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Insights and Commentary from Dentons

On March 31, 2013, three pre-eminent law firms—Salans, Fraser Milner Casgrain, and SNR Denton—combined to form Dentons, a Top 10 global law firm with more than 2,500 lawyers and professionals worldwide.

This document was authored by representatives of one of the founding firms prior to our combination launch, and it continues to be o ered to provide our clientsG withro thewing information with they need to do business in an increasingly complex, interconnected and competitive marketplace.

The role of government has never been more critical www.salans.com FALL 2012

GLOBAL REAL ESTATE CLIENT REPORT

Spotlight on Turkey

Spanish Real Estate Market

Global Hospitality Trends

REGIONAL OUTLOOK ASIA NEWS LEGAL DEVELOPMENTS ROUND-UP Central and Gridlock on the China, Vietnam, UK, Germany and Eastern Europe Road to Recovery Singapore and India France Our founding vision was to create a true international law partnership based on mutual cooperation, team spirit and a multicultural openness. Today, Salans is a truly international firm that acts as a bridge between different cultures.

Carl Salans Salans’ Global Real Estate Group

With over 225 real estate and real estate specialists in 20 offices, Salans’ Global Real Estate Group is one of the largest and most recommended cross-border real estate teams amongst the world’s leading international law firms. We are trusted commercial advisors with the knowledge and experience to deliver cost- effective, decisive and innovative advice. We gained this trust by combining fundamental local market real estate knowledge with sophisticated corporate, finance and structuring advice. Our team is capable of handling all aspects of real estate transactions in virtually all major real estate sectors, including offices, retail, hotels, Index warehouse and distribution facilities, large-scale residential developments, and infrastructure projects.

The Group is divided into six industry sectors: Note from the Editor...... 4 CIS...... 66 Real Estate M&A and Private Equity Focus on Turkey...... 8 Russia...... 66 Ukraine...... 73 Real Estate Finance Special Feature on Hospitality Azerbaijan...... 74 and Leisure Sector...... 18 Real Estate Asset Management Kazakhstan...... 76 Central & Eastern Europe...... 26 Hospitality and Leisure Poland...... 26 United States...... 78 Retailing Hungary...... 29 New York...... 78 Czech Republic...... 31 Asia...... 80 Construction, Development & Infrastructure Slovakia...... 33 China...... 80 Romania...... 36 Singapore...... 82 Our clients include many of the world’s India...... 84 Salans News...... 38 demanding institutions, real estate developers, Vietnam...... 87 banks, private equity houses, investment funds Focus on Spain...... 42 and multi-national corporations. The Global Real Estate Group and its clients also have Office Contacts ...... 90 access to the resources of Salans’ nearly 1700 Western Europe...... 52 attorneys and staff who specialise in a variety of Germany...... 52 support areas including mergers and acquisitions, private equity, project finance, tax, international France...... 58 arbitration, and energy. United Kingdom...... 60 The Global Real Estate Group is headed by Eric Rosedale and Evan Z. Lazar who have nearly 50 years of combined international real DISCLAIMER estate experience and are recognised leaders in Salans LLP has offices, or is associated with Salans offices in: emerging real estate markets. ALMATY, BAKU, BARCELONA, BERLIN, BRATISLAVA, BRUSSELS, BUCHAREST, BUDAPEST, FRANKFURT, ISTANBUL, KYIV, LONDON, MADRID, MOSCOW, NEW YORK, PARIS, PRAGUE, SHANGHAI, ST. PETERSBURG, WARSAW Salans LLP is a Limited Liability Partnership registered in England and Wales with Registration Number OC 316822. Regulated by the Solicitors’ Regulation Authority of England and Wales. A list of the members of Salans LLP and of the non-members who are designated as partners of Salans LLP and/or its affiliated entities is available at its Registered Office: Millennium Bridge House, 2 Lambeth Hill, London EC4V 4AJ, United Kingdom. See www.salans.com for further information. © 2012. Salans LLP. All rights reserved. In certain jurisdictions this brochure may constitute attorney advertising.

3 FOCUSNOTE FROM ON SPAIN THE EDITOR

Gridlock on the Road to Recovery

For the past two years the “Road to Recovery” in global

real estate markets has been buffeted by a litany of headwinds and tail risks.

Since the inception of the global financial crisis, real estate professionals have held no illusions that the recovery would be complex and arduous. However, real estate market bulls were disappointed when transaction momentum began to stagnate in mid- 2011 as gloom and uncertainty crept back into investor sentiment. Many institutional real estate investors began to re-think their opportunistic strategies and work their way back down the risk curve or wait for outcomes of an array of conflicting global political and economic signals. The slowdown in transaction volume and flight to quality that began last year accelerated in 2012 and is beginning to create investment “gridlock”, with the weight of real estate capital bearing down on an increasingly narrow band of core global investment targets. The gridlock is being fuelled by fear over three over- riding global risks. The On-going Eurozone Crisis The continuing Eurozone sovereign debt crisis has spooked real estate investors from Madrid to Moscow. Part of the problem is rooted in real estate fundamentals (such as supply dynamics, flagging occupancy demand and the availability and cost of bank financing). But the more confounding headwind is the current atmosphere of political uncertainty in Europe and questions over the resolve of EU member states and central banks to find a lasting solution to the debt crisis. The dual market and political headwinds are dramatically suppressing real estate transaction volumes in both developed and emerging European real estate markets. The slowdown in The decline in real estate transaction volume in transaction volume Southern Europe has been particularly severe. and flight to quality The Spanish and Italian real estate markets have virtually collapsed with the number of transactions that began last year in both countries falling by more than 90% in the accelerated in 2012 past quarter. Emerging Southern European markets, and is beginning to such as Romania, have seen volumes hit seven year lows. The drop-off in activity indicates that even the create core appetite for buying distressed assets in a large part of investing gridlock the Eurozone has fallen away.

4 NOTE FROMFOCUS THE ON EDITOR SPAIN

While Germany, France and the Nordic regions Many observers collectively hold large volumes of highly-prized liquid “core” assets, real estate transaction volumes have view the fast been declining due to a combination of investors’ approaching U.S. relentless appetite for core assets in financial hubs “Fiscal Cliff” as a without sufficient product. greater cause for Certain Central and Eastern European real estate concern than China markets have also experienced sharp drops in or the Eurozone transaction volume with a reported 60% quarter-on- quarter regional decline. This is a substantial reversal, crisis considering that CEE transaction volume was up 75% in 2011. Poland and Russia (which dominate CEE real estate markets and continue to outperform their neighbours by a wide margin) are also experiencing resistance to growth over robust 2011 transaction volume levels, mostly due to a limited supply of prime assets on the market and high prices for core products. Poland’s real estate market is performing best, with volumes close to its 2007 peak levels, while Russia is experiencing a reported 30% year-on-year drop in investment activity. On top of uncertainty over the future of the monetary union, the regulatory environment in Europe is also having an impact on real estate equity and debt availability. The combined effects of Basel III, Solvency II, new European Banking Authority capital reserve rules and the Volker Rule are set to challenge the European real estate investment landscape for years to come. China The second major risk dragging on real estate investor sentiment is the continued fear of a hard landing or bubble bursting in China’s economy, which is largely fuelled by domestic real estate investment. China’s rapid economic growth has decelerated rapidly for the past eight quarters – the longest slowdown since the government began reporting such data a decade ago. GDP in 2012 is estimated to be in the region of 7.6%, down from a peak of 14% in 1992 and marking the slowest growth since 2009. FDI in real estate and other sectors is also weakening. As the second largest economy in the world with the most active global commercial property investment market, investors fear that a sharp economic downturn in China could trigger a global recession. The U.S. “Fiscal Cliff” Every tail risk has Many observers view the fast approaching U.S. “Fiscal a silver lining and Cliff” as a greater cause for concern than China or the Eurozone crisis. The “cliff” refers to a set of sharp every headwind budget cuts and tax hikes worth more than $1.2 breeds a compelling trillion over the next 10 years which will automatically contrarian real come into effect if the U.S. or Federal Government fails to pass new legislation by the end of this year. estate investment The legislation is meant to force Congress to reverse strategy

5 FOCUSNOTE FROM ON SPAIN THE EDITOR

rampant spending which has increased the total U.S. There is a growing In China, the consensus view seems to be that federal debt to nearly $16 trillion – a 70% increase the Government has the policy and credit tools it since 2007. amount of capital needs to engineer a soft landing, especially in the targeting real estate, speculative residential real estate sector which is The impact of Fiscal Cliff uncertainty is suppressing which is seen as deflating at a measured pace. Equally important, U.S. business orders, retail sales, corporate profits and many commentators believe that the impending hiring. Ultimately there is a fear that the automatic an attractive risk change of leadership will result in a concentrated fiscal actions could tip the U.S. economy back into adjusted return effort to increase government spending which should recession and cut U.S. GDP growth by up to 4%. across all asset help maintain sufficient GDP growth and capital to support the domestic real estate sector. With so much riding on the results of the upcoming classes Presidential election and current political gridlock in In the US, the debate over the Fiscal Cliff will Washington, hard-won gains in a growing number of crystalize between now and November as U.S. real estate markets are at stake. From a global Republicans and Democrats face off over the fate perspective, the Fiscal Cliff is the third major tail risk of historic tax and budget legislation and voters driving investors down the risk curve and contributing grow increasingly impatient with the lack of progress to real estate recovery gridlock. on reducing the U.S. debt burden. The downside of letting the automatic cuts come into force will Silver Linings hopefully focus politicians’ minds and result in some Every tail risk has a silver lining and every headwind progress on U.S. debt reduction. And some deficit breeds a compelling contrarian real estate hawks believe that going over the cliff is actually investment strategy. desirable, and would largely solve near-term fiscal problems. Despite the prospects of a cliff dive, U.S. On the optimistic side of the Eurocrisis is a growing real estate transaction volumes are still trending perception that a grand political solution may upward. For example, REITS raised record amounts finally be on the horizon and that debates over an of equity and debt in 2011, and foreign acquisitions of uncontrollable collapse of the Eurozone are largely U.S. property doubled in 2011 to 20 billion and could academic. While past EU summit meetings have left double again this year. real estate investors more convinced than ever to “sit on the side-lines” or avoid European markets, prime Overall, with interest rates low and investors assets are performing relatively well and banks are increasingly seeking alternative risk adjust investment finally becoming more proactive about the need to opportunities, there is a growing amount of capital off-load non-core at price discounts that real estate targeting real estate, which is seen as an attractive investors have been anticipating for the past risk adjusted return across all asset classes. More few years. than 450 property funds are currently on the road

6 NOTE FROMFOCUS THE ON EDITOR SPAIN

seeking to raise almost $160 billion globally and The range of players Partners currently allocated to real estate. Insurance there is reportedly $160 billion of dry powder now companies with hundreds of billions of dollars of available to closed-end real estate private equity fund in the global real real estate under management are also considering managers globally as of the end of the first quarter of estate market is making maiden investments in real estate this year. this year. broadening despite In addition, insurance companies could be in a position to increase real estate lending activities as a Tellingly, opportunistic funds have the largest all of the fiscal and consequence of Solvency II legislation due to come proportion of available capital. These investors are political uncertainty into force in 2014. In fact, some observers have looking to pursue modified opportunistic strategies facing global real predicted that insurance companies will provide up to ranging from the repositioning of “broken core” 20% of debt to the real estate sector. assets to loan restructurings where a new infusion of estate investors equity is required to seek out opportunities in hard- Emerging and “Frontier” hit secondary markets. Real Estate Markets Further, continued deleveraging should lead to more Although core real estate investing in developed real estate investment opportunities worldwide and gateway cities is the dominant theme in today’s lenders are facing the reality that they will need to risk averse environment, it is hard for opportunistic reduce prices to sell their properties. On the supply investors to ignore more dynamic markets from side, constraints in construction financing matched Turkey to Brazil that are growing at rates many with pent up demand should help support occupancy times faster than mature markets which are in no or rates and rent fundamentals. negative growth territory. Broadening Market Participants Turkey is an especially intriguing market, being as it is at the cross-roads of European, Asian and Middle The range of players in the global real estate market Eastern capital flows and trade. With 8.3% GDP is broadening despite all of the fiscal and political growth in 2011 and an increasingly populous and uncertainty facing global real estate investors. An wealthy middle class, it is attracting a growing number increasing portion of real estate capital for investment of cross-border real estate investors, especially in the is coming from sovereign wealth and pension funds retail sector. from North America, the Far East, Middle East and Central Asia. Frontier global real estate markets in Central and South America and Central and Southeast Asia, Sovereign wealth fund assets are set to grow from including Thailand, Malaysia, Indonesia and Azerbaijan $4.8 trillion in 2011 to $5.2 trillion by the end of this are attracting increasing attention from savvy regional year (with China accounting for nearly 30% of the players with access to local knowledge and local debt. total). An increasing number of sovereign wealth funds are adding a few percentage points to their The Road Less Travelled global real estate allocations. SWFs from the Gulf, The three overriding global risks on the road to Korea, Norway, China, Russia, Malaysia and other recovery are channelling an increasing amount of real countries have the ability to move local real estate estate capital into an increasingly restricted “core” market dynamics with even minute shifts in their assets box. investment allocations toward alternative assets such as real estate. Norway’s sovereign fund alone is Whether this bottleneck will be relieved by a expected to grow to $1 trillion in the next decade convincing reversal of at least one of the tail risks will and only recently permitted real estate investments. probably not be known until well after the upcoming US elections. Global pension fund assets are estimated to total over $30 trillion (a 3% increase over 2011). Until then, core assets in global money centres should continue to trade well given the growing weight of A wide range of pension funds, including a number It is hard for real estate capital from a broadening base of global of new players from Canada (such as CPPIB and opportunistic real estate investors. On the other hand, less risk HOOPP), saw the value of their real estate portfolios investors to ignore averse opportunistic investors should have more than increase substantially with recent commitments to enough niche opportunities off the well-beaten path grow their exposure to real estate. more dynamic and may be the biggest winners when gridlock on the Insurance companies are also becoming more active markets from road to recovery begins to clear. real estate players, both in direct investing and in Turkey to Brazil that the debt arena. The assets under management of are growing at rates insurance companies active in real estate currently stand at $13.2tn, representing 26% of the $50.2tn many times faster Eric Rosedale, of total assets under management of all Limited than mature markets Co-Chairman, Global Real Estate

7 FOCUS ON TURKEY

Salans in Turkey

Salans has been offering legal services in Turkey for nearly 10 years. We have recently strengthened our presence in Turkey by joining forces in Istanbul with local firm Balciog˘lu Selçuk Akman to create a local partnership that is now known as Balciog˘lu Selçuk Akman Keki (BASEAK) and which is fully integrated into the Salans global network.

Our Istanbul office comprises 37 lawyers, including 4 Galip M. Selçuk Our Expertise partners, 2 counsel and 31 associates, whose working (Istanbul Office Our Istanbul practice offers a broad languages are Turkish, English, French and German, scope of services including: among others. Managing Partner) Real Estate Our expanded and strengthened Istanbul practice impresses clients provides creative and diligent transaction counselling with his excellent Corporate and cutting edge litigation services to both foreign and negotiation skills. Mergers & Acquisitions domestic clients. We represent and advise a diverse ‘He is the complete client portfolio of Turkish and multinational clients, Banking and Finance including Fortune 500 companies across a wide range lawyer,’ they say, ‘he of sectors. is thorough, can work Project Finance Real Estate Team in detail and takes a Capital Markets commercial approach’ Members of our real estate team of 8 lawyers Restructuring regularly provide legal assistance to developers, Chambers Global 2012 owners, private and institutional investors, Competition and Anti-Trust contractors, construction companies and investment funds in connection with acquisition, development, Employment construction, operation, leasing and management of Litigation and Arbitration business complexes, shopping centres, hotels, logistics centres and ports. We have advised extensively on Telecommunication real estate matters such as ownership, leases, rights of easement, government permits (construction licences, Regulatory and Public Law occupancy permits, etc.), zoning, environmental and Intellectual Property similar issues. We also have experience in public offerings and acquisitions of Real Estate Investment Companies (REIC). Finally, we provide general Turkish law advice in connection with REICs.

8 FOCUS ON TURKEY

Commercial Real Estate Market in Turkey: A Powerful Player

Turkey has always been on the investor radar due to the benefits of its huge population” or “owing to its large population. It is the 2nd most populated in Europe and had the 2nd highest country growth in 2011 in the OECD-, impressive economic growth and strategic importance as being one of the most powerful players in the world. The political stability and economic progress has uplifted Turkey into a different category as opposed to the perception of a “risky emerging market”.

