attribution representing a part of the underlying assets, (each shareholder has a right to receive a part of the property when the company is wound up), or even rights to build acquired through bulk sales and forward sale.
3. Ownership – What types of ownership are there?
Different types of ownership may be distinguished in France such as freehold ownership, (including joint-ownership), co-ownership (copropriété) and volume ownership.
The most common type of ownership of land or buildings is freehold ownership. The freehold ownership of land includes anything above or below the property plus the buildings. Such owner is entitled to mortgage its property, to grant easements and leases on it and to sell it at any time. Under French law, ownership can be held in common (tenancy in common), each joint owner then having a freehold right. The freehold ownership may also be jointly owned by several people in a so-called joint ownership (indivision), which may be for a fixed period (the maximum term is 5 years, renewable) or not (the ownership may be terminated at any time).
Co-ownership (copropriété) is applicable for a building with at least two co-owners. The building is divided into private areas, on which each co-owner may enjoy full rights, and common areas (land, structure and common parts of the building), on which each co-owner has a joint right. A property manager (Syndic) has to be appointed by the co-owners and his functions are determined in accordance with law.
With volume ownership, there is no distinction between the private and the common parts of the building. The property is divided vertically as well as horizontally in three dimensional units. Different tranches of the land may be allocated different owners, who each have a proprietary interest in their respective “volumes”. This type of ownership offers the owner of each volume the right to build within it.
It should also be mentioned that according to French law, property rights can be either full/bare property (pleine/nue-propriété), which usually only gives rights and obligations in relation to the capital, and usufruct, which gives rights and obligations in relation to the income.
4. Matters burdening or benefiting real estate – What matters can affect real estate?
Common matters affecting real estate include :
Easements and encumbrances (servitudes et charges)
Rights which burden a plot of land and benefit another may be created to comply with local or general planning policy. They are not personal but attached to the land itself. They do not disappear with a change of ownership.
In France there are several types of easements, depending on the parties or the right itself:
  • Administrative easements arising from statutory or regulatory provisions
  • Conventional easements, registered at the Land Registry, arising from a contract
  • Legal easements arising from civil law
Mortgages (hypothèques)
Any property in France may be mortgaged. The mortgage must be executed in the form of a deed signed before a notary and has to be registered at the Land Registry in order to be enforceable against third parties. The same property may be burdened by several mortgages.
Mortgages can be created by contract, statute and civil law or by court order.
Pre-emption rights (droits de préemption)
A pre-emption right may affect real estate and the sale of a property. It results from local and general planning regulations or from a contract, published at the Land Registry in order to be enforceable against third parties.
There are four types of pre-emptive rights in favour of public authorities: the urban pre-emptive right (droit de préemption urbain, DPU), pre-emptive rights in a deferred development zone (droit de préemption dans le zones d’aménagement différé, ZAD), pre-emptive rights in sensitive natural areas (droit de préemption dans les espaces naturels sensibles) and pre-emptive rights in favour of municipal districts in the case of transfer of rights on business and commercial leases or in the case of transfer of land on which shops from 300 to 1000 square meters are to be built (droit de préemption des communes sur les fonds artisanaux, les fonds de commerce, les baux commerciaux et les terrains faisant l’objet de projets d’aménagement commercial) . When transferring properties subject to such pre-emptive rights, the owner must observe the formality of the “Declaration of intent to alienate” prior to the sale and submit a declaration indicating the price of the proposed transfer to local authorities.
Private individuals, such as residential tenants or farmers, may be granted a right of pre-emption exercisable when the owner wishes to dispose of the building or the land.
Lender fixed charge (privilège de prêteur de deniers)
When the property acquisition has been financed by a loan (often a bank loan), a lender fixed charge may be registered to guarantee the payment of the funds borrowed to pay the price of the real estate.
Expropriation for public purpose (i.e compulsory purchase)/ condemnation for public use
A property may be subject to expropriation for public purpose. The owner is compelled to sell his property provided that public authorities give him indemnities in return, which cover his loss. Prior to the expropriation, a public investigation is undertaken in order to justify the expropriation.
Restriction on use of real estate
If the property is situated in a municipal district of 200,000 or more inhabitants or in the Hauts-de-Seine, Seine Saint-Denis and Val-de-Marne departments (art. L.631-7 of the Housing Code) or in a municipal district in which the regulation on change of use is applicable (art. L.631-9 of the Housing Code), the property’s use cannot be changed from a residential use to another use without the prior authorisation of the Prefecture (without the authorisation of the mayor of the municipal district from 1 January 2009 (art. L.631-7-1 of the Construction and Housing Code, modified by the Law 2008-776 of 4 August 2008, known as loi LME.
5. Occupation of real estate – Who may occupy real estate?
Real estate is usually occupied by one of the following categories of person:
  • Owners – those persons having one of the types of ownership mentioned in section 3
  • Tenants – those persons with a lease of the property or part of it such as a residential lease, commercial lease or long term lease. Depending on the provisions of the contract, it is possible for the tenant to sublet the premises. Under specific conditions, tenants of commercial or residential premises have statutory rights to renew their leases when the contractual term ends
  • Persons claiming ownership by adverse possession – where they have occupied the property for a long period of time without having any legal rights to do so, but without challenge by the owner
  • Holders of concessions and any other contractual permissions including a right to occupy the property
6. Brokers – What is the broker’s role?
An estate agent may be appointed to find a contracting party to purchase or rent the property of others. He is mandated to buy, sell, rent or exchange. He is an intermediary for such operations, and receives payment in the form of commission.
The broker’s profession is strictly regulated by the law of 2 January 1970 (Law 70-9 controlling practice requirements for activities regarding some real estate operations, also known as loi Hoguet). The broker has to comply with the provisions of the law and may be subject to civil and criminal penalties. To practice, he must receive a professional “Estate Agent’s card” delivered by the Prefecture and meet the following conditions:
  • have proof of his professional ability
  • provide a sufficient financial guarantee
  • have a certificate of insurance for civil responsibility and
  • have a police record proving he has no incapacity to practice
The estate agent’s main purpose is to represent the parties. He is entrusted with powers to carry out his appointment on behalf of his client. He puts potential buyers in contact with sellers, or potential tenants in contact with landlords. He can draw up sale agreements. He may handle funds for his clients if given precise powers. His professional licence mentions specifically the scope of his activity:
  • transactions relating to real estate business (transactions sur immeubles et fonds de commerce) – basically the purchase, sale and letting of buildings, lands and commercial property
  • real estate management (gestion immobilière)
Where the estate agent also acts as an advisor, he has a duty to provide advice to his clients on applicable regulations, the feasibility of the project, and a number of other matters, such as:
  • the administrative state of the property (land for construction, building constraints, etc.)
  • the information given to the parties (lease situation, validity of present leases, etc.)
  • the existence of any defects in the property (parasites, etc.), within the limits of his professional responsibility and
  • the creditworthiness of the buyer
The estate agent is entitled to receive the agreed commission only when the contract has definitely been concluded. Consequently, if the contract is subject to a condition precedent, the commission is payable when the condition has been met.
7. Employees – What employment issues affect real estate acquisitions?
The national law provisions (Article L.1224-1 of the French Labour Code, former L.122-12) incorporating the EC provisions (Directive 2001-23 of March 12, 2001) state that the employment contracts of the transferor’s employees are automatically continued by the transferee in the event of a transfer of an autonomous economic entity which would affect staff.
In practice, such economic entity is traditionally defined by the French Courts as a unit composed of persons and tangible and intangible assets, having an economic activity with a defined goal.
For this reason, the transfer of tangible assets is important as real estate can constitute an element, especially in conjunction with other elements, making it possible to characterise the existence of an autonomous economic entity whose transfer can involve the automatic transfer of employment contracts.
A real estate acquisition project in France consequently entails consideration of various issues by the investor such as:
  • the nature of the activity which is carried on within the real estate in question and the conditions of its organisation
  • the transferee’s methods of managing the real estate (for example the existence of a management section with dedicated employees) and
  • the nature of the assets whose acquisition is considered at the time of the project
The answers to these questions enable verification of whether or not there is an autonomous economic entity that would entail the transfer of the employment contracts.
If the operation involves the transfer of employment contracts, the investor must pay particular attention to:
  • the type of employees whose contracts can be transferred (in certain cases, a prior administrative authorisation may be needed for the transfer of the employment contract in question)
  • the collective or individual benefits which the employees may enjoy, in particular with regard to mutual insurance, provident funds, etc. and
  • collective agreements entered into with workers
The transfer of employment contracts, when it is imposed by the provisions of national law or EC legislation, has the result of qualifying the investor as the employer under French law.
For this reason, the investor should ensure that he is properly registered with :
  • the national social security scheme
  • the unemployment insurance fund and
  • the supplementary pension scheme
Under French law, the continuation of employment contracts where there is a transfer of an autonomous entity is a matter of public policy. Consequently, the transferor cannot accept any obligation to terminate just before completion the employment contracts of the employees of the entity to be transferred, even on economic grounds.
PART B - PROCEDURE AND TERMS
8. Procedure – What are the steps in a sale and purchase transaction?
The first step in a transaction starts with the so-called pre-contractual period, allowing the parties to discuss the main conditions of the transaction. This period is not regulated by the Civil Code but often organised through contracts.
In order to provide the purchaser with complete information regarding the building, investigations are carried out including technical and legal due diligence in relation to the property. This information enables the purchaser to determine the price and the nature of any obligations to be requested from the seller.
The prospective purchaser may make an offer for the property (Offre d’achat). Alternatively, a vendor may make an offer (Offre de vente). Great care must be taken to avoid a binding contract at that stage. A purchaser can find himself bound under contract to purchase (or sell) if the purported offer accurately identifies the subject matter of the proposed contract and with price payable and the other party then accepts such an offer.
Most of the time, the parties will enter into a preliminary contract, in preparation for the notarised deed of sale, the form of which is generally either a unilateral promise to sell (promesse unilatérale de vente) or a bilateral promise to sell (compromis de vente i.e. promesse synallagmatique de vente).
In the unilateral promise, the seller, referred to as promisor, undertakes to sell the property to the buyer, referred to as the beneficiary of the promise to sell, on the date when the buyer expresses the intention to buy the property. The beneficiary holds an option he can exercise for a certain period of time. The beneficiary pays a deposit (indemnité d’immobilisation, generally 10% of the purchase price) which remains in a special account at the notary’s office until completion takes place or the purchase is cancelled. When he exercises this option to buy, the sale is completed. Failing that, the seller is released from his promise and can sell the building to another party, when the beneficiary will have to pay the promisor compensation amounting to the deposit. This type of preliminary contract is drafted by a notary or drawn up as a private agreement and in both cases the validity of the contract is subject to its registration with the tax administration within 10 days of the beneficiary’s acceptance.
The bilateral sale agreement is a reciprocal undertaking to sell and to buy, binding the parties. This preliminary contract generally includes clauses containing conditions precedent. The sale will be completed once those conditions are fulfilled. This preliminary contract is always drawn up as a private agreement.
The final stage in the completion of a sale and purchase transaction is the signing of the registered deed. The purchase deed may be drafted by one notary who is a public officer, but each party may decide to have his own notary. In some cases, the seller and the buyer may directly sign the final notarised deed of sale without signing a preliminary contract.
Legal formalities with authorities and agencies such as the land registry (conservation des hypothèques) and the tax authority have then to be completed in order for the sale to be enforceable against third parties. The published and registered deed is an acte authentique and can then only be overridden by a judge.
9. Other common contract terms – What other provisions does a real estate sale contract commonly contain ?
As mentioned in section 8, the parties generally enter into a preliminary contract, unilateral promise or bilateral promise to sell, prior to the signature of the agreement before a notary. Depending on the formula selected, the parties will have more or less wide-ranging rights.
The purchaser will often hold an option right enabling him to acquire the building if he wishes to do so. The contract will mention the deadline and the form in which the option must be exercised.
Generally, the contract will contain an assignment clause under which the benefit of the contract may be transferred unless otherwise agreed. In the case of a unilateral promise to sell, this entitlement will last until such time as the option is taken up. In practice, unilateral promises contain a substitution clause, whereby the beneficiary can have himself replaced by a third party who may be an individual or a legal entity.
It is common for the sale and purchase agreement to provide for a deposit of between 5-10% of the purchase price on exchange of agreement, depending on the price of the property and the duration of the option to purchase in a promise to sell. The contract generally mentions that this deposit remains in a special account at the bank or the notary’s office.
It is usually stipulated that if an option is taken up, the option fee will be offset against the sale price of the building. If the option is not taken up, this fee will accrue to the promisor. This remunerates the seller for granting the purchaser first refusal on the property.
The contract will generally provide for conditions precedent under which, for example, a pre-emption right will be exercisable, or an administrative authorisation (planning permission) or finance needs to be obtained prior to the signature of the final deed. To be valid, all conditions precedent must have been satisfied or if any condition exists for the benefit of one party, that party must have agreed to waive it in the absence of satisfaction.
Generally, full payment of the price is made when the transfer of ownership is completed.
If the property being sold is in the course of construction (Vente en l’Etat Futur d’Achèvement or VEFA, Article L.261-3 of the Construction and Housing Code and 1601-3 of the Civil Code), the contract for sale will incorporate provisions dealing with the obligations of the seller to construct in accordance with an agreed specification and building permit, and provide to the buyer separate deeds of warranty from the building contractor and professional team in order to safeguard the buyer against defective design or workmanship. If the contractor is the seller himself, he will usually provide the buyer with legal and contractual warranties.
10. Due diligence – What investigations does the buyer normally make?
Before the acquisition of any property or of a company owning a property, before the signature of the preliminary contract the buyer will carry out due diligence investigations. These will concern the legal as well as the technical condition of the property.
From a technical point of view, the matters normally covered are:
  • the structure of the building
  • soil and geological investigations
  • compliance with any applicable regulations (such as labour regulation, public premises, asbestos, termites and environment)
  • an environmental audit and
  • compliance with article L631-7 of the Construction and Housing Code, if applicable (change of use of premises)
The following legal matters will also be checked, namely:
  • the title of property, origin of ownership over the last 30 years
  • matters burdening or benefiting the property
  • the type of ownership and related documents
  • administrative authorisations (planning permissions, etc)
  • building and operating insurance policies
  • the rental situation
  • any current legal disputes and
  • works and maintenance on the building
Generally, a town planning certificate is obtained at contract stage in order to provide the purchaser with information concerning any applicable planning restrictions and confirming the ability to build, rebuild or extend on the land and whether any particular zoning regulations apply to it.
11. Terms implied by law – What provisions are implied by Statute, Code or otherwise?
An agreement for the sale and purchase of land must be in writing and must be drafted by the notary in the form of an authenticated deed and be registered at the Land Registry (conservation des hypothèques) in order to be valid against third parties.
The Code provides for various conditions applicable to sales of property, although these can be contracted out of and varied. In a similar way to the standard conditions of sale in relation to English conveyancing, the parties to a French property acquisition are able to vary most of the code provisions.
Certain things must be stated for the purpose of registration. In addition to the provisions specific to the sale, the deed must contain various stipulations referring to :
  • the names of the parties, whose identities must be checked. The contract must state the companies’ names as well as legal form, registered office and registration number
  • the designation of the property and of the rights transferred, including a list of priority ranking or mortgages, contractual easements, town planning obligations, co-ownership regulations and rental status
  • the price at which the sale is to be or may be determined. It must be specified whether or not the price is paid in front of the notary and the origin of the sums of money involved. A description of the building must also be given. If the property sold is held in joint ownership, the undertaking must state the exact surface area of the plot of land sold, failing which it may be declared null and void and
  • any special conditions of sale and any charges attached to the building. Appendices are often required, for example relating to the building’s condition, the risks of lead exposure issued within the past year (in the case of residential property built before 1948 and located in a zone with a lead exposure risk), the presence or absence of asbestos in certain developed buildings and the energy consumption diagnosis (diagnosis de performance énergétique or DPE) required by Article L.134-1 of the Construction and Housing Code.
Some measures have been enacted to protect private buyers of new or existing housing who are not real estate professionals. The beneficiary of an undertaking to sell concluded by private agreement is allowed to withdraw his consent within a seven day period. If the undertaking is notarised, the draft deed only becomes firm and final at the end of this seven day period.
12. Registration and Notarisation of real estate – What are the basic requirements?
Within the context of a property purchase, even if the sale may legally exist before the drafting of the notarised deed, the final deed must be drafted by a notary in order to ensure that the transaction is carried out legally and accurately, in accordance with the proper procedures. The notary is technically independent so far as both parties are concerned unless each of the parties is assisted by its own notary. The notary is generally responsible for ensuring that the contract will be effective, for verifying title to the real estate, for informing the parties of any mortgages or liens and for the legal and tax consequences of the executed documents. It is advisable that such points be checked by a lawyer at the preliminary contract stage.
The notarised deed gives the purchaser a full proof of ownership of the property which can only be disputed by a legal action in front of a judge. Any French property/real estate transaction has to comply with the acte authentique rules and obligations to be valid. All real estate transfers, mortgages and liens must be executed in the form of a notarised deed.
The purchase deed is only enforceable against third parties after its publication/registration (publicité foncière) at the Land Registry (conservation des hypothèques). The sale is then protected against third party claims, including those made by persons not stated in the deed. The registration does not in itself create the right of any party over the property, but is necessary in order to enforce the transfer against third parties.
All recorded documents become part of a real estate file (fichier immobilier) which indicates ownership of and claims against real property. Authenticated copies of all notarised deeds are kept at the Land Registry. Most of the time, any person can obtain an abstract of the real estate file for a particular piece of property.
13. Disputes – How are they dealt with and resolved?
According to Article 3 of the French Civil Code, “Statutes relating to public policy and safety are binding on all those living in the territory. Immovables are governed by French law even when owned by foreigners”.
French Law permits freedom of contract and the parties may choose the method of dispute resolution they prefer, which should be expressly stated in the contract. Methods of dispute resolution could include court proceedings, arbitration (whether domestic or international) or reference to an alternative dispute resolution process. Nevertheless, this freedom of contract is not absolute and civil law and statute may require a certain method of dispute resolution especially in real estate matters.
France has a civil law system, as opposed to a common-law system, and the procedure before the French Courts is essentially carried out by the parties filing written submissions through their lawyers.
The lower district Court of first instance is called the Tribunal d’Instance (TI), and the higher district Court of first instance is called the Tribunal de Grande Instance (TGI). Which court first hears a case depends upon the amount of the claim. There is also a separate Commercial Court of first instance known as the Tribunal de Commerce. Appeals against decisions of the above are heard by the regional Court of Appeal and further appeals (solely on points of law) are dealt with by the Cour de Cassation in Paris, France’s supreme civil court. An injunction can be obtained requiring a party to do, or refrain from doing, some act, either before or during the litigation. Injunctions are obtained under French law through instigating summary proceedings (Procédure de référé). They can be requested in the following circumstances: urgent matters, danger of irreparable harm, obviously illegal acts, etc. As a general rule, the unsuccessful party following trial will be responsible for the court costs (dépens) unless the court orders otherwise. The dépens includes a fee for pleading in court, but although it does not include the lawyers’ or barristers’ fees, the court may order the unsuccessful party to bear the legal costs of the successful party. The French legal system encourages parties to resolve their disputes otherwise than in the courts. Recently, the scope of arbitration within French law has been extended.
Different types of dispute are often resolved in different ways. For example, rent reviews are dealt with by court proceedings only and disputes of fact may be dealt with by expert determination.
When choosing a method of resolving disputes, the parties will have to take into consideration:
  • the domicile/nationality and governing law of the contracting parties and applicable limitations
  • whether or not awards be enforced in the relevant jurisdictions and
  • if compensation can be given in the form of an interest in land, rather than payment of money
PART C - PERMITS INSURANCE AND ENVIRONMENT
14. Permits – What permits are required for the use and occupation of real estate and are they personal?
Planning permission authorises construction according to urban regulations (locality, use, aspect, arrangement of the building). Planning permissions are necessary to carry out the construction of brand new buildings as well as for any works carried out on existing buildings. The application for such permission includes the identity of the applicant, location of land, type of works and intended use of the building. The file is filed with the town-hall and must contain a master plan of the land, an overall plan of construction and plans of the façade. The planning permission must be posted on the site for the duration of the building work and in the town hall in order for it to be enforceable against third parties. It must remain there for the entire period in which people are allowed to object to the planning permission. The building permit is not personal and may be transferred to any new owner at the same time as any transfer of the land.
An authorisation to parcel out land (permis d’aménager) is required for any division of land for building purposes resulting in the creation of more than two plots, or aiming at creating more than two plots over a period of up to ten years (Article R.421-19 of the Town Planning Code). The validity of this authorisation is limited to 2 years, during which time the work on the parceling must start (Article R.424-17 of the Town Planning Code).
A specific authorisation must be obtained from the Commission Départmentale d’Aménagement Commercial (CDAC) for the construction of supermarkets, shopping centres and cinemas depending on the factors such as the surface area and the number of seats. Any party applying for planning permission for such an operation must apply for this authorisation beforehand.
The use of premises in cities having a population greater than 200,000, or in the Hauts-de-Seine, Seine Saint-Denis and Val-de-Marne departments, may not be changed from a residential use to another use without prior authorisation of the préfet (without prior authorisation of the mayor of the municipal district from 1 January 2009, article L.631-7-1 of the Construction and Housing Code, modified by the Law 2008-776 of 4 August 2008, known as loi LME). This authorisation is personal and may not be assigned. If residential premises are transformed into office premises or commercial premises, the authorisation is issued on the condition that the beneficiary makes compensation for the creation of office/commercial buildings by creating new residential premises (this operation is called transfert de commercialité). Moreover, professional or administrative premises may not be used for another purpose without prior authorisation of the préfet unless their new purpose is residential. The préfet may issue a certificate confirming that the premises may be used as commercial premises or offices.
Concerning industrial buildings, a list of classified installations for environmental protection (ICPE) has been established to list activities which may interfere with or be dangerous to the surrounding areas, public health and safety, or the environment. This list distinguishes installations requiring authorisation from the préfet from those only requiring a declaration. If needed, the authorisation is valid for a three-year period.
Other authorisations are also required for the use of woodland sites, industrial decentralisation, classified buildings, and property restoration.
In situations where demolition is involved, a specific demolition permit will need to be obtained.
Within the Paris region, a special licence is required for commercial offices or industrial developments when new construction occurs or when existing premises are to be renovated or extended.
15. Insurance and Risk – What insurance will the parties effect and when does the insurance risk pass at the time of sale
Insurance is generally the responsibility of the owner of the property. When a lease has been granted on the property, the terms of the lease will prescribe which party has responsibility to insure and pay for such insurance.
The tenant will generally insure the contents of the property belonging to the landlord and in some cases certain parts of the property for which the tenant is contractually responsible. It is common that tenants of long leasehold interests (bail emphytéotique or bail à construction) insure the property they build. The tenant is often asked by the owner to present a certificate of insurance. The owner will insure the building but it is common to ask the tenant to pay the insurance premiums. Lease contracts often contain a reciprocal waiver of recourse clause.
The insuring party must enter into a comprehensive buildings insurance policy to protect the structure and fixtures and fittings of the property in the event of damage or destruction by any of a comprehensive list of insured risks, such as storm, lightning, fire and water damage.
Generally buildings are insured for the reinstatement cost rather than the reinstatement value. Property owners may take out a single insurance policy for one particular property or a block policy covering a portfolio of properties. Insurance policies are transferable with the property unless the parties agree otherwise. Where a sale is taking place, timing of the transfer of risk is normally prescribed by the sale agreement.
As accidents occurring in the course of construction works have major financial consequences, French law makes it compulsory to take out insurance against building-related risks arising in the course of construction, consisting of a structural damage policy and a ten year liability policy. The first, which must be taken out by the owner of the building, covers repair works to be made in case of damage to the structure, for which builders are automatically liable under the ten-year warranty (assurance dommages-ouvrage, Article L.111-30 of the Construction and Housing Code). This insurance policy benefits subsequent owners of the structure. The second policy (assurance responsabilité civil, Article L.111-28 of the Construction and Housing Code), which must be taken out by the builder, covers his ten year professional liability. Other types of liability (such as any arising under a two year performance obligation (garantie biennale), any one year completion guarantee (garantie de parfait achèvement) or legal contractual liability) are not usually insured.
16. Environmental – What are the common environmental issues?
When selling an industrial site or a site with a potential pollution problem, the seller has to supply a building in compliance with contract specifications. Legislation governing installations classified for environmental protection (ICPE) enables the Prefecture to order operators to rehabilitate the contaminated site, and, in some cases, the owner may be requested to do such works. The scope of this obligation depends upon the risk to the environment and the public health, due to the exploitation of the classified installation and also on the future use of the site. The seller has a duty of disclosure and must provide the purchaser with all information concerning potential or actual contamination of the site (article L. 514-20 of the Environmental Code). If the purchaser is not properly informed, he may seek the cancellation of the sale or a reduction in the price.
Since 1 June 2006, when selling or renting a building located in areas covered by a plan for the prevention of technological risks or foreseeable natural disasters, whether such plan is prescribed or approved, or in the areas exposed to a seismic risk (as defined by a Decree), the seller or the landlord must provide a natural and technological risk status report (état des risques naturels et technologiques, E.R.N.T) on the basis of information communicated by the préfet in each department. If the seller or the landlord fails to provide such a report, the purchaser or the tenant may seek the cancellation of the sale or a price/rent reduction (Article L.125-5 of the Environmental Code).
The carrying out of an environmental audit is recommended in order to analyse the risks relating to pollution.
Specific risks and diseases related to real estate have been recently identified by French Law in order to protect properties against termites, and their occupants against asbestos and lead poisoning. For example, property owners must conduct a search for asbestos and create and update an asbestos technical file, in order to find out if their premises contain asbestos. Such works can be very expensive and can lead to the vacation of the building. In the case of residential property, the vendor must also provide specific reports related to lead poisoning or termites. These regulations are applicable if the property is situated in a risk area and if the property is a residential one irrespective of the type of ownership.
Other risks have also been identified under French law. For example, a report on the presence of pyralene is also required in certain specified cases and reports are required on the security and conformity of internal gas installations in connection with residential properties.
PART D - FINANCE AND TAXES
17. Pricing/Valuation – What sets the price / valuation of real estate ?
The purpose of the valuation is to determine the building’s market value (valeur vénale). The market value is the average price that can be obtained for a property to be sold, at the date of the valuation, be it a flat (apartment), house, plot of land, block of flats (apartment building), leisure centre, industrial or commercial premises, an office, hotel, clinic, castle etc . The valuation is intended both for private individuals and for companies who own a property.
Every property needs to be valued when settling wills, deeds of gift, divorce, division of property, tax investigation or adjustment, company purchases, company mergers, wealth tax declarations, etc. Experts are valuation professionals in the property field such as notaries and property experts, members of the French Institute for Property Valuation, chartered surveyors and court-appointed valuers. Valuation fees are mainly based on the amount of time estimated to carry out the valuation and not the value of the property to be valued.
Each valuation is performed after inspecting the property. When pricing a property, the professional will take several factors into consideration such as location of property, its type and condition, surface area, date of construction, legal and tax situation, applicable planning regulations, occupation of the property and comparison with similar transactions. The valuation report contains a description of the work done, the location and surroundings of the property, its legal status, its town-planning status, a description of the property, general assessment, the market sector, comparison points used, estimate and the conclusion.
The property expert may use several methods to carry out a property valuation, such as the comparison or analogy method, the revenue method, the method called “property developer evaluation”, the “professional” method and the “cash flow” method.
The most common method of valuation in France is the comparison or analogy method, where the valuer will consider similar transactions made in the same area in relation to buildings with similar characteristics.
The income method is based on the actual income received (annual rental income) on which a particular yield is applied depending on the location and characteristics of the property. The analysis of the lease contract enables a determination of the potential income and the detailed provisions of the contract concerning such factors as duration and covenant strength are also taken into consideration.
18. Financing: How is a real estate acquisition financed?
The principal ways in which a real estate acquisition is financed are through the purchaser’s own cash resources or general corporate banking facilities.
There are no specific regulatory requirements for foreign banks wishing to lend and take security in France, but banking transactions may generally only be carried out in France by authorised foreign banks, of which there is a list published by the Banque de France.
The loan will be secured on the property by a mortgage or a charge in favour of the lender. As in every civil law jurisdiction, security used to be specific to an asset and to a debt (different from full fixed and floating charges as in the UK) but the introduction in 2006 of the “rechargeable mortgage” (hypothèque rechargeable, Article 2422 of the Civil Code) permitted more than one debt to be secured on a specific asset.
The mortgage or charge will invariably be governed by French law when the property in question is situated in France, irrespective of the law which governs the accompanying loan documentation. A charge in favour of the lender (privilège du prêteur de deniers) is similar in nature to a mortgage but may only be granted at the same time as the loan facility is entered into. In order to be valid, the main terms of the loan must be recorded simultaneously with the acquisition of the property.
Finance can also be raised by real estate finance leasing (Crédit-bail), in circumstances where a finance company purchases an industrial or commercial building in order to rent it to a lessee, for a given period of 12 to 15 years generally at the end of which time the lessee will benefit from a call option at a reduced price.
