Fall 17
INTERNATIONAL LAWYERS NETWORK
BUYING AND SELLING REAL ESTATE: AN INTERNATIONAL GUIDE
ILN REAL ESTATE GROUP [BUYING AND SELLING REAL ESTATE] 2
This guide offers an overview of legal aspects of buying and selling real estate in the requisite jurisdictions. It is meant as an introduction to these market places and does not offer specific legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney- client relationship, or its equivalent in the requisite jurisdiction.
Neither the International Lawyers Network or its employees, nor any of the contributing law firms or their partners or employees accepts any liability for anything contained in this guide or to any reader who relies on its content. Before concrete actions or decisions are taken, the reader should seek specific legal advice. The contributing member firms of the International Lawyers Network can advise in relation to questions regarding this guide in their respective jurisdictions and look forward to assisting. Please do not, however, share any confidential information with a member firm without first contacting that firm.
This guide describes the law in force in the requisite jurisdictions at the dates of preparation. This may be some time ago and the reader should bear in mind that statutes, regulations, and rules are subject to change. No duty to update information is assumed by the ILN, its member firms, or the authors of this guide.
The information in this guide may be considered legal advertising.
Each contributing law firm is the owner of the copyright in its contribution. All rights reserved.
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Contents CHAPTER CONTRIBUTORS & FIRMS ...... 4 Buying and Selling Real Estate in Argentina ...... 6 Buying and Selling Real Estate in the Bahamas ...... 12 Buying and Selling Real Estate in Brazil ...... 19 Buying and Selling Real Estate in Chile ...... 27 Buying and Selling Real Estate in Czech Republic ...... 34 Buying and Selling Real Estate in Germany ...... 41 Buying and Selling Real Estate in Greece ...... 49 Buying and Selling Real Estate in India ...... 54 Buying and Selling Real Estate in Latvia ...... 65 Buying and Selling Real Estate in the Netherlands ...... 75 Buying and Selling Real Estate in Portugal ...... 83 Buying and Selling Real Estate in Russia ...... 94 Buying and Selling Real Estate in Scotland ...... 102 Buying and Selling Real Estate in Turkey ...... 107 Buying and Selling Real Estate in England, Wales, and Northern Ireland ...... 112 Buying and Selling Real Estate in the United States - Florida ...... 123 Buying and Selling Real Estate in the United States - Massachusetts ...... 129 Buying and Selling Real Estate in the United States - Michigan ...... 137
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CHAPTER CONTRIBUTORS & FIRMS
“Buying and Selling Real Estate in “Buying and Selling Real Estate in Argentina” Greece” Lawyers at Lawyers at Salaberren & López-Sansón Abogados A&K Metaxopoulos and Partners – – Buenos Aires Athens
“Buying and Selling Real Estate in “Buying and Selling Real Estate in the Bahamas” India” Lawyers at Lawyers at Halsbury Chambers – Nassau Singhania & Company – Mumbai
“Buying and Selling Real Estate in “Buying and Selling Real Estate in Brazil” Latvia” Lawyers at Lawyers at KLA - Koury Lopes Advogados – São TGS Baltic – Riga Paulo
“Buying and Selling Real Estate in “Buying and Selling Real Estate in Chile” the Netherlands” Lawyers at Lawyers at
Aninat Schwencke & Cia – Santiago PlasBossinade Advocaten N.V. – Groningen
“Buying and Selling Real Estate in “Buying and Selling Real Estate in Czech Republic” Portugal” Lawyers at Lawyers at PETERKA & PARTNERS – Prague MGRA & Associados - Lisbon
“Buying and Selling Real Estate in “Buying and Selling Real Estate in Germany” Russia” Lawyers at Lawyers at Michel LLP – Berlin Lidings Law Firm – Moscow
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“Buying and Selling Real Estate in Scotland” Lawyers at Miller Samuel Hill Brown – Glasgow
“Buying and Selling Real Estate in Turkey” Lawyers at Özcan & Natan Attorney Partnership - Istanbul
“Buying and Selling Real Estate in England, Wales & Northern Ireland” Lawyers at Fladgate LLP – London & Cleaver Fulton Rankin - Belfast
“Buying and Selling Real Estate in the United States – Florida” Lawyers at Shutts & Bowen - Miami, Florida, USA
“Buying and Selling Real Estate in the United States - Massachusetts” Lawyers at Davis Malm & D’Agostine – Boston, Massachusetts, USA
“Buying and Selling Real Estate in the United States - Michigan”
Lawyers at Howard & Howard – Detroit, Michigan, USA
ILN Real Estate Group – Buying and Selling Real Estate Series
Fall 17 INTERNATIONAL LAWYERS NETWORK
SALABERREN Y LÓPEZ SANSON ABOGADOS Buying and Selling Real Estate in Argentina
ILN REAL ESTATE GROUP
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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER ARGENTINIAN LAW I. INTRODUCTION. one person, where each person owns an We hereby analyze the more relevant legal undivided share of said property. Each co- aspects in relation to the acquisition of real owner can, solely or jointly, use the estate property in Argentina. Real estate common property without altering its acquisition provisions are mainly comprised in destiny, and, they can agree either the the Argentine Civil and Commercial Code use of the common property at alternate (“CCC”). Said body of laws regulates the times or the exclusive use over different modes of relation between persons determined parts of the property. and property, as well as the civil and Additionally, each co-owner can sell or commercial capacity premises as for encumber his or her undivided share contracting. Certain matters in relation to real without the assent of the other co- estate acquisition are defined by specific laws owners, while the sale of the whole apart from the CCC or by commercial usage. property requires the consent of all the With the CCC coming into force on August 1st, co-owners. Each co-owner is responsible 2015, new forms of real estate property (which for paying the expenses corresponding to were not formally comprised by existing laws to his/her share, as well as of refunding said date) have also been given a legal other co-owners the expenses in which framework (for example, country clubs, gated they may have exceedingly incurred in communities, and surface right). relation to their hares. Unless otherwise agreed, every co-owner may require the II. FORMS OF REAL ESTATE OWNERSHIP. legal partition of the ownership and the Argentine law regulates different forms of real division of the property. estate ownership. A brief summary is provided c) Condominiums. below: Condominium (propiedad horizontal) a) Sole Ownership. confers rights of use and disposal of an Sole Ownership confers all the powers to independent and undivided share of a legally use and materially and legally building (called a functional unit) and the dispose of a real estate property. All the proportional part of said building’s existing constructions belong to the common areas. The building’s different owner, which are presumed to be built by parts, as well as the rights arising from said owner, except evidence to the them, are interdependent. This type of contrary. This kind of ownership extends property exercised over the functional to the subsoil and airspace, except for unit, which may consist in a flat, a specific cases determined by law. The commercial property or other space with owner is also legally entitled to exclude functional independence and direct or third parties from said real estate indirect access to a street. The property. condominium is governed by internal regulations which are incorporated to the b) Joint Ownership. title deed. Joint Ownership is the right over a real estate property that belongs to more than
ILN Real Estate Group – Buying and Selling Real Estate Series
[BUYING AND SELLING REAL ESTATE IN ARGENTINA] 8 d) Residential Developments. right. The term can be renewed if it does This category comprises country clubs, not exceed said maximum terms. gated communities, industrial, The owner of the property keeps his right commercial, or nautical parks or any other to sell and dispose of the property if it type of residential developments does not interfere with the existing regardless of their destiny (temporal or surface right. During the agreed term, the permanent homestead or commercial), surface right holder may transfer and also including those with mixed uses, in encumber the constructions without the accordance with local administrative prior consent of the owner. regulations. The residential developments f) Usufruct. are considered a type of condominium. Usufruct confers the right to use a third The main characteristics of this party’s real estate property. This right can developments are: enclosure of the apply over a whole property or just a development, existence of common and share of said property. This right can only individual areas and the existence of an be granted by the owner of the property. internal regulations. All the common and exclusive parts and areas are Usufruct can be granted for life if the interdependent, as well as the rights over holder of the right is an individual or for a them, conforming a non-divisible whole. maximum of 50 years if the holder is a corporation. Aspects relating to authorized areas, dimensions, uses and other urbanistic III. LEGAL FORMALITIES IN RELATION TO REAL elements of residential developments are ESTATE OWNERSHIP ACQUISITION. governed by local administrative I. Preliminary Purchase Agreement. regulations of each jurisdiction. Under Argentine law, all transfers or e) Surface rights. creation of rights over real estate Surface right is a temporary right over a properties must be granted as a public third party’s real estate property, which deed before a notary. The notary must confers to its holder the power to use and conduct due diligence to verify the dispose the legal right to plant, forest, or soundness of the title of the seller over construct in said property (or a right over the relevant property, obtain certificates existing plantations, forestations, or attesting the ownership and the constructions), comprehending property’s inexistence of injunctions preventing the terrain, soil and/or subsoil, in accordance transfer. The notary also acts as a with the terms and conditions set forth in withholding agent of the taxes connected the deed title. The third party remains with the transfer. owner of the real estate property. Although it is not mandatory, usually The term of the surface right cannot seller and buyer execute a preliminary exceed seventy years for constructions, or purchase agreement (boleto de fifty years for plantations and compraventa) of the real estate property, forestations, both terms considered as to agree on the terms of the transaction from the date of acquisition of the surface while all the required formalities for
ILN Real Estate Group – Buying and Selling Real Estate Series
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executing the transfer deed are complied while the remaining fees are paid by the with. seller. To enter into the preliminary purchase III. Registration with the Real Estate agreement each of the parties must: (i) Registry. have general capacity in terms of the CCC The final stage for acquiring property is as for the performance of legal acts; (ii) the registration of the transfer deed with have an Argentine tax ID number; and (iii) the Real Estate Registry of the jurisdiction in the case of individuals married under where the property is located. Once community property regimes, obtain their registered, the buyer’s ownership over spouse’s assent to the sale. the property is enforceable before third Preliminary purchase agreements usually parties. Such registration entails certain include: (i) the identification of the fees which are usually comprised in the parties; (ii) the price and payment terms; notarial fees, and are also assumed by the (iii) a detailed description of the property buyer. to be acquired; (iv) the current condition The times involved in the registration of of the property to be acquired; (v) time of the deed will depend on the relevant conveyance of the possession over the jurisdiction, but in average this should property; (vi) tax treatment of the take between 1 and 2 months. transaction; (vii) general obligations of the parties; (viii) appointment of a notary IV. TAXES. public for the granting of the transfer Please find below an outline of the main taxes deed; and (ix) provisions in connection involved in the sale of shares. Please be aware with parties’ failure to compliance with that a project for a comprehensive tax reform is their respective obligations. being considered by the current administration, II. Transfer Deed. which in the case of being enacted would significantly affect the below analysis. Once the due diligence of the title has been completed and the certificates have a) Real Estate Transfer Tax. been obtained, which usually takes about Individuals selling real estate property are 30 days, the parties shall grant the taxed at 1.5 % tax rate over the price of transfer deed which has substantially the the sale. This tax is withheld by the notary same content that the preliminary public. purchase agreement. b) Corporate Income Tax. Parties may directly sign the transfer deed and not sign a preliminary purchase Companies selling real estate must pay agreement. corporate income tax over the sale of real estate property. The notary must make a The notary public is usually chosen by the withholding over the purchase price buyer. The fees of the notary usually because this tax. range from 1 % to 1.5 % of the purchase price. The fees and expenses relating to c) Stamp Tax. the due diligence over the title to the This is a tax levied by each of the property are usually paid by the seller, provinces in Argentina and the City of
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Buenos Aires which applies over the governmental authorities, except for higher of the purchase price or the assets located in certain cities or urban registered value of the property. The tax assets which have a surface of less than rate varies in each jurisdiction. Usually, 5,000 square meters, must be previously this tax is borne in equal parts by the approved by the Internal Affairs Secretary. seller and the buyer. To obtain said approval, foreign V. AGENTS. companies must make a filing with the Real Estate agents may be used by either buyer Internal Affairs Secretary, including or seller of real estate property, but their certain forms provided by said participation in real estate transactions in not governmental entity, certain corporate mandatory. The agent fees are not determined information (e.g. corporate bylaws, by law and may differ from one jurisdiction to appointment of board members, latest another. Usual fees range from 3 % to 4 % of financial statements, identification of the purchase price. shareholders), certificates of criminal record of the board members and an VI. SPECIAL CASES. investment project to be conducted in the a) Frontier Securities Zone Act (Decree real estate property to be acquired. The 15,385/44 as Amended) (“FSZA”). filing should be made by the investor. The FSZA regulates the acquisition by The authorization is granted by way of foreign individuals or foreign companies exception, and depends on showing that of rural real estate assets and certain the investor (or its shareholders and urban real estate assets located in frontier officers) has not been convicted of crimes zones. It also regulates the acquisition of affecting national security and proposing shares in companies which own said real an investment project for the estate assets, as well as corporate development of the acquired real estate restructuring operations of said asset. The investment project is analyzed companies. in the light of the following criteria: (i) that the project is declared of national, The regulation of the FSZA considers the provincial or municipal interest by the following to be foreign companies: (i) competent authority; (ii) purports to the companies incorporated abroad from social and economic development of the Argentina, (ii) companies incorporated in region where it is located; (iii) it will be Argentina, in which foreign companies or implement in under developed zones; and individuals hold the majority stake or have (iv) it mainly employs Argentine workers. sufficient votes to make decisions in shareholders’ meeting; and (iii) b) Protection of Rural Lands Ownership Act companies in which foreign shareholders (Act 26,737) (“PRLO”). own more than 25% of the corporate The PRLO limits the ownership or capital. possession of rural land by foreign Under the FSZA, all acquisitions of real individuals or companies (which are estate assets located in frontier zones, or referred to as Foreign Owners). Rural shares of companies which own said Land is defined as any real estate asset assets require clearance from located outside the limits of cities. It
ILN Real Estate Group – Buying and Selling Real Estate Series
[BUYING AND SELLING REAL ESTATE IN ARGENTINA] 11 provides that all Foreign Owners cannot The PRLO has created a National Registry own or possess more than 15% of the of Rural Land which oversees compliance total rural land of Argentina. Likewise, with the PRLO. Foreign Owners cannot own or possess The application of the PRLO is triggered more than 15% of the total rural land in when dealing with the acquisition of real each Province or Administrative estate assets or participation in Department. Additionally, Foreign Owners companies which own of real estate of the same nationality cannot own or assets which qualify as rural land. As possess more than 30% of the rural land noted before, the PRLO bans the owned by Foreign Owners. Moreover, a acquisition of rural exceeding 1,000 single Foreign Owner cannot own more hectares in the core area, or adjacent to than 1,000 hectares in the core area or an bodies of water of certain importance, or equivalent surface in other locations to be in excess of the 15% maximum of the determined by the governmental rural land allotted to Foreign Owners at authority. Finally, Foreign Owners cannot national, provincial and municipal level. hold an interest on rural land adjacent to bodies of water of certain importance. Before the granting of the deed of Moreover, any change in the composition acquisition of the rural real estate asset of the corporate capital of local the intervening notary must procure with companies’ owners of rural land should the National Registry of Rural Land a be informed to the authorities to verify certificate of clearance, confirming that compliance with the PRLO. the above limits are not breached by the intended transaction. If the certificate of The PRLO considers the following to be clearance is not obtained the transaction Foreign Owners: a) Individuals of foreign cannot be implemented. nationality (although there are some exceptions for foreign nationals who have resided in Argentina for more than 10 years, or have Argentine children, or have been married to an Argentine national for more than 5 years); b) Companies, incorporated in Argentina or abroad, whose capital is owned in more than 51% (or a sufficient percentage to adopt decisions in shareholders’ meetings) by foreign individuals or companies. The regulations of the PRLO provide that in the case of usufruct and surface rights, it will only control the owner of the property and not the holders of said rights.
ILN Real Estate Group – Buying and Selling Real Estate Series
Fall 17 INTERNATIONAL LAWYERS NETWORK
HALSBURY CHAMBERS Buying and Selling Real Estate in the Bahamas
ILN REAL ESTATE GROUP
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PURCHASE OF BAHAMIAN REAL ESTATE BY NON- BAHAMIANS Columbus came to The Bahamas when he first purchase and/or ownership of discovered the New World, landed on San Bahamian real estate. Salvador in 1492. Over the centuries, the From the outset, real estate in The Bahamas islands of The Bahamas became key waypoints presents a compelling buying opportunity for for explorers and adventurers which connected th non-Bahamians potential investors from the Old World with the New. In the late 17 abroad. Purchasing real estate in The Bahamas century, the islands became the hotspots of can diversify an investor’s investment portfolio pirates and privateers who marveled over and provides a bit of a shelter form economic landscape and mass of the Bahama Islands. siege, with a built-in benefit of permanent The 100,000- square-mile (258,998-square- residency granted by The Bahamas kilometer) archipelago of The Bahamas begins Government. just 50 miles (80km) off Florida’s east coast at It is customary that within a matter of weeks, the Island of Bimini and stretches more that foreign buyers could have residency status, 500-miles (840km) southeast in a chain provide that the purchase of the real estate is comprised of some 700 islands and cays in the at least $1.5 million net or more. Atlantic Ocean. Total land mass is estimated at 5,382 sq. mi (13, 939 sq. km). The capital, 1. Intent of Purchase Nassau is on New Providence, while Freeport In any potential purchase of real estate in The and Lucaya combined on Grand Bahama are Bahamas will require the drafting and regarded as the nation’s second city. preparation of Agreement of Sale. For the The Bahamas has proven to be one of the top most part, a Realtor and/or Broker would islands in the Caribbean hemisphere, when it facilitate in the location of the potential comes to the purchase of real estate. To this property and/or real estate, but once the real end this article seeks to address two aspects of estate has been negotiated upon in terms of purchase of Bahamian real estate by non- the purchase price and time limit for Bahamians: - completion etc., it is mandatory under law that an Agreement of Sale be prepared setting out
(i) what is required under Bahamian law the agreed terms between the Seller and Buyer. for non-Bahamians desirous of In addition to the agreed terms which must be purchasing real estate in The Bahamas; set out in the Agreement of Sale, there are and additional requirements which must be (ii) to identify tax implications imposed on adhered to by non-Bahamians whom seek to non-Bahamians with respect to their purchase property and/or real estate in The Bahamas.
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Realtors/Brokers Commission Fees on Real Estate i) Undeveloped property/real estate 10% of the agreed purchase price ii)Developed property/real estate 6% of the agreed purchase price (whether residential or commercial) iii) Family Island property/real estate 10% of the agreed purchase price (whether land, home or commercial) If a non-Bahamian/foreigner does not own ➢ Copy of Site Plan of land being property in The Bahamas already, and wishes to acquired/purchased- this will normally purchase a piece of property and/or real estate be attached to the Agreement for Sale in your own individual name, then an or the title documents for the property; application must be obtained for Certificate of ➢ Bahamas Immigration Status (confirm if Registration or Permit from The Bahamas the non-Bahamian and/or foreigner has governmental agency. The application must be obtained permanent residency status or made to the Bahamas Investments Authority any other status in The Bahamas); (IB) and is applied after the completion of the sale. The property and/or real estate being ➢ Social Security Number/National purchased must not be commercial property, Identification Number; must be less than five (5) acres and it cannot be ➢ Evidence of payment of real property titled in the name of two or more persons who taxes for the property being purchased- are not related (i.e. the persons must be this is normally secured by the Attorney husband and wife or brother and sister/parent representing the Seller and provided to and child (with the same last name) or a the Buyer’s Attorney; company. ➢ A Certificate of If the property and/or real estate is commercial Incorporation/Registration, if the property and is being purchased by a company applicant is a Bahamian Registered or unrelated persons or consists of more than Company or a Foreign Company five (5) acres, then a Permit is necessary. The Registered under the Foreign Company Permit also must be obtained from the IB provisions of the Companies Act of the before the purchased transaction is complete. Commonwealth of The Bahamas; 2. Requirements ➢ Financial Reference – normally obtained The application for the Permit and the from a bank/financial institution whom Certificate of Registration requires that the the Buyer has an account for at least following be submitted to the IB in support of three (3) to five (5) years; the same: - ➢ Source of Wealth- a letter obtained ➢ Copy of National Photo Identification from the bank/financial institution (namely, Passport, Driver’s Licence etc.); holding the account in the name of the Buyer, which will be utilized as the ➢ Police Record/Certificate from Country source of funds for the purchase of the of residence; real estate. ➢ Character Reference;
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➢ The Buyer will also be required to ➢ A permit to acquire property is required complete a KNOW YOUR CLIENT profile if the property is undeveloped land and Form for submission to his Bahamian the purchaser would become the owner Attorney. of two or more contiguous acres. A Under the International Persons Landholding permit is also required if the non- Act, 1993- Amended in 2007, The International Bahamian intends to acquire land or an Person Landholding Act made it easier for non- interest therein by way of freehold or Bahamians and companies under their control leasehold, when the acquisition is not in to own property. accordance with item 1. ➢ ➢ A non-Bahamian or permanent resident Non-Bahamians who own homes in The who purchases or acquires an interest in Bahamas may apply for an annual a condominium or property to be used homeowner’s residence card. This card by him/her as an owner-occupied entitles the owner, spouse and property, or for construction of dependent child or children to enter and premises to be used as an owner- remain in The Bahamas for the duration occupied property, must apply to the of the validity of the card (one year). secretary to the Investment Board (IB) This facilities entry-it does not confer to register the purchase. resident status in The Bahamas. ➢ Upon receipt of the above, the acquisition is registered, and a certificate of registration issued. FEE SCHEDULE APPLIED: (i) Application for Registration B$25.00 (ii) Application for Permit B$25.00 (iii) Certification of Registration B$250.00 a. $50,000 under B$50.00 b. $50,000.01 up to $101,000 B$75.00 c. $101,000 and over B$100.00 (v) Annual homeowners' a. residence card B$500.00
3. Joint Tenancy such a gift as imparts to them, with respect to all other persons than themselves, the As with any real estate whether purchased 1 jointly or solely, there are legal implications properties of one single owner” . Although as which follows regarding the type of ownership between themselves joint tenants have the real estate falls under. It is said, “A gift of lands to two or more persons in joint tenancy is 1 Megarry & Wade- The Law of Real Property, Sixth edition, Sweet & Maxwell.
ILN Real Estate Group – Buying and Selling Real Estate Series
[BUYING AND SELLING REAL ESTATE IN THE BAHAMAS] 16 separate rights, as against everyone else they or intestacy, for his undivided share is disposed are in the position of a single owner. A joint of as he wishes. For instances, where a tenancy is known by its four (4) principal husband and wife are beneficial joint tenants features, in particular the right of survivorship and one of the spouses dies intestate, the and the “four unities”. survivor will acquire the property by right of 1. The right of survivorship: - This is, survivorship and will in addition be entitled to a above all others, the distinguishing statutory legacy. On the other hand, if property feature of a joint tenancy. On the death and/or real estate is owned by the spouses by of one joint tenant, his interest in the virtue of tenants in common, the survivor will land/real estate passes to the other receive only the statutory legacy, i.e. only the joint tenants by the right of portion to which the spouse has contributed to survivorship. This process is said to the property and/or real estate. continue until there is one survivor, who In comparison to the principal requirements set then holds the land/real estate as a sole out in determining whether joint tenancy owner. By law, joint tenancy cannot exists, it appears that only the unity of pass under a Will or intestacy of a joint possession is essential or may be present in a tenant. tenancy in common in establishing ownership. 2. The four unities must exist, namely: - 5. Transfer of Title on Death i) Unity of possession; If property is purchased in the name of an ii) Unity of interest; individual, there are no transfer taxes on death in The Bahamas. On the death of the owner, iii) Unity of title; and the only thing that will have to be done is to iv) Unity of time probate the Estate. If the property is purchased by joint owners, then the surviving joint owner 4. Tenants- in-Common will automatically be the sole owner of the The other form of ownership is called and property. No probate of the deceased owner’s known as tenancy in common. It is said legally estate is necessary. On the death of the last that tenancy in common differs significantly joint owner, however, his estate will have to be from joint tenancy. probated. If the property/real estate is purchased as tenants-in-common then on the Unlike joint tenants, tenants in common hold death of one tenant, that person’s share of the undivided shares in property and/or real estate. property will devolve upon the person entitled Each tenant in common has a distinct share in thereto under the last will and testament of the property and/or real estate which has not yet deceased tenant or according to the laws of been divided amount co-tenants. The only fact intestacy, if he died intestate (without a Last which brings them into co-ownership is that Will and Testament). they both have shares in a single property which has not yet been divided among them. 6. Title held by a Company Similarly, there is no right of survivorship, If the property/real estate is purchased in the accordingly, the size of each tenant’s share is name of a Bahamian Company, then the fixed finally and is not affected by the death of following requirements should be met: - one of his companion. When a tenant in common dies, his interest passes under his will
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➢ The company must first be Bahamas will require the same information incorporated; stated above for the Shareholders of the ➢ The company must first be a Bahamian company. Company (domestic) with the majority In any event, the Company whether it is a of shares held by a Bahamian citizen. Bahamian Registered Company (i.e. IBC) or a Alternatively, an application can be Foreign Company registered under the Foreign made to the Central Bank of The Company provisions of the Companies Act, will Bahamas with regards to a foreign have to be in existence before it can enter into person having ownership of the real an Agreement for Sale to purchase Bahamian estate/property to be designated as a property/real estate. Alternatively, if there is an resident of The Bahamas. urgent need to pay the deposit and to secure ➢ Shares of the incorporated Company the purchase of the property/ real estate, the will have to be issued – and these will Agreement for Sale can be entered into by the devolve upon the person entitled potential Buyer with a provision in the said thereto upon the death of the Agreement providing a right reserved therein to shareholder under the provisions of the assign the sale of the property/real estate to Last Will and Testament of the deceased the company once it has been established. or the laws of intestacy (if the deceased The only advantage to having a company is that died without a Last Will and Testament). there is limited liability protection (no one can ➢ If shares are transferred, taxes are go beyond the corporate veil of incorporation if payable on such transfer (see below). they choose to sue the owner of the property, to attach the owner’s personal assets. This is ➢ If the property is transferred to the usually the case where the property is being owner of the company, taxes are also used as commercial (i.e. rental) property and is payable (see below). constantly rented out for profit. A Bahamian company can be incorporated by a 7. Legal Fees and Stamp Duty non-Bahamian as an International Business Company and it will be allowed to do business Legal Fees associated in the purchase and sale in The Bahamas. Central Bank Approval is of all real estate transaction in The Bahamas required before shares in a company can be are normally 2.5% for each party- Seller and issued to a non-Bahamian. In this regard, the Buyer. information required above for the Certificate There are also charges imposed and of Registration is also required for submission implemented by The Government of The to Central Bank. Bahamas in relation to Stamp Duty on all Alternatively, some persons have opted to form properties/real estate prepared by a deed of a company in the Country where they live (i.e. conveyance assignment or transfer of realty at United States) and have the company two and a half per cent (2.5%) of the amount of registered under the foreign company value of the consideration. Provided that provisions of the Companies Act in The properties over fifty thousand dollars in value Bahamas. Once the company is registered became liable to Value Added Tax (VAT) at then the company can proceed to operate in 7.5%. The Bahamas. The Central Bank of The
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With regards to Leases on every property/real ➢ All back taxes (if any) will be waived for estate the stamp duty imposed is two and a owners of residential properties valued half per cent (2.5%) of the annual rent above the $250,000.00 exemption reserved. threshold and owners of commercial The normal procedure for a property properties, who have never received a transaction is that the Seller and Buyer each tax bill, if they register their properties with the Chief Valuation Office by the pay their own legal fees and one half of the th stamp duty on the value and/or current market 30 June 2013; and value of the sum that would be expected to be ➢ Owners of residential properties who realized on the sale of any property/real estate remain current with their payments by the seller to the buyer. The commission of over the next three (3) years will receive the Broker and/or Realtor is normally payable a 5% rebate of their annual real by the Seller. This, however, is all subject to property tax assessment. agreement between the parties and can be It is certainly true that real estate purchase in drafted in the Agreement for Sales differently, The Bahamas is a purchase of paradise. Not if both Seller and Vendor so desire. only, by the unique geographical location of 8. Tax Implemented on Real Estates The Bahamas, just 50 miles off the coast of On or about March 2013, the Government of Florida, but The Bahamas is strategically The Bahamas implemented new real property positioned to the wider Americas. This is an tax incentives, to provide tax relief to both undeniable advantage. Bahamians and non-Bahamians purchasing Its proximity to the US, Central and South property/real estate in The Bahamas. The America places The Bahamas in an enviable objective of the new tax incentives is to provide position to serve both its traditional and tax relief and to update the real property tax emerging markets and presents an opportunity register. This new legislation and tax incentive to link commercial and financial interests of came into effect on the 1st March 2013, which non-Bahamians desirous of purchasing real provides as follows: - estate.