In accordance with the sustainable economic The political stability Investment Market growth and draft legislations such as new reciprocity and economic Retail, with its great potential, has been the most law, disaster preparedness and change in the priority market for international investors. In order to restrictions on foreigners buying properties, a positive progress has uplifted benefit from the untapped retail market, a number improvement is expected in the Turkish real estate Turkey into a of well-known developers and investors entered the market in 2012. different category market. Multi Corporation, for example, joined forces Economic Outlook as opposed to the with Turkmall and developed a portfolio of shopping centres under the name of “Forum”. Amstar, a leading Currently, Turkey is the largest economy of Central perception of a asset manager in the US and Europe partners with and Eastern Europe and the 6th largest economy in Renaissance Construction in a number of shopping Europe. Financial discipline has been implemented “risky emerging centre projects. Some investors/developers, on the very seriously for several years in Turkey, and a stable market” other hand, entered the market on their own and political environment has led to an increase in the have been leading successful operations in the Turkish welfare level of the country. Despite all unfavourable market. Corio, Redevco, ECE, Prime Development economic and political developments in the European and Union Investment are examples of such. countries and in the Arab world, with which Turkey Canada Pension Plan Investment Board (CPPIB), has the most extensive commercial relations, Turkey for example, has taken an equity position in Multi achieved an annual GDP growth of 8.5% exceeding Corporation’s Turkey Retail Fund and invested in expectations in 2011. With this GDP growth rate, their retail portfolio. Bank of America Merrill Lynch Turkey again became the fastest growing country in also invested in the Turkish real estate market having OECD and the second in G20 countries, after China established an investment fund – Bosphorus Real in 2011.Turkey’s consistent economic growth has Estate Fund- with their Turkish partner Krea in 2006. significantly strengthened the country’s global position. The fund developed a number of shopping centres It is expected that the economic growth of Turkey in and residential projects until June 2010. Pradera has 2012 will surpass the IMF estimates; however, there also established an investment fund with Krea named will be a decrease in the growth rate compared to “Pradera Turkish Retail Fund” targeting existing 2011 which will allow Turkey to have a sustainable retail assets. economic growth. For the office market, we have been observing an increasing foreign investor interest in the last few years, Population, 2011 largely driven by Istanbul’s becoming an operational (Million) Russia Germany Turkey Poland Czech Hungary hub for multinational companies and prospects Republic to become a financial centre. However, lack of institutional assets acts as the main barrier for trade by Population 142.4 81.4 74.7 38.1 10.5 10.0 international investors. A positive progress in 2011 was Source: IMF that Tishman Speyer, US-based developer, opened an office in Istanbul showing their appetite for the Turkish office market. Additionally, prime office assets were the GDP Growth of Turkey versus Europe priority investment opportunity for investors in 2011. 2009 2010 2011 2012* The logistics market is challenging for global investors Advanced Europe -4.1% 1.7% 1.6%* 1.3% for both development and acquisition opportunities. Euro Area -4.3% 1.9% 1.6% -0.5% Development projects are in general difficult as high land prices and current rent levels undermine the Emerging Europe -6.0% 4.4% 4.4%* 3.4% project’s feasibility. The logistics market is, however, Turkey -4.8% 8.9% 8.5%** 2.3% one of the most promising sectors in Turkey due to the country’s enormous trade capacity and significant Source: IMF, Regional Economic Outlook October- January 2011, Turkstat (**) 2011, (*) Estimates retail market. When the occupier demand is strongly

9 FOCUS ON TURKEY

established, the development projects would become Existing Grade A Office Stock feasible, creating opportunities for many global Sub Market GLA (million sq. m) developers/investors. Europe CBD 1.17 The comparably strong position of the Turkish Non-CBD 0.81 economy in the global economy expected in 2012 Asia 0.96 and strong economic prospects in the medium term will keep Turkey as an attractive investment Total 2.94 destination. On-going negotiations on a few possible Source: Jones Lang LaSalle, Q1 2012 deals are expected to be completed successfully during the first half. Appetite for development Currently, Turkey is This accelerating occupier demand in the office projects will remain limited; however, investor the largest economy sector is expected to put upward pressure in late demand for prime income bearing assets will remain 2012 on prime office rents in Istanbul, which have of Central and been steady at 30 per sq. m. since the second strong as long as yield levels in Turkey move in line € half of 2009 while rental levels in Ümraniye on the with the global markets. In this respect, we believe Eastern Europe th Asian Side have increased approximately 60% since that the prime yield will move within the band of 7%- and the 6 largest the beginning of 2009 due to offering new and high 7.5%, the upper band of which represents a 50 bps economy in Europe quality of office spaces and relatively low rental levels increase over end 2011. Despite the fact that 2012 in in comparison with the CBD. general is expected to be a difficult year for the global The occupier trend of relocation from the old and economy, it might be the year in which the Turkish comparatively low quality Grade A office stock to investment market will re-emerge after a few long new, accessible and high quality Grade A offices is years of inactivity. projected to continue in 2012. Based on realised transactions and our regular communication with local vendors and global Office Market investors, we believe that the prime yield is currently 7%. This is likely to remain stable during Istanbul is the most developed and active office the remainder of the year provided that political market in Turkey due to the fact that many and economic stability remains. It should also be multinational companies have designated Istanbul noted that a risk spread within the band of 100 bps as their operational hub to serve the MENA should be applied for the development projects with leasing and development risk and the assets in non- and CIS regions. Activity in the office sector is established sub-markets. currently dynamic due to strong demand from the occupier market. Unlike the retail market, the office The chart below displays the prime yield comparison between Istanbul and other benchmark markets in development activity remains dominated by local Europe as of Q1 2012, and the historical trend of developers, mainly large local land-owning families. prime yields in Istanbul over the last few years. However, a number of institutional developers are now becoming active in the market; Renaissance Construction, Soyak Group, Torunlar REIT and European Office Prime Yields, Q1 2012 Eczacıbas¸i Group being a few examples. Office Prime Yield Q1’12% Q-o-Q Bps Y-o-Y Bps Existing Grade A office stock in Istanbul is Barcelona 6.00 0 +25 approximately 2.94 million sq. m., as at Q1 2012 Berlin 4.95 0 -5 while the total Grade A office space in Istanbul is Brussels 6.00 0 0 projected to reach 3.57 million sq. m. by the end of 2013. Currently, the largest office market is the Budapest 7.75 +25 +25 CBD, accounting for 40% of the total stock, with the Frankfurt 4.80 0 -10 Non-CBD Asia accounting for 33% and the Non- London 4.00 0 0 CBD Europe 28%. However, it is expected that the Madrid 6.00 0 +50 growing pipeline on the Non-CBD will reduce the Milan 5.00 0 +15 share of the CBD. The major projects in terms of GLA are largely situated in the CBD such as Kristal Moscow 9.00 0 0 Kule to be developed by Soyak with a GLA of 50,000 Paris 4.75 0 0 sq.m, Çiftçiler project with a total GLA of 40,000 sq. Prague 6.50 0 -25 m. and Torun Tower in Esentepe with 40,000 sq. m. Stockholm 4.75 0 0 leasable space. Two of the most major projects on Warsaw 6.25 0 -25 the Asian side include Palladium Tower in Atas¸ehir with a GLA of 55,000 sq. m. and Buyaka in Ümraniye Istanbul 7.00 0 -50 with a leasable area of 51,000 sq. m. Source: Jones Lang LaSalle

10 GUEST CONTRIBUTION

Retail Market Shopping Centre Development, Unit & GLA During 2011 retailer demand from both domestic End 2010 Q1 2011 End 2011 Q1 2012 and international brands was strong in line with the impressively growing economy and strong consumer Istanbul Unit 92 96 104 107 spending. Additionally, the economic slowdown in GLA (sq. m.) 2.65 2.85 3.07 3.18 Europe and the political ambiguity in MENA region Rest of Turkey Unit 171 174 198 198 have placed Turkey as one of the most attractive GLA (sq. m.) 3.87 3.93 4.56 4.61 markets for retailer expansion. Turkey Unit 263 270 302 305 For retailers, location continued to be one of the GLA (sq. m.) 6.52 6.78 7.63 7.79 most important factors shaping their expansion plans. Source: Jones Lang LaSalle, as of Q1 2012 The retailer demand has remained strong for modern shopping centres which are not only used as shopping schemes but also attraction centres and pass time centre stock in Turkey with a GLA of 3.18 million platforms, both in major and secondary cities. Due to sq. m. in 107 centres. Thus, Istanbul is the largest increasing competition, retailers have focussed more retail market in terms of GLA in Turkey. Some of on innovation, by means of developing new concepts the major shopping centres opened during 2011 and and taking place in various shopping platforms such as Q1 2012 were Marmara Forum-Istanbul (137,000 online shopping sites. sq. m.), Akbatı-Istanbul (63,500 sq. m.), Ora Outlet Centre-Istanbul (65,000 sq. m.), Anatolium-Ankara Within the context of strong retail performance and (83,000 sq. m.), Nata Vega Outlet-Ankara (60,000 the positive outlook in the market, many well-known sq. m.), Optimum Gaziemir-Izmir (59,000 sq. m.), international brands such as Pinkberry, Converse Optimum Outlet Centre-Adana (68,000 sq. m.), and Payless entered the market. Additionally, luxury Terracity-Antalya (48,000 sq. m.), Trump Towers- brands such as Marc by Marc Jacobs and Michael Kors Istanbul (43,500 sq. m.), Buyaka-Istanbul (43,000 sq. opened their first stores, while Chanel and Hermes m.), Prime Mall Antakya-Hatay (38,500 sq. m.), Sümer expanded by opening stores in Istinye Park. French Park-Denizli (33,500 sq. m.), Cevahir Outlet Centre- menswear brand Zilli opened its first store on Abdi Trabzon (30,000 sq. m.), Tarsu-Mersin (27,000 sq. Ipekçi Street. Finally, during Q4 2011, Victoria’s Secret m.) and Ninova Park-Diyarbakır (22,000 sq. m.). and Bath & Body Works opened their first stores in Turkey at City’s and Istinye Park shopping centres. The development prospect in the Turkish retail After entering the market in Q4 2010, H&M opened market is strong for 2012 and 2013. By end 2013 6 stores during 2011, while C&A continued growth, the shopping centre stock is expected to reach 9.97 focusing more on secondary cities, along with Ankara million sq. m. in 368 centres with 2.18 million sq. m. and Istanbul. In line with the increasing demand for leasable space under construction. children’s retail, international brands such as Jacadi and Zippy entered the market causing stronger In terms of GLA, the major share of the organised competition. Additionally, La Fayette plans to enter retail stock in Turkey is formed of regional centres the Turkish retail market in 2013. at 34.5% followed by neighbourhood centres, outlet centres and super-regional centres respectively, Total GLA in Turkey reached 7.79 million sq. m. at 26%, 19% and 18%. Power centres, life style in. 305 shopping centres as of Q1 2012. Istanbul centres, and theme and festival centres are still at the accounts for around 41% of the existing shopping development stage.

Shopping Centre United Kingdom Stock and Pipeline France Italy Source: Russia Jones Lang LaSalle, Germany as of H1-2011 Spain TurkeyTurkey Netherlands Poland Sweden Existing Stock Ukraine Pipeline 2012-2013 Portugal Czech Republic Ireland Finland Romania Hungary Slovakia Belgium Greece Total GLA in 000's Sq M Bulgaria Luxembourg

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000

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Compared to other European countries, in terms of In 2011 Turkey Logistics Market Index the GLA per 1,000 capita, which is the key criteria to measure the market density, Turkey remains at the achieved an annual Country Source World Rank lower end of the European ranking. As of end 2011, GDP growth of 2010 Turkey’s GLA per 1,000 capita at 102 sq. m. was 8.5%, exceeding Germany 4.11 1 compared to the European average of around 222 expectations. With Netherlands 4.07 4 sq. m. Turkey’s retail density is also lower than most United Kingdom 3.95 8 of the CEE countries such as Czech Republic, Poland this GDP growth France 3.84 17 and Hungary. However, it should be noted that these rate, it became the figures do not consider purchasing power in those fastest growing Czech Republic 3.51 26 markets; but rather the population. Turkey obviously Poland 3.44 30 benefits from its significant population placing the country in OECD Slovakia 3.24 38 country down the ranking in terms of market density. and the second in Turkey 3.22 39 The prime rent has been on a declining path since G20 countries, Hungary 2.99 52 Q1 2008 from €90 per sq. m./month to €85 per sq. after China Greece 2.96 54 m./month during Q1 2009 and remaining stable at Romania 2.84 59 €75 per sq. m./month during the remainder of 2009 and 2010. With the revival of retailer demand and Bulgaria 2.83 63 strong rebound in economic growth, prime rents have Croatia 2.77 74 increased by €5 per sq. m./month and reached €80 per Serbia 2.69 83 sq. m./month during 2011. Due to increasing density Russia 2.61 94 in the retail market and the serious depreciation of the TL against USD and EUR in 2011, the prime rent Source: World Bank, 2010 is expected to remain largely stable at €80 per sq. m./ Various estimates indicate that Istanbul accounts for month in 2012 with some possibility to reach €85 per sq. m./month in 2013. around 60-75% of all logistics activity in Turkey. According to the World Bank’s Logistics Performance Based on the potential transactions in which Jones Lang Index, Turkey’s ranking is above most of its close and LaSalle is involved, we believe that the prime yield is developing neighbour countries, while it is lower than estimated at circa 7% as of Q1 2012. most of the long-established European developed Despite the strong retailer demand in 2011, it is logistics markets. The index provides the first in- expected that retailers will follow a prudent path in depth cross-country assessment, and states that the 2012 for their expansion, especially in the competitive performance of customs, trade-related infrastructure, locations. However, retailer demand for secondary port efficiency, logistics services, information systems cities will continue increasing. Innovative retail concepts and inland transit are all critical to whether a country can will continue to be an important differentiating factor trade goods on time and at low cost. in the medium term. Following strong performance In line with the economic conditions and increased during 2011, the development prospect of the retail activity in the retail sector, occupier demand in the market is strong for 2012-2013 periods; however, logistics market has recovered well since the beginning delays are possible due to the expected slight of 2010. New trends in the logistics space have been slowdown in the economy. observed, due to the changing requirements of retailers Industrial/Logistics Market from logistics service providers. For example, demand for new generation and high quality logistics space has Istanbul is a natural choice as it is the centre of trade increased due to the rising amount of e-commerce in in Turkey and by far its largest city, with the best road the market. connections and infrastructure. Therefore, Istanbul accounts for over half of the trade volume of Turkey, Despite the fact that the market is mostly dominated by and is the location of circa 38% of industrial enterprises. owner occupier stock, and the logistics leasing market is very limited, demand was strong particularly from the local and international third party logistics (3PL) Prime Yield Comparison companies in 2011, and it is expected that this demand 2006 2007 2008 2009 2010 2011 Q1 will increase in the short to medium-term. 2012 It is estimated that the total logistics stock in Istanbul Czech 5.75 5.50 6.50 7.00 6.75 6.25 6.25 and the surrounding areas is approximately 2,500,000 Republic sq.m (circa 75% of Turkey’s total stock). Major pipeline France 4.50 4.25 5.75 5.75 4.75 4.75 4.75 projects, which are currently under construction or Germany 5.00 4.50 5.75 5.75 5.25 5.00 5.00 about to start, are the 55,000 sq. m. Çelebi Logistics Hungary 5.75 5.75 6.75 7.50 7.50 7.00 7.00 Park in Esenyurt, developed by Logiturk, the 101,000 sq. m. Ekol Logistics in Gebze, the 122,000 sq. m. Poland 5.75 5.50 6.50 7.00 6.50 6.00 6.00 and the 40,000 sq. m. developments by Logiturk and Romania 7.00 6.25 8.00 9.00 8.25 8.25 8.25 owned by local investor S¸ekerpinar, also in Gebze. Russia 9.50 8.50 11.00 12.00 10.00 9.00 9.00 Turkey 7.00 7.00 8.00 8.25 8.00 7.00 7.00 Dr. Kıvanç Erman, MRICS Director, Capital Markets & Advisory UK 4.75 5.00 6.75 6.50 5.50 5.50 5.50 Jones Lang LaSalle Turkey, Yes¸im Sok. No. 2 Source: Jones Lang LaSalle Akatlar, Levent, Istanbul 34335, Turkey

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Future Legal Amendments Regarding the Acquisition of Real Property by Foreign Individuals

In Turkey, the acquisition of real property by foreign individuals is subject to specific principles and procedures establishing stringent requirements.

With a recent amendment dated 3 May 2012 With a recent Reciprocity Principle (“Amendment”) to Article 35 of the Land Registry amendment to Under Turkish law, the reciprocity principle means Law, Law No: 2644 (“Land Registry Law”), the that the rights given by a foreign country to its own acquisition of real property by foreign individuals in Article 35 of the citizens or legal entities must also be given to Turkish Turkey has been eased as the reciprocity requirement Land Registry Law, citizens and legal entities. The Land Registry Law is abolished. The reciprocity has required that the acquisition of specified that reciprocity must be both in law and in reciprocal rights exists for Turkish individuals to practice, which implies that the reciprocity principle acquire real property in the country of the foreigner real property by applies depending on laws and particular treaties concerned. foreign individuals to which Turkey is party and de facto applicability Herein we summarise these legal restrictions and in Turkey has between the relevant countries. The reciprocity explain the reciprocity principle and new changes, been eased as requirement had to be satisfied to acquire rights in which aim to facilitate acquisition of real property by rem by foreign individuals other than mortgage right. foreign individuals. the reciprocity Now with the Amendment, The Land Registry Law requirement is replaces this principle by referring to a list of foreign Legal Restrictions abolished countries, whose nationals are entitled to acquire real The legal restrictions consist of quantitative and property and rights in rem in Turkey for residential qualitative limitations. Accordingly, foreign individuals purposes. The said list shall be declared by the are entitled to acquire ownership right or rights in Council of Ministers. rem on real properties, on a district basis, up to 10% Under the previous regime, there were 89 countries of the total survey of the concerned district which is whose citizens were restricted from acquiring real subject to private ownership. In any case however, property or rights in rem, due to the reciprocity the total space to be acquired by foreign individuals principle. The Amendment is expected to affect in Turkey cannot exceed 30 hectares. This may positively citizens of the Russian Federation, Arabic be increased up to 60 hectares by the Ministry of countries and Turkic republics, who were not allowed Council. Before the Amendment, the total space to acquire ownership or rights in rem in Turkey that could be acquired by foreign individuals was 2.5 under the previous regime. The Amendment aims to hectares instead of 30 hectares. increase the number of property sales in Turkey and From the qualitative perspective, foreign individuals hence attract significant foreign investment. may not own real property located in military and private security zones. In addition, sales of land in Kaan Saadetlioglu, Associate areas under protection, as well as strategic areas that concern public interest and national security are not allowed.

The total space to be acquired by foreign individuals in Turkey cannot exceed 30 hectares

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Introducing Basic Principles of Draft Public Private Partnerships Law in Turkey

The long-awaited Draft Law for Certain Investments and Services to be Carried Out under the Models of Public and Private Sector Partnership (“Draft PPP Law”) has been on the agenda of the Turkish Grand National Assembly again.