19. Security over real estate - How is security over real estate created and protected?
Security granted over real property usually relates to the building being financed for acquisition purposes. This security gives the lender the benefit of rights over the building.
French law establishes several types of statutory charges applicable to real estate, called special real estate charges (privilèges spéciaux). These charges have priority from the date of the act giving rise to the charge over any subsequently arising real-estate charge or subsequently recorded mortgages. The charges may be registered at the Land Registry (conservation des hypothèques). The Civil Code also provides for a seller’s charge (privilège du vendeur d’immeuble) arising from any sale or transfer of real estate for the benefit of a vendor in order to secure payment of the purchase price by the purchaser and a charge in favour of the lender (privilège du prêteur de deniers) arising from a loan made at the same time of the sale in the form of a notarised deed and registered simultaneously.
A mortgage (hypothèque) can be created at any time by contract whilst the mortgagor is the owner of the relevant property. This usually constitutes effective and enforceable security for a loan. The mortgage must be executed in the form of a deed signed before a notary and has to be registered at the Land Registry in order to be enforceable against third parties. This will invariably be governed by French Law when the property is in France, as with most French Law-governed documents, and especially those requiring notarisation. The documents will need to be in French although foreign parties may have a translation. The same property may be burdened by several mortgages. A recorded mortgage has priority, as of the date of registration, over any subsequently arising real estate charge or subsequently recorded mortgage. A mortgage is effective only as long as the underlying debt is valid; after satisfaction or cancellation of the debt, the mortgage is no longer effective.
Whenever the mortgaged property is sold or transferred, it can be purged of mortgages and other charges at the initiative of the purchaser who notifies the secured creditors and proposes to repay the recorded mortgage up to the amount of the purchase price.
The antichrèse is a form of security pursuant to which a creditor is given possession and enjoyment of real estate in order to guarantee the obligations due to the creditor. Its use is very uncommon.
20. Taxes and costs – What are they and who pays them?
Generally, please refer to our CMS transaction costs guide as to the nature and amount of the taxes and costs
The acquisition of real estate is generally subject to registration fees calculated on the purchase price increased by additional costs and compensation paid to the seller. Registration duties are due on the date of sale and payable by the purchaser.
The purchase of the following types of property is subject to value added tax (19.60% as a rule), which will be payable by the purchaser, namely:
  • a building which has been completed less than 5 years before the sale
  • a building in the course of construction to be finished in the 4 year period which follows the date of acquisition
  • land to be built upon in the 4 year period which follows the date of acquisition and
  • a building to be demolished or entirely renovated in the 4 year period which follows the date of acquisition
French tax authorities may challenge the purchase price and substitute the price paid with the actual market value of the property sold, if higher.
In addition to the transfer duties, the land registrar’s fees of 0.10% and legal fees will apply.
Legal fees and registration taxes amount to approximately 7.5% of the purchase price including any geometrist’s costs that might have been incurred for establishing boundaries and preparing plans for the final deed. These fees are paid to the notary on the day of signature of the deed together with the balance of the purchase price. Notary fees are also to be paid, which amount to 0.825 % of the purchase price.
The seller pays the agent’s commission, unless the parties have agreed otherwise.
Some other related costs, such as loan and mortgage costs, will also need to be taken into account.
Germany
PART A - PARTIES AND INTERESTS
1. Parties - Who can own real estate?
Any “person” with legal capacity may own real estate. This includes legal persons under private law (e.g. stock corporations or limited liability companies) as well as legal persons under public law (e.g. local authorities). Associations with legal capacity or non-profit-organisations may also purchase real estate.
Unlike the above mentioned legal persons, a civil law partnership (Gesellschaft bürgerlichen Rechts (GbR)) and its partners are not recorded in a public register. Also a change of partners cannot be verified. Therefore, when buying real estate property as a GbR, all partners must be entered into the land register.
Commercial real estate is often owned by insurance companies, banks, investment companies or real estate holding companies.
There are no statutory restrictions on foreign persons or companies acquiring real estate in Germany, provided that they have legal capacity.
2. Property - What property interests are currently sold?
In Germany, it is principally only possible to sell title to land or to create limited rights in rem (beschränkte dingliche Rechte).
German law recognises several forms of interest in property. These are:
  • ownership (including condominium ownership)
  • limited rights in rem such as

    • heritable building right (Erbbaurecht)
    • easements (Dienstbarkeiten)
    • realty charge (Reallast)
    • mortgage (Hypothek)
    • land charge (Grundschuld)
    • annuity (rent) charge (Rentenschuld).
Real estate may be held by means of sole ownership (Alleineigentum), joint ownership (Gesamthandseigentum) or co-ownership (Miteigentum).
In the case of real estate which is leasehold, only the land may be acquired. However, the buyer of leased real estate enters into the rights and obligations contained in the lease agreement in lieu of the lessor, i.e. as soon as the buyer is registered in the land register it automatically assumes the status of a lessor (§ 566 (1) German Civil Code (BGB)) if all conditions are met.
The buildings on the land and all other fixed components and items such as crops are regarded as essential parts of the land and cannot be separated from it. Consequently, a separate legal transfer of either land or building is neither necessary, nor possible. Unless the parties have agreed otherwise, the sale also includes the appurtenances (Zubehör), i.e. the movable items on the site that serve the commercial purpose of the land, such as construction materials or supplies of heating oil.
Condominium ownership is a special kind of right in rem. It consists of individual ownership (Sondereigentum) of a flat / apartment in connection with ownership of undivided shares (ideelles Miteigentum) and jointly-owned land or communal areas (Gemeinschaftsflächen). It is possible to sell the individual property in conjunction with a share of the jointly owned property. Any issue arising which concerns the jointly owned property must be decided on jointly by majority or unanimous decision of all co-owners.
Another special kind of right in rem is the heritable building right (Erbbaurecht)This is a temporary right to have a building on another person’s land. A transfer of title to land is not necessary (see question 3).
3. Ownership - What types of ownership are there?
German law differentiates between the following types of ownership:
  • Sole ownership (Alleineigentum) – the sole owner is the only person authorised to control and dispose of the land
  • Co-ownership (Miteigentum) – more than one person owns an undivided share of the land. Each co-owner can dispose of its share
  • Joint Ownership (Gesamthandseigentum) – land which forms part of jointly held assets, e.g. by a civil law partnership or an association without legal capacity. Each joint owner is entitled to a share of the joint property but is not entitled to dispose of its share independently
  • Rights which are similar to full ownership of real property – by analogy these rights are subject to the provisions on full ownership, provided that there are no special regulations. Heritable building rights are particularly important and are generally created for a period of up to 99 years. During that period, the holder of a heritable building right may build on the land and use it. Commonly, a recurrent charge or rent (Erbbauzins) is stipulated in the contract.
Any transfer of title to land has to be entered into the land register (Grundbuch). Prior to this, the real estate transfer tax and other financial duties relating to the property have to be paid. To assure these payments, the tax authorities responsible for the respective area have a right of appropriation. Only if the tax authorities waive this right can the transfer of title to land be executed.
A distinctive feature of German law is the notice procedure (§ 927 German Civil Code (BGB)). Under certain circumstances, the owner of a piece of land may lose its title to property. In particular, the land must have been in proprietary possession of another party for over 30 years and the real owner must be either missing or dead, or alternatively, not listed in the land register.
4. Matters burdening or benefiting real estate - What matters can affect real estate?
Common matters affecting real estate include:
MatterEffectExampleEasement (Grunddienstbarkeit)This right burdens one piece of land and benefits another. It is not personal but attaches to the land itself. This right only refers to tolerance and omission.A right of way; a right to use pipes and cables; way-leaves; ban on digging next to cablesLimited personal servitude (beschränkt persönliche Dienstbarkeit)This right is granted not to the owner of a specific piece of land but to a specific person. This right only refers to tolerance and omission.An obligation not to carry out a certain type of business on the land; right of abode; tenant’s / lessee’s limited personal servitude: an effective means of protection against the termination of a long-term lease agreement, e.g. by a buyer in a public auctionRight of usufruct (Nießbrauch)An inalienable and non-heritable right to use the land.The right to the fruits of the property e.g. crops or proceeds of rentGround rent (Reallast)This right is typically characterised by recurring obligations (payments in kind or services) which are due on the land. If these are not fulfilled, the entitled party may enforce their right over the property. Payment of a pension; provision of food or energy / water; right to co-possess the property, etc.Property charges, i.e. land charge and mortgage  (Grundschuld und Hypothek)Security and realisation rights where a certain amount of money is payable to the beneficiary of the encumbrance. Two kinds exist: Uncertified / certified land charges, annuity charge (see question 19).(1) A mortgage is dependent on the underlying secured obligation out of a loan agreement (Hypothek) (2) Land charges (Grundschulden) both certified and uncertified – which are not dependent on the existence of a specific claim out of a loan agreement and are significantly more widespread.Pre-emptive right (Vorkaufsrecht)If the owner sells the land, the beneficiary of a pre-emptive right is authorised to demand a transfer of title to land on the conditions agreed in the sale contract with the third party. In addition to contractually agreed pre-emptive rights, there are also statutory rights in favour of the local authority which are not recorded in the land register.Occurs frequently in the case of a property burdened with heritable building rights; pre-emptive right in favour of the local authority by virtue of a statute.Right to repurchase (Rückkaufsrecht)This right enables a party selling land to buy it back from the buyer under certain circumstances.Occurs frequently with the sale of publicly owned land to property developers. If the land cannot be developed as planned, the local authority has the right to buy it back.Priority notice (Vormerkung)The priority notice is a provisional means of security. Once the priority notice has been entered into the land register, protection of the right in question is secured and any rights subsequently entered cannot be considered valid if they invalidate or impair this claim.Priority notice protecting a claim for transfer of title to unencumbered land (Auflassungs-vormerkung).
Matter
Effect
Example
Easement
(Grunddienstbarkeit)
This right burdens one piece of land and benefits another. It is not personal but attaches to the land itself.
This right only refers to tolerance and omission.
A right of way; a right to use pipes and cables; way-leaves; ban on digging next to cables
Limited personal servitude
(beschränkt persönliche Dienstbarkeit)
This right is granted not to the owner of a specific piece of land but to a specific person.
This right only refers to tolerance and omission.
An obligation not to carry out a certain type of business on the land; right of abode; tenant’s / lessee’s limited personal servitude: an effective means of protection against the termination of a long-term lease agreement, e.g. by a buyer in a public auction
Right of usufruct
(Nießbrauch)
An inalienable and non-heritable right to use the land.
The right to the fruits of the property e.g. crops or proceeds of rent
Ground rent
(Reallast)
This right is typically characterised by recurring obligations (payments in kind or services) which are due on the land. If these are not fulfilled, the entitled party may enforce their right over the property.
Payment of a pension; provision of food or energy / water; right to co-possess the property, etc.
Property charges, i.e. land charge and mortgage  (Grundschuld und Hypothek)
Security and realisation rights where a certain amount of money is payable to the beneficiary of the encumbrance. Two kinds exist:
Uncertified / certified land charges, annuity charge (see question 19).
(1) A mortgage is dependent on the underlying secured obligation out of a loan agreement (Hypothek)
(2) Land charges (Grundschulden) both certified and uncertified – which are not dependent on the existence of a specific claim out of a loan agreement and are significantly more widespread.
Pre-emptive right
(Vorkaufsrecht)
If the owner sells the land, the beneficiary of a pre-emptive right is authorised to demand a transfer of title to land on the conditions agreed in the sale contract with the third party. In addition to contractually agreed pre-emptive rights, there are also statutory rights in favour of the local authority which are not recorded in the land register.
Occurs frequently in the case of a property burdened with heritable building rights; pre-emptive right in favour of the local authority by virtue of a statute.
Right to repurchase
(Rückkaufsrecht)
This right enables a party selling land to buy it back from the buyer under certain circumstances.
Occurs frequently with the sale of publicly owned land to property developers. If the land cannot be developed as planned, the local authority has the right to buy it back.
Priority notice
(Vormerkung)
The priority notice is a provisional means of security. Once the priority notice has been entered into the land register, protection of the right in question is secured and any rights subsequently entered cannot be considered valid if they invalidate or impair this claim.
Priority notice protecting a claim for transfer of title to unencumbered land (Auflassungs-vormerkung).
The entry in the land register is decisive, even if it is incorrect, i.e. if rights are registered or cancelled by mistake. Under certain circumstances the law protects a buyer in good faith as to the title of the seller being registered but not being the owner. The buyer cannot be in good faith if an objection is entered into the land register.
5. Occupation of real estate - Who may occupy real estate?
Real estate is usually occupied by one of the following categories of individuals:
  • Property owner – unless a third party has been granted an exclusive utilisation right (either by an utilisation right in rem or by permission to use the property by way of a lease agreement)
  • Tenant (Pächter) / lessee (Mieter) – due to the lease agreement the tenant / lessee is entitled to possession. Under certain circumstances the tenant / lessee may restrict its utilisation right in part or in whole by (permitted) sub-letting. Commercial lease agreements frequently contain an extension option for the period after expiry of the original lease term. However, a lease contract originally concluded for a term of more than 30 years is subject to a special termination right (§ 544 German Civil Code (BGB))
  • Parties with entitlement in rem are also entitled to possession (e.g. heritable building right, right of usufruct, right to abode)
  • Beneficiary of a right of way – the beneficiary may enter the property within the agreed limits.
6. Brokers - What is the broker’s role?
Unlike their counterparts in some other countries, the activities of estate brokers in Germany are primarily restricted to real estate brokerage.
A broker may be instructed by any of the parties in a real estate transaction. Generally, the broker’s tasks include:
  • acting for a landlord to find a tenant for a property, which includes marketing the property
  • acting for a tenant to find a property to lease
  • acting for a buyer as to find a property to purchase, or acting for a seller to find a buyer
  • project management of development of new buildings or refurbishment
  • researching rents of comparable commercial and / or residential property and other market research
  • in some cases evaluating a client’s existing and target properties
In Germany, real estate brokers are not permitted to draft contracts or negotiate preliminary agreements or letters of intent / heads of terms as the law forbids non-lawyers to give legal advice. However, the new legal service act (Rechtsdienstleistungsgesetz), coming into effect on 1 July 2008, implements an authorisation for non-lawyers to provide supplementary legal services linked to their original services which extends the competences of real estate brokers in a limited way.
Unless prohibited by contract, a real estate broker may act both for the seller / landlord and for the buyer / tenant and demand full commission from both parties. However, acting for both parties would mean a breach of the agreement, if this leads to a conflict of interest. In practice, real estate brokers inform the parties at an early stage that they are acting for both.
7. Employees - What employment issues affect real estate acquisitions?
In terms of real estate acquisitions, the following two employment issues have to be taken into consideration:
Transfer of business
The transfer of a business or part of a business is subject to special provisions under German law (§ 613 a (1) German Civil Code (BGB)). Frequently, employment relationships between the seller and third parties are so closely linked to the property that the transaction constitutes a sale of a business or part of a business. This often applies to the employment of caretakers and cleaning staff. Under these circumstances, the buyer takes over all the rights and obligations of the employment contracts existing at the time of the transfer.
Where the transaction constitutes a transfer of a business as described above, the seller (the former employer) and buyer will be jointly and individually liable for obligations arising under the existing employment contracts. These employment contracts may not be terminated on the grounds of the transfer of business or changed to the disadvantage of the employee within one year after the transfer. In this connection it is important that the employees concerned are informed about the business transfer at an early stage. The employees can object to the transfer of their employment within one month after receipt of the notification. By doing so, they continue being employed by the seller but run the risk of being made redundant if the seller is unable to provide a similar employment.
Employer-owned accommodation
When the transaction concerns property which includes accommodation let to the employees in connection with their employment, the landlord can terminate the lease agreement at short notice and without stating reasons, once the employment has been terminated. However, this only applies where the accommodation is furnished mainly by the landlord and the employee inhabiting it does not live there with its family. Agreements made on different terms are invalid as far as they are to the disadvantage of the tenant.
PART B - PROCEDURE AND TERMS
8. Procedure - What are the steps in a sale and purchase transaction?
A letter of intent or head of terms is not required in every sale or purchase transaction. These non-binding declarations of intent are used with large transactions, such as the sale of a real estate portfolio with a bidding procedure.
It has become common practice for a seller or buyer to carry out a due diligence process. The due diligence identifies problematic issues relating to the property and points out remedies (see question 10).
Usually, one party sends the other party a draft contract tailored to the specific property. Since a contract for the sale of land must be notarised, it is also possible to have the contract drafted by the notary. Lawyers are normally engaged to advise the parties and to draft the contract.
If the parties have reached an agreement on the specifics of the contract, it has to be notarised. It is important to note that associated agreements must also be notarised if they are of significance to the conclusion of the contract, e.g. if a construction or lease agreement is coupled with a real estate sale. Otherwise, the whole contract is void. A binding offer of one party also requires notarisation. An offer or a contract concerning real estate, not concluded in that form, only becomes entirely valid if the transfer of title to land has been declared by the parties and entered into the land register.
Two essential criteria are required to be fulfilled for transfer of title to land (§ 873 German Civil Code (BGB)):
  • Conveyance of property (Auflassung) – this is the compulsory agreement between the buyer and the seller on the transfer of ownership which has to be notarised. Commonly, it is already included in the contract for the sale of land and does therefore not require separate notarisation
  • Entry into land register – the entry into the land register completes the legal purchase and has a constituent effect, i.e. the title is not transferred before the buyer’s status as owner is entered into the land register. Some time, usually several weeks or months, may pass between the date on which the contract is notarised and the completion of the legal purchase (entry into the land register).
9. Other common contract terms - What other provisions does a real estate sale contract commonly contain?
Contractual provisions normally govern:
  • Definition of the object of purchase (land description, appurtenances, fixtures and fittings, encumbrances, etc.)
  • Exclusion of liability (e.g. soil contamination, hidden defects)
  • Protection of the seller
The parties instruct the notary not to file the application for the transfer of title to land until the seller or the bank have confirmed the receipt of the purchase price. As far as the payment of the purchase price is concerned, the buyer submits itself to immediate execution on its entire assets. This means that the seller is able to access the assets of the buyer, thereby avoiding lengthy legal proceedings. Alternatively, payment can be deposited into an escrow account which is administered by the notary as trustee. However, this generates additional costs.
  • Protection of the buyer
A very important contractual term is the priority notice (Auflassungsvormerkung). It protects the buyer’s claim to a correctly ranked entry in the land register. The purchase price usually does not become due until the priority notice has been entered in a correctly ranked order.
  • Transfer of possession
At the date on which possession is to be transferred, the risk of accidental loss, deterioration not caused by either party, ability to use, compliance with encumbrances, and all duties to ensure that the land or premises are safe for persons or vehicles, are passed on to the buyer. It is advisable for the contract to make a specific provision for the transfer of possession. There should be a clear distinction between the recurring public charges and the allocation of infrastructure development costs and other levies.
  • Authorisation regarding execution of the contract
At the notary’s office, the parties give authority to the notary’s staff regarding all declarations that are necessary to enter the legal transactions listed in the contract into the land register. In general, this authorisation expires once the title has been entered into the land register.
  • Advice of the notary
The notary must advise the parties on all contract-related issues that might imperil the execution of the contract. A special clause of the contract contains this advice.
10. Due Diligence - What investigations does the buyer normally make?
The common law principle of “caveat emptor” does not exist under German law. In principle, the seller is liable for the object to be free from quality and legal defects and to be usable for typical purposes unless the contract specifies that it is to meet certain requirements.
Claims on the buyer’s part made on the grounds that the condition / quality is not as stated in the contract are excluded only if the buyer was aware of the defect when signing the contract. If the reason for its lack of awareness was due to gross negligence, he may only assert claims for defects if the seller fraudulently concealed them or had given a guaranty that the object would have a specified condition / quality. Gross negligence depends on whether the buyer was under an obligation to examine the property prior to and at the conclusion of the contract.
As far as real estate transactions are concerned, case law has acknowledged that it is common practice for a buyer to carry out a diligent inspection of the land and / or buildings. The buyer should at least examine the land and the buildings for any obvious defects (technical due diligence).
In practice, the scope of the inspection to be carried out by the buyer is based on the extent to which the seller excludes liability for defects. The greater the exclusion of liability, the more detailed the buyer’s inspection is likely to be so as to properly gauge the risk of defects.
When the buyer carries out a due diligence review, he uses a comprehensive checklist tailored to the requirements of the specific transaction (location of the property, condition of the development, use). In addition to an examination of the legal situation regarding the planning and building permits, an inspection of the following should also be carried out: encumbrances entered into the land register, public easements, and the actual condition of the site (in particular inherited environmental liabilities and contamination of the building). Concerning the building, the buyer should examine the condition of the building (backlog of repairs) as well as the lease and other contracts regarding the use of the building.
11. Terms implied by law - What provisions are implied by Statute, Code or otherwise?
The German Civil Code (BGB) comprehensively regulates the law of purchase. Strictly speaking, therefore, all the parties have to do is to specify the subject of the contract and to reach express agreement on aspects of the transaction which differ from those provided by statute. However, there are certain mandatory provisions which the parties may not exclude by contract. The most important are the following:
Exclusion of liability in the event of fraudulent intent
The seller may not exclude or limit its liability where it has guaranteed the condition of the property or fraudulently concealed the existence of a defect. Consequently, where liability is completely excluded the seller must specify all circumstances which, according to usual business practice, constitute a defect of land or buildings. Failure to do this may render the liability exclusion clause invalid.
Liability for defects
In so far as liability for defects has not been excluded, the buyer has the following rights (§ 437 German Civil Code (BGB)):
  • Subsequent remedy – eliminating a defect or providing a substitute
  • Withdrawal – concurrent return of consideration received (or equivalent), i.e. return of the land against repayment of the purchase price
  • Price reduction – compensation for the difference in value by withholding, or if the purchase price has already been paid, by repaying part of the purchase price
  • Compensation – in addition to the above remedies, if the seller is in breach of its duties, the buyer may demand compensation or reimbursement of expenses
Protection of confidence by acquisition in good faith
For the benefit of the buyer, the content of the land register is deemed to be correct. For this reason, title to land can be acquired from a party registered as owner in the land register, even if this party is in fact not the legal owner. Likewise, land can be purchased unencumbered, even if the encumbrances have merely been cancelled inadvertently. However, the buyer cannot refer to good faith if it has positive knowledge of the fact that the land register is incorrect. This protection of good faith does not apply to rights which cannot be registered, such as the existence or non-existence of a lease agreement.
Automatic passage of non-registrable rights
In most of the German federal states (Bundesländer) public easements (Baulasten) have to be recorded in a special register (Baulastenverzeichnis). The public easement is a formal obligation to be supervised by the building authorities, stating, for example, that the landowner will not build on a certain area of the land. This obligation then becomes an encumbrance which is not to be entered into the land register and which applies to any legal successor of the property.
General terms and conditions of business
Limitations regarding the content of general terms and conditions of business are regulated by law (§§ 305 et seq. German Civil Code (BGB)). Land transactions generally include some standard clauses not specific to a particular transaction. A clause used as general business term or condition is deemed invalid if it causes a breach of good faith or unfairly discriminates a contracting party. Whether this is the case or not must be decided on the merits of the individual case.
12. Registration and notarisation of real estate - What are the basic requirements?
The ownership status of real estate is recorded in the land register, which is an official register kept by the land registries at the local courts. The land register contains the reference list (Bestandsverzeichnis) and sections I, II and III. The reference list contains a detailed description of the real estate and should correspond with the data in the cadastral plan, i.e. plan indicating the location and size / area of the land which is kept by the real estate offices (Liegen-schaftsämter). Section I lists the name of the owner. Section II includes any encumbrances and / or restrictions (servitudes, rights of usufruct), while section III refers to mortgages, land and annuity charges. Any person verifying a legitimate interest may inspect the land register. In principle, there is an irrefutable presumption that the content of the land register is correct, i.e. the facts entered are deemed to be correct.
The land registry procedure is based on a number of statutory principles, the most important being:
  • Applications – the land registry only acts on an application. Ex officio entries are comparatively rare
  • Approval – any land register entry concerning a change in the legal rights must have the approval of the respective party. Such a party is anyone in whose favour a right is entered in the land register and whose right is affected by the desired amendment
  • Prior entry – according to the principle of material priority the rights in land are ranked in the chronological sequence in which they were entered in the land register. The chronological sequence of the entries refers to the date of the corresponding application for entry
A priority notice may be entered into the land register to secure a certain ranking. This protects the claim to a legal position in rem. There are separate land registers for heritable building rights (Erbbaugrundbuch) and condominium property (Wohnungsgrundbuch). The land register for condominium property records the proportion of co-ownership in the land and the individual ownership (Sondereigentum) separately for each co-owner.
Contracts for the sale of land must be notarised. Notarisation is also required for all collateral agreements which are so closely linked to the contract that neither can stand alone. Hence, collateral agreements, such as a purchase of movable objects, an obligation to construct a building, or lease agreements must be notarised in their entirety if it is the will of the parties that the various agreements should be so closely interlinked that they “stand and fall” together.
13. Disputes - How are they dealt with and resolved?
Under German law the parties have great latitude for dispute resolution.
If the parties have not made any alternative provision for dispute resolution in the contract, disputes will be decided by a court of law. District courts (Landgerichte) are competent for dispute values of over EUR 5,000.00 whereas disputes up to EUR 5,000.00 are within the competence of the local courts (Amtsgerichte). The competent district court regularly depends on the place of residence of the defendant or, in the case of a legal person, the head office of the defendant’s company. If the action concerns the issue of ownership per se or a charge in rem, the matter is referred to the competent court of the district in which the land is located (in rem jurisdiction). If the parties of the contract are entrepreneurs or legal persons under public law and if exclusive in rem jurisdiction does not apply, they may agree on a place of jurisdiction (Prorogation). In other circumstances an agreement on the place of jurisdiction can only be made if additional criteria are met.
Alternatively, the parties may agree to settle any or some specified disputes by arbitration. In this case, all or the specified disputes are not settled in court but by an arbitration tribunal. The parties themselves decide on the composition of the arbitration tribunal. If they fail to reach an agreement, however, the arbitrator(s) may be determined by a third party, generally the head of the local chamber of industry and commerce. The decision of the arbitration tribunal has the effect of a final and absolute judgment and the only available legal remedy is to file a petition to set the decision aside.
Apart from litigation or arbitration mediation represents a further possibility to reach an out-of-court resolution. In practice, however, mediation is not common in connection with property transactions.
When deciding which form of dispute resolution to adopt, the parties should consider:
  • the place of residence, the legal person (also any non-German company) and the choice of law specified in the contract which may restrict the options. Particular attention should be paid to the mandatory requirements of private international law and potential difficulties in enforcing a decision
  • the time factor – the length of time required for a final decision will depend upon the course of action adopted
  • legal fees and court fees – court proceedings are frequently time-consuming (particularly if more than one court has to adjudicate on the case) and expensive. It may cost less to have the dispute resolved by an arbitrator, especially if the alternative is likely to be protracted litigation through several courts with the involvement of experts that may take several years
PART C - PERMITS, INSURANCE AND ENVIRONMENT
14. Permits - What permits are required for the use and occupation of real estate and are they personal?
Which permits are required for the use or occupation of real estate depends upon whether or not the land is developed.
Undeveloped land
Whether and how a piece of land can be developed is governed by public planning law. All land can be classified into one of the three development categories:
  • Designated development area (§ 30 German Statutory Code on Building – Baugesetzbuch (BauGB))
If a piece of land falls within the scope of a local development plan, which contains a minimum of specifications on the type and extent of the development, on the areas which may be developed, and on the local public access areas, the construction project is permitted. This only applies if the project complies with these specifications and the development infrastructure is assured.
  • Developed areas without a local development plan (§ 34 BauGB)
Development is permitted inside continuous built-up areas for which a local development plan does not exist. However, this only applies if the type and extent of the project, the construction method, and the area which is to be built upon fit into the surrounding area and development infrastructure. Where the character of the area falls within one defined by the Federal Land Utilisation Ordinance (Baunutzungsverordnung (BauNVO)), the proposed development has to meet the criteria required. This ordinance defines the typical categories of land and permits certain types of use in various categories (e.g. residential, commercial, mixed areas etc.).
  • Non-developed area (§ 35 BauGB)
If the land is not located within a continuous built-up area and if there is no local development plan, a construction project is only permitted provided that it does not conflict with public interests, that the development infrastructure is assured, and that the construction project is a privileged project within the meaning of § 35 BauGB. Privileged projects are certain types of building projects which generally should be located outside developed areas, such as agricultural plants, power plants, etc.
Given the approval of the responsible local authority, a commercial real estate project may be realised by way of a project-specific local development plan. The contracts dealing with large-scale projects in particular must ensure the possibility of realising the project according to all public law requirements and contain provisions to cover the possibility that the project cannot be realised as anticipated.
Once the plans for a project have been drawn up, a building permit (Baugenehmigung) is applied for. The requirements for a permit vary according to the Building Law of each German federal state (Landesbauordnung). A building permit is necessary for the erection, demolition, or change in material or use of a building. In order to obtain a building permit, an application must first be submitted. It may be filed by the owner of the land or third parties if such agreement was reached with the owner beforehand.