ILN Real Estate Group – Buying and Selling Real Estate Series
Fall 17 INTERNATIONAL LAWYERS NETWORK
KLA – KOURY LOPES ADVOGADOS Buying and Selling Real Estate in Brazil
ILN REAL ESTATE GROUP
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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER BRAZILIAN LAW 1. OVERVIEW OF BRAZILIAN HISTORY current constitution, formulated in 1988, Brazil is a federative republic and the largest defines it as a democratic federal republic. country in both South and Latin America. It is The federation comprises the union of also the world's fifth-largest country the Federal District of Brasília, 26 States, and by area and sixth by population. In the 5,570 Municipalities. The legal system of all Americas, it is the only country where States and the Federal District is governed by Portuguese is the official language. the Civil Law system, derived from the French Bordered by the Atlantic Ocean on the east, Napoleonic Code, as reflected primarily in the Brazil has a coastline of 7,491 kilometers Civil Code. (4,655 mi). It borders all other South American In practice, this means that just Brazilian State countries except Ecuador and Chile and covers regulations on notarial and conveyancing 47.3% of the continent's land area. The Amazon matters, together with the municipal is a world-renowned vast tropical forest, home ordinances on urban property taxation bring to diverse wildlife, a variety of ecological over 5,597 different enacted provisions into systems, and extensive natural resources consideration when acquiring real estate in spanning numerous protected habitats. This Brazil! unique environmental heritage makes Brazil 2. DIFFERENT TYPES OF REAL PROPERTY focal point of significant global interest and debate regarding foreign ownership of rural The classification of a property depends on its land, deforestation, and environmental use and it is, therefore, irrelevant where the protection. property is located (i.e. property located in an urban area with municipal zoning regulations Explorer Pedro Álvares Cabral claimed the area will be considered rural property if used for for the Portuguese Empire in 1500. Brazil rural purposes). There are two main types of remained a Portuguese colony until 1808, when property: the capital of the empire was transferred from Lisbon to Rio de Janeiro. In 1815, the colony a) Rural property. was elevated to the status of kingdom upon the b) Urban property. formation of the United Kingdom of Portugal, Brazil and the Algarves. Independence was Urban properties can be classified as residential, conferred in 1822 with the creation of commercial, and industrial. The ownership of the Empire of Brazil, a unitary state governed urban property may be classified as fractional by a constitutional monarchy and a ownership, joint ownership in a condominium parliamentary system. The ratification of the building or a co-ownership in an ordinary first constitution in 1824 led to the formation of condominium. a bicameral legislature, now called the National All the regulations applicable to property Congress and also marked the introduction of cadastre, rules, restrictions and other the real property registry system. The requirements depend on the classification of country became a presidential republic in 1889 the property. following a military coup. A military junta came to power in 1964 and held power until 1985, after which civilian rule was reinstated. Brazil's
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3. TYPES OF REAL ESTATE DEVELOPMENTS b) Rural properties: Brazil law basically recognizes the following b.1) Allotment - same concept as above; types of land development: b.2) Land division - same concept as above.
a) Urban properties: The development of urban real estate projects a.1) Allotment - the division of a plot of in Brazil typically occurs through a sales process land into lots with the installation of that begins prior to construction of the project the necessary infra-structure, i.e. where buyers purchase units 'off-plan', i.e. serviced lots (e.g. streets, water, based on architectural plans and models. sewage, electricity for transfer to A typical urban real estate project would public agencies upon conclusion) comprise the following stages: prepared and ready for sale. There has been a notable impact on this type of a) Land Analysis. Mainly involves the development following the enactment calculation of the: of new Federal Law no. 13,465/17 that a.1) Maximum amount of built area that now permits a local municipality to could be constructed on the land, as control access to allotments, which prescribed by local zoning and use has resulted in a fierce debate about category legislation; the legality of access control to such allotments which, as a result, ended); a.2) Unit sale price, which varies according to project and the property location, a.2) Land division - the division of a plot of its distinctiveness, as well as the land into lots without the installation characteristics of the units on which of infra-structure (because the plot the analysis is based; already has access to the necessary infra-structure); a.3) The cost of the project, which primarily comprises construction a.3) Real Estate Development - real estate costs, marketing costs, brokerage developments are regulated by Law expenses and taxes; and 4,591/64, thus created by dividing a piece/portion of real estate into a.4) Environmental and zoning several individual/separate and requirements pursuant to local private constructed units, whereby an regulations (Federal and State undivided interest in the real estate is regulations might be also applicable). established/registered in each unit; b) Project approval. Any real estate project a.4) Plots under the condominium regime - must be approved by the relevant brand new type of real estate Municipality prior to the commencement development also regulated by new of the project. Federal Law no 13,465/17, this type of c) Project development. A property condominium entails division of plots developer is permitted to start selling the into lots, without improvements, units of a real estate project only after created/developed as individual units obtaining regulatory approval and the with the remaining areas registered as relevant permits referred to above and communal property. after the project development has been
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registered with the relevant Real Estate ✓ Finding a property for sale, possibly with Register Office. the assistance of a real estate d) Due-Diligence. broker/realtor, whose assistance is not mandatory. The broker's fee and payment e) Project Launch. Essentially the start of the thereof, which is negotiable between the units’ sale. The sale of units may only take parties and broker, and may be up to 6% place after a project has been approved of the purchase price. and the development has been duly ✓ registered before the relevant Real Estate The purchaser, whether individual or Registry Office. company, must have a Brazilian Tax Registration Number issued by the f) Construction. Federal Revenue. The registration 4. TYPES OF IM REM RIGHTS IN BRAZIL procedure is straightforward and can be carried out by a third party (attorney–in- a) ownership; fact). b) surface; ✓ Execution of a private sale and purchase c) use; agreement. This is not a mandatory step, but recommended given that such an d) right-of-way; instrument entitles the parties concerned e) enjoyment; to not only establish all the conditions to f) habitation; be met to conclude the real property acquisition, but also to outline all the g) right to acquire; obligations with respect to the formalities h) pledge; to be complied with prior to the acquisition, among which, notably, due i) right of floor slab ("Direito de Laje", diligence. which roughly translates to the Right of the Floor Slab, allows to obtain a distinct ✓ Property legal due diligence. It is highly title to construction on top of or under recommended that a legal due diligence another building even though it sits on on the property is conducted by a lawyer the same land) - regulated by the new appointed by the purchaser, which would Federal Law no 13,465/17; include a detailed audit of the rights of the seller and his/her predecessors, as j) right to guaranty: well as a research on any encumbrances j.1) mortgage; that may be registered over the property j.2) fiduciary lien; (mortgages, claims, etc.). The property due diligence is a very important step, j.3) antichresis; given that Brazilian Notaries are not j.4) seizure. obliged to (and hence will not) perform such due diligence, moreover, given that 5. GUIDELINES AND MAIN STEPS IN THE it is possible to waive in the deed of PROCESS OF REAL PROPERTY ACQUISITION purchase the right to certain information Acquisition of a real estate property in Brazil, and to obtain the basic clearance whether urban or rural, essentially involves the certificates. It is important to note that following steps: recent changes in Brazilian Law could
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facilitate the legal due diligence measures ✓ Payment of the property ownership given that, among other provisions, the transfer tax. In general, the property law now states that any claims, ownership transfer tax (a Municipal tax) encumbrances or liens (with some must be paid upon the execution of the exceptions) will affect the sale of a real deed, but the rules on the payment of this property only if such encumbrances or tax and its rates vary in accordance with liens were duly registered and therefore the applicable rules imposed by the appear in the property ownership record municipal authority where the property is file, with the relevant Real Estate Registry located. Office (the ownership record file is a ✓ Registration of the deed of sale with the mandatory certificate for the execution of relevant Real Estate Registry Office (in the real property sale deed). contrast with the choice of Notary Officer, ✓ Technical (e.g. engineering, geological or who may be chosen by one of the parties, archeological) and environmental due the Real Estate Registry Office’s diligence would also be recommended, jurisdiction is defined by State Law and, depending on the status of the property, therefore, cannot be selected by either its historical data or the prior (or future) party). Under Brazilian law, a purchaser of use of the property. real property only becomes the property’s ✓ Execution of the purchase deed before a rightful owner after the notarial purchase Notary Public. In Brazil, the acquisition of deed is duly registered with the any real property occurs solely by virtue competent Real Estate Registry Office, as of a notarial deed (save for certain indicated in the real property ownership exemptions, as in the event of the certificate. acquisition of a property for a price lower 6. FEES AND EXPENSES RELATED TO THE than thirty times the official minimum ACQUISITION OF REAL PROPERTY wage, or in case of participation of a Notarial and Real Estate Registry Office fees financial institution by means of a private vary from State to State, and are regulated by instrument). The Notary Public is usually State law. In each State, the same fees will be chosen by the purchaser, who also pays charged by every Real Estate Registry Office the notary fees. Both the seller and the and Notary Public practicing in that State. purchaser may either appear in person before the notary to execute the deed, or Lawyer’s fees can be negotiated, and are appoint attorneys-in-fact to do so in their established by the Brazilian Bar Association in name and on their behalf by virtue of a its main fee guidelines. Under the law, a lawyer notarized Power of Attorney. The deed does not need to be present at the execution of must be drawn in the Portuguese the deed of sale; however, to ensure the language only. The Notary Public will read validity of negotiations and compliance with the deed aloud to the parties. Therefore, the relevant legal formalities, it is advisable to a non-Portuguese-speaking party (if have a lawyer present. Furthermore, the attending the execution of the deed in presence of a lawyer also serves to ensure the person) will need to appoint and have a accuracy of the deed’s content in relation to translator present. the description of the property, the description of the succession of rights of the seller and
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[BUYING AND SELLING REAL ESTATE IN BRAZIL] 24 his/her predecessors, in addition to other legal INCRA, and may lead to other legal requirements. measures/requirements with respect to the Depending on circumstances, other costs might property regularization given that the be applicable, such as the laudemium, applied description must be recorded in the property to marine land (properties located on islands or ownership record file. In addition to properties that fall under an occupancy regime certification by INCRA, as a requirement for the or a permit issued by the Federal Government). valid execution of a deed of sale of rural land, registration with the relevant Real Estate 7. FINANCING Registry Office is also required if the property in The most common way to finance the purchase question comprises an area of more than 100 of a real estate property is through a bank loan. hectares in extent (note that this provision will To grant a loan, Brazilian banks examine the soon apply in transactions involving properties purchaser’s credit history and financial smaller than 100 hectares in extent). situation in addition to having the current It is also important to note that the registration commercial value of the property appraised by of rural property data with the State and the a civil engineer. Federal environmental agencies is a further Upon payment of the purchase price - loaned requirement for the execution of deed of sale amount - directly to the seller, the bank secures for the acquisition of rural land, coupled with its interest over the property by registering a its registration with the relevant Real Estate guarantee with the Relevant Real Estate Office Registry Office. to guarantee the loan (commonly a mortgage In addition, the rural property must be or a fiduciary lien). registered with the Federal Revenue, since the 8. SPECIFICITIES WITH RESPECT TO RURAL property must have an identification number LAND - PROPERTY BOUNDARIES (“NIRF”). DESCRIPTION AND ITS ENVIRONMENTAL 9. RESTRICTIONS ON REAL PROPERTY DATA ACQUISITION BY FOREIGNERS Brazilian Law prescribes particular provisions in Brazilian law does not impose restrictions on relation to rural land, and anyone with the urban real property ownership by foreign intention of acquiring rural land must be aware entities or persons. of (i) specific rules/regulations with respect to the description of the boundaries of rural land However, foreign entities or persons are that detail satellite geo-referenced coordinates currently not permitted to own rural real in accordance with the proper topographical properties without governmental authorization. rules established by the National Institute of It is worth noting that over the course of the Colonization and Agrarian Reform ("INCRA"), last two decades fierce debate has been and (ii) specific rules/regulations with respect ongoing in on the issue of property ownership to demarcated preservation areas on such by foreign entities. Up until the end of 2016, in properties and cadastre thereof with the State São Paulo State the mere fact that an entity and the federal environmental agencies. was duly registered with the São Paulo Board of It is important to note that the description of Commerce, with no consideration given to the rural properties by way of satellite geo- nationality of its shareholders, was sufficient referenced coordinates must be certified by for such an entity to be treated as a Brazilian
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[BUYING AND SELLING REAL ESTATE IN BRAZIL] 25 entity, hence making it possible for the entity to Inalienability clause: This clause restricts the own rural property in São Paulo State. owner’s faculty/ability/capacity to dispose of However, the Supreme Court suspended this the property. practice. Presently, the position is that a foreign 11. NOTES/OBSERVATIONS ON TAXATION entity is the one under direct or indirect foreign Real property transfer tax varies between control. municipalities and, therefore, depends on Changes on this issue are expected; however, where the property is located. It is important to there is no clear period for their note that in case of donation of real property, implementation. Said changes might originate Municipal transfer tax shall not be levied, but from a final ruling by the Supreme Court, or State Donation and causa mortis shall be the from the several bills put forward for payable tax instead. consideration by the National Congress. Urban Real Estate Property Tax (“IPTU”). All 10. IMPORTANT PROVISIONS TO BE urban real estate property in Brazil owned by CONSIDERED AT TIME OF individuals or legal entities as at January 1st of PURCHASE/ACQUISITION OF A REAL each year, is subject to Urban Real Estate PROPERTY Property Tax payable to the municipality within Right of first refusal: A provision stipulating that whose jurisdiction the property is located. IPTU in the event of a sale, sale commitment, is the main annual tax imposed on urban real assignment, or commitment to the assignment estate properties, and the surface area of the of rights in connection with a leased real real estate property, its location, the value of its property, the tenant has the right of first constructions etc. are used to calculate such refusal to acquire the leased real property, and tax. that the landlord must bring the transaction to Rural Real Estate Property Tax (“ITR”). All rural tenant´s knowledge. Further, in case of joint real estate property in Brazil owned by ownership, members of the condominium also individuals or legal entities as at January 1st of have the right of first refusal. each year, is subject to Rural Real Estate Validity Clause: A type of clause, which if Property Tax, payable to the Federal included in a lease agreement and registered at Government. Calculation of ITR is based on the Real Estate Registry Record, grants the right information provided by the property owner to to a tenant to see out the lease for the entire the Federal Revenue (information includes the term should ownership be transferred to a third surface area, the purpose of its use, extent of party. preserved native forest, agricultural production, among several other considerations). Restraint of mortgage/Non-encumbrance clause: This type of clause prohibits the Tax on income from property rental, or the sale encumbering of a property with a mortgage; of property (capital gain tax), pursuant to only applied on specific circumstances. federal tax provisions, apply on real property leases or sales. Given the frequent Non-communio bonorom clause: This type of amendments to tax legislation, it is highly provision prevents the property from becoming advisable that all property related taxes are part of a joint estate due to marriage or union, revisited and re-calculated as necessary. regardless of the regime governing the union or marriage.
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12. NOTES ON THE REAL ESTATE REALTOR ACTIVITIES Under Brazilian law, a Real Estate Realtor must be registered with the relevant agency (“CRECI”). A broker’s participation in a transaction is not mandatory but if a broker has been hired, even if the broker is not responsible for the effective conclusion of the transaction, regardless whether the transaction is duly concluded, the realtor’s fees would still be due. The parties may (and should) agree to incorporate a provision in the deed of sale stipulating effective conclusion of the transaction as a prerequisite to the payment of realtor’s commission. Realtor’s commission may vary in accordance with the arrangement between the party and the broker, with an upper limit of 6% per cent of the purchase price, established by law in general/standard/conventional cases.
ILN Real Estate Group – Buying and Selling Real Estate Series
Fall 17 INTERNATIONAL LAWYERS NETWORK
ANINAT SCHWENCKE & CIA Buying and Selling Real Estate in Chile
ILN REAL ESTATE GROUP
[BUYING AND SELLING REAL ESTATE IN CHILE] 28
KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER CHILEAN LAW I. STANDARD FORMS OF AGREEMENTS authorizes the deed of sale, with A. Offer to Purchase sets forth Buyer’s instructions to deliver said offer of price, date for closing, documents once the property is contingencies for inspections, financing registered to the name of the Buyer etc. and date for signing a formal in the competent Real Estate purchase and sale agreement. Seller Registrar, with no encumbrances may accept or reject. If the seller except those that are unrelated to rejects, rejection is considered a guarantees provided by the owner counteroffer if reasons for rejection are (i.e. Co-ownership Bylaws, informed. easements) and those accepted by the Buyer in order to guarantee B. The most usual form of commitment to payment of credits for the purchase sell and purchase real estate, (i.e. mortgages, prohibitions to sell). notwithstanding the property’s purpose, features of the parties, or other If the parties agree that the conditions is through a Promise purchase price will be paid in Agreement. The promise agreement installments, the Seller does not must detail the terms and conditions of waive its resolutory action and does the purchase as thoroughly as possible, not grant the Buyer settlement. or it may be deemed invalid and 3. Form of sale and delivery: how the unenforceable. This means the promise property will be sold: usually ad agreement must at least include: corpus, in its current state which the 1. A full description of the property, Buyer declares acknowledging, free including address, boundaries, land of any encumbrances and in general tax identification number, and any limitations to ownership. number of registration in the However, for large plots, especially competent Real Estate Registrar. rural real estate, the parties usually agree to review the property’s exact 2. The agreed purchase price and its surface through a topographical form of payment. If Buyer will pay survey, setting a unitary price per part or all the purchase price with a square meter sold, which may loan from a bank or other financial produce an adjustment against or institutions, Seller usually states that for each party regarding the price. failure to obtain credit by the Buyer For example, if the topographical is considered a breach of the survey reveals that the property’s agreement and not a condition for actual surface is less than 2% of the declaring the agreement void. The property’s surface in its titles, that parties also usually agree that the difference is accepted by the Buyer. purchase price will be paid through If the difference is higher, the Buyer bank documents that will be left in has the right to request a price the custody of the notary public that
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reduction. This also applies in case corporations, were legally
the property’s actual surface is more entitled to acquire, maintain, than 2% of the property’s surface in and sell the property (i.e., Stock its titles: if the difference is higher, corporations are mandated by the seller has the right to collect an Law to authorize, through an increased price that considers the extraordinary shareholders actual surface of the property meeting, the sale of real estate if measured in the survey. it represents 50% or more of the In case the property is part of a company’s assets). condominium, it is sold with the Co- 3. The property is not subject to ownership Bylaws that regulate how encumbrances and limitations the condominium is managed. The that may hinder its transfer or its property must be delivered empty, full exploitation and use by the with no debts of any kind, i.e. land Buyer, due to, for example, tax, utilities, common expenses, etc. leases, seizures, mortgages, In the case of rural property, it must prohibitions, mining permits, be delivered with no workers of any easements, expropriations, kind, the Seller guaranteeing that usufructs, environmental the labor contracts of any workers conservation rights, co- that worked in the property have ownership regulation, etc. been terminated. 4. There are no technical 4. Titles: the sale is usually subject to conditions that may affect the the condition of having the Buyer’s transfer or full exploitation and use of the property by the Buyer, attorneys review the legal titles of the property. If the titles do not such as farming and forestry conform to law, the condition fails, subsidies, debts owed to public and the promise agreement institutions for land taxes, becomes void with not liability to subsidies, declarations of public any party. utility (which mean part, or all the property may be subject to Review of the property’s legal titles future expropriation due to seeks to verify that: eminent domain), etc. In the 1. The Seller, either directly or by case of urban real estate adding the possession of the purchased for the construction property by prior owners, has of any sort of building, both the owned the property for at least city and the district’s land-use 10 consecutive years, since this master plans must be reviewed term is the statute of limitations to verify if construction in the for acquiring real estate through property is authorized based on prescription. the use of the land included in the master plan. 2. The Seller (and prior owners), especially in the case of 5. Term and place of execution: the parties agree on a term to sign
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the purchase agreement, usually as public deeds. In the case of a
based on the time necessary for public deed, if authorized by the the Buyer’s counsel to review Seller, the Buyer may register the the property’s legal titles and, Promise Agreement in the when applicable, to obtain competent Real Estate Registrar, to financing for the purchase. They notify third parties that the Seller also agree on the notary public’s has formally promised to sell the office where the deed will be property. The Seller may also accept, signed. In case the property’s at Buyer’s request, to abstain from price is paid partially or fully offering the property to third parties using a loan, the notary public or encumbering it during the term of who will authorize the deed is the promise agreement; and if usually appointed by the authorized by the Seller, this financial institution that grants prohibition may be registered in the the loan. competent Real Estate Registrar. 6. Guarantees: in guarantee of D. Purchase and Sale Agreement complying with their obligations usually repeats the terms sets forth set forth in the promise in the Promise Agreement. If there is agreement (for the Seller no Promise Agreement, the providing the legal titles of the complete terms of the purchase and property and signing the deed on sale, which are the same as those the agreed date; for the Buyer described herein, are included in the signing the deed on the agreed Purchase and Sale Agreement, date), the parties provide cross- except that in this case the Buyer guarantees in the form of may agree to accept the property’s banking documents with a sum titles without actually reviewing usually equivalent to 10-20% of them. In this case, the Seller inserts the sale price, which may only be a clause having the Buyer collected if the counterparty acknowledge this situation and breaches her contractual waiving its actions to sue the Seller obligations. for hidden flaws in the property 7. Conflict resolution: any (“vicios redhibitorios”). disagreements between the II. BROKERS parties, including any I. Real estate brokerage is an unregulated disagreements regarding the activity in Chile, no special qualifications legality or completeness of the or permits are required to operate as a property’s titles, are usually broker. resolved through arbitration, but there is no impediment in having II. Broker collects a commission of 1-2% of the conflict resolved by the the sale price, from both the Seller and ordinary courts of justice. the Buyer, unless negotiated otherwise. C. Promise Agreements may be III. Brokerage is not mandatory. It is usually executed as private documents, or used in the sale of used real estate,
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although seller can offer directly, and Consumer Protection Act.
sellers of new IV. FORMS OF OWNERSHIP residential/commercial/industrial/forest ry/agro projects hire established A. Residential Property is usually held to an brokerage firms to look for potential individual’s own name or to the name of buyers, and to preparing bidding a company controlled by the Buyer. processes, usually for large properties Joint ownership is allowed in the with percentage determined by the joint commercial/industrial/forestry/agro purchasers, even if it is not a 50-50% potential. assignment. III. BUYER’S INSPECTIONS B. Commercial Property is usually held to a commercial real estate (“inmobiliaria”) A. Inspections are not mandatory, company’s name. although the Buyer usually performs a visual inspection of the property, just to C. Rural Property is usually held either to verify its state. Technical inspections are an individual’s own name (especially in not customary, but are usually case of small plots of at least half a requested for old properties. The Seller hectare) or to a rural real estate usually imposes a sale “as is” of the (“agrícola”) company’s name. property, meaning the Buyer accepts to V. FORMALITIES purchase the property in the state verified during visual inspection. Buyer A. Purchase of real estate in Chile is reviews technical information as part of categorized in Chilean law as a solemn the legal review necessary to confirm agreement. This means that the transfer the Seller has been in possession of the of ownership does not happen when the property, either by her directly or by parties sign the Purchase and Sale adding possessions of prior owners, for Agreement, but only when two at least ten years. copulative requisites are fulfilled: a) Execution of the Purchase and Sale B. When buying new property, the Buyer Agreement through a public deed usually inspects the property with an granted before a notary public, and b) architect to verify if there are any flaws the deed is then registered in the or construction defects that must be competent Real Estate Registrar. repaired before receiving the property. Additionally, the sale of new property, B. If any of the parties needs to appear especially for residential purposes, is through a proxy, either because they subject to Chile’s Consumer Protection are unable to be physically present on Act in all aspects unrelated to the day of execution, of because any of construction quality. Therefore, them is legally incapable (i.e. a minor, or inspection may reveal differences a person that has lost the administration between the conditions offered by the of its patrimony), a power of attorney Seller v. the actual conditions of the must be granted by public deed, and property, which may configure said power of attorney must grant all deceptive advertising and leave the the necessary authorities to the proxy, Seller liable for infringing Chile’s including agreeing the sale price and
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form of payment, granting settlements VII. OTHER CLOSING DOCUMENTS
and waiving resolutory actions. A. Condominiums: The Seller will provide VI. CLOSING COSTS/ADJUSTMENTS the Buyer with a copy of the A. The notary public’s costs for authorizing corresponding Co-ownership Bylaws, in the Sale and Purchase Agreement are the case of properties that form part of usually borne 50% by each party, a condominium regulated by Law although the Seller may try to impose 19.537 of Real Estate Co-Ownership. full payment of all costs by the Buyer. The Buyer also usually requires the Costs of registering the Sale and Seller to provide a certificate, issued by Purchase Agreement before the the condominium’s administrator, competent Real Estate Registrar are stating that the Seller does not owe any borne by the Buyer. The fee paid to the common expenses for his unit. Real Estate Registrar is of 0,002% of the B. Land tax: Real estate subject to land tax sale price, considering a maximum price may not be transferred if there are land ceiling of CH$ 128.000.000 (USD tax payments owed to the Treasury. 205,000 approx.). Therefore, a land tax debt certificate B. Buyer and Seller adjust for land taxes, issued by the Treasury or the Tax which must be paid on a quarterly basis. Authority showing that there are no In addition to the foregoing, if the outstanding land tax payments is property is commercial property, attached to the sale deed. adjustments are also made for rents, C. Utilities: Seller is usually required to third party operating expenses and prove to the Buyer that all bills for common area maintenance expenses. utilities, such as sanitary services, C. Land that has been subjected to electricity, gas, cable TV/Internet agricultural purposes may be subject to services have been duly paid and no certain taxes and payments derived outstanding debts for these services from obtaining agricultural/forestry exist. Buyer may request that some of subsidies. Those subsidies must usually these services, especially telephone and be respected by the Buyer, or previously cable TV/Internet services, be terminated by the Seller. For example, terminated before the sale. subsidies for irrigation works, make the VIII. RECORDING REAL ESTATE DOCUMENTS owner of the property, even after it is A. Since real estate must be transferred by sold by the owner who obtained the a public deed registered before the subsidy, liable for failure to maintain the competent Real Estate Registrar, copies irrigation works that were paid through of the deed are always available firstly the subsidy. in the office of the notary public that D. Value added Tax: the sale is subject to legalizes the deed, and then in the VAT if the property is sold fully competent Judicial Archive. furnished, or in other specific cases, i.e. B. Regarding the actual registration, the in case of a rural property, if the Seller sale deed is registered in the Property obtained fiscal credit derived from Registry of the competent Real Estate investments in the property.
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Registrar, who may then issue copies of documents to the Buyer, once the Buyer
the property’s registration to the signs a deed annulling the Purchase and Buyer’s name, and a certificate that Sale Agreement shows all the liens and encumbrances IX. ANNUAL COSTS FOR PROPERTY OWNERSHIP on the property, including prohibitions, seizures, litigation, easements, A. Property Insurance: it is not mandatory, usufructs, Co-ownership Bylaws, etc. but very common. For condominiums, insurance is contracted for the
C. Since the recommended form of condominium’s common property. transferring a property is to settle all When property is purchased through obligations that arise from the sale and loans by banks or other financial purchase agreement in the same deed, institutions, the lender requires the this must be reconciled with the Seller’s Buyer to at least contract fire and interest of not materially delivering the earthquake insurance. Unemployment property until he receives full price insurance for the Buyer who is a natural payment, and the Buyer’s interest of not person is also usually demanded by delivering the payment of the purchase financial institutions, which may be price until the inscription of the enforced contractually but is not legally property to the Buyer’s name in the mandatory. Real Estate Registrar is completed. To leave no obligations pending, the parties B. Land tax: Real estate in Chile is subject agree in the Sale and Purchase to a land tax, paid quarterly to the Agreement to state that the Seller Treasury, and whose value is received payment in that act, and the determined by the fiscal value of the Buyer received the property in the same property, which usually is 1/3 of the act. Then, besides signing the Sale and property’s commercial value. Some Purchase Agreement, the parties also properties, due to their surface or use sign a separate document with are exempt from the land tax. Some instructions to the notary public that properties, due to their state, may be legalizes the deed, with the Buyer castigated with a higher land tax. providing the notary with the payment documents, which are safeguarded by the notary public. The notary will then, as instructed, hand over the payment documents to the Seller once the notary has verified that the property is registered to the Buyer’s name in the competent Real Estate Registrar, and that the only encumbrances that lien the property are those that existed before the sale or those constituted by the Buyer. If the instructions are not completed in a pre-determined period, the notary will return the payment
ILN Real Estate Group – Buying and Selling Real Estate Series
Fall 17
INTERNATIONAL LAWYERS NETWORK
PETERKA & PARTNERS Buying and Selling Real Estate in Czech Republic
ILN REAL ESTATE GROUP
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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER CZECH REPUBLIC LAW I. Types of Real Property Transactions the seller, existing mortgages and possible a) Purchase of an undeveloped plot of land ongoing proceedings. Registered there are also records called “notices” concerning the b) Purchase of a developed plot of land important information regarding the registered c) Purchase of a building (that is not part real estate or its owners or the persons holding of plot of land) other rights to the real estate, for instance, information regarding dispossession, execution d) Purchase of a flat proceedings, prohibition of disposition, and e) Purchase of a right to build prohibition of establishing a pledge. f) Through a share deal with a corporation • Description of needed repairs or other that purchases and sells the real estate regulations the seller/buyer must comply with. Note: The right to build is right in rem related to a plot of land consisting in a right to have • Date of handover to the buyer/date of an overground or underground structure transfer of ownership (N.B. the ownership whether yet existing or future. It is is transferred on the day of registration in considered according to Czech law as an the land register retroactively on the day immovable asset. There is a special regulation of filing the request. regarding this new institute which has been • The conditions of the change of incorporated into the Czech law since 1 ownership. January 2014. A detailed description of this institute exceeds the scope of this article; • Real estate charges. however, it could be useful in some cases. We • Declaration regarding the required will gladly provide more detailed information municipal decisions such as, for instance, upon request. the occupancy permit determining the II. Major Content of the Purchase Agreement purpose of the use of the real estate. • The contracting parties, as well as the • Detailed representations and warranties price and the payment terms. regarding the current ownership and substantial characteristics of the real • An exact description of the real estate, estate such as: access, connectivity to i.e., the land, any fixtures and fittings of media supplies (gas, electricity etc.). the building or flat and existing easements, pledges, etc. Czech law • Since 1 January 2016, the Energy expressly regulates the description of the Performance Certificate of the building land and buildings used for the purpose of shall be prepared by the purchaser, and it their registration in the land register. is recommendable to include it in the Therefore, the most important document purchase agreement as its annex. containing the description of the land is Note: There are collateral provisions in the the land register. purchase agreement, which can be constituted Note: The review of the land register is of major as rights in rem and registered in the land importance regarding the ownership status of register. These collateral provisions may
ILN Real Estate Group – Buying and Selling Real Estate Series
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facilitate the negotiations of both contractual attorney-at-law. According to the escrow parties by ensuring their specific requirements agreement the bank/notary/attorney-at- through these rights in rem. The collateral law is obliged to transfer the purchase provisions in the purchase agreement are price after the fulfilment of the conditions namely: (i) reservation of the ownership right, stated in the escrow agreement, which (ii) reservation of the repurchase, (iii) usually includes the registration of the reservation of the resale, (iv) pre-emption right, buyer in the land register as the owner of (v) purchase testing, (vi) reservation of a better the transferred real estate and payment buyer. A detailed description of these institutes of the tax on acquisition of real estate. exceeds the scope of this article however it V. Agents could be useful in some cases. We will gladly provide more detailed information upon • The Buyer or Seller can both use a real request. estate agent. The contract with the agent can be concluded as an exclusive
III. Conclusion of the Purchase Agreement agreement.
• The purchase agreement must be • The Czech Chamber of Real Estate concluded in writing and the signatures of Agencies issued a book of recommended both parties must be on one document. commissions for real estate agents, which For the purpose of the registration in the is however not binding, and the real land register, it is required that the parties estate agent's commission is generally to the contract prove their identity by determined by the market situation. The their officially certified signatures. The commission ranges from 3% to 7% of the purchase agreement shall be thus purchase price. concluded in writing with the officially certified signatures of both parties on one VI. Forms of Ownership document. • In general, all individuals and legal entities IV. Transfer of Ownership can invest into and own real estate assets. • The parties provide for who will apply for • It is irrelevant if the owners and the registration in the land register in the purchasers are resident or non-resident or purchase agreement. In most cases, it is which country they come from. It is only stated that the seller is obliged to apply crucial that the Czech land registry for the registration in the land register recognizes the legal personality of the within a certain period from the foreign company or individual. conclusion of the purchase agreement. A. Acquisitions • To ensure that the purchase price is • Real estate can be acquired by way of transferred to the seller after the an asset or a share deal. The legal registration of the ownership in favour of entities in the case of a share deal are the buyer, the parties mostly use a mostly organized as limited liability deposit of the purchase price at a notary, companies or joint stock companies. attorney-at-law or bank. The parties to the contract thus conclude, mostly with a B. Residential Property purchase agreement, also an escrow Most frequent forms of ownership of the agreement with the bank, notary or residential property:
ILN Real Estate Group – Buying and Selling Real Estate Series
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1. Sole ownership: The owner is the only b) Formation person authorized to control and dispose • The foundation act is a of the land in question. Memorandum of Association or 2. Co-ownership: More than one person Foundation Deed in the case of a owns an undivided share of land. Each co- sole shareholder. It must be owner is entitled to dispose of its share. notarized. 3. Joint ownership of spouses: Each of the • Setting up an s.r.o. is spouses is entitled to a share of the joint uncomplicated and can be property, but is not entitled to dispose of accomplished easily. Registration it independently, i.e. without the consent is done either directly by the of the other joint owner (spouse). notaries or via Court. Ownership by legal entities is however not • A supervisory board is not an excluded. obligatory company body. C. Commercial Property c) Costs of Formation Owners of commercial property are most The estimated total notarial costs for the frequently legal entities of either private or formation of a standard s.r.o. are public law. The most commonly used entities amounting approximately to CZK 6,800 under Czech private law are joint-stock CZK (€ 250) (In case of registered capital – companies (a.s.) and limited liability CZK 200 000 (€ 7,300)) plus court costs, companies (s.r.o.). As regards the entities of about approx. CZK 6,000 CZK (€ 220) and public law, they are usually insurance fees for a legal counsel for the drafting of companies, banks, funds or purely real estate the Foundation Deed or Memorandum of companies. Association. The notarial costs are 1. Limited Liability Company – s.r.o. calculated according to the amount of the company's registered capital. It is also • Most widely used legal form for possible that the registration of the corporations. established company can be performed • Highly flexible, with relatively few directly by a notary based on a obligations. certificated notarial deed. The total costs are in this case a little lower. a) Legal Entity d) Minimum Registered Capital • A legal entity acts autonomously, represented by executive • The minimum registered capital director(s). required for an s.r.o. is CZK 1 but it is recommendable to set up a • Independently subject to taxation. company with higher capital • The rights and obligations of an covering the initial company´s s.r.o. exist autonomously from expenses to exclude situation of those of the shareholders and the insolvency (at least CZK 100 000 (€ executive directors. 3700).