The motivation and general mentality behind The PPP projects to determine the public authority and the private the Draft PPP Law is to implement investments body that will collectively carry out the PPP project. and provide services when public resources are are expected to: (i) Once the co-working public and private bodies are insufficient. In this respect, the Draft PPP Law aims establish an efficient determined, the operation phase of the projects will to enhance investments in the fields of, inter alia, partnership between commence. agriculture, irrigation, mining, manufacturing, energy, transportation, telecommunications, high technologies, the public and the There are four models of PPP regulated in the Draft city and urban infrastructure, and to offer the private actors; (ii) PPP Law: services currently provided by central or local public enhance long term Build-Operate-Transfer Model: The private authorities to the public, based on the public-private 1. body finances the project in terms of construction partnership (“PPP”) Models regulated under the Draft investments in the and operation of the facility for a pre-determined PPP Law. relevant sectors; period and finally transfers the same to the public and (iii) renovate The PPP projects are expected to: authority at the end of the operation period. the current facilities 2. Build-Operate Model: The private body (i) establish an efficient partnership between the and construct new public and the private actors; finances the project in terms of construction and facilities operation of the facility and keeps the ownership of (ii) enhance long term investments in the relevant the same. sectors; and 3. Build-Rent Model: The private body finances (iii) renovate the current facilities and construct the project in terms of construction, and operates new facilities. the facility and its units in part or in whole. The public Among the main objectives of the Draft PPP Law, as authority leases the said facility for a pre-determined stated by the draftors, is to allocate the risk on each period from the private body, at the end of which the project to the party (either public or private), which public authority shall take the ownership of the facility may be best suited to deal with it. if stated in the agreement between the public and private bodies. Additionally, the Draft PPP Law aims for a smooth operation for infrastructure investments, where 4. Transfer of Operational Rights Model: The the projects are concluded in shorter time periods public authority transfers the operational rights of the with higher budgets. The Draft PPP Law suggests facilities to the private body without transferring the that the smooth operation of such infrastructure ownership in lieu of an operation fee and for a certain investments can be achieved by unifying the relevant period of time. legislation and eliminating the lack of harmonisation Procedure and Partnership of the Public- in the relevant fields mentioned above. Examples of such lack of harmonisation may be observed in Private Actors different sectors, where provisional regulations are The competent public authority in the relevant sector scattered amongst separate pieces of legislation. The shall prepare a preliminary feasibility report with Draft PPP Law also aims to unify such legislation in a regard to the project to be undertaken. Subsequently, comprehensive manner. the project and the preliminary feasibility report along with the considerations regarding the use PPP Models of land whereby the project will be constructed Under the Draft PPP Law, PPP projects will be shall be submitted to the High Planning Council of coordinated via a central body, which will evaluate Turkey (“HPC”) and the HPC evaluates the need to the risk factors and determine the type, amount and complete such project. When the HPC approves the scope of the guarantees required for each project. project, the relevant public authority shall prepare PPP projects will be initiated via a tender followed by the tender documents. The Draft PPP Law regulates a bidding process, which will regulate the procedures the basic structure of PPP projects; the details of such

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approval process and the other operational issues will The Draft PPP ATTORNEY HIGHLIGHT be addressed in secondary legislation. limits the capital At the sole discretion of the competent public Barlas contribution of ˘ authorities, the tenders are held by one of the four BalcıoGlu following methods: (i) open tender, (ii) tender among the public sector Head of Real Estate, Turkey certain bidders, (iii) competitive tendering, or with 49% of the (iv) negotiation. Barlas Balcıog˘lu share capital of the is a partner and Head of Implementation Agreement and Financing partnership Istanbul’s Real Estate Team. The successful bidder and competent public He specialises in structured finance transactions, in authority shall enter into an agreement concerning particular project finance, real estate finance and the implementation of the PPP project which will be restructurings. His clients include commercial and governed by civil law rather than administrative law. investment banks, borrowers, institutional investors and The term of the agreement varies depending on the project sponsors. features of the facility subject to the PPP project and the outcome of the feasibility report. However, the term Barlas’ real estate experience includes direct and of the projects cannot exceed 49 years in any event. indirect provision of equity to investment and It is also noteworthy that depending on the type of the development projects. His clients include owners, PPP project, equity contribution would be required developers, investors, and others in connection with from the public authorities. The Draft PPP limits the the development, purchase, sale, and exchange of capital contribution of the public sector with 49% of commercial real estate such as business complexes, the share capital of the partnership. shopping centres, hotels and vacant land for development purposes. He has substantial experience Benefits of PPP Projects representing owners in construction matters, including The PPP Model presents a variety of benefits: planning the structuring of complex hotel design-build and new facilities, searching for alternative solutions how construction management arrangements. to finance new investments, and directing local and/or Barlas’ corporate experience includes mergers and foreign private sector resources to invest in different acquisitions as well as domestic and international joint sectors. Therefore, in addition to the public financing ventures, corporate restructuring, and providing written instruments such as the general budget, revolving fund, opinions in transactions, including de-mergers. He public domain selling/bartering, and local resources The PPP Model has also been involved in a wide variety of corporate (civil society contribution, charitable contribution, presents a variety matters and the development of profit sharing municipality and special provincial administration mechanisms and shareholder or member relationships contribution), it is of great importance to ensure local/ of benefits: planning involved in group-owned companies. In the course of foreign private sector financial contribution through new facilities, his Frankfurt practice, he was involved in bank M&A PPP Models. searching for deals and supervised and coordinated the regulatory alternative solutions filings of German clients in Turkey. Barlas Balcıog˘lu, Head of Real Estate Turkey how to finance In addition to his practice at Balcıog˘lu Selçuk Akman, new investments, Barlas is a lecturer at Yeditepe University Law Faculty, directing local and/ where he teaches Mergers & Acquisitions to LLM and or foreign private PhD students. sector resources to A native Turkish speaker, Barlas is fluent in English and invest in different German and also speaks Dutch (proficient). sectors

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Politics of the Turkish Government on Urban Redevelopment

Deliberations on the necessity for urban redevelopment projects in major Turkish cities, especially in Istanbul, have significantly sped up during the last decade.

This has resulted in the preparation of a large Deliberations on the 400 billion. The financing may also be a significant number of projects. Most of these projects are of struggle that needs to be overcome, taking into a residential nature; however, the most significant necessity for urban account the economic recession that adversely affects projects concern recreation, cultural or in some cases, redevelopment the global economic climate. To the extent possible, commercial areas. projects in major the necessary funds will be made available by the Turkish state; however, the support of the private Taking into account that Turkey is vulnerable to Turkish cities, construction sector is also essential to attain the earthquakes, it was essential for the Turkish especially in Istanbul, projected goal. Major private construction companies government to take an initiative to renew or reinforce have significantly have highly appreciated the Turkish government’s existing, old buildings. In this respect, the Turkish initiative; however, their involvements may be limited government has co-operated with metropolitan sped up during the as not all the urban redevelopment projects can be municipalities to implement huge urban development last decade economically efficient. projects for metropolitan cities. However, the current legal regime has not allowed such implementation At this stage, this initiative can only be regarded as a in many aspects; therefore the need for specific necessary effort that was needed to be undertaken legislation has arisen. by the Turkish government. Its outcome can only become concrete once the Urban Development Law Accordingly, a new law on urban development is efficiently implemented. (“Urban Development Law”) has been drafted and entered into force following its publication in the Official Gazette dated 31 May 2012. The Kaan Saadetlioglu, Associate Urban Development Law covers the planning and redevelopment of areas that are exposed to natural disasters and will ease the process for urban planning efforts. The Urban Development Law entitles the Ministry of Environment and Urbanism of the Republic of Turkey (“Ministry”), The Housing Development Administration (a state-owned ATTORNEY HIGHLIGHT construction and development institution, known as TOKI) and the municipalities to expropriate buildings Özgür Nemutlu that they deem necessary for implementation. Associate, Turkey However, further amendments to certain existing laws such as the Condominium Law, Law No. 634, and the Land Registry Law, Law No: 2644, will also Özgür Nemutlu is an associate in the firm. His practice need to be integrated and have the support of the focuses on corporate and real estate transactions. concerned individuals to these plans. He advises multinational and Turkish companies in media, hospitality and leisure, real From an economical point of view, it is expected estate, and retail sectors in cross-border mergers and acquisitions, joint ventures and real that such an effort will significantly and efficiently estate deals. influence the Turkish economy, which was negatively affected by the Euro-zone debt crisis. Nevertheless, Prior to joining the Firm, Özgür worked in a leading law firm in Istanbul. the Turkish government’s primary aim is to increase He is a graduate of Middle East Technical University, Faculty of Economic and the prosperity of Turkish citizens by providing them Administrative Sciences (BS, 1997) and Istanbul University, Faculty of Law (LL.B., 2003). with earthquake-resistant buildings at no cost; or at a He earned his LL.M degree from Leiden University, Faculty of Law in 2006 and currently relatively low cost. is a Juris Doctorate student at Istanbul University. Özgür is a member of the Istanbul Bar Based on a statement issued by the Ministry, the and is fluent in English. expected costs associated with the contemplated urban redevelopment projects will raise up to US$

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The New Turkish Commercial Code

In an effort to modernise existing legislation to international and EU laws and standards, a new Commercial Code (TCC 2012) has come into effect in Turkey on 1 July 2012. It will revolutionise Turkey’s commercial activity and conduct and have a considerable impact on transparency and corporate management practices in the country. It will also direct how company law is used and how mergers and acquisitions will be structured.

One of the new Commercial Code’s aims is to help Although Turkey is Minority shareholders will now have the right to attract foreign direct investment into Turkey, in demand full transparency and a replacement of particular into non-listed companies which have been still considered as a company auditors if they are deemed to be partial, previously considered as ‘black boxes’ by international major growth area whilst a 90% or more majority shareholder may businesses, through delivering improved transparency in Europe, it too buy out an uncooperative minority shareholder that and legal certainty. It is also hoped to act as a has suffered from violates the company’s interests. It will also become vehicle to eliminate the country’s grey market and easier to transfer shares, and legal deadlines, within consequently to raise much-needed tax revenue. a slower economic which shareholders must contribute the share capital growth rate in the they have committed, will become shorter. The TCC 2012 has been in the pipeline for over a decade and the sudden revival of its enactment in global downturn Questions, however, remain about how the new early 2011 was very much solicited by the Turkish Commercial Code will be applied or whether any business community. Although Turkey is still changes will be necessary to mitigate public concerns. considered as a major growth area in Europe, it too Many of the articles may have to go through debate has suffered from a slower economic growth rate and be delayed, and the implementation process in the global downturn, and so the implementation could become quite lengthy. Already in the weeks of the TCC 2012 coincides with the Turkish before the TCC 2012 came into force, the Turkish government’s latest initiatives to help boost this. Customs and Trade Minister announced a number of amendments to accommodate criticism raised by For the legal market, the new Commercial Code the business community – highlighting the difficulty of is expected to be very good news. A large volume implementing such large-scale changes. of businesses, from small to large, are expected to require detailed advice on the new changes, and for Naturally it will remain to be seen how serious these many, the measures will mean that they will require challenges will be and whether the Code will actually legal advice and support in the long-term. achieve its goals for the Turkish economy. What is, however, clear at this stage is that there will be One of the most significant changes in the new significant opportunities in Turkey, and it will be up to Code is the rule framing the relationship between the law firms there to take advantage of these. controlling entities and their subsidiaries. It will aim to Excerpt from this article was published in prevent parent companies from abusing their powers The Lawyer on 9 July 2012. in forcing losses on their subsidiaries and acquiring financing from them. The subsidiary’s management will have to produce annual reports on an ex post Selim Keki, Partner, Corporate basis, explaining the relationships with other entities in the group. All limited liability and joint stock companies, irrespective of size, will also have to disclose all their financial statements and auditor and director reports on their websites – something that reflects the Turkish government’s desire to bring the commercial One of the most sector into the 21st century. These will now have to significant changes be prepared by an independent auditor and meet in the new Code is International Financial Reporting Standards (IFRS), although small and mid-size enterprises will still be the rule framing the allowed to use a Turkish Certified Auditor or a CPA. relationship between There will also be greater protection for minority controlling entities and majority shareholders in joint stock companies. and their subsidiaries

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Sleepless in Russia: The Challenges of Hotel Automation

Approximately one year ago, pedestrians walking by the Yotel Times Square hotel in New York could marvel through a large glass window at Yobot, the world’s first robotic hotel luggage handler that stores your luggage for you, without the awkward “should I tip the bellboy?” moment.

While the value of the service (beyond a marketing While the value obligation to register foreign citizens staying with coup) leaves some sceptical, it has the merits of them shortly after their entry on Russian soil. This highlighting a growing trend in the hotel industry: of the service administrative procedure entails the verification of increased automation of services once reserved (beyond a marketing the visitor’s passport and the physical exchange of a for humans – particularly in the lower segments of coup) leaves some certain number of documents. In addition, automated the hotel market. In Russia, where this segment is sceptical, it has the check-in systems rely extensively on the use of credit notoriously under-represented, the automation trend cards, but credit and debit card penetration remains presents certain challenges but also offers interesting merits of highlighting relatively low in Russia. According to Alexis Delaroff, development opportunities. a growing trend the General Director of Accor Russia CIS, “As long as we do not have a developed credit or debit card Hotel amenities have historically gone hand-in-hand in the hotel system, the customer base is too limited for automated with technological progress and the related decrease industry: increased properties.” Automation also often implies less staff, in the costs of certain services. Rooms with individual automation of but the remaining personnel are called upon to multi- telephone lines were introduced at the Plaza New task and possibly take on more responsibilities. This York in 1907; rooms with private baths were services once requires additional training of the workforce, but introduced at the Statler Boston in 1927. At the same reserved for humans hoteliers in Russia have often bemoaned the difficulty time, services rendered by humans have multiplied – particularly in the of finding well-trained personnel even for basic tasks. exponentially, such as 24-hour room service More generally, security may also be a concern for introduced at the Westin in 1969. lower segments of some travellers, especially for hotels that are on the the hotel market outskirts of towns and are virtually staff-less. As a consequence, the industry has gradually become more and more labour intensive in order to deliver the experience hotel guests have come to expect. Payroll and related costs today comprise by far the largest portion of hotel operating expenses. Depending on the nature of the property, labour costs can range from around 30% in limited service hotels and all-suite hotels to approximately 46% at resorts or convention hotels. Needless to say, when the economy tanks and hotel revenues decrease, shedding staff is crucial to the survival of many properties. But if redundancies are often temporary adjustments to economic cycles, a deeper, structural movement is at work today as well. The service sector, which is the last great bastion of human workers, is succumbing to more and more automation. In the hotel industry in particular, operators are trying to benefit from the technology- induced productivity enhancements that other industries have been exploiting for quite some time. In some cases, machines replace humans, such as in the completely automated check-in and departure systems that are implemented across many budget properties throughout Europe. Such form of automation represents a challenge in Russia for several reasons. When dealing with foreign guests, for example, Russian hotels have an

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If these few hurdles can be overcome, there is no reason that the automated budget hotel segment ATTORNEY HIGHLIGHT should not develop in Russia. Automation does not Laura Tiuca necessarily imply the total absence of staff. Recently Managing Counsel, Co-Head of Real Estate, Romania developed software packages called “property management systems” can take on and integrate a host of duties previously done by the employees, from reservation and room management, customer information and accounts receivable to arranging a guest’s wake-up call. Liberated from repetitive chores at the front or back desks, better-trained personnel Laura Tiuca is the Co-Head of Salans’ Real Estate Group in Bucharest and leader of can therefore dedicate more time to being in contact Bucharest Hospitality and Leisure team. Described in Chambers and Partners 2012 as “a with the hotel guests and solving any issues that very pleasant and prompt lawyer” and also having “a robust reputation for handling investment may arise. structuring, acquisitions, leasing and development of all types of real estate portfolios”, Laura The existence in Europe of a well-developed is one of the very few full-knowledge Romanian experts in both contentious and non- network of budget hotels shows that the partially contentious real estate matters on the market. or fully automated hotel model is a viable one from an economic standpoint, without compromising She is also recognised and recommended as a top real estate lawyer in the latest editions on design, cleanliness and the general well-being of Legal500 and PLC Which Lawyer and was a finalist for “The Professional of the Year” of guests. The French Accor Hotel group operates distinction at the prestigious Europaproperty’s South-Eastern Europe Real Estate Awards around 100 budget hotels representing over 40,000 Gala held on 17 May 2012 in Bucharest. rooms through the hotelF1 and Etap Hotel brands, mainly in Europe and the Southern Hemisphere. In Laura’s more than 11 years’ experience encompasses M&A, banking and finance and PPP, Russia, Accor plans to open an Ibis hotel in Moscow and she is very skilled in dealings with local authorities, practiced during large privatisations next year that will be partly automated. or while assisting sophisticated developers for their greenfield projects. As the low-cost model has shown in the airline industry, clients in Europe have demonstrated Prior to Salans, Laura was a Senior Lawyer with PricewaterhouseCoopers. She graduated that they are ready to forego a certain number of magna cum laude from the University of Bucharest Law School and obtained an MBA amenities in exchange for a lower price tag. In the certified by the University of Ottawa-Quebec and École des Hautes Études Commerciales. lower segments of the service industries, clients She is a member of the Bucharest Bar. In addition to Romanian, Laura speaks English and in Russia are accustomed to being ignored while French. standing at the counter, only to be served thereafter by grumpy and bored employees. They will most She regularly publishes articles about legal issues in real estate and hospitality and is likely find the prospect of inevitable automation frequently quoted by the Romanian business press on real estate stories. quite enticing.

Excerpt from this article was published in The Moscow Her native creativity and optimism enable Laura to offer ingenious and ‘out-of-the-box’ Times on 29 May 2012. solutions to clients’ needs and to identify the full half of the glass easily. “No matter how difficult a situation is, clients know they can count on our commitment to find the best solution Alex Skoblo, for their business.” Laura is a nature lover, always willing to explore new places and cultures. Partner and Head of CIS Hospitality Practice Group She also finds time to get involved in CSR initiatives, which she actively supports in her spare moments. Andras Haragovitch, Associate

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The Reality Test: Successful Stories or Not in the Hotel Field

Many reasons exist behind the establishment of a new business, but the strongest are linked to the desire to develop a business that can be sold in the future in a profitable manner, either to another entrepreneur or investment fund, or linked to the establishment of a family business to be continued by following generations.