If the construction project complies with the local development plans and if it does not infringe any public-law requirements, the local authority will issue the building permit, possibly attaching additional requirements (in particular relating to fire protection, building safety, etc.). The neighbours adjacent to the site will be notified of the construction project and given an opportunity to comment. The neighbours may file objections regarding the building permit and, under certain circumstances, hinder the progress of construction work by taking legal steps. However, this is only possible if the building permit infringes regulations specifically designed to protect the interests of neighbours, such as the distance between buildings and boundaries.
If the land is intended for commercial purposes, further permits may be necessary. Of particular practical importance is the permit under the Federal Emission Control Act (Bundesimmissionsschutzgesetz).
Certain projects, such as industrial buildings and shopping malls, additionally require an environmental impact assessment before the building permit can be issued.
German law distinguishes between rights attached to the land (Realkonzession) and rights attached to a specific individual. Where the right is attached to the land, it automatically applies to any new owner. Whether the permit is granted as a right attached to land depends on the specific type of permit. The building permit is issued for a specific piece of land and also applies to the new owner of the land. A new application is not necessary. In case the permit only applies to a specific individual, a new owner must re-apply for it.
Developed land
Regarding developed land, the buyer should ensure that the required permits have been obtained and, in particular, that any additional requirements have been observed. If certain conditions are met, existing buildings may enjoy legal protection (Bestandsschutz) even if the building permit is subsequently modified or withdrawn, and where this is the case the local authorities cannot force the owner to demolish the building.
Older buildings may be declared historical monuments by the Historical Monuments Preservation Authority (Denkmalschutzbehörde) according to the Monuments Preservation Code (Denkmalschutzgesetz). There are stringent requirements for intended alterations to the listed buildings. In urban areas, the local authorities may pass preservation and restoration regulations for certain designated areas. Construction work on such buildings is subject to a special permission.
15. Insurance and risk - What insurance will the parties effect and when does the insurance risk pass at the time of sale?
There is no mandatory insurance for land and / or buildings. The owner bears the risk of deterioration or accidental loss of its property. In general, this risk is covered by a property insurance policy in the form of an all-risks insurance policy which covers the risk of loss and destruction. In addition, there is a third-party insurance policy for house and land owners and water pollution insurance including clean-up and demolition costs on a sliding-replacement costs basis. In the case of leased property, the insurance premium may be charged to the tenant provided there is a contractual clause to that effect.
If an insurance policy is concluded for a piece of land, the insurance along with the title to land passes to the new owner when the land is sold (§ 69 Insurance Policy Act – Versicherungsvertragsgesetz). The new owner is entitled to either continue the policy or to terminate it within one month after having been entered as the new owner into the land register. The insurer is also entitled to choose to terminate the policy within one month after having been informed by the seller. The insurer must be informed about the change in ownership without undue delay. Failure to do so may lead to loss of insurance cover.
If companies own more than one piece of land, they can insure the entire portfolio under one block policy. In this case, the insurance policies stipulate that if one piece of land is sold the insurance for that particular piece expires and the new owner has to be informed about the expiry. The new owner must effect a new insurance, to retain full coverage, ideally before the property is transferred.
As far as the transferability of insurance policies is concerned, a distinction is made between property and third-party insurance. Whilst in principle property insurance policies are transferred to the new owner (see above), third-party policies generally refer to one person, i.e. a new policy has to be concluded.
16. Environmental - What are the common environmental issues?
Protection of the environment is a very important issue in Germany. According to the German Constitution (Grundgesetz (GG)), the state is responsible for the protection of the “natural basis of life” (Art. 20 a GG). The following points are relevant for contracts:
Low-energy construction methods
Every new building must comply with the Energy Saving Act (Energieeinsparungsgesetz) in conjunction with the new Energy Saving Regulation (Energieeinsparverordnung (EnEV)) which became effective on 1 October 2007. The EnEV stipulates specific standards concerning the conservation of energy through heat insulation and low water consumption which must be observed by property developers. Under certain circumstances, existing buildings must be upgraded. This concerns, in particular, buildings with old boilers and buildings which are refaced.
A new requirement stipulated in the EnEV is the Energy Pass (Energieausweis). This pass documents the energy needs of a building. It has to be shown to every buyer / tenant of an already existing residential building as guidance in advance of any contractual agreements. As of 1 July 2008 this applies to residential buildings constructed in 1965 or earlier, and as of 1 January 2009 to all existing residential buildings. The Energy Pass is also required for non-residential buildings from 1 July 2009.
Waste law
Waste management is an integral part of environmental protection. The main aims are firstly to avoid waste and secondly to recycle materials or convert them into energy. These two alternatives have clear priority over disposal. Production plants must comply with the extensive waste prevention regulations.
Soil protection
The issue of “inherited environmental liabilities” arises in virtually all property sales.
Liability for inherited environmental obligations is mainly governed by the Federal Soil Conservation Act (Bundesbodenschutzgesetz). Not only must contamination be avoided but also precautionary measures must be taken. Soil which has been contaminated must be cleaned up. With property transactions, the clean-up issue is extremely sensitive since several responsible parties might exist where property has frequently changing owners. The principle whereby the party which caused the contamination is obliged to remedy the damage does not apply unreservedly in this case. The competent authority follows the principle of finding the most effective means to avert danger and may decide between a number of potential candidates (§ 4 BBodSchG). The responsible party may be:
  • the causing party (as far as it can be clearly identified) or its legal successor (e.g. the successor in title or a company which has come into existence as a result of a merger)
  • the owner of the land registered in the land register or the party having actual control (a tenant) even if the party has neither caused nor even been aware of the soil contamination
  • a party which is liable for a legal person for commercial or corporate reasons (e.g. liable partner / shareholder, under certain circumstances also a director or liquidator)
  • a former owner of the land if transfer of title took place after 1 March 1999. This liability has serious implications for the seller since it may still be held liable by local authorities many years after the sale. Thus, as a rule, the seller will seek an indemnity from the buyer to protect itself against such liability.
Where more than one party from the above groups is liable, the party against whom the local authority directs the claim does not always have to bear the costs of clean-up itself. Under § 24 (2) Federal Soil Conservation Act (Bundesbodenschutzgesetz), the party liable may seek recourse from the other parties. The extent of the duty to render such recourse depends upon the extent to which the danger or the loss was caused primarily by one party. Unless otherwise agreed in the contract, a passive offender will generally be able to demand full compensation from the party that caused the contamination. In a landmark decision, the Federal Constitutional Court has ruled that in individual cases the liability of the passive offender may also be restricted to the purchase price received for the land. This would be the case if the owner’s other assets were not related to the contaminated site.
Since there are a large number of inherited environmental liabilities in Germany such as abandoned or disused houses, industrial landfills, ammunition from the First and Second World Wars, unofficial dumps, former production sites with soil contamination, tank storage and waste water pipes, the risk of inherited environmental liabilities is frequently an important and sensitive issue in negotiations for property transactions. This risk makes a thorough due-diligence review an absolute necessity. Generally, an initial assessment of the risk can be made by researching the history of the site (past use of the site, existence of ammunition). If research suggests there may be inherited environmental liabilities, the next step is to make exploratory investigations by taking soil samples. Should they reveal a soil contamination, the parties must agree by way of contract on the obligations of remedying the contamination and bearing the costs. Similar problems arise with asbestos and PCB (polychlorinated biphenyls) contamination in older buildings. It may be necessary to ascertain the extent of the contamination by analysing the air in the buildings’ rooms.
Contracts for the sale of land generally contain detailed provisions on environmental liability. This allows the risk in the specific case in question to be assessed and to be allocated between the parties concerned.
Nature preservation
If the property provides a habitat for rare species of animals or plants it may be subject to nature preservation requirements. The property developer may, for example, be barred from building in certain areas or be required to create similar preservation areas at another location in substitution.
PART D - FINANCE AND TAXES
17. Pricing / Valuation - What sets the price / valuation of real estate?
The purchase price of real estate primarily depends on whether or not the property is leased, an undeveloped site, or developed real property. There are different methods of valuing real estate depending on the use the property is designed for. The market value of real estate can be determined by professional property valuers. There are various valuation methods.
Leased property can be valued according to the “gross rental method” (Ertragswertverfahren). In Germany, this method is defined by statute (§§ 78 et seq. Evaluation Statute (Bewertungsgesetz)) and the revenue from rent is incorporated into the valuation method. However, more recently the international “discounted cash flow method” (Ertragswertmethode) has become more widespread. This method establishes the value of real estate by discounting the expected income and expenditure, which must be determined regularly. This covers necessary future repairs and maintenance work and the expected loan costs that must be taken into account. The purchase price for property with a long-term lease is commonly calculated by multiplying the net annual rent with a certain factor, usually between 11 and 17.
The market value for land the owner itself intends to use is generally determined by the “property value method” (Sachwertverfahren). The calculation is based on the usual building costs of all buildings on the land taking into account their remaining economic life, building defects and damages, as well as other circumstances affecting the value of the land itself. This calculation of market value can also be carried out by an expert committee of the local authority (Gutachterausschuss). The expert committee can also provide land values as a guide for evaluation of the site.
18. Financing - How is a real estate acquisition financed?
There are several options for financing real estate acquisitions:
  • Buyer’s own capital or reserves
  • Bank loans - banks generally insist that the buyer is able to provide a certain amount of the total sum from its own capital plus land charges as collateral for the loan (see also section 19)
  • Credit derivatives - for transactions involving large individual properties or real estate portfolios, a common alternative to a conventional bank loan is certification in the form of credit derivatives. The use of capital market products may provide a cost effective means of financing. In principle, it involves a structural transfer of loans, bonds, receivables or credit derivatives to a special purpose vehicle which then issues tranches of securities drawn from the portfolio. The special purpose vehicle refinances the purchase of the land through this issue of securities. Both the buyer and the financing bank, and in some cases, also the seller, are stakeholders in this special purpose vehicle. “Synthetic transactions” represent a further option for financing real estate acquisitions. The item sold is not the asset itself but only certain risks. Depending on the specific terms of the transaction it may be possible to reap tax benefits by avoiding land transfer tax (Grunderwerbsteuer).
19. Security over real estate - How is security over real estate created and protected?
The classic means of providing security for purchase price financing is to encumber the land with property charges. If a borrower does not fulfil its obligations under the loan, the lender may satisfy the debt by realising the property charge, for example by auctioning the land. There are three types of property charges:
  • Land charge (Grundschuld) – the most frequent form of property charge in real estate financing, because in contrast to the mortgage, the land charge is abstract (not accessory), i.e. it is not coupled with the existence of a specific claim. Cost adjustments, re-scheduling, assignments and charges can therefore be made more readily and at less expense
  • Mortgage (Hypothek) – accessory property charge on land as security for a loan. Due to the accessory character the value of the mortgage is identical to the value of the claim. Common forms of mortgage are the conventional (certificated and uncertified) mortgage (Verkehrshypothek), the security mortgage (Sicherungshypothek) and the fixed liability mortgage (Höchstbetragshypothek). In practice, the significance of the mortgage as a means of finance has dropped considerably
  • Annuity charges (Rentenschuld) – encumbrances whereby a certain amount is due to the beneficiary at regular intervals. As a form of credit security, annuity charges have very little relevance nowadays.
Since property charges are merely a form of security, the borrower must conclude a security agreement with the financing bank. This must state the conditions under which the bank is obliged to approve cancellation or reduction of the property charge.
Regarding the financing of leased real estate, the financing bank often demands the assignment of claims as security, such as a claim to payment of rent.
Depending on the buyer’s credit rating, the bank may claim additional security such as a bank guaranty or a comfort letter from a company with a higher credit rating. The conditions of the loan may also stipulate that the company must not allow its equity level to fall below a certain level during the term of the loan.
20. Taxes and Costs - What are they and who pays them?
For general information on the type and level of transaction taxes and costs, please see our CMS transaction costs guide.
The purchase of real estate generates land transfer taxes of currently 3.5 % (4.5 % in Berlin) of the purchase price. Legally, the buyer is obliged to pay the respective amount.
Value Added Tax (VAT) is due only if the buyer is an entrepreneur and if the real estate is directly related to its company. However, the seller can waive its right to VAT exemption. The issue of VAT options becomes complex in the case of real estate which combines residential and commercial property. Residential areas are not covered by the VAT exemption. For the purpose of calculating the tax burden, the residential area must be calculated as a percentage of the whole. According to the current legal tax situation, the buyer must pay VAT (at present 19 %) to the tax authorities or it can offset using an input tax refund claim. In order to assert the input tax refund claim, the seller must issue an invoice to the buyer which complies with the VAT requirements. The real estate contract itself does not have to specify VAT.
If a real estate agent is involved in the property purchase, the instructing party must pay the agent’s fees. In exceptional circumstances the agent may charge both the buyer and the seller.
The notarisation costs of the transaction and the land-register entry costs are normally borne by the buyer. However, in the contract they can be stipulated differently. In practice, the seller is occasionally willing to assume the notarisation costs if it is allowed to select the notary.
Unless otherwise agreed, fees for lawyers, valuers and other consultants are borne by each party individually. The same applies to the costs associated with due diligence work such as inspecting official registers, copies and extracts from detailed local development plans, permit charges, etc.
Hungary
PART A - PARTIES AND INTERESTS
1. Parties - Who can own real estate?
Any legal “person” may own real estate. This will include individuals, companies, entities established by statute and certain charitable bodies.
Owners of commercial real estate include private developers, insurance companies, banks and other financial institutions, private or public property companies, charities, the government and local authorities.
There are certain restrictions preventing foreign nationals and foreign companies from owning real estate. Foreign entities and natural persons are prohibited from acquiring ownership of nature preservation areas, although they may acquire ownership title to real property which does not qualify as arable land with the permission of the head of the regional administrative office (except in the case of inheritance when such permission is not required). The granting or denial of such permission is not capable of being appealed.
No licence is required if a foreign individual or company establishes a Hungarian company, which it then uses to acquire real property.
Foreign entities registered in the European Union or citizens of European Union Member States may acquire ownership title to real property not qualifying as arable land on the same conditions as Hungarian citizens (i.e. without permission).
Foreign legal and natural persons may not acquire ownership title to arable land. This rule does not apply to citizens of a Member State who wish to settle in Hungary as independent agricultural entrepreneurs and have lived in Hungary continuously and legally for at least three years and perform an agricultural activity.
2. Property - What property interests are currently sold?
Property in Hungary is classified as either freehold or leasehold. Freehold is the best class of title and is as near to absolute ownership as is possible at law.
Freehold is a real right (a right in rem). Technically, leasehold is a personal right (right in personam) and does not have the attributes of freehold.
Property interests which are currently sold in Hungary include:
  • Freehold interests – title of ownership (the best type of ownership)
  • Leases - these are usually concluded for relatively short term (3-5 years) and are personal rights. Therefore it occurs only relatively rarely that the lease right is sold with the consent of the landlord (if the property is owned by the municipality, the relevant act and the municipality’s decree regulates the conditions upon which the municipality is to consent the transfer of the lease right, therefore such transfers occur much more often )
  • Options and pre-emption rights – rights to buy or first refusal (these right can not be transferred but, in case the beneficiary is a Hungarian legal entity, it may appoint a third party for the exercise of these rights, such appointments are often paid for by such third parties)
The concept of root of title is not relevant in Hungarian law. Title to a property may, as a general rule, only be validly obtained from the current owner. All immovable properties (i.e. real estate such as land and buildings) and their respective owners are registered at the relevant Land Registry.
Title does not, therefore, emanate from the sovereign government. It should be noted that, even if there is some defect in the chain of transfers of ownership in respect of a property (for example, if one of the previous sellers is discovered not to have been the owner of the property), such defect may be cured by a lapse of time. Pursuant to Section 121 of Act IV of 1959 on the Civil Code (as amended), subject to certain conditions, a person who continuously possesses a property as its own for fifteen years becomes the owner of such property. Therefore, if the defect occurred more than fifteen years ago, the present owner may claim that, irrespective of the previous defective transfer, he has obtained title to the property by continuous (adverse) possession. It should also be noted that pursuant to Section 63 (2) of Act CXLI of 1997 on Land Registration (as amended) if a buyer obtains the property in good faith for value after three years from the date of registration of the seller’s title, the buyer’s title may not be deleted from the Land Registry even if it becomes apparent that the seller’s title had been registered on the basis of an invalid document.
Ownership extends to buildings on or beneath the land and the airspace above it, but does not include “treasures of the earth” or natural resources. A builder may own the freehold title of the building constructed on third party land and a land use right for the land beneath the building if a court decision or a written agreement with the freehold owner of the land orders as such. This is the only case when the ownership of the building and the land beneath could be separated. Reference to “land” generally includes the buildings and structures situated upon it, similarly “property” includes both land and buildings unless limitations are created.
3. Ownership - What types of ownership are there?
Legal ownership of property in Hungary is classed as freehold. Hungarian law does not acknowledge any other form of in rem ownership. All other rights will only incorporate parts of a freehold title and/or be personal rights. Some rights can be registered at the Land Registry, whilst others, such as leases, cannot be registered.
Leaseholds are typically for a definite period of time, usually for a short term. Indefinite leaseholds are usually concluded for municipality owned property and for residential properties. The lease agreement must always be in written form.
A person who has continuously had possession of real estate for 15 years acquires ownership (and freehold title) through adverse possession. If an adverse possessor fails to register his title in the Land Registry, he will not be entitled to claim acquisition of ownership against any person who acquired a freehold title to the property for payment of a consideration, relying upon the Land Registry.
Under the Civil Code, the types of interests in real estate, which are registerable at the Land Registry, include the following:
  • Ownership right (similar to the common law concept of freehold) - an absolute right which includes the right to possess the property; the right to use the property and collect the proceeds from the property; the right to transfer possession or use of the property; the right to encumber or transfer title to the property and the right for the ownership to be protected
  • Beneficial usage right (or usufruct right) - the limited right to occupy and use a property owned by another and to collect the proceeds from such property. This right cannot be transferred by the beneficiary; however, another person may be permitted by the beneficiary to exercise this right including the case when the beneficiary lets the property to a tenant. This right must be for a definite term ending, at the latest, at the time of the beneficiary’s death
  • Right of use- a limited right to use a property owned by another which may be established for a definite period of time. The rules of beneficiary usage right apply, except that:
    • the holder of a use right can only use the property not exceeding his own needs and those of his relatives living in the same household and
    • the holder of a use right cannot permit another person to use the property
  • Land use right – the beneficiary of a land use right may construct a building on third party land and become the owner of the superstructure only. He is entitled to use the land beneath the building and collect the proceeds whilst the building stands and at the same time is obliged to bear the burdens of the land. If the ownership of the building is transferred, the new owner has the same right. Pursuant to a Supreme Court case, this right cannot be established upon public roads, squares and parks, which is a significant issue for the owners of underground car parks constructed on public lands in the last few years based on the land use right
  • Easement - a limited right to use another person’s real property by the possessor of another real property to a specific extent. These purposes can include a right of passage or building a cellar etc. As regards the granting of an easement, the regulations of the establishment of beneficial usage right apply. The easement, if based on a contract, should therefore be registered at the Land Registry
Leases are mere contractual interests, which are not registerable with the Land Registry.
4. Matters burdening or benefiting real estate - What matters can affect real estate?
Common matters affecting real estate include:
MatterEffectExampleEasementsUnder a typical easement, the possessor of the so-called “dominant” plot of land may use access/have rights over the so-called “servient” plot for a specific purpose at any time or may demand the possessor of the servient plot to refrain from exercising certain rights arising out of its title. There are also a number of easement rights based on law Easements may be created for passage, water supply or drainage, for creation of a basement, for installation of pylons, for supporting buildings or for other purposes advantageous to the possessor of the dominant plot. Easements based on law include, for example, access rights where the dominant plot is not connected to an adequate public road or, in the case of agricultural lands, the right of delivery and drainage of water if other methods for the purpose of irrigation are impossible or extremely difficult/costlyAdverse possessionIf a person has continuous possession over a real estate for more than 15 years, they may acquire ownership through adverse possessionOccupation of land to which title is not registered at the Land Registry for more than 15 yearsMortgageIn respect of mortgages, the pledged property remains in the possession of the mortgagor, who is entitled to use and utilize the property; however, the mortgagor must maintain such pledged property in good condition. In the event the mortgagor or a third person is endangering the condition of the pledged property, the beneficiary is entitled to demand that the endangering act be prohibited and that an order be issued to take the necessary measures to eliminate the danger. Real property may be pledged as security only in the form of a mortgage. A mortgage is considered valid only if contracted in writing and recorded in the Land RegistryThe property was acquired with bank debt and the mortgagee secures the lender to claims. Usually appears in association with prohibitions of transfer and encumbrancesProhibition of transfer and encumbranceIt can be established by agreement or by law. If established by agreement, it may only be stipulated upon the transfer of title of the property in order to secure the rights of the seller or lenders. The right secured by the prohibition also has to be indicated in the Land Registry(See mortgages above)Right of use in public interestThe owner of the real property is obliged to tolerate agencies authorised by law (e.g. utility, telephone services) to use the real property for a period of time, obtain right of use and restrain ownership rights to the extent that is necessary for the performance of their professional tasks. In these cases, the owner is entitled to compensation proportionate to the extent of the restraintConduit right established for the benefit of an electricity or gas supplierSale with title retentionThe seller is entitled to retain the title of ownership until the purchase price is fully paid. During this time, neither the buyer nor the seller can sell or encumber the property It is commonly included in contracts for the sale of property and it in practice establishes prohibition of transfer and encumbrance Pre-emption rights Pre-emption rights may be based on law or on agreement; the pre-emption right established by law precedes the latter and is not required to be registered at the land registry. If based on agreement it has to be in writing. If the pre-emption right is registered in the Land Registry or if it is based on law, then the right is effective against everybody who acquires any right to the property. If the sale-and-purchase agreement is concluded in disregard of the pre-emption right, then the agreement is not effective. Transfer of a pre-emption right is null and void by law, but a company may appoint a third party to exercises such right.Pre-emption rights based on law include: - in case of historically or architecturally important (listed) buildings, certain state agencies have pre-emption right; - the co-owners of common ownership have pre-emption rights on the other parts of the common ownership; - in case of arable land or farms, the lessee of a leasehold, the local neighbour, other local residents and the State of Hungary, in this order; - owners in a condominium for the common areas if recorded in the deed of foundation
Matter
Effect
Example
Easements
Under a typical easement, the possessor of the so-called “dominant” plot of land may use access/have rights over the so-called “servient” plot for a specific purpose at any time or may demand the possessor of the servient plot to refrain from exercising certain rights arising out of its title. There are also a number of easement rights based on law
Easements may be created for passage, water supply or drainage, for creation of a basement, for installation of pylons, for supporting buildings or for other purposes advantageous to the possessor of the dominant plot. Easements based on law include, for example, access rights where the dominant plot is not connected to an adequate public road or, in the case of agricultural lands, the right of delivery and drainage of water if other methods for the purpose of irrigation are impossible or extremely difficult/costly
Adverse possession
If a person has continuous possession over a real estate for more than 15 years, they may acquire ownership through adverse possession
Occupation of land to which title is not registered at the Land Registry for more than 15 years
Mortgage
In respect of mortgages, the pledged property remains in the possession of the mortgagor, who is entitled to use and utilize the property; however, the mortgagor must maintain such pledged property in good condition. In the event the mortgagor or a third person is endangering the condition of the pledged property, the beneficiary is entitled to demand that the endangering act be prohibited and that an order be issued to take the necessary measures to eliminate the danger. Real property may be pledged as security only in the form of a mortgage. A mortgage is considered valid only if contracted in writing and recorded in the Land Registry
The property was acquired with bank debt and the mortgagee secures the lender to claims. Usually appears in association with prohibitions of transfer and encumbrances
Prohibition of transfer and encumbrance
It can be established by agreement or by law. If established by agreement, it may only be stipulated upon the transfer of title of the property in order to secure the rights of the seller or lenders. The right secured by the prohibition also has to be indicated in the Land Registry
(See mortgages above)
Right of use in public interest
The owner of the real property is obliged to tolerate agencies authorised by law (e.g. utility, telephone services) to use the real property for a period of time, obtain right of use and restrain ownership rights to the extent that is necessary for the performance of their professional tasks. In these cases, the owner is entitled to compensation proportionate to the extent of the restraint
Conduit right established for the benefit of an electricity or gas supplier
Sale with title retention
The seller is entitled to retain the title of ownership until the purchase price is fully paid. During this time, neither the buyer nor the seller can sell or encumber the property
It is commonly included in contracts for the sale of property and it in practice establishes prohibition of transfer and encumbrance
Pre-emption rights
Pre-emption rights may be based on law or on agreement; the pre-emption right established by law precedes the latter and is not required to be registered at the land registry. If based on agreement it has to be in writing. If the pre-emption right is registered in the Land Registry or if it is based on law, then the right is effective against everybody who acquires any right to the property. If the sale-and-purchase agreement is concluded in disregard of the pre-emption right, then the agreement is not effective. Transfer of a pre-emption right is null and void by law, but a company may appoint a third party to exercises such right.
Pre-emption rights based on law include:
- in case of historically or architecturally important (listed) buildings, certain state agencies have pre-emption right;
- the co-owners of common ownership have pre-emption rights on the other parts of the common ownership;
- in case of arable land or farms, the lessee of a leasehold, the local neighbour, other local residents and the State of Hungary, in this order;
- owners in a condominium for the common areas if recorded in the deed of foundation
5. Occupation of real estate - Who may occupy real estate?
Real estate is usually occupied by one of the following categories of person:
  • Owners – those persons with a freehold interest in the property
  • Tenants – those persons with a lease of the property or part of it. It is possible to create subleases in relation to the same property, creating a chain of interests. However, such subleasing is usually subject to the prior written consent of the owner and the sublease automatically ceases when the head lease is terminated or expires
  • Persons claiming ownership by adverse possession – where they have occupied the property for a long period of time (at least 15 years) without having any legal rights to do so, but without challenge by the owner of any freehold or leasehold interest
  • Beneficiary usage right (usufruct) - a contractual right of occupation given to persons for a definite period of time. The beneficiary usage right ceases at the latest when the usufructuary dies. Beneficiary usage right is established when registered in the Land Registry. If beneficiary usage right is created by virtue of law, by a court decision or administrative resolution and it is unregistered, then it is only enforceable against a mala fide acquirer of the real property or against an acquirer who acquired the property without consideration
  • Right of use – is in general the same as the beneficiary usage right but with the limitation that the beneficiary may only use it for its own and his/her family’s purposes
  • Right of use in public interest - the freehold title owner is obliged to tolerate agencies authorised by law (i.e.: utility, telephone services, etc.) to use the real property for a period of time, obtain right of use and restrain ownership rights to the extent that is necessary for the performance of their professional tasks. In these cases, the owner is entitled to compensation proportionate to the extent of restraint
  • Land use right – based on the land use right the owner of a building constructed on a plot owned by a third party may use the land beneath the building until the building ceases to exist
  • Easement – may be granted to and held by the possessor of real property over another person’s real property, to use such property to a specific extent or to demand the possessor of the easement to refrain from what would otherwise be rightful conduct of his entitlement. An easement is registered in the Land Registry according to the rules of registering a beneficial usage right. The court is entitled to cancel or suspend an easement if it is not necessary for the proper use of the real property of the holder of the easement. An easement is terminated if the holder of the easement, despite the possibility of being able to exercise the easement, does not exercise the right for ten years or lets others prevent him from practicing the easement for ten years
6. Brokers - What is the broker’s role?
Brokers in Hungary, also referred to as surveyors or agents, generally fall into 6 categories:
Investment
Valuation
Consulting and analysis
Buildings
Management
Rent Review
They are employed by any party to any transaction involving real estate. Their role may include any of the following tasks:
  • Managing real estate sales projects: provision of marketing and realty functions, representing the owner, constructor or investor of the real estate. Full-scale project implementation from market research through marketing design to the preparation of contracts to be established with buyers or lessors
  • Finding real estate: finding appropriate real estate and determining optimum conditions for leasing or sales, including managing the move-in process, negotiating rent reviews of existing properties
  • Appraisal services: accurate and objective appraisal of real estate portfolios, individual estates and other assets (machinery, equipment, vehicles, stocks etc.) for marketing, accounting, credit coverage or any other purposes. Perform appraisals appertaining to corporate transactions or investment as well as other related tasks (e.g. asset balance production)
  • Consulting and analysis: project evaluation, market analyses, feasibility studies, investment and portfolio management consulting in all areas of real estate trading (e.g. office market, residential real estate market, industrial estates and warehouses, commercial estates)
  • Transaction documentation: acting for any party to a transaction drafting and negotiating heads of terms, preparing heads of terms for documenting and liasing with lawyers
  • Management: day-to-day management of property owned by clients, including managing maintenance programmes and landlord and tenant work, project management of development of new buildings and refurbishments
Brokers available in the market range from those employed by major international organisations to specialised advisers providing advice on a more restricted basis.