ILN Real Estate Group – Buying and Selling Real Estate Series
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• Nevertheless, at least 30% of each • Under Czech law, a violation of shareholder’s monetary these duties by an executive contribution must be paid-up in a director will not affect the validity special bank account before the of a contract with a third party, company's registration in the but the s.r.o. may hold the Commercial Register. In case of executive director in question sole shareholder, the registered liable for damages. capital has to be paid-up entirely. 2. Czech Joint-Stock Company – a.s. e) Limited Liability • An a.s. (akciová společnost) is a legal • The shareholders of the entity are entity in which the shareholders are not not personally liable for the liable for the debts of the company during company's debts. The its existence. shareholders' liability is joint and • It is much more complicated to form and several and is limited to the extent operate than an s.r.o. of their unpaid contribution in the registered capital according to the • Hence, the rules of the a.s. are generally Commercial Register at the time less flexible compared to the rules of they are invited by the creditor to forming a limited liability company. meet performance. a) Formation • The limitation of liability arises • At least one founding shareholder is once the s.r.o. has been registered required, which can be an individual in the Commercial Register. or a legal entity. Note: If the corporate share is not yet • The minimum share capital is CZK fully paid, the shareholders must, if 2,000,000 (EUR 80,000). need be, pay the outstanding difference privately in full. • The Articles of Association must be notarized and contain certain • The company's statutory body is mandatory information. one or more executive directors. The executive directors act in all • Application for registration in the matters on behalf of the company company’s register takes place in the in the way of acting that is district where the company is located. registered in the Commercial Note: Previously, the founding shareholders Register. The Foundation Deed had to pay a minimum contribution. In the and the Memorandum of case of cash contributions: each of the Association may state that the founders had to pay of at least 30% of its executive directors constitute a subscribed registered capital by the time of collective body. The internal the submission of the proposal to the restriction of the executive Commercial Register. directors' powers is not effective • Tax registration is at the local tax against a third party. authority.
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• The company must establish a website Board. The Board of Directors is the containing the obligatory information company's statutory body which oversees concerning the company without undue the company's business management. delay after its registration into the Nobody is authorized to instruct the Commercial Register. Board of Directors in business b) Structure – 2 options management matters. The Supervisory Board is a controlling corporate body • There are two options regarding the supervising the performance of the Board company's structure: (i) the monistic of Directors and the acting of the structure, (ii) the dualistic structure. Both company. Nobody is authorized to options are not implemented in Czech law instruct the Supervisory Board in Board of in their pure forms. The company may Directors controlling matters. freely change its structure by changing its
Articles of Association. • The General Meeting is the third body of the a.s. in both company structures. It • The monistic structure is a new option consists of all company shareholders. Its which exists in the Czech Republic only most important rights consist of (i) since 1 January 2014. This structure is electing new members to the Board of typical in European countries such as Italy, Directors in the dualistic structure if the France and Switzerland, and this structure Memorandum of Association does not is also used for a European Company delegate this right to the Supervisory (Societas Europaea). Board; (ii) electing new members in the • A company with a monistic structure has a Supervisory Board in the dualistic Management Board and a Statutory structure or Management Board in the Director. monistic structure except for members of the Supervisory Board who are not • The Management Board has the elected by the General Meeting; (iii) controlling powers towards the Statutory deciding on the distribution of profits and Director and determines also the amending the Articles of Association. fundamental orientation of business management. The Statutory Director is c) Liability the company's statutory body with • Only the company is liable towards the management powers (these powers are company's creditors and not the shared with the Management Board) and shareholders. it is elected by the Management Board. Note: Persons acting on its behalf are liable • The dualistic structure, which was for the obligations which arise before the originally the only structure used for a company's incorporation in the Commercial joint-stock company in the Czech Republic Register. If there are more persons acting before 1 January 2014, and currently used together, they are liable for such acting jointly also in Germany, is the more common and severally. The company can acknowledge structure of a joint-stock company in the the effect of such acts within three months Czech Republic. from its incorporation and then it is bound by • A company with a dualistic structure has a such acts from when it began. Board of Directors and a Supervisory
ILN Real Estate Group – Buying and Selling Real Estate Series
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3. Other types of entities bear the costs of deleting old mortgages in There are two other types of companies the land title register. Limited partnership company (k.s.) and • Usually, the purchase price is transferred to Unlimited partnership company (v.o.s.), that an escrow account maintained by the are however not often used in real estate notary, bank, or attorney-at-law, whereby transactions. the money solely gets transferred to the The same applies to private law associations seller when the registration in the land that are not considered to be legal entities registry is complete. and where the liability of the members is • The tax on acquiring real estate is 4% of the unlimited. purchase price to be paid by the seller, VII. Financing whereby the buyer is the guarantor (and the parties may agree in writing that the tax • The usual way of financing real estate is a will be paid by the buyer) but as of 1 bank loan/mortgage for at least a part of October 2016, this tax will be paid by the the purchase price. Thereby, a bank buyer only. generally insists on a collateral. • Agent fees. • The buyer normally must provide a certain
amount of the overall costs from its own IX. Examinations before closing sources. For large development projects, • The buyer is advised to check the titles to banks usually require a pledge on all the property for any potential or real possible claims which the buyer can gain deficiencies. relating to the real estate. • Commercial buyers should additionally • In this connection, the buyer often must check if there are any planning restrictions: present the seller with an irrevocable mostly, a construction or alteration as well acceptance of loan financing by a reputable as a change in use or the demolition of a bank or show proof of sufficient funds building requires a building permit. The before signing the purchase agreement. building project must comply with the • Normally, the mortgage/loan is provided for content of the local (or regional, as the case about 60%, up to 70%, of the purchase may be) development plans. Therefore, price. regarding prospective plans of construction, the development and land use should be • For special transactions such as large reviewed very carefully before the closing individual properties or real estate of the contract. portfolios, a common alternative to a bank
loan is the use of capital market products, • In addition to this, environmental issues for instance, bonds, receivables or credit should be checked before closing too. derivatives. Note: It is strongly recommended to undertake VIII. Payments and Costs a due diligence review before the closing of the contract. • The costs and taxes are normally borne by the buyer. However, usually the seller must
ILN Real Estate Group – Buying and Selling Real Estate Series
41
Fall 17 INTERNATIONAL
LAWYERS
NETWORK
MICHEL LLP Buying and Selling Real Estate in Germany
ILN REAL ESTATE GROUP
[BUYING AND SELLING REAL ESTATE IN GERMANY] 42
KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER GERMAN LAW I. Types of Real Property Transactions Note: The buyer should insist on A. Purchase of an undeveloped plot of registration of a priority notice in the land. land registry to secure the buyers title in the real estate. This protects the buyer B. Purchase of a developed plot of land. from other, unexpected sales activities C. Purchase of a single building. to other buyers by the seller. D. Purchase of a condominium. III. Notarization of the Purchase Agreement E. Through a share deal with a corporation • The purchase agreement must be that purchases and sells or manages its concluded by notarial deed to be own real estate. binding for the successive transfer of ownership. As long as the contract is not II. Major Content of the Purchase Agreement notarized, the buyer cannot claim the • The contracting parties as well as the transfer of ownership. The notarized price and the payment terms. contract is irrevocable upon signing. • An exact description of the real estate, • The buyer or the seller must set an i.e. the land, any fixtures and fittings of appointment with the notary of his the building or condominium and choice. existing mortgages. Thereby, the most • At the date of the appointment all important document containing the persons buying the property must be description of land is the land register. present in person or must be Note: The review of the land register is represented. Proof of identify is of major importance regarding the necessary through legal papers and in ownership position of the seller and cases of representation, the proof of existing mortgages. authorization. If the buyer is a company: The representative signing the contract • Description of needed repairs or other needs to show proof of identity. This actions the seller must comply. includes the proof of authorization from • Date of handover to the buyer/date of the company, his passport and a trade transfer of ownership. register excerpt showing the status of the company. • The conditions of the change of ownership. • The notary will read the contract aloud for both parties. The buyer should bring • Real estate charges as development and a qualified translator if the contract is in adjoining property charges. German. The translator will translate • Declaration about required municipal the deed aloud in the language of the decisions. foreign purchaser. Some notaries also offer a bilingual German-English version • Detailed representations and warranties of the deed. on environmental liability.
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• If there are no changes or additions transfer land and the factual transfer of needed, the deed will be signed by both ownership which must be declared by parties personally and the notary. the so called (Auflassung). • The notary must ensure that the parties Usually, the conveyance will occur at the of the purchase agreement understand same time as the registration for the the contract. Hence, he will answer any change of ownership. questions coming up whilst the V. Agents notarization. • Buyer or Seller can both use an estate • The notary checks the land register to agent. Agents are not obliged to act to see whether the property can be sold at find a proper real estate. all or if there are any restrictions on the property. He must inform the parties • Their entitlement of commission arises about any clauses in the contract that as far as the agent can prove that he might be critical from a legal point of conveys the real estate for his client. view. This does not include questions • There are regional differences within about the appropriateness of the sales Germany as to who must pay the agents price, the conditions of the real estate fees. It can be solely the buyer, the or the ability of the buyer to pay the seller or both. agreed price. • Normally, the agent demands up to 7% IV. Transfer of Ownership of the purchase price. The notary is responsible for the contract VI. Forms of Ownership execution. Therefore, the notary will apply for the registration in the land register In general, all individual and legal entities regarding the change in ownership, the can invest and own real estate. It is registration of a priority notice or a irrelevant if the owners and purchasers are mortgage. He will ensure that all resident or non-resident. It is only crucial requirements set out in the contract are that the German land registry recognizes fulfilled, like the cancellation of old entries the legal personality of the foreign company of mortgages in the land register. or individual. Subsequently, the notary will give the A. Acquisitions parties notice of maturity. Real estate can be acquired by way of an The final transfer of ownership takes place asset or a share deal. The legal entities in through two steps: the case of a share deal are normally 1. The declaration of consent about the organized as a limited partnership or a change of ownership must be declared limited liability company. notarial. B. Residential Property 2. Registration of the change of ownership 1. Sole ownership: The owner is the in the land register. only person authorized to control and Note: German law differentiates dispose of the respective land. between the contractual obligation to
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2. Co-ownership: More than one person • Setting up a GmbH is uncomplicated owns an undivided share of land. Each and can be accomplished easily. co-owner is entitled to dispose of its • A supervisory board is required if the share. company has more than 500 employees. 3. Joint ownership: Each joint owner is c) Costs of Formation entitled to a share of the joint property but is not entitled to dispose of its share The estimated total notarial costs for the independently. formation of a standard GmbH are approximately up to 900 € plus court costs C. Commercial Property about circa 200 € and fees for a legal Legal entities under German private law are counsel for the drafting of the contract of mostly stock corporations (AG) and limited association. liability companies (GmbH) as well as legal d) Minimum Share Capital entities under public law. • The minimum founding capital required Thereby, commercial real estate is often for a GmbH is 25.000 €. owned by insurances, banks, companies, funds, or real estate companies. • Nevertheless, at least half of the minimum capital must be contributed 1. Limited Liability Company – GmbH on a bank account before registering in • Most widely used legal form of the commercial register. corporations. e) Limited Liability • Highly flexible with relatively few • obligations. The members of the entity are not personally liable for the company's a) Legal Entity debts. The liability is limited to the • The legal entity acts autonomously company’s assets. represented by the executive • The limitation of liability arises once the management. GmbH has been entered in the trade • Independently subject to taxation. register. • Considered as a legal person. Note: If the corporate share is not yet fully paid, the shareholders must, if • Liable to corporate income tax, solitary needed, pay the outstanding difference surcharge, and trade tax. private in full. • The particular rights and obligations of • The managing directors have the GmbH exist autonomously from unrestricted proxy for the company. those of the shareholders and the Nevertheless, the members acting executive managers. collectively are able to restrict the b) Formation power of the managing directors. • The founding act and the articles of • Under German law, a violation of these association must be notarized. duties by a managing director will not affect the validity of a contract with a
ILN Real Estate Group – Buying and Selling Real Estate Series
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third party, but the GmbH may hold the available without partners being managing director in question liable for liable with their private capital. damages. • Thus, the GmbH & Co KG 2. Entrepreneur Company Limited combines the tax and company Liability – UG law advantages of a personal • Represents an entry-level model for the company with those of the GmbH, especially start-ups, with a low limited liability of a corporation. capital endowment. • Commonly, the limited partners are • The capital stock of a UG amounts to at excluded from management and least 1 Euro. It must accumulate 25% of representation of the company. its yearly earnings as legal reserve until However, special business decisions it reaches 25.000 €. require the approval of the limited partners. Thereby, the scope of • Afterwards, it can be registered as a participation rights can be modified in GmbH. the partnership agreement. 3. GmbH & Co. KG b) Foundation a) Structure and Liability The foundation of a GmbH & Co. KG • The KG is a business partnership. requires at first the foundation of the GmbH and afterwards of the KG in • At least two partners are necessary in a which the GmbH must be a participating KG. One of them is unlimited liable shareholder. Both may take place in a whilst the liability of the other partners joint notary consultation. does not exceed the value of their share investment in the company. 4. German Stock Cooperation - AG • In a GmbH & Co. KG, the GmbH has the • An AG (Aktiengesellschaft) is a legal position of the partner with unlimited entity in which the shareholder liability liability. Hence, its liability is limited to for debts of the corporation is limited to its own business assets and the whole the amount of the subscribed share GmbH & Co. KG is only liable for the capital. amount of the GmbH’s nominal capital • Much more complicated to form and plus the share investments of the operation than the GmbH. limited partners. • Hence, the rules of the AktG are Note: generally less flexible compared to the • However, the limited partners rules of forming a limited liability will be personally liable, as long company. as they do not implement the a) Formation initial contribution required. • At least one founding shareholder is • With this construction, the required, which can be a natural or legal advantages of the KG are person.
ILN Real Estate Group – Buying and Selling Real Estate Series
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• The minimum share capital is 50,000 Note: For obligations which arise before Euro. the Articles of Association is certified, the shareholders are personally liable as • The articles of association must be joint debtors. notarized and contain certain mandatory information. 5. Private Company – GbR • Application for registration in the In contrast to the type of enterprises company’s register in the district where mentioned above, an unincorporated civil the company is located. law partnership (Gesellschaft Bürgerlichen Rechts, GbR) is not registered in the Note: Previously, the founding commercial and company register. shareholders must pay a minimum contribution. In case of cash a) Structure contributions: one quarter of the lowest • It consists of at least two partners and is issue price. subject to the regulations of the • Tax registration at the jurisdictional tax German Civil Code (BGB). office and local business registration at • Based on a partnership agreement to the jurisdictional local business office. support a purpose jointly pursued by b) Structure the partners. • The Management Board is responsible • When a civil law partnership wants to for daily business of the company and acquire real estate, all partners must authorized to decide all matters relating sign the sale and purchase agreement. to operational conduct of the business. • There is no minimum capital needed. • The Supervisory Board is a controlling • Usually, all partners are jointly corporate body responsible for the authorized to manage the company’s appointment and removal of members business. to the Management Board as well as for the supervision of the management of b) Liability the company. • The use of a GbR is unusual as the • The General Assembly is the third body liability of the partners is unlimited. of the AG, and consists of all company • A leaving partner will be liable for five shareholders. His most important rights more years for the obligations existing consist of electing new members in the before his departure. Supervisory Board, deciding on the distribution of profits and amending • A partner joining the GbR will be liable articles and bylaws. for the obligations that exist already. c) Liability VII. Financing Only the company is liable toward the • The usual way of financing real estate is company's creditors and not the a bank loan for at least a portion of the shareholders. purchase price. Thereby, the bank generally insists on collateral.
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• The buyer normally must provide a varies depending on the federal state certain amount of the overall costs from between 3,5% and 6,5% of the purchase its own capital as well as mortgages. price. • In this connection, the buyer often must Note: The ownership will not be present the seller an irrevocable transferred until the transfer tax is paid acceptance of loan financing by a as a certification of clearance is needed. reputable bank or show proof of • The property transfer tax may also apply sufficient funds before signing the in a share deal. This depends on the purchase agreement. legal form of the real estate entity as • Normally, the mortgage loan is about corporation or partnership and the 60%, up to 70%, of the purchase price. respective shareholding. The tax base is the purchase price, or the real value of • The remaining amount must be secured the real estate assessed by the tax through insurance or other financial authorities. securities. • Capital gains taxation on the seller. • For special transactions such as large individual properties or real estate • Agent fees. portfolios, a common alternative to the IX. Examinations before closing bank loan is the use of capital market products, for instance as bonds, • The buyer is advised to check the receivables, or credits derivatives. property for any potential or real deficiencies, as the notary is not VIII. Payments and Costs responsible for the correctness of the • The costs and taxes are normally borne property description of the owner. by the buyer. However, usually the • The seller is obliged to disclose any seller must bear the costs of deleting hidden defects. However, he does not old mortgages in the land title register. have to suggest any obvious defects. • Usually, the purchase price is • Commercial buyers should additionally transferred to an account maintained by check if there are planning restrictions: the notary whereby the money solely mostly, a construction or alteration as gets transferred to the seller when the well as a change in use or the registration in the land registry is demolition of a building requires a complete. building permit. The building project • After the purchase agreement is signed must comply with the content of the by deed, it is common that the notary local development plans. Therefore, and registration fees are due. prospective plans of construction the development and land utilization should • Notarial costs in a German real estate be reviewed before the closing of the transaction depend on the value of the contract. land and buildings. • Besides, environmental issues should be • Asset deals are subject to a property checked before closing. Important are transfer tax (“RETT”). The percentage
ILN Real Estate Group – Buying and Selling Real Estate Series
[BUYING AND SELLING REAL ESTATE IN GERMANY] 48 the Energy Saving Act and the conjunction of the Energy Saving Regulations. In this connection, an Energy Pass is necessary to obtain a building permission. Furthermore, inherited environmental liability as stipulated in the Federal Soil Conservation Act is a critical issue in real estate sales which requires an extensive due diligence. Note: It is strongly recommended to undertake a due diligence review before closing of the contract.
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Fall 17
INTERNATIONAL LAWYERS NETWORK
A&K METAXOPOULOS AND PARTNERS Buying and Selling Real Estate in Greece
ILN REAL ESTATE GROUP
[BUYING AND SELLING REAL ESTATE IN GREECE] 50
KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER GREEK LAW 1. PROCEDURE – MAIN STEPS OF REAL the property to be purchased is already ESTATE ACQUISITION UNDER GREEK LAW. built, to determine whether the already Acquisition of a real estate property in Greece existing building(s) include any illegal includes mainly the following steps: constructions (namely constructions not covered by a Building Permit) which must • Finding of the property to be purchased, be legalized according to the relevant with the possible assistance of a real laws. Even in cases where the property estate agent. Usually, the agent’s fee does not include any illegal constructions, amounts to 2% upon the purchase price the transfer may be performed only after (plus VAT 24%), but can be negotiated a civil engineer certifies in writing that it between the parties. does not include such constructions. • Obtain a Greek Tax Registration Number. • Issuance of the required certificates and This procedure is simple and does not other documents. For a property require the presence of the foreigner in purchase to take place, several Greece, since it can be carried out by a certificates must be produced to the third party, by a Power of Attorney. notary public, which however pertain to • Legal due diligence of the property. After the seller. having found the property and before • Execution of the notarial purchase deed. proceeding to the execution of any deed In Greece, purchase of any real estate or agreement, the purchaser should property is performed solely by a notarial appoint a lawyer to perform a thorough deed. Execution of such a deed takes legal due diligence of the property, which place before a notary public. The notary includes a detailed audit of the rights of public is usually chosen by the purchaser, the seller and his predecessors, as well as who also pays the relevant notary fees. a research on any possibly existing Both the seller and the purchaser may encumbrances (mortgages, claims, etc.). either appear in person before the notary Legal due diligence is performed with the to execute the deed, or they may appoint Land Registry or Cadastre of the region in someone else to execute it in their name which the property lies. It is noted that and on their behalf, by a notarized Power the responsibility for this very important of Attorney. step lies with the purchaser, given that
Greek notaries are not obliged to (and will • Registration of the notarial purchase deed not) perform such a due diligence. with the Land Registry or Cadastre. In Greece, a purchaser of a property • Technical due diligence. This is performed becomes the property’s owner only after by a civil engineer and is needed in almost the notarial purchase deed is registered all cases of property transfer. Technical with the competent Land Registry or due diligence aims to ensure that the Cadastre. Such registration entails certain property meets all legal requirements for fees which are paid by the purchaser (and the construction of buildings to be their amount is indicated herein below). allowed (in cases where the property is a non-constructed land) and, in cases where
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2. TIMELINE of rights of the seller and his The time required for the conclusion of a predecessors, etc. Lawyer’s fees for the purchase of a real estate property depends on performance of the legal due diligence the complexity of each case. In regular cases, and the attendance of the execution of after the property has been found, purchase the purchase deed are agreed between procedures are normally concluded within a the client and the lawyer and usually period of 1,5 – 2,5 months. depend on the value of the transaction and the complexity of each case. Lawyer’s 3. MAIN CONTENT OF THE PURCHASE DEED fees are subject to VAT 24%. - The Contracting Parties • Registration Fees. The fees for the - Detailed description of the property registration of the notarial purchase deed with the Land Registry or Cadastre - Detailed description of the ownership amount approximately to 0,5% upon the rights of the seller and his predecessors value of the deed and are subject to VAT - The price 24%. - The payment terms in detail 5. FINANCING - Other clauses depending on each case. The most common way of financing the purchase of a real estate property is through a The notary will read the deed aloud for both bank loan. To grant a loan, Greek banks parties, but purchase deeds are only in Greek. examine the financial situation of the purchaser. Therefore, non-Greek-speaking purchasers (if Greek banks have the current commercial value personally attending the execution of the deed) of the property estimated by a civil engineer of will need to appoint a translator. their own choice and grant loans for an amount 4. FEES AND EXPENSES CONNECTED WITH not exceeding the 70 – 75% of such estimation. THE EXECUTION OF THE NOTARIAL Before the loan is disbursed (directly to the PURCHASE DEED. TO BE PAID BY THE seller) the bank shall register a mortgage upon PURCHASER. the property for an amount of approx. 120% of • Notarial Fees. They are calculated the loan. gradually, as a percentage upon the value 6. TAX TREATMENT of the purchase deed, ranging from 0,80% a. Taxes imposed at the time of purchase of for the part of the value up to 120.000,00 the property. To be paid by the purchaser. € to 0,10% for any amount beyond 20.000.000,01 €. Notarial fees are subject Transfer Tax to VAT 24%. Before the execution of the notarial • Lawyer’s Fees. The presence of a lawyer purchase deed, the purchaser is obliged at the time of execution of the purchase to pay the corresponding transfer tax. deed is no longer required under law. It is, Such tax amounts to 3% upon the value of however, strongly recommended, to the property. secure the accuracy of the deed’s content It should be noted that Greek Law also in relation to the description of the provides for an exemption – under certain property, the description of the sequence conditions – from the payment of the
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transfer tax. These exemptions apply only when it comes to plots of land, it ranges to purchasers that already reside or from 0,0037 € per m2 to 11,25 € per m2. intend to be established in Greece and fall Real Estate Duty (sic: “TAP”) into the following categories: (i) Greeks, (ii) repatriates from Albania, Turkey, and This is a special duty imposed upon real countries of the former Soviet Union, (iii) estate properties, in favour of the EU citizens and citizens of the European Municipal Authorities. It is calculated by Economic Area, (iv) acknowledged multiplying the value of the property by a refugees, and (v) nationals of non-EU rate ranging from 0,25 ο/οο to 0,35 ο/οο. countries who enjoy the status of long- This duty is collected through the term residency in Greece. Electricity Bills of the property. Value Added Tax for new buildings Special Real Estate Property Tax When it comes to new buildings, namely This is a special property tax imposed buildings the building permit of which has upon natural or legal entities residing or been issued or revised from 01.01.2006 having their registered seat in countries onwards, a VAT of 24% upon the value of with a privileged tax regime, and the property shall be imposed at the time possessing full or bare ownership or of their first sale/transfer by a usufruct of properties located in Greece. manufacturer, or by a person who deals Such tax amounts to 15% upon the value professionally with the construction and of the property. This tax has been sale of buildings. In cases where VAT is imposed to deal with the phenomenon of applicable, the purchaser is not required tax evasion of offshore companies to pay any transfer tax. possessing real estate property in Greece. The law provides for several exemptions Important Note: due to frequent from the application of the above tax. legislative amendments in taxation of property, it is strongly recommended that Tax on Income from Property Rents all property related taxes are re-visited Annual income from property rents is and re-calculated before any purchase. taxed by a rate of 15% on the amount of b. Annual fiscal obligations of property income up to 12.000 €, by a rate of 35% owners. for the amount of income between 12.001 € and 35.000 €, and by a rate of Real Estate Property Tax (sic: “ENFIA”) 45% on any amount above 35.001 €. Any real estate property located in Greece Rents of properties leased for business or belonging to individuals or legal entities professional purposes is surcharged by a on the 1st of January of each year, is stamp duty of 3,6%, which however is burdened with Real Estate Property Tax. usually paid by the lessee, subject to an This is the major annual tax imposed on agreement. real estate properties. Such tax is calculated based on the surface of the Important Note: due to frequent real estate property, its location, etc. legislative amendments in taxation of When it comes to buildings, it ranges from property, it is strongly recommended that to 2,00 € per m2 to 13,00 € per m2, while
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all property related taxes are re-visited the issuance of a permit by the Minister of and re-calculated as need may be. Defense. 7. RESTRICTIONS IN ACQUIRING REAL ESTATE When it comes to public islands, acquisition of PROPERTY IN GREECE ownership is not possible; such islands may Cross-border Areas only be leased under the same above conditions (prior issuance of a permit by the Greek law provides restrictions for the Minister of Defense). acquisition of property rights in cross border areas of Greece, by individuals or legal entities 8. IMMIGRATION RULES RELATED TO that are not nationals of the European Union or PROPERTY INVESTMENT the European Free Trade Association (“EFTA”). Greek law provides that a residence permit of 5 Furthermore, the transfer of shares or the years shall be granted to citizens of non-EU change of partners /shareholders of companies countries who are the owners (either not located in the EU or EFTA that own real personally or through a legal entity the shares estate property in cross-border areas of Greece, of which belong entirely to them) of real estate is also prohibited. Any such natural or legal property in Greece, or who have concluded a persons (that are not nationals of the EU or timeshare agreement, or have leased hotel EFTA) wishing to acquire real estate properties accommodations for at least 10 years. The located in cross-border areas, must apply to a minimum value of the real estate property and special Committee to obtain permission to the contractual value of the hotel acquire or rent the real estate property. Any accommodations lease agreement has been set transaction taking place in breach of the above to the amount of 250.000 Euros. Such provisions is null and void. residence permit may be renewed for an equal period (5 years) for as long as the real estate The following areas of Greece are considered as cross-border areas, in which the above property remains in the ownership of the non- restrictions apply: Dodekanisa, Evros, EU citizen or the timeshare-lease agreements Thesprotia, Kastoria, Kilkis, Lesvos, Xanthi, remain in force. Preveza, Rodopi, Samos, Florina, Chios, Thira Said non-EU citizens may be accompanied by (Santorini), Skiros, as well as certain regions of their family members (spouse, children under the areas of Drama, Ioannina, Pella and Serres. 21 years old, parents), to whom a separate Restrictions are lifted depending, in principle, residence permit may be also granted following on the legal form of the requested transaction, their request. Their permit shall be terminated its monetary value, the exact location or value at the same time as the permit of the property of the property, and unless national security owner. reasons exist. Purchase of Islands Greek law also provides that for a natural or legal person to acquire ownership of or rent a privately-owned island or a property located in a privately-owned island, they must apply for
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Fall 17 INTERNATIONAL LAWYERS NETWORK
SINGHANIA & CO. Buying and Selling Real Estate in India
ILN REAL ESTATE GROUP
[BUYING AND SELLING REAL ESTATE IN INDIA] 55
KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER INDIAN LAW 1. INTRODUCTION does not include standing timber, growing 5 India is one of the fastest developing crops or grass . economies in the world and real estate plays a 3. TYPES OF REAL ESTATE INVESTMENT major role in it. For a faster development of the The major types of real estate investments country, the government of India is investing which are prevalent are: heavily in infrastructure projects and thereby attracting foreign investments in this sector. a. Residential- This means investment made The transitions governing real estate are in residential real estate which includes primarily governed by the laws framed by the houses, apartments, buildings, etc. respective state government, however the constituting around 80% of the real estate Central Government has introduced a new sector6. legislation called the Real Estate Regulation and b. Commercial- This means investments Development Act, 2016 (RERA) with a view to made in commercial real estate which further boost this sector. This sector, as per the generally includes office buildings, 2 planning commission report , is the second factories, hotels, and other premises used largest employer in the country after for generating profits. Over 40.2 million agriculture. sq. ft. of corporate real estate space was 2. WHAT REAL ESTATE DEALS WITH absorbed by top 7 cities of India during 20157. Commercial investments in real Real estate deals with lands, buildings, or any estate include - other kind of immoveable property (along with the natural resources included) which can i. Retail- This means investment made in either be commercial or residential and can the retail sector for construction of include housing units, office spaces, malls, shopping malls, retails stores etc. schools etc. Real estate is always in relation to ii. Hospitality- This means investments an immovable property, which, under Indian made in the hospitality sector which law, includes lands or benefits arising out of has seen a robust outgrowth owing to land, things attached to the earth or reasons like easy availability of travel permanently fastened to anything attached to plans, holidays, and vacations, 3 the earth where "attached to earth" means growing financial status of people etc. rooted in or embedded in the earth like trees, As of 30 July 2015, India had 972 walls, buildings etc. or attached to what is so approved hotels with a total of 63715 embedded for the permanent beneficial rooms8. enjoyment of that to which it is attached4 but iii. Industrial- Property used for the actual manufacturing of something,
2 TENTH FIVE YEAR PLAN 2002-07, 5 Section 3, Transfer of Property Act, 1882
http://planningcommission.nic.in/plans/planrel/fiveyr/10th/volu 6 me2/v2_ch7_6.pdf https://www.ibef.org/download/Real-Estate-May-2017.pdf 7 3 Section 3(26), General Clauses Act, 1897 Supra, note 5. 8 4 Supra, note 1 Supra, note 5.