The lesser reason is not found so often, because the Years of crisis have points” become, miraculously, major sore points, tradition to create continuity is no longer “trendy”, when problems occur or when selling the business given that in the last 20 years the miracle of hitting presented a shock- is contemplated. the jackpot and making large profits has been too test for the strength much of a draw card for a country burnt by years of of businesses; we There have been cases when the company’s archive communism and troubled by changes. had no documents regarding the property title. Upon have witnessed the selling, the purchasers (particularly during crisis years) However, creating a healthy business development collapse of many and the funding parties check whether the seller’s framework is also essential for a family business. property title is valid. Furthermore, the solidness of sand castles with a a business is always determined by the real property Years of crisis have presented a shock-test for lot of noise component. That is why the reconstruction or the strength of businesses; we have witnessed the completion of the file related to the property title collapse of many sand castles with a lot of noise. We represents the first step which, unfortunately, in have seen circumstances under which serious people Romania can be quite time-consuming, especially have succeeded in selling their business in the hotel if copies of the papers are held by the public sector profitably, even during tough years. But take authorities. We faced situations when the entire file note; they had prepared themselves for such an event concerning the property title had vanished completely long in advance. from the authorities’ archive and, consequently, we had to reconstruct their archive as well. It all started by establishing a team of professionals in the hotel sector, able to cover all business aspects, from management, operations, F&B to financial and legal issues. In the first instance, the team in question examined the existing business, found its weak points and, using the owner’s support, implemented changes within the organisation and restructured it completely. Many times in To accept the fact that your organisation is not going the past we have well, that you have made many mistakes in the past found a dangerous and, in particular, to allow a team of professionals recklessness to work with no interference on your part, is an act of courage. The change within an organisation that concerning the has been operating for some time leads, in the first examination of instance, to a reaction of full rejection on behalf of the property title the people who have been working for the company for a long time and intervention in management and at the time of the shareholding is required in order for the measures business acquisition. taken to be achieved in practice. In many cases, All of these the process of change initiated by the team of apparently “weak professionals can last up to several years, and its success depends to a large extent on the support of points” become, the business owners. miraculously, major Additionally, in most cases, while being caught in day- sore points, when to-day activity, one forgets to leave written traces problems occur of performed operations. Many times in the past we or when selling have found a dangerous recklessness concerning the examination of the property title at the time of the the business is business acquisition. All of these apparently “weak contemplated

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One of the lessons learnt by the Romanian One of the The purchasers will always check certain essential entrepreneurs during the past several years is that aspects such as who are the real owners (who is the buyer should not be considered ignorant and lessons learnt by behind the off-shore companies, existence of trusts, bewildered by empty words and “gloss”, one who the Romanian etc.); whether the negotiator has a valid power of makes decisions without checking the real facts. In entrepreneurs attorney from the real owners, the real property and this respect, we refer to the fact that the business the location thereof; the validity of the property title should enjoy transparency, and the management during the past and existence of a dispute pending with the courts team should be made of serious, experienced, several years is or other investigations; financial issues; the business’ professional people. that the buyer management manner and transparency thereof; possible affiliations to international chains, and existing The reality is that there is money on the market should not be agreements – all need to be examined. and there are investors willing to buy, but not just considered ignorant anything and everything, because no one invests It does not matter if you intend to sell the business money in stories anymore; people want to see that and bewildered by or not, it is always advisable to have it checked out the business is managed by the book. empty words and in detail, in order to find out where the business sits “gloss”, one who in reality. In many cases such a test has actually saved Regarding the successful selling of the Romanian hotel the business from going to ruin. we are talking about, we have been involved in the makes decisions legal part of the audit and restructuring. The audit, without checking reorganisation and preparation process of all papers the real facts Laura Tiuca, took almost three years; however, the expectations Head of Bucharest Hospitality and Leisure Group and invested money was worth the time, as the sale was achieved in just a few months. The purchaser, an investment fund whose teams of foreign auditors searched in detail for each issue of the business, had the confidence to invest in a year dominated by crisis. However, we have also seen unfortunate situations. For example in Spain when one of our clients intended to purchase a five-star hotel in Barcelona – a contemporary jewel seeming to have its origins in kings’ days – we discovered serious hidden It does not matter irregularities after the audit, and those irregularities if you intend to led to the conclusion that the business was nothing sell the business but a nicely varnished black hole. Thus, trust in the seller was lost and business arrangements or not, it is always were cancelled. advisable to have it checked out in detail in order to find out where the business sits in reality. In many cases such a test has actually saved the business from going to ruin

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Hotels in Russia, the CIS and Georgia: Trends and Opportunities

Most of the CIS countries showed significant growth in the mid 2000s, mainly due to their economies’ close link to the energy sector. Supported by the booming oil prices and high demand from industrialised nations, GDP growth in the region was above world-average in the years prior to the world economic crisis of 2008/09.

The global economic slowdown severely impacted The combination Russia will continue to remain the most attractive GDP growth in Russia, the CIS and Georgia. Of of recovery in both and prominent country in the CIS. Russia has been the six CIS countries covered in this report, only ranked fifth in global foreign direct investments (FDI) Kazakhstan and Azerbaijan showed positive GDP occupancy and ADR in 2010 and is expected to remain among the top growth in 2009, whereas Ukraine and Armenia assured not only five attractive destinations for international investors exhibited the largest declines of 14.8% and positive, but double- during 2010-12, according to a report on world 15.2% respectively. investment prospects titled, ‘World Investment digit growth in Prospects Survey 2010-2012’ by the United Nations Even Russia’s economy, which is the largest in the RevPAR across Conference on Trade and Development (UNCTAD). CIS (and part of BRIC), registered a 7.8% decline in GDP growth. The years 2010 and 2011 saw the the region Despite perceived instability and a certain economic region gradually recover. Kazakhstan and Georgia turmoil, Russia, the CIS and Georgia continue to registered the highest GDP growth in 2010 and 2011. remain attractive investment prospects. Overall Azerbaijan, on the other hand, went from being the interest in the economies of these countries will be leader in GDP growth to showing almost no change mirrored in hotel development in the region. in 2011 (0.1%). It is important to note that once again Industry Performance Russia is not the leader in GDP growth. Out of the In 2011 hotel markets across Russia, the CIS and six countries covered in this report, Russia has shown Georgia continued their recovery in occupancy, which the second-worst results in GDP growth in the past most of them exhibited in 2010. Yekaterinburg (28%), two years. Tbilisi (23%), Baku (16%), Kazan (13%), Samara (12%) Despite all the countries having shown significant and Almaty (11%) observed a double-digit increase progress in their recovery from the world economic in occupancy levels. Of these six markets, however, crisis, the forecasts of GDP growth by both EIU and only Kazan, Baku and Tbilisi saw an increase in supply IMF are moderate in the short to medium term. Most in 2011. Baku, in fact, was expected to see much of the countries are forecasted to grow their GDP by larger supply growth; delays in construction have now approximately 3-5% annually. Kazakhstan and Georgia allowed this market to recover some of its occupancy should continue to dominate the region in GDP losses from 2009/10. Such strong increases in growth, while Azerbaijan is forecasted to remain at occupancy can be attributed to both a low base of the bottom of the table. Nonetheless these growth the previous year, as well as to the economies’ steady recovery from the global slowdown. For example, rates are still higher than Western Europe (1.5-2%), Almaty, despite an occupancy increase of 10.5% in but lower than China and India (7-9%) in the short to 2011, displayed the second largest absolute decline medium term. over the past five years (-10.4%). Moscow (2%) One of the main worries for the CIS countries has shown the lowest increase among all the cities; has been high and unstable levels of inflation. High however, it also had the largest base in 2010, meaning GDP growth has often been accompanied by rising that even a 2% increase amounts to a significant inflation. In 2008 a record was set, with all the increase in room nights sold. Furthermore, Moscow countries in the region except Armenia exhibiting has been one of the most stable markets (in terms double-digit inflation. From 2008 all the countries of occupancy) in the past five years, second only to covered were able to lower their inflation to single- Rostov, exhibiting a 1.1% CAGR in occupancy, as digit rates; however, inflation in 2011 still ranged from opposed to Rostov with a compounded occupancy 8% to 9.5% for the region as a whole. While EIU and increase of 0.3%. In addition to Moscow and Rostov, IMF have forecasted a reduction in these countries’ only Kazan (5%) and Yerevan (2%) demonstrated a positive CAGR over the past five years. inflation levels to 5-5.5% in the short to medium term (with Ukraine as the only exception at around 7%), questions have to be raised whether or not such quick reduction is possible.

22 GUEST CONTRIBUTION

Chart 1: Key Operating Characteristics By Major City – Occupancy

12 Month* Compounded 2007 2008 2009 2010 2011 Growth Growth Moscow 65,4% 65,0% 62,6% 67,1% 68,4% 1,9% 1,1%

St Petersburg 64,4% 60,2% 44,4% 52,7% 55,8% 5,9% -3.5%

Yekaterinburg 55,4% 55.5% 31,0% 30,0% 38,4% 28,0% -8,8%

Rostov 59,7% 57,8% 53,8% 56,7% 60,3% 6,3% 0,3%

Samara 56,8% 52,7% 36,3% 44,5% 49,6% 11,5% -3,3%

Kazan 41,8% 49,3% 49,1% 45,0% 51,0% 13,3% 5,1%

Kyiv 64,5% 63,6% 46,6% 47,5% 51,7% 8,8% -5,4%

Baku 64,4% 59,6% 46,6% 43,8% 51,0% 16,4% -5,7%

Astana 58,0% 49,3% 40,6% 44,1% 47,4% 7,5% -4,9%

Almaty 72,0% 60,0% 50,0% 42,0% 46,4% 10,5% -10,4%

Tbilisi 75,5% 70,5% 46,4% 50,1% 61,6% 23,0% -5,0%

Yerevan 48,3% 45,9% 49,9% 49,4% 51,6% 4,5% 1,7%

*Growth in 2011 (in absolute terms) expressed as percentage of the figure for 2010 Source: HVS Rearch

Despite perceived RevPAR growth (in local currency) in 2011 was sensational. All markets except one – Baku – instability and a exhibited not only positive but double-digit growth. certain economic Yekaterinburg led the way with an almost 42% turmoil, Russia, the increase in RevPAR in local currency, while Moscow CIS and Georgia exhibited the lowest growth at almost 11%. Yerevan is the only market to have demonstrated a decline in continue to remain RevPAR in local currency (12%). In terms of Euros, all attractive investment the markets showed positive growth: Yekaterinburg, prospects. Overall the leader in RevPAR, had an almost 39% increase. Both Baku and Kiev, which recorded 5.3% and 14.2% interest in the increase in local currency respectively, demonstrated economies of these the lowest increases in Euros (0.6% and 7.4%) due countries will be to the depreciation of their local currencies. To further stress the importance of currency exchange, mirrored in hotel we look at the CAGR of RevPAR over the past five development in years. While in terms of local currency only eight the region markets exhibited a decline, in Euro terms it was all but one (Yekaterinburg). Fluctuations in the state of local economies affect hotel performance twofold: through changes in hotel operating results (occupancy and average daily rate) and currency exchange

23 SPECIAL FEATURE: HOSPITALITY AND LEISURE SECTOR

Chart 2: Distribution Of Existing And Proposed Branded Hotel Rooms By Major City

Existing Existing Proposed Percentage Increase Over Rank Rank Supply 2010 Supply 2011 Supply of Total Five Years Moscow 12 400 13 000 7 200 1 35% 55% 9

St Petersburg 6 470 6 800 1 700 4 8% 25% 13

Yekaterinburg 800 800 500 9 2% 63% 7

Rostov 100 100 1 200 6 6% 1200% 1

Samara 670 670 400 11 2% 60% 8

Kazan 630 780 330 12 2% 42% 10

Sochi 800 800 3 800 2 18% 475% 2

Kyiv 1 600 1 800 2 300 3 11% 128% 3

Baku 1 200 1 350 1 500 5 7% 111% 4

Astana 700 700 200 13 1% 29% 12

Almaty 1 400 1 400 550 8 3% 39% 11

Tbilisi 630 830 700 7 3% 84% 6

Yerevan 450 450 450 10 2% 100% 5

Total 27 850 29 480 20 830 71%

Source: HVS Research

rates. RevPAR growth shoud be read carefully as We can clearly see hotel market by over 7,000 hotel rooms over the poor operating performance from 2009 weakened next five years, which accounts for 35% of the total the base for growth, thus even a slight increase in the effects of hotel supply in the thirteen markets. Due to the EURO absolute figures leads to a significant percentage markets recovery, 2012 and 2014 Winter Olympic Games, Kiev and change. which is not only Sochi are forecasted to increase their supply by 2,300 and 3,800 hotel rooms respectively, which rank these Hotel Supply mirrored by cities as second and third, both in absolute increase The last decade can be characterised by increased improved operating in supply and in percentage terms. Room supply in development of new hotels in Russia, the CIS and results, but also Rostov, which currently has the lowest base of quality Georgia. Despite real progress in the early- and hotel rooms, is forecasted to increase by 1,200 mid-2000s, hotel development lost considerable in the number of rooms in the next five years. Such a large pipeline pace in the past three years mainly due to the announced hotels in ranks it at first place in percentage increase and global slowdown. Many projects have been either the region sixth in absolute terms. It is important to note that cancelled or put on hold since 2008, while most of the large percentage increases are mainly due to a the development that took place in 2010 and 2011 combination of aggressive expansion and low existing consisted of unfinished hotels from before the crisis. base of quality hotel accommodation. Hotel supply in 2011 in the region only increased by It is important to note that the increase in hotel approximately 6% (Table 2), with almost 60% of that room supply by 3,800 in Sochi consists of the city of increase due to new developments in Moscow and Sochi and Krasnaya Polyana. Imeretinskaya Valley is St. Petersburg. Nonetheless, forecasted increase in forecasted to have more than 12,000 guest rooms supply in the above-mentioned twelve markets, along for the Olympic Games. Since most of this stock with Sochi, is approximately 70%. Moscow continues will be converted into residential projects for sale in to attract investors and is forecasted to expand its the post-Olympic period and the exact remaining

24 GUEST CONTRIBUTION

hotel supply is unknown, we decided not to include Even though we by the local authorities. We anticipate that hotels Imeretinskaya Valley into our forecasts of future in Imeretinskaya Valley and Krasnaya Polyana will hotel supply. anticipate that in experience pressure on operating performance in the the medium to medium term. Future Trends long term most Our analysis of the hotel markets of Russia, the CIS Currently there are few investors in the region that and Georgia leads us to believe that while some markets’ demand can be characterised as institutional. As hotel markets markets have shown signs of improvement since will match or in Russia, the CIS and Georgia continue to grow and the downturn of 2008/09, others are still struggling outgrow the supply, mature we should start seeing more institutional to recover. Furthermore many of the studied hotel investors. The maturing of the hotel market is markets have significant new supply in the short to certain markets usually accompanied by increased activity in hotel medium term. Even though we anticipate that in are bound to transactions. Thus, as the number of hotels increases, the medium to long term most markets’ demand experience pressure investors will have a choice between developing will match or outgrow the supply, certain markets a new property or acquiring an existing one. Even are bound to experience pressure on operating on operating though investor interest is increasing, it is important to performance in the short and even medium term. performance in understand that factors like oversupply, bureaucracy and delays in hotel development will deter some As local economies become more stable so should the short and even of the potential investment in existing and the exchange rates. Thus if hotels are reporting their medium term proposed assets. operating performance in Euro terms, additional losses due to currency exchange should be minimised.

It is important to focus on Sochi separately as the Tatiana Veller, Managing Director market is going through some drastic changes due to the 2014 Olympic Games. Over 15,000 rooms are Alexey Korobkin, Senior Associate, being prepared for the Games, most of which will Consulting & Valuation be sold as residential projects later on. Imeretinskaya Galina Kuzmina, Associate, Executive Search Valley will experience enormous oversupply of both hotel rooms and residential projects, as by itself the HVS Global Hospitality Services – Moscow valley is not a major attraction for visitors. Krasnaya 4/5 Gilyarovskogo Street Polyana, even though it is a ski resort, will heavily Office 301, 129090 Moscow, Russia depend on the success of destination management T: +7 495 608-9931

25 CENTRAL AND EASTERN EUROPE

New Real Estate Developers’ Act

On 28 October 2011, the Act of 16 September 2011 on protection of rights of a purchaser of residential premises or single-family house was announced in the Journal of Laws (Journal of Laws of 2011, no. 232, item 1377, the “Act”). The Act came into force on 29 April 2012.