7. Employees - What employment issues affect real estate acquisitions?
The main employment issues, which may arise in connection with the acquisition of real estate, include the transfer of undertakings and redundancies, as well as variations to employment contracts due to a change to the conditions of employment.
Business transfer
Pursuant to Act XXII of 1992 on the Labour Code, as amended, of the Republic of Hungary, employees are entitled to special protection if an undertaking or business (or an independent unit of the material and non-material assets of an employer) is transferred from one party to another. If the property being transferred can be classified as a “core asset” to the business of the company, then the sale of that property may trigger business transfer rules. For example, business transfer rules may be triggered as a result of the sale of an office building, mall or other type of real estate which has its own management and security or maintenance staff.
The main effects of the business transfer rules regarding the protection of employees are as follows:
  • the rights and obligations arising from an employment relationship automatically transfer from the transferor (or legal predecessor) to the transferee (or legal successor). The transferor and the transferee have joint and several liability in respect of those claims which are enforced within one year after the transfer of undertakings and which are in connection with debts and damages incurred prior to the date of the transfer
  • if an employee is dismissed (by redundancy based ordinary termination) by the transferee within one year of the date of the transfer, the transferor is liable as a surety for the employee’s severance payments, if it has a majority control in the transferee
  • an employee’s seniority is deemed to be continuous
  • the fact of the transfer of undertakings is not, by itself, an acceptable reason for the ordinary termination of an employment relationship and
  • the representatives of the recognised trade union or the works council or the delegation of the employees must be informed in advance regarding the details of the transfer and consulted on other planned measures that may affect the employees covered by the transfer
Variation of contract
A business transfer does not necessitate the amendment of the affected employees’ employment agreements. The employee’s employment is deemed to be continuous with the same conditions. Nevertheless, it is advisable to inform the employees in writing about the succession and specifying at least the following matters:
  • the person vested with employer’s rights after the succession
  • clarification as to whether the place of work has changed and general information on work schedules and other modified elements, if any, which can be determined by the employer in its own discretion
  • the allowances of the employees
  • confirmation that other conditions of the employment relationship remain unchanged
Redundancy
The business transfer is not, by itself, an acceptable reason for dismissing employees. However, in reality, this does not offer much protection to employees. Commentaries on the Labour Code suggest that dismissals associated with business transfers may be justified if they are for ‘operational reasons’. An operational reason is one that is related to an economic, technical or organisational issue with regard to an employer.
PART B - PROCEDURE AND TERMS
8. Procedure - What are the steps in a sale and purchase transaction?
Transactions formally start when proposed heads of terms are drafted, negotiated and agreed by the brokers on behalf of the seller and the buyer or by the parties themselves. The heads of terms (or memorandum of understanding) set out the principal terms agreed between the parties and are generally expressed to be “subject to contract” and are not legally binding. They form the basis of the documents to be drafted by the lawyers. Due care needs to be used in signing such heads of terms or memorandum of understandings to avoid them being construed as a preliminary agreement enforceable as a binding commitment to enter into the final agreement.
Once the heads of terms have been finalised, they are sent to the parties’ lawyers. The seller’s lawyers will usually collate all information relating to the property and send it to the buyer’s lawyers together with a draft sale and purchase agreement (contract). The form of the sale and purchase agreement will vary according to whether the property being sold is under construction or already built and the extent to which leases to tenants have already been granted. The accompanying finance documents are also drafted at this time.
The buyer’s lawyers consider and suggest amendments to the draft sale agreement and at the same time will undertake general due diligence investigations (see section 10).
Once the sale agreement is in an agreed form, the parties will sign the agreement and the buyer’s lawyer will countersign it and will then be regarded as legally completed.
If any of the parties is a foreign registered company, generally the other party will require a company extract from the foreign party confirming that the company is properly incorporated, has power to sell and has carried out appropriate authorisation procedures.
Completion may take place at the same time as signing, depending on the acquisition timetable. Where the purchase is made with borrowed finance, a charge over the property will be completed at the same time. The lender of the finance may instruct its own lawyers to carry out due diligence procedures on its behalf and negotiate security documentation.
Following completion, the buyer’s lawyers need to deal with registration of the transfer documents (and any charging documents) at the Land Registry and payment of stamp duty which is assessed on the price paid for the property.
9. Other common contract terms - What other provisions does a real estate sale contract commonly contain?
An agreement for the sale and purchase of land must be in writing, must contain or clearly refer to all main terms and conditions and must be in a form in which both parties have signed and the buyer’s lawyer has countersigned.
It is common for the sale and purchase agreement to provide for a deposit (in Hungarian foglaló) of around 10% of the purchase price on exchange of agreements, where there is to be a gap between exchange and completion. The seller’s or buyer’s lawyers usually hold the deposit as an escrow agent. In this case the parties enter into a separate escrow agreement in accordance with the terms and conditions set out in the sale and purchase agreement.
Because the buyer has the opportunity of conducting a full title investigation or due diligence before signing the agreement, the buyer is usually prohibited from subsequently making any objection to any matter of title that was disclosed in the due diligence documents.
Where timing is crucial to the agreement, there may be a provision expressly stating the date after which the parties will be in breach and the agreement will be terminated. This means that any breach of the time limits in the agreement will be deemed to be a repudiatory breach, subject to a claim for damages. Normally, time is not of the essence and may only be made so by one party to the agreement serving notice on the others to make time of the essence.
Where there are matters of title affecting the property, such as pending deletion of prohibition of transfer and encumbrance, the buyer may require reciprocal obligations from the seller and an indemnity in respect of any liability the seller may still have following completion of the transaction.
Provisions relating to value added tax and transfer duty will usually be included to regulate the parties’ obligations.
Contracts for sale of property subject to occupational interests, such as leases, will include clauses to cover ongoing management matters, and provide for the apportionment of occupational income and outgoings on completion of the transfer of ownership in the property.
If the property being sold is in the course of construction, the contract for sale will incorporate provisions dealing with the obligations of the seller to construct in accordance with an agreed specification and to provide to the buyer separate deeds of warranty from the building contractor, and persons such as the architect, in order to safeguard the buyer against defective design or workmanship.
Where there are conditions to be met for the completion of the contract, such as building permits, communal services, transformation of a plot, deletion of a restriction against sale and purchase, the parties set out liabilities and timelines for the fulfilment of such conditions.
10. Due Diligence - What investigations does the buyer normally make?
The prudent buyer will carry out a survey of the building and, if required, soil and geological investigations, plant and machinery tests and environmental investigations. The buyer shall also require appropriate information on the following related matters: charges, occupational tenants, lease agreement(s) and licences, insurance, building contracts, disputes and claims, easements and/or covenants.
The buyer’s lawyers will consider the entries on the property sheets, the marginal notes and, where relevant, historic title documents. Where the property is leasehold, or subject to leasehold or other occupational interests, the terms of the relevant occupational documents need to be considered carefully to ensure that they are not contrary to the buyer’s intentions for the property.
The buyer’s lawyers will commence their own due diligence, which will include the conducting of various searches to check the position regarding municipal and zoning consents, environmental matters, utilities serving the property, easements, boundaries of the property, financial encumbrances and valid site licences. Where the seller is a company, the buyer’s lawyers will also conduct searches against the seller’s name at the Court of Registration to ascertain whether the company is solvent and therefore able to dispose of its assets freely. Where the search result refers to security, the buyer’s lawyers will ask for confirmation that such matters do not encumber the property and that no third party consents are required for the transaction to proceed.
The buyer’s lawyers will raise pre-contract enquiries (“preliminary enquiries”) of the seller’s lawyers to obtain information regarding a large number of practical matters, which may affect the property and ask any relevant questions in relation to the title to the property. The seller is under the general obligation to inform the buyer about the material features of the property being sold (including but not limited to all rights and encumbrances) and to deliver all relevant documents. In most cases the parties agree that the properties are sold as is, with no expressed or implied guarantee of quality or condition. A seller must not knowingly or negligently mislead a buyer and the seller’s replies to the due diligence questionnaire may be actionable if wrong or misleading.
11. Terms implied by law - What provisions are implied by Statute, Code or otherwise?
The Civil Code provides that the seller warrants that the property is free of claims, encumbrances and lawsuits and this is often repeated expressly in the sale and purchase agreement. If a third person has such a right over the property that restrains the buyer from the acquisition of freehold title, the buyer can rescind the agreement and claim damages. If the seller acted in good faith he only has to pay for damages arising from concluding the agreement. The seller always guarantees that the real property is free from mortgages, irrespective of whether the buyer knew about them or not.
The seller warrants furthermore that the property complies with all attributes set out in the sale and purchase agreement or legal regulations at the time of contract. If the purchaser was aware of the defect of the property at the time of contract, the seller is not liable for such defects. These warranty rights may be exercised by the purchaser within 5 or 10 years as regulated by law in respect of the various elements of a building.
If a pre-emption right (which must be in writing) is established for someone, then the owner of the property must ordinarily disclose any offer for the property to the owner of the pre-emption right. The pre-emption right can be established by contract or by law. If the owner of the pre-emption right accepts the offer, the agreement for sale becomes effective. If a general period of acceptance passes without any notification of acceptance or rejection from the owner of the pre-emption right, the owner of the property is free to sell the property under the same or better terms. If the pre-emption right is registered at the Land Registry, it takes effect against everybody who acquires any right to the property following the registration. Transfer of a pre-emption right is null and void by law. If the owner of such right is a company then the company may appoint the person who may exercise the pre-emption right. A pre-emption right established by law always takes precedence over a pre-emption right established by agreement.
Rights of re-purchase can be included in the original sale and purchase agreement. The seller can exercise this right by declaring an intention to re-purchase. The period for the right of re-purchase can be set up to a maximum of five years; any provision setting a longer time period makes such a provision null and void. The basic re-purchase price is the original purchase price, but the original buyer may seek compensation for any added value, whilst the re-purchaser may seek to deduct any decrease in value.
If the owner of real property grants an option, then the beneficiary may purchase the property by his unilateral declaration. An option agreement is valid only if in writing and provided that it also specifies the object of the transaction and the selling price. The “five year” rule is also applicable here. If, however, the option is granted for an indefinite period of time, it ceases after six months and any contravening provision is null and void.
12. Registration and Notarisation of real estate - What are the basic requirements?
The land registries record the most important data and rights and encumbrances required to be registered relating to each property in Hungary. It is now possible to get access to the land registry data for all properties in Hungary by an online system to which most of the law firms and public notaries have access.
Local Land Registries operate in every city (in Budapest there are three district land registries), county land registries operate in each of the nineteen counties of Hungary, and the Metropolitan Land Registry operates in Budapest. The local Land Registries deal with property issues at first instance and the county Land Registries deal with property matters at second instance.
Pursuant to the Land Registration Act, a Land Registry should complete the registration of an entry (e.g. a transfer of title) in twenty two working days.
It is in the interest of a property purchaser to lodge the transfer documents with the relevant Land Registry as soon as possible after signature (but in any event within the thirty day mandatory deadline for filing). The filing with the relevant Land Registry results in a so-called marginal note being put on the register of the property within twenty-four hours of filing. This marginal note – the indication of a pending application by its reference file number – establishes a priority date for the application. Therefore, subsequent submissions, as a rule, cannot by-pass a previous submission (clearly indicated by a lower figure for its reference file number).
The property-related rights, and the holders of such, which may be recorded in real estate registers are:
  • ownership rights, and, in respect of state-owned or municipality-owned real estate, asset management rights
  • permanent rights of use for members of housing co-operatives
  • land use on the basis of agreement or court decision
  • usufruct and the right of use
  • easement rights
  • permanent geodetic markings, land survey pilot areas, rights of use for the placement of power supply equipment, cable rights, water and mining easement rights, and easement rights and utilisation rights in the public interest as prescribed by law
  • rights of first refusal and rights of re-purchase and option
  • rights of support and life annuity
  • mortgages (independent liens) and
  • rights of execution
There is no requirement for notarisation of title in Hungary. Contracts for the disposal and acquisition of interests in real estate are signed by or on behalf of the parties and countersigned by a lawyer. However, if any of the contracting parties is a citizen of a foreign country and wishes to sign the contract outside Hungary, authentication of the document is required. This means the formality by which the Hungarian diplomatic or consular agents certify the authenticity of the signature, the capacity in which the person signing the document has acted and, where appropriate, the identity of the seal or stamp which is affixed to the document. Rules of authentication also apply to powers of attorney executed outside Hungary.
In accordance with the Hague Convention (5 October 1961), each signatory state is to exempt from authentication documents to which the Convention applies and which have to be produced (i.e. used) in its territory. The contracting states designate, by reference to their official function, the authorities who are authorised to issue the certificate, called an “Apostille”. The Apostille certificate can be issued at the request of the person who has signed the document or that of the bearer.
13. Disputes - How are they dealt with and resolved?
The most common disputes relate to land boundaries, co-ownership, use rights within a condominium, lease disputes and inheritance.
A lawsuit is especially time consuming when there is a dispute involving a claim to adverse possession of part of the land by a third party including the owner of a neighbouring plot. This is because, in such a case, the court must not render a judgment without the results of a plot division procedure performed by the land registry. The plot division procedure will determine whether the disputed land is allowed to be separated from the part of the land in respect of which adverse possession is not claimed or whether the disputed land could be merged with the parcel of the neighbour if it was the neighbour who used the land adversely.
In general, the Civil Code entitles any of the co-owners to demand termination of co-ownership (or transformation of the co-ownership into a condominium). The co-ownership of a property may be terminated in the following ways, namely:
  • by physical separation by division of the plot, if this is permissible by the land registry in a plot division procedure
  • if division is not permissible, the court may designate a co-owner to buy the interest of the other co-owner (in theory even if against the intention of such designated buyer) for a price established by the court based on an expert opinion on the market value
  • failing such enforced purchase, the court may order the sale of the property by auction at a pre-established minimum price or
  • it may be possible to convert the jointly owned property into a condominium. In this case, the court may choose this solution in a manner whereby the judgment includes the founding document for the condominium.
The court may not order such method of terminating co-ownership where all the owners object
In other cases, the law permits considerable freedom of contracting and the parties can insert into the contract which law they want the contract to be governed by, in which jurisdiction they would prefer any dispute to be resolved and what method of dispute resolution they would prefer.
Methods of dispute resolution could include court proceedings, arbitration (whether domestic or international) and/or reference to an independent expert or a mediation process. This freedom of contract is not absolute, however, and can in certain circumstances be regulated by statute, e.g. Hungarian courts have exclusive jurisdiction in cases pertaining to in rem rights regarding real estate that is located in Hungary and also in proceedings concerning lease and usufruct agreements.
The choices should be stated expressly in the contract. If it can be avoided, these matters should not be left to the courts to decide, since the uncertainty of law and jurisdiction shopping will be costly to all parties and can mean that any dispute is likely to take a very long time to resolve.
PART C - PERMITS INSURANCE AND ENVIRONMENT
14. Permits - What permits are required for the use and occupation of real estate and are they personal?
There are no planning permissions under Hungarian law, but land and property is regulated by a zoning map and local building code, which are binding decrees of the local government. The national zoning requirements and building rules are regulated by national laws and governmental decrees.
If a developer plans to develop an area for a different use to the one regulated by the relevant decrees, then it can initiate negotiations with the local government for changing the status of the area. The results of the negotiations are then recorded in an urban development agreement. In such agreements, it is common for the developer to grant some benefits to the local government, such as the construction of roads or other necessary infrastructure in consideration of which the municipality undertakes to initiate the procedure for the change of the zoning regulation. However, the local municipality cannot enter into a binding obligation to change the content of the zoning as it would limit the legislative power of the general assembly of the municipality, which would be in breach of the constitution.
Regarding construction works, some require no permit, others require notification to a relevant building authority, and others require a permit of the building authority. Permits may be preliminary building permits or building permits. A preliminary building permit can be obtained in order to clarify certain requirements in connection with cultural heritage or ecological protection, for example, but it does not give a right to actually construct.
The deadline for the issuance of building permits varies, but even for the most complicated construction it cannot exceed 45 working days. For simpler construction works, the deadline is between 8 and 22 working days.
Developments that are likely to cause significant environmental impact require an environmental impact study to be submitted along with the application for a building permit, explaining the likely environmental impact of the development.
Generally, a building permit will be required for the construction of a newly-built property. The refurbishment of an existing building requires notification if the roof or the load bearing structure of the building needs to be changed, whilst in other cases refurbishment usually has no administrative requirements. Stricter rules normally apply when the proposed work relates to historically or architecturally important (listed) buildings.
As for occupancy, the procedure is also divided: in relation to simpler works a notification is sufficient, whilst for others a permit is required. The general deadline for issuing an occupancy permit is 22 working days.
The system is a one-stop shop system under which the client (constructor, developer, builder, etc.) is in contact with only one authority (the building authority) which handles all aspects of the procedure including the contacting of other specialised authorities.
15. Insurance and Risk - What insurance will the parties effect and when does the insurance risk pass at the time of sale?
Only persons who are interested in protecting a property or those who conclude contracts on behalf of an interested person are entitled to conclude property insurance contracts.
Generally it is the building, and not the land, which is insured for the value of the reinstatement cost.
The insuring party should have a fully comprehensive buildings insurance policy to protect the structure and fixtures and fittings of the property in the event of damage or destruction (by any of a comprehensive list of insured risks, such as storm, lightning, fire and water damage). The policy may also cover additional special heads of cover such as subsidence, heave, earthquake and, where available, terrorism.
Insurance policies may either comprise a single policy for one particular property or a block policy designed to cover a portfolio of properties.
Occupiers of a property (including tenants) usually have separate policies to cover the contents of the property belonging to them, especially if the property includes costly plant and machinery and, in some cases, certain parts of the property for which the occupier is contractually responsible. In case of leases the landlords being the owners of the property have property insurance in respect of the whole building.
Insurance policies are usually not transferred on sale but the buyer concludes a completely new insurance contract. Where a sale is taking place, timing of the transfer of risk is normally prescribed by the sale agreement and is generally linked to the transfer of possession.
16. Environmental - What are the common environmental issues?
Real estate may be contaminated as a result of current and/or former uses. Primary legal responsibility follows the “polluter pays” principle: the person who spilled, released or discharged a substance will normally be liable for any ill-effects it causes. Nevertheless, Hungarian law always presumes that the current owner and the user of the property are jointly liable for pollution unless the owner names the responsible polluter. If the company causing environmental damage ceases to exist, its executive officers and voting members are jointly and severally liable without limitation until evidencing that they did not take part in the decision making. If someone took over such responsibility for pollution, that person will be responsible. The same is true if the sale and purchase agreement provides that the property is purchased “as is” and there is no other warranty or valid exclusion of liability for environmental pollution.
During pre-purchase due diligence, the buyer’s lawyers will check the Land Registry as to whether permanent environmental damage is registered and will also check with the competent environmental authority for any ongoing environmental cases. Pursuant to the Government Decree 219/2004 (V11.21) any person acquiring the property affected by contamination is required to clean up the property.
If development is proposed, then planning permission may be made conditional upon the proper investigation and remediation, if necessary, of potential contamination. If the planned development is of a type considered potentially detrimental to the environment, the application for planning permission may need to be supported by an assessment of the development’s likely future environmental impact.
The presence of protected species may impede development by increasing costs, particularly through delay.
Those who have control of places of work have a duty to assess the risk of asbestos being present in the fabric of the building and to manage the human health risks posed by any asbestos found.
Acquisition due diligence may involve the appointment of environmental consultants to consider documentary information and to carry out a site visit (Phase I). If considered necessary, further, intrusive investigations (Phase II) may then be undertaken. It is important to identify potential problems early so that there can be negotiation on price, the need for and scope of any remediation and/or the need to put in place protection in respect of any existing contamination related losses that may arise in the future. Such protection may take a number of forms, including obligations to remediate any contamination discovered post-acquisition, indemnities in respect of first party loss or third party claims, or specialist historic liabilities environment insurance to cover any of these risks.
PART D - FINANCE AND TAXES
17. Pricing/Valuation - What sets the price/valuation of real estate?
There is no legal requirement for an accurate appraisal of a property’s value or condition to be undertaken. However, extreme inaccuracies are covered by the Civil Code which prohibits contracts in which (i) at the time of signature, there is an “unreasonable and extensive difference” between the value of the thing sold and the consideration due, without either party having the intention of giving a gift or (ii) one contracting party has stipulated an unreasonably disproportionate advantage by exploiting the other party’s situation.
In the case of (i) above, the injured party is allowed to challenge the contract within one year of its signature.
In the case of (ii) above, the contract is deemed to constitute usury and is potentially null and void. Unless otherwise provided by law, anybody is entitled to apply for the contract to be annulled without a time limit and no special procedure is required.
Finally, both the various Tax Offices and the Stamp Duty Offices have a right to challenge and reassess the value of a property, if the value set out in a sale and purchase agreement (on the basis of which tax and stamp duty is calculated) appears unreasonably high or low.
The main areas of activity of appraisers and property brokers are regulated by the Act No. LXXVIII of 1993 on the lease and sale of flats and premises.
Both companies and individuals may only act as appraisers if they have a clean criminal record and have a certificate of professional expertise (for individuals) or they have at least one member/employee who has such a certificate (for companies). An individual may only carry out appraisals if they are entered in the Register of Estate Agents. The entry is automatic if the above two conditions are met.
Currently, three methods of appraisal are used to determine the value and condition of the property, being the Cost Method, the Comparison Method and the Income Method:
Cost Method
The value determined by the Cost Method is the cost required to replace or reproduce the property at the time of the appraisal, following the deduction of the amortisation costs plus the market value of the plot. This method is used only if there is no other alternative to appraise the property.
Comparison Method
The value determined by using the Comparison Method is the figure established from data of other properties sold in the recent past. The comparison must always be performed with the property being appraised. This is the most commonly used method.
Income Method
The main focus of this approach is the income-producing capability of the property. This approach provides an objective estimation of the price that a cautious investor would pay for the property on the basis of the net income producing capability. The Income Method applies to a property which has a measurable income or a relatively high value. .
The State Supervising Authority of Financial Organisations (PSZÁF) also publishes certain appraisal methods which Hungarian banks in particular may request appraisers to follow.
18. Financing - How is a real estate acquisition financed?
Until 1 January 2010, the main feature of real estate financing in Hungary was that the financing was secured by the acquisition of shares (so-called “business quotas”) of the special purpose vehicle holding the real estate, as opposed to the acquisition of the real estate itself. This was because an overwhelming majority of Hungarian property acquisitions were done through corporate acquisitions. The properties were held in a special purpose vehicle set up in the form of a limited liability company (in Hungary: Kft.). The reason for this was that if real estate itself was transferred, then a 10% stamp duty was payable, whereas in the case of the transfer of a company (in which there was real estate), only a nominal court registration fee was payable.
From 1 January 2010, the same stamp duty is payable in case of the transfer of real estate and the transfer of the business quota of a Company owning real estate. Complicated, tax driven structures involving cross-border merger of companies and the finance possibilities relating to them are currently under consideration by developers and bankers.
Under the traditional acquisition method, the registration of a transfer of a business quota is done by the competent court of registration that will examine all the underlying transfer documents and therefore registration of the new owner may take some time. The courts of registration usually take approximately 15 days, but this is variable. Therefore, the usual problem with property financing in Hungary is that the financing bank is required to disburse the purchase price of the business quotas (property) at a time when the buyer of the property is not yet registered as the owner of the SPV and thereby it is not the legal owner of the property. As a consequence, the financing banks may set up an escrow mechanism, whereby the purchase price is paid out of the escrow as and when the registration of the buyer as the new owner of the SPV occurs. Another solution is for the purchase price for the property to be paid only when the registration of the transfer of the SPV’s business quotas to the buyer has occurred. It may facilitate the process if the SPV’s articles of association are based on, or converted into, the statutory sample form. In this case the deadline for the Court of Registration to register the change of the transfer of the business quota is one working hour (in practice, it takes a little longer, but usually not longer than one working day).
A typical security package will involve the granting of a mortgage of the real estate together with an option over real estate, an account pledge, and supporting floating charge over all the other assets of the SPV. The income stream generated by the property will be assigned and, in addition to that, also pledged for the benefit of the lender. It is usual to pledge the business quotas of the SPV and to create an option over such business quotas.
It should be noted that options may only be registered for 5 years in Hungary - thereafter such options will expire. However, there is a mechanism whereby the expiring mortgages may be renewed.
The SPV’s should not be set up in the form of a company limited by shares (in Hungary: Nyrt., or Zrt.) because this type of company falls within the scope of the financial assistance regulations and therefore the giving of security to the lender would be restricted.
19. Security over real estate - How is security over real estate created and protected?
Under Hungarian law real property may be pledged as security only in the form of a mortgage. Mortgages may only be over the entire property that is registered in the real estate register or over the entire share of the mortgagor to a property being owned in common ownership.
A mortgage is considered valid only if contracted in writing and recorded in the land registry. The mortgage agreement creating the mortgage, although not compulsory, is usually executed in the form of a notarial deed. The reason for this is to provide the mortgagee with easier enforcement against the mortgagor in the event of default.
Upon the filing of a registration claim, the land registry should complete registration of the entry within 22 working days. Therefore, in practice, it is prudent for the mortgagee to submit the mortgage agreement to the relevant land registry as soon as possible after such agreement has been signed and from the date of such submission the land registry extract will contain a so-called “marginal note” showing that such document was lodged. Such marginal note is put on the register of the property within twenty-four hours of filing. This marginal note – the indication of a pending application by its reference file number – establishes a priority date for the application. Therefore, subsequent submissions, as a rule, cannot by-pass a previous submission.
In respect of mortgages, the pledged property remains in the possession of the mortgagor, who is entitled to use and utilize the property. However, the mortgagor must maintain such pledged property in good condition. In the event that the mortgagor, or a third person, endangers the condition of the pledged property, the mortgagee is entitled to demand that the endangering act be prohibited and that an order be issued to take the necessary measures to eliminate the danger. If any deterioration in the condition of the pledged property jeopardizes the satisfaction of a claim, the mortgagee may demand replacement of the pledged property or security that corresponds to the degree of endangerment. Should the mortgagor fail to comply with request of the mortgagee within due time, the lien holder may enforce his right to satisfaction.
20. Taxes and Costs - What are they and who pays them?
In Hungary, there are various taxes associated with real estate, including personal income tax (PIT), corporate income tax (CIT), value added tax (VAT), transfer duty, wealth tax and certain local taxes. Whether a tax liability arises depends on a number of factors including the legal standing of the purchaser, the location of the real estate, the nature of the real estate. The most important aspects of these taxes are briefly summarised below.
CIT is normally paid by companies and various other entities on any gains derived from the sale of real estate, at a current rate of 19%. As there is no specific capital gains tax in Hungary, gains from the sale of real estate are included in the general tax base of a company and are taxed as any other income. As of 1 January 2010, foreign corporate shareholders deriving capital gains from a “real estate company” are subject to CIT, provided that they are resident in a country in respect of which the relevant double tax treaty allows Hungary to tax the capital gains (or with which Hungary has no treaty). So far, Hungary has concluded double tax treaties with 65 countries, of which 21 treaties (eg. those with Ireland, France) contain the so-called real estate clause allowing the taxation of capital gains from a “real estate company”. These are companies, the assets of which are predominantly comprised of real estate in Hungary. Note that the details of these rules contain a lot of pitfalls.
CIT is not only levied on domestic entities but also on permanent establishments of foreign entities. It should be noted in this respect that according to the Act on Corporate Income Tax and Dividend Tax, of the Republic of Hungary, the utilisation of real estate located in Hungary does in itself constitute a permanent establishment. Furthermore, the possibility to tax foreign companies on any such income is usually also provided for in Hungary’s many treaties on the avoidance of double taxation. Consequently, any income derived from the utilisation of real estate located in Hungary is taxed at the normal rate of CIT (i.e. 19%) regardless of the seller’s residence.
If an individual transfers the ownership of his real estate then he has to pay PIT at a rate of 25% on the gains from the transfer of the property. When calculating the amount of such gains, certain costs and expenses may be deducted from the actual purchase price, most importantly all costs and expenses incurred in relation to the initial acquisition of the real estate. Please note that if the transfer of ownership takes place after the sixth year from acquisition, the amount of tax payable is gradually reduced in a manner such that no PIT is payable after the fifteenth year from acquisition. In the case of the sale of residential property, no PIT is payable after the fifth year from the date of purchase. In any case, it should be noted that income derived by individuals from the utilisation or the sale of real estate located in Hungary is generally taxable in Hungary, regardless of the residence and/or the nationality of the seller. As for the CIT rules already described, foreign individuals may be obliged to pay PIT on the capital gains derived from the sale of a Hungarian “real estate company”, depending on the provisions of the relevant treaty.
Generally, the sale of property is VAT exempt. However, VAT is payable at 25% on the sale of building plots and of so-called “new buildings”. (Buildings qualify as “new” if their operating permit has not yet been issued or if less than two years have passed since the issue of such permit.) Further, in the case of the sale or letting of all other immovable property it is possible to opt for taxation. Opting for taxation has the benefit that input VAT incurred in respect of otherwise exempt activities could be deductible.