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and can be considered either a factory of shares is restricted and it has a or plant. This includes things such as minimum of 2 and maximum of 50 warehouses, garages, and distribution members. There is no minimum paid centers, etc. up share capital requirement for this 9 c. Mixed use- This is the type of investment type of company . in which any two of the above properties iv. Public Companies: This is a company are combined into a single project. that allows the transfer of shares and 4. FORMS OF OWNERSHIP must have a minimum of 7 members. There is no limit on the maximum a. Residential property in India can be held number of members. There is no in the following ways: minimum paid up share capital i. Sole ownership - When the property is requirement for this type of company. held solely by the individual in the v. LLP: This is a type of partnership in individual’s own name. which all the members enjoy limited ii. Tenants in common- Where all the co- liability (their liability is limited to the owners can use the entire property for extent of their contribution in the themselves and each co-owner has a partnership). It requires a minimum of specific share in the property. 2 members and there is no cap on the maximum number of members and is b. Commercial property in India can be held governed by the LLP Act, 2008 and is in the following ways: taxed in the same way as that of the i. Sole Proprietorship: This is the oldest partnership firm i.e. tax is levied only and most common form of business. It on the LLP and the partners are is an unincorporated business where a exempted from the tax. single individual owns, manages, and vi. One Person Company (OPC): OPC is a controls the whole business. The new form of business vehicle which liability of the owner is unlimited, and enables entrepreneurs to carry he has the legal title to the assets and business in sole proprietor form and properties of the business. enter into a corporate framework. It is ii. Partnership Firm: This is a relation basically a hybrid of sole proprietor between two or more persons who and company form of business. This have agreed to share the profits of a company has only one shareholder business carried on by all of them or and must have a minimum of one one of them acting for all. A minimum director and maximum of fifteen of 2 and a maximum of 10 members directors. The sole shareholder can are required to start a partnership himself be the sole director. firm. The relation between partners is created by a contract which is known as the “Partnership Deed”. iii. Private Limited Company: This is a
company in which the right of transfer 9 Companies (Amendment) Act, 2015, Section 2
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5. REAL ESTATE DEVELOPMENT of all phases, need not be registered. Also, Promoter those projects for which the completion certificate has already been obtained With a view to boost the real estate sector, its before the commencement of RERA need development, and to protect the interest of the not be registered. purchaser/allottees, the government has recently framed a new legislation called Real • Every promoter is required to make an Estate Regulation and Development Act, 2016 application to the authority for registering (RERA) which has come into force from 26th his project (online) along with the April 2016. Promoter, as defined under RERA, is prescribed fee and relevant documents any person, including any development such as a brief detail of his enterprise, a authority or a public body who constructs or brief detail of the projects he has causes to construct any building or building completed in the past five years, the consisting of apartments or who develops any authentic copy of the commencement land into a project for the purpose of selling. certificate (which is issued by the Apart from this, the term ‘promoter’ also competent authority indicating that the includes within itself an apex state level co- promoter is allowed to start the project), operative housing finance society and a primary all the sanctioned plans to be executed in co-operative housing finance society which the project, the location details, etc. constructs apartments or buildings for its • The promoter, most importantly, must members. Any person who acts as a builder, deposit 70% of the amount raised from colonizer, contractor, or developer and who is the allottees for the real estate project the holder of the power of attorney given by into a separate account that is maintained the owner of the land or any such person who in a scheduled bank which will only be constructs buildings for sale to the public can used for construction and land cost10. A also be termed as a promoter. declaration, supported by an affidavit Requisites for Selling of Real Estate Property by should be sent along with the application Promoter for registration by the promoter, and the declaration should state that the account • The first and the foremost requisite is the is being maintained along with time registration of the project. The promoter period proposed for the completion of is not allowed to market, book, sell or project. offer for sale, or even advertise any kind of plot, building or apartment before • Within 30 days of receiving the registering the project with the Real application, the authority will grant or Estate Regulatory Authority (Authority) reject the registration of the project and which is constituted specifically for in case the authority fails to respond considering real estate matters. However, within 30 days, the project will be the projects, where the proposed area of deemed to have been registered, and land used for development is not greater after the registration, within a period of 7 than five hundred square meters or the days, a registration number and Login ID number of apartments proposed to be 10 Section 4(2)(l)(D), Real Estate (Regulation and Development) developed does not exceed eight inclusive Act, 2016
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is provided to the promoter to access the c. They are entitled to claim possession over website of the authority and to create his the apartment, plot, or building, as the web page and fill in the details of the case may be. proposed project. d. They are entitled to claim refund on the • Once all the above-mentioned procedures amount paid along with the interest and are followed and complied with, the can also claim compensation from the promoter can start the sale or promoter if the promoter fails to comply advertisement of the property. with the regulations or is unable to give the possession in accordance with the Real Estate Agents terms of agreement. • A real estate agent is not allowed to Duties of the Allottees facilitate the sale or purchase of any plot, apartment, or building if the agent is not a. Every allottee who has entered into an registered under the Authority. For the agreement of sale to take an apartment, same, the agent must make an application plot, or building is responsible to make to the Authority and the Authority can the necessary payments within the time then either reject or grant the specified. registration. b. Allottees are liable to pay the interest • The agents are supposed to facilitate the according to the rates which are possession of all the information and prescribed for any delay that happens in documents to which the allottee is making the necessary payments. entitled to at the time of booking of any c. Every allottee of the apartment, plot, or plot, apartment, or building. building must take part in the formation • In case any agent fails to fulfill his of an association, society, or a co- statutory obligations, he can be held liable operative society of the allottees. to pay the penalties/fines as prescribed d. Every allottee must take physical under RERA. possession of the apartment, plot, or Rights of The Allottees building within two months of the issuing of the occupancy certificate (a certificate a. The allottees are entitled to have the issued by the competent authority which information about the sanctioned plans, denotes that the building has followed layout plans along with all the other the prescribed norms and is suitable for specifications as approved by the occupation by the allottees). competent authority. e. Every allottee must participate towards b. The allottees are entitled to know the the registration of the conveyance deed time schedule for project completion, of the apartment, plot, or building. along with the provisions that are there for basic amenities and services that are Duties of the Promoter agreed between the promoters and the a. The promoter is duty bound to get his allottees. project registered under the Authority, and prior to registering the project, the
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promoter is not allowed to sell, market, or due to the defects in title to the property. advertise any plot, apartment or building Unlike other common insurance, this policy is a under any real estate project. retrospective one as it provides cover for an b. The promoter, after receiving the Login ID event that happened in the past which has and password, must create a web page on resulted in an unclear title. Again, it is the duty the website of the Authority which has to of the promoter to obtain and provide the contain extensive disclosures ranging allottees with the title insurance for every from the project plans and the completion project that they are selling. timeline, to the project approvals and the Institutions Established for Real Estate permissions, and from the construction There are three different institutions in India costs to the details of the litigations and that are established specifically for considering encumbrances on the land. real estate matters. They are: c. It is the promoter’s duty not to make any a. The Real Estate Regulatory Authority unilateral change of plans without obtaining prior consent of the allottees. b. The Real Estate Appellate Tribunal (REAT) The promoter requires a written consent c. Central Advisory Council (CAC) of 2/3 of the allottees for making any changes to the project plans. The RERA and the REAT are the regulatory and adjudicating mechanisms, which have members d. The promoter must deposit 70% of the who specialize in the related areas, thereby amount received from the allottees into a ensuring greater certainty to the proceedings. separate account in a scheduled bank The CAC acts as an advisory body to the central account. Money from this account can government and it is comprised of members only be withdrawn when the promoter from central ministries, Real Estate Regulatory submits certificates issued by an architect, Authorities, real estate industries, consumers a chartered accountant and civil engineer. etc. e. The promoter is not allowed to accept NOTE: A civil court does not have the authority more than 10% of the cost of apartment, to entertain any suit or proceeding in respect to plot or building in advance from an a matter which the RERA or the REAT is allottee without first entering into and empowered to consider. registering an agreement for sale. 6. FOREIGN INVESTMENT IN REAL ESTATE f. The promoter is responsible for obtaining all the necessary insurances as notified by I. Background the appropriate government. • The first step taken towards opening g. It is the promoter’s duty to transfer the the real estate sector for foreign title by executing a registered conveyance investors was taken in 2001 by the deed in favor of the allottees. Department of Industrial Policy and Promotion (DIPP) which permitted FDI Title Insurance up to 100% for development of This is a type of indemnity insurance which integrated townships, including insures against the financial loss that happens housing, commercial premises, hotels, resorts, city and regional level urban
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infrastructure facilities such as roads • FDI is not permitted in an entity and bridges, mass rapid transit which is engaged in any Real systems and manufacture of building; Estate Business (which is defined however, the investment was allowed and is dealt with below), or only through the approval route (i.e. construction of farm houses, or after it is approved by the trading in transferable government). development rights. • 2005 saw a real boost for foreign b. Real estate business investment when the sector was • Real Estate Business has been opened to FDI and no government defined as dealing in land and approval was required for the same. immovable property with a view of This was done with the object of earning income from there. It does improving the overall infrastructure of not include development of the country as well as to cater to the townships, construction of growing real estate demand in the residential/commercial premises, country. roads or bridges and Real Estate • According to DIPP, total FDI inflow in Investment Trusts (REITs) construction development sector registered and regulated under (including townships, housing, built-up the SEBI (REITs) Regulations infrastructure) during April 2000 to 201412. September 2015 has been around US$ c. Applicable Conditions 24.16 billion which is about 9% of total FDI inflows (in terms of UD$) from • Minimum Capitalization: earlier a April 2000 to September 201511. minimum capitalization amount of US$ 5 million was required, II. Current Position however, this requirement of a. FDI in real estate capitalization has been done away • 100% FDI under the automatic with. route (without the approval of the • Exit and Lock-in Restrictions: the government) is permitted in investor can exit from the construction-development investment after 3 years from the projects, which include date of each tranche of foreign development of townships, investment, or on the completion construction of of the project residential/commercial premises, • Separate Phases/Projects: each roads or bridges, educational phase of a project is considered as institutes, recreational facilities, a separate project for the purpose city/regional level infrastructure, of the FDI policy. townships.
12 http://dipp.nic.in/sites/default/files/CFPC_2017_FINAL_RELE 11 http://ficci.in/Sedocument/20342/survey-fdi-retail.pdf ASED_28.8.17.pdf
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• Minimum Land Stipulation: earlier with all other requirements as there was a requirement of a prescribed by local government minimum of 20,000 sq. meters of bodies. floor area for construction- NOTE: The restrictions and conditions development projects; however, applicable to foreign investment in now this provision has been done Indian real estate is not applicable to away with and there is no investments by Non-Resident Indians minimum land requirement. (NRIs). As per Foreign Exchange • Completed Assets: 100% FDI is Management (Transfer or Issue of permitted under automatic route Security by a Person Resident Outside into completed projects for India) Regulations 2000, NRIs are operation and management of permitted to invest in activities in the townships, malls/shopping real estate sector covering (i) complexes and business centers. Development of serviced plots and However, a lock-in period of 3 construction of built up residential years is applicable. premises; (ii) Investment in real estate covering construction of residential • Transfer of Control from Residents and commercial premises including to Non-Residents: such transfer business centers and offices; (iii) because of foreign investment is Development of townships; (iv) City permitted with the applicability of and regional level urban infrastructure a lock-in period for 3 years and no facilities; (v) Investment in transfer of immovable property is manufacture of building materials; (vi) permitted during this period. Investment in participatory ventures in • Earning or Rent/Income on Lease the above; and (vii) Investment in of the Property: FDI is not housing finance institutions. permitted in an entity which is However, it is important for the NRIs to engaged in real estate business, invest in their own individual capacity however the earning of and the exemptions indicated above rent/income of the lease property, will not be available if the NRIs invest not amounting to transfer does in India through corporate entities not amount to real estate business owned by them. and therefore is permitted. The buyers who are not Indian citizens • Obligations of the Indian Investee must ensure that the property they are Company: the company is purchasing is not built on agricultural permitted to sell only developed land or plantation property. plots, i.e. where trunk infrastructure has been available. No special permission is required by an The company is also responsible Indian citizen resident outside India for for obtaining all approvals, buying an immovable property in India, payment of development and however the payment of purchase other charges, and compliance price should be made in Indian
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currency through normal banking lending of rupees between a channels. person resident in India and a As far as disposal of property is person resident outside India. concerned, an NRI can sell his property • The bank can also prohibit, to a fellow NRI or any Indian citizen. regulate, or restrict the acquisition A foreign national resident outside or transfer of immovable property India cannot buy a property in India, outside India, other than a lease however the foreign nationals who are not exceeding 5 years, by a person resident in India (except the citizens of resident in India or by a person Pakistan, Bangladesh, Sri Lanka, resident outside India. Afghanistan, China, Iran, Nepal, or • Regulations of RBI also provide for Bhutan) can purchase immovable the opening, maintenance and property in India. holding of different types of The NRIs can acquire real estate in accounts for the NRIs and PIOs India in the following ways: with different schemes for the same. ➢ Direct purchase: real estate in India can be directly purchased (except • Approval to a foreign national for for the farm land, farm house and selling or gifting a residential or plantation property) without any commercial property to any Indian restrictions on the number of citizen, NRI, PIO (Person of Indian properties. Origin) is also given by the RBI. ➢ Gifts: Gifts are permitted under the 7. TAX REGIME exchange control regime, with • In India, everyone is taxed based on relevant Indian stamp laws residence and not citizenship. Indians are applicable. subjected to tax in India on their global ➢ Inheritance: They may inherit income, while non-residents are taxed on Indian real estate from a resident their Indian source of income. or non-resident. 8. STAMP DUTY d. Reserve Bank of India (RBI) • The government levies a tax when there is • RBI is empowered by the Foreign a transaction of property. This tax is Exchange Management Act, 1999 known as ‘Stamp Duty’. It is levied on to prohibit, regulate, or restrict residential and commercial property the transfer or issue of any transactions, as well as freehold or security by a person resident leasehold properties. Stamping is done in outside India. certain contracts to make it legally binding, like to execute a sale deed. • It is also empowered to regulate any borrowing or lending in • Stamp duty is levied by states and foreign exchange in whatever form therefore, the rate varies from state to it may be, or any borrowing or state. It is a one-time fee that is required
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to be paid under Section 3 of the Indian established as the Central Record Stamp Duty Act, 1899 after a sale deed is Keeping Agency (CRA) for all e-stamps processed. used in the country and currently, SHCIL is responsible for everything- • Stamp Duty must be paid in full and on from user registration to time. If there is a delay in payment of administration, all e-stamping stamp duty, it attracts a penalty. This applications and maintenance of payment is a proof that the government records. has been paid its share, for future reference. 9. REAL ESTATE CONTRACT • Stamp duty ranges from 3% to 10%, The basic legal requirements of a real estate depending on the slab decided by the contract are: particular state. The onus of paying the a. Mutual assent- there must be a mutual stamp duty, normally vests on the buyer agreement between the buyer and the of the property. seller for the sale of a property. • There are three different modes of b. In writing- the contract for purchase and stamping in India: sale of a real estate property must be in ➢ Non-Judicial Stamp Paper: This is a writing for it to be enforceable. traditional method wherein an c. Identify the parties- the contract must individual must buy a stamp paper identify the parties with their full name. from a licensed vendor and then the terms of the agreement are printed on d. Identify the property- the contract must the paper. identify the property which is being sold and purchased. ➢ Franking: An individual must print the document on the blank paper and e. Purchase price- the contract must before the parties sign it, they must expressly state the price for which the take it to the bank or any other property is being sold. authorized agency which has the f. Consideration- a contract must have a franking machine. The stamp duty is consideration for it to be enforceable. paid in the bank and the bank then g. Signature- a contract will be enforceable puts stamp on the document once it is duly signed by the parties having indicating the value of the stamp duty legal competence to do so. A person is paid. This is called franking. legally competent to enter into a contract ➢ E-Stamping: The Indian government if the person is a major i.e. above 18 years introduced e-stamping to tackle of age, is of sound mind and is not legally counterfeiting and make the payment barred from entering into contract i.e. he of stamp duty easier and glitch free. In is not insolvent. fact, in certain states, such as Delhi, all h. Registration- the contract must be stamp duty needs to be paid through registered with the respective registrar of e-stamping. Stock Holding Corporation assurances. of India Limited (SHCIL) has been
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DISCLAIMER: The contents of this article should not be construed as legal opinion. The information contained herein is provided by Singhania & Co. and is intended to provide general information on the subject. The information in this article is not intended to constitute legal or other professional advice or services. Before making any decision or taking any action that might affect the business, a qualified professional adviser must be consulted. Singhania & Co. shall not be responsible for any loss whatsoever sustained by any person who relies on the information contained herein.
ILN Real Estate Group – Buying and Selling Real Estate Series
Fall 17
INTERNATIONAL LAWYERS NETWORK
TGS BALTIC Buying and Selling Real Estate in Latvia
ILN REAL ESTATE GROUP
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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER LATVIAN LAW 1. Types of real estate owned by another person (please see 1.1. Land estate Section 3).
Consists of one or several land plots. 2. Undivided share of the real estate 1.2. Land and building estate It is possible to acquire not the entire real estate, but an undivided share of the real Consists of one or several land plots and one estate, i.e. to acquire the undivided share of or several buildings or structures located on the joint property (Note: do not mix up with the the land plot (plots). joint property included in the composition of the 1.3. Building estate residential estate). The joint property is the undivided real estate owned by several persons Consists of one or several – joint owners of undivided shares so that only buildings or structures. the substance of the rights is divided. In case of a building estate, the land plot, on A joint owner owns the undivided share of the which the respective buildings or structures joint property; therefore, the joint owner is are located, is owned by another person, and entitled to deal with the undivided share, does not belong to the owner of the building including alienating or pledging the respective estate (please see Section 3). undivided share. 1.4. Residential estate However, to deal with the joint property itself, Consists of: either in its entirety or with respect to a part of it, the consent of all the joint owners shall be - an individual property (apartment, non- obtained. The joint owners can agree on residential premises, or artist’s workshop divided use of the joint property proportionally in a residential house) in a residential to the amount of the undivided shares by building; and signing a respective agreement. - the relevant undivided share of the joint 3. Divided estate property (external enclosing structures, internal load bearing constructions and The general principle provided by the Latvian intermediate coverings of the residential law is that buildings and structures located on house, premises for common use, the land plot are part of the land plot and engineering communication systems, therefore owned by the land owner, and only in devices servicing the residential building exceptional cases buildings and structures as and other indivisible elements separate building property could be owned by functionally associated with the another person, which is not the owner of the exploitation of the residential building, as land plot – the so called divided estate. well as the auxiliary buildings and In case of the divided estate, namely, if the structures belonging to the residential building (structure) is located on the land plot, building). The joint property also includes which does not belong to the owner of the the land plot, on which the respective building (structure), but is owned by another residential building is located, unless it is person, the status of such building (structure) and therefore the legal consequences, which
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[BUYING AND SELLING REAL ESTATE IN LATVIA] 67 depending on the status of the building The separate ownership of the building (structure) may vary, should be evaluated. (structure) is established only during the There are two forms of divided estates, validity of the lease agreement. depending on the status of the building Amendments to the Civil Law entered into (structure) on the land plot: First form. force on January 1, 2017, by introducing a Compulsory divided estate new institute of build-up rights, which Generally, a building (structure) built during henceforward replaces the institute of the Soviet time and until September 1, specific long-term lease for the voluntary 1992, when the Civil Law of the Republic of established divided estate. Latvia entered into force. The build-up rights are rights in-rem, The divided property was formed when the established based on the agreement ownership rights of the land plot under the entitling, during the validity of such rights, to build and use non-residential buildings building (structure) were renewed to the previous owners or their heirs during the or engineering structures on the land plot land reform, or the land belonging to the owned by another person. The building state or local government, or building (structure) built based on the build-up (structure) was acquired by privatizing the rights is an integral part of the build-up state or municipal undertakings or separate rights. It is not permitted to build real estate objects. residential buildings based on the build-up rights. The owner of the building (structure) is entitled to use the part of the land plot The validity of the build-up rights cannot functionally related to the building on the be less than 10 years, and the build-up rights shall be registered with the Land grounds of the so-called compulsory lease. In case of a compulsory lease, the parties Registry. should agree on the size of the leased area The build-up rights can be alienated and of the land and on the amount of lease encumbered with rights in-rem, unless payment, and, if the parties cannot agree explicitly prohibited in the agreement on on the mentioned, the dispute shall be granting of the build-up rights. resolved by the court. The usual practice is After expiry of the build-up rights, the to establish a lease payment of building (structure) built based on the approximately 6% of the cadastral value of build-up rights becomes an integral part of the leased part of the land plot per year. the land plot, i.e., becomes the property of Second form. Voluntarily established the land plot owner. The owner of the land divided estate. plot acquires the building (structure) Buildings built after September 1, 1992, without remuneration, unless such when the Civil Law of the Republic of Latvia remuneration has been provided in the entered into force, based on a specific long agreement on granting of the build-up term (at least 10 years) lease agreement rights. In the agreement on granting of the providing the rights to the lessee to build build-up rights the parties may provide that, buildings on the leased land plot as prior to the expiry of the build-up rights, separate real estate objects. the holder of the build-up rights shall
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vacate the land plot from the constructed Estonia, Israel, South Korea, United buildings (structures). Kingdom, Lithuania, the 4. Restrictions for acquisition of land in Latvia Netherlands, Norway, Poland, Portugal, Finland, Spain, There are certain provisions and legal Switzerland, Uzbekistan, Germany, restrictions for acquisition of real estate in Vietnam, Sweden); or Latvia; however, these restrictions are imposed only regarding ownership of the land, there are d) private individuals or legal entities no restrictions regarding ownership of other from the countries, which have types of real estate such as buildings, structures, concluded an agreement with the apartments, business premises etc. Republic of Latvia for the Encouragement and Reciprocal Restrictions for acquisition of the land vary Protection of Investment after 31 depending on the fact whether the land is December 1996, and the respective located in the city or in rural areas. concluded agreement prescribes the 4.1. In the cities land may be acquired by: rights of the private individuals and legal entities from Latvia to acquire 1) the citizens of Latvia and any European land in the respective country Union (EU) member state; (countries, which have concluded 2) the State and local government, and agreements for the Encouragement state and municipal companies; and Reciprocal Protection of Investment after 31 December 1996 3) a capital company (a limited liability are - Armenia, Azerbaijan, Belarus, company or a joint stock company) Bulgaria, Egypt, Georgia, Croatia, registered in Latvia or any EU member India, Iceland, Canada, Kazakhstan, state, if more than a half of the share China, Kirgizstan, Kuwait, Moldova, capital of the company belongs to: Rumania, Singapore, Slovakia, a) the citizens of Latvia and EU Turkey, Ukraine, Hungary, but member state; or regarding these countries the exact b) the State and local government, and provisions of the agreements should state and municipal companies; or be reviewed); c) private individuals or legal entities 4) a public joint stock company registered from the countries, which have in Latvia or any EU member state, if its concluded an agreement with the shares are quoted in stock exchange; Republic of Latvia for the 5) religious organizations, which were Encouragement and Reciprocal registered in Latvia before 21 July 1940; Protection of Investment and such 6) the state or municipal institutions of agreement has been approved by higher education. the Parliament of Latvia prior to 31 December 1996 (such counties are: Other private individuals and companies the United States of America, that do not correspond to the Austria, Belgium, Luxemburg, Czech conditions may acquire the land in Republic, Denmark, France, Greece, Latvia with the permission from the
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local government; however, it is also agreement has been approved by prohibited for such private individuals the Parliament of Latvia prior to 31 and companies to acquire the following December 1996; or types of land: land in the border zone; d) private individuals or legal entities - land in the protection zone of from the countries, which have coastal dunes of the Baltic Sea and concluded an agreement with the the Gulf of Riga and land in the Republic of Latvia for the protection zones of public bodies of Encouragement and Reciprocal water and water courses, except if Protection of Investment after 31 the build-up is allowed on the land December 1996, and the respective in accordance with the spatial plan concluded agreement prescribes the of the city; rights of the private individuals and - agricultural and forest land in legal entities from Latvia to acquire accordance with the spatial plan of land in the respective country; the city. 4) legal subject registered in Latvia, EU, 4.2. In rural areas land may be acquired by: EEA country or Switzerland, if the respective legal subject has been 1) the citizens of Latvia, citizens of the EU registered in Latvia as a tax payer or as a member states or European Economic commercial activity performer and if the Area (EEA) states or Switzerland; legal subject is: 2) the Republic of Latvia or derived public a) an individual merchant owned by a persons (such as municipal or other citizen of Latvia, citizen of the EU public person established based on law); member state or EEA country, or 3) a capital company (a limited liability Switzerland; company or a joint stock company) b) an individual undertaking registered registered in Latvia, EU, EEA country or by a citizen of Latvia, citizen of the Switzerland, if the respective company EU member state or EEA country, or has been registered in Latvia as a Switzerland; taxpayer and if all the shareholders of
the company are: c) a co-operative society, if all the members of the society are legal a) citizens of Latvia, citizens of the EU subjects mentioned in clause 1), 2), member states or EEA country, or 3) or sub-clause a), b), d) of clause Switzerland; or 4); b) the Republic of Latvia or derived d) other legal subject registered in the public persons; or EU member state, EEA country or c) private individuals or legal entities Switzerland, which can be compared from the countries, which have to the above individual merchant, concluded an agreement with the individual undertaking, or co- Republic of Latvia for the operative society; Encouragement and Reciprocal Protection of Investment and such
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5) religious organisations registered in If a private individual or a company, which Latvia, the activity whereof is at least 3 has acquired land in the cities or rural areas years; with the permission of the local government, 6) associations and foundations registered does not use the land for the prescribed in Latvia, the activity whereof is at least purpose the land should also be alienated 3 years and the purpose of activity within a period of two years. whereof is related to the environment 5. Agricultural land protection, production of agricultural The additional limitations are set on the cultivated plants or products, or hunting acquisition of agricultural land in rural areas of management or maintenance, if the Latvia. Legal entities are entitled to acquire 5 ha land is acquired to ensure the of agricultural land in aggregate without mentioned purpose of activity. additional limitations, but private individuals Other private individuals and companies that are entitled to acquire 10 ha of agricultural land do not correspond to the abovementioned in aggregate without additional limitations. conditions may acquire the land in Latvia with To acquire more agricultural land, the private the permission from the local government; individuals and legal entities should confirm however, it is also prohibited for such private that the acquired land will be used for individuals and companies to acquire the agricultural activities, as well as the respective following types of land: private individuals and legal entities shall - land in the border zone; comply with the specific criteria prescribed by - land in nature reserves and other law, including: clear information on the true protected nature areas in zones of beneficiaries and statement that the amount of the possible tax debt does not exceed EUR 150. nature reserves; In addition, the citizens of the European Union - land in the protection zone of coastal Member States, the Member States of the dunes of the Baltic Sea and the Gulf of European Economic Area or the Swiss Riga; Confederation, if they wish to acquire the - land in the protection zones of public agricultural land as private individuals, or if bodies of water and water courses; they are sole shareholders or shareholders jointly representing more than a half of the - agricultural and forest land; share capital of the company intending to - land in the mineral deposits of national acquire the agricultural land, or persons significance. entitled to represent the respective company, shall receive a registration certificate of the If due to the changes the status of the legal Union citizen and the document certifying subject does not correspond to the conditions, knowledge of the official language (Latvian) at to keep the land in the cities or rural areas, least at B level grade 2 (namely, the person is the permission from the local government able to communicate on everyday subjects and should be received within a period of one professional issues, to clearly phrase and justify month, and if the permission is not granted his or her opinion, reads and understands texts the land should be alienated within a period of different content, is able to write the of two years. documents necessary for work (for example,
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[BUYING AND SELLING REAL ESTATE IN LATVIA] 71 statements, summaries, minutes, reports, 6.1. Local government rights of first refusal deeds), as well as expanded texts regarding In case of alienation of the real estate a local everyday life and professional topics, government shall have the rights of first comprehends, and understands naturally paced refusal to the real estate, if the real estate is spoken texts on different topics). necessary for performance of local Upon the request of the local government, the government functions. person shall make a presentation in Latvian The local government decision on exercising explaining the intended usage of the land in its rights of first refusal or on refusal to agricultural activity. If the agricultural land is to exercise its rights of first refusal is adopted be acquired by a legal entity – the usage of the within 20 (twenty) days after submission of land in agricultural activity shall be presented the copy of the purchase agreement to the by the individual – the sole shareholder or local government. individual shareholder jointly representing more than one half of the share capital of the The local government rights of first refusal company (in case of beneficiaries – shall not apply to the following real estates: presentation shall be made by those - production objects with all their beneficiaries). accessories; For a person, who meets the criteria, to be able - real estate, from which an undivided to acquire agricultural land, it shall first submit part has been alienated and which an application to the local government of the remains in the joint property of the territory, in which the relevant land is located, seller and the purchaser; and after examination of the application and offering to exercise the rights of first refusal to - real estate that is being sold through the registered lessee, if any, of the agricultural voluntary or compulsory auction; land and to the Land Fund of Latvia, the - real estate, to which third parties have commission of the local government shall the rights of first refusal or redemption decide on giving its consent or refusal to rights based on the law, agreement or acquisition of the agricultural land. will. In addition, one private individual or legal 6.2. Joint owners’ rights of first refusal entity can acquire up to 2,000 ha of agricultural If any of the joint owners of the real estate land. The local government has the right to alienates its undivided share (please see determine the maximum area of agricultural Section 2) to a person, who is not a joint land one private individual or legal entity can owner, then the other joint owner(s) shall possess within their administrative area, but no have the rights of first refusal. A joint owner more than 2,000 ha. Related parties can is entitled to express the will to exercise its acquire up to 4,000 ha of agricultural land. rights of first refusal within a 2 (two)-month 6. Rights of first refusal period as from the receipt of the purchase The rights of first refusal are priority rights to agreement. But, if by the fault of the seller, purchase a real estate, if the owner sells the the joint owner is not able to exercise the real estate. rights of first refusal, such joint owner will have the redemption rights, namely, within a period of 1 (one) year as from the registration
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[BUYING AND SELLING REAL ESTATE IN LATVIA] 72 of the acquirer’s title to the real estate with 7. Real estate registries the Land Registry, the joint owner will be There are two registries related to the real entitled to claim for acquisition of the real estate in Latvia: the Land Registry and the estate, by taking precedence over the National Real Estate Cadastre Information acquirer and by assumption of the rights of System (Cadastral Registry). the acquirer. The Land Registry is the main real estate
6.3. Rights of first refusal in case of divided registry and is kept by the respective Regional property Court Land Registry Offices, each of them In case of divided property (please see Section operating within an administrative territory. All 3), the owner of the land and the owner of rights (including the ownership rights, all kinds building (structure) have mutual rights of first of legal encumbrances, mortgages, restrictions, refusal and redemption rights, if the etc.) regarding real estate shall be registered respective land or building estate is alienated. with the Land Registry. The rights of first refusal shall not apply, if the The ownership rights of the real estate shall be building (structure) is built based on the registered with the Land Registry and only a build-up rights. person, whose ownership rights have been 6.4. Other rights of first refusal registered with the Land Registry, shall be Rights of first refusal can be established also considered the owner of real estate, except by the agreement or will. when the ownership rights of the real estate are established by the law. The law also provides for other specific cases when third parties have the rights of first Entries registered with the Land Registry have refusal or redemption rights to the real public credibility. Thus, not only the owner of estate, for example, if the real estate is the real estate is guaranteed credibility of its alienated in the territory of a civil aviation title registration, but also every third party is aerodrome of the state significance (also the provided with valid information on the current territory necessary for further development status of the real estate. However, this does thereof) and the civil aviation aerodrome is not mean that transfer of title to real estate or owned by a capital company where the state the title itself cannot be challenged (for has a decisive influence – the state has the example, the seller has no rights to sell the rights of first refusal, but if the civil aviation respective real estate, or any third party’s rights aerodrome is owned by a capital company, of first refusal have been violated and thus this where the local government has a decisive person may possibly exercise his or her influence – the respective local government redemption rights). has the rights of first refusal, or rights of first The Cadastral Registry is kept by the State Land refusal to the real estate in the territory of Service. The cadastral value (determined mainly the port may be exercised by the local for the real estate tax and Land Registry state government, represented by the port duty purposes), detailed information on authority, but the rights of first refusal to the buildings and structures (area, number of real estate in the territory of the port of Riga premises, etc.) as well as detailed information shall be exercised by the port authority of on every real estate object, including graphical Riga as a derived public person.
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[BUYING AND SELLING REAL ESTATE IN LATVIA] 73 information and technical encumbrances, are depending on the historical usage of the held in this register. respective real estate there is a risk that However, not all encumbrances prescribed by historical pollution may appear. law are registered in the registers, for example, 9. Agreement and re-registration of the title protection zones and consequential restrictions with the Land Registry and limitations are set by law, notwithstanding Any transfer of the title to the real estate whether they are registered with the Land should be registered with the Land Registry. Registry and/or Cadastral Registry, therefore Agreement on alienating of the real estate the actual situation on site shall be considered should be prepared in writing and signed by prior to the acquisition of the real estate. both parties personally. It should be noted also In practice, it is quite often that the information that an oral agreement is binding to the parties, in the Cadastral Registry differs from the and each party is entitled to claim from the information in the Land Registry. other party to express the oral agreement in a The law specifies also buildings and structures, written form. which are not registered in the Land Registry as It is not required, but signatures of the separate building property, for example, some contracting parties on the agreement could be transport structures, and such buildings and certified by a notary public, as well as an structures are registered in the Cadastral agreement could be concluded in the form of Registry. notary deed. Therefore, to obtain more detailed information Recently there have been discussions on on the real estate, the information in both establishment of a requirement that all real registries – the Land Registry and the Cadastral estate transactions should be concluded in the Registry should be reviewed and considered form of a notary deed. prior to the acquisition of the real estate. Agreement on alienation of the real estate is 8. Permitted use of the real estate (zoning) binding upon the parties from the moment of and environmental protection regulations its conclusion, but for any third party only a Prior to the acquisition of the real estate the person, whose ownership rights have been permitted use of the real estate (zoning) and registered with the Land Registry, shall be possible restrictions for the usage, including considered as the owner of real estate. construction, of the real property should be The title (ownership) is transferred to the buyer additionally reviewed in the local government from the moment of re-registration of the title spatial plan and Territory Usage and Build up with the Land Registry (i.e. a Land Registry Regulations. judge has adopted a decision on registration of Prior to the acquisition of the real estate, it the buyer’s title). This rule would be always should also be reviewed whether the territory applicable in relation to reliance of third parties of the real estate is not registered with the on the owner of the real estate; however, the Register of Polluted and Potentially Polluted contracting parties may agree otherwise on the Areas. However, it should be noted that, even if moment of transfer of title. the territory of the real estate has not been To re-register the title with the Land Registry, registered as polluted or potentially polluted, the registration request to the Land Registry on
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[BUYING AND SELLING REAL ESTATE IN LATVIA] 74 the transfer of the title should be personally The ratio of 1.5 is applied to the state fee, if signed before a notary public chosen by the more than 6 months have passed as from the contracting parties. day of signing the respective agreement on The notary verifies the identity of both parties, alienation of the real estate. and in case of legal entity also the rights to Costs for the re-registration of the title with the represent the legal entity. The persons signing Land Registry, including notary fees, are usually the registration request need to provide a covered by the buyer, or equally divided proof of the identity – passport or ID card for between both the seller and the buyer; the private individuals and a representative of however, the seller usually bears the costs of the legal entity. If the contractual party is a deleting of the existing mortgage on the real legal entity not registered in Latvia an excerpt estate, if any. from the company register certifying The seller should also pay the real estate tax for registration of the company and the the entire year of the transaction, and no representation rights of the representative ownership will be transferred until the real should be provided. Depending on the estate tax is paid. registration country of the legal entity, the excerpt from the company register should be A registration request for the re-registration of certified by a notary public or by an authority of the title with the Land Registry should be the company register of the respective country submitted with the respective Land Registry (for the EU or the EEA countries, or Office. The following documents should be Switzerland), or the excerpt should be legalized enclosed to the registration request: in accordance with the international regulatory - an agreement on alienation of the real enactments. The excerpt from the company estate; register should also be translated in Latvian and translation should be certified by a notary - a refusal to exercise the rights of first public. refusal (except the refusal of the joint owner or owner of divided property) The notary fees are determined by secondary (please see Section 6); legislation, i.e. the Regulations of the Cabinet of Ministers. - a consent from third parties, if such is required in the situation, for example, a For the re-registration of the title with the Land consent from the bank in case of a Registry, a state duty and a stamp duty should mortgage, or a consent from the spouse be paid prior to the submission of the of the seller, if the real estate is the co- registration request with the respective Land property of spouses; Registry Office. - a permission from the local government The standard amount of the Land Registry state to acquire the land in Latvia, if such is duty is 2% of the value of the real estate, i.e., of required by the law (please see Section 4); the cadastral value of the real estate or the transaction amount, whichever is higher; - documents certifying representation however, for some transactions the amount of rights of the parties; the state duty may vary, for example, if a legal - receipts for the payment of the state and entity acquires a residential estate the state stamp duties duty is 6% of the value of the real estate.