The Act regulates the rules of protection of the Drawing up Extract from the National Court Register (KRS) or purchaser’s rights vis-à-vis which purchaser a the Central Registration and Information on Business; developer undertakes to: (i) establish separate the information ownership title to the residential premises and prospectus together Copy of the building permit, architectural – transfer the ownership title to the said premises to with appendices is building design; and the purchaser, or (ii) transfer to the purchaser the Financial statement of the developer for the last ownership title to the property developed with a the basic obligation 2 years, and in the case of a special purpose vehicle – single-family house or the right of perpetual usufruct of a developer a financial statement of a parent company. to the land property and the ownership title to the single-family house erected thereon constituting Developer’s Responsibility separate real property (Art. 1 of the Act, the Pursuant to Art. 32 of the Act, a developer, employee listed rights shall be hereinafter referred to as the of a developer, or any other person obligated to “ownership title”). draw up the prospectus who fails to do so is subject Obligations of Developer Prior to the to a fine. Providing false information in the prospectus Execution of the Agreement carries the penalty of imprisonment of up to 2 years. Information Prospectus Developer’s Agreement Drawing up the information prospectus together with Definition appendices is the basic obligation of a developer. The Act defines the developer’s agreement as an The prospectus should be delivered to the purchaser agreement under which the developer undertakes free-of-charge on a permanent data carrier (material to establish or transfer to the purchaser upon the or equipment which enables storing the recorded completion of the development project the rights data as long as required considering the nature as referred to in Art. 1 (the ownership title), and of information and the purpose of drawing up the purchaser undertakes to accomplish payment thereof in the manner which does not allow any to the benefit of the developer on account of the amendments thereto). If the information included purchase price for the said title. Within the meaning in the prospectus is changed, relevant information of the Act the developer is an entrepreneur who, as about the amendment is provided at the time which part of its business activities, undertakes to establish allows the purchaser to learn the information prior the ownership title and transfer the said title to the to the execution of the developer’s agreement, Within the meaning purchaser under the developer’s agreement. Pursuant and it is delivered in the same form in which the of the Act the to the Act only a natural person can be prospectus was delivered (with the prior consent of the purchaser. the purchaser, the amendment may be delivered in developer is an a different form). The change should be delivered entrepreneur Elements of the Developer’s Agreement in the form of: (i) an annex to the information who, as part of its The Act stipulates that the developer’s agreement prospectus or an amendment to the appendix, or (ii) should include, inter alia, the following: a new prospectus or a new appendix with a clearly business activities, marked amendment in such a manner that allows the undertakes to Information about the real property on which purchaser to identify the amendment. the development project is to be carried out, establish the including information on the legal status of the real Other Documents ownership title property including in particular existing mortgage At the request of an interested person, the developer encumbrances and easements; ensures the possibility to read the following and transfer the documents in the premises of the enterprise: said title to the Description of the location of the residential purchaser under premises in the building together with an indication Current status of the title and mortgage register of the surface area and the room layout and the of a real property on which the development project the developer’s scope and standard of the fit-out works which the will be carried out; agreement developer undertakes to do;

26 POLAND

The commencement and completion dates of ATTORNEY HIGHLIGHT A developer, employee of a the construction works, the date of transferring the ownership title to the purchaser and the deadlines, Tomasz Stasiak developer, or Partner, Poland amounts or conditions on which the purchaser any other person accomplishes the payment to the benefit of the obligated to draw developer; up the prospectus Representation by the purchaser on accepting who fails to do so is and reading the information prospectus together with appendices including the information that the subject to a fine purchaser was notified of the possibility to read the Tomasz Stasiak is a real estate partner in Salans’ documents specified in Art. 21 (current status of the Warsaw office. title and mortgage register, excerpt from the National Court Register (KRS) or the Central Registration and Tomasz specialises in real estate law. He has Information on Business, copy of the building permit, participated in many project finance investments developer’s financial statement for the last 2 years (including public private partnerships and multinational and in the case of a special purpose vehicle – the joint ventures) representing both the developers and financial statement of the parent company). financial institutions. In his career he has been involved in all stages of property projects from purchasing Disclosure in the Title and Mortgage Register land and commissioning contractors and consultants Developer’s agreement constitutes grounds for through arranging for funding and leasing to sale of disclosing in the title and mortgage register the claim completed products. to establish and transfer the ownership title. Tomasz gained professional experience during four Rescission by the Purchaser years at Clifford Chance in Warsaw. In 2007 and 2008 he was also heavily involved in setting up Clifford The purchaser is entitled to rescind the developer’s Chance’s office in Kyiv where he then led the real agreement within 30 days from the date of conclusion estate practice. thereof, if inter alia: the agreement does not include elements specified Tomasz is recommended in the legal directory The by the Act or if the information included in the Legal 500, 2012 in the field of real estate, where he agreement is not consistent with the information is seen as a “calm, considered lawyer” who advises on prospectus; project finance investments and CEE projects, with a focus on Ukraine. Also, Chambers Europe 2012 the prospectus includes data which is inconsistent recommends him as a “talented practitioner”. with the factual background; Tomasz was admitted as a legal adviser in Warsaw in the ownership title to the real property is not 2005. He is a graduate of Warsaw University (2000) transferred to the purchaser upon the designation of and American Law Studies run by the Center for 120 days for transferring the said title. American Legal Studies at the Warsaw University with co-operation with the Florida University (1999). He Trust Account speaks Polish, English and Russian. Types The Act introduces two types of trust accounts: Closed residential trust account from which a one- off withdrawal of the deposited funds is made upon transfer of the ownership title to the purchaser, and

27 CENTRAL AND EASTERN EUROPE POLAND

Open residential trust account from which Within the meaning (iii) if the developer fails to deliver the prospectus withdrawal of deposited funds is made in accordance of the Act the together with appendices; with the schedule. developer is an (iv) if the data included in the prospectus or The developer is obligated to provide the purchaser entrepreneur appendices is not consistent with the factual with one of the following means of protection: background as of the date of conclusion of the who, as part of its developer’s agreement; Closed residential trust account; business activities, (v) if the prospectus does not include information Open residential trust account and an insurance undertakes to specified in the Appendix to the Act; guarantee; establish the (vi) in the event the ownership title is not transferred Open residential trust account and a bank ownership title to the purchaser within the time limit specified in the guarantee; or and transfer the developer’s agreement; Open residential trust account. said title to the with reference to the developer: purchaser under Agreement on Opening the Account (i) if the purchaser fails to accomplish payment the developer’s The aforementioned trust accounts are kept within the time limit specified in the developer’s under the account agreement concluded between agreement agreement; the developer and the bank. The bank under (ii) if the purchaser failed to arrive for accepting the the concluded agreement registers deposits and residential premises or a single-family house or to withdrawals of funds separately for each purchaser. sign the notarial deed transferring the ownership title to the purchaser); Only the bank is entitled to terminate the agreement, the termination of which can be done solely for the bank promptly returns the funds (in the nominal important reasons. value) which remain in the account and which are attributable to the purchaser. If the termination of The developer has the right to dispose of the the agreement is made for reasons other than those funds withdrawn from the open trust account only specified in Art. 29, the parties are obligated to for purposes related to the performance of the present a unanimous representation specifying the development project for which the account is kept. manner in which the funds are to be distributed. Withdrawal of Funds from the Account Enactment The funds from the open trust account are The Act came into force after six months from the withdrawn to the benefit of the developer upon date of the announcement thereof, namely on determination that a given stage of development is 29 April 2012. completed. The bank determines the completion based on the entry made by the site manager in the The provisions of the Act with reference to trust construction log, and the costs of the inspection are accounts apply to development projects in respect borne by the developer. If one of the parties rescinds of which the sale started upon the date of enactment the developer’s agreement pursuant to Art. 29 of the of the Act. If the sale commenced prior to the date Act (namely, with reference to the purchaser: of the said enactment, the developer includes in the information prospectus a relevant statement about (i) if the developer’s agreement does not include not applying the measures in the form of the elements as referred to in the Act; trust accounts. (ii) if the data included in the developer’s agreement is not consistent with the data included in the information prospectus or appendices; Monika Sitowicz, Counsel

28 HUNGARY

New Rules on Government Property and the Shopping Mall Ban

Two recent changes in the law have attracted special attention among investors as they are likely to have an impact on the real estate market of Hungary.

One of the changes is the enactment of a new act Two recent changes exercising decisive influence), with the exception of (Act CXCVI of 2011) stipulating the basic rules in public limited companies; the scope, acquisition, use, management and sale of in the law have government property, including the assets of both attracted special tax residence in an EU, EEA, OECD state or in the central and local government (the “Government attention among another state with which Hungary has concluded a double tax treaty; Property Act”). The other change is the introduction investors as they (by amending Act LXXVIII of 1997) of a ban on are likely to have an not a controlled foreign company (under the constructing shopping malls exceeding a certain size Act on Corporate Income Tax, a controlled foreign (the “Shopping Mall Ban”). impact on the real company is, inter alia, any foreign person or entity The Government Property Act estate market of having a domestic beneficial owner for the majority Hungary of the tax year or the source of the majority of its The Government Property Act defines the scope revenue in Hungary, with certain exceptions); of those assets that may constitute government property and classifies them into categories, on the all legal or business entities having directly or basis of the limitations on disposal that are applicable indirectly more than 25% ownership interest, to them. While the core assets listed in the strictest influence or voting rights in the business entity also category may not be alienated or encumbered at all, fulfil the above criteria. the business assets of the government may be the subject of transactions generally on market terms. The Government Property Act stipulates that only transparent organisations may enter into any In between these two categories there are others agreement regarding the use or acquisition of imposing various levels of limitations on disposals. government property or concession agreements. In The Government Property Act also determines respect of agreements on the use of government the basic rules on the establishment of companies property that already exist, the business entities party and acquisition of business shares in a company to such agreements must reveal their ownership by the central or local government. The utilisation structure in accordance with the above until 31 and the sale of government property exceeding a December 2012. certain value threshold are subject to tendering. The Government Property Act also lists the business Right of First Refusal of the Central Government activities that may be pursued exclusively either by The Government Property Act reserves a right the central or local government, or on the basis of a of first refusal for the central government in case concession agreement with these entities. The Government the real estate being sold is owned by a local Aside from the above, the Government Property Act Property Act government. This right of first refusal of the central stipulates three major changes: government is first ranking, superseding all other defines the scope pre-emptive rights on the real estate. The central Transparent Organisations of those assets that government may exercise this right within 30 days The Government Property Act defines transparent may constitute following the delivery of the agreement on the organisations, which may be certain public bodies and transfer of the real estate. The unsuccessful expiration entities or international organisations, or furthermore, government of this deadline results in the loss of this right. foreign or domestic business entities, with or without property and Exclusion of Arbitration legal personality, fulfilling the following criteria: classifies them The Government Property Act prescribes that ownership structure and beneficial owner is into categories, in civil law agreements concerning government recognisable (under the Act on the Prevention and on the basis of property located within the borders of Hungary: (i) Combating of Money Laundering and Terrorist the limitations on only the Hungarian language may be stipulated as Financing, the beneficial owner is, inter alia, any the prevailing language; (ii) only Hungarian law may individual having voting rights or an ownership disposal that are be stipulated as the governing law; and (iii) only an interest directly or indirectly exceeding 25% or applicable to them Hungarian court may be chosen as a forum. The

29 CENTRAL AND EASTERN EUROPE HUNGARY

Government Property Act excludes the stipulation The Shopping Mall Transitional Rules of the jurisdiction of arbitration courts for the above Under the transitional rules, the Shopping Mall Ban is agreements. Ban applies not only to shopping malls also applicable in building permit procedures pending The majority of the Government Property Act’s rules at the time of entry into force (1 January 2012), i.e., (including the above) entered into force on as such, but also such procedures where the application for building 1 January 2012. to premises used permit was delivered to the competent authority but the authority has not yet granted the permit or The Shopping Mall Ban for commercial in case of construction subject to notification, the According to the Shopping Mall Ban, the construction purposes on the notification has not yet been recorded as received. of commercial buildings with a floor area exceeding ground floors of It is difficult to interpret the legislators’ intention 300 sq. m. and the expansion of existing commercial office buildings, as regarding the new provisions which exclude the buildings over the floor area of 300 sq. m. is well as buildings and applicability of certain provisions on pending building prohibited. The Shopping Mall Ban applies not only to permit procedures. According to such excluded shopping malls as such, but also to premises used for parts of buildings provisions, in building permit procedures initiated on commercial purposes on the ground floors of office primarily intended the basis of theoretical building permits, the authority buildings, as well as buildings and parts of buildings for the purposes of would be bound to matters explicitly dealt with in the primarily intended for the purposes of supply and theoretical building permit, even if in the meantime storage, in which commercial activities are pursued. supply and storage, the relevant legal regulations and the mandatory Accordingly, the new rules may not only affect in which commercial regulatory provisions have changed. companies involved in the development of shopping malls but also the investors planning the development activities are pursued The intention of the provision by which the validity of mixed-function office and warehouse buildings. of the theoretical building permits being effective on 1 January 2012 is extended is also ambiguous since Exemption (i) applications for extension may only be filed in For buildings falling under the scope of the Shopping cases of valid theoretical building permits and (ii) relief Mall Ban, theoretical building permits, lot formation otherwise set forth by law shall only be considered permits and building permits may only be applied in cases of applications for building permits filed on for after the applicant has obtained an exemption the basis of valid theoretical building permits; thus granted by the minister responsible for commerce. the extension of validity until the expiration of the The investor shall apply for an exemption by the Shopping Mall Ban (31 December 2014) does not minister, who may grant the exemption in the course benefit parties in possession of theoretical building of an administrative procedure after having requested permits for the reason that their theoretical building the opinion of a committee consisting of the ministers permits will expire on the very day when they are responsible for commerce, environment and rural not yet entitled to apply for any building permit with development and after taking into consideration the the competent authority in the absence of the above criteria set forth by the Shopping Mall Ban. mentioned individual exemption. The government is authorised to adopt regulations The Shopping Mall Ban entered into force on on the composition and operation of the committee, 1 January 2012 and will remain in force until the criteria to be taken into consideration by the 31 December 2014. committee during the exemption procedure and the minister responsible for commerce, and the specific rules of the exemption procedure. Based Ádám Kaplonyi, Of Counsel on the above authorisation, Government Regulation Andras Horvath, Associate No. 367/2011 (XII. 30.) entered into force on 1 January 2012 regarding the operation of the Committee in connection with the establishment of certain commercial buildings and the content of the application for exemption. The Government Regulation sets forth the scope of the information that should be indicated in the application for exemption and that investors shall attach an impact study to the application for exemption for commercial buildings exceeding 5000 sq. m.

30 CZECH REPUBLIC

Real Estate Revolution in Czech Law is Knocking on the Door

Czech civil and commercial law will change in 2014 as the new Civil Code (the “NCC”) will enter into force on 1 January 2014. The NCC will replace many laws (e.g., Act No. 116/1990 Coll., on lease and sublease of non-residential premises, Act No. 513/1991 Coll., the Commercial Code, etc.), and amend many others.

The NCC will serve as general statutory law Czech civil and against any other owner who acquires it. If, however, regulating mutual relationships between individuals commercial law will the pre-emptive right is exercised by the owner of and entrepreneurs (private law). It should respect the the building (i.e., the land and the building built on parties’ free will more when agreeing on their mutual change in 2014 as the land will be owned by the same person/entity), rights and duties otherwise than as set forth under the new Civil Code the pre-emptive right ceases to exist. The acquirer the codified legal provisions. of the land will be then able to dispose of the land will enter into force in the future only, i.e., any subsequent disposition In addition, it returns to the classical principle of on 1 January 2014 with the land will also affect the building which will superficies solo cedit, applicable in most foreign be from that moment part of the land (due to the jurisdictions, that buildings and other structures statutory “merger” of the title to land and building). closely connected to the land are not separate things, This method is inspired by the transition to the but form part of the land (the “SSC Principle”). This SSC Principle which was also undertaken after the article aims to introduce its readers to the basics of reunification of Germany in 1990. the transition to the SSC Principle under the NCC. It should also introduce the new legal institution known Existing contractual pre-emption right encumbering as the “building right” (právo stavby), which is meant either land or a building should prevent the statutory to govern placement of structure on third-party lands merger of the land and the building. However, in in the future. case that land and a building are owned by different owners (i.e., the merger described above does The NCC sets forth that the land includes space not occur due to such situation) and any of such above and below its surface and any structures built real estate is also encumbered by the pre-emptive on such land, except temporary structures, are part of right, the situation is more complex. This is because the land. This includes also anything that is embedded the NCC does not resolve explicitly such conflict in the land or mounted on the walls. The Civil Code between contractually established pre-emptive rights as it stands now contains just the opposite principle and the statutory pre-emption rights mentioned under which a building does not form part of above which are established by operation of law. As the land. indicated above, in such case, the owner of the land and the owner of the building benefit from mutual As of the date of effectiveness of the NCC, if the statutory pre-emptive rights. However, the NCC owners of the land and the building located on the does not provide anything about priority between land are the same persons/entities, their ownership the beneficiary of the statutory and the existing titles, until that moment separate, will merge together contractual pre-emptive right. The general principles by operation of law. From that moment it will be of the NCC governing pre-emptive right suggest possible to dispose of the land only, and all such that in such a case, the pre-emptive right must be dispositions will also affect the building located on exercised collectively, but the explicit answer to such such land. However, as there are currently many questions is missing. cases in which the owners (of the land and of the building located on the land) are different, the Developers benefiting from an easement or NCC seeks to adjust such separate ownership titles another contractual title to use third-party land for gradually by establishing statutory pre-emption rights construction purposes do not have to be afraid of encumbering the land in favour of the building located losing their title due to the SSC Principle transition. on it and vice versa. In case such title was established prior the NCC’s legal effectiveness, the building built on such land will An example: an owner of land on which a building not become part of the land. However, it will be still owned by a different owner is located wants to encumbered by the same pre-emption right as the sell the land. The land then has to be offered first one described above. to the owner of the building. If the owner of the building does not exercise its pre-emptive right, the The developers may note that the transition to the pre-emptive right continues encumbering the land SSC Principle will not affect utility networks such as

31 CENTRAL AND EASTERN EUROPE CZECH REPUBLIC

water mains or sewerage. Neither will it affect most The New Civil or constructed the building on or under the buildings which are necessary for their operation and encumbered land. The main difference between the underground constructions which have their own Code returns to the building right and the easement is, however, that purpose (such as an underground garage built under classical principle the building right is not associated with the owner third-party land). On the other hand, the classification of superficies solo of other real estate or the builder as such. Thus the of such constructions retaining their own legal building right can be transferred and inherited as existence may be difficult due to the missing case-law, cedit, applicable well. The building right will be registered in the Real and the existing case-law will be largely of no use. in most foreign Estate Cadastre. It can be subject to a mortgage, and jurisdictions, that it will be possible to encumber the building right with The NCC will not restrict development projects on easements of third parties (e.g., for the placement of third-party land. The NCC contains for such purposes buildings and other utility networks on the building right). The building a building right allowing the builder (stavebník) to structures closely right will be established as a temporary right with a benefit from the building it constructs on someone maximum duration of 99 years. else’s land. Despite being only a right, the building connected to the right will be considered by the NCC as standard real land are not separate As was shown above, the NCC does not resolve estate in the legal sense, which can be subject to things, but form part explicitly certain issues related to the transition to the various legal transactions. The building as such will be SSC Principle. Such issues will need to be resolved attached to the building right, and the SSC Principle of the land by case-law which will have to be redefined, as the will not apply during the existence of the current case-law will be largely inapplicable due to building right. the revolutionary real estate change in Czech legal order. The essence of the building right is similar to an easement, i.e., it encumbers the land owned by a third party and entitles the builder to have located Václav Žalud, Associate

32 SLOVAKIA

New Rules of Bankruptcy and Restructuring Proceedings

In 2011 the Slovak parliament adopted an extensive amendment of Act No. 7/2005 Coll. on bankruptcy and restructuring (the “Amendment”). The Amendment will, except for some provisions, apply to all bankruptcy and restructuring proceedings commenced after 1 January 2012.