In principle, the reverse charge mechanism is to be used whenever, in connection with the sale of immovable property, the option to tax has been exercised. Similarly, certain services connected to immovable property are listed as giving rise to domestic reverse charge.
There is stamp duty (i.e. transfer tax) payable by the buyer on the purchase of a property. A 4% stamp duty rate is applied up to a market value of HUF 1 billion, and 2% for the excess, with an overall cap of HUF 200 million per property (ie. if the market value of the property exceeds HUF 9 billion, the excess value will not be subject to any further transfer tax), and certain exceptions and lower beneficial rates are available (for example, on the purchase of residential property, etc.).
As of 1 January 2010 the direct or indirect acquisition of at least 75% of the shares of a company – whether Hungarian or foreign resident – owning real estate located in Hungary will also be subject to transfer tax along the above lines (i.e. the transfer tax is still calculated on a per-property basis).
A two percent preferential rate of transfer duty is applicable to real estate traders, if the newly acquired property is being resold within two years. The two year re-sale period may, subject to certain conditions, be extended to four years upon request.

As of 1 January 2010, residential properties and holiday houses situated in Hungary are subject to the wealth tax (regardless of being owned by companies or individuals). The tax base is the market value which will need to be self assessed. However, the Act on Wealth Tax also determines a deemed value adjusted by several items (eg. location, availability of a swimming pool or a garage) to make it easier for the tax authority to collect the tax. One residential property per individual, having a market value of up to HUF 30 million is exempt from tax, if the owner actually lives there. A second residential property or holiday house (of the owner’s choice) worth less than HUF 15 million will also be exempt. The tax rate for real estate is progressive: 0.25% (yearly) of the market value up to HUF 30 million, 0.35% of the market value between HUF 30 and 50 million, and 0.5% on the excess.
Local authorities are authorised to impose taxes on the owners of buildings and land located in their territories. Some municipalities have utilised this opportunity whilst others have not. The Act on Local Taxes, of the Republic of Hungary (the Local Taxes Act) only provides a framework of rules for these property-related taxes, with the details to be governed by separate decrees of the local municipalities.
Pursuant to the Local Taxes Act, building tax and land tax are based either on the area of the property or on the value of the property, depending on the decision of the local municipality. Currently, building tax is subject to a maximum of HUF 1,241/m2 or 3% of the “calculated value” of the property (such calculated value being equal to 50% of the market value of the property). The land tax is subject to a maximum of HUF 275/m2 or 3% of the calculated value of the property. The maximum amounts of the above taxes (if determined in amounts and not as percentage) are subject to a yearly increase based on past inflation statistics. The amount of the local taxes paid in relation to residential property in the relevant tax year is creditable against the wealth tax, if payable.
The value of the property sold would typically be regarded as part of the net sales revenue, therefore it forms part of local business tax base. Such tax base (i.e. the net sales revenue) may be decreased by the cost of materials, cost of goods sold and the value of intermediated services (including, to a limited extent, the value of subcontractor’s work). The rate of the local business tax is a maximum of 2% but is determined by each municipality.
The above mentioned local taxes are imposed by the local municipalities and are normally borne by the owner of the property in respect of which the taxes are levied. As of 2010, the local business tax is collected and administered by the Hungarian (State) Tax Authority.
Italy
PART A - PARTIES AND INTERESTS
1. Parties - Who can own real estate?
Any legal “person” may own real estate. This will include individuals, companies and other legal entities established by statute.
From 1997, unincorporated associations and charitable institutions can also freely own real estate (before that date real estate acquisitions by such entities were subject to government authorisation).
Owners of commercial real estate include private developers, insurance companies, pension funds, banks and other financial institutions, private or public property companies, charities, trusts, the government and local authorities.
There are no restrictions preventing EU nationals or companies from owning real estate. With regard to non-EU nationals, reciprocity conditions apply.
2. Property – What property interests are currently sold?
Property interests which are usually sold in Italy include:
  • Proprietà (full ownership) – the right to use and dispose of a property in a full and exclusive manner, within the limits and in compliance with the provisions of law. “Piena proprietà” is the term normally used to describe the title of the person who has full ownership
  • Nuda proprietà (residual ownership) – the right that remains to the owner of a property over which a right of usufruct has been created in favour of another person
  • Diritto di Superficie (also known as proprietà superficiaria) (right of superficies) – the right to construct and maintain a construction on land belonging to another person. If the right of superficies was created for a limited period of time, at the end of the term the owner of the land acquires title to the building
Other relevant rights in rem or contractual rights relating to property are as follows:
  • Lease – a contractual right to use a property for a certain period of time and for a specific purpose. Assignment of a lease by the tenant usually requires the consent of the landlord
  • Option and pre-emption - rights to buy or first refusal respectively. Unless they originate from statutes (e.g. pre-emption right of the tenant), they are not enforceable against third parties and do not entitle the holder of the relevant right to obtain the revocation of acts of disposal of the property carried out in violation of the option or right of pre-emption
  • Servitù (easements) – rights in rem, which include rights of way as well as restrictions concerning use of land or activities permitted on the land (e.g. an obligation not to build)
3. Ownership – What types of ownership are there?
In Italy there is no distinction between classes of titles. However, there are different forms of ownership that can be summarised as follows:
  • Proprietà (ownership) – the right to use and dispose of a property in a full and exclusive manner, within the limits and in compliance with the provisions of the law
  • Comunione (joint/shared ownership) – the division of the right of ownership between a number of people, with each person having rights and obligations in respect of the others. As a consequence, each joint-owner must contribute to the costs for maintenance and use of the property and other necessary outgoings. Each participant can request to end the joint ownership. However, the court can postpone the end of the joint ownership of the property, by a maximum of 5 years, if the division would be detrimental to the interest of the other joint-owners
  • Multiproprietà (time-sharing) – a new interest, formally recognised and introduced in 1998, the object of which can be a right in rem or the contractual right to use a property
Although the possessor of a property enjoys a certain degree of protection pursuant to Italian law, possession does not constitute title to a property. However, continued and uninterrupted possession of a property for a given number of years (10, 15 or 20, depending on the type of property and other circumstances concerning the possession) would entitle the possessor to claim ownership of such property. The actual title will have to be established and declared by a court of law.
4. Matters burdening or benefiting real estate – What matters can affect real estate?
Common matters affecting real estate include:
MatterEffectExampleServitù (easement)Rights which burden one piece of land and benefit another. They are not personal but attach to the land itself. Servitù may also consist of restrictions as to the use of land. These rights can be either registered or unregistered, depending on how they were createdA right of way; a right to light; a right to use or lay pipes and cables; a right to run a telephone or electricity cable or erect telecoms equipment; obligation not to build on the landUsufrutto (usufruct)Usufruct is a right in rem enabling a person to use another’s property and to draw from the same all the profit, utility and advantage which it may produce, without altering the substance or use of the property. The holder of a usufruct may allow use of the property by third parties but is not entitled to dispose of the property. Usufruct can be created for the entire life of the beneficiary but if the beneficiary is a legal entity a statutory 30 year limit appliesRight of use or habitationThe rights of use and habitation are limited forms of usufruct where the beneficiary is allowed to use and exploit a property (e.g. agricultural land) or occupy a property (e.g. flat) to satisfy his own needs and those of his familySuperficies (right of surface)Right to construct and maintain a construction on land belonging to another personVincoli (restrictions)Restriction imposed on a property and/or its use by a public entity, often with a view to preserve the property and/or to give a right of pre-emption to the public entityRestrictions for renovation of listed buildings and pre-emption right of the stateUsucapione (acquisition by continued possession)It includes the acquisition of title to or legal rights over another person’s property or land by continued and uninterrupted possession for a given period of time (usually 20 years but also 10 or 15 years under certain circumstances). Acquisition of title or creation of the legal right must be declared by a courtOccupation of a property for more that 20 years; a right of way exercised for more than 20 years
Matter
Effect
Example
Servitù (easement)
Rights which burden one piece of land and benefit another. They are not personal but attach to the land itself. Servitù may also consist of restrictions as to the use of land.
These rights can be either registered or unregistered, depending on how they were created
A right of way; a right to light; a right to use or lay pipes and cables; a right to run a telephone or electricity cable or erect telecoms equipment; obligation not to build on the land
Usufrutto (usufruct)
Usufruct is a right in rem enabling a person to use another’s property and to draw from the same all the profit, utility and advantage which it may produce, without altering the substance or use of the property. The holder of a usufruct may allow use of the property by third parties but is not entitled to dispose of the property. Usufruct can be created for the entire life of the beneficiary but if the beneficiary is a legal entity a statutory 30 year limit applies
Right of use or habitation
The rights of use and habitation are limited forms of usufruct where the beneficiary is allowed to use and exploit a property (e.g. agricultural land) or occupy a property (e.g. flat) to satisfy his own needs and those of his family
Superficies (right of surface)
Right to construct and maintain a construction on land belonging to another person
Vincoli (restrictions)
Restriction imposed on a property and/or its use by a public entity, often with a view to preserve the property and/or to give a right of pre-emption to the public entity
Restrictions for renovation of listed buildings and pre-emption right of the state
Usucapione (acquisition by continued possession)
It includes the acquisition of title to or legal rights over another person’s property or land by continued and uninterrupted possession for a given period of time (usually 20 years but also 10 or 15 years under certain circumstances). Acquisition of title or creation of the legal right must be declared by a court
Occupation of a property for more that 20 years; a right of way exercised for more than 20 years
5. Occupation of real estate - Who may occupy real estate?
Real estate is usually occupied by one of the following categories of persons:
  • Owners – those persons with a full ownership of the property
  • Tenants – those persons with a lease of the property or part of it. A subtenant may also occupy a property by means of an agreement with the tenant; however, the consent by the landlord is usually required before the tenant can sublet the property
  • Holders of rights of usufruct, use or habitation – such rights are normally acquired by either succession or as part of an arrangement within a family for a family member to remain in an apartment, for example, for his life
  • Holders of rights of superficies – the right to construct and maintain a construction on another person’s land
  • Holders of concessions – contractual permissions to occupy rather than interests in the property itself. Normally, the rights are personal and are not capable of being transferred to a third party without the consent of the owner of the property. A concession is the typical form of right granted over state-owned land (e.g. beach)
  • Possessors – they may establish entitlement to property where they have occupied or used the property for a long period of time as if they were legally entitled to do so without being challenged by the rightful owner of the property. Actual acquisition of title to or other interest in a property by a possessor would require a court decision
6. Brokers - What is the broker’s role?
Pursuant to Article 1754 of the Italian Civil Code, a broker (mediatore) is the individual or organisation that brings two or more parties together for the conclusion of a deal, not acting solely in the interests of one of the parties.
Pursuant to Italian law, only those brokers who are registered in the list of authorised brokers at local Chambers of Commerce (Ruolo degli Agenti d’Affari in Mediazione) can legitimately be qualified as brokers and as such are entitled to receive commissions on sales. Whoever operates as a de facto broker without being registered in the above lists of the Chambers of Commerce may be liable to pay fines and to return any sum received from the parties by way of commission.
The role of the broker is usually not limited to acting as a mediator for the purpose of facilitating the conclusion of the transaction; in fact, a broker has a legal duty to disclose to the parties all the information obtained in relation to the transaction and this includes an implicit obligation to procure information that could have been obtained by applying ordinary diligence and care.
Also, the broker may assist the parties with the drafting of the transactional documents (e.g. irrevocable proposals or preliminary agreement) though for larger deals transactional documents are usually drafted by lawyers.
Services offered by brokers usually include:
  • property search detailing every aspect of the property
  • property procurement, guiding buyers through the purchasing process
  • acting for a seller to find a buyer for a sale property, including advertising of the property for sale
  • acting for a landlord to find a tenant, including advertising of the property
  • acting for a tenant to find a property to lease
  • collection of documentation and liaising with lawyers and notary and
  • valuation services
Property management services do not strictly fall within the scope of brokers’ services and usually major national or international organisations providing management services do so through ad hoc entities that do not also provide brokerage services.
It should be noted that in certain cases brokers act only in the interests of one party, to whom they provide also consultancy and valuation services, on the basis of a specific mandate received from such party. In that case, the broker can no longer be qualified as an independent intermediary and the provisions of the Civil Code on brokers would not apply. Therefore, in such cases, the broker would be entitled to receive a commission only from the party that instructed him.
7. Employees - What employment issues affect real estate acquisitions?
According to the Italian rules on the transfer of business, when a business (or part of one) is transferred from one party to another, the work relationships of the employees pertaining to such business or part thereof continue with the new owner of the business.
The sale of a property may attract application of the above rules if the property transaction can be qualified as transfer of a business. This may be the case with regard to employees dedicated to management of a building or staff working on the premises (e.g. security staff or maintenance personnel).
The application of the rules on transfer of a business would entail, inter alia, the following consequences, namely that:
  • the buyer assumes responsibility for employees working in the business transferred
  • the rights of employees transferred, deriving from both their individual and collective employment agreements, would be preserved (e.g. salary level, fringe benefits, notice periods)
  • fully accrued rights of the employees towards the seller would be undertaken by the buyer as a consequence of the transfer of a business
  • the seller and the buyer are jointly liable for all the financial obligations of the seller, existing at the time of the transfer, vis à vis the employees and
  • information and consultation with the unions prior to the transfer may be required, depending on the number of employees employed by the seller
The transfer of business does not in itself constitute a justified reason for dismissal; the termination of employment is legal only when justified by reasons totally independent and autonomous from the transfer of a business i.e. economic, technical or organisational reasons entailing changes in the workforce (so called “ETO reasons”).
PART B - PROCEDURE AND TERMS
8. Procedure - What are the steps in a sale and purchase transaction?
Transactions start with negotiations as to the proposed terms of the acquisition. It is not very frequent that heads of terms are drafted setting out the principal terms agreed between the parties, because, in Italy, such documents may be construed as creating formal binding agreements. Whilst it is possible for an informal “memorandum of understanding” to be executed (mainly to create confidentiality and/or exclusivity obligations as well as obligations to negotiate in good faith), the common first step in a transaction is an irrevocable purchase offer (proposta irrevocabile di acquisto) or more often a preliminary agreement (contratto preliminare).
Irrevocable Purchase offer
The irrevocable purchase offer obliges the buyer to pay a deposit on the property, states that the contract is to be completed by a specified date (upon the expiry of which, the offer ceases to be binding) and commits the buyer to purchase the property at the terms and conditions set out in the offer . By signing the purchase offer, the buyer becomes legally bound for the period of time stated in the proposal, but the seller is free to consider other offers.
The purchase offer contains the main terms of the sale, including the price and financing of the purchase, and forms the basis of the final deed of sale to be drafted by the notary. It is only once the seller communicates to the buyer his acceptance in writing of the offer that the (preliminary) contract is concluded.
Usually, a purchase proposal is drafted in such a way that it would create, once accepted by the seller, binding obligations to sell and purchase but would not cause the actual transfer of the property. By accepting the purchase offer, the seller would be bound to effect the transfer of the property to the buyer (by means of a notarised deed of sale) and the buyer would be obliged to buy the property and pay the agreed price.
Preliminary Agreement for sale
Often the first step consists of a preliminary agreement for sale (contratto preliminare di vendita) (sometimes also called, though improperly, compromesso) detailing the terms of the future sale, including warranties and representations. A preliminary agreement creates binding and enforceable obligations on the seller and the buyer to sell and buy the property respectively, but does not cause the actual transfer of the property.
A preliminary agreement can be a privately executed agreement between the buyer and the seller, but for large commercial transactions or where the circumstances of the transaction suggest extra caution, the preliminary agreement can be notarised so as to allow its registration at the land registry office (Conservatoria dei Registri Immobiliari) and ensure that it can be enforced also against third parties to protect the buyer against disposals of the property in favour of third parties and/or encumbrances that may be registered by third parties (e.g. enforcement or seizure orders).
Upon execution, the buyer usually pays a deposit ranging from 10% to 30% of the purchase price. Unless otherwise indicated, in the event either party does not perform the sale, the other party has the right, at its option, to (i) request specific performance (i.e. force the sale) (ii) terminate the agreement and claim damages or (iii) retain the deposit (or request payment of an amount equal to two times the deposit, if the seller is in breach) and terminate the agreement.
If one of the parties is a foreign registered company, the other party may require a foreign lawyer’s opinion confirming that the company is properly incorporated, has power to enter into the transaction and that the signatory has the power to bind the company.
Where a property under construction is being sold to individuals, the developer must provide a bank or insurance guarantee to the purchaser to secure any advance payments made during the construction period in the event of insolvency or seizure of assets of the developer.
Property Searches
It is normal practice to carry out searches of the property title on two occasions - before the preliminary contract has been drawn up and then before completion, by way of a protective search.
Checks that the data contained in the title documents have not recently altered/been amended are essential, and in this regard it is necessary to carry out a search at the Land Registry where the exact ownership status of the property can be ascertained, as well as the existence of any third party rights over the property (such as rights of usufruct, mortgages, restrictions or other encumbrances).
In the case of restrictions revealed by searches, which have not been declared by the seller, the buyer is usually entitled to terminate the preliminary agreement (if already executed) and to claim compensation for damages.
Deed of Sale
The public deed of sale (atto pubblico di vendita) is the final contract and transfer of title, which is based upon the preliminary agreement and is drawn up, signed and sealed by a notary, usually appointed by the buyer.
This document contains all the elements necessary to pass title, and includes all those matters which may have affected the title between the preliminary agreement and the deed of sale (such as the existence of mortgages, checks of the cadastral details and details of original deeds). Both parties, or their duly appointed attorneys, must be present to sign the deed.
In Italy, a property may also be transferred by means of a private agreement with signatures authenticated by a notary. However, the public deed of sale is mostly used as it provides more protection to the buyer. When a property is bought by private agreement and is subsequently found to have a charge against it, such as a mortgage, the liabilities of the notary may be limited. When buying by public deed, the buyer may more easily seek legal action against the notary for professional misconduct.
Registration (tax office and land registry)
The notary is obliged to register the deed at the competent tax office (Ufficio delle Entrate) and to pay the relevant registration tax and other charges (cadastral and mortgage duty) on behalf of the buyer.
The notary must also file the deed of sale with the local office of the Land Registry in the shortest possible time and in any case within 30 days. The notary is also responsible for notifying the sale to the cadastral office.
9. Other common contract terms - What other provisions does a real estate sale contract commonly contain?
A distinction should be made between the preliminary sale agreement (i.e. the agreement creating obligations to sell and purchase that is usually executed before the actual transfer of the property) and the deed of sale (i.e. the notarised agreement transferring title to the property).
The preliminary sale agreement must be made in writing and notarisation is not required unless the parties intend to record the agreement at the Land Registry.
The preliminary agreement often contains detailed provisions relating, inter alia, to the obligations of the parties pending execution of the deed of sale, deadlines for satisfying conditions precedents, if any, and terms and methods of payment of the purchase price, including down-payment(s) made by the buyer and the consequences of refusal by one party to execute the deed of sale.
The preliminary agreement also usually contains detailed representations and warranties in relation to the property and matters affecting it as well as indemnity provisions. Specific warranties will usually be given in relation to any lease under which the property is occupied (e.g. validity of the lease, due performance by the seller, timely payment of rent by the tenants). Where individuals are purchasing a property being constructed, the terms for payment, details of bank or insurance guarantees in relation to the developer, the date by which the property must be constructed and details of any subcontractors must be set out.
Since not all representations, warranties and, in particular, indemnity provisions set out in the preliminary agreement will be repeated in the deed of sale so as not to attract registration tax on the resulting obligations, the preliminary agreement may also contain provisions to the effect that certain obligations of the parties under the preliminary agreement will survive the execution of the deed of sale and will not be superseded by it.
The deed of sale must be made in writing and notarisation is required, though only for the purpose of complying with publicity requirements (registration at the land registry) and not for its validity.
Only one original deed of sale is executed and the notary, who is required by law to keep the original in his records, is authorised to issue certified copies to the parties as well as to public offices to which the sale must be notified (e.g. land registry, cadastral office).
The deed of sale must state the purchase price and may contain provisions dealing with its payment by the buyer. Usually, the deed of sale contains only an acknowledgement of payment of the price (quietanza) whereas detailed provisions concerning terms and methods of payment are set out in the preliminary agreement. If the deed of sale does not contain an acknowledgement of payment for the full price or a specific waiver by the seller, the land registry will automatically register a mortgage over the property as security in favour of the seller for payment of the price.
The deed of sale must clearly identify the property, also by indicating its boundaries and cadastral details, and must set out the details of the instrument(s) whereby the property was acquired by the seller as well as the details of building permits (including amnesties) issued in relation to the property.
The deed of sale must show details of any estate agent or broker who assisted in the sale, including his VAT number and the amount and method of payment of his fees.
Where new properties are sold to individuals, the developer must at the time of sale deliver to the buyer an insurance policy valid for 10 years relating to defects in the property and any damages payable due to any collapse of the property.
10. Due Diligence - What investigations does the buyer normally make?
The buyer of an Italian property would normally instruct different professionals, depending on the type and size of deal, to carry out investigations on the property and, in case of share deals, on the target company.
Investigations are usually carried out before an offer to purchase a property is made or before execution of a preliminary agreement for sale. However, in certain cases, the offer may be made or the preliminary agreement may be executed subject to a condition that the investigations to be carried out or completed will not reveal any material issue or defects. This is often the case where the buyer is already generally satisfied with the result of a preliminary due diligence and only a few aspects need to be investigated or finalised.
Usual investigations carried out for property transactions include, inter alia:
  • inspection of title, carried out by reviewing the entries made at the Land Registry and relevant documents registered (deeds of sales and other acts or instruments, e.g. mortgage instruments). Records of the land registry are the ultimate evidence of title , subject only to limited exceptions (e.g. unregistered easements, prescriptive rights and adverse possession, unregistered leases). Title inspection may be carried out by lawyers or, more often, notaries. A notary’s report on title is always required by banks before granting a loan to be secured by a mortgage over the property
  • review of building permits, for the purpose of ensuring that the necessary permits were obtained and that no unauthorised works were carried out on the property. This review is usually carried out by land surveyors or qualified architects, due to the technical skills required. Notaries will also require copies or details of all relevant permits before the deed of sale is executed
  • review of cadastral registration of the property. The Cadastral Office, created for tax purposes, records details of ownership, rateable values, property categories and plans. The cadastral register is divided into two sections (land and buildings). Though cadastral registrations do not affect title, they affect, inter alia, taxes payable on the property and, if a property is not properly recorded at the cadastral office, this may result in additional costs and liabilities for the buyer
  • where the property is occupied by tenants, leases are usually reviewed by lawyers appointed by the buyer to establish, inter alia, the prima facie validity of the leases and their terms and
  • in the case of share deals, lawyers are usually instructed by the buyer to review the main corporate documents to ensure, inter alia, the transferability of the shares and any limits to their transfer. Review of the company’s accounts, accounting books and tax documents is usually also required in order to assess potential tax liabilities
11. Terms implied by law - What provisions are implied by Statute, Code or otherwise?
The following provisions would normally be included in property transactions and would usually also apply if no reference to them is made in the deed of sale:
Warranty for Defects
Regardless of the investigations and the inspections carried out by the buyer prior to the purchase, the seller may remain liable towards the buyer for hidden defects in the property that would render the property unfit for its intended use or which may negatively affect its value. Any agreement or provision excluding or limiting this warranty would have no effect if the seller acted in bad faith and concealed the defects (art 1490 of the Civil Code). A claim for defects in the property must be notified to the seller within 8 days of discovery (unless a longer period is agreed) and claims are subject to a period of limitation of 1 year from the delivery of the property to the buyer.
Warranty for Eviction (loss of title)
The Civil Code requires the seller to give a warranty on his title. The warranty also covers rights of third parties that, though not affecting ownership of the property, may affect the ability of the buyer to use or occupy the property. If a third party successfully claims title to the property from the buyer, even if the parties have excluded the warranty on title the seller would be liable to return the price to the buyer and reimburse the costs incurred by the buyer to purchase the property. If the parties want to exclude completely statutory warranty for eviction, the agreement must state clearly that the sale was made “at buyer’s risk and peril”.
General rules on exclusion and limitation of warranties
Agreements or contractual provisions aimed at excluding or limiting the liability of the seller would not operate in any case of gross negligence or wilful misconduct.
General terms and conditions
Pursuant to Article 1341 of the Civil Code, if an agreement is not the result of negotiations between the parties and one party imposed and required the application of his terms and conditions, certain provisions of the agreement that are in favour of such party (e.g. right of exit, limitation of liabilities) would not be enforceable against the other party unless specifically approved by such other party in writing (usually a second signature by such other party is required). This provision of the Civil Code would be more likely to apply to property leases (where use of standard forms is more frequent) rather than agreements for sale of properties, where actual negotiations of terms and conditions are usual.
Sale of property as a whole (a corpo)
Properties are usually sold a corpo (as a whole). This means that if the actual size of the property is not that stated in the agreement, price adjustments would be permitted only if the difference between the size stated and the actual size exceeds 5%. If the property is not sold as a whole, but having regard to the size of the property (vendita a misura), any discrepancy would allow a price adjustment. Differences exceeding certain thresholds may also allow the parties to withdraw from the agreement.
12. Registration and Notarisation of real estate – What are the basic requirements?
Agreements or other instruments transferring title to a property or creating, modifying or transferring rights in rem concerning a property must be recorded for publicity purposes with the Italian land registry (although the name of the competent office recently changed, it is still usually referred to using the previous name of Conservatoria dei Registri Immobilari). Usually there is a land registry office for each province though for larger provinces there are usually more offices, each having jurisdiction over a certain part of the territory of the province.
Registration of the above agreements and instruments is required to ensure that they are enforceable against third parties (as opposed to enforceability limited to the parties to the agreement or instrument).
Also, the creation of charges and encumbrances (e.g. mortgages, court orders concerning title to the property or other rights in rem created over the property) requires compliance with publicity requirements to ensure that such charges and encumbrances are enforceable against third parties. However, registration with the land registry is permitted only for those instruments and agreements that are specifically identified by Italian law (e.g. registration of an option for purchase of a property is not permitted).
It should be noted also that lease agreements may have to be recorded at the land registry, where their initial terms exceed 9 years.
In general, notarisation (either in the form of certification of signatures by a notary or of a proper public deed, drawn up, signed and sealed by a notary) of contracts transferring title to a property or creating, modifying or transferring rights in rem concerning a property is not required for the validity of the contract itself but is required to allow the agreement to be recorded at the land registry.
However, notarisation is a validity requirement for certain types of transfers of title to or other interests in a property (e.g. a public deed is required for transfers by way of gift).
13. Disputes - How are they dealt with and resolved?
In Italy, the parties to a real estate transaction are free to choose the law governing the transaction as well as the methods to resolve disputes arising in relation to the transaction. Available methods of dispute resolution include, besides recourse to court proceedings, arbitration, independent expert determination and mediation (less usual).
With regard to the law governing the contract, even if it may technically be possible when one or both parties are foreign nationals to choose a law other than the lex rei sitae (i.e. the law of the country where the property is located) as the law governing the contract, several aspects of the transaction would still be subject to the law of the place where the property is located (e.g. aspects relating to the property itself, its marketability, permitted use, title of the seller, and registration requirements) and therefore a choice of a foreign law for the contract may not be appropriate.
A dispute may be referred to the determination of an independent person acting as arbitratore, particularly for those disputes where specific technical or professional qualifications are required (e.g. defects affecting the property or estimation of costs for repairing the property, or an audit of revenues generated by occupation of the property). In the case of recourse to an expert, the parties should establish clearly the level of discretion to be used by the expert in rendering his decision as that may affect the ability of the parties to challenge the decision.
When the parties decide to refer disputes to one or more arbitrators, they should state clearly in the arbitration agreement or arbitration clause whether the arbitrator(s) should decide the dispute by strict application of rules of law or if an equitable decision should be rendered. The choice of certain arbitration courts or chambers (and respective arbitration rules providing for fixed or pre-established fees) may help limit or control costs to incurred by the parties. However, the parties should be aware that such rules may also provide for an implied waiver (or partial waiver) of the rights of the parties to challenge the arbitration award.
PART C - PERMITS INSURANCE AND ENVIRONMENT
14. Permits - What permits are required for the use and occupation of real estate and are they personal?
Applications to obtain a planning permit to develop land must be filed with the municipal authority, which has the responsibility for controlling the use and development of land in the territory of the municipality.
The approval of an application for a building permit is subject to compliance of the proposed development with, inter alia, planning instruments and building regulations. Construction fees and contributions towards costs for infrastructure are usually payable.
The decision on an application for a building permit should be issued within statutory time periods set by national law
If an application for a building permit is rejected, the applicant is entitled to challenge the decision before the Regional Administrative Tribunal (TAR). Recourse to the TAR is also available to third parties that may be affected by the development.
In addition to obtaining a building permit, inspections must be carried out at the end of the works to confirm that the construction was carried out in accordance with, inter alia, applicable building regulations as well as health and safety and sanitary regulations. A certificate must be issued by the municipality (Certificato di Agibilità) to confirm compliance with the above rules and regulations.