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75
Fall 17 INTERNATIONAL LAWYERS NETWORK
PLASBOSSINADE ADVOCATEN NOTARISSEN Buying and Selling Real Estate in the Netherlands
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KEY FACTS OF REAL ESTATE ACQUISITIONS buyer may expect that the immovable property UNDER DUTCH LAW has the characteristics necessary for a normal Introduction use and on the presence of which he did not need to doubt, and that it has the The purchase of an immovable property is a characteristics necessary for a particular use mutual agreement. which was foreseen in the agreement. Neither the seller nor the buyer has the The parties can derogate from this statutory obligation to make use of the services of a real main rule at the time of the purchase estate agent. In practice, one often sees that agreement. This is often done by giving the seller instructs a real estate agent to act as substance to the duty of disclosure and an intermediary. A purchase agreement cannot examination and laying down the outcome in be effected by the real estate agent himself: he the agreement. is merely the intermediary. Should the seller engage a real estate agent, the seller must also Elements purchase agreement pay the charges arising from the use of his The following items require attention during services. the negotiations and in the purchase A real estate purchase agreement is often agreement: preceded by a pre-contractual stage. If the • object description parties have agreed upon essential conditions, • purchase price a purchase agreement has been achieved. • transfer of ownership by means of a Generally, no formal requirements need to be notarial deed of delivery observed, which means that a written purchase agreement is not necessary. This requirement • costs and taxes only applies in the event of consumer sale i.e. • current agreements regarding the that a residence is purchased by a natural immovable property person. In case of a consumer sale, a so-called reflection period applies. During three days • transfer and transmission of claims after signing the purchase agreement the • guarantees seller consumer buyer has the right to dissolve the agreement without having to give reasons and • oversize/undersize without consequences. • environmental regulations Conformity – examination • risk transfer of damage The Dutch Civil Code (article 7:17) stipulates • notice of default/omission/dissolution/penalty that a seller is obligated to supply to the buyer an immovable property that must be in • energy performance certificate conformity with the agreement. The immovable • registration in the public records property is not in conformity with the agreement if it does not have the • Municipalities Preferential Rights Act characteristics that the buyer, given its nature • suspensive or dissolving conditions and the statements of the seller about it, could have expected based on the agreement. The
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Various types of registered immovable property leasehold conditions to transfer the leasehold, rights the mortgagee is not bound by this condition in a The Dutch Civil Code distinguishes four main situation of a forced sale. However, after the immovable property rights which confer full execution sale the new leaseholder is again fully ownership or a limited right in rem to the bound by the leasehold conditions. purchaser. These rights are: Apartment right Property right The apartment right is a distinct share in an The property right (ownership right) is the most immovable property with its appurtenances, comprehensive immovable property right one giving entitlement to the sole use of a certain may acquire, free and unencumbered with any part of the immovable property. The immovable limited right belonging to other (third) parties. property is divided into apartment rights by way The owner of the immovable property is in the of a notarial division deed, containing a division position to sell and dispose of the immovable plan and rights and obligations of the owners of property, to encumber the immovable property the apartment rights. The application of with limited rights in rem such as leasehold or apartment rights is widely used as to legally mortgage. structuring immovable property, whether residential or commercial or otherwise. Leasehold The notarial division deed contains, as required Leasehold ("erfpacht") is a limited immovable by law, the establishment of an owner property right in rem and provides the association. All apartment right owners are leaseholder the right to hold and use the members of this owner association by operation immovable property which is owned by another of law. The objects of the owner association are person or legal entity. The rights and obligations to manage the immovable property and the of the leaseholder are generally limited by law general interests of the joint owners directly and can be specifically limited by the leasehold relating to the immovable property. conditions which are concluded between the owner and the leaseholder. An apartment right may be encumbered with limited rights in rem such as leasehold or The following items are usually determined by mortgage. the leasehold conditions: Right of superficies - duration of the lease (temporary, The right of superficies ("opstalrecht") is a limited permanent, or perpetual); right in rem and provides the holder the right to - ground rent ("erfpachtcanon"); own or to acquire constructions and structures - designated use; in, on or above immovable property which is owned by a third party. The right of superficies - (conditional) right of transfer; may generally be compared with leasehold, but a - (conditional) right of sub-leasehold. distinctive contrast is that the leaseholder may use and hold the immovable property itself while The leaseholder is entitled to mortgage the the holder of the right of superficies has the leasehold without the consent of the owner. ownership and use of constructions and Therefore, in case the leaseholder requires the structures in, on or above a third party's written consent of the owner under the immovable property.
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A second difference between leasehold and the The role of Dutch civil-law notaries in right of superficies is that leasehold is an immovable property transactions, payment independent right while the right of superficies procedure and the Public Registers may be an independent right or a right Under Dutch law a notarial deed is compulsory to dependent on another agreement between the transfer title to immovable property or to owner and the holder, such as a lease establish limited rights in rem, such as a agreement. In such case ending of the lease mortgage. Notarial deeds are conclusive proof of agreement would mean the end of the right of the transactions laid down therein. superficies. Dutch civil-law notaries are impartial legal The rights and obligations of the holder of the professionals appointed by the Government. In right of superficies are generally limited by law his capacity the civil-law notary must consider and can be specifically limited by the conditions the interests of all parties involved in a which are concluded between the owner and the transaction regardless who pays the notary's fee. right's holder, equal to leasehold conditions. Also, in general, the interests of third parties who An independent right of superficies can be are affected by a transaction must be transferred and encumbered by a limited right in considered. The civil-law notary advises the rem such as mortgage. Since the dependent right parties and oversees the transaction. of superficies depends on another agreement, The notarial deed containing the transfer of such right cannot be transferred nor be ownership or the establishment of the limited encumbered with a limited right in rem. right in rem are recorded by the notary with the The right of superficies is widely used for designated Public Registers, kept by the Land pipelines, cable networks and other valuable Registry "Kadaster"), by way of filing a certified structures or equipment. copy (or an excerpt) of the deed. These Public The property right, leasehold, apartment right Registers are accessible for everyone. The civil- and right of superficies can all be leased to a law notary is the custodian of the original deed third party. and therefore it remains with the notary. Parties entitled to it will receive a certified copy or, when Non-registered immovable property rights required, an authenticated copy. (economic ownership) In an immovable property transaction, the Economic ownership can be defined as the purchase price (or secured loan amount) must be separation of full ownership in legal ownership deposited with the (impartial) civil-law notary and economic ownership. It is based on prior to the closing of the transaction. This has obligations between involved parties by means the meaning that at the time of the transfer of of contracting. The economic owner is usually ownership of the transaction, the purchase price entitled to the value and profits of the real is in place but out of the hands of the Buyer and estate. The legal owner is registered at the Land Seller alike. After the transfer of ownership has Registry but does not necessarily hold any been completed (by way of recording the deed of economic or financial interest of the real estate. transfer in the designated public registers and For third parties only, the legal owner is known checks of various other registers), the civil-law due to registration. notary releases the funds to the Seller. Each civil- law notary is obliged to keep a special account in his name with a bank acknowledged by the
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Dutch authorities, stating his capacity; this/these In case seller and buyer are both subject to VAT account(s) is/are exclusively intended for funds and buyer will use the real estate for 90% or the civil-law notary retains in relation to his more for VAT business activities, they can opt for activities in that capacity. a transfer of real estate with VAT. Transfer tax is The statutory provision further implies that the also payable. VAT can be reclaimed by buyer in funds in this special account, which is called a the VAT return. A revision period is applicable for third-party account, do not belong to the civil- 1/10 of the initially reclaimed VAT in the law notary, but to the parties entitled to them. following nine years. When buyer in any year This means that the balances in this account performs less than 90% business activities for cannot be attached by the civil-law notary’s VAT, the buyer has the obligation to partially pay creditors and that, should the civil-law notary get back VAT. into financial difficulties or go into involuntary Research on the tax history of real estate liquidation, the balances in the account cannot between a tax advisor and a civil-law notary is be involved in the financial difficulties or the highly recommended especially regarding liquidation. commercial real estate. The above has been included in the law to Transfer tax protect the interests of the civil-law notary’s Transfer tax is imposed on the acquisition of clients who need to be able to rely on the fact existing, used immovable property and limited that the funds they have deposited with the civil- rights in rem thereto (not security rights such as law notary will reach the parties they are mortgage). The tax rate is 2% for residential intended for. The civil-law notary is the only properties and 6% for commercial and all other party who can dispose of this account. properties. The taxable base is the purchase Tax issues price or the fair market value of the real estate Value added tax (VAT) when this value exceeds the purchase price. In general acquisition of real estate is not subject Subject to Transfer tax is the transfer of: to VAT (21%), except for newbuilding and/or I. Real estate including rights derived from building sites. In case VAT is applicable, there is real estate such as leasehold, right of usually an exemption from Transfer tax. superficies and apartment right. Newbuilding is considered newbuilding in the II. An economic ownership in real estate. building phase, when it is completed and The economic ownership includes the occupied, up until two years after occupation. risks of change of value of the real estate. In the event newbuilding is purchased within two Participation rights in real estate years after occupation and the seller is subject to investment funds are exempt when VAT, VAT and Transfer tax are both applicable. acquiring interests below one/third in the Depending on the tax status from buyer for VAT fund, interests above one/third are purposes, VAT can be reclaimed in the VAT tax subject to transfer tax (including interests return. When a natural person – not subject to already held). VAT - is selling newbuilding within two years of III. So-called fictitious real estate, to be occupation only Transfer tax is applicable. distinguished as follows:
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a. Shares in a (separate) real estate The corporate income tax rates for 2017: entity, which possessions mainly 20% for taxable income between € 0 - € 200.000; consist from real estate (acquisition of one/third or more of shares, 25% for taxable income exceeding € 200.000. including interests already held). According to the plans of the new government b. Rights on memberships of association (October 2017) Corporate income tax will be or cooperation in case the rights reduced to 16% (taxable income between € 0 - € include the (exclusive) right to use of 200.000) and 21% (taxable income exceeding € a building or a part from that building 200.000). that is meant to be used separately. Income tax Several acquisitions of real estate are under Real estate (not the residence/permanent home conditions tax exempt for Transfer tax among in the Netherlands) can be taxed with (personal) which: Income tax within three categories (Box 1, 2 and - the acquisition of newbuilding and/or 3). building sites in the phase before Real estate which is part of a personal business occupation (subject to VAT 21%); (including partnerships that qualify as business) is - acquisitions under the scope of subject to Box 1 progressive income tax rates business/family succession; with a maximum rate of 52%. Box 1 can be applicable for personal held real estate leased to - acquisitions in the event of mergers, certain affiliated companies. Net income from restructuring and division of corporate real estate may also fall under the scope of Box 1 entities. in case the owner performs active real estate Corporate income tax management to make more return on investment compared to passive real estate A Dutch corporate entity investing in leased real management. estate is subject to Corporate income tax. Real estate held by foreign corporate entities is Box 2 is a flat rate of 25% for owners of more considered as a permanent establishment for than 5% of the shares in a corporate entity (a Corporate income tax purposes. substantial interest). Income from real estate from the corporate entity is not directly taxed by Taxable income is profit (rental income, realized the shareholder but with the entity itself with capital gains) minus costs and depreciation. Corporate income tax. Valuation of the real Depreciation is limited to 100% of the estate held by the entity is directly related to the determined value of the leased real estate of for value of the shares held by the shareholder. In the purposes of the Valuation of Immovable case the shareholder sells shares in the real Property Act. Depreciation of real estate that is estate entity a rate of 25% is applicable in case used by the corporate entity itself, is limited to capital gain on the value of the shares is realized. 50% of the determined value of for the purposes of the Valuation of Immovable Property Act. According to the plans of the new government Transfer tax is not deductible as costs from (October 2017) the Box 2 flat rate of 25% will be taxable profit and is part of the cost price of the increased to 28,5%. real estate on the balance sheet. Interest on Individually held real estate with passive asset loans is in general deductible from profit. management, including investment in real estate
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[BUYING AND SELLING REAL ESTATE IN THE NETHERLANDS] 81 funds and partnerships is taxed under the regime - the shares are not held as an investment; of Box 3, wealth tax. Per 1 January of each year - the participation is subject to a corporate the market value of real estate minus debts tax with a realistic tax rate compared to related thereto is subject to a notional annual Dutch tax rates, or income of 1,63 – 5,39%. The notional annual income calculated is taxed with 30%. less than 50% of the assets of the participation consists from low tax rated The abovementioned Boxes are also applicable investments (surplus liquidities, assets for non-resident investors subject to Dutch related to passive financing of group income tax. They are considered as non-resident companies, or assets that are placed at taxpayers for Dutch Income tax purposes. The the disposal of group companies). Netherlands have an extensive network of tax treaties with other countries in which the effects Dividend withholding tax of double taxation are mutually arranged, According to the plans of the new government regarding Box 1, 2 and 3. The right to levy Dutch (October 2017) Dutch Dividend withholding tax income tax on income, gains and assets of non- will be abolished. It is unclear when the residents may be therefore limited. abolishment will come into effect, so it is Capital gains on real estate or shares in a Dutch recommended to postpone dividend corporate entity holding real estate distributions. Contact PlasBossinade Advocaten NV for the actual state of affairs. Capital gains made by a Dutch corporate entity and a foreign corporate entity (also by means of Below the current Dividend withholding tax rules a partnership) is subject to Dutch Corporate for the following categories: income tax. Capital gains made by individuals - dividends paid to shareholders natural under the regime of Box 1 of Income tax are persons with a substantial interest; progressively taxed. - dividends paid to shareholders natural In case there is an intention to reinvest a capital persons without substantial interest; gain, profit from selling real estate can be reserved in a fiscal reserve up until three years - dividends paid to a resident corporate after selling. Within these three years entity; reinvestment must take place. If not, the capital - dividends paid to a non-resident gain is taxed in the third year after selling, at the corporate entity. latest. Dividends paid to shareholders (natural persons) Capital gains on the sale of shares in a corporate with a substantial interest (5% or more of the entity by a Dutch corporate entity is in general shares) are subject to 15% Dividend withholding exempt from Corporate income tax. The tax. Dividend withholding tax is an advance levy Corporate income tax act provides for a before Box 2 flat rate of 25% in Income tax. In participation exemption on dividends and capital case the shareholder with a substantial interest is gains for Dutch and foreign held shares by Dutch a non-resident the same rules in principle apply. corporate entities under the following The non-residential shareholder is considered as conditions: a non-resident taxpayer for Dutch income tax - at least 5% of the shares is held by the purposes. Dutch tax regulations and tax rates Dutch corporate entity; may be overruled and/or adjusted in case a tax
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[BUYING AND SELLING REAL ESTATE IN THE NETHERLANDS] 82 treaty is applicable with the country of residence of the non-resident shareholder. Dividends paid to resident shareholders without substantial interest are subject to 15% Dividend tax. Dividend withheld tax is refundable and/or can be settled with due Income tax. Non-resident shareholders without substantial interest are also subject to 15% Dutch withholding Dividend tax. Dutch tax rates may be overruled and/or adjusted in case a tax treaty is applicable with the country of residence of the non-resident shareholder. On request the Dutch tax authorities will refund Dividend tax entirely or partly, depending on the applicable treaty. Dividends paid by a Dutch corporate entity to another Dutch resident corporate entity are exempt from withholding Dividend tax in case the participation exemption of the Corporate income tax applies. The participation exemption applies in case a corporate entity holds 5% or more of the shares in another corporate entity. Dividend tax withheld in other situations will be refunded and/or settled with Dutch Corporate income tax. Dividends paid by a Dutch corporate entity to a non-resident corporate entity is subject to 15% Dividend withholding tax unless the non-resident corporate entity holds more than 5% of the shares and the EU Parent Subsidiary Directive is applicable. In other cases, the 15% Dividend tax rate may be adjusted due to the applicable tax treaty with the country of residence of the non- resident corporate entity, depending on conditions.
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Fall 17 INTERNATIONAL LAWYERS NETWORK
MGRA & ASSOCIADOS LAW FIRM Buying and Selling Real Estate in Portugal
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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER PORTUGUESE LAW I. INTRODUCTION proactive pensions, an advantageous tax Portugal is an Iberian Peninsula country, system for investors and flexibility in human bordered by the Atlantic to the west and south resource management systems. These and Spain to the north and east, in addition to singularities have made Portugal a privileged its continental landmass, also comprises the place to invest, to do business and to live. archipelagos of the Azores and Madeira. III. OVERVIEW OF THE NATIONAL REAL ESTATE Portugal has around 10.3 million of inhabitants. MARKET Portuguese territory is split up into three administrative divisions: the first division includes 18 administrative country districts, while the others include the autonomous regions of the Azores and Madeira. All country districts are sub-divided into 308 municipal districts and approximately 3,100 parishes. Lisbon is the capital of Portugal and its largest The real estate market in Portugal is highly city with around 510,000 inhabitants. developed. It has a high relative quality of Portugal’s second largest city is Porto, in the supply in all sectors, on par with the larger core northern, with around 240,000 inhabitants. European markets, dynamic demand and a considerable presence of foreign occupiers. The Portugal is a democracy. Its sovereign bodies market is highly transparent, with various are the President of the Republic, Assembly of international consultants regulated by the most the Republic, Government, and the Courts. The demanding professional organizations of the current President of the Republic, elected in commercial real estate sector. There is also a 2016 for a five-year term, is Marcelo Rebelo de strong international contingent of developers Sousa. Elections for the 230 deputies of the and investors looking for new opportunities in Assembly of the Republic are held every four the Portuguese market. years and are followed by the appointment of the Prime Minister (currently António Costa), III.1. REAL ESTATE INVESTMENT MARKET who then forms the government (currently a PS In 1985, the road for real estate investment government supported by a four-party left wing funds in Portugal was opened. Since their alliance). launch and up until the 1990s, these funds Portugal has been a member of the European had typically been used as SPVs rather than Union since 1986 and a founding member of as an actively managed, pooled, closed-end- NATO in 1949. It has been a member of the fund. The market in Portugal, up to 1998, was United Nations since 1955. relatively small and not particularly professional, with foreign investments being II. REASONS TO INVEST IN PORTUGAL very rare. Portugal has a pleasant weather, an extensive The elimination of foreign exchange risk with Atlantic coast, a wide system of motorways, most of other European markets, when excellent infrastructures for living and for Portugal joined the Euro in 1999, placed the leisure time, competitive operating costs, country more notably on the radar of
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[BUYING AND SELLING REAL ESTATE IN PORTUGAL] 85 international investors. Investment, in 1998, closed, tripling the volume of 2012 and ahead of the Euro’s launch, increased from double the 2011 figure of €167 million. around €180 million to more than €400 • 2014 continued the evolution of the million, around 90% of which was foreign. Portuguese real estate market. There Almost all asset transactions were in the was a significant evolution in all sectors. office or shopping center sectors; with retail property accounting for more than 60% of the • 2015 registered €1.9 billion of capital involved. As can be noticed in the transactions in commercial real estate picture above, assets, doubling the volume of the previous year. 90% of the invested • In 2007, the volume of transactions capital came from outside the country. broke through the €1 billion barrier and The values surpassed the historical high achieved a new investment volume of 2007. record. • In 2016 €1.3 billion were transacted in • 2008 registered a 60% fall in activity commercial real estate in Portugal – the compared to the preceding year, mostly second highest value ever achieved. due to restrictions and scarcity of bank funding for the real estate sector. • The numbers of investment in the Portuguese real estate sector during • In 2009, the market followed the 2017 not only surpassed expectations previous year numbers, before showing but may still hit record highs. The first a slight recovery in 2010 with a total half of the year closed near the €800 investment volume of €690 million. million mark – one of the best first • The two following years continued to semesters ever registered. The reflect the sector investment investment achieved in the first six tendencies. 2012 reached a low point months of the year and the assets that for the last 12 years, recording only a are and are expected to enter the total investment of €108 million (a 36% market raise the year’s closing drop over 2011). expectations to more than €2 billion, with the probability of reaching a new • In 2013, the rise in the market activity historical record, close to € 3 billion. began, and a total of €322 million in Foreign capital remains strong in the commercial real estate assets were market.
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Real Estate Investment in Portugal during the past decade. III.2. FOREIGN INVESTMENT IN REAL ESTATE However, the second half of 2015 brought The real estate investment market in Portugal back international investment in to Portugal came to notice by the foreign investors since and, more particularly the last quarter of the the country joined the Euro in 1999. year, showed signs of what may be considered an upturn of real estate More than €4.2 billion of foreign capital has investment activity. The successful outcome been invested mostly by Germans, British, of the political crisis, continued improvement Dutch and Americans on the acquisition of of economic indicators, greater public debt several real properties since then. This value market stability and Portugal’s good could have been higher as the Portuguese performance in terms of the adjustment market was, on occasions, simply not large program, made important contributions to enough to supply sufficient products in terms the market recovery. of number, quality and/or scale, to fully meet the demand recorded at the time. Portugal remained present in the investment intentions of several of the most important European investment houses over the past 15 years, with buyers, interested in effectively diversifying risk and achieving slightly higher income returns than those available from IV. HOW TO MAKE A REAL ESTATE other markets, in a country offering security, INVESTMENT transparency and less competition. Portugal, lined with other continental legal Dramatic changes impacting on European systems such as France (propriété), Germany economic situation and in particular on (Voll Eigentum) and England (freehold), Portugal had driven away the attention of adopted the concept of “full ownership” which foreign institutional investors until 2013.
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[BUYING AND SELLING REAL ESTATE IN PORTUGAL] 87 is defined by the full and exclusive right of use, The parties can also agree with a deposit disposal, and fruition of the property. and down payment of the property price. In IV.1. INDIVIDUAL (DIRECT ACQUISITION) the case of a default by the promissory seller, the promissory purchaser may The formalization of a real estate acquisition receive twice the amount paid; if the requires the compliance of some important default is caused by the promissory steps, as follows: purchaser, the promissory seller can keep IV.1.1. INVESTIGATION the amounts already received. Investigate the property intended to be IV.1.3. SALE AND PURCHASE AGREEMENT acquired by checking its commercial, legal, The real estate sale is formalized either in a fiscal, environmental, and urban status is deed, signed before a notary, or by a essential for a clean and structured certified private document, which can be execution of the sale and purchase signed in the presence of a lawyer. agreement. Altogether with the deed, or certified Usually, it is done by commissioning due private document, there is the Land diligence procedures, which should ensure Registry Office record, which is one of the and guarantee that the property in question main instruments of a real estate deal, is not subject to any encumbrance, costs, or destined to make public the property’s limitations (registered with the respective actual legal status. Land Registry Office), or that any impediments have been extinguished Due to the principle of the priority of before or after the sale. registration, the first registered right is effective before third parties and prevails If the intention is to acquire a plot of land, over their incompatible rights even if those the buyer should also verify, with the rights have been established before the competent entities, the urban planning in date of registration. all its different forms, as well as any restrictions and licenses. Accordingly, together with the sale and purchase agreement, the registry of the If the intention is to acquire a building, or property acquisition is vital to assure the building unit, the buyer should also verify protection of the purchaser before third the use permit license which defines the parties. purpose of the property. IV.1.4. REAL ESTATE WARRANTY IV.1.2. SALE AND PURCHASE PROMISSORY AGREEMENT According to Portuguese Law, the real estate seller (and the property builder, Before the formalization of the real estate when applicable) is responsible for any sale, it is common practice to celebrate a defects or flaws in the property that may promissory agreement as an immediate occur in a five-year period upon delivery. binding document, in which case the signing The purchaser must report the defect or of the definitive sale agreement is usually flaw to the real estate seller or property conditional upon the parties’ compliance builder within one year from the date of with several obligations. detection of the defect (always within the
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five-year warranty period). The problems IV.2.3. SALES GUARANTEES that have arisen during this period cannot In special purpose vehicles acquisitions, it is be the result of bad use by the purchaser. common practice by the seller to accept There may be warranties with distinct liability for a specific length of time for any deadlines when a conventional warranty is infringement of its representations and stipulated between the parties and is warranties on the object of the sale and expressly stated in the sale and purchase underlying assets. agreement. V. TYPES OF SPECIAL PURPOSE VEHICLES This legal warranty can also be refused by It is standard practice in Portugal to make real both parties, specifically if they agree to sell estate investments through one of these three the property “as it is” at the moment of the vehicles which, in other words, represent the sale. process of a special purpose vehicle acquisition IV.2. SPECIAL PURPOSE VEHICLE (INDIRECT deal: (i) commercial companies, (ii) real estate ACQUISITION) investment funds and, (iii) real estate The second form of real estate investment is investment companies. the indirect acquisition of property, via a V.1. COMMERCIAL COMPANIES special purpose vehicle, previously Joint-stock companies as well as limited incorporated, or acquired, for such purpose. liability companies are on the Portuguese This procedure requires the compliance of frontline, representing most of the existing some steps, as follows: national commercial entities. IV.2.1. DUE DILIGENCE V.1.1. LIMITED LIABILITY COMPANIES BY As in direct acquisition deals, in indirect SHARES (PLC) acquisition deals it’s also recommended the In a PLC, share capital is divided up into commission of a due diligence procedure by shares, with a minimum initial amount of the purchaser, to i.) verify the property €50.000,00, and must, only at the moment legal status, as detailed above and to ii.) of its incorporation, have a minimum of five analyze the investment vehicle’s shareholders, unless it is incorporated by commercial, financial, tax, corporate and another company, as its sole shareholder. legal status, ensuring the legal acquisition of equity stakes as well as that no undesired After the incorporation, restrictions to the obligations or rights are dragged along with minimum number of shareholders no the entity to be used as vehicle. longer apply. IV.2.2. SHARE DEAL In its most common composition, the company’s is governed by a General This process involves the acquisition of Meeting, the Board of Directors, and the equity stakes in investment vehicles, such Sole Supervisor, who should be a Statutory as commercial companies (usually joint- Auditor. stock and limited liability companies) and undertakings for collective investment of a In most PLC companies, the share transfer contractual nature or of a corporate nature. agreements require no special formalities
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and its register is executed directly at the holders.” FII’s are also divided up into company itself. identical investment units. These commercial companies have a FII’s must assume one of three capital confidential advantage for investors, by variability forms: keeping information about shareholders’ i) Open-ended funds – with a number of identity away from public knowledge. investment units variable according to the V.1.2. LIMITED LIABILITY COMPANIES BY market demand; QUOTAS (LTD) ii) Close-ended funds – with a fixed number Usually representing the small and medium of investment units, established at the sized companies, the LTD companies are moment of its emission, with the the most found type of companies in possibility of increasing or reducing its Portugal due the inexistence of minimal number if mentioned in the law and initial share capital requirement and management regulation; simpler functioning and structure, as well as iii) Mixed funds – with a fixed number of the bigger control given to the founder investment units and variable number, partners. included in two different categories. Its share capital is divided up into quotas, FII’s are a type of undertaking for collective with a minimum initial amount per quota of investment of a contractual nature, which €1. The limited liability company can have management and representation must be or be incorporated by a sole quota holder performed by third ones specialized in the (in which case the company must bear the real estate market. corporate expression: “sole quota holder limited liability company by quotas”), or by FII’s can be managed by real estate any other number of quota holders. investment fund management companies with effective registered office and activity in Differently from PLC companies, the Portugal. information about the quota holders’ identity is public, accessible through the The creation of these entities requires a commercial registry official records. formal process, which includes authorization and official supervision from Bank of Portugal The quota transfer requires writing form (“Banco de Portugal”) and of the Securities and an official registry of the transmission. Commission (“Comissão do Mercado de V.2. REAL ESTATE INVESTMENT FUNDS Valores Mobiliários” or “CMVM”). Over the last few years, these vehicles of real The assets of a FII may comprise liquidity, real estate investment took up the Portuguese estate property and shareholdings in real market, mostly due to its favorable tax estate companies. regime. V.3. REAL ESTATE INVESTMENT COMPANIES The so called “Fundos de Investimento In 2010, Portugal included in its legislation a Imobiliário” (“FII”) are autonomous assets possibility that already existed in most of under the joint ownership of individuals or European countries which consisted in corporate entities, usually called “unit-
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forming FII's with a corporate form (aside of signing of the real estate acquisition the contractual form previously mentioned). agreement. The so-called “Sociedade de Investimento IMT – Real Estate Transfer Tax, which is Imobiliário” (“SIIMO”) are collective calculated over the price of the real estate investment entities with legal personality, or its tax patrimonial value, if higher (which which may take the form of a public limited is uncommon). liability company of variable capital ("SICAVI") IMT tax rates for housing buildings are or fixed capital ("SICAFI")' and whose progressive between 0% to 8% and fixed for property assets is owned by such entity. plots for construction or other urban A SIIMO can be self-managed or managed by buildings (6.5%) and rural property (5%), or professional real estate investment fund when the purchaser, not as an individual, management companies (as FII with has office at tax haven (10%). contractual form). The standard practice in Nevertheless, Portuguese law foresees Portugal is to choose already existing some exceptions or postponements on IMT investment fund management company. payments, some of them applicable when Both SICAFI and SICAVI are subject to: the acquisition is made by using some of i) The regulations on the previously special purpose acquisition vehicles mentioned open-ended and close-ended identified above. real estate investment funds, respectively IS – stamp tax, calculated over the price, or and, the tax patrimonial value, if higher. ii) The applicable regulations set out in the IS tax rate is, in most frequent situations, Portuguese corporate legislation. fixed in 0.8%, although this rate can SIIMO’s must have a minimum share capital increase to 1% on acquisitions of real estate of €375.000 divided into identical nominative valued at lease at € 1.000.000,00, or when shares with no nominal value. the purchaser, not as an individual, has office at tax haven (7.5%). Additionally, it is important to point out that the rules behind the incorporation of FII’s VI.1.2. VAT (“IVA”) (contractual form) are equally applied to the Under Portuguese law real estate SIIMO’s incorporation, as well as the acquisitions are exempted from VAT. applicable Portuguese corporate legislation. VI.2. PROPERTY OWNERSHIP
VI.TAX REGIME VI.2.1. PROPERTY TAX - “IMI” VI.1. PROPERTY ACQUISITION IMI is levied on a property’s taxable value VI.1.1. REAL ESTATE TRANSFER TAX and is payable by the property owners on (“IMPOSTO MUNICIPAL SOBRE AS 31 December of each year. TRANSMISSÕES ONEROSAS DE IMÓVEIS”) Nowadays, IMI reaches a variable rate AND STAMP TAX (“IMPOSTO DE SELO”) between 0.3% and 0.45% for urban The acquisition of real estate is subject to buildings and plots for construction, a fixed two types of taxes, which must be paid by rate of 0.8% for rural property, and a fixed the purchaser to the tax authorities before
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rate of 7.5% for owners’ resident in tax European Central Bank and the International havens. Monetary Fund, a pack of Laws entered into VI.2.2. SPECIAL CONTRIBUTION force with the purpose of implementing structural reforms in the Portuguese legal Special Contributions are required when framework of real estate lease to boost the properties are destined to the construction market. of new buildings and whenever the value of plots of land for construction increases The real estate lease is divided into two significantly due to major infrastructure types: (i) leases for non-housing purposes and public works carried out (mostly in Lisbon, (ii) leases for housing purposes. Porto, and their outskirts). The applicable VII.2. LEASES FOR NON-HOUSING PURPOSES rate varies between 20% and 30% and is The most relevant aspects of lease levied on the previously mentioned agreements for non-housing purposes, increased value. usually for commercial or industrial purposes, VI.2.3. TAX ON INCOME FROM PROPERTY can be freely stipulated by the parties, who OBTAINED IN PORTUGAL BY NON- are, accordingly, free to agree on issues RESIDENTS related to duration, termination, and Income from property obtained in Portugal opposition to the renewal of lease contracts, by non-residents (e.g. leases) is taxable at a with subsidiary application of the rules special rate of 28% (applicable to regarding leases for housing purposes. individuals), or 25% (applicable to corporate According to the law, the lease agreements entities), being in both cases subject to a may be entered into for fixed term or be of 25% withholding tax, whenever that income non-specified duration. The last option is not is paid by entities which have an organized commonly used in the property market in accounting system. recent years. If entered on a fixed-term basis, the duration may be freely agreed between the parties. The agreement can be automatically renewable, unless the parties agree or any of them decide otherwise. Maintenance works are freely regulated between the parties. In this case, if no provision is made by the parties, the landlord is responsible for the property maintenance. VII. LEASING LEGAL FRAMEWORK The costs and expenses related with the VII.1. GENERAL ISSUES property are freely agreed between the parties, who are also free to agree the criteria In Portugal, leasing is, day by day, acquiring a for updating them. more relevant economic weight. Parties can subject the transmission of On 14 August 2012, in compliance with the tenant’s contractual position to landlord´s terms established in the memorandum of permission, although, if nothing is stipulated, understanding executed by and between the transmission is possible in the most Portugal, the European Commission, the
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[BUYING AND SELLING REAL ESTATE IN PORTUGAL] 92 frequent situation of transfer of the duration has elapsed, by means of a written commercial or industrial business carried out communication sent to the landlord with a in the property (“trespasse”). prior notice provided in the applicable law. Any party may cancel the lease agreement As to non-fixed term agreements, the law based on a serious breach of duty committed provides the conditions and the prior notices by the other. The legal system provides a that the landlord and the tenant must comply non-exhaustive list of cases of breach to legally terminate the agreement. justifying a landlord’s decision to terminate Like in the non-housing lease agreements, the lease agreement. any party may cancel the lease agreement Additionally, the contract can be simply based on a serious breach of duty committed terminated by means of a written by the other. Also, here the legal system communication sent by the landlord to the provides a non-exhaustive list of cases of tenant in situations of delay or lack of breach justifying a landlord’s decision to payment of the rent. terminate the lease agreement. On all other serious breaches, the Additionally, the contract can be simply termination can be declared by the Court. terminated by means of a written VII.3. LEASES FOR HOUSING PURPOSES communication sent by the landlord to the tenant in eligible situations of delay or lack of The lease agreements for housing purposes, payment of the rent. unlike the lease agreements for non-housing purposes, have less contractual freedom. On all other serious breaches, the Some of the most relevant matters are termination can also be declared by the Court. imperatively established in the law. That is VII.4. SPECIAL PROCEDURE FOR EVICTION the case of rules regarding the early One of the ultimate goals of the urban lease termination and the opposition to renewal of regulation’s reform in 2012 consisted of the lease agreements which were, speeding up the procedure for eviction. A nevertheless, softened in 2012, favoring and special eviction regime was established to strengthening the landlord position. ensure the effectiveness of the termination of These lease agreements may also be entered lease agreements – regardless of its purpose for a fixed term or be of non-specified – applicable when the tenant has not vacated duration. The information provided above on the leased property on the date foreseen in leases for non-housing purposes is also the law or agreed by the parties. applicable here. This eviction procedure is specially used when Regarding the fixed-term lease agreements, the lease agreement was terminated by non- the tenant is entitled to oppose to the judicial means. The landlord can cumulate the renewal of the lease, by mean of a notice sent request for eviction with the claim of with a prior notice that may vary depending payment of rents and other expenses and on the initial term or on the term of its charges due by the tenant. This procedure renewal, as well as to terminate the lease takes place before an extrajudicial entity and agreement at any time and without is aimed to ensure fast procedures, although justification, provided that 1/3 of the lease
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it can, under certain circumstances, be In case the property is leased, and the landlord transferred to court. intends to carry out refurbishment works or VIII. URBAN REHABILITATION deep restoration, in most situations, landlord is entitled to terminate the lease agreement To promote the properties’ rehabilitation, the without having to resort to court and obtain new reforms simplified the urban licensing the release of the leased property, provided procedure required for these operations as well that the landlord relocates the tenant or, as for termination of lease agreements when alternatively, awards the tenant with the the landlord desires to perform rehabilitation compensation legally foreseen. works on the property. There is a special procedure applicable to the prior licensing control regarding buildings that were built at least 30 years ago and that show high levels of deterioration. According to this procedure, the execution of works in such buildings does not require a construction license, usually a bureaucratic process, being that a prior formal communication to the competent entity is requirement enough to allow the works to commence.