The main changes brought by the Amendment are Under the previous 3. Criminal liability of the creditor may rise if the the following: legislation a creditor fails to inform the bankruptcy trustee by a 1. Automatic joint and several liability of directors statutory body written notice about any circumstance that may cause and other statutory bodies to pay the sum of the termination of such creditor’s participation in the registered capital of the company into the bankruptcy was liable to the bankruptcy proceeding. assets, unless they adopt timely legal measures. extent of the 4. A debtor does not have to file for bankruptcy Although at first glance it appears so, such measure is damage caused by due to its payment incapacity (platobná neschopnost’), not necessarily only the actual filing for bankruptcy. its “omission” to i.e. because it has more than one creditor and it Under the previous legislation a statutory body was file for bankruptcy. defaults with paying its debts more than 30 days. liable to the extent of the damage caused by its From 1 January 2013, the debtor will be obliged to “omission” to file for bankruptcy. Now, the liability of Now, the liability file for bankruptcy only if it is insolvent (predlžený), a statutory body is objective, which means that the of a statutory body which means that it has more than one creditor and statutory is obliged to pay, regardless of the damage is objective, which the value of its assets is lower than the amount of its caused to the creditors (i.e. even if the breach of its debts. Under the Amendment, however, the value duties has no effect on the position of the creditors). means that the of the assets will be considered also in the view of The liability is, however, limited to the amount statutory is obliged prospective future business development, and the corresponding to double the minimum statutory to pay, regardless of debts will not include debts towards related parties. registered capital of the company (i.e. 10,000 if € 5. Creditors who fail to file an application in debtor is a limited liability company and 50,000 if the damage caused € the bankruptcy proceedings on time will not be debtor is a joint stock company). to the creditors precluded from participation in the proceedings. As from 1 January 2013, directors who no longer However, creditors who fail to file their application serve as a statutory body also will be liable if, during within the statutory 45 days period will lose their the four years preceding the bankruptcy proceedings, voting rights and their claims will be treated as they failed to apply for bankruptcy. unsecured claims regardless of whether or not they are secured. If two or more directors have to file for bankruptcy proceedings and the reluctance of the other directors 6. The period for contesting (odporovat’) the legal prevents them from filing for the bankruptcy, the actions of the debtor is prolonged from 6 months to director willing to file for bankruptcy shall file a As from 1 January 1 year. In addition, if the bankruptcy proceeding was relevant notice into the collection of deeds. preceded by a restructuring proceeding, the 1-year 2013, directors who period will be counted from the commencement of 2. Rights of shareholders and related creditors no longer serve as the restructuring proceeding. (including creditors that were related in the past) will be limited in the bankruptcy and restructuring a statutory body proceedings since: also will be liable Katarína Pecnová, Counsel they will lose their voting rights in creditor if, during the four Matej Košalko, Junior Associate committees, and years preceding their claims will be treated as subordinated claims, the bankruptcy regardless of whether or not they are secured. proceedings, they A debtor must submit to a bankruptcy trustee a list of failed to apply for these related creditors. bankruptcy

33 CENTRAL AND EASTERN EUROPE

Slovakia Adopts New Law on Environmental Burdens

As of 1 January 2012, a new Act No. 409/2011 Coll., on Certain Measures in the Field of Environmental Burdens, entered into force in Slovakia after almost 10 years of preparatory work.

According to information from the Ministry of According to the The Registry is available on the internet portal of the the Environment of the Slovak Republic (further geological law, Slovak Environmental Agency. After identification “Ministry”), the adoption of this Act was one of the of the environmental burden, the Ministry shall also conditions to be able to receive financial support environmental notify the respective Cadastral Administration for the from the EU funds to deal with the old burden is generally purpose of registering such environmental burden in environmental burdens in Slovakia. the Real Estate Cadastre. Following this, the owner defined as pollution or user of the burdened property and the respective General caused by human municipality shall be notified about the identified The Act governs the environmental liability for old activities which environmental burden. environmental burdens that occurred prior to 1 constitutes Liable Entity September 2007. The Act does not define the term major risk for “environmental burden” but refers to the existing Generally, in line with the principle “the polluting party pays”, a person liable for an environmental definition used by the geological law. According to human health or burden shall be the polluter, i.e. anyone who caused the geological law, environmental burden is generally rock conditions, the environmental burden by its activities. The defined as pollution caused by human activities groundwater polluter shall be obliged, inter alia, to prepare a plan which constitutes major risk for human health or and soil for the clean-up of the environmental burdens and rock conditions, groundwater and soil. The Act subsequently to carry out such plan and bear all costs regulates: (i) rights and obligations of the entities related thereto. and individuals in connection with the identification of the environmental burdens, (ii) determination If a polluter is not known, is deceased, or has ceased of a so called “obliged person” with respect to to exist, the Regional Environmental Authority the environmental burdens, (iii) obligations of the (further “Authority”) shall determine the so-called polluter, obliged person and respective ministry, (iv) powers of the respective public authorities and (v) liability for the breach of the obligations stipulated by the Act. Identification of Environmental Burdens Anyone who has information on the existence of environmental burden in a certain locality can notify the Ministry or the Regional Environmental Authority. The Ministry shall examine and verify the existence of environmental burden in the given locality. If the environmental burden is identified, the Ministry shall register its existence in the Registry of Environmental Burdens (further “Registry”). The Registry forms part of the information system of environmental burdens; it is divided into 3 sections. Section A includes information on probable environmental burdens, i.e. such burdens which have not yet been identified officially but it is reasonably expected that they exist in a certain locality. Section B includes information on identified environmental burdens, and section C includes information on environmental burdens that have been removed.

34 SLOVAKIA

“obliged person” who shall bear the obligations Despite the many Conclusion of the polluter stipulated by the Act (including the years in preparation, Despite the many years in preparation, the Act obligation to perform a clean-up of the environmental has many imperfections. For example, the Act burden). The obliged person shall be determined by the Act has many does not regulate the procedure to determine a the respective Authority in specific administrative imperfections, e.g., polluter nor does it clearly stipulate the conditions proceedings. In the first instance, the legal successor it does not regulate for liberation from the liability for environmental of the polluter (save for certain exceptions provided burdens. Moreover, it appears that the Authorities by the Act) shall be determined to be the obliged the procedure who decide on the determination of the obliged person. If it is not possible to determine a legal to determine a persons do not have the necessary qualifications. successor of the polluter as the obliged person, polluter nor does The Ministry plans to adopt guidelines in order to the Authority shall determine the owner of the facilitate the implementation of the Act in practice, environmentally burdened property as the it clearly stipulate but nevertheless, it appears that the Act will have to obliged person. the conditions for be changed in the near future in order to remove its The Act further stipulates exceptions when the liberation from shortcomings. owner of a property cannot be determined to be the liability for the obliged person. Such exceptions also include the situation when the owner – after acquiring the environmental burdened property – did not continue to perform burdens Petra Novotná, Senior Associate the polluting activity and at the time of acquiring the property could not know about the existence of the environmental burden. Other exceptions when the owner will not be liable is if it continues to carry out the activity which caused the environmental burden if, after the acquisition of the property, such activity no longer causes pollution of rock conditions, groundwater, soil or human health. It must be noted that the burden of proof is on the owner who has to prove to the Authority that conditions for liberation stipulated by the Act were fulfilled. If the obliged person cannot be determined by the above-mentioned procedure, the Government shall designate a respective ministry to undertake the obligations of the polluter (including the clean-up). Restriction on Transfer of Burdened Property The Act further provides that if the polluter or the obliged person is also the owner of the environmentally burdened property, it may transfer such property to a third party only after it ensures that a geological survey of the environment with respect to such property is carried out. The report on such geological survey must be attached to the respective transfer agreement and any such transfer must be notified in writing to the Authority.

35 CENTRAL AND EASTERN EUROPE

Real Estate Transactions under the Scrutiny of Romania’s New Civil Code

1 October 2011 was a milestone in the Romanian legal system, as it was the date the new Civil Code was enacted – almost 150 years after implementation of the old Civil Code. The Code is, as expected, a challenge; its assimilation, interpretation, and implementation represent a complex and intense process for legal professionals working in this area.

Best practice, along with doctrine and jurisprudence, 1 October 2011 a notary public shall no longer be sufficient for the will produce a wide-ranging legal framework to transfer of the right in question, and the right shall which subsequent legislation and other potential was a milestone in exist solely to the extent that it has been registered amendments will apply. the Romanian legal and described in the registration with the Land Book. One of the numerous provisions upon the New Civil system, as it was the With regard to the seller’s guarantee against eviction Code coming into force, which raises questions, is that date the new Civil (the loss under certain conditions of the acquired of new regulations for the sale and purchase of real Code was enacted ownership right), this should apply solely if the claims properties concluded after 1 October 2011. of the third party are based on a right which occurred – almost 150 years prior to the selling date and were not notified to the The New Civil Code also stipulates provisions which after implementation purchaser, until that date. Further, it is provided that shall apply to those agreements signed before 1 of the old Civil Code the parties may agree upon the extension or limitation October 2011 (such as the provisions concerning of such a guarantee obligation, the parties in question payment notification to the debtor). also being able to exempt the seller from any Special attention should be given during the period guarantee against eviction. Where the seller expressly of negotiations, as under the new rules, negotiations assumes the risk of the occurrence of such eviction, made in bad faith can entail payment of damages the seller shall enjoy the possibility of not repaying to the other party. Moreover, the court may take the price. However, even if it is agreed that the seller into consideration, in determining the value of owes no guarantee, it shall be held responsible for an the damages, the costs of the other party during eviction caused after the sale through its own deeds the period of the negotiations as well as loss of or for an eviction originating from causes kept secret opportunity costs, such as the waiving of other from the purchaser and known thereby upon selling. potential offers. In addition, the parties should be very This provision of the New Civil Code seems to be careful when drafting offers or signing any memoranda another Pandora’s Box in Romanian legislation. It is of understanding or letters of intent, because under hard to believe that the presence of such a clause certain conditions, such agreements can be recognised would be a cause of great enthusiasm to sophisticated as binding contracts. purchasers or financing banks involved in the transaction. With respect to the new rules, the New Civil In addition, the New Civil Code provides that, if Code specifies that if there is a promise to sell and goods are usually sold by the seller, it is presumed that the conclusion of the promised sale agreement is the parties have contemplated the price typically used unreasonably refused, the other party may request, by the seller. Where the parties do not otherwise within six months from the date the agreement agree in the contract, sale of goods whose price is should have been signed, the issuance of a court determined on regulated markets is deemed to be decision to replace that agreement. concluded at the average price applicable on the nearest market to where the contract is concluded. With regard to the transfer of the ownership right, there are new provisions concerning the constitutive Special attention Just by going through the aforementioned provisions effect of registrations with the Land Book (i.e., the should be given of the New Civil Code, it is apparent that a three right arises through the simple act of registration); to five year period of uncertainty can be expected however, the new provisions concerning the during the period concerning the progress of judicial practice, and that constitutive effect shall apply solely in the future, upon of negotiations, as the analysis of the ownership titles will be much more completion of the cadastral works. under the new rules, complex (particularly because of the overlapping of the two civil codes); therefore special attention should In conclusion, title to the real estate shall be negotiations made in be given when starting negotiations or signing any transferred and/or constituted in the future, but only bad faith can entail document. upon the completion of the cadastral works, solely through registration with the Land Book. It means payment of damages Laura Tiuca, Managing Counsel, that, as of such date, execution of the deed before to the other party Co-Head of Real Estate Romania

36 ROMANIA

Special Patrimony in the New Romanian Civil Code

The New Civil Code provides that any natural or legal person can be the holder of a patrimony, which includes all rights and debts measureable in money and belonging to the holder. Patrimony is not defined as consisting in assets solely because it represents an intellectual authenticity.

The New Civil Code further stipulates that patrimony Patrimony is life and to have been infiltrated at the level of may be the subject of a division or specialised estate the authorities. (“patrimoniu de afectatiune”) provided by the not defined as related law. consisting in assets In addition to those set forth above, the New Civil solely because Code provides that, in case of division or specialised With regard to the specialised estates, these are, for estate, the transfer of the rights and obligations from example, the fiduciary patrimony divisions and those it represents one patrimony division to another, within the same related to persons practising an authorised profession an intellectual patrimony, shall be performed based on observing (for example, certified physical persons, architects, authenticity the conditions provided by law and without any doctors, lawyers, etc.) prejudice to creditors’ rights over each patrimony division (for example, there should not be any fraud In the chapter concerning in rem guarantees, the – which must be proved – and the transfer should New Civil Code provides that assets representing the not be subsequent to the fraudulent deed). One subject of a patrimony division practicing a profession should note that if the intra-patrimony transfer fails authorised by law may be enforced solely by the to correspond to the specialised estate of the new creditors whose receivables have arisen in connection patrimony division, such issue could constitute a with the profession in question. In other words, fraud indicator. such creditors (for example, tax authorities) may not enforce the other assets of such debtor (i.e., the Another example (a little bit exaggerated, for the assets not registered as the property of the certified purpose of understanding the principle) would be the physical person). transfer of the ownership right over a professional kitchen to the patrimony division of a lawyer who Under such conditions, the question is how renders solely consultancy services, with the transfer the individual professional patrimony is formally occurring a few days after the physical person who constituted; because Romanian legislation is, deals with the trading of such professional kitchens essentially, a formalistic one. We find an attempted having received an executory title for failing to pay answer in the very same New Civil Code, which the VAT. provides that the increase, decrease, or constitution of the patrimony division meant to an individual In all these cases, the New Civil Code expressly stipulates that such transfer of rights and obligations practicing an authorised profession is determined from a patrimony division to another does not through an act concluded by the holder thereof, constitute alienation. (In other words, it should not based on observing the form and publicity conditions be taxed.) provided by law. It is obvious that It is obvious that the aforementioned provisions It is not very clear what such provision would have been promoted because most drafters of the mean in practice – does it mean this act is just a the aforementioned New Civil Code are members of professional bodies simple unilateral act solely signed by the holder provisions have been regulated by their own codes and pursuing their own thereof without any other formality required? (E.g. promoted because interests. It is expected that the tax authorities are notarisation) There are already voices according to going to come with their own interpretation of such which such act should be notarised. However, there most drafters of the New Civil Code provisions and attempt to promulgate the amending is no solid motivation for such opinion, as long as the laws. In other words, an uncertain period concerning New Civil Code (which is, essentially, a “notarial” are members of the practice development shall also follow. code) does not expressly stipulate notarisation – as it does for other acts. professional bodies regulated by their However, in the past, there have been circumstances own codes and under which the practice “hit hard” the legislation and, unfortunately, this excessively precautious spirit pursuing their own Laura Tiuca, Managing Counsel, seems to prevail in many fields of our day-to-day interests Co-Head of Real Estate Romania

37 SALANS: NEWS

Salans wins Europaproperty SEE Real Estate Law Firm of the Year award

Salans’ achievements and expertise in the real estate sector were recognised by Europaproperty at the annual SEE Real Estate Awards Gala on 17 May 2012. Salans won the 2011 Law Firm of The Year Award for the third time, following on previous wins in 2009 and 2006. In addition, Laura Tiuca, Co-Head of the Bucharest Real Estate Group and Head of the Bucharest Hospitality Practice, was a finalist for the Professional of the Year distinction. The team is highly experienced in matters involving crisis management issues, asset management aspects, and real estate related disputes, including both litigation and arbitration, and is headed by Laura Tiuca and Bogdan Papandopol, two reputed real estate lawyers. Despite a continued weak market, Salans Bucharest has maintained its prominent Laura Tiuca added: “I am very proud of our team, position, having been involved in most of 2011’s whose hard work and dedication made this award few major real estate transactions. This award possible. On a personal note I am honoured to be thus affirmed the firm’s Romanian real estate among the finalists for Professional of the Year for team’s status as among the most professional, the SEE region. We all look forward to continuing innovative and deal oriented on the market. to serve our real estate clients in Romania and throughout the region.” “It is gratifying that the SEE Europaproperty jury has once again recognised our team’s strength and Europaproperty provides comprehensive and contribution to the Romanian real estate market. up-to-date news, information and analysis on I would also like to thank all our clients who commercial real estate markets and related nominated the firm and acknowledged in this way businesses, covering the whole of Central and our leading position among Romanian real estate Eastern Europe, Russia and the CIS. In addition practices” said Christopher D. Berlew, Partner to its publications, Europaproperty.com in Bucharest and Prague and Head of Salans’ organises conferences on real estate matters Global Real Estate M&A and Private Equity and a range of other events at locations both sector group. inside and outside the CEE region.

Salans top ranked by Chambers & Partners 2012 Band 1 (Czech Republic, Hungary, and Poland); five We are extremely pleased to announce that 21 Salans at Band 2 (France, Romania, Russia, Slovakia, and the real estate lawyers are included in the 2012 edition of Ukraine); and our German real estate practice is a new Chambers & Partners Europe Guide. entry this year.

Of those 21 individually ranked lawyers, we have two Also, the 2012 edition of Chambers & Partners Global Star Individuals (Evan Z. Lazar, Co-Chairman of the Guide recognised Eric Rosedale, Co-Chairman of the Global Real Estate Group and Paweł De˛bowski, Head Global Real Estate Group as a UK-based Foreign Expert of Central Europe Real Estate), one Senior Statesmen for Corporate and M&A. (Henry Lazarski, France), and four Band 1 rankings (Olga Humlová, Czech Republic; Judit Ko˝vári, Hungary; Piotr Chambers has published the leading directories of Szafarz, Warsaw; and Jesús Varela, Spain). the legal profession for more than twenty years. Their reputation is based on the independence and objectivity In addition to our individually ranked lawyers, we also of their research. Their directories are known to be the have nine of our European jurisdictions ranked: three at most accurate and the most reliable.

38 SALANS: NEWS

Salans wins CEE Quality Award for the 2nd year running

We are pleased to announce that for the second year running, our Global Real Estate Group has won the Quality Award for CEE Legal & Consulting Firm of the Year 2011. Paweł De˛bowski, Head of Central Europe Real Estate, collected the award on behalf of Salans.

Our competitors this year were Allen & Overy, Clifford Chance, CMS Cameron McKenna, Hogan Lovells, Linklaters, Norton Rose and White & Case.

The CEE Quality Awards is the annual real estate sector’s flagship event and main annual industry awards organised for the 9th time by CEE Insight Forum in association with the Financial Times. The awards were nominated by the sector and judged by a jury of senior representatives of real estate market leading companies active across Central & Eastern Europe and Southeast Europe. They cover the following CEE markets: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Slovakia, Poland and Ukraine.