Also, major works to be carried out on existing properties require a prior authorisation by the municipal authority. Renovation or refurbishment works can usually be carried out without a prior authorisation provided that a 30-day prior notice of commencement of works (Denuncia di Inizio Attività) is sent to the competent office of the municipality along with designs of the works and a report by a qualified professional (chartered surveyor or architect) certifying that the works to be carried out are in compliance with applicable planning instruments and building regulations, health and safety regulations as well as sanitary regulations. No authorisation or notice is usually required for minor refurbishments or ordinary maintenance works.
Properties of relevant artistic or historical value (listed buildings) may be subject to restrictions and works to be carried out on such properties would require a prior approval by the local agency of the Ministry of Cultural Heritage.
In general, building permits are granted to the owner of the land or building or to a third party that, by virtue of a contract with the owner or of an interest held in the land/property, is authorised to carry out the works for which the permit is requested. The building permit can be transferred to successors, assigns or transferees only jointly with the land or property concerned.
15. Insurance and Risk - What insurance will the parties effect and when does the insurance risk pass at the time of sale?
The owner of a property usually takes out and maintains insurance covering both the property and its fixtures and fittings. Property insurance usually covers both damage to and destruction or loss of the property caused by a number of events including fire, explosion, lightning and road vehicles or, in some cases, aircraft collisions. Property insurance coverage would usually also protect the owner against claims for damage caused to equipment of third parties installed at the premises (e.g. equipment of utility companies) and may also cover damage resulting from loss of rent.
The owner of a property may - and normally would - also take out an insurance for third parties’ liabilities (e.g. damages suffered by third parties that occupy or have access to the property). Insurance for damage caused by water (e.g. pipe bursting), riots and terrorism, storms (including rain, hail or snow) or earthquakes may require additional special heads of cover.
Tenants are usually required by the lease to take out additional insurance cover for damage caused to the leased property or the entire building (e.g. by fire, water and explosion) or to third parties that have access to the leased property.
Risks relating to a property pass with title (though the seller may remain responsible for custody of the property until delivery of the property is effected). The seller would usually maintain insurance on the property until the execution of the deed of sale and it would be the buyer’s responsibility to take out new insurance for the property with effect from the date of transfer of title.
16. Environmental - What are the common environmental issues?
The buyer of a property, although not being the person directly responsible for contamination of the building or the land on which it is sited would still be responsible for costs incurred for de-contamination of the site and such obligations usually attach to the site itself.
If a site is found to be contaminated, a legal charge may be created on the site and such charge would result also from a Certificato di Destinazione Urbanistica, a certificate issued by the municipality showing the permitted use of the land. Such a charge will also imply that costs incurred for the de-contamination of the site and to put in place necessary protection measures would be given priority over the proceeds generated by the sale (including a forced sale) of the site.
The owner of a site that is contaminated as a result of former uses may also be responsible for taking the steps necessary for its de-contamination if he intends to change the use of the site and the new use imposes stricter environmental requirements.
The occupier or owner of a site used for unauthorised waste disposal would be liable for environmental damages as well as for payment of fines if he fails to report to the competent regional authorities the illegal disposal of waste on the site before such illegal disposal is discovered and notified by competent authorities.
In relation to buildings, asbestos is usually the main environmental concern, particularly if the building is to be used as place of work (offices, retail properties). Asbestos found in the building should be removed or properly contained.
When the characteristics of a property or the circumstances concerning its former use suggest that there might be potential environmental risks, an environmental due diligence would normally be carried out. The main aspects and documents to be considered for a preliminary assessment of environmental risks and to establish whether further investigations should be carried out are :
  • the history of the site/property (e.g. previous owners)
  • maps, planning and zoning instruments
  • building permits and authorisations issued for the site/property
  • Certificato di destinazione urbanistica (certification of permitted use of the land)
  • the register of potentially contaminated sites and sited to be de-contaminated
  • Regional Plan for Decontamination
  • certificates issued after decontamination of the site
  • documentation concerning previous activities carried out on the site or in surrounding areas and
  • accounts of the seller/target company
In general, environmental risks are addressed by specific provisions in the contract. In addition to general provisions that are often included in preliminary agreements and sale agreements, specific provisions will be included if particular risks are identified, so as to ensure that costs for decontamination are either deducted from the price or secured by specific (bank) guarantees.
PART D - FINANCE AND TAXES
17. Pricing/Valuation - What sets the price/valuation of real estate?
Prices of commercial properties are usually determined on the basis of the expected revenues that the property can generate (rent paid by tenants) as well as on the average market value of the same type of properties in the same area. Should a property be capable of being converted from residential to non-residential or vice-versa, the value (usually calculated per square metre) of non-residential properties (or residential, as the case may be) in the same location and area could be used as reference.
Whilst the expected revenues that a property is capable of generating are usually calculated on the net area capable of being leased, the value of the property (per square metre) is usually calculated on the so called “commercial size” of the property (total area of the property, including areas occupied by partitions and external walls). Certain areas of a property or a building (e.g. balconies, entrance hall, parking spaces, storage rooms) are usually taken into account only for a portion of their actual size.
When a building is acquired with a view to its demolition and reconstruction, the value of the land where the building is located and the planning provisions applicable to such land are considered, together with estimated construction costs and fees.
18. Financing - How is a real estate acquisition financed?
The principal ways in which real estate acquisition is financed are:
  • Through the buyer’s own cash resources or general banking facilities
  • By raising finance using the property or other assets of the company as security
This will typically be supported by a security package which will involve the grant of a voluntary mortgage over the property being purchased, often along with charges over the shares in the company itself (mainly when the property is acquired using a special purpose vehicle) or over shares held by such company in other companies (less usual).
Other forms of security required to secure financing for large property transactions include charges over rents payable by tenants and charges over other debts of the company (e.g. value added tax credits). Floating charges are not permitted under Italian law.
Enforcement of rights under a mortgage always requires the intervention of the court whereas charges over debts and, to a certain extent, over shares, may be directly enforceable by the secured creditors.
  • Raising finance by bond/debenture stock issue
Limits apply as to the amount for which bonds can be issued, mainly based on the value of the share capital of the company and its reserves. Those limits may not apply if bonds are offered for subscription to professional investors (e.g. banks).
19. Security over real estate - How is security over real estate created and protected?
The only security that can be created on a property is the ipoteca (mortgage), i.e. a fixed security interest over property.
The main effect of an ipoteca is to give the secured creditors priority over other creditors of the debtor to seek satisfaction of their debts out of proceeds generated by a forced sale of the property. Though this charge does not legally prevent the disposal of the property, it does create substantial limitations to the de facto transferability of a property.
A mortgage can be provided by law (legal mortgage, for instance when the purchase price is not paid in full at the time of the sale), based on court orders (judicial mortgage) or granted by the debtor (voluntary mortgage). A voluntary mortgage must be agreed in writing and notarisation is required for the purpose of recording the mortgage at the Land Registry.
In any case, registration in the Land Registry is necessary to perfect the creation of the mortgage. The registration is effective for a maximum period of twenty years, and it ceases to be effective unless it is renewed before the expiration of such time limit, regardless of whether the debt secured by the mortgage has been repaid.
The order of priority among various mortgages charged over the same property in favour of different creditors depends on the date on which the mortgage instruments were recorded at the Land Registry (first in time, first in priority).
Should the debtor fail to fulfil its obligations, creditors secured by a mortgage are entitled to cause the forced sale of the property provided that they have a valid title for enforcement (court decision or, usually, a loan agreement executed in the form of a notarised public deed).
The sale of property takes place under the control of the court though notaries are often appointed by the court to act as auctioneers. Proceeds of sale are assigned to secured creditors up to the amount of their claim for the principal debt, accrued interest and costs. The balance, if any, must be returned to the debtor.
20. Taxes and Costs - What are they and who pays them?
Generally, please refer to our CMS transaction costs guide as to the nature and amount of the taxes and costs.
The sale of a property may be subject to value added tax (VAT) or registration tax (stamp duty), depending on the nature of the property sold (residential or commercial property) whether or not the seller is VAT-registered, on the activity carried out by the seller and on the right of the buyer to deduct the VAT paid in whole or part.
In general:
  • If the seller is a VAT-registered entity/individual and the property sold is a commercial property, VAT is not due. However, certain exceptions apply. In particular VAT at a rate of 20% is due:
    • if the seller is a construction company (i.e. active in construction and refurbishment business, not a property investment company) and the sale is made within four years from the date of construction/refurbishment
    • if the buyer can deduct VAT in a percentage not exceeding 25%
    • if the buyer is not subject to VAT
    • if the seller opts for the application of VAT
In any of the above cases regardless of whether or not VAT applies, registration tax is payable in a fixed amount of €168. Cadastral and mortgage charges are also payable at a rate of 4% of the value of the property.
  • If the seller is a VAT-registered entity/individual and the property sold is not a commercial property, VAT is not due. An exception applies if the seller is a construction company (in the sense described above) and the sale is made within four years from the date of construction/refurbishment. In that case VAT is charged at a rate of 20%.
When VAT is not due, registration tax will be payable at a rate of 7% of the value of the property. When VAT is due, registration tax will be payable in the fixed amount of €168. Cadastral and mortgage charges are also payable, in the fixed amount of €336 if VAT is due and at a rate of 3% of the value of the property if VAT is not due.
Under certain limited conditions VAT, registration tax and cadastral and mortgage charges may be payable at a reduced rate.
  • If the seller is not a VAT-registered entity/individual, irrespective of the nature of the property sold, VAT is not due.
Registration tax will be payable at a rate of 7% of the value of the property. Cadastral and mortgage charges are also payable, at a rate of 3% of the value of the property.
In theory, the seller and the buyer are both liable for payment of registration tax as well as cadastral and mortgage charges, unless they agree otherwise. The buyer would usually appoint the notary for the execution of the deed of sale and will pay the notary’s fees and expenses. Notaries’ fees vary according to the value of the transaction and the title investigations the notary will have to carry out. Typically, those fees would range from 2% to 0.15% of the value of the transaction.
The buyer will also pay the costs for conducting searches on title and on matters affecting the property as well as, in general, costs for the due diligence review of the property and any valuations or audits he may require.
Each party will bear the costs for its own consultants (e.g. lawyers).
Brokers’ commissions may be payable by both parties unless the broker acted upon specific instructions and only in the interest of one of the parties, in which case that party would be responsible for the relevant commission.
Poland
PART A - PARTIES AND INTERESTS
1. Parties - Who can own real estate?
General
There are no specific limitations as regards ownership of property. Natural persons, legal persons (corporations) and organisational units not having legal personality but which have been granted the legal capacity by virtue of statutory law may own real estate. Owners of real estate include: individuals, corporations (such as property funds, developers, insurance companies, banks and other financial institutions), the State Treasury and local governments.
Acquisition of real estate by foreigners
There are some restrictions limiting foreign ownership of real estate in Poland. To a certain extent they still apply to EU companies and citizens.
The 1920 Act on the Acquisition of Real Estate by Foreigners provides restrictions on the acquisition of real estate and majority stakes in companies holding properties by foreign nationals or companies. Based on this Act, prior to acquiring land or majority stake in a company owning property in Poland, a foreigner is obliged to obtain a permit issued by the Ministry of Internal Affairs and Administration (“MOI”). A property sale agreement executed without a required MOI permit is invalid.
Companies and individuals from the European Economic Area (“EEA”) which includes EU members, Switzerland and Norway do not need permits to acquire property with the exception of agricultural land and forests. Shares in companies owning real estate may be purchased by companies from EEA without any permits.
2. Property - What property interests are currently sold?
Under Polish law interests in property include:
  • ownership (freehold) (własność)
  • perpetual usufruct (użytkowanie wieczyste) established for 99 years
  • limited property rights: usufruct (użytkowanie), easement (służebność), cooperative ownership right to residential premises (spółdzielcze własnościowe prawo do lokalu mieszkalnego), mortgage
  • contractual rights to use property: lease (najem), tenancy (dzierżawa) and leasing
Ownership and perpetual usufruct are the only rights that are freely transferable and can be mortgaged and that are recognised by institutional lenders and investors for long term investment purposes. The ownership of buildings and other structures is always vested with the owner (or perpetual usufructee) of the land but individual premises may constitute separate properties whereby the owner of the premises also holds a share in ownership (or perpetual usufruct) of the land. Other property rights are either accessory (road easements) or are not common because of legal restrictions (usufruct right for instance is not transferable).
Occupational leases (tenancy, lease and leasing) are usually a source of profit for the property owners investors. Leases entitle the holder of the lease to the use of the leased property or premises and to derive income from the leased property. The detailed scope of the rights and mutual obligations of the lessor and lessee depend on the wording of the agreement.
Ownership
Ownership (Freehold) is the broadest right in property, enjoying full constitutional protection. Public owners of real estate (State Treasury, local authorities, other public bodies) are not privileged over private ones. Private ownership of land is becoming more and more common - it was in fact quite common even during the communist era, especially in relation to farmland.
Perpetual usufruct
One of the most important property interests in land is the right of perpetual usufruct (użytkowanie wieczyste).
The concept of the right of perpetual usufruct to land arises from the historical reluctance of the State to hand over control of properties to full private ownership. Perpetual usufruct has now become a strong and stable right in property, far removed from its origins, the closest relation to ownership of all property rights.
Perpetual usufruct may only be created on land belonging to the State Treasury or local authorities. Currently it can be created by contract only. However, the majority of existing perpetual usufruct titles to the land were created by operation of law in 1990, when all state owned enterprises were granted perpetual usufruct title to the land belonging to the Polish State which they held under management. The acquisition of the perpetual usufruct by the enterprises required confirmation by an administrative decision usually referred to as the decision establishing perpetual usufruct. Once created (regardless of the method of creation), perpetual usufruct title can be inherited, transferred to third parties and encumbered (with a mortgage, easements or usufruct). The perpetual usufructee holds freehold title to buildings and other constructions erected on the land. In comparison with the wide powers granted to the holder of the perpetual usufruct right, the owner of the land (the State Treasury or the local authority) is limited: it cannot encumber the property or sell it to an entity other than the holder of perpetual usufruct. Only the holder of the perpetual usufruct right is entitled to use and collect income from the land.
One of the fundamental differences between perpetual usufruct and ownership is that perpetual usufruct is supposed to be created for a defined specific purpose (e.g. the development of a project or conducting a particular activity) as set out in a perpetual usufruct contract. If the perpetual usufruct was created by operation of law the purpose is usually very broadly defined in the decision establishing perpetual usufruct. The decision very rarely includes limitations with respect to use of the land. If the holder of the title breaches the provisions of the contract or decision establishing perpetual usufruct concerning the purpose, it may lead to an increase of the annual fees, or even the termination of the contract.
Another fundamental difference is that perpetual usufruct is created for a specified term (40 to 99 years depending on the purpose of its creation). All perpetual usufruct titles created in 1990 by operation of law were created until 5 December 2089. If the holder demands an extension within five years before the scheduled termination date, the owner must extend the term, unless there are material public reasons for not doing so. The perpetual usufructee may also demand an extension earlier if developments are planned on the land, which will be depreciated over a period longer than the remaining term of this right.
Upon the creation of a right of perpetual usufruct by virtue of contract, the perpetual usufructee is obliged to pay an ‘initial fee’ amounting from 15% to 25% of the value of the land. Thereafter, he pays annual fees of 3% of the land value of land with commercial purpose and 1% of the land zoned for residential purposes. The percentage of those fees may be lower in certain specific cases, for example in relation to some non-profit organisations and for historic monuments.
Upon termination of a perpetual usufruct contract, the perpetual usufructee loses the right, and the land (together with the buildings and other improvements) is taken over by the owner. The owner is, however, obliged to reimburse the perpetual usufructee for the current market value of the buildings and other improvements legally made on the land.
Usufruct
Usufruct grants its holder the right to use and collect income from the property in compliance with a notarised usufruct contract. Under the contract, the usufructee is granted full economic use of the property, along with all responsibility for making improvements or repairs to the property. Usufruct cannot be contractually transferred to a third party, which is a major inconvenience of this right. There is no maximum time limit for which usufruct may be created.
Easements
Polish law recognises two types of easements: land easements and personal easements. The former are established to the benefit of each owner (or perpetual usufructee) from time to time of (usually neighbouring) land, and the latter are established to the benefit of a specific individual. Land easements are transferred together with the property (whether dominant or servient) and personal easements may not be transferred. Depending on the content of the easement right, defined in the easement deed, the holder of the dominant tenement may exercise various rights such as using the servient property to a specific extent (e.g. passage by foot and vehicle) or requiring the holder of the servient property not to exercise some of his rights to his property (e.g. not to build closer than x metres to the boundary). As a rule, any installations necessary to exercise the easement should be financed, maintained and repaired by the holder of the dominant tenement. Easements expire if they are not exercised for more than 10 years. In general, easement is not a suitable title for a development, but it has a subsidiary function, which amongst other things enables the provision of connections to the municipal media network or an access road, for example.
A specific type of easement (the transfer easements, służebność przesyłu) are available to utility companies. These easements may be established also on non-neighbouring land for the purpose of operating utility installations. The transfer easement constitutes a part of the utility enterprise and as such is transferable.
Lease and tenancy
The basic contractual rights allowing the use of a property are a lease (najem) and a tenancy (dzierżawa). Both can be concluded for unspecified period of time of for a maximum fixed period of 30 years (10 years in the event of a lease concluded by natural persons outside of business activity). The lease grants the right to use the object for any lawful purpose including business activity, while the tenancy grants the right to use and to collect income from the object. After the lapse of their statutory maximum terms, both contracts transform into agreements for an unspecified period of time (and are thus subject to termination on notice). In general terms, 30-year tenancies may be signed with respect to farmland, operating businesses and rights, while leases are available for all types of moveable and immoveable assets leased for any business activity.
3. Ownership - What types of ownership are there?
Ownership is the broadest title a legal person can hold in relation to property under Polish law. Ownership can be equated with freehold title under Anglo-American legal systems.
Title register
There are two parallel types of title register in Poland: (i) the land and mortgage register or “perpetual book” (księga wieczysta), registering titles and encumbrances, maintained by the courts, and (ii) the land register (ewidencja gruntów i budynków) maintained by administrative authorities (powiat), the main purpose of which is to describe the physical features and the designated use of the land and buildings.
Land and mortgage register
Land and mortgage registers (further “mortgage registers”) are kept by special divisions of district courts competent for the relevant territory. They include a description of the property and register titles and encumbrances. The long-term target of the mortgage register system is to have all properties registered.
The mortgage register is predominantly kept in a freely accessible electronic format. The traditional paper registers continue to exist in some courts, but these are continually being converted into the electronic register.
The mortgage register is broken down into four sections. The first section contains a physical description of the property and lists the rights benefiting the property (e.g. granted easements). In section two, the owner (and perpetual usufructee, where appropriate) is specified. Section three contains all encumbrances other than mortgages (easements, usufructs, leases, pre-emption rights etc.). It also includes restrictions in disposals, such as warning notices (e.g. regarding enforcement proceedings, or the status of the register not being in conformity with the actual legal status). Section four contains mortgages.
Certain rights are created or transferred upon registration (i.e. perpetual usufruct, mortgage). Moreover, the sequence of registration determines the ranking of the rights. Registered rights rank higher than unregistered ones.
According to the “principle of public faith of mortgage registers”, everybody may rely on the contents of the mortgage register with respect to registered rights.
Mortgage registers are publicly available for review by anyone.
Land register
Land registers, in comparison to mortgage register, have a technical function. The registers concern physical features of the land (surface, borders etc.), as well as its designated use (agricultural, forest, construction purposes etc.), and the class of land etc. Land registers are kept by powiats (local-government units at a level between gmina – district or municipality, and województwo – province).
The land register is supposed to be converted into a cadastral register, however it is not likely to happen soon due to the huge amount of work necessary to value properties.
Transfer of ownership
Subject to limited restrictions, ownership is freely transferable. Agreements on transfer of ownership title and perpetual usufruct title must be entered in the Land and Mortgage Register. Ownership title passes upon execution of the property transfer agreement and perpetual usufruct title passes upon execution of the decision of the Land and Mortgage Registry Court, but the decision takes effect retrospectively from the date on which the application to register the transfer was filed.
Purchase from public bodies
The largest Polish landowners are the public bodies, i.e. the State Treasury and local authorities (mainly gminas). The acquisition of real estate from public bodies (or granting perpetual usufruct on their land) is regulated by the same civil law regime as transactions between individuals. However, due to the public status of the land, it is additionally subject to specific regulations contained in the 1997 Real Estate Management Act.
As a rule, the acquisition of public land is subject to the principle of transparency reflected by a general obligation to dispose of land via public tenders. The relevant authority selects the purchaser of the land from the bidders in an oral or written tender. An oral tender is used if the highest price is considered, while a written tender is used if there are other aspects to take into account than simply price.
The Act exempts certain disposals from the tender procedure. The most important exemption is an in-kind contribution to a company. As a matter of fact, several reputable developments were carried out in this more flexible way. Municipalities selected developers in a less formal procedure, set up common SPVs and sold their stake of shares once the development was completed. However, this scheme is no longer popular due to restrictions on the acquisition of shares held by public bodies (they must be sold via a public tender, or another public procedure; in other words the private shareholder already holding shares in such SPV has no priority in the acquisition).
Pre-emptive right
In certain cases, public bodies may have a statutory pre-emptive right relating to properties put up for sale. If such a property is sold without observing this right, the sale is invalid. This involves the district’s (gmina’s) pre-emptive right (almost always waived) applying to the sale of the following kinds of properties (i) undeveloped land previously acquired from the State Treasury or from the local authority (ii) undeveloped land held in perpetual usufruct (iii) land for which a public use is provided in the local Master Plan (if the pre-emptive right is registered in the mortgage register) and (iv) an historical monument (if the pre-emptive right is registered in the mortgage register). The district in question has one month following the notification of the conditional purchase agreement by the notary to exercise its right, failing which the parties may enter into the final purchase agreement.
In addition, the 2003 Agricultural System Act introduced a pre-emptive right of tenants of agricultural land. If there are no qualifying tenants, the pre-emptive right may be exercised by the Agricultural Properties Agency. Selling agricultural land in violation of the Act or without notifying the entitled tenant or the Agency is null and void. There are plans to limit the pre-emptive right of the Agricultural Properties Agency to the properties exceeding 1 hectare.
4. Matters burdening or benefiting real estate - What matters can affect real estate?
Common matters affecting real estate include:
MatterEffectExampleEasementsPolish law recognises two types of easements: land easements and personal easements. The former are established to the benefit of each owner (or perpetual usufructee) from time to time of (usually neighbouring) land, and the latter are established to the benefit of a specific individual. Land easements are transferred together with the property (whether dominant or servient) and personal easements may not be transferredA right of way; a right to use pipes and cables, the right of operating utility installations, the right to use waterMortgageA mortgage may be established either as a contract between the borrower and the lender in the form of a notarial deed or through a notarial statement of the borrower submitted on the basis of the written statement of the lender (a bank). Alternatively, a written document issued by the bank together with a written statement of the borrower may also serve as the legal basis of establishing a mortgageMortgage securing receivables arising out of a loan agreement or other monetary claims (taxes)UsufructUsufruct grants its holder the right to use and collect income from the property in compliance with a notarised usufruct contractAdverse possessionAcquisition of ownership to property based on long term possession in good faithOccupation of land for more than 20 years in good faith and on others case for more than 30 yearsPre-emption rightWhen a party has reserved the priority of the purchase of a property where the other party sells the property to a third partyContractual rightsLease (najem) and a tenancy (dzierżawa) which are contractual rights allowing the use of a property. Annuity (dożywocie) – when in exchange for the transfer of the ownership of a property, the buyer has assumed the obligation to provide the seller with financial support for life or with accommodation for lifeLease of land, lease of building, lease of the premises
Matter
Effect
Example
Easements
Polish law recognises two types of easements: land easements and personal easements. The former are established to the benefit of each owner (or perpetual usufructee) from time to time of (usually neighbouring) land, and the latter are established to the benefit of a specific individual. Land easements are transferred together with the property (whether dominant or servient) and personal easements may not be transferred
A right of way; a right to use pipes and cables, the right of operating utility installations, the right to use water
Mortgage
A mortgage may be established either as a contract between the borrower and the lender in the form of a notarial deed or through a notarial statement of the borrower submitted on the basis of the written statement of the lender (a bank). Alternatively, a written document issued by the bank together with a written statement of the borrower may also serve as the legal basis of establishing a mortgage
Mortgage securing receivables arising out of a loan agreement or other monetary claims (taxes)
Usufruct
Usufruct grants its holder the right to use and collect income from the property in compliance with a notarised usufruct contract
Adverse possession
Acquisition of ownership to property based on long term possession in good faith
Occupation of land for more than 20 years in good faith and on others case for more than 30 years
Pre-emption right
When a party has reserved the priority of the purchase of a property where the other party sells the property to a third party
Contractual rights
Lease (najem) and a tenancy (dzierżawa) which are contractual rights allowing the use of a property. Annuity (dożywocie) – when in exchange for the transfer of the ownership of a property, the buyer has assumed the obligation to provide the seller with financial support for life or with accommodation for life
Lease of land, lease of building, lease of the premises
5. Occupation of real estate - Who may occupy real estate?
Real estate is usually occupied by one of the following categories of person:
  • Owners - persons with an ownership right to the property
  • Perpetual usufructees - persons holding perpetual usufruct interest in the property
  • Tenants - persons with a lease (tenancy) of the property or part of it. It is possible to create a sublease to a leased property
  • Persons claiming ownership by adverse possession - where they have occupied the property for a long period of time without having any legal rights to do so, but without challenge by the owner or the perpetual usufructee
  • Persons benefiting from the right of easement and usufruct
6. Brokers - What is the broker’s role?
Brokers in Poland are employed by any party to any transaction involving real estate. Their role may include:
  • acting for a seller to find a buyer for a sale property, including marketing the property for sale
  • acting for a landlord to find a tenant for a leasehold property, including marketing the property
  • acting for a buyer to find a property to buy
  • acting for a tenant to find a property to lease
  • acting for any party to a transaction drafting and negotiating heads of terms (or LoIs)
  • valuing a client’s existing and target properties
  • day to day management of property owned by clients, including managing maintenance programmes and landlord and tenant work
  • project management of development of new buildings or refurbishments
Brokers available in the market range from those employed by major international organisations to specialised advisers providing advice on a more restricted basis. Brokerage services are licensed in Poland and rendering services without a license is an offence.
7. Employees - What employment issues affect real estate acquisitions?
Typical employment issues such as the transfer of undertakings, redundancies and changing terms and conditions of employment may be relevant to the following real estate transactions:
  • the acquisition of the business enterprise if real estate is a component of that business enterprise
In the event of the transfer of the property through the transfer of business enterprise the buyer becomes employer in all employment agreements binding on the day of transfer by operation of law. The previous and a new employer are joint and severally responsible for all claims and liabilities arising from employment relationship created before the transfer. The new employer is obliged to propose new terms and conditions of employment to all workers who work on other basis than an employment agreement. Transfer of business enterprise may not be a reason of a termination of the employment agreement.
  • the acquisition of shares of the company that owns the property
In the event of the transfer of shares of the company that owns property, the employer remains unchanged and consequently the company is still responsible for all claims and liabilities relating to employees and the terms and conditions of the employment agreements remain unchanged.
PART B - PROCEDURE AND TERMS
8. Procedure - What are the steps in a sale and purchase transaction?
A sale and purchase transactions usually start when proposed heads of terms (or LoI) are drafted, negotiated and agreed by the seller and the buyer. The heads of terms (or similar documents) set out the principal terms agreed between the parties and are generally expressed to be “subject to contract” and not legally binding. They form the basis of the documents to be drafted by the lawyers.
Once the heads of terms have been finalised, they are sent to the parties’ lawyers. The seller’s lawyers will usually collate all information relating to the property and send it to the buyer’s lawyers together with a draft sale and purchase agreement (contract). The form of the sale agreement will vary according to whether the property being sold is under construction or already built and the extent to which leases to tenants have already been granted. Sometimes there is a need to enter into a preliminary agreement caused by the fact that Polish law does not allow for the conditional transfer of real estate. This limitation does not apply to share deals, but due to some practical reasons (difficulty to establish whether all the conditions were fulfilled and when the title to the shares finally passes to the purchaser) two stage transactions are also recommended in this case. The preliminary agreement should also establish clear criteria as to the rights and obligations of the seller in respect of operating the asset/target company during the interim period between the execution of the preliminary sale agreement and the final agreement. The buyer’s lawyers consider and suggest amendments to the draft sale agreement and at the same time will undertake general due diligence investigations. Once the sale agreement is in an agreed form, the seller and the buyer sign the sale agreement.
Before signing the sale agreement the buyer’s lawyers will also conduct pre-completion searches, including a protective search at the Land and Mortgage Registry, to ensure that the seller is still the owner of the property and that there are no new encumbrances affecting the property.
The preliminary agreement, as with a final agreement, must be executed as the notarial deed (for the sale of real estate) or with the signatures of the parties certified by a notary (for the sale of shares).
Following completion, the notary before whom the sale agreement was signed deals with registration of the transfer document at the Land and Mortgage Registry and the notary needs to collect and arrange payment of transfer tax (tax on civil transaction), which is assessed on the price paid for the property, if applicable. In the case of VAT, it is paid directly by the seller to the buyer who then settles it with the tax office.