*** The information contained in this “Guide” is provided for informational purposes only and should not, under any circumstances, be understood as legal advice on any subject matter. Recipients of this document, clients or otherwise, should not act or refrain from acting on the basis of any content included in the document without seeking the appropriate legal advice from an attorney on their particular facts and circumstances. Mouteira Guerreiro, Rosa Amaral & Associados, Sociedade de Advogados R.L. expressly disclaims all liability for any possible damages caused by actions taken or not taken based on any or all the contents of this document. This "Guide " and its contents are provided "AS IS" without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranties of merchantability, fitness for a particular purpose, or non-infringement. Reproduction, distribution, republication, and/or retransmission of material contained within this “Guide” is prohibited without prior written permission of Mouteira Guerreiro, Rosa Amaral & Associados, Sociedade de Advogados R.L.
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LIDINGS LAW FIRM Buying and Selling Real Estate in Russia
ILN REAL ESTATE GROUP
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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER RUSSIAN LAW I. Types of real estate 1. Public ownership: • land plots; state ownership comprising • buildings, facilities, and other objects ▪ federal ownership (real estate closely connected with land (i.e. objects owned by the Russian that cannot be removed without Federation); detriment to their designation); ▪ ownership of constituent entities • constructions or developments under of the Russian Federation; construction; municipal ownership; • objects qualified as real estate by non-delimited public ownership (i.e. operation of law (registrable aircraft, public ownership, which is not explicitly ships, inland-waterways vessels); attributed to the ownership of certain • residential and non-residential particular public owners – federal or premises; regional). • car parking space. Land plots in state or municipal ownership can be sold only by tender held in the form of Land plots and buildings and constructions auction or without tender in certain cases constitute two separate types of real estate provided by the law (generally when land plots objects, according to Russian law. In practice, provided for non-commercial, personal, this means that a land plot and a building agricultural purposes). located on it represent two separate real estate items and can be owned by different parties If title to the public non-delimited land plot is and even on different titles (for example, right not registered, it does not prevent disposal of of ownership to the building and right of lease such land plot. Generally, such land plots are to the underlying land plot owned by another disposed by local authorities, executive party). State registration of title to buildings, authorities of constituent entities of the constructions on the one hand and underlying Russian Federation or federal executive land plots on the other hand, is carried out authorities in cases provided for in the law. separately, as well. However, there is a 2. Private ownership: principle of “unanimous destiny of land plot and objects closely connected to it” commonly individual ownership; known in Russian law according to which the co-ownership (simultaneous enjoyment building inseparably follows the underlying land of right of ownership to the same real plot (see for more details section VII). estate item by several persons): II. Right of ownership to real estate (title to ▪ joint ownership – co-owners real estate) enjoy right of ownership to the There are the following types of real estate real estate item in whole, ownership: without the opportunity to separate the co-owners’ shares;
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▪ shared ownership – each co- and objections in respect of registered owner has precise separable rights; share of ownership to the real data on existence of decision on withdrawal property. of real estate item for state or municipal III. Data and documents on titles to real estate needs. Prior to making a real estate transaction, A request for provision of extract from the parties are supposed to obtain authentic and Register can be filed with the Rosreestr in hard up-to-date information on the real estate item copy in person or by post, in electronic form by that is subject to transaction, evidence of e-mail or by filling up request form on the existing titles, encumbrances, and other website of the Rosreestr or in hard copy filing property details. with the multifunctional center. The extract Right of ownership and other property rights to from the Register can be provided in hard copy real estate, encumbrances of these rights, their or in electronic form as well, and the respective commencement, transfer, and termination are form should be specified in the request. An subject to state registration in the Unified State extract shall be generally provided by the Register of Real Estate (hereinafter – the Rosreestr within 3-5 days from the receipt of “Register”). It includes the following request (3 for filing directly with the Rosreestr information: the real estate objects; rights on office and 5 for filing with the multifunctional real estate; protected and special-use areas; center). register books; tax map; document journals. Documents confirming title to real estate The Register is managed by the Federal Service registration. for State Registration, Cadastre and IV. Sale and purchase of real estate Cartography (hereinafter – the “Rosreestr”). 1. Preliminary agreement The official website of the Rosreestr - https://rosreestr.ru. Reference information on Prior to entering into the main sale and the real estate item such as location address, purchase agreement (hereinafter – “SPA”) the area, cadastral number, existence of registered parties are entitled to conclude a preliminary rights and encumbrances is available to any agreement. third party on the website of the Rosreestr. Under a preliminary agreement, parties agree Upon the request of interested party, the to conclude the SPA in the future on terms following information can be provided in an specified in the preliminary agreement. extract from the Register: A preliminary agreement should contain description of real estate item, including its conditions which allow the determination of a location address, area, cadastral number, subject matter and other material terms of the and permitted use; SPA and should be concluded in the form provided for the SPA. data on title holders; A preliminary agreement should specify a term data on registered encumbrances; for entering the SPA. If no term is specified, the data on third parties’ claims in respect of SPA should be concluded within one year from real estate items, legally asserted claims,
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[BUYING AND SELLING REAL ESTATE IN RUSSIA] 97 the date of conclusion of the preliminary Other important provisions: agreement. Payment conditions Should one party to the preliminary agreement If payment of price under the SPA occurs after fail to conclude the SPA, the other party is the transfer of real estate to the purchaser (sale entitled to apply to the court to enforce on credit), additional provisions such as method, conclusion of the SPA by the other party. The terms, and amount of payment should be party failing to conclude the SPA shall provided for in the SPA. In case a real estate reimburse damages resulting from such failure item is sold “on credit,” it shall be considered to the other party. mortgaged in favor of the seller until the full 2. SPA price is paid by the purchaser, unless otherwise Under an SPA of real estate, a seller is obliged provided by the SPA. to transfer a real estate item (land plot, building, Provisions in respect of real estate transfer construction, apartment, or other real estate) The seller is obliged to transfer the real estate into the ownership of a purchaser, and the item to the purchaser, and the purchaser is purchaser is obliged to accept the real estate obliged to accept the real estate item from the item and pay a certain sum of money (price) to seller. The transfer of real estate by the seller the seller. and its acceptance by the purchaser should be Material terms of the SPA: evidenced by a transfer and acceptance act Subject matter of the SPA sighed by the parties. The risk of loss of the real estate item passes to the purchaser at the The SPA should provide for the data uniquely moment when the transfer and acceptance act identifying the real estate item that is subject is signed; until then, the real estate item is at to transfer to the purchaser under the SPA, the seller’s risk. including data on the location of real estate on a land plot or as a part of another real estate Form of the SPA: item. If no such data are specified, the SPA The SPA should be executed in writing by should be deemed not to have been concluded. means of drawing up one document signed by the parties, otherwise the SPA is deemed Price invalid. Obligatory notarization of the SPA of The SPA should provide for the price of the real real estate is not provided for in the law. The estate item; otherwise, the SPA should be parties can notarize the SPA at their own will. deemed not to have been concluded. Rights to land plot when the Specific provision for sale of residential building/constructions is being sold: premises Under the SPA of building, construction, or An SPA of residential premises should provide other real estate item, the purchaser along with for list of persons retaining rights to use such the title to such real estate item simultaneously premises after transferring them to the acquires rights to a land plot where such purchaser under the SPA with specification of building or construction is located, and which is such rights. required for their use.
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If a seller has a title to a land plot where real Legal risks in respect of existing estate being sold under the SPA is located and encumbrances: which is required for its use, the purchaser ▪ lease (with a term of more than a acquires a title to such land plot unless year); otherwise provided by the law. ▪ mortgage; 3. Due Diligence ▪ easement; Within the due diligence procedure, the following legal risks are subject to examination, ▪ attachment; based on the following documents: ▪ pending court proceeding; Legal risks in respect of parties’ powers to ▪ preservation order. make transactions: 4. Warranties ▪ Constituent documents; The party provided untrue warranties on ▪ Registration certificated; circumstances significant for conclusion of the ▪ Powers to sign an SPA; SPA, its performance or termination (including in respect of subject matter of the SPA, powers ▪ Necessary approvals, permits and to conclude the SPA, compliance of the SPA consents; with the applicable law, existence of necessary Legal risks in respect of title to real estate licenses and permits, its financial condition or item: in respect of third party) shall compensate to the other party on its request damages resulted ▪ certificate of state registration of from the untruthfulness of warranties or pay a title; penalty provided by the SPA. The party relying ▪ extract from the Register; on untrue warranties also has a right to ▪ documents of title (for example, unilaterally terminate the SPA unless otherwise SPA); provided for in the latter. Legal risks in respect of prior owners: Typical warranties in respect of real estate are the following: ▪ documents - grounds for acquisition of titles by all prior owners; the seller is the registered sole owner of the real estate item; Legal risks in respect of compliance of real estate item with the purchaser’s the real estate item does not have any requirements encumbrances; ▪ act on ranging of a land plot within the condition of the real estate item does particular category of land; not have any quality defects and does not need any repair works; ▪ land management file/demarcation plan; there are no pending court proceedings in respect of the real estate item; ▪ expert findings and competent authorities’ reports;
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all governmental approvals and permits for Should the property be seized from the construction of the real estate item have purchaser on grounds that existed before been obtained; entering the SPA, the seller shall compensate damages to the purchaser unless they can the seller has obtained all corporate prove that the purchaser knew or should have approvals for acquisition and disposal of the known about these grounds. real estate item; The purchaser’s liability there are no third parties’ claims in respect of the real estate item. Should the purchaser fail to accept the real estate item, the seller has a right to: 5. Parties’ liability under the SPA request the acceptance of the real estate The seller’s liability item by the purchaser; Should the seller fail to transfer a real estate unilaterally terminate the SPA. item to the purchaser, the latter has a right to: Should the purchaser fail to pay the purchase unilaterally terminate the SPA; price the seller has a right to: request the transfer of the real estate item request the payment of the purchase price; through a court order; unilaterally terminate the SPA. claim for reimbursement of damages. Contractual liability Should the seller transfer the real estate item of inadequate quality to the purchaser, the latter The seller and the purchaser can agree upon has a right at its own choice to: contractual liability for violation of particular provisions of the SPA. claim for pro rata decrease of the purchase price; 6. Share deal demand the seller removes the defects at Another method for acquiring real estate is a its own expense within a reasonable term; share sale – acquiring a share in a company holding title to real estate. A share deal can be claim for compensation of the purchaser’s performed by acquiring shares in a Russian joint expenses resulted from removal of defects. stock company or by acquiring participatory In case of substantial non-compliance with the interest in a Russian limited liability company. quality requirements, the purchaser has a right In a share deal, the purchaser acquires the to unilaterally terminate the SPA and claim for target company with all its rights, obligations, repayment of the purchase price from the seller. and liabilities. The seller shall transfer the real estate item Real estate acquisition through a share deal free of third parties’ rights unless the purchaser may be preferable for the purchaser due to tax agrees otherwise. Should the seller violate said and other advantages of such a transaction. obligation, the purchaser has a right to: Sale of shares in a joint stock company or participatory interest in a limited liability unilaterally terminate the SPA; company is not subject to VAT according to claim for decrease of the purchase price. Russian legislation. Besides, share sales can be governed by foreign law selected by the parties
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to transaction, while asset deals are subject Land plots taken out of circulation and only to Russian law. A share deal allows parties owned by the Russian Federation cannot be to avoid state registration of transfer of real privately owned and subject to real estate estate items belonging to the target company. transactions (land plots occupied with state V. State registration nature reserves and national parks; facilities of the Armed Forces of the Russian Transfer of title under the SPA is subject to Federation, other armed forces, the Federal state registration. State registration is normally Security Service, the state guard authorities; done within 7-9 working days from receipt of nuclear facilities and storage facilities for documents required for state registration (7 for nuclear and radioactive materials, etc.); filing directly with the Rosreestr office and 9 for filing with the multifunctional center). Land plots of limited circulation and subject to state or municipal ownership cannot be To register the transfer of title, the parties shall privately owned unless otherwise provided submit the following documents to the for in the law (land plots within specially registration authority: protected territories, forest lands; lands an application for registration; occupied with space infrastructure objects; lands underlying the sea and river ports, an SPA or agreement/document – the hydro-technical utilities, etc.). ground for title transfer; Certain restrictions on ownership of land are documents confirming the applicants’ provided for in respect of foreign citizens: authority (corporate documents, power of attorney, etc.); Foreign individuals, apatrides and foreign legal entities cannot have a title to land confirmation of payment of state duty; plots located at the border territories the corporate and other approvals (if list of which is established by the President applicable). of the Russian Federation and at other territories as provided for in the law (within Should one party to the SPA avoid state the borders of sea ports); registration of the SPA, the other party has a right to apply to court to render a decision on Foreign individuals, apatrides, foreign legal state registration of title transfer. The party entities and legal entities with a share of avoiding state registration of the SPA without a more than 50% belonging to foreign reasonable basis shall reimburse damages individuals, apatrides and foreign legal resulting from such avoidance to the other entities cannot have a title to land plots party. classified as agricultural lands, and can only possess such land plots on lease terms. The purchaser acquires the right of ownership from the moment of state registration of title VII. The principle of “unanimous destiny of transfer. land plot and objects closely connected to it” VI. Restrictions on sale of land Despite the legal distinction made between Russian law provides for several restrictions on land plots and buildings located on them and ownership of particular types of real estate: considering them as separate property interests,
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one of the basic principles in the sphere of land VAT is not imposed upon: sale of residential law is the principle of “unanimous destiny of houses or premises and shares in such houses land plot and objects closely connected to it” and premises; which is as follows. ▪ sale of land plots and shares in land A person, when acquiring a title to a building or plots; construction located at the land plot belonging ▪ sale of shares in charter capital of to the owner of such building or construction, companies holding title to real estate. acquires the title as well to such land plot necessary for use of building or construction, *** unless otherwise provided by the law. About the firm A person, when acquiring a title to a building or Lidings is a leading independent national law firm with a construction located at the land plot belonging broad base of clientele in Russia and the CIS. The firm to another person, acquires the right as well to advises its predominantly international clients from its two offices in Moscow and St Petersburg. Since its launch use the respective part of such land plot in the mid-2000s, the firm has achieved impressive necessary for use of building or construction on growth and built a noteworthy reputation. Lidings has the same terms and to the same extent as prior followed a consistent strategy of growth to become a owner did. high-quality provider of legal services with a clear focus to advise almost exclusively international businesses An owner of building or construction located at active in Russia and the CIS. It has also been successful in the land plot belonging to another person has a establishing sector expertise in certain industries where preemptive right to buy or lease such land plot. global investors play an important part, such as pharmaceuticals and life sciences, automotive, energy, Foreign individuals, apatrides, foreign legal FMCG, and aviation. entities – owners of buildings or constructions The firm’s significant footprint, accompanied by a located at the land plot belonging to another growing degree of brand reputation in the domestic person, have a preemptive right to buy or lease markets, has been recognised by a series of awards from such land plot. However, the President of the independent global market analysts like The Legal 500 EMEA, Chambers and Partners, ILFR1000, Martindale- Russian Federation can provide for the list of Hubbell, Who is Who Legal, and Best Lawyers. Areas of buildings and constructions that are not subject practice to the aforementioned rule. Antimonopoly, banking and finance, bankruptcy, and VIII. State duties/transfer taxes payable on the restructuring, corporate and M&A, criminal defense, purchase of real estate dispute resolution, employment, government relations, intellectual property, real estate and construction, and State duty: tax and customs. State duty is payable for state registration of title transfer in the amount of 22 000 Rubles for legal entities and 2000 Rubles – for individuals. Value added tax (VAT): The VAT is payable on sale of real estate at the rate of 18 % of full purchase price.
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Fall 17 INTERNATIONAL LAWYERS NETWORK
MILLER SAMUEL HILL BROWN Buying and Selling Real Estate in Scotland
ILN REAL ESTATE GROUP
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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER SCOTTISH LAW 1. Introduction aspect of a purchase/sale and conveyancing This guide applies to real estate in Scotland transaction. In these notes, we have attempted only. to highlight only the main topics. Each transaction has its own peculiarities and 2. Tenure potential problems. We shall be pleased to Real estate, both commercial and residential in answer more detailed questions and to advise Scotland may be either of the following: as required. Freehold INDEX Freehold real estate is the absolute property of Section Subject its owner, subject to any rights and title 1 The Survey burdens or servitudes in favour of third parties. These may affect how the real estate is used. 2 Home Report Leasehold 3 The Offer and Acceptance Leasehold real estate is held under a lease for a 4 The Title Deeds and fixed period of time, usually subject to the Conveyancing payment of rent and the performance of 5 Land and Buildings Transaction obligations specified in the lease. The terms of Tax the lease will dictate whether or not the leaseholder is entitled to transfer its interest to 6 Money Laundering Regulations a third party or whether it can sublet either the 7 Insurance whole or part of the real estate. 8 General 3. Know your client (KYC) 1. THE SURVEY It is necessary to carry out due diligence on the purchasing entity to comply with UK and Ideally a purchaser should always obtain the European-wide Anti-Money Laundering most detailed survey report on the property to Regulations. The documents which are required be purchased. Better to be “safe than sorry.” will vary depending on the purchasing entity, While a prospective purchaser is entitled to but they will need to establish the identity of instruct their own report, generally, they may the purchaser and its ultimate beneficial owner. choose to rely on the home report referred to Actual requirements are set out at greater in the following section. length in Section 4. 2. HOME REPORT 4. Guide to purchase and sale of Residential With a very limited number of exceptions (for Property example new build properties) all homes (all We are frequently asked by purchasers and types) that are advertised for sale in Scotland sellers to answer many basic and wide-ranging from 1st December 2008 require a home report. questions concerning all types of residential This is a statutory requirement. The report property and investments. It is difficult to consists of a pack of documents that will report produce a comprehensive guide covering every on the condition of the property. It will contain
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[BUYING AND SELLING REAL ESTATE IN SCOTLAND] 104 a valuation of the property, and a report on the We always advise that a prospective buyer home’s energy efficiency. The responsibility for should obtain the most detailed Report providing the Home report rests with the seller, possible on a property, before proceeding with who will be responsible for the costs involved in any purchase and should be comfortable and obtaining the information required and satisfied with the terms of any home report or producing the report. A prospective purchaser survey instructed directly, before entering into will be able to rely on its contents and is a binding contract for the purchase of any entitled to ask the seller for a copy of the property. report. The report comprises three documents: 3. OFFER AND ACCEPTANCE – “MISSIVES” (1) THE PROPERTY QUESTIONNAIRE When a written offer is submitted, that itself This is completed by the seller and contains does not create a binding contract between the useful information helpful to a purchaser, for seller and purchaser. The offer for the property example, details of any alterations to the will, if generally acceptable to the seller as to property, the council (local authority) tax purchase price and entry date, be accepted banding, any managing agents’ details, and usually with legal qualifications. The offer, and details of repairs affecting the property. any qualifications made by the two solicitors on behalf of their respective clients as part of the (2) SINGLE SURVEY contract negotiations and the final acceptance Although instructed by the seller, the survey is will together constitute a binding contract prepared by a chartered surveyor and will between the seller and the purchaser (called report on the valuation of the home and its “the missives”). Only after the final acceptance condition. A purchaser may rely on that survey is issued will there be a binding contract and and providing the purchaser is happy with the “missives will be concluded.” The contract must terms of that survey report and providing the be written. Verbal agreement is not sufficient purchaser’s lender (if any) is also satisfied with to conclude a contract. It should be the terms of that survey report, then a understood that individual purchasers and purchaser may feel it unnecessary to obtain sellers do not usually sign the missives and the and pay the cost of an independent report. contract is made binding by the signature of the (3) THE ENERGY REPORT purchaser’s and seller’s solicitors. Again, this is prepared by a chartered surveyor 4. TITLE DEEDS AND CONVEYANCING and will report on the energy efficiency of the Once there is a binding contract, the two property, its environmental impact and if solicitors (one for the seller and the other for appropriate will suggest ways to improve the the purchaser) will carry out the necessary property’s energy efficiency. conveyancing formalities and prepare the legal Home reports dramatically change the level of documentation. The purchaser’s solicitor will information that a seller is legally obliged to receive and examine all the relevant Title Deeds have available when selling their home. The of the property and will check the conditions, home report needs to be available to be which apply to ensure that there are no exhibited to prospective purchasers before a unusual and exceptionally oppressive or property is marketed for sale. onerous conditions. They will check to ensure that Local Authority Consents are in place for
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[BUYING AND SELLING REAL ESTATE IN SCOTLAND] 105 any structural or other alterations to the produced, then we may have to report the property requiring consent. The existence of transaction to the relevant authority. We would any structural alterations should be highlighted also likely withdraw from acting. We will need in the Survey/Home Report. During the to see the original of one of the following: UK Conveyancing process, checks are made to passport, residents permit issued to EU ensure, for example, that there are no previous nationals, UK (or EU equivalent) photo driving Securities or mortgage deeds affecting the license, Inland Revenue Tax Notification, property, which will remain undischarged after firearms certificate, or suitable ID from client the purchase has been completed, and to who reside outwith the EU and the original of ensure that there are no court orders (such as a one of the following: bank statement, utility bill, Bankruptcy Order) which prevent the seller council tax bill, mortgage statement, land from granting a good and marketable clear title registry confirming house purchase, to you. Similar procedures operate in reverse in confirmation of house purchase from other the case of a sale. The seller’s solicitors will solicitor, tenancy agreement or confirmation of answer any reasonable observations made on address from Electoral Register, or the the conditions in the title deeds and searches. equivalent from clients residing outwith the EU. Clients from the EU and further afield will also The purchaser’s solicitor will prepare the be required to provide information about the conveyance of title deed in favour of the source of funds to be used for their purchaser, and after settlement of the purchase. If the purchaser is buying or selling transaction takes place, ensure that the purchaser’s title is registered in the Land as a limited company, partnership, or other Registers. The registration system is electronic, body, but not as an individual, we still need to and all deeds are now held electronically by the carry out such money laundering checks, as are required by the laws in force at the time. We Scottish Land Registry. will supply prospective clients with details of 5. LAND AND BUILDINGS TRANSACTION TAX the current requirements at the outset of the (formerly Stamp Duty) transaction. This tax has been recently introduced by the 7. INSURANCE Scottish Government and replaces Stamp Duty. It is based on the price of the property We recommend that buildings insurance on the purchased, and the level of tax has been property and if relevant life policies on increased for more expensive properties. purchaser’s lives are effected (provided proper Please ask us for a calculation of the tax advice is taken and given) and, subject to that, payable when considering purchasing a put into force as soon as missives are property in Scotland. concluded in any purchase because from that date a purchaser will be under a legal 6. MONEY LAUNDERING REGULATIONS obligation to purchase the property and pay Every solicitor in Scotland must comply with the purchase price. The Law Society of Scotland’s money 8. GENERAL laundering regulations. This means that if we have not acted for a client in the past we must Hopefully, we have covered some of the more in every case obtain verification of identity. If relevant issues that may arise during a the documentation required cannot be residential sale or purchase transaction. We did
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[BUYING AND SELLING REAL ESTATE IN SCOTLAND] 106 not set out in these notes to answer every question, but have simply dealt with some of the most often raised questions. 5. Purchase/Leasing of Commercial Property The principles of commercial property practice in Scotland are not dissimilar to English practice. There will be differences in terminology, legal variances where the actual law differs in each country, and the Land and Buildings Transaction Tax payable. We would refer you to Fladgate LLP’s excellent guide for general information, but should you have a specific query relating to purchase or leasing in Scotland generally, or indeed any planned purchase, sale, lease, or development of commercial property in Scotland, please refer your query to us and our experts will be pleased to assist you.