Salans voted Law Salans celebrates 15 years Firm of the Year in Romania at CEE Retail Real This year Salans celebrates 15 years since it entered the Romanian market and began advising on projects Estate Awards that have shaped the local business landscape.

We are pleased to announce “In a young and dynamic economy like ours 15 years that for the second year means a lot because we had to adapt to a constantly running, GREG has won another changing market,” said Anda Todor, the Bucharest office prestigious regional award – we Managing Partner. “We would especially like to thank our were voted Law Firm of the Year at the 4th Annual clients who have entrusted us with their projects all these Europa Property CEE Retail Real Estate Awards, held years, as well as our team and everyone else who has lent in February 2012 in Warsaw. valuable support.”

Countries covered in the awards included Poland, Salans entered the market in 1997 following the Firm’s Czech Republic, Hungary, Slovakia, Ukraine, Austria, recognition of Romania’s growing potential. Our first Lithuania, Latvia and Estonia. Among our competitors major clients included companies such as Gillette, were Clifford Chance, CMS Cameron McKenna, Allen & Telesystem International Wireless (parent company Overy and Lovells. The Award was presented to Piotr of Connex), SABMiller, HeidelbergCement and Bank Szafarz, Head of the Warsaw Real Estate Team. Austria Creditanstalt. During the Firm’s first 15 years in We are also pleased to say that Eric Rosedale was Romania, Salans advised on high profile projects such shortlisted for “Overall Professional of the Year” award. as A&D Pharma’s listing on the Main Market of the London Stock Exchange, the sale of a majority stake The CEE Retail Real Estate Awards represent the most in Rompetrol to KazmunaiGas, the sale of Connex to outstanding and accomplished real estate companies, Vodafone, the sale of the first and largest wind farm projects, retailers and individuals throughout the region, project by Continental Wind Partners to CEZ, and and also acknowledge winners’ contributions to the the development of Renault’s largest R&D centre development of the retail commercial real estate market outside France. in the CEE for 2011. Salans attorneys offer a full range of services in M&A, real estate, energy, infrastructure, banking & finance, litigation and international arbitration, competition, capital markets, restructuring and insolvency, tax and tax disputes.

39 SALANS: NEWS

Salans Global Salans receives top Real Estate rankings by Group The Legal 500, 2012 The 2012 edition of The Legal 500 NEW MEMBERS global directory ranks 9 Salans real estate practices and mentions 19 Bucharest individual attorneys in the real estate and construction Irina Florian (Associate) sectors across Europe. Of these 9, five practices Salans is Top Law Firm received the top, No. 1 ranking, i.e. the Czech in Poland, Hungary and Istanbul Republic, Hungary, Poland, Romania and Russia. Slovakia, says Construction & Barlas Balcioglu (Partner) Published for over twenty years, The Legal 500 Series Yasemin Zongur (Associate) provides the most comprehensive worldwide Investment Journal coverage currently available on legal services providers, Gozde Manav Kılıcbeyli in over 100 countries. Used by commercial and private Salans scooped the 2011 Law Firm of the Year titles (Associate) clients, corporate counsel, CEOs, CFOs and professional at the CIJ Journal Awards in Poland, Hungary and advisers – as well as by other referrers of work both Ferit Esen (Associate) Slovakia. For Poland and Hungary this recognition nationally and internationally – the series is widely came for the second year in a row. Arzu Inoglu (Associate) chosen for its definitive judgement of law firm capabilities. Salans saw off fellow shortlisted international and Özgür Nemutlu (Associate) domestic law firms to claim the prize, which was awarded “in recognition of outstanding service provided in London 2011” in each of these three countries. Richard Benson (Associate) The host of the event, Central & Eastern European Construction & Investment Journal, is an English language Sarah Rochelle (Associate) Eurobuild hands Salans magazine for the property development & real estate Madrid industry in Central & Eastern Europe. Warsaw top honours Javier Saínz García We are delighted to announce that for the second (Associate) year running our Warsaw real estate practice has won the Law Firm of the Year award of Eurobuild CEE Paris magazine. Head of the team, Piotr Szafarz collected Myriam Mejdoubi the award on behalf of Salans. (Associate) The Eurobuild awards recognise and reward the success Marianne Syed (Associate) and dynamism to be found in the Polish real estate market. The jury takes into account the company’s Warsaw activity, presence and reputation on the market, its lease Salans awarded 2012 Banking and sales deal expertise, and the number and profile of Anna Kopytowska clients represented. and Construction Law Firm of (Associate) the Year in Russia Jakub Nawrocki (Associate) Salans has been announced the winner of the Piotr Niczko (Associate) Peter Figdor selected for New Construction Law firm of the Year in Russia and Banking Law firm of the Year in Russia and awards by Alicja Puławska (Associate) York Super Lawyers of 2012 DealMakers Monthly Magazine. New York Partner Peter Figdor was once again Piotr Staniszewski selected for the New York Super Lawyers listing, real The DealMakers Law Awards 2012 recognise a select (Senior Associate) estate section. number of leading professional firms across the globe for their individual areas of specialisation within Super Lawyers is a rating service of outstanding lawyers their region. from more than 70 practice areas who have attained a high-degree of peer recognition and professional This year’s winners were chosen by electronic voting, achievement. The selection process is multi-phased and with 81,500 electronic forms being issued. The poll includes independent research, peer nominations and represents who the readership believe are the leading peer evaluations. professional firms for that particular area of specialization and geographical region. The Super Lawyers selection process involves three basic steps: creation of the candidate pool, evaluation The vote is externally assessed against experience of candidates by the research department and peer and knowledge of the industry, and provides a evaluation by practice area. comprehensive list of those firms that are truly “Top Tier”. The award in essence sets the benchmark for all Super Lawyers magazine is published in all 50 states of the others to follow. United States and reaches more than 13 million readers.

40 SALANS: NEWS

Salans Prague wins Development and Real Paweł De˛bowski named Estate award again Lawyer of the Decade by a premier Polish daily Salans’ Prague office has won Salans Warsaw office was ranked No.1 in three key categories of the premier ranking of the Law Firm of the Year law firms in Poland conducted by Rzeczpospolita, a leading Polish business & legal daily: in Development and Real headline number of lawyers, number of advocates and legal advisers, as well as revenue Estate award for the third for 2011. Rzeczpospolita in its 10th jubilee ranking gave special praise to Salans for its time in a row. Organised achievements over the decade: by e.pravo, a major Czech publisher, the “We believe Salans deserves the title of most dynamic law firm of the last ten years, as it has prestigious award is based experienced exponential growth during that time. This is borne out in terms of both its size and on an assessment given by excellent turnover last year as well as its two awards of best law firm in the categories of real other law firms. estate and energy law.” The office was also shortlisted for the first time as a As part of the ranking, Salans and individual lawyers were recommended by other law firms “recommended firm” in the Restructuring & Insolvency in a number of practice areas. Salans, real estate team and individually Paweł De˛bowski, and Banking & Finance categories. Head of Central Europe Real Estate, are recommended as leaders on the Polish market. Rzeczpospolita’s recognition comes to Paweł for the 8th time and thus he was named the The award was presented at a gala dinner at the Lawyer of the Decade. InterContinental Hotel and collected by Head of Real Estate, Olga Humlová, and real estate Counsel Michal Piotr Szafarz, Head of Real Estate Team in Poland, is also recommended. Hink.

Ladislav Štorek, Prague Office Managing Partner, said: “I am delighted our real estate team has won this prestigious award again. It is a true testament to their hard work, expertise and capability, and I am confident it will support our continuing growth in this market for years Salans awarded Financial Law to come. I am also happy to see the recognition of our insolvency and banking teams as a reflection of our growth Firm of the Year 2012 in Ukraine in these practice areas.” Salans has been named Financial Law Firm of the Year 2012 in Ukraine in Finance Monthly’s Global Awards.

Extensive research involving clients and peers was conducted for over six months by Finance Monthly’s research team. The end result was an awards publication which celebrates the success, innovation and quality of financial and legal firms across the globe.

Finance Monthly is a global publication providing news, analysis and features on all the latest headlines within the financial sector. It examines the key issues affecting the corporate, financial and legal community globally, and covers the major regions such as the US, Europe and Asia. Salans ranked No. 2 among 79 law firms in Russia by the Best Lawyers Salans wins four Lawyer Monthly On 23 April 2012, Vedomosti, a leading Russian daily, published the Best Lawyers Guide listings for Russia. Legal Awards 2011 titles We are pleased to say that 20 Salans Russian practice Salans has won four awards at the annual Lawyer Monthly Legal Awards 2011, organised lawyers have been listed, ranking Salans No. 2 among by the Lawyer Monthly magazine. The firm was recognised as the Law Firm of the Year 79 law firms in Russia. in Russia, the Banking and Finance Law Firm of the Year in Poland and Ukraine, as well as the Competition Law Firm of the Year in Germany. From the Global Real Estate Group in Russia, Anna McDonald, Florian Schneider and Roman Kozlov, three The awards recognise the achievements of those law firms and individuals who have Moscow partners, as well as two St. Petersburg partners, engaged and responded most successfully to the demands of the global economic turmoil. Karina Chichkanova and Artem Zhavoronkov, were They also serve as a legal guide for the magazine’s corporate readership. listed in the guide.

Dariusz Oleszczuk, Global Managing Partner, said: “I am delighted four of our offices have won The Best Lawyers is one of the most respected and these prestigious awards by Lawyer Monthly magazine. Congratulations to them all for such a definitive peer-reviewed guides to legal excellence in great achievement.” the U.S. and increasingly around the world.

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Salans in Spain

Salans has marked its presence in Madrid and Barcelona since 2007 following its merger with two established Spanish law firms with over 20 years of experience. Our Spanish team includes 6 partners, 2 Of Counsels and 25 associates who provide a full range of legal services to domestic and international clients interested in doing business in Spain.

In common with Salans as a whole, our Spanish Clients have Real Estate practice combines detailed knowledge of local law resoundingly praised The real estate teams in Madrid and Barcelona with the Firm’s international experience in similar comprise seven dedicated attorneys who advise on a specialisations. Our lawyers in Madrid and Barcelona Jesús Varela as full range of real estate transactions in Spain. work closely with colleagues from our other offices an “exceptional on a client-by-client basis to deliver tailored legal Our clients include leading domestic and cross- services that draw on the Firm’s collective expertise. lawyer”. They praise border institutional investors, international financial his “super-deep institutions (including banks and investment funds), Areas of Specialisation knowledge of the private equity and pension funds and developers, Salans in Spain is a full-service commercial law firm whom we advise in all types of real estate offering quality advice in all areas of the law. We Spanish real estate transactions including investment and divestment, specialise in: sector”, his excellent acquisitions and sales, development, construction, real estate litigation, tax planning, leasing and financing Corporate / M&A commercial awareness and related to offices, retail, residential buildings, business Energy parks, hotels, tourist complexes and leisure centres in negotiation skills, Spain and abroad. Regulatory & Public Law and incredible work Our real estate practice comprises a multidisciplinary Real Estate ethic. Peers also team drawn from our tax, corporate, commercial, finance and litigation departments. Tax recognise him as ‘a superb real estate Our strength derives from our ability to combine Employment finance lawyer who real estate asset knowledge with corporate and Arbitration, Litigation and financial expertise, bringing a sophisticated level of looks for a win-win understanding to commercial transactions. Alternative Dispute Resolution solution and always Banking & Finance has a dynamic Reorganisation, Restructuring & Insolvency approach.’ Chambers Europe 2012

Aleksandar Todorovic / Shutterstock.com

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Spanish Real Estate Investment Market: A World of Contrast

Not that long ago the flow of international investment in Spain was phenomenal. International Funds of all profiles were struggling to get into the market and consolidate their market share in a seemingly always booming market. Banks and Saving Banks were strongly competing to finance deals, and the result was that the financing conditions subsequent to that strong competition made all investments highly profitable at very low yields.

Agents were always short in their optimistic What is Left Four Years After the Party? Not that long predictions. At the zenith of the party, some Spanish The whole industry has collapsed, and the banks real estate developers even dared to jump into ago the flow have become the main real estate owners. A London, New York or Paris or even acquire – with of international significant part of their portfolios is still liquid and the relative success – control stakes in the big petroleum investment in Spain loss attached is at reasonable levels, but for certain companies or the main banks in the country. This entities, the situation has become dramatic as they sequence of excesses, although initially started in the was phenomenal made a strong bet on residential land plots or even residential sector, quickly expanded to all areas worse, they financed rustic plots at high prices in the of activity. hope of turning them into zoned land. Obviously today the value of those plots is directly related to

Main Investment Deals in the Offices and Retail Markets

Area a/g Investment Market Address Location Vendor Purchaser Yield (m2) Volume (€) Retail Splau! Barcelona Acciona Unibail-Rodamco around 6,5% (net) 55.100 185.000.000

Retail El Rosal Ponferrada 50.000 Sonae Sierra Doughty Hanson 8,00% 120.000.000 Retail Plaza Éboli Pinto 31.000 Offices Granada, 1 Sevilla 2.898 Offices Cantón Pequeño, 18-21 La Coruña 8.201 BBVA Pontegadea 6,25% 75.000.000 Offices García Barbón, 2 Vigo 2.503 Offices Paseo del Bome Palma de Mallorca NA Retail APN Portfolio several locations APN Värde 10% net (estimated) 81.618 70.000.000 Offices FCC Portfolio (HQ in Madrid & Barcelona) Madrid y Barcelona FCC Inversiones Subel 7,25% (estimated) NA 60.000.000 Offices Tripark (buildings B&C) Las Rozas Hines Rilafe 7,25%-7,50% (estimated) 22,000 50.000.000 Retail Parque Abadia Toledo Murias Rockspring 7,5% (net) 55.500 50.000.000 Retail 22 supermarkets Eroski several locations Eroski Rockspring 7,50% 29.000 45.000.000 Offices Titán, 4-6 (ADIF HQ) Madrid Pramerica Invesco 6,93% 10.308 39.000.000 Offices Avda. Burgos, 18 (Repsol HQ) Madrid Aliseda (Banco Polular) Cerquia 5,41% 8.000 38.000.000 Blanco Villegas Offices José Echegaray, 6B Las Rozas Pramerica 7,45% 12.180 31.000.000 widow Offices Hewlett Packard HQ Madrid Orion Capital Management Allegra 7,85% 11,032 29.300.000 Offices Tripark (building A - DIA HQ) La Rozas Hines REEFF 6,80% 10.500 28.000.000 Offices Paseo de Recoletos, 17 Madrid Inmouno MDR 3,92% (net) 3.877 25.500.000 Mutua de la Offices Agustin de Foxa, 31 (CAM) Madrid Colonial 6,75% 7.600 25.000.000 Abogacía Offices Serrano, 240 Madrid Grupo Foxá CPI 7,50% 8.000 22.000.000 Caja de Ahorros y Monte de Retail 9 high street units San Sebastián Redevco NA 2.500 22.000.000 Piedad de Guipuzkoa y San Offices Building in Plaza del Ayuntamiento Valencia Generali Grupo Zriser 4,72% 6.079 21.000.000 Offices Emisora 20 - ONO HQ Pozuelo ONO Inversiones Subel 6% (estimated) 7.460 20.142.000 Offices BBVA Valladolid REEFF Private Investor 5,66% 4.346 18.000.000 Offices Diputación, 260 Barcelona Pontegadea IVG 4,70% 3.706 17.500.000 Offices Fernández y González, 2 Sevilla Allianz Seguros Private Investor 4,90% 6.700 17.000.000 Offices Volkswagen HQ in Mas Blau Barcelona GE Real Estate Private Investor NA 7.539 16.000.000

Source: Savills Research

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their ability to produce oranges in the best case. The CBD Prime Rents – Historic Series and Forecasts most aggressive financial institutions have started an active process to clean the balance sheets either by means of retail sales of real estate through their own networks or by means of big portfolio sales to the so-called Op Funds. In any case they are actively managing their balance sheets, trying to lower their needs for liquidity and assuming the losses. Others are in a total stagnation situation as they cannot accept the losses without collapsing. In most of these cases the situation gets worse as time goes by, as the market keeps toughening and the search for available resources intensifies. All this financial mess has put the traditional real estate investment market in a completely new situation as it has dragged most of the available liquidity, and subsequently there is a dramatic shortage of financing available. In addition to that, most of the banks that remain open have toughened their financing criteria and so the focus is now not Source: Savills Research only on what they are going to finance but also on whom they are going to finance. This means that it is not just a matter of financing the correct product in terms of liquidity, LTV, quality of the tenant or strength of the lease, but also on the reliability and Gross Take-Up in the Madrid Office Market – Historic Series and Forecasts collateral strength of the borrower. This situation has reduced the availability of buyers to two main groups, basically strong family offices/ wealthy investors that are either cash buyers or that have a financial solvency that enables the financing at reasonable levels and some international cash buyers who are focused on Class A assets with strong income streams. It is worth noting that financing is very expensive even if you are very solvent as the minimum spread charged ranges between 250 and 300 b.p., pushing prices down. There is a third group of buyers who are actively looking at the Spanish market: the Op Funds. In this case, and given that they never collateralise their investment, the cost levels (400 b.p.) and low leverage ratios (55% max) have forced a dramatic upwards yield shift in their target products. With their current return requirements, there is no product available in the market and subsequently they have to return to Source: Savills Research transactions where there is vendors´ finance available at softer rates. Under These Circumstances, What is the Most Likely Scenario for 2012? We cannot anticipate how the sector will evolve in the following months, but we have some hints about We cannot it. First of all there will not be a sudden rise in the anticipate how the activity levels, basically because the fundamentals sector will evolve in underneath the market are expected to remain in a stand still situation or to get slightly worse. Retail the following months sales, office take up and rental levels do not have but we have some favourable perspectives as the latest tax increases will hints about it

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reduce the disposable income and unemployment will All this financial write off that could create a second wave of mergers quite likely continue to grow. Besides, there is a wide in the banking sector could imply a massive flow consensus that the lack of finance will remain at least mess has put the of property into the market at liquidation prices. until the summer break and that, although Euribor traditional real estate The effect of these actions (that were massively could go slightly downwards, the spreads will remain investment market discounted by the main players during Q3 and Q4 close to the current levels. This means that we should of 2011) will be focused mainly in the residential not expect a recovery for exogenous factors. in a completely new sector, where we can anticipate significant price situation as it has drops in the most competitive areas. Having said On the other hand the Torre Picasso transaction has dragged most of the that, its effect on the office and retail sectors will be set a new price/yield range in the market. Part of the very limited and those will remain linked primarily to lack of transactions in 2011 has been due to the lack available liquidity, and the overall pulse of the private consumption and the of agreement between buyers and sellers. Basically, subsequently there is corporate activity, despite the actions taken in the very few owners wanted to sell at the existing price financial sector. levels set by the buyers. The stagnation situation has a dramatic shortage been suddenly broken by FCC, a corporation with a of financing available In summary, the general economic environment is side interest in the real estate market that had a need not going to change for the better and will therefore to sell. Therefore, we have seen a rise in prime yields, not help to recover the activity levels in the real and we should not expect these levels to move estate industry through an increase in demand, but backwards. If real estate owners accept the new with the new price levels set by the Torre Picasso reality set by this transaction we might see a rise in deal, the increasing confidence in the country politics, the level of activity, as there is a strong latent demand the total lack of new developments, and the new at the right prices and the confidence in the country price scenario set by the banks sales, there will be is slowly, but persistently, returning. a solid foundation for a fast recovery as soon as there is a change in demand and an increase in the In the Spanish market there is hardly any new financing available for real estate. development (as can be seen with the concrete consumption back at 1987 levels) and in our view there is not an oversupply situation in the office sector and in the consolidated residential areas, and José Navarro Pinagua thus the market trend in those specific sectors could Subdirector General change rapidly with slight changes to demand. FPD Savills Edificio Cuzco IV Notwithstanding the above, we must point out that Paseo de la Castellana several projects have been delayed in their delivery 141, 6ª pl., 28046 Madrid, Spain to the market and are expected to be completed during this year. This situation has occurred mainly in peripheral areas, and not only for speculative projects. Most of the new projects expected to be entered onto the market by the end of 2012 (almost 40% of the total) are already compromised for pre-lettings contracts (such as Cuatrecasas new HQ, 14,000 sq.m.) or for owner occupation (such as Repsol Campus, 60,000 sq.m.). The gloomy perspectives for the Spanish economy do not help to support any rent recovery perspectives; however, taking a look at the historical prime office rental level series, we are at the bottom of the cycle or very close to it. Our forecast for 2012 total take- up (in the region of 350,000 sq.m. in Madrid) will mean that the availability levels will increase slightly, There will be a solid and therefore a slight rental decrease in nominal rents foundation for a fast back to 2004 levels can be anticipated. In real terms recovery, as soon this is a decrease in the cost of space for corporations of more than 20%. as there is a change in demand and There is also a great level of uncertainty regarding the impact of the government’s latest actions with an increase in the regard to real estate assets in the banks’ balance financing available sheets. The enforcement of massive provisions and for real estate

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Debt Trades with International Banks in the Spanish Property Market

The existing global financial crisis has left debris of huge amounts of real estate debt in the books of financial institutions and very little liquidity in the hands of the borrowers to sustain it.

Consequently, the need of the financial institutions The need of the On the one hand, commercial real estate loans have to deleverage together with up-and-coming new become a very attractive product given that many regulatory requirements has boosted a new debt financial institutions of these loans are about to reach maturity while the market between financial institutions and a number to deleverage borrower is currently not in a position to refinance of new investors, “new kids on the block” with a together with them (let alone repay them) when they fall due. different profile. Investors have used this as leverage to (i) negotiate up-and-coming juicy discounts and (ii) request vendor financing to In the Spanish real estate debt market, this trend has new regulatory the international financial institutions whose difficult had a different impact depending on the profile (and requirements has situation does not leave them with much room to the regulatory requirements) of the financial institution counter-offer. at hand. Spanish financial institutions (who have a boosted a new debt huge exposure following the burst of the Spanish real market between A key issue in these transactions (due to its impact in estate bubble) have been somehow reluctant so far to the acquisition costs) is the structure to follow for the sell real estate debt at a discount (and consequently, financial institutions acquisition of the debt. Some investors have chosen to account for the relevant loss) based on the shield and a number of to enter into sub-participation agreements subject to created by the accountancy rules of the Bank of new investors, English law where the original lender remains doing Spain. These accountancy rules are based on the the fronting vis-à-vis the borrower as beneficiary of the principle that the real estate asset securing the relevant “new kids on the mortgage-secured loan while the investor is mainly the loan always keeps a minimum determined value block” with a owner of the economic rights derived from the loan. (irrespectively of its real market value). different profile The beauty of this structure is that the investor would avoid the payment of the stamp duty derived from the However, these accountancy rules do not apply to registration of the investor as the new beneficiary of international financial institutions that operate in Spain, the mortgage with the Spanish Land Registry (which which usually apply the more extended “mark to can be up to a 1.5% of the relevant mortgage liability). market” accountancy principle where the real estate assets are accounted for their market current value Notwithstanding this, there have also been transactions which in many cases may be close to zero (or even where the investors have preferred to have a direct less than that, taking into account the payment of real contact with the borrower and to secure their estate taxes and zoning costs, as it may be the case investment becoming the beneficiaries of the mortgage of rural plots of land. This, together with the decision (and paying the relevant stamp duty) by means of made by many international financial institutions to a direct assignment/purchase of the debt subject to “retrench” from the Spanish market, has triggered an Spanish law. increase of these kinds of transactions in Spain. On the other hand, the acquisition of pieces of debt The product for trade in this market can be easily in syndicated facilities granted to Spanish property divided into (i) bilateral loan agreements (commercial companies have been a very much coveted trophy for real estate) where an entity receives the financing to Spanish financial investors of an opportunistic profile. Pieces of debt in fund the acquisition of a certain real estate asset, or (ii) these usually complex syndicated facilities where there pieces of debt in syndicated facilities granted to Spanish institutions have are many banks participating tend to include express property companies. been somehow regulation to facilitate the trading. Likewise, the fact reluctant so far to that the security package of these kind of syndicates sell real estate debt at a discount based on the shield created by the accountancy rules of the Bank of Spain

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are typically granted in favour of a security agent A key issue in Finally, what is going to happen in this debt market in elected by the banks avoids the payment of the stamp 2012? Our view is that the debt market in Spain will duty referred to above deriving from the change of the these transactions, definitively continue growing in volume. 2012 is a year beneficiary of the mortgage. due to its where many real estate loans will mature, which will impact in the give again an opportunity to the investors to continue Another interesting feature of these transactions is the getting good deals as the recovery of the financial veto right that a holder of a piece of debt can have acquisition costs, institutions is still slowly underway. On the other hand, in the syndicate, since unanimity is often required for is the structure international banks with positions in syndicated facilities most key decisions. What has been seen in the market to follow for the and a declared strategy to abandon the market have in this respect is that the strategy of certain aggressive allocated teams to prepare packages of syndicated investors which have acquired pieces of debt in a acquisition of debt to be traded. syndicate has been to veto every single proposal the debt made by the syndicate of banks in order to block the normal operation of the facility. The ultimate goal of Carlos Soler Vock, Senior Associate this position is obviously to seek that the other banks (or third parties at the request or offer of the banks) purchase the piece of debt held by the investor at a higher price than that originally paid by the investor. This sounds like a perfect business; however, there have been cases where the process has been migrated to the UK to cram down these investors through a Scheme of Arrangement (which is not foreseen under Spanish law). A good example of this was the case of the restructuring of the manufacturing business La Seda de Barcelona where a 25% in value was crammed down when 75% by value and over 50% by number of the syndicate of banks approved the restructuring, 3% voted “no” while others demanded different conditions. The market has been active, under either alternative (acquisitions of both bilateral commercial loans and debt trades in syndicated facilities). We can quote as valid examples the acquisition in the first quarter of 2011 by Perella Weinberg Partners of a pool of real 2012 is a year where estate loans with a face value of €286 million from many real estate The Royal Bank of Scotland (codenamed “Project Campeón”), and a number of debt trades in facilities loans will mature, to Spanish companies Metrovacesa, Reyal Urbis which will give an and Colonial. opportunity to the investors to continue getting good deals as the recovery of the financial institutions is still slowly underway

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Spanish Real Estate: Sale and Lease-Back Opportunities

The measures for the reduction of the public debt imposed by the Spanish Government (acting under heavy pressure from the financial markets and the European leaders) have strongly affected the majority of regional and local authorities.

It has been suggested that regional authorities sell The measures for good indication of the importance that this kind of their (very significant) portfolios of real estate assets the reduction of the transaction will have in 2012. in order to improve their heavily indebted balance public debt imposed However, potential investors are encountering sheets. This situation has opened attractive windows two main deterrents. On the one hand, there is an in the field of sale and lease-back transactions for by the Spanish increasing difficulty to raise financing due to the credit international investors interested in the acquisition Government have block-out affecting the Eurozone. And, on the other of high-quality assets occupied by solvent long-term strongly affected side, investors are paralysed by the uncertainties tenants. hanging over the future of the Spanish economy the majority of and the capacity of public authorities to meet their Sale and lease-back transactions have become a regional and local obligations. There are some interesting indicators major trend in the Spanish market during the last authorities. It has that justify these doubts: (i) the rating agencies have few years. From 2007 to 2011 these transactions been suggested have normally been undertaken by major financial that they sell their institutions in search of liquidity; just to give a few portfolios of real examples: Santander, BBVA, Sabadell, or the savings bank Caja Madrid have completed sale and lease- estate assets in backs comprising their headquarters and their order to improve portfolios of bank offices. The legal, commercial and their heavily ATTORNEY HIGHLIGHT tax question-marks and challenges affecting these indebted balance transactions during 2007 and 2008 have mostly been José Miguel sheets Domenech cleared since then, and the sale and lease-back has Senior Associate, Spain now become (at least in theory) a more standardised and simple product which can be finalised in a relatively short term. This positive experience has probably encouraged the local and regional authorities to study the ways to translate the sale and lease-back structure to their own assets. José Miguel Domenech is a senior associate in the real estate and banking department of Salans’ Madrid The most relevant regional process was started by office. the government of the Region of Catalonia in the last He has extensive experience in real estate acquisitions, quarter of 2011 and comprises two office portfolios restructurings, real estate financing, real estate related with a total value of €450 million; (it is expected that investments and operations of “sale and lease back”. the Region will be including other more complex This positive assets, such as hospitals or even schools, in future experience José Miguel has more than seven years of experience offers). Although the exact figures will not be known has probably advising banks and investors. He has represented RBS, Deutsche Pfandbriefbank and Santander in real estate until closing, it seems that the value of the properties encouraged the financing transactions, Credit Suisse and Pramerica has been subject to substantial discounts and that local and regional Real Estate Partners in real estate acquisitions, as well the minimum yields will finally be in the region of authorities to study as Barclays and Morgan Stanley’s real estate funds in 7%. This, added to the long lease terms (from 10 to complex restructurings. 25 years) and the covenant of a public authority, has the ways to translate made it very attractive for investors. The fact that the sale and lease- Prior to joining Salans, José was a senior associate at Linklaters’ Madrid office. the Region of Catalonia will still own approximately back structure to 200,000 sq.m. of office areas in Barcelona is a their own assets

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downgraded the Catalonian debt this year (it is now It is worth noting financial situation, the market is expecting that at least A2 according to Moody’s and A+ according to S&P, a few of them will be starting sale processes in 2012. and it currently makes the worst credit rating among that investors the regions of Spain); and (ii) the liquidity/working expect changes It is worth noting that investors expect changes in capital needs of the Catalonian government have in legislation that legislation that will improve the accounting treatment led it to make several extraordinary bond issues of the assets acquired through sale and lease-back will improve transactions. On the other hand, the fact that the addressed to Catalonian individuals, which have been sale and lease-back will not always be a useful mockingly nicknamed by the media as the “patriotic” the accounting tool to improve the credit ratings of regions might bond issues. In fact, rumours in the market point out treatment of the disincentive the authorities at the time they choose that several investment funds (who were familiar with assets acquired their preferred way to obtain liquidity. For instance, the Spanish real estate market and had participated S&P has stated that it will treat the proceeds to be in the sale and lease-backs of bank offices of 2007 through sale received by the Region of Andalucía as long term to 2010) have withdrawn from the process due to and lease-back debt, rather than as a regular sales income. The these uncertainties, or are keeping them “on hold” transactions underlying reason is surely that the region will assume until they solve their doubts on the solvency of their (i) an obligation to pay rent under the relevant lease potential new tenants. agreement signed with the investor (this obligation Similarly, the Region of Andalucía has been working would be similar, for accounting purposes, to the since July 2011 in a sale and lease-back transaction obligation to repay an ordinary financing), and (ii) a comprising 94 administrative buildings with an right to repurchase them for their market price at the approximate surface area of 350,000 sq.m. The end of the term of the lease (through the exercise of the purchase option). If this accounting treatment is purchase price would be approximately €700 million. However, the transaction has also encountered some generalised, sale and lease-backs would have a neutral problems that have delayed closing and given rise impact on the credit rating of the regions. to serious doubts on whether it will be completed Our impression is that sale and lease-back in the first months of 2012 (which would put in risk transactions (i) will remain a very interesting product the fulfilment of the debt reduction commitments for investors who have access to funding and are not assumed by the Region of Andalucía vis-à-vis the risk-averse, and that (ii) they will become again more Spanish government; in this case, the uncertainties on complex from a legal and commercial point of view the solvency of the Region, and the regional election (as it happened in 2007 and 2008), given that it will and political changes expected in the government Our impression is be necessary to adapt the transaction to the specific of the Region in March 2012 seem to be the main that sale and lease- needs and constraints of the public authorities, and to reasons for the delay). This shows that political back transactions a wider and more complicated range of assets, such factors can influence the success of these “public” sale as public hospitals. and lease-backs in a more marked way than ordinary will remain a very transactions among private entities. interesting product José Miguel Domenech, Senior Associate There is a third Region that will probably be in the for investors who spotlight in 2012. The government of the Region have access to Valencia, one of the most dynamic and fast-growing funding and are not regions of Spain during the last years, is also suffering risk-averse, and that financial difficulties and debt down-ratings. So far its delegate for economic matters has stated that he they will become will not resort to the issue of patriotic bonds as his again more complex Catalonian counterpart, but has left the door open to from a legal and the sale of real estate assets. Considering that most of the other 14 Spanish regions (and also many of commercial point the most important local authorities) are in a similar of view

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Spanish Banks Exposure to the Real Estate Sector: Potential Opportunities in Light of New Accounting Regulations

One of the main consequences of the abrupt end of the property bubble in Spain has been the avalanche of defaults under property loans and the repossession of real estate assets by Spanish banks and “cajas”, who have taken thousands of properties in their books as a result of enforcements and repossessions; however, this oversupply has not yet been marketed significantly.

Spanish savings banks are holding huge portfolios of Spanish savings This exposure has been recently quantified in app. delinquency loans (most of them for developments banks are holding €310 billion, of which three-fifths are considered and land acquisitions) and properties (mainly “problematic”, and €80 billion are repossessed assets residential). They are also trapped in Spanish property huge portfolios of which are said to be a “killer” of core capital for companies, as their unhappy majority stakeholders. delinquency loans banks. The overall goal, in terms of reducing this Consequently, Spanish Banks have become the main (most of them for exposure, is to cover up to 45% of it (up to €137 property owners in Spain. billion). Thus, the regulations of 3 February set an developments and objective of €54 billion, and the regulations of 12 May This situation was not worrisome at the beginning land acquisitions) imply an additional cushion of €30 billion that would of the crisis, basically because Spanish bankers had and properties add to the provisions already made until the end of in the back of their minds the same strategy as they 2011. Some consider that this cover will suffice for followed in the 1990s, when they created today’s big (mainly residential) what many consider the ultimate goal: a soft landing property companies (or what remains of them) with from the peak of the property bubble for Spanish repossessed assets. This explains why investors who banks. approached Spanish bankers to buy “toxic property The new regulations put in place new tools to help assets” from them on a “thirty cents on the dollar” Spanish banks achieve this “real estate deleveraging” basis and who were abruptly kicked out of the banks’ (in addition to the new provisions and capital buffers): headquarters used to say that Spanish bankers were “in denial”. 1. Higher levels of “cover” on “problematic assets”, by way of new specific provisions, a generic provision But Spanish banks were not the “forced vendors” that and capita add-ons; investors expected, or at least they did not feel to be so. The Bank of Spain imposed on them a plethora 2. A potential injection of capital by rescue fund FROB (new State money up to 15 billion); and of helpful accountancy rules whose fundamentals € were far from the “mark to market” radical approach 3. The creation of property companies attractive to that other banks were applying worldwide. Those investors which would eventually deconsolidate from accountancy rules, basically gathered in an annex the banks’ balance sheets. (number IX) of a very technical Bank of Spain order (Circular 4/2004), which has become many people’s New “Cover” on “Problematic Assets” night table reading in this market, allocated an The New Regulations impose higher levels of “cover” abstract (if not artificial) value to the property offered These new pieces for all those “problematic assets” (property loans, as collateral and provided for a long-term calendar for of legislation even normal ones, and repossessed assets). This “cover” translates into three different mechanisms provisions which helped Spanish banks to cope with are the Spanish the property tsunami. that Spanish banks will need to apply onto their Government’s legacy “problematic assets” (as of 31/12/2012): Those rules have been modified recently. On 12 response to the May 2012, the Spanish government passed a new (i) additional specific provisions; set of regulations applicable to Spanish banks, in clean-up and (ii) a new generic provision on “normal” property the aftermath of a previous reform of 3 February recapitalisation loans; and 2012. These new pieces of legislation (which amend needs of Spanish (iii) extra capital add-ons. Circular 4/2004) are the Spanish Government’s banks in light of their response to the clean-up and recapitalisation needs of Spanish banks in light of their exposure to the real exposure to the real estate sector. estate sector

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This is important: when the press (and Bank of The new law has ATTORNEY HIGHLIGHT Spain itself) published, after the passing of the new regulations, that the new “cover” would be up to been envisaged as a triggering event, Jesús Varela 80% (land), 65% (developments) and 35% (finished Partner, developments/housing), this “cover” needs to be and its ultimate goal Head of Real Estate, Spain implemented, in practice, through a combination of is to push Spanish the