9. Other common contract terms - What other provisions does a real estate sale contract commonly contain?
An agreement for the sale and purchase of land must be in the form of notarial deed, must contain all main terms and conditions as required by the law, and must be signed by the seller, the buyer and the notary.
The sale and the purchase agreement apart from essential terms such as the exact description of the property, the price and the parties includes the following:
  • description of all encumbrances burdening and benefiting of the property
  • representations and warranties of the seller with respect to the property and to the seller’s status
  • representations and warranties of the buyer with respect to its status
  • specification of documents evidencing the Seller’s title to the property
  • price and the method of payment of the purchase price
  • date of a delivery of the property to the buyer
  • seller’s liability for breach of warranties
  • transfer of contractor’s warranties (if a property is developed and the warranties are still in force)
  • in the event if the property is subject to occupational interests such as leases - clauses to cover ongoing management matters
  • confidentiality
  • tax provisions setting out whether the transfer of the property is subject to VAT or transfer tax (tax on civil transactions)
  • application to the court to register the buyer as the new owner of the property, the application being filed by the notary
10. Due Diligence - What investigations does the buyer normally make?
General
Before the acquisition of the property it is recommended to carry out comprehensive legal, technical and limited tax due diligence of the property and in the case of the acquisition of the property through a share deal due diligence of the property holding company (including full tax due diligence) is recommended. Legal due diligence is typically carried out by specialised legal advisors. A prudent buyer is likely to commission also technical due diligence including a survey of the building and in appropriate cases, soil and geological investigations, plant and machinery tests, and environmental investigations. Tax due diligence is carried out in particular to check whether the sale is subject to VAT (22% fully recoverable) or transaction tax (2% non-recoverable).
Title to the property will be investigated first. The buyer’s lawyers will consider the entries on the Land and Mortgage Register and where relevant documents on previous title transfers. At this stage also additional details of the interest registered at the Land and Mortgage Registry are investigated, such as mortgages, easements, pre-emption rights and other rights. In addition to standard checks it is recommended that a special check is carried out in respect of potential restitution claims of former owners. This concerns in particular Warsaw, which had a special nationalisation regime after the Second World War that allowed former owners to reclaim title for a certain period of time following nationalisation. In other parts of Poland it may often be reasonable to check for restitution claims following the title history check.
If the property is subject to leasehold or other occupational interests, the terms of the relevant occupational documents need to be considered carefully to ensure they are not contrary to the buyer’s intentions for the property and that there are no limitations to property transfers. Leases are transferred to the acquirer of property by operation of law and the tenant does not have termination right unless such right is granted in the lease.
The buyer’s lawyers will review permitting process for a developed property to check the position regarding zoning consents, environmental permits, building permits and occupation permits.
If the seller is a company, the buyer’s lawyers will also conduct searches against the seller’s name at the companies register to ascertain whether the company is solvent and therefore able to dispose of its assets freely. Where the search result refers to security, the buyer’s lawyers will ask for confirmation that such matters do not encumber the property and that no third party consents are required for the transaction to proceed.
Remaining due diligence items include environmental matters, utilities serving the property, financial encumbrances, pending proceedings which may affect the property, insurance policies etc.
Reporting to the client
The buyer’s lawyers report their due diligence findings to their client, raising any matter of particular importance or concern during the diligence process.
11. Terms implied by law - What provisions are implied by Statute, Code or otherwise?
Some of the most significant are as follows:
  • Principle of public faith of mortgage registers (zasada rękojmi wiary publicznej ksiąg wieczystych)
According to the “principle of public faith of mortgage registers”, everybody may rely on the contents of the mortgage register with respect to registered rights. A good faith purchaser of a registered right acquires this right as it is described in the mortgage register and from the person registered as the holder of the right (even if such person did not actually hold it). It should also be noted that there is a legal presumption of good faith in the Polish Civil law i.e. the burden of proof is on the party questioning good faith.
Mortgage registers are publicly available for review by anybody.
  • Warranty for defects (rękojmia za wady fizyczne i prawne)
There is statutory law rule which protects the buyer against physical and legal defects of the sold property. The seller is responsible to the buyer if the sold property has defects which reduces its value or utility with respect to the purpose stipulated in the sale agreement or resulting from the circumstances or the designation of the thing if the property does not have the properties about which the seller assured or if the property. The seller is also responsible to the buyer if there are third party claims on the title or if it is encumbered with a right of a third party. There is no seller’s liability for defects if the buyer knew about the defect when the sale agreement was concluded. The parties (other than consumers) may extend, limit or exclude the liability. This kind of liability is strict liability and the seller is liable to the buyer for legal and technical defects even if the seller did not know about the defects. If the sold property has defects, the buyer may withdraw from the sale agreement or demand a reduction of the price. In order to enforce this claim the buyer has to notify the seller immediately after discovering the defect.
  • Registration of perpetual usufruct
Agreements on transfer of ownership title and perpetual usufruct title must be entered in the Land and Mortgage Register. Ownership title passes upon execution of the property transfer agreement and perpetual usufruct title passes upon execution of the decision of the Land and Mortgage Registry Court, but the decision takes effect retrospectively from the date on which the application to register the transfer was filed.
  • Change of landlord
If the property leased is sold during the period of the lease the acquirer replaces the seller in the relationship of lease. The acquirer may terminate the lease while observing the statutory time limits for notice, unless the lease agreement was concluded for definite period of time in writing and with certified date, and the premises were delivered to the tenant. This rule is applicable to all kind of the premises (residential and non-residential).
12. Registration and Notarisation of real estate - What are the basic requirements?
Poland has a central title register, the Land and Mortgage Register. The Land and Mortgage Register is run through regional district courts which are responsible for specific areas of the country.
An excerpt from the Land and mortgage Register for a particular property provides the following information:
  • Section I “Description of the property” – provides the location, address, area, geodesy number of land plot(s) comprising of the property
  • Section II “Ownership” – provides the name of the owner and/or perpetual usufructee or names of all co-owners or perpetual co-usufructees
  • Section III – “Rights, claims and encumbrances” – discloses all rights and claims of any third party affecting the property (leases, pre-emption right), name of a third party and all encumbrances of the property, except for a mortgage
  • Section IV – “Mortgage” – discloses all mortgages encumbering the property, including the kind of a mortgage, the amount of a mortgage, the beneficiary of a mortgage and the amount secured by a mortgage
Agreements transferring ownership and perpetual usufruct title to property must be executed before a notary. The transfer of the property as a share deal requires notarisation of signatures of the parties to the share transfer agreement.
13. Disputes - How are they dealt with and resolved?
Polish law permits considerable freedom of choosing dispute resolution methods. Parties are free to choose whether they want arbitration tribunals (domestic or international) or state courts to resolve disputes.
When choosing a method of resolving disputes, the parties will have regard to various issues, including the following:
  • the domicile/nationality and governing law of the contracting parties and any relevant statutory limitations which inhibit such choice or the effectiveness of such a choice
  • whether or not awards may be enforced in the relevant jurisdictions. Many jurisdictions will not enforce awards that have not arisen through the consideration and final judgment of a court.
PART C - PERMITS INSURANCE AND ENVIRONMENT
14. Permits - What permits are required for the use and occupation of real estate and are they personal?
In general, development of land requires a building permit and in many cases it also requires a planning permit and an environmental permit. The use of the completed building requires notification to the relevant authority or an occupancy permit. A reform is planned under which the building permits will be replaced by registration of construction with the local authorities.
Planning permit
If the site is not covered by a master plan, a planning permit must be obtained before submitting the building permit application. The law makes a distinction between planning permits for public developments and those for private schemes. “Private” planning permits are much more difficult to obtain. Obtaining a “private” planning permit requires a number of conditions to be fulfilled, including securing media connections (at least signing contracts with grid operators) and ensuring architectural compliance with neighbouring developments. The local authority architecture department has to prepare a “zoning analysis” in order to verify whether those conditions are met, and if not, whether they can be waived. The planning permit procedure may be suspended (at the city’s discretion) for up to 12 months. If a master plan for a given development or territory is “obligatory”, the planning permit procedure is suspended until the adoption of the master plan.
The current form of the planning permit makes it possible for the authorities to approve only those developments that they in their discretion consider appropriate. Obtaining a planning permit may also turn out to be dangerous to the developer, as it has to satisfy the claims related to the restriction of use or loss of value of neighbouring plots caused by this decision.
Planning permits may be obtained by any interested party, irrespective of whether such party holds a legal title to the site. They are also transferable into third parties.
A planning permit specifies its validity period (usually 2 – 3 years). It expires if another developer obtains a building permit for the site, or if a master plan is adopted and the planning permit does not comply with the new plan (unless a building permit has already been granted).
Building permit
Building permits may be obtained if the project complies with the master plan and technical requirements. If there is no master plan then a building permit may be obtained if it complies with the planning permit and technical requirements. In this latter case, the building permit application must be submitted within the validity period of the planning permit.
A building permit is usually composed of two basic elements: approval of the designs and permission to start the works. If the project is phased, the developer may request permission to start the works for the initial phase(s) only. In this case, the building authority must approve the “site development plan” (forming part of the building documentation) and detailed architectural designs for the initial phase. This flexibility allows considerable savings in terms of the preparation of architectural designs for consecutive phases (which may be approved at a later stage, together with granting permission to start the works for such future phases). In order to obtain a building permit, the developer needs to hold a legal title to the site (not necessarily freehold – it may be even a simple lease).
The building permit documentation must be approved in advance by various authorities, including (as applicable): the sanitary inspector, environmental protection inspection, the cultural and heritage inspector, the road management authority, the work safety administration, the fire marshal etc. A large part of the land in Poland is considered “agricultural” (the formal criterion is the relevant entry in the land register). In such a case, prior to issuing a building permit, the site should be excluded from agricultural use. This involves payments from the owner, in ten annual instalments, depending on the category of the land. The above limitations will not apply to land designated as “agricultural” located in the city limits where no master plan is applicable.
In most cases, building permits are issued by the starosta (head of mid-level administrative unit called powiat). In bigger cities, the functions of the starosta are exercised by the mayor. As with a planning permit, a building permit may be transferred on a third party, provided that it holds a title to the site and accepts conditions provided in these decisions.
An additional building permit issued by the monument restorer is required when it is proposed to do work to historically or architecturally important buildings. Such a building permit must be obtained before a regular building permit.
Construction works exempted from building permits.
Certain construction works do not require a building permit, but simply a notification to the building authority. The notification should include appropriate drawings, as well as opinions and approvals from various administrative bodies (if applicable). The works may be started if the building authority does not raise any objections within 30 days from the notification. The works concerned include: parking lots with no more than 10 spaces, certain temporary objects, fencing, renovation works (except for structures entered into the register of historical monuments), certain advertising billboards, reconstruction and modernisation of roads etc. The list of construction works that may be commenced via the notification procedure has been extended by the recent amendment to the Building Code. In particular, the general rule requiring the building permit no longer applies to the construction of power, water, sewage, gas, heating and telecommunications connections, irrespectively of whether such works are related to the construction of the building or work performed on an undeveloped land.
Planned amendments
The Polish Parliament is currently in the progress of reforming the statutory regulation concerning the construction process. The important changes concern replacing the building permit with notification of planned construction works. Under the currently debated amendment bill, the authorities may object the notification in the event the intended construction is incompliant with the zoning of the property. In such case the building design must be amended. The authorities may raise their objections only once and the applicant will have to introduce the relevant changes within six months.
Environmental procedures
The provisions of the law on environmental information and environmental impact assessment introduced in November 2008 expand considerably the scope of application of the “environmental decisions”. The law divides the investments between those which (i) may always significantly influence the environment and (ii) may potentially significantly influence the environment. For both an environmental decision will be required.
Certain investments require preparation of an environmental impact assessment report due to their potential impact on the environment. The developments concerned include: most industrial facilities, public roads at least 1 km long, parking lots or garages for more than 100 lorries or 300 cars, shopping centres of more than 10,000 square metres, other service developments of more than 20,000 square metres, out of town hotels with more than 100 beds, and many others. For others such requirement may be imposed by the authorities after an application for an “environmental decision” is submitted.
The developer has to obtain a “decision on environmental conditions” prior to obtaining a planning permit or filing for a building permit (and without the need to secure the title to the site). The decision on environmental conditions is valid for 2 years and will be binding on the building authority while granting the building permit. The 2 year term may be extended if the conditions specified in the decision on environmental conditions do not change and the project is developed in phases. In the event of conducting an environmental impact assessment, environmental NGOs have the right to participate in the environmental procedure. Environmental NGOs may submit an appeal against the “environmental decision” and challenge such decision before the administrative court. Environmental NGOs do not participate in the building permit procedure. An environmental impact assessment is mandatory for investments which will significantly influence the environment. The assessment may be required for investments which may potentially significantly influence the environment.
In the currently planned amendments to the law, a notification of construction works will not be sufficient if the investments may significantly impact the environment. For those investments a decision on registration of construction works will be required. The proceedings for registration of construction works will be treated as proceedings involving the public, with all consequences regarding the participation and appeals by Environmental NGOs.
Occupancy permit
The use of the completed building or structure may be commenced upon notifying the relevant authority, subject to cases specified in the Building Code. The investor may take the occupancy if the authority has not reported any objections within 21 days of the delivery of the notification. However, in some cases the notification is not sufficient and a occupancy permit is required. This applies to the following cases: (i) where a building permit was required for the erection of the structure and the structure falls within the relevant category as stipulated in the article 55 (1) of the Building Code (ii) where use of the structure is to be commenced prior to the completion of all construction works (iii) for illegal construction projects, if the body conducting the legalisation proceedings imposes such an obligation on the investor and (iv) when the building works were temporarily halted due to the “material” deviations from the approved design or other conditions as indicated in the building permit.
The issuance of the occupancy permit requires a compulsory inspection by the relevant authorities provided for in the Building Code.
Moreover, if the investor was obliged to obtain a building permit, it should also inform the Environmental Protection Inspection, the Sanitary Inspection, Labour Inspection and Fire Marshal of the completion of the construction works and of the intention to use it. If there are no objections or official statements from the relevant authorities within 14 days of the notification date, it is to be treated as tacit consent to use the building structures.
The use of the building structures without notifying the relevant authorities or without required occupancy permit is considered illegal. Apart from the administrative consequences of illegal use, such as a fine which may be imposed by the relevant authorities, the lack of notification or a occupancy permit causes fundamental problems concerning leasing or insuring the building.
The planned amendments to law intend to eliminate the occupancy permits altogether. The investor will be obliged to notify the authorities on completion of the construction works and enable an inspection by the relevant bodies within 14 days. Failure to conduct such an inspection will be deemed an acceptance of the construction.
Energy Performance Certificate
From 1 January 2009 the Building Code introduced a requirement that applications for an occupancy permit will have to include an energy performance certificate (świadectwo charakterystyki energetycznej) as an attachment. The certificate may refer to the entire building or a separable part thereof (e.g. an apartment). Moreover, on concluding a purchase or lease agreement of buildings, apartments and premises the seller or landlord is obliged to disclose this energy performance certificate to the buyer or the tenant.
The energy performance certificate specifies the type of the building, its relevant features and the energy consumption. These certificates are issued by individuals holding certification authorisations issued by the Ministry of Infrastructure or persons authorised to prepare construction designs or graduates of dedicated postgraduate studies.
15. Insurance and Risk - What insurance will the parties effect and when does the insurance risk pass at the time of sale?
Before a sale, insurance is generally the responsibility of the owner or perpetual usufructee of the property. However, where property is the subject of a lease or the property is a leasehold interest, the terms of the lease will prescribe which party has responsibility to insure.
As a rule, the landlord insures the building and the common areas and the tenant insures its premises fit-out. The premium paid by the landlord is usually recovered in the service charge. It is important to structure the various policies so that the scope of the insurances do not overlap. Otherwise, there may be problems with payment in the event of a claim, as there may be a dispute between the insurers as to which of them is actually bound and in what proportion.
Tenants are also usually required to insure their civil liability for any possible damage to individuals or assets which they, their employees or agents etc. may cause in their operations. Sometimes, they also take out “business interruption” insurance or participate in “loss of rent” insurance. Landlords’ policies are often assigned (at least conditionally) to the banks which finance the development. Tenants’ policies may sometimes be assigned to the landlord and then further to the banks. In the event of fit-out works by the tenant, the tenant has to take out a liability insurance policy covering construction risks.
Insurance policies may either comprise a single policy for one particular property or an umbrella policy designed to cover a portfolio of properties. Insurance policies are transferable on sale with the consent of an insurance company. However, usually the buyer executes a new policy after sale completion.
In transactions concerning real properties, there are two specific types of insurance:
  • gap insurance - for the purpose of insuring the event where the court refuses to register the mortgage or insuring the beneficiary’s rights until a mortgage is registered in the Land and Mortgage Register
  • title insurance - in situations where even a legal due diligence cannot answer whether the legal title to particular land can be challenged by third parties or not. This concerns “border line” situations, where the full certainty would only be assured by a final court verdict. In all such cases it is possible to obtain title insurance, offered by specialised firms acting in the Polish market
16. Environmental - What are the common environmental issues?
Regardless of the kind of development, the buyer before the acquisition of the property must take certain environmental issues into account. The development of land in many cases requires an environmental impact assessment. As some environmental issues can play a crucial role in the development and investment process, it is advisable to undertake environmental due diligence. Acquisition due diligence may involve the appointment of environment consultants to consider documentary information and to carry out a site visit. It is important to identify potential problems early on so that there can be negotiation on price, the need for and scope of any remediation and/or the need to put in place protection in respect of any existing contamination related losses that may arise in the future.
Real estate may be contaminated as a result of current and former uses. Primary Polish Environmental Law (the “Environmental Law”), as in other European jurisdictions, contains a general rule of “polluter pays” as regards counteracting and removing pollution. This principle concerns pollution of all major areas of the environment, i.e. air, water, soil, protection from noise, electromagnetic fields, protection of animals and plants and protection of extracted minerals.
In respect of land where industrial activity has been conducted, there may be a potential risk of residual pollution of the soil. In this context, a duty to keep the land free from pollution rests with the holder of the real estate and is further transferred to subsequent holders of the real estate. There is a statutory assumption that the holder is liable for any pollution of the soil. The current holder of real estate may be exempted from this liability if it proves that the previous holder of the real estate caused the pollution in question. If some land turns out to be polluted, the holder may be obliged to re-cultivate it at its own cost. If the current holder is successfully exempted from liability, the obligation to take appropriate steps to re-cultivate the soil will revert back to the previous holder.
PART D - FINANCE AND TAXES
17. Pricing/Valuation - What sets the price/valuation of real estate?
Polish law requires that the price, or at least a price fixing mechanism, be agreed in the sale agreement. When the price for the shares is considered, apart from the value of the asset, the parties should agree to the adjustment of the price to reflect the receivables and liabilities of the target company. Such an adjustment is often made on the basis of the balance sheet of the company as of the date of executing the final agreement The price established in the transfer agreement may also be adjusted to reflect, for example, progress in leasing the scheme after transferring shares or an asset. Such post-closing adjustments create certain tax and bookkeeping consequences that should be considered beforehand.
Pricing of real estate investments is a combination of the aggregate rent being paid by occupational tenants of the property and the value that investment buyers consider that a property of the specific type and location is worth at the time of valuation taking that income into account. The rent for a particular property is likely to be assessed by multiplying the area of the property by the market rental value per square metre. The market rental value will take into account factors such as the location of the property, its type and condition, and the length of the lease term. Investment properties are commonly referred to as being sold on a particular yield, meaning the investment return that will be gained from the capital sum which it is necessary to pay to buy the property. For example, where a property with an aggregate annual rent of EUR 100,000 is sold for EUR 2,000,000, it will have a yield of 5%.
18. Financing - How is a real estate acquisition financed?
The principal ways in which real estate acquisition is financed are:
  • through the purchaser’s own cash resources
  • through external debt
Banks offer a variety of construction and refinancing facilities, mixtures of the two, as well as various hedging options.
Equity may be financed through mezzanine lending. Mezzanine lending is characterised by low security level and the mezzanine lender is sometimes able to have second ranking security over the assets encumbered in favour of the senior lending bank(s). Quasi-mezzanine financing may be provided by parent companies or affiliates through subordinated loans or other forms of equity contribution. In this respect, thin capitalisation rules should be taken into account at the stage of structuring forms of equity and quasi entity. Those rules apply to such loans that exceed 3 times the share capital of the borrower, and disallow the tax deductibility of interest allocated to the excess. Interest on loans granted by unconnected entities will not be subject to thin capitalisation.
Types of Loan Agreement
There are three main types of loan documentation reflecting the type of the transaction: (a) financing the construction of a development (b) refinancing an existing development (including acquisition) and (c) convertible facilities which initially finance the construction of the development, and are then converted into investment loans.
Floating rate and fixed rate facilities
The vast majority of commercial loans for construction purposes will bear interest at a floating, rather than a fixed rate. The floating rate will vary periodically to reflect the cost to the banks of providing the money. In respect of Euro loans, it will be usually based on Euribor, with US dollar and Polish Zloty loans at Libor and Wibor respectively.
A fixed rate is more likely to be selected in transactions where the borrower’s cash flow generated from its main activities is expected to reach a certain level (e.g. if the loan is intended to refinance the acquisition or construction of an office building in which the rental payments are fixed).
As the fixing mechanism requires the lenders to take refinancing for a long term (in line with the fixed rate term selected in the loan agreement), the loan documentation will normally either prohibit the borrower from making prepayments of the loan, or will require the borrower to bear all costs resulting from such prepayment.
Currency
The market offers loans in various currencies. To decrease foreign exchange risks, the currency of the loan should match the currency of the rents payable by tenants in the property concerned. As buildings are usually rented under Euro or US dollar denominated rents, these are the main lending currencies. Sometimes a building has leases denominated in both currencies. In this case, a solution is to match such incomes with a loan of two tranches in mirroring currencies.
Financial Covenants
All types of facility agreements most often include two financial ratios that the borrower needs to maintain during the lifetime of the loan: (a) debt service cover ratio and (b) loan to value ratio.
Debt service cover ratio is usually the ratio between the amount of the outstanding loan and the rental income on the property, decreased by the operating costs of the property. The borrower is required to maintain the ratio at a certain agreed level.
Loan to value ratio is the ratio between the amount of the outstanding loan and the value of the property established through a valuation completed by a reputed valuer.
In the case of construction loans, the debt to equity ratio is also introduced.
If any ratio provided for in the agreement is not respected, an event of default is triggered. It is, therefore, vital from the borrower’s point of view that the facility agreement envisages a cure period to remedy the level of the ratio.
Default
The facility agreements preview standard representations and warranties as well as events of default. It is worth noting that most facility agreements include the concept of a potential event of default, meaning a situation in which it might be expected that an event of default will occur shortly. Furthermore, an event of default is triggered if any circumstances occur that would have an adverse effect on the borrower’s performance of obligations under the facility.
19. Security over real estate - How is security over real estate created and protected?
Securities over real estate are as follows:
Mortgages
In real estate financing transactions, the following types of mortgage are used: (i) ordinary “contractual” mortgages (used when the exact amount of the loan is already known) and (ii) capped mortgages (hipoteka kaucyjna) (used when the facility is made up to a certain amount). Both types may be also used in what is called a joint mortgage (hipoteka łączna), which is one mortgage (either ordinary or capped) encumbering several real estate properties. A mortgage is a right in rem encumbering ownership or perpetual usufruct title. Unlike in some other jurisdictions, the title of encumbered property remains with the debtor and the creditor may only demand an auction sale of the property if the debtor defaults on the loan and may satisfy its receivable from the proceeds of the sale.
A mortgage may be established either as a contract between the borrower and the lender in the form of a notarial deed or through a notarial statement of the borrower submitted on the basis of the written statement of the lender (a bank). Alternatively, a written document issued by the bank together with a written statement of the borrower may also serve as the legal basis of establishing a mortgage. In practice, the form of a notarial statement of the borrower is used most frequently.
Pledges
Polish law recognises four types of pledges: (i) registered pledge over shares (ii) registered pledge over assets, (iii) ordinary pledge and (iv) financial pledge. It has become market practice that the banks granting property financing secure their claims with a registered pledge over shares in the company to which the facility is granted, as well as a registered pledge over the rights and assets of that company. Until the registration of the pledge over shares, the banks take an ordinary or financial pledge. The sub-sections below present the main information on the four types of pledges:
  • Registered pledge over shares
Until recently, banks accepted registered pledges only over shares in limited liability companies and joint stock companies. However, when, due to tax reasons, borrowers begin to develop properties belonging to limited partnerships, there were attempts to pledge the interests in limited partnerships. This has not yet become standard on the market.
Registered pledges over shares established by the parent company(ies) to the borrower, allow the lending bank, upon enforcement of the loan, to seize the shares or sell them at public auction. The seizure of shares is accomplished at a value established by the parties according to the method set out in the agreement.
A standard registered pledge agreement includes (i) a negative pledge clause where any form of disposal of shares is forbidden without the prior written consent of the bank (ii) an obligation to pledge any new shares created in the company and (iii) an ordinary or financial pledge clause with expiry upon registration of the registered pledge.
The share pledge agreement must be entered into with signatures certified by a notary and registered with the National Pledge Register.
  • Registered pledge over assets
Under this agreement, the company pledges all of its current and future assets, including any rights, especially rights to the accounts. It is the equivalent of a floating charge under common law.
Upon enforcement of the loan, the bank may sell the enterprise at public auction, lease the enterprise or take over administration of the enterprise.
A standard registered pledge agreement includes a negative pledge clause where any form of disposal of shares is forbidden without prior written consent of the bank.
The pledge agreement should be entered into with the date certified by a notary and registered as described above.
  • Ordinary Pledge
Typically entered into in a form with signatures certified by the notary, in the case of pledge of shares in limited companies and joint-stock companies. Upon enforcement of the loan, the shares will be sold in an enforcement procedure as provided for by the civil procedure code. Such enforcement is more difficult from the bank’s perspective.
  • Financial Pledge
This is a new form of security. It may be established on monies, financial instruments and shares. The pledge may be enforced through a seizure of the object of the pledge.
20. Taxes and Costs - What are they and who pays them?
Generally, please refer to our CMS Transaction Costs Guide as to the nature and amount of the taxes and costs.
Transactional costs
The notary and registration fees depend on various factors: in particular, on the value (price) of the property, but also on the parties (e.g. private or public bodies) and the category of the property (e.g. agricultural or commercial). They are subject to statutory tariffs and are calculated based on degressive rates with caps.
  • Notary fees
These are the fees for preparing the notarial deed. VAT is added to notarial fees at a rate of 22%. The maximum net fee for one deed is approx. PLN 15,000 (approx. EUR 3400).
  • Registration fees
Fixed fees of between PLN 100 and 200 (approx. EUR 30 and EUR 60) are levied at the time of registration.
Transfer taxes
The transfer of real estate may be subject to either VAT or transfer tax (tax on civil transactions). VAT will apply if a business entity makes the sale, unless the property fulfils certain conditions (the building is considered “used”, or the land is not developed or zoned for development). Sales made by individuals not conducting business activities are not subject to VAT. The base rate of Polish VAT is 22%, but a 7% rate applies in certain cases (e.g. sale of apartments). If the sale of real property is not subject to VAT, it is subject to a transfer tax at the rate of 2% (asset deal) or 1% (share deal). The notary is responsible for the collection of the transfer tax and registration fees. VAT is paid directly by the seller to the buyer who then settles it with the tax office.
Land tax
Land buildings and structures are subject to land tax. The tax is payable by owners, perpetual usufructees, and lessees of public (state or municpality-owned properties). The tax is based on surface area in the case of land, and on the useable area in the case of buildings. The rate of the tax is defined by a city council but there is a statutory cap. Polish governments have been working on a new common property tax based on the value of the property since 1994. The introduction of the tax requires the valuation of all real properties. The process of valuation is still far from completion and there are no credible estimates regarding introduction of such a tax.
Perpetual usufruct fee
Holders of a perpetual usufruct right are obliged to pay the annual perpetual usufruct fee by 31 March of each year. The annual fee is calculated on the basis of a rate applicable to the land and the value. The rate is 3%, if the land is designed for commercial purposes, and 1% if it is designed for residential purposes. The city council may increase the fee by re-evaluating the land.
Public infrastructure fee
Owners must participate in the costs of public infrastructure developed by local authorities. The public infrastructure fee is calculated on the basis of the increase in the value of a property due to the development of infrastructure and a percentage rate adopted by the city council (not to exceed 50%). The payment of the fee may be imposed by the city council within three years following the development of the infrastructure.
Re-zoning and subdivision fees
It happens that the market value of land increases or decreases as a result of the adoption or modification of a master plan, or as result of subdivision of land.
If the market value of land decreases (but the owner may still use the land in the same manner as before the master plan), then the owner (or holder of the perpetual usufruct) may demand that the local authority (the city) pay compensation equal to decrease of the value of the land calculated as at the date of sale. Such a claim may be raised only if the owner sells or otherwise transfers the title to the land, but not later than five years from the adoption or modification of the master plan.
More frequently, the value of land increases as a result of adoption or modification of a master plan, e.g. green-field is re-zoned to land on which a shopping centre may be built. In such a case, if the owner sells or otherwise transfer the title to the land (e.g. by means of an in-kind contribution to a company), within five years from the adoption or modification of the master plan, the city will charge a re-zoning fee. The re-zoning fee may not exceed 30% of the increase of the value of the land calculated as at the date of sale. The percentage for calculation of the re-zoning fee must be provided for in the master plan.
If, as a result of the subdivision of land made at the request of the owner of the land, the value of the land increases, the municipality may charge a subdivision fee within three years from the subdivision. The amount of the fee may not exceed 50% of the increase of the value. The increase of the value is calculated as at the date of the city’s decision charging a subdivision fee.
Road infrastructure
Under the Act on Public Roads, owners (perpetual usufructees) of real estate must participate in the cost of construction and modernisation of public roads that serve their properties, in proportion to the traffic they generate. The construction or modernisation of the road is usually regulated in the agreement with the public manager of the road.
Exclusion from agricultural use
Properties legally recognised as farmland and forest can only be turned into non-agricultural (or non-forest) use if special conditions are met. First of all, the local master plan must provide for such a possibility. If this is not the case then no investment falling outside the scope of their current use is allowed. Secondly, and provided that the master plan allows such new investments, the investor must obtain a special decision excluding a given site from agricultural (or forest) use. Following the issue of the decision and the actual change in use of the site, the investor will be obliged to pay an initial fee, and then 10 consecutive annual fees (equal to 10% of the initial fee). The actual amount of these charges depends on the class of the land (or forest), the surface of the site and the current price of rye (or wood). It should be noted that the initial fee is decreased by the market value of the property, which in most cases means that it is not due at all. If the property is sold, the obligation to pay the annual fees passes to the purchaser.
The provisions on exclusion from agricultural use do not apply to agricultural land located within the city limits, provided this land is not designated as agricultural in the applicable master plan. If the property is designated as agricultural land in the master plan, amendment of this plan (and the underlying zoning study) will be necessary to change this designation.
Romania
PART A - PARTIES AND INTERESTS
1. Parties – Who can own real estate?
Any “person” can own real estate. This will include individuals, companies, entities established by statute and certain charitable bodies.
The concept of trust is not recognised under Romanian law.
Owners of commercial real estate include private developers, private or public companies, charities, the central bodies of government and the local authorities. Property owned by the government and local authorities is either in their public or private domain.
Foreign nationals or companies can own buildings, but under current law cannot directly own land (although a foreign national may inherit land in certain circumstances). They are, however, allowed to do it indirectly, by creating a 100% held company incorporated in Romania. Also, it is contemplated that foreign nationals and companies will be able to own land under terms resulting from Romania’s accession to the European Union on 1 January 2007 and other international treaties.
The general rule is that the acquisition of land for secondary residence/headquarters will be permitted after 5 years from accession, while the acquisition of agricultural and forestry land will be permitted after 7 years from accession.
However, an exception is set out in favour of European Union nationals and corporations who acquire Romanian residency status: these are allowed to acquire ownership in land immediately after accession.
Natural and legal persons, whether Romanian or foreign, may rent property in Romania.
2. Property – What property interests are currently sold?
Romanian law does not operate a classification of property as either freehold or leasehold.
Nevertheless, freehold would be similar to the Romanian concept of ownership, i.e. a perpetual real right (a right in rem) that gives to its holder the power to possess, use and dispose of a property.
Leasehold would include leases, i.e. personal rights (rights in personam), though in practice leasehold could also be regarded to include real rights such as usufructs, surface rights (superficies) or concessions, which have many of the attributes of ownership, but are limited in time (usufructs enjoyed by companies – 30 years, surface rights – limited to the duration of a building’s existence and concessions – 49 years).
There is exclusive and common ownership. Common ownership can be temporary or perpetual, the latter being similar to a condominium interest.
Other property interests that are recognised under Romanian law include:
  • Options and pre-emptions – rights to buy or first refusal
  • Easements – such as rights of way or for the use of services - and wayleaves – contractual rights to use land for limited purposes such as to site telecommunications equipment (both easements and wayleaves are deemed as being servitudes, i.e. real rights over property owned by a another person)
All real rights and the leases having a period longer than 3 years must be registered in the Land Book.
Any items that are fixed to the property are presumed to form part of it and to belong to the owner of the property.
3. Ownership – What types of ownership are there?
Ownership of property in Romania is either public or private.
Public ownership belongs to the state and the administrative-territorial units (communes, towns, municipalities and counties). Public property cannot be sold, seized or acquired by virtue of occupation. It may, however, be granted into concession or leased, typically following a public tender procedure.
Public property includes property of public use (such as parks, squares, streets, which are accessible to any person) or of public interest (such as schools, theatres, museums, which although being of limited access are allocated to activities of a social nature).
Romanian law distinguishes between exclusive ownership and co-ownership of land and buildings. This means that a condominium style ownership is permitted where, for example, a person may be exclusive owner of a part (unit) of a building and co-owner with other unit owners of the common areas, the structure and the land on which the building stands. Alternatively, more than one person may own the whole of a building and/or plot of land. In each case, the co-owner is said to have an “ideal” share (percent) in such common parts or the whole of the building or land plot.
In Romania, like other countries, where a natural person owning land dies without heirs, or where a company is wound up without its land (and any other properties) being transferred to a third party, the land will automatically pass to the State as res derelictae.
Aside from ownership rights, another important right in real property is the usufruct, which provides the right to possess and use a property but without conferring the right to sell it. However, usufruct rights are not particularly common and are therefore just worth a mention for completeness.
Long term leases are also available and they confer to the tenant the right to use a property in a manner similar to the usufruct rights. Nonetheless, rights under such leases are not deemed as being real rights.
After 1990, a large number of claims for restitution were made against the Romanian State and the public authorities from former owners (or their successors) of property confiscated by the communist regime. Subsequently, a number of laws instituting administrative restitution procedures came into force, all of which purported to establish a time frame beyond which no further claims could be admitted. Although many of these were prolonged, it is now becoming more firmly established that none remain open and thus it appears that new restitution claims may no longer be filed. Nevertheless, most of the restitution laws were modified, directly or indirectly, resulting in the conditions and content of filings being changed (and some of the legislation is extremely complex). Thus, there may still be a possibility of some limited new claims.
As the number of applications was high and the process of their analysis is slow, the title to a large number of apparently public properties will still remain unclear for a period. In many cases, there is little possibility to check whether restitution claims over certain types of property remain pending, although public authorities sometimes made information public about restitution claims. Nevertheless, where the restitution laws enabled a person legally to acquire a property, then the title acquired is granted some protection. Each case needs to be reviewed on its merits.
4. Matters burdening or benefiting real estate – What matters can affect real estate?
MatterEffectExampleEasements(Servituti)Rights which burden one piece of land and benefit another. They are not personal but attach to the land itself. They do not permit the owner of the benefited land to remove anything from the burdened landA right of way; a right to drain rain water; a right to light; a right to run pipes and cablesWayleaves (Drepturi de uz)Rights of use for a temporary period corresponding to the building and operation of utilities infrastructure, exercisable by one party over the land of another, granted by law to companies supplying utility services, subject to payment of compensation for damages caused to the land and reinstatement of the land to its initial status at the expiration of such rightsA right to erect equipment, to remove crops or to deposit on the land materials and equipments related to operation of cables or installationsLand charges (Sarcini)Land charges represent a restriction or prohibition imposed on land (e.g. an attachment, or interdiction to sell), a mortgage or a lien, which is binding on successive owners of land or occupiers of property. To burden subsequent owners of the land they must be registered in the local land registry for the region in which the land is located (known as the “Land Book”)A mortgage agreement in favour of a bank financing a real estate development projectAdverse possession (Prescriptie achizitiva or uzucapiune)Where one party makes a claim to a piece of land that is contrary to another’s assertion of ownership, either based on a just title (e.g. a testament or a sale purchase agreement invalidated subsequent to the transfer of ownership) and an adverse possession of 10 to 20 years or, in the absence of a just title based, only on an adverse possession of at least 30 years. The adverse possession needs to satisfy certain legal requirements before being accepted as a valid ground for acquiring ownershipPeaceful occupation of land for more than 30 years
Matter
Effect
Example
Easements(Servituti)
Rights which burden one piece of land and benefit another. They are not personal but attach to the land itself. They do not permit the owner of the benefited land to remove anything from the burdened land
A right of way; a right to drain rain water; a right to light; a right to run pipes and cables
Wayleaves
(Drepturi de uz)
Rights of use for a temporary period corresponding to the building and operation of utilities infrastructure, exercisable by one party over the land of another, granted by law to companies supplying utility services, subject to payment of compensation for damages caused to the land and reinstatement of the land to its initial status at the expiration of such rights
A right to erect equipment, to remove crops or to deposit on the land materials and equipments related to operation of cables or installations
Land charges
(Sarcini)
Land charges represent a restriction or prohibition imposed on land (e.g. an attachment, or interdiction to sell), a mortgage or a lien, which is binding on successive owners of land or occupiers of property.
To burden subsequent owners of the land they must be registered in the local land registry for the region in which the land is located (known as the “Land Book”)
A mortgage agreement in favour of a bank financing a real estate development project
Adverse possession
(Prescriptie achizitiva or uzucapiune)
Where one party makes a claim to a piece of land that is contrary to another’s assertion of ownership, either based on a just title (e.g. a testament or a sale purchase agreement invalidated subsequent to the transfer of ownership) and an adverse possession of 10 to 20 years or, in the absence of a just title based, only on an adverse possession of at least 30 years. The adverse possession needs to satisfy certain legal requirements before being accepted as a valid ground for acquiring ownership
Peaceful occupation of land for more than 30 years
5. Occupation of real estate – Who may occupy real estate?
Real estate is usually occupied by one of the following categories of persons:
  • Owners – those persons with a freehold interest in the property
  • Tenants or holders of other usage rights – those persons with a lease or other contractual personal usage rights over the property or part of it. It is possible for any number of usages to be created in relation to the same property, so creating a chain of interests if no restriction is contained in the first agreement created limiting the number of subsidiary usages. Tenants of business premises do not usually have statutory rights to renew their leases when the contractual term ends
  • Holders of concessions, usufructs, surface rights or interests in unregistered partnerships – this is common for land owned by the local authorities over which private entities acquire real usage rights for a determined, usually long, period of time. For instance, concessions may run for up to 49 years and may be renewed, subject to the parties’ agreement, for another 24 years and 6 months
  • Persons claiming ownership – typically, this occurs when they have registered ownership rights recorded in the Land Book, but also occupy unregistered buildings located on the land
6. Brokers – What is the broker’s role?
Brokers, also referred to as surveyors or agents, generally fall into five categories:
  • Investment
  • Valuation
  • Buildings
  • Management
  • Rent review
They are employed by any party to any transaction that involves real estate. Their role may include:
  • Acting for a seller to find a buyer for a sale property, including marketing the property for sale
  • Acting for a landlord to find a tenant for a leasehold property, including marketing the property
  • Acting for a buyer to find a property to buy
  • Acting for a tenant to find a property to lease
  • Acting for any party to a transaction drafting and negotiating heads of terms
  • Preparing heads of terms for documenting and liaising with lawyers
  • Valuing a client’s existing and target properties
  • Day to day management of property owned by clients, including managing maintenance programs and landlord and tenant work and
  • Project management of development of new buildings or refurbishments and negotiating rent reviews of existing properties
7. Employees – What employment issues affect real estate acquisitions?
Transfer of undertakings (“TUPE”) is likely to be the most significant employment issue under Romanian law.
TUPE applies when an undertaking or business (or part of one) is transferred from one party to another.
The broad effects of TUPE are that:
  • with effect from completion of the transfer, the buyer assumes responsibility for employees working in the business transferred
  • accrued continuity of employment is preserved
  • dismissal for a reason connected to the transfer is automatically unfair
  • if the buyer changes terms and conditions by reason of the transfer, these changes generally are ineffective, even where the employee’s agreement is obtained
  • employees’ elected representatives must be informed and consulted about the transfer and
  • any attempt to circumvent the effect of TUPE is void
Although the legal effects of TUPE cannot be avoided, it is possible to apportion TUPE liabilities by agreement between the seller and the buyer. For instance, the seller could agree to be responsible for all claims and liabilities relating to employees up to the date of transfer, and the buyer could take on all post-transfer employment liabilities.
PART B - PROCEDURE AND TERMS
8. Procedure – What are the steps in a sale and purchase transaction?
Real estate business transactions formally start when proposed heads of terms are drafted, negotiated and agreed by the brokers for the seller and the buyer. The heads of terms (or memorandum of understanding) set out the principal terms agreed between the parties and are generally expressed to be “subject to contract” and not legally binding. They might be accompanied by a (legally binding) exclusivity and confidentiality agreement.
The seller’s lawyers will usually collate all information relating to the property and send it to the buyer’s lawyers. The buyer’s lawyers will undertake general due diligence investigations. The buyer’s lawyers usually prepare the form of the sale agreement. The scope of the due diligence and the draft of the sale agreement will vary according to whether the property being sold is under construction or already built and the extent to which leases to tenants have already been granted, as well as whether the transaction will be structured as a property deal or a share deal.
Romania has adopted a new registration (or cadastral) system for land and buildings, a key part of which is that the registry is intended to provide definitive property boundaries. However, many plots (particularly those outside the main commercial centres) have not yet been registered in this way. If a property has not been newly registered, its sale will trigger an obligation to complete the cadastral registration, meaning (amongst other things) that certified surveyors must produce detailed and definitive plans to be approved by the territorial Cadastral and Real Estate Publicity Office and subsequently submitted to the relevant Land Book. There is a resulting time and cost implication for transactions of this type, which (depending upon the nature and use of the land concerned) may prove to be significant.
Once the sale agreement is in an agreed form, the seller and the buyer will sign it. In case of a property deal involving a sale of land, the agreement needs to be authenticated by a public notary.
The notary is bound to verify the power of the corporate bodies and their signatories and that there are no impediments to the sale. Updated Land Book excerpts and certificates issued by the fiscal authorities (stating that there are no outstanding debts) also need to be presented to the notary on authentication. The real estate publicity fee and notary fees (see below) need to be settled in full. Following this, the notary is able to register the buyer’s interest in the contract against the property in the Land Book, thereby affording the buyer some protection against a subsequent sale (assuming the ownership was not transferred upon authentication to the buyer).
Legal completion of the sale and purchase transaction may occur at the same time as the authentication or subsequently, depending on the acquisition timetable. Where the purchase is made with borrowed finance, a mortgage over the property (and other security interests) will generally be instituted at the same time as the authentication.
Following completion, the notary needs to complete final registration of the transfer in the Land Book, in case the transfer of title has not already occurred and been registered upon authentication. Registration of other documents (e.g. security documents) in other relevant registries (e.g. the Electronic Archive for Secured Transactions) may also be necessary. In case of financing being involved, the disbursement of the price will generally be made only after the security interests have been appropriately recorded, in order to protect the financier’s ranking.
9. Other common contract terms – What other provisions does a real estate sale contract commonly contain?
An agreement for the sale and purchase of property must be in writing and, if it involves land, authenticated by a Romanian public notary, must contain or clearly refer to all main terms and conditions and must be in a form signed by both seller and buyer.
It is common for the sale and purchase agreement to provide for a deposit of between 5-10% of the purchase price payable on exchange of agreements. The deposit can be placed in an escrow account opened with a Romanian bank.
There are no standard terms published by the Romanian National Bar Union for commercial property sales.
Contracts for sale of property subject to occupational interests such as leases will include clauses to cover ongoing management matters, and provide for apportionment of occupational income and outgoings on completion of the transfer of ownership in the property.
10. Due Diligence – What investigations does the buyer normally make?
Pre-signing of agreement(s)
The prudent buyer is likely to commission a survey of the building and in appropriate cases, soil and geological investigations, plant and machinery tests, and environmental investigations. There are two limbs to the pre-signing due diligence by the buyer’s lawyers.
Firstly, title to the property and existence of any encumbrances or restrictions will be investigated. The buyer’s lawyers will first consider the entries in the Land Book, the cadastral documentation and historic title documents. Where title to the property is not registered in the Land Book, the buyer’s lawyers will advise the buyer to enter into a pre-sale or an option agreement pending completion of the cadastral documents and Land Book registration, as no sale is permitted in cases where the property is not registered. The buyer’s lawyers will also make enquiries of the local authorities where the land is located or other institutions involved to obtain information regarding any restitution claims affecting the property and their current status. In cases where any claim was rejected by such authorities or institutions, the search will also be pursued with the courts of law having relevant jurisdiction in order to assess the status, impact and/or potential outcome of court proceedings.
Where the property is leasehold, or subject to leasehold or other occupational interests, the terms of the relevant occupational documents need to be considered carefully to ensure they are not contrary to the buyer’s intentions for the property. The buyer’s lawyers will also need to check whether these documents require the consent of any third party to be given to the transaction.
Secondly, the buyer’s lawyers will undertake general due diligence, which will include conducting various searches to check the position regarding municipal and zoning consents, environmental matters, utilities serving the property, financial encumbrances etc. Where the seller is a company, the buyer’s lawyers will also conduct searches against the seller’s name at the Trade Registry to ascertain whether the company is solvent and therefore able to dispose of its assets freely. A search referring to moveable security will be undertaken on-line by the buyer’s lawyers with the Electronic Archive in Security Interests to obtain confirmation that there are no moveable security interests in any way affecting the envisaged transaction.
Pre-completion
After signing of the agreement and before completion the buyer’s lawyers will deal with completion formalities such as the seller’s lawyers’ bank details etc.
Reporting to the client
Before completion of any agreement the buyer’s lawyers usually report their due diligence findings to their client, raising any matter of particular importance or concern.
Occasionally, and normally only where the buyer is acquiring property as a result of the acquisition of a company, instead of due diligence being carried out by the buyer’s lawyers, the seller’s lawyers provide a certificate of title addressed to the buyer and any lender to the buyer. This may occur where the sale has been planned for some time and the parties wish the transaction to proceed quickly.
11. Terms implied by law – What provisions are implied by Statute, Code or otherwise?
Some of the most significant are as follows:
Title guarantee
In a transfer of property there are various statutory obligations on the part of the seller in relation to the quality of the title being sold. The seller is under an obligation to guarantee to the purchaser that he will not be evicted by any third parties and may be called into court proceedings as a respondent if the title of the purchaser is challenged by such third parties.
Misdescription and misrepresentation
In cases of misrepresentations or misdescriptions of fact made by the seller to the buyer which have the effect of inducing the buyer to enter into a transfer of land, damages may be payable to the buyer or the buyer may be entitled to rescind the transaction.
12. Registration and Notarisation of real estate – What are the basic requirements?
Romania is in the process of implementing a unified cadastral and land book system. The system is run by cadastral and real estate publicity offices, one for each county of Romania. Registration of land is compulsory throughout Romania and to the extent that land is unregistered, it must be the subject of an application for first registration before it can be sold. Large areas of land still remain unregistered, although the owner may make an application for voluntary registration at any time.
Land Books are created at municipality level and also for every immovable asset which is identified by an individual number. Therefore, a new land book entry will be created each time a new property is required to be registered.
The system of cadastral and real property publicity is designed to make public through registration: (i) all of the real rights that are transferred, created, modified, terminated or erased pursuant to juridical acts and facts or events related to immovable assets and (ii) certain other items of information related to immovable assets.
Registration gives constructive notice to third parties (making certain registrations binding on them). In certain regions (for example, Transylvania, Banat and Bucovina) the existing land book system (which will be replaced by the cadastral system described above) was the definitive record of land ownership, and so there are some regional variations in application.
There are three types of registration in the Land Book:
  • registration of a real property right (this is the primary registration)
  • provisional registration of a real property right on the condition that it will be confirmed at a later date and
  • notification of other juridical relationships, including status, capacity and incapacity, certain personal rights, claims and appeals, and measures taken for making an immovable asset in the Land Book unavailable for transfer or further encumbrances
The registration of a real property right establishes the rights obtained through a property title transfer, a final and irrevocable judicial ruling or decision of an administrative authority.
The provisional registration operates for those rights granted subject to conditions, or by extinctive periods.
The title registration for a particular property all over Romania comprises:
  • the Property register, which gives a description of the property
  • the Proprietorship register, which gives details of the registered owner of the property and
  • the Charges register, which lists all recordable matters that encumber the property such as rights benefiting other property, covenants, financial charges, contracts, recordable leases and, where appropriate, special entries that restrict the registered owner’s ability to deal with its title without obtaining the consent of another person
There is an ad validitatem requirement for notarisation of any deed for acquisition/disposal of ownership of land, as well as for mortgage deeds. Also, for all practical purposes, all deeds regarding property (including those referring to buildings only) should be concluded in a notarised form.
13. Disputes – How are they dealt with and resolved?
Romania law permits considerable freedom of contract and the parties must give careful thought to which law they want to govern the contract, in which jurisdiction they would prefer that any disputes are resolved and what method of dispute resolution they would prefer. Methods of dispute resolution could include court proceedings, arbitration (whether domestic or international), reference to an independent expert or a mediation process. This freedom of contract is not absolute, however, and can in certain circumstances be circumvented if statute requires.
The choices should be stated expressly in the contract. If it can be avoided, these matters should not be left to the courts to decide, since the uncertainty of law and jurisdiction shopping will be costly to all parties and can mean that any dispute is likely to take a very long time to resolve. The parties can agree to leave any or all of these matters fluid to be resolved at the time any dispute arises, but this can create its own problems.
Different types of dispute are often resolved in different ways. For example, rent reviews are often dealt with by arbitration only whilst disputes of fact (or under particular clauses or in respect of particular aspects of the contract) are often dealt with by expert determination. Disputes of law should preferably be referred to a court or institutional arbitration.
When choosing a method of resolving disputes, the parties will have regard to various issues, including the following:
  • The domicile/nationality and governing law of the contracting parties and any relevant statutory limitations may inhibit such choice or the effectiveness of such a choice
  • Whether or not awards can be enforced in the relevant jurisdictions. For example, is there an international treaty that will allow enforcement of an award in a particular jurisdiction? If such a treaty does exist, does it recognise arbitration awards and agreements arising out of a mediation process? Many jurisdictions will not enforce awards that have not arisen through the consideration and final judgment of a court/judge
  • Obtaining the decision of an expert may be faster and cheaper than obtaining one from an arbitrator
If the parties are not satisfied by the decision of the independent person, different remedies and courses of action apply depending upon whether that person acted as an expert or as an arbitrator. An arbitral award may be subject only to a cancellation application on limited grounds.
PART C - PERMITS INSURANCE AND ENVIRONMENT
14. Permits – What permits are required for the use and occupation of real estate and are they personal?
Before performing operations involving real estate (especially regarding building/construction), it is recommended, and in certain cases compulsory, to obtain a planning certificate from the local government authority responsible for controlling the use and development of land in its area (county councils and city halls). This planning certificate provides information regarding legal, economic and technical issues with respect to the land or construction. This certificate is issued upon request to any interested person, and within the legal time limit of 30 days.
The planning certificate (certificat de urbanism) generally also indicates a number of other authorizations and endorsements (e.g. environmental permits, public safety and health permits, permits from the fire prevention service and public utilities providers) required in order subsequently to undertake building/construction works. Subject to fulfillment of the required conditions, a building permit (autorizaţie de construire) will be issued by the local government authorities (usually from the city hall) within 30 days from the date of request.
Generally, a building permit will be required for the construction of a “new build” property, work that is proposed for refurbishment of an existing building, and where an existing use (for example office space) is to be changed to another distinct use (for example retail premises). Under the planning legislation the terms “develop” and “development” have a much wider meaning than the construction or replacement of buildings; minor building works or simple changes of use may amount to “development” requiring planning permission and building permit.
Special approvals from the competent Ministry are required when it is proposed to do work to historically or architecturally important buildings.
In addition to a building permit, at the end of construction, the building must obtain approvals confirming that construction has taken place in accordance with plans and applicable regulations.
The Government, through the Ministry of Regional Development and Housing, coordinates the activity of territory arrangement and urbanism at a national level. Locally, the county councils or local councils draw up urbanism plans to supplement national activities and policies.
The framework Planning and Zoning Law no. 350/2001 establishes the main principles governing this activity, as follows: (i) local autonomy (ii) transparency (iii) partnership (iv) decentralized public services and (v) durable development.
There are three different kinds of urbanism plans: (i) General Urbanism Plan (“PUG”), one for each locality (ii) Local Urbanism Plan (“PUZ”), providing detailed regulations for a specific area (e.g. districts of Bucharest) and (iii) Detailed Urbanism Plan (“PUD”), required only in certain cases and referring to one or more plots.
In application of the relevant regulations on territorial arrangement and urbanism, urbanism plans are issued by county councils and city halls.
15. Insurance and Risk – What insurance will the parties effect and when does the insurance risk pass at the time of sale?
Before a sale is contemplated, insurance is generally the responsibility of the owner of the freehold interest in a property. However, where such property is the subject of a lease, the terms of the lease will determine which party has responsibility to insure. It is common for owners of long leasehold interests in commercial properties to insure rather than the landlord/freehold owner. Whatever the length of the lease, the tenant will generally insure the contents of the property belonging to the tenant and in some cases certain parts of the property for which the tenant is contractually responsible.
The insuring party should have a fully comprehensive buildings insurance policy to protect the structure and fixtures and fittings of the property in the event of damage or destruction by any of a comprehensive list of insured risks, such as storm, lightning, fire, earthquake and water damage. The policy may also cover additional special heads of cover such as subsidence, heave and, if available, terrorism.
Generally it is the buildings, and not the land, which are insured for the reinstatement cost rather than the reinstatement value.
Insurance policies may either comprise a single policy for one particular property or a block policy designed to cover a portfolio of properties.
Owner-occupiers generally have separate policies to cover the contents of the property, especially if the property includes costly plant and machinery.
Policies for defects in title to property are not yet available on the Romanian market (although at the time of going to press, there are initiatives in this direction). Also, certain foreign title insurance companies may be offering policies on a case-by-case basis, in particular for properties of significant size/value
Insurance policies are generally personal and not transferable on sale.
Recently a new law was enacted imposing on the owners (legal or natural persons) of residential buildings, situated either in the urban or the rural zone, the duty to conclude for such dwellings insurance policies against natural disasters such as earthquakes or floods.
The mandatory insured sum is:
  • Euro 20,000 for each type A dwelling and
  • Euro 10,000 for each type B dwelling.
The qualification of the dwellings is to be made in accordance with the norms issued by the Insurance Supervision Commission in this respect, using the criterion of the construction materials (type A - construction materials subject to chemical or thermo treatment; type B - not subject to such treatment).
The insured risk is any form of deterioration arising directly or indirectly from the occurrence of a natural disaster.
16. Environmental – What are the common environmental issues?
Real estate may be contaminated as a result of current and former uses. Primary legal responsibility follows the “polluter pays” principle: the person who spilled, released or discharged a substance will normally be liable for any ill-effects it causes.
All activities with a potential adverse impact on the environment should be carried out only on the basis of authorizations or permits issued by the relevant authorities.
For certain specified activities (present or future) which have a significant impact on the environment and are identified by an order of the Ministry of Environment and Waters Management, it is necessary to obtain an environmental authorization (autorizatie de mediu).
Upon the sale of a majority stake in a company, of a disposal of an undertaking or unit, or in case of a merger or spin-off, or of a new development, owners or investors in real estate that perform activities with a significant impact on the environment must obtain an environmental permit (aviz de mediu), based on an environmental survey report (bilant de mediu).
The responsibilities of the acquirer or the developer are laid down in an environmental conformity plan (program de conformare), the terms of which are negotiated between the acquirer/developer and the environmental authority. These may refer to both reduction and rehabilitation measures.
PART D - FINANCE AND TAXES
17. Pricing/Valuation – What sets the price/valuation of real estate?
Pricing of real estate investments is a combination of the aggregate rent being paid by occupational tenants of the property and the value that investment buyers consider that a property of the specific type and location is worth at the time of valuation taking that income into account.
The rent for a particular property is likely to be assessed by multiplying the area of the property by the market rental value per square metre. The market rental value will take into account factors such as the location of the property, its type and condition, and the length of the lease term. The area of the property will be calculated by reference to Gross Internal Area (used, for example, in relation to warehouses and industrial buildings) and Net Internal Area (used, for example, in relation to offices and shops).
In the case of retail shops, it is common for the rent of the property to have differential values according to the positioning of the floor space – that nearest to the frontage is the most valuable and will be described as “Zone A”. The rental values of the various areas will be added together to provide an overall rental value for the property.
Investment properties are commonly referred to as being sold on a particular yield, meaning the investment return that will be gained from the capital sum which it is necessary to pay to buy the property. For example, where a property with an aggregate rent of ROL 1,000,000 is sold for ROL 20,000,000, it will have a yield of 5%. Conversely, the interest can be said to have been sold at a YP (years’ purchase) of 20.
18. Financing – How is a real estate acquisition financed?