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INTERNATIONAL LAWYERS NETWORK
ÖZCAN & NATAN ATTORNEY PARTNERSHIP Buying and Selling Real Estate in Turkey
I L N R E A L ESTATE GROUP
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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER TURKISH LAW 1. Agreement Types seller and buyer. It is revised annually by Pursuant to the Turkish laws, a real estate sale the Ministry of Finance. and purchase agreement shall be in an official b. Stamp tax and notary fee form and the transfer of ownership of a real In case a real estate sale commitment estate is only possible with an official deed and agreement is signed before a notary registry, which is signed at the Land Registry public, a stamp tax of 0,948% and a Directorates. notary fee of 0,113% of the purchase It is also possible to sign a real estate sale price shall be applied. Unless otherwise commitment agreement that sets forth the agreed by the parties, the buyer and conditions of the sale before a notary public. It seller shall be jointly liable for the is advisable to annotate this agreement to the payment of the stamp tax and notary relevant land registry records to assert personal fee. rights arising from this agreement to third The annotation fee is 0,683% of the parties. In case that the real estate has been purchase price and shall be paid in case acquired by third parties, a lawsuit for the of annotation of a real estate sale nullification of title deed can be filed. However, commitment agreement to the land if the sale is not effectuated within five years of registry records. the annotation, the annotation will be automatically removed by the Land Registry The rates are revised annually by the Directorates pursuant to the Land Registry Law. Ministry of Finance. 2. Buyer’s Inspection c. Value added tax A due diligence at the Land Registry If commercial income is generated from Directorates shall be carried out to determine if the sale of real estate, the sale there is any encumbrance and limitation on the transactions shall be subject to VAT. VAT real estate, such as mortgages, attachments, rates for residential real estate vary rights in rem, lease annotation or any obstacle from 1% to 18% depending on the net preventing the purpose of the sale. It is area. On the other hand, the sale of advisable for the buyer to inspect that the commercial real estate shall be subject property tax for the real estate has been paid to VAT of 18%. and the real estate has been constructed in In the case that real estate has been compliance with the zoning plan. owned by companies for at least a two- 3. Financial Obligations year period, the sale of such real estate shall be exempt from VAT. However, The transfer and acquisition of real estate may companies that are engaged in real give rise to title deed fees, annotation fees, estate trading business cannot benefit stamp tax, notary fees, value added tax, income from VAT exemption. tax and corporate tax. d. Income tax and corporate tax a. Title deed fee Capital gains generated by individuals The title deed fee is 4% of the purchase from the sale of real estate shall be price and shall be paid equally by the
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subject to income tax, which varies from in terms of country, person, geographical area, 15% to 35%. However, if the term of duration, number, proportion, qualification, holding the title is longer than five years, area meter and quantity; limit, cease entirely or the sale of such real estate shall be partially or forbid the acquisition.” exempt from the income tax. There are legal restrictions for foreign real Capital gains generated by companies persons and foreign commercial companies in shall be subject to the standard acquisition of real estate as follows: corporate tax rate of 20%. However, • Areal restriction: The total area of the 75% of capital gains shall be exempt real estate that a foreign real person from corporate tax provided that the may purchase cannot exceed 10% of the real estate has been owned by the total area of private real estate within selling companies for at least two years. the related district and 30 hectares in 4. Acquisition of Real Estate by Foreign Real total within Turkey. Persons and Foreign Commercial • Territorial restriction: If the area desired Companies to be purchased is within the borders of The Land Registry Law regulates real estate a military forbidden zone or military acquisitions made by foreign real persons and security zone, foreigners cannot acquire foreign legal entities. such real estate. Foreign real persons are entitled to purchase • In case the acquired real estate is in real estate in Turkey, pursuant to the Land land form, foreign real persons and Registry Law. In accordance with Article 35/1 foreign commercial companies should of the Land Registry Law, “Foreign real persons submit the project that will be who are citizens of countries determined by the developed on the unconstructed real Council of Ministers pursuant to international estate to the relevant ministries for relations and the country’s benefits may acquire approval within two years. real estates and rights in rem in Turkey The real estate is subject to liquidation provided that the legal restrictions are to be provisions in following cases: complied with.” • if the real estate is acquired in violation Foreign commercial companies, which are of the laws; established pursuant to the relevant laws of their countries, are entitled to acquire real • if the relevant ministries and estate in Turkey only within the provisions of administrations determine that the real special laws such as the Law on Encouragement estate is used in violation of purpose of of Tourism. purchase; However, according to Article 35/3 of the Land • if the foreigners do not apply to the Registry Law, “In case the country’s benefits relevant ministry within the required necessitate, the Council of Ministers is time in case the property is acquired authorized to determine the acquisition of real with a project commitment; estates of foreign real persons and foreign • if the projects are not realized within commercial companies which are established the required time. pursuant to the relevant laws of their countries
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In above-mentioned cases, if the liquidation structures have changed and the companies fall process has not been conducted by the owner within the scope of the foreign invested Turkish within the period given by the Ministry of companies as explained above; the companies Finance, which shall not exceed one year, the shall notify such change to the Ministry of liquidation shall be carried out by the ministry Economy within one month following the and the amount acquired as a result of the transfer of shares. liquidation shall be submitted to the holder of The governorate checks whether the right. companies use the real estate in accordance 5. Acquisition of Real Estate by Foreign with its field of activity stated in their articles of Invested Turkish Companies association. If the governorate determines that Foreign-invested Turkish companies as defined the companies do not comply with such use, a period of six months will be given to the below are entitled to acquire ownership of real estate in Turkey only if such acquisitions shall companies to provide the compliance with the be in relation to scope of activities stipulated in regulation. In case of failure by the companies, their articles of association: the real estate shall be liquidated. 6. Necessary Documents for Application • If 50% or more shares are owned by foreign real persons, companies The owners of the real estate or authorized incorporated in accordance with the representatives shall make an application to laws of foreign countries, or the relevant land registry directorates. international institutions; or Necessary documents for the application are as follows: • If foreign real persons, companies incorporated in accordance with the • Title deed of the real estate or detailed laws of foreign countries, or information about the real estate. international institutions have right to • Identification document or passport assign or depose most of the persons together with its translation. having the management rights in that company established under Turkish • Property value statement document to laws. be provided from the relevant municipality. However, acquisition of real estate in a military forbidden zone or military security zone or a • Compulsory earthquake insurance strategic zone is subject to the approval of the policy. commanderships. The acquisition is also subject • Photos of the seller and the buyer. to the governorate’s approval, if the real estate is in a special security zone. • If the power of attorney is prepared abroad, the original power of attorney The companies with foreign capital outside the and its certified translation. scope of above-mentioned companies are entitled to acquire real estate in Turkey with • Signature circular of companies. equal treatment to local investors. • Certified of authority of companies to It should be noted that if companies have real acquire and sell real estates issued by estates in Turkey and the shareholding relevant registry.
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In addition to above given documents, buyers with foreign nationality shall also obtain potential tax numbers from Turkish tax offices. 7. Annual Cost for Ownership of Real Estate The owners of real estate shall pay a real estate tax that varies from 0.1% to 0.6% of the tax based market value determined by the relevant municipality and shall take out a mandatory earthquake insurance policy.
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Fall 17 INTERNATIONAL LAWYERS NETWORK
FLADGATE LLP & CLEAVER FULTON RANKIN Buying and Selling Real Estate in England, Wales, and Northern Ireland
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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER BRITISH LAW
1. Introduction Leasehold14 Historically, there has been significant Leasehold real estate is held under a lease for a investment by overseas individuals and fixed period, usually subject to the payment of corporations in real estate in England and rent and the performance of obligations or Wales and in particular in central London which covenants contained in the lease. The terms of is perceived as a safe haven for overseas the lease will dictate whether the leaseholder is investors. Much of the recent overseas entitled to transfer its interest to a third party investment has been focused on residential real or whether it can sublet either the whole or estate, but there has also been substantial part of the real estate. investment in commercial real estate. Commonhold15 This guide applies to real estate in England and This is a relatively new type of real estate Wales, but it is not applicable to other parts of ownership. It allows perpetual “strata” the United Kingdom, namely Scotland and ownership of a multi-occupied residential Northern Ireland; or to dependencies such as property by the individual unitholders, with the Channel Islands or the Isle of Man, which joint responsibility over common areas and have their own separate legal systems. facilities. However, commonhold has, for We have however added footnotes to relevant various reasons, failed to gain traction in the paragraphs which seek to highlight some of the marketplace and is rarely used. Residential more salient differences with real estate apartments are, therefore, almost always transactions in Northern Ireland which we hope owned under a long lease. you will find useful. This does not obviate the 3. Know your client (KYC) need for specific legal advice which should be obtained in all cases. It is necessary to carry out due diligence on the 13 purchasing entity to comply with UK Anti- 2. Tenure Money Laundering Regulations. The Real estate in England and Wales may be any of documents which are required will vary the following: depending on the purchasing entity, but they Freehold need to establish the identity of the purchaser and its ultimate beneficial owner Freehold real estate is the absolute property of its owner, subject to any rights and title 14 It is common for land to be held under a long lease in covenants in favour of third parties. These may Northern Ireland. However, it should be noted that, since affect how the real estate is used. 10 January 2000, it is no longer possible to grant a new long lease (i.e. a lease for more than 50 years) of a dwelling house other than an apartment. It is also possible for a leaseholder to buy out their ground rent 13In Northern Ireland there is an additional form of and obtain a freehold title, but this is not normally worth tenure – fee farm grant. This is a hybrid species of tenure the expense as many restrictive covenants will remain. where the title is effectively freehold but has some of the characteristics of a long lease, such as a rent and 15 This form of real estate does not exist in Northern forfeiture rights. Since 10 January 2000 it is no longer Ireland, where residential apartments are also typically possible to create a new fee farm grant, but many are owned under a long lease. As noted above, it is still still in existence. permissible to grant a new long lease of an apartment.
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4. Individual stages in a real estate purchase by the seller as to the state and condition of the It is customary for real estate to be sold by a real estate. It may also be advisable for the two-stage process. Firstly, the parties enter buyer to have soil or other technical into a contract in which the seller agrees to sell investigations made, particularly where a the property to the buyer. This process, known development site is being acquired or where it as “exchange of contracts” has the effect of is possible that the real estate has been used passing the beneficial interest in the property for purposes causing contamination. The to the buyer. In the second stage, typically environmental protection legislation may about 28 days later, the seller transfers the require the owner of a contaminated site to legal title to the buyer. This is known as incur substantial clean-up costs in respect of “completion”. It is possible, however, for the waste left by a previous owner, and a tenant parties to proceed straight to completion and can sometimes be liable for such matters under this is sometimes done when timing is critical. the terms of the lease either directly or indirectly through the service charge. Before signing the purchase contract Exchange of contracts After the buyer’s offer has been accepted, but before the purchase contract is “exchanged” Once the contract has been negotiated and (i.e. becomes legally binding), the buyer’s agreed and the buyer’s investigations have solicitors will negotiate with the solicitors been completed, the parties will then proceed acting for the seller and conduct investigations to “exchange” formal written contracts. It is relating to various matters, such as: usual for a buyer to pay a deposit, often but not always of 10% of the purchase price on • the form of the purchase contract; exchange, which sum is liable to be forfeited if • the title documents, including any the buyer does not “complete” (i.e. close) the leases and other matters subject to purchase. Completion of the actual transfer of which the real estate is being sold; and the real estate follows a pre-agreed period following exchange of contracts, typically about • searches with various local authorities 28 days. or statutory bodies to ascertain matters which may affect the real estate or its Once contracts have been exchanged, both use, including environmental matters. parties, subject to the terms of the contract, become bound to continue with the transaction It is important to note that, during this and neither party can withdraw. Where the investigatory period, the seller of the real buyer is borrowing all or part of the price, it is estate generally is not contractually bound to highly advisable that the lender’s financial the buyer and is free to deal with other commitment is in place before exchange of prospective buyers. It may be possible, contracts. The buyer may also need to arrange however, to negotiate an exclusivity agreement insurance as from exchange of contracts. which will prevent the seller from negotiating with a third party for a limited period. Registration of the buyer’s title A prudent buyer should always commission a Following completion, the buyer’s solicitor will structural survey of the real estate and this pay any purchase tax (SDLT) due on the should be carried out prior to any exchange of purchase and apply to the Land Registry to contracts, as generally no warranties are given have the change of ownership and any
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[BUYING AND SELLING REAL ESTATE IN ENGLAND, WALES, AND NORTHERN IRELAND] 115 mortgage registered. If the buyer is a company, Leases of commercial real estate generally fall any mortgage will also be registered at into one of two categories: Companies House. • a building or “ground” lease at a premium 5. Lender’s requirements for a long period, usually at least 125 Each lender’s requirements will vary depending years, possibly acquired as a capital on the real estate, the identity of the borrower investment to be sublet to occupational and the nature of the transaction but, subtenants; or generally, on investment real estate a lender • an occupational lease for a shorter term will require the following: (say, up to 25 years) at an open market • a satisfactory valuation from the lender’s rent. valuers; Long-term leases of commercial real estate are • a satisfactory report on title from the not uncommon, especially where there are lender’s solicitors confirming that the plant and machinery tax benefits (capital lender will obtain a good and marketable allowances) that the freeholder wishes to title to the real estate; retain or where the freeholder will not willingly part with the freehold (e.g. the Grosvenor • full information about the proposed Estate). Residential apartments are also owned borrower, including company accounts by means of a long lease.17 (where applicable); and The liabilities of a tenant will depend on what is • where the real estate is bought as an agreed between landlord and tenant and are investment, details of the occupiers of the subject to negotiation. Generally, however, an real estate and the passing rents. occupational tenant would expect to be 6. Leasing of commercial premises16 responsible for the costs of repairs, insurance, business rates (local taxes) and outgoings. There may also be an obligation to contribute 16 In Northern Ireland, the majority of commercial leases by way of service charge for services provided are subject to the terms of the Business Tenancies (NI) by the landlord. The lease is also likely to Order 1996 which gives business tenants security of prevent the tenant from making substantial tenure and unlike in England and Wales the provisions of alterations. The lease may also prevent the this Order cannot be excluded by the terms of the lease. Under the Order, as long as the tenant continues to tenant from subletting or disposing of the lease perform their obligations under the lease, a lease of to a new tenant without the landlord’s prior business premises will continue indefinitely unless either written consent. the landlord or the tenant serves a notice that they wish to determine the tenancy, or the tenant serves a notice The rent under an occupational lease generally requesting a new tenancy. The landlord can only bring reflects the open market letting value of the the tenancy to an end if there is a legitimate reason, for premises and, depending on the length of lease example, that the premises have fallen into disrepair due term, there may be rent reviews at to the tenant’s failure to comply with the repairing obligations or that the landlord intends to carry out development works which cannot be carried out whilst lease that such consent will not be unreasonably the tenant is in possession of the premises. The Order withheld or delayed. also provides that, where the lease states that the tenant cannot alienate the premises or make improvements 17 Please see note 2 above. without the landlord’s consent, it will be implied into the
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[BUYING AND SELLING REAL ESTATE IN ENGLAND, WALES, AND NORTHERN IRELAND] 116 predetermined intervals (typically five years). A well-advised tenant will also want to The rent under a building or ground lease, commission a survey of the premises, especially however, is usually nominal, reflecting the fact where the lease requires the tenant to repair that a capital premium has been paid on the and maintain the structure. grant of the lease. A tenant taking a transfer of a lease from an The occupying tenant of business premises existing tenant is unlikely to have the normally has a statutory right to renew the opportunity to negotiate the terms of the lease, lease on the expiry of the contractual term. but will have to take it on its existing terms. This right can be excluded by agreement A tenant who takes a transfer of a lease between the landlord and tenant by following a originally granted before 1 January 1996 is 18 prescribed procedure. Most underleases and likely to have to remain liable under its terms short-term leases (e.g. five years or less) will for the remainder of the lease period, even exclude the right to renew. though it subsequently transfers it to a new Depending on the state of the market and the tenant, if there is a subsequent default.19 particular real estate, the tenant of an An original tenant or a tenant who takes a occupational lease should seek to negotiate: transfer of a lease granted on or after 1 January • an initial rent-free period; 1996 is likely to have to guarantee any new tenant to whom it transfers the lease for the • an unconditional right to terminate the period that that particular tenant remains the lease early (a “break right”); and tenant, but its guarantee will cease if the new • a limit on service charge payments. tenant later transfers the lease to another 20 The first draft of a lease will normally be party. prepared by the landlord’s solicitor and the 7. Ownership structure terms will be negotiated by the tenant's The choice of ownership structure is often tax solicitor who will make similar searches and driven. We look at tax in the next section but enquiries to those on a freehold purchase. A here we focus on the non-tax facets of different landlord will frequently require security if the types of ownership. tenant is an overseas company or a private limited company. This may take the form of a Personal ownership / Directly held parent company guarantee or a “rent deposit”. Advantages: Simple and cost effective. There A rent deposit is a sum of money equal to (say) is no structure to maintain and no annual six to 12 months’ rent, held by the landlord, to running costs. be used by the landlord in the event of a default by the tenant; it will be returned at the 19 end of the lease or in other agreed These provisions do not apply to leases in Northern Ireland. An outgoing tenant will be relieved from any circumstances. future liability under the lease if the landlord’s consent is endorsed onto the deed. However, dependant on the terms of the commercial lease, it would not be uncommon for landlords to be able to require suitable guarantors for any incoming tenant if it is reasonable to 18 Please see note 5 above – this is not possible in respect do so. of leases in Northern Ireland which are subject to the Business Tenancies (NI) Order 1996. 20 Please also see note 7 above.
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Disadvantages: Details of land ownership are hold shares may prevent the identity of the held on a central, searchable register at the ultimate beneficial owner being disclosed. Land Registry. If owned through a nominee (be Disadvantages: Annual running costs can be they a corporate entity or trustees of a bare high. It is likely that provisions requiring the trust), only the nominee’s details appear on the disclosure of ultimate beneficial ownership, like title, but UK corporate nominees have had to the rules that apply to UK companies, will be disclose their ultimate beneficial owner on a introduced in the near future. separate public register (see below) since June 2016. A UK Will and UK Property and Financial Partnerships Affairs Lasting Power of Attorney should be Limited partnerships are private arrangements considered, to avoid a loss of control over the whose terms do not appear on any central property in the event of death or incapacity. register. The identity of the partners is not The asset will be exposed to claims from disclosed unless the partnership is a Limited creditors and potentially also on divorce or Liability Partnership, in which case the relationship breakdown. members of the partnership will appear on a Company registered in UK publicly searchable register at Companies House. Advantages: Annual running costs are usually less than for offshore registered companies Trusts (UK or offshore) where corporate fiduciaries located in offshore Advantages: Common law jurisdictions often jurisdictions often provide the directors. The have a significant body of law associated with company affords limited liability. trusts and their operation, providing certainty Disadvantages: Since June 2016, those owning as to how they can be used. Trust assets can more than 25% of the ultimate beneficial benefit successive generations. Often ownership of a company must appear on a beneficiaries do not hold a fixed share of trust publicly searchable register held at the UK’s assets, so a beneficiary’s death or incapacity Companies House. Corporate governance does not affect the administration of the trust’s documentation, such as company articles and assets. possibly shareholders’ agreements, may be Disadvantages: The trust model may, in the required in order to regulate who controls the opinion of some, confer insufficient control on company in the event of death, divorce or the person contributing the wealth to the trust incapacity. The shares owned by the ultimate structure. In certain trust jurisdictions beneficial owner of the company will still be (especially the UK), the law may be perceived considered in the event of financial claims but as allowing the beneficiaries to have too much pre-emption rights in the company’s articles influence. The trustees’ fiduciary obligation to may prevent the shares being transferred to act in the best interests of the beneficiaries satisfy creditors. may prove too constraining. Company registered offshore (i.e. outside UK) 8. Tax implications of ownership structures Advantages: The jurisdiction may not have A major consideration for investors. The taxes introduced public registers of ultimate that need to be considered include: beneficial owners. The use of a nominee to
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• Stamp duty land tax (SDLT) at rates that than £500,000 is acquired by certain differ significantly depending on whether “non-natural persons” (NNPs). These the real estate is commercial or include companies and partnerships residential. with a corporate partner but not trustees. Relief from the 15% charge o For commercial real estate, the rate of (with the effect that the normal rates tax is 0% on the first £150,000 of the apply) may be claimed by NNPs purchase price, 2% on the next carrying on real estate development £100,000 and 5% on the remaining or using real estate for commercial amount. renting to third parties. Conditions o For residential real estate, the rates apply. are 0% on the first £125,000 of the • Annual Tax on Enveloped Dwellings purchase price, 2% on the next £125,000, 5% on the next £675,000; (ATED) came into effect on 1 April 2013 10% on the next £575,000 and 12% on and is currently payable only in respect of the remaining amount. With effect residential properties owned by NNPs from April 2016, however, the worth in excess of £500,000 on 1 April relevant rates for purchasers of 2012 (or at acquisition if later). For ATED additional residential real estate tax year 2018/19, the valuation date (whether buy-to-let property or changes to 1 April 2017 for properties second homes) are 3%, 5%, 8%, 13% held on that date. ATED is an annual and 15% respectively. First-time charge of up to £220,350 per year (as at buyers of properties worth up to ATED tax year 2017/18), calculated by £500,000 may pay a reduced rate of reference to real estate value bands. SDLT. Rates increase in line with the Consumer Prices Index each year. Relief may be o Regarding leases, a 1% rate of SDLT claimed by NNPs carrying on real estate will be due on the net present value of development or using real estate for the rent, above £125,000 (residential) commercial renting to third parties, or £150,000 (non-residential/mixed), commercial trade purposes or as which is calculated using a formula employee accommodation. Conditions that considers various factors, apply. including the fact that rents to be received in the future have a lower • Liability for ATED-related Capital Gains value than rents received Tax (ATED-related CGT) of 28% on any immediately. gain when residential real estate is sold. If residential real estate is subject to ATED it o For commercial leases, where the net is also within the scope of ATED-related present value exceeds £5m, the rate CGT. Conditions apply. of SDLT for the proportion of the net present value above £5m is 2% rather • For residential properties owned by non- than 1% resident persons, Non-Resident Capital Gains Tax (NRCGT) may be payable at o A 15% SDLT rate applies when rates of between 18% and 28% residential real estate costing more (depending on total UK income and gains)
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on gains realised on a disposal of the real residential property owned by closely estate that have accrued on or after 6 held companies or partnerships will be April 2015. Conditions apply. ATED- subject to IHT. In addition, any loan, related CGT takes precedence if it applies. security, collateral, or guarantee given to enable the acquisition, maintenance, or • In the Autumn budget 2017, it was enhancement of UK residential property announced that the government would be by another is likely to give rise to IHT consulting on extending CGT to UK implications for the giver, under the same commercial real estate (whether the draft legislation. owner is UK resident or not) and to entities that derive their value from UK • Value added tax (VAT). This is applicable real estate (whether UK resident or not). to commercial real estate only and is payable at the standard rate of VAT, • Income tax (IT) is payable by individuals which is currently 20%, unless it is on rental income. Various deductions are possible to structure an acquisition as a permitted against rental income, transfer of a going concern (TOGC). A including interest payable on a loan to TOGC is generally available to a purchaser purchase or improve the real estate. of investment real estate, but there are However, from 6 April 2017 a phased conditions that include the buyer withdrawal of interest deductibility registering for VAT and submitting applies to individuals (but not companies). quarterly VAT returns to the UK’s revenue Capital allowances may also be available authorities. for commercial real estate. • The interrelationship of each of these • UK resident companies are liable to taxes and the formalities which need to corporation tax on their profits (rental be complied with are complex and careful income, capital gains or trading income). consideration needs to be given to their The rate of corporation tax is 19% from 1 application to the acquisition of any April 2017 and will be 17% from 1 April specified real estate. By way of example, 2020.21 the following table compares ownership • Inheritance tax (IHT). An overseas by an offshore company with personal individual may be liable to pay 40% IHT on ownership. the value of real estate situated in the United Kingdom in the event of his death or on making certain lifetime disposals. A common planning technique is to hold the real estate via an offshore company. However, the ATED implications of doing this now need to be considered. Assuming draft legislation is enacted in Q4 2017, with effect from 6 April 2017, UK
21 For companies resident in Northern Ireland, the rate of corporation tax is due to be reduced to 12.5% in 2018.
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Ownership by Offshore Company Ownership by Individual
ATED Yes, annual charge, depending No on value
ATED-related CGT Yes, potentially at 28%, No depending on value
CGT Yes, potentially at 20% (if ATED- At rates of between 18% and related CGT does not apply) 28%. Relief may be available if property used as main residence
IHT Exposure from 6 April 2017 is Yes, immediate exposure likely (pending enactment of legislation) IT Rental income taxed at 20%. Rental income taxed at Mortgage interest will remain 20%/40%/45%. Deductibility of deductible mortgage interest being phased out SDLT Potentially at higher flat 15% Stepped rates between 0% and rate if purchase price >£500,000 10%. Since April 2016, higher rates apply to purchases of residential buy-to-let and second residences
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9. Expenses residential market, where there is often The buyer will have to meet at least the stiff competition for prime real estate. following additional expenses at completion of • Fees incurred in obtaining finance. the transaction: • Miscellaneous expenses such as search • Land Registry fees ranging from £20 to fees of approximately £1,000 per property £910, depending on the value of the real and bank transfer fees. estate. This is significantly less than the 10. Constraints on development registration or cadastral fees payable in most other European countries.22 Town planning legislation • Legal and other professional fees, which Development may not be undertaken without are generally agreed at levels to reflect planning permission obtained under the Town the purchase price and professional input. and Country Planning Act 1990.23 These fees will bear VAT at the then “Development” may take one of two forms: current rate (currently 20%), even for overseas investors. Each party usually • the making of a material change in the meets its own professional advisers’ fees use of land or of an existing building; or unless agreed otherwise. A tenant who is • the erection of new buildings or the subletting or transferring the lease will extension or other alteration of existing usually be required to pay the landlord’s buildings. professional fees for the consent to the Applications for planning permission are made subletting or transfer. to the local planning authority in the first • The seller, not the buyer, pays the selling instance and there is a right of appeal to the agent’s fees. These typically vary from Planning Inspectorate against a refusal of 1%-3%, depending on whether the real permission. estate is commercial or residential, with Certain additional controls apply development fees for auction sales generally higher is proposed within a conservation area or if than for private treaty sales. Payment of listed buildings are affected. the agent’s fee is normally conditional on completion of the sale. Other controls • Some buyers may instruct a buyer’s agent The development and use of buildings may be to help them find a suitable property. The governed by other statutory controls which fee payable to the agent normally varies regulate the quality and form of construction. from 1-3%. These “finder’s fees” are Building regulations cover the technical common in the high-end London
23 This Act does not extend to NI, which is instead 22 In Northern Ireland, depending on the purchase price, governed by the Planning Act (NI) 2011. Applications for Land Registry fees for the registration of a purchase Planning Permission are made to the local council and range from £80 to £535. Where the land is being there is a subsequent right of appeal to the Planning registered for the first time, a fixed fee of £110 is Appeals Commission against a refusal of permission or a payable. Additional fees will also be chargeable, for condition imposed. All structural works of whatever example, on the registration of a mortgage or a right or nature, whether internal or external, also require burden attached to the land. Building Control Approval from the local council.
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[BUYING AND SELLING REAL ESTATE IN ENGLAND, WALES, AND NORTHERN IRELAND] 122 standard that building works need to meet and the procedures that need to be followed. In the case of leasehold land, the lease may have controls on both kinds of development. Disclaimer This note is for general guidance only. Specific legal advice should be obtained in all cases. Fladgate LLP is regulated by Solicitors Regulation Authority, number 484783. Fladgate LLP accepts no liability for anything contained in this brochure or for any reader who relies on its content. Before concrete actions or decisions are taken by you or your business, you should seek specific legal advice. We remain at your disposal in relation to questions regarding this note and in relation to your current or planned commercial activity in the UK and look forward to assisting you. ©Fladgate 2017. This material is the copyright of Fladgate LLP and is not to be reproduced in whole or in part without prior written consent. December 2017
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SHUTTS & BOWEN LLP Buying and Selling Real Estate in the United States - Florida ILN REAL ESTATE GROUP
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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER FLORIDIAN LAW I. STANDARD FORMS OF AGREEMENTS 3. Letters of Intent may or may not be A. Purchase and Sale Agreement sets forth binding depending on the language the complete terms of the purchase and utilized; they are usually non-binding. sale including, among other things, price, C. While utilized in other states, an Offer to security deposit, allocation of costs of the Purchase is not commonly used in Florida. transaction, date for closing, inspection II. BROKERS period, financing, title contingencies, escrow information, representations, A. There are four general types of brokers: warranties, covenants, and default 1. Residential Brokers provisions. a. Sell homes, condos, vacant lots 1. Either party’s attorney can prepare the initial draft of the Purchase and 2. Commercial Brokers Sale Agreement. a. Office buildings, vacant land, 2. FARBAR Form – this is the pre-printed shopping centers, apartment form of Purchase and Sale Agreement buildings, raw land, warehouses, typically used in Florida for residential industrial facilities. Multi-family real estate transactions; parties can Apartments: include Retail, Office, freely negotiate the terms and and Industrial subcategories. provisions contained in the FARBAR. 3. Leasing Brokers 3. The assignment of a Purchase and Sale a. Specialize in leased properties (tend Agreement can be prohibited or to focus on commercial properties, restricted if expressly stated in the which includes retail, office, and document (for example, seller can industrial). restrict buyer to only being able to 4. Mortgage Brokers assign contract to an entity related to buyer). a. Facilitate mortgage lending in both residential and commercial B. Letter of Intent, like a term sheet, is transactions sometimes utilized in commercial transactions to outline the basic terms of b. They typically receive commission a transaction before drafting and based on a percentage of the loan negotiating a Purchase and Sale amount or a flat fee Agreement. B. Must be licensed in Florida and they are 1. Beneficial because allows parties to regulated by state law put to paper key terms to deal, which C. Real estate brokers usually enter into helps facilitate agreement on the listing agreements with sellers, and they remaining terms. typically receive a commission based 2. Signing letter of intent adds level of upon a percentage of the sales price formality and gravitas to negotiations. (generally 6%, but commonly negotiated); if there is a co-broker, the listing broker
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will usually share the commission with the IV. SURVEYS co-broker. A. As-Built Surveys – depict the D. Real estate brokers are paid by the seller, improvements over a given parcel of land and they owe fiduciary duties to the party and can be utilized both prior to that they represent. construction and post-construction. III. BUYER’S INSPECTIONS B. ALTA/ACSM – standards by which A. Residential: Prior to Closing, the Buyer will surveyors are held; many lenders require typically perform property inspections that the surveyors meet these standards including inspection for structural issues, and requirements (these are national radon, asbestos, pest infestation or requirements, not just Florida). damage, title searches, survey, and in C. Benefits of Surveys certain rare circumstances, lead paint and 1. Ensure property actually exists underground storage tanks (for oil or propane). Buyers should also order 2. Determine relationship of property to municipal lien/open permit searches to other properties confirm there are no outstanding 3. Ensure the record boundary lines are governmental violations, liens, or fines actually the ones being occupied/ and to confirm that all alterations and used renovations have been completed in compliance with permits and all permits 4. Determine physical location of are properly closed out. improvements and easements B. Commercial: In addition to the inspections 5. Determine whether there are any described above for residential buyers, encroachments on the property commercial buyers also usually obtain an V. FORMS OF OWNERSHIP environmental inspection (Phase I, and if A. Residential Property is usually held in a necessary, Phase II), and a land use and nominee trust, an estate planning trust, zoning/permitting analysis. or an individual’s own name (especially if C. The Purchase and Sale Agreement the property is the owner’s homestead so typically designates an inspection period that the owner is afforded certain (also known as due diligence period), homestead rights and protections during which buyer has a specified provided under Florida law). Joint owners amount of time (usually 30-45 days) to may take title as: conduct the above referenced inspections 1. Tenants in Common (each own 50%); as well as investigate any title issues or zoning and land use concerns; buyer 2. Joint Tenants with rights of generally may terminate the contract survivorship (they own the property during this inspection period for any or no jointly and upon the death of one of reason and receive a return its initial the joint tenants, the property deposit. automatically passes to the surviving joint tenant(s)); or
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3. Tenants by the Entirety if the owners 2. Most likely to see this form of deed in are married (they each own the the commercial context undivided whole of the property and if C. Quitclaim deed – least protection for one spouse dies, the property buyer automatically passes to the other spouse). 1. Contains no warranties of title B. Commercial Property may be held as 2. Typically used for gifting property or follows: for situations where necessary to correct title defects or issues 1. As the Owners pursuant to the forms set forth in A above, (highly unusual 3. Title companies do not like to insure for commercial properties to be held quitclaim deeds in an individual’s personal name for VII. CLOSING COSTS/ADJUSTMENTS liability purposes) A. Documentary Stamp Taxes (Doc Stamps) – 2. General Partnership/Joint Venture levied on documents that transfer interest 3. Limited Partnership in Florida Real Property (i.e. deeds) 4. LLPs 1. In most counties in Florida, the documentary stamp taxes are
5. LLCs (has become the most common calculated at the rate of $0.70 per form of ownership) $100 of purchase price; in Miami- 6. Business Trusts Dade County the rate is $0.60 per 7. Business Corporations $100 of purchase price plus an additional $0.45 surtax per $100 of (i) C corporation purchase price on documents (ii) S corporation transferring property other than a single-family residence VI. FORM OF DEED 2. The documentary stamp tax and, if A. General warranty deed – most protection applicable, the surtax, is paid to the for buyer Clerk of Court when the deed is 1. Grantor warrants title for all times recorded; the Clerk then sends the that the property has existed, money to the Department of Revenue. including before grantor took title to B. Title Insurance Commitment, Title Policy, the property and Municipal Lien Searches 2. Most likely to see this form of deed in 1. The cost of the title insurance the residential context commitment is usually paid by Seller, B. Special warranty deed – middle-level even if ordered by the Buyer or protection for buyer Buyer’s attorney. 1. Grantor warrants title for the period 2. The premium for the title insurance that grantor has owned the property policy is a promulgated rate based upon the purchase price for the property being purchased. The
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attorney for the party that is 1. Title Company will typically require on responsible for paying for the title Title Commitment as a requirement insurance premium generally is the for Title Policy to be issued. agent that issues the title insurance 2. Purpose of the Affidavit is for Seller to policy. Whether the Buyer or the provide assurance to the Title Seller pays for the title insurance Company and the agent for the Title premium is negotiable, but in most Company that no liens or other counties in the Florida, the custom is encumbrances have been placed on for the Seller to pay for the title the property in the past 90 days and insurance premium. The main that no work has been performed the exceptions are Miami-Dade County cost of which is remains unpaid; this is and Broward County, where the important because there is a gap custom is that the Buyer is responsible period between when the Title for paying the title insurance Commitment is issued by the Title premium. Company and when the Title Policy is 3. The cost of the municipal lien searches issued. (also known as lien letters) is usually C. FIRPTA Affidavit – IRS requires paid by the Seller. 1. Proof that grantor is a US entity
C. Inspections, Survey, Due Diligence, and paying US taxes Financing Costs are usually the responsibility of the Buyer. 2. If Seller is a foreign entity not paying US taxes, the transferee/settlement
D. Real property taxes, association agent must withhold 15% of the maintenance fees, special assessments, purchase price and remit it to the IRS rents, and operating expenses are usually to ensure that taxes will be paid on prorated as of the closing date, with the the income if any taxes are owed. Seller responsible for those costs/revenues incurred prior to the 3. One important exception to FIRPTA closing date and the Seller responsible for withholding is a transferee/settlement those costs/revenues incurred from and agent is not required to withhold after the closing date. when the Buyer is purchasing a home and the purchase price is not more
VIII. OTHER CLOSING DOCUMENTS than $300,000.
A. Bill of Sale – conveys personal property D. Assignments (i.e. refrigerator, washing machine, appliances, equipment, etc.); usually does 1. Can include Assignment of Leases, not get recorded. Assignment of Contracts, Assignment of Bulk Buyer Rights, etc. B. Seller’s Affidavit – also can be referred to as title affidavit, lien affidavit, gap (i) Would typically see these in the affidavit, or some combination of these context of buying and selling a terms i.e. title, lien, and gap affidavit. commercial building (ii) Both buyer and seller usually sign these assignments.
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E. Closing Statement – also typically called Settlement Statement 1. Sets forth the purchase price, closing costs and prorations of the transaction as debits and credits to Buyer and Seller. 2. Will usually include the financing costs for the Buyer’s loan; provided, sometimes in a commercial transaction, the Buyer’s lender will have its own, separate loan closing statement. IX. RECORDING REAL ESTATE DOCUMENTS A. Deeds need to be witnessed by two witnesses and notarized 1. Only the Grantor signs the deed (not the grantee) 2. Regarding recording, Florida is a Notice state, i.e. last bona fide purchaser without notice who pays value has priority 3. Must record the original of the deed (cannot record copies, except with e- recording but must have original in possession) B. Other than the Deed, most other conveyance documents are not recorded; sometimes a limited liability company affidavit is recorded to evidence authority for execution of the Deed C. If the conveyance is a condominium unit which requires the approval of the condominium association, then the condominium association approval is usually recorded with the Deed
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Spring 17 INTERNATIONAL LAWYERS NETWORK
DAVIS, MALM & D’AGOSTINE Buying and Selling Real Estate in the United States - Massachusetts
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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER MASSACHUSETTS LAW I. STANDARD FORMS OF AGREEMENTS with a Title V inspection (with passing A. Offer to Purchase sets forth buyer’s offer of results) from the town in which the home is price, date for closing, contingencies for located. inspections, financing etc. and date for C. Commercial: In addition to the inspections signing a formal purchase and sale performed by residential buyers, agreement. Seller may accept or reject. commercial buyers also usually obtain a B. Purchase and Sale Agreement sets forth the survey, an environmental review, and a use complete terms of the purchase and sale. and zoning/permitting analysis. C. Note: In Massachusetts an Offer to IV. FORMS OF OWNERSHIP Purchase may be enforced as a binding A. Residential Property is usually held in a contract even if it contemplates the nominee trust, an estate planning trust, or execution of a Purchase and Sale an individual’s own name. Joint owners Agreement. may take title as: II. BROKERS 1. Tenants in Common (each own 50%); A. All brokers in Massachusetts whether they 2. Joint Tenants with rights of survivorship are working with the buyer or the seller (they own the property jointly and the represent the seller unless the buyer enters survivor ends up with 100%); or into a separate Buyer’s Broker or Dual 3. Tenants by the Entirety if the owners Agency Agreement. are a married couple (they each own B. Seller usually pays the brokers commission the undivided whole of the property). unless negotiated otherwise. B. Commercial Property may be held as III. BUYER’S INSPECTIONS follows: A. Residential: Prior to Closing, the buyer 1. As the Owners pursuant to the forms performs property inspections including set forth in A above, (highly unusual for inspection for structural issues, radon, liability purposes) asbestos, pest infestation or damage, title, 2. General Partnership/Joint Venture and in certain rare circumstances, lead paint and underground storage tanks (for 3. Limited Partnership oil or propane). Buyers should also check 4. LLPs the town/city building file on the property to make sure all alterations and renovations 5. LLCs (most common) have been completed in compliance with 6. Business Trusts permits and all permits are properly closed 7. Business Corporations out. Buyer or its lender will also obtain a plot plan of the premises. i. C corporation B. Private Septic. If the property is on a private ii. S corporation septic system (rather than municipal sewer), then seller has to provide buyer
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V. THE “CHECK-THE-BOX” REGULATIONS 2. Trust property can be effectively A. Treas. Reg. §1.7701-1 et seq. provides that conveyed by assignment of domestic business corporations are always beneficial interests. Useful for intra- classified as corporations for Federal family gifts. income tax purposes; GPs, LPs, LLCs, LLPs, 3. No income taxation on trust level; and business trusts are automatically “pass-through” to beneficiaries. classified as partnerships (with pass- 7. Disadvantages through treatment) unless they “check-the- box” on Form 8832 electing to be taxed as 1. No limited liability for beneficiaries. corporations. 2. Sole trustee and sole beneficiary B. C corporations are subject to a “double may not be identical – merger will tax,” once on the corporate level, and again result. on dividends or distributions to 3. Poor draftsmanship can result in shareholders. S corporations are taxed only trust being treated as a “true trust,” at the shareholder level, with a few which may result in the trust being exceptions. Partnerships “pass-through” subject to tax on capital gains and income or loss to the partners. Single- undistributed income and inability owner LLCs and business trusts are to pass through losses. “disregarded entities.” 4. Ancillary probate for deceased non- VI. DISTINGUISHING FEATURES Massachusetts beneficiaries (who A. Nominee Trust are deemed to own Massachusetts real estate). 1. Fiduciary relationship between “trustee” and beneficiaries listed on an 5. Potential for fraud by beneficiaries. unrecorded schedule. 6. Creation of a partnership if two or 2. Trustee has no power to deal with the more beneficiaries. trust property except as specifically 7. Deeds excise tax on transfer of directed by beneficiaries – legally an beneficial interest (DD 95-2). “agent” for beneficiaries. B. General Partnership/Joint Venture 3. Third parties are entitled to rely on certificates signed by trustees of record. 1. GP is an agreement (oral or written) among two or more people to engage in 4. Beneficiaries may terminate or amend business. trust at any time. 2. A joint venture is a GP which is limited 5. On termination, the trust property is to a specific project or business. conveyed to beneficiaries. 3. Governed by Massachusetts Uniform 6. Advantages Partnership Act, G.L. c. 108A. 1. Beneficiaries are undisclosed 4. In absence of written agreement, a (privacy). numerical majority of partners control decision-making.
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5. Limited transferability of interests. 4. Fiduciary duties – self-dealing, 6. Limited life. Withdrawal of partner corporate opportunities. Can be dissolves partnership, but partnership modified by contract. can be reconstituted. C. Limited Partnerships 7. Advantages 1. A statutory entity governed by G.L. c. 1. Simplicity, informality. 109. Creation requires filing of a brief certificate of limited partnership. 2. Pass-through treatment. 2. Limited partnership is managed and 8. Disadvantages controlled by general partners (GPs). 1. No limited liability. Partners are Limited partners (LPs) are passive jointly and severally liable for investors. partnership liabilities. New partners 3. Certain extraordinary actions can liable only for future obligations; require approval of LPs. retired partners for past obligations. 4. Written limited partnership agreement 2. Limited transferability of interests. not required but highly advisable. 3. Conveyancing issues: 5. Advantages (i) If title to real estate is in the 1. Limited liability for LPs. name of the partnership, any
partner may convey title in the 2. “Pass-through” tax treatment. No name of the partnership. A BFP entity-level tax. may rely on the deed, 3. Names of LPs not publicly disclosed. notwithstanding any limitations 6. Disadvantages on the partner’s authority (G.L. c. 108A, §10(1)). 1. Unlimited liability for GPs, but a limited liability entity, such as an LLC
(ii) If title in the name of less than or a corporation, can be a GP. all partners (and the record does not disclose the partnership’s 2. Unlimited liability for LP who takes rights), the named partners may part in control of business or convey title to a BFP, knowingly permits his name to be notwithstanding the existence of used in the name of the limited an undisclosed partner (G.L. c. partnership. 108A, §10 (3)). 3. Limited transferability of interests (iii) If title in the name of all the requires consent of all partners to partners, all must sign the deed. admit a new LP; unadmitted (G.L. c. 108A, §10 (5). transferees are entitled to distributions but have no other
(iv) Attachments against partners rights as LP. individually can affect the partnership’s title if the claim 4. Fiduciary duties. relates to a partnership liability.
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D. LLP partnership); (iii) an “autocratic 1. A general partnership that files a model” LLC, with one or more registration form with the Secretary of managers having sole control of the State under G.L. c. 108A, §§45-47. LLC (like a limited partnership); or (iv) any combination of the above. 2. Same advantages and disadvantages as
a general partnership, but partners have 4. Can limit or eliminate fiduciary limited liability. duties.
3. Must renew LP status by annual filing 7. Disadvantages with Secretary of State. 1. Limited transferability. Effectively E. LLCs disqualifies LLCs from being public companies. 1. Governed by G.L. c. 156C. Requires
filing of certificate of organization 2. Operating agreements can be naming manager (of if no manager, at complex and expensive to create. least one person authorized to sign 3. Uncertainty as to “corporate veil” filings with the Secretary of State). doctrine. 2. Very flexible, can be member-managed 4. Uncertainty re legal status in other or manager-managed. states. 3. “Pass-through” tax treatment, unless it F. Business Trust elects to be taxed as a corporation. 1. An unincorporated organization 4. Single-member LLCs can be treated as governed by the common law, but “disregarded entities” for tax purposes. subject to regulation under G.L. c. 182. 5. Written operating agreement 2. Written declaration or agreement of unnecessary, but highly desirable in trust and all amendments must be filed most cases. with the Secretary of State and the clerk 6. Advantages of every municipality in which trust has a usual place of business, and recorded 1. Limited liability and pass-through in the registry of deeds if it owns real tax treatment. property. 2. Less formality than a corporation. 3. Trustees are the managing body of the No minute book, stock ledger, etc. trust and may delegate duties to Query: Is that an advantage or officers. Shareholders may elect disadvantage? trustees, but this may give rise to 3. Flexibility. Operating Agreement can personal liability. See Paragraph 4 create (i) a “corporate model” LLC, below. with officers and a board of 4. Trustees have personal liability for managers elected by members (like contracts, but typically limit liability to a corporation); (ii) a “partnership the trust assets. Shareholders who model” LLC, with management by participate in excessive control or the members (like a general
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management may be personally liable, 4. Advantages as partners, for the debts of the trust. 1. Limited liability of shareholders by 5. Shares are represented by certificates, statute. which are freely transferable subject to 2. Free transferability of stock. applicable securities laws. 3. No deeds excise tax on sale of stock. 6. The existence of a business trust may be subject to the Rule against Perpetuities. 4. Pass-through treatment for S Many trusts have specified dates of corporations. termination. 5. S corporation dividends are tax free 7. Advantages to extent of basis. 1. Free transferability of interests. 5. Disadvantages 2. Limited life. 1. Double-taxation for C corporation. 3. May elect “pass-through” 2. No pass-through of C corporation treatment. loss. S corporation losses limited to shareholder’s basis (plus loans to
4. Once popular, now uncommon corporation and corporate liabilities outside the utility, mutual fund, and assumed by S corporation REIT industries. shareholders). Guaranties not 8. Disadvantages considered as debts. 1. Potential unlimited liability. 3. Unlike partnership, S corporation 2. Fiduciary duties. allocation of income and loss is inflexible. G. Business Corporations 4. Mass. “sting tax” to “big” S 1. Statutory entity – G.L. c. 156D. corporations with over $6 million in 2. C corporation taxable as an entity (max. income (1.87%) or $9 million (2.8%). Federal tax, 35%; Mass., 8%). (G. L. c. 63, §32(b)). 3. S corporation gives pass-through of 5. Corporation excise tax lien (G.L. c. income and loss (Federal and Mass.) pro 62C, §51). rata based on shareholdings. i. (NOTE: excise tax lien now 1. Requires election by all also applies to shareholders. unincorporated entities electing corporate tax 2. One class of stock. status). 3. 100 shareholder maximum. 6. Two-thirds shareholder vote 4. Shareholders must be individuals required to approve sale of all or (no non-resident aliens), certain substantially all assets. (G.L. c. trust and estates, certain tax- 156D, §12.02). exempt entities.
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7. Dissolution by Secretary of State – maximum tax liability on disposition is but reinstatement possible. (G.L. c. less than amount required to be w/held; 156D, §108). Note that assets can be installment sales rule exception, l/c or sold after dissolution as part of bond is posted etc.) “winding up.” - Buyer becomes withholding agent and 8. Corporate signatories: President or must remit by the 20th day of the date Vice President and Treasurer or of transfer; file Form 8288 Asst. Treasurer, who may be the IX. OTHER CLOSING DOCUMENTS same person. (G.L. c. 156D, §8.46). Corporate vote authorizing other A. Residential Properties: Seller must have a officers may be recorded. smoke/carbon monoxide inspection performed by the town/city fire VII. FORM OF DEED department and provide a certification at A. The common deed in Massachusetts is the Closing. Quitclaim Deed whereby the Seller gives B. Title V Inspection Certificate – if the covenants as to Seller’s period of ownership property is on a private septic system. only. C. Buyer must obtain a municipal lien VIII. CLOSING COSTS/ADJUSTMENTS certificate from the Town/City where the A. Seller usually pays the transfer taxes due at premises are located stating the current the time of the conveyance to the status of real property taxes payments and Commonwealth of Massachusetts. The tax balances due. This certificate also advises if is $4.56 per $1,000 of sale proceeds. water and sewer charges are due. B. Note: In a few jurisdictions in D. Residential Property – If the property is to Massachusetts the tax is higher. be used as a principal place of residence, C. Note: In Nantucket and Martha’s Vineyard, the buyer may want to consider filing a there is an additional land bank tax that is Homestead Exemption. paid at the time of conveyance. E. Sales by a Corporation are subject to the D. Buyer and Seller adjust for water, sewer, seller’s procurement of a Tax Lien Waiver. gas/oil, electricity, and taxes. In addition to The Commonwealth of Massachusetts has the foregoing, if the property is commercial an inchoate lien on the real and personal property, adjustments are also made for property of a seller if the sale of the rents, third party operating expenses and property constitutes a sale of all or common area maintenance expenses. substantially all the seller’s assets in the Commonwealth and the waiver advises the E. Land that has been subjected to agricultural buyer that the lien has been waived and all purposes may be subject to certain taxes taxes have been paid. and payments if it the agricultural purposes are terminated. X. RECORDING REAL ESTATE DOCUMENTS
F. Withholding Tax – Foreign Seller A. Title Documents are recorded on a county basis in Massachusetts. In other states, title - 10% of amount realized (subject to documents are recorded in the towns and reduction in certain situations (i.e. city records.
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B. Unlike most other states in the United States, Massachusetts has two recording systems. 1. Registered Land. Some property is registered land whereby real estate documents are filed with the Registry District of the Land Court within each county in which the premises are located. Registered Land means that the land has been certified, all documents affecting registered land are confirmed at the time of filing, and the Commonwealth of Massachusetts guarantees the title to the property. The Land Court issues a certificate of title certifying title to the owner of each registered property. 2. Recorded Land. Unless the property is registered, it is recorded land and is recorded with the Registry of Deeds in the County where the premises are located. XI. ANNUAL COSTS FOR PROPERTY OWNERSHIP A. Property Insurance B. Real Estate Taxes A. Ad Valorem/Town & City Assessments B. Rental Properties (Florida – tax on rental income) C. Personal Property Taxes (Cars, Boats, etc.) NOTE: The tax implications of Foreign Purchases and ownership of US-based real estate are outside the scope of this outline.
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HOWARD & HOWARD ATTORNEYS PLLC Buying and Selling Real Estate in the United States - Michigan
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QUICK TIPS FOR CONVEYANCE OF REAL PROPERTY IN MICHIGAN I. STANDARD FORMS OF AGREEMENTS III. BUYER’S INSPECTIONS A. Offers to Purchase that are accepted by A. Residential. It is typical that a buyer is sellers are the typical form of purchase provided with a 5 to 7-day window to contract for residential properties. The have the property inspected. The skill offer, often negotiated before being level of residential home inspectors signed by all parties, sets forth the varies greatly. Inspectors should review offered price, proposed closing date, the structural elements, roof, windows, buyer’s inspection and financing soundness of foundation, mechanical contingencies, type of deed conveyance equipment (AC and heating units, hot (warranty, special or quit claim), etc. water tanks, etc.) and check for radon Any proposed change by seller to the gas, asbestos, and pest infestation. In buyer’s offer is considered a counter- older homes, especially in rural areas, offer. the inspection should look for old fuel B. Negotiated Purchase and Sale oil tanks that can lead to environmental Agreements are typically utilized when issues if they were not properly closed. commercial or industrial properties are It is wise to hire an attorney to review bought and sold. the seller’s title to the property and that review (whether or not an attorney is II. BROKERS hired) is much more definitive if a A. Buyers and sellers are not required to survey of the property is obtained use a real estate broker or real estate (showing encroachments, easements or salespersons (a/k/a agents) in restrictions that might affect the ability connection with the sale of real estate. to add on to the home later, etc.). All real estate brokers and agents must B. Adverse Possession/Boundary Disputes. be licensed by the state of Michigan. All A survey obtained during the inspection real estate agents, while being licensed period should assist in determining any themselves, must be associated with a potential adverse possession claims or licensed broker. boundary line disputes (e.g. B. In most residential transactions, the encroachments by a fence, a shed, etc.). broker and agent must disclose which Adverse possession and acquiescence to party they are representing. Brokers a particular boundary line may happen and agents may, through a statutory after 15 years of uninterrupted dual agency disclosure, represent both possession (or location of a fence or the buyer and the seller in a residential boundary marker). A boundary line can transaction. be re-established by agreement (through conduct or writing) without a C. In the typical transaction, the seller pays 15-year waiting period. its broker a full commission and seller’s broker will share that commission with C. Private Septic. If the property is on a the buyer’s broker, if any. private septic system (rather than a municipal sewer), then, depending on
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the locale, a certificate of inspection must be complied with or waived before from the local municipality or health a sale can proceed. A certificate from department may be required. the commercial tenants certifying the D. Seller’s Disclosures. For improved exact lease and all amendments thereto residential property, the seller is and that the seller-landlord is not in required to provide a seller’s disclosure default are often obtained as part of the statement where the seller discloses due diligence. certain conditions (water infiltration, IV. FORMS OF OWNERSHIP condition of heating unit, etc.) of which A. Typically, residential property is held in it is aware. For houses built before a trust or an individual’s name. If held in 1978, a lead paint disclosure is also a trust, the trust may be either required. irrevocable or revocable. Irrevocable E. Certificates of Occupancy and Building trusts typically cannot be modified or Permits. Some cities and townships terminated by the grantor without the require that a home be inspected to consent of all of the beneficiaries or verify that it meets the applicable court approval. In Michigan, trusts are building codes before it can be sold. If generally governed by the Michigan code violations are cited, the parties Trust Code, MCL 700.7101 et seq. Joint often negotiate a price reduction if the owners to property may take title as: seller is not willing or able to cure the 1. Tenants in Common. Tenants in violation(s). A buyer should also check common each hold a separate and the municipality building department to distinct interest in property but determine if there are any open permits share a right of possession. There is for work that have not been approved no right of survivorship. In other through a final inspection. words, if property is owned by two F. Commercial: In addition to the individuals, and one individual dies, inspections performed by residential the deceased’s interest reverts to buyers, commercial buyers also usually his or her estate, and not the other obtain a survey, an environmental owner. review, and a use and zoning and/or 2. Joint Tenants. Joint Tenants hold permit compliance review. Depending equal and undivided interests in on the municipality, a certificate of property, with a right of occupancy may also be needed before survivorship. In other words, if commercial property can be property is owned by two transferred. If commercial tenants individuals, and one person dies, the occupy the premises, a thorough review deceased’s interest reverts to the of the leases is advised (buyers are other owner of the property. advised not to rely on rent rolls or lease summaries) and it is not uncommon for 3. Tenants by the Entirety. A married commercial leases to contain a right of couple can hold real property as first refusal to buy the property that tenants by the entirety, where each spouse holds equal and undivided
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interests in the real property, with VI. DISTINGUISHING FEATURES rights of survivorship. A. GP/Joint Venture
B. Commercial property may be held as 1. A partnership is an association of follows: two or more persons to carry on as 1. As individuals pursuant to the forms co-owners of a business for profit. set forth in IV.A above (not MCL 449.6. A partnership is a recommended for liability concerns). distinct legal entity, separate from 2. General Partnership (“GP”)/Joint its owners. Venture. 2. GPs (sometimes referred to as 3. Limited Partnership (“LP”). copartnerships) generally must file a certificate of partnership in the 4. Limited Liability Partnership county where the partnership (“LLPs”). conducts its business. MCL 449.101. 5. Limited Liability Corporation (“LLCs”) 3. A joint venture is a partnership (most common). which is limited to a specific 6. Corporation: duration or scope. i. C corporation; or 4. GPs are governed by the Michigan Uniform Partnership Act, MCL 449.1 ii. S corporation. et seq (“MUPA”). V. TREASURY REGULATIONS 5. Although not required by statute, it A. Under Treas. Reg. §301.7701-1 et seq., is strongly recommended that corporations are always classified as partnerships have a Partnership corporations for federal income tax Agreement. A Partnership purposes. On the other hand, GPs, LPs, Agreement sets forth the duties and LLCs (with more than one member), and obligations of the partners towards LLPs are classified as partnerships for one another and to the partnership. federal income tax purposes, unless Absent a Partnership Agreement, they elect to be taxed as corporations. the MUPA creates default rules governing the relationship between B. C corporations are subject to a “double” partners. For example, absent an income tax because they are taxed at agreement to the contrary, the the corporate level, and shareholders MUPA provides that partners will are taxed on the dividends they receive share equally in the partnership’s from the corporation. Subject to certain profits and losses, and that all exceptions, S corporations are generally partners have equal rights in the taxed only at the shareholder level. management of the partnership. Partnerships and LLCs pass through MCL 449.18 (a); MCL 448.18(e). their income and losses to the partners of the partnership. All entities except 6. Absent a Partnership Agreement to for C corporations generally avoid the contrary, partnership interests double taxation. are generally transferable. However,
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the transfer of an ownership the partnership, unless (i) interest in a partnership only the conveying partner lacks transfers the right to receive the authority to make the distributions, and not any other conveyance, and (ii) the rights of ownership (including the purchaser has actual right to participate in management). knowledge of the fact that MCL 449.27. the conveying partner lacks 7. The withdrawal of a partner such authority. MCL 449.9. dissolves the partnership. MCL ii. If title is in the name of 449.29 multiple partners in their 8. Advantages individual capacities, all such partners must sign the 1. A partnership is a pass through deed. entity. The partnership passes
through its profits and losses to 2. Fiduciary Duty. Partners have a the partners and there is no duty to render true and full entity level income tax. information to the partnership. MCL 449.20. 2. Partnerships can be informal,
depending on the partnership B. LPs agreement (or lack thereof). 1. A LP is a statutory entity governed 9. Disadvantages by the Michigan Revised Uniform Limited Partnership Act 1. Partnerships are not limited (“MRULPA”), MCL 449.1101 et seq. liability entities (like a LLC or a The MUPA also applies to LPs, corporation). The partners of a except to the extent that it conflicts partnership are jointly and with the MRULPA. severally liable for partnership
liabilities. MCL 449.15. 2. In order to form a LP, a Certificate of Limited Partnership must be filed Conveyancing issues: with the Michigan Department of i. Any partner of a Licensing and Regulatory Affairs partnership may generally (“LARA”). MCL 449.1201(a). convey title to partnership 3. A LP must have at least one general real estate (i.e. title to the partner and one limited partner. real estate is in the MCL 449.1101(8). General partners partnership’s name). A have managerial authority over the purchaser may rely on a business. Limited partners are deed signed by any generally not liable for the partner, so long as the obligations of the partnership, partner who executed the unless (i) the limited partner is also a deed is carrying on in the general partner or, (ii) the limited usual way of business of partner takes part in the control of
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the business. MCL 449.1303(a). obligation of the LLP, partners in a 4. Certain actions may require LLP are not liable for the negligence, approval of the limited partners. wrongful acts, omissions, misconduct, or malpractice 5. A written limited partnership committed while the partnership is a agreement is not required but registered LLP. MCL 449.46. strongly recommended. 2. Partners in a LLP have some liability 6. Advantages protection, but not as much 1. The limited partners of the protection as limited partners in a partnership have limited liability. LP. MCL 449.1303(a). 3. Must file an application to register a 2. A LP is a pass through entity. The LLP with LARA. LP passes through its profits and D. LLCs losses to the partners and there
is no entity level income tax. 1. Governed by the Michigan Limited Liability Company Act, MCL 7. Disadvantages 450.4101 et seq. A LLC must file 1. Full liability for general partners, Articles of Organization with LARA. however, a limited liability MCL 450. 4202. entity, such as an LLC or a 2. LLCs are very flexible and can be corporation, can serve as a tailored to the needs of the general partner. MCL 449.1403. members. LLCs can be member- 2. A limited partner who takes part managed or manager-managed. in the control of the business Profits, losses, and distributions can may be subject to unlimited generally be divided in any manner liability. MCL 449.1403(a). A agreed upon by the members with limited partner who “knowingly certain restrictions. permits his or her name to be 3. LLCs receive pass through income used in the name of the limited tax treatment, unless the LLC elects partnership”, except under to be taxed as a corporation or is a certain circumstances permitted disregarded entity. by statute, is liable to creditors
of the LP, provided that the 4. A written Operating Agreement is creditors do not have actual unnecessary, but strongly recommended. This is the document knowledge that the limited partner is not a general partner. that describes how the LLC will be MCL 449.1303(d). managed and operated. Operating Agreements can be drafted in a C. LLP manner that best suits the needs of 1. Similar to GPs, except with more the company and its members. limited liability for partners. Specifically, except for a tax
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5. Advantages Michigan Business Corporation Act, 1. Unless otherwise provided by MCL 450.1101 et seq. law or in an operating 2. Corporations must file Articles of agreement, the members and Incorporation with LARA. MCL mangers of a LLC have limited 450.1202 et seq. liability. MCL 450.4501(4). 3. A C corporation is subject to double 2. There is no entity level income income taxation. It is taxed at the tax on a LLC. The profits and entity level, and then the losses of the partnership are shareholders are taxed on dividends. passed through to the members. 4. An S corporation passes through 3. Fewer statutory requirements income and losses pro rata based on than a corporation and generally ownership. S corporations are more flexible. generally not taxed at the entity 4. Flexibility. There are very few level. S corporation status requires: statutory requirements about 1. Election by all shareholders. what must be contained in an 2. The filing of form 2553 with the Operating Agreement. Internal Revenue Service. Operating Agreements can be as simple or as complex as the 3. Only one class of stock. members desire. However, 4. A maximum of 100 shareholders. Operating Agreements generally cover issues like management, 5. Only certain individuals or membership, income or loss entities may be shareholders. allocations, cash and property Shareholders may be individuals, distributions, and transferability certain trusts, and estates, and of ownership. may not be partnerships, corporations, or non-resident 5. The Operating Agreement can aliens. limit or eliminate the duties members owe to each other. 5. Directors and officers owe a fiduciary duty to the corporation. 6. Disadvantages They must: (i) perform their duties 1. In order to enjoy some of the in good faith, (ii) with the care an benefits of a LLC, the members ordinarily prudent person in a like must create a tailored operating position would exercise under agreement. In can be expensive similar circumstances, and (iii) in a to have an attorney draft a manner he or she reasonably complex operating agreement. believes to be in the best interests of the corporation. MCL
E. Corporations 450.1541a(1). Shareholders 1. A corporation is a statutory entity. generally do not owe a fiduciary Corporations are governed by the duty to other shareholders (unless
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the duty is set forth in a shareholder 450.1703a(1)), and selling all or agreement). substantially all of the 6. Advantages corporation’s assets outside of the ordinary course (MCL 1. Shareholders have limited 450.1753). Most changes require liability for acts of the approval from the majority of corporation. shareholders, and may require 2. Shareholders can generally approval from an affected class freely transfer their stock (unless of shareholders. Shareholder subject to a shareholder agreements may require agreement stating otherwise). approval from a greater percentage of shareholders for 3. S corporations receive pass certain actions. through income tax treatment (no double taxation). VII. FORM OF DEED 4. S corporations may lead to A. The common deed in Michigan is the savings on self-employment “warranty deed” where the seller taxes. warrants title. The “special warranty deed” is becoming more accepted and 7. Disadvantages popular whereby the seller gives 1. C corporations are subject to warranties against title defects arising double income taxation. during seller’s period of ownership only. Quit claim deeds are also frequently 2. A C corporation cannot pass used where the seller conveys whatever through its losses to its interest it has and provides no shareholders. IRC 172. warranties of title, in which case the 3. Unlike an LLC, S corporation buyer should obtain and would be allocations of income or loss are relying entirely on title insurance to rigid. address title defects. 4. The Michigan Business VIII. CLOSING COSTS/ADJUSTMENTS Corporation Act is more A. Seller usually pays the transfer taxes stringent than other applicable due at the time of the conveyance. entity statutes in terms of There is a standard county tax of $0.55 requirements applicable to per $500 of consideration, however, a corporations. county with a population over 2 million 5. Certain corporate activities may charge as much as $0.75 per $500. require shareholder approval The state transfer tax is $3.50 per $500 including, amending the Articles in consideration. There are several of Incorporation (except under transfer tax exemptions mostly certain circumstances) (MCL involving family or related party 450.1611(3)), adopting a plan of transactions with little consideration. merger or share exchange (MCL B. Buyer and seller adjust for water, sewer,
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gas/oil, electricity and taxes. Depending property is nearly impossible without a on what part of the state the property is title commitment (and copies of all located, proration of taxes varies by exceptions to the seller’s title that local custom. The most common survive closing) being provided, which methods for pro rating taxes are: (1) commitment is the basis for the title paid in advance, due date basis (favors policy issued at closing. Typically, the seller), (2) calendar year and (3) paid in seller pays the premium charged to arrears, due date basis (favors buyer). issue the title insurance policy. Buyer is With retail or multi-family commercial responsible for a title policy required for properties, closing adjustments also any purchase money financing. include, among others, rents, X. RECORDING REAL ESTATE DOCUMENTS management/operating expenses and common area maintenance expenses. Deeds and any other documents evidencing an encumbrance on title are recorded at the
C. Certain lands used for agricultural Register of Deeds for the County where the purposes pay reduced taxes that, in property is located. some instances, may be clawed back if the agricultural use is terminated. XI. PROPERTY TAXES D. Standard federal income tax A. Real Estate Taxes withholding for sellers who cannot 1. Real property is assessed for taxes provide a non-foreign FIRPTA affidavit. based on its true cash value which is IX. OTHER CLOSING DOCUMENTS to be determined annually by the local assessing unit. The assessed
A. Residential Property – If the property is value is to represent 50% of the true to be used as a principal residence, the cash / fair market value. seller should rescind any PRE or “Personal Residence Exemption” seller 2. Michigan has a “cap” on increases in may have (results in lower property a property’s taxable value that is taxes) and the buyer should promptly tied to inflation. The taxable value file a PRE form with the local assessing stays low (no more than 5% increase unit. annually) regardless of any increase in the FMV of the property and is
B. If the property is leased (residential or reset to equal assessed value commercial/industrial), if the lease is to anytime there is a non-exempt be terminated at or before closing, a “transfer of ownership.” A transfer lease termination instrument signed by includes (with a few exceptions) the the tenant should be provided and if the sale of stock or lease(s) is to continue, an “assignment membership/partnership interests and assumption of lease(s)” instrument (not a deed) in the entity having title should be executed by the seller and to the property. buyer. 3. Only businesses pay personal
C. Title insurance is always recommended property taxes and they are and an effective review of title to the structured the same way and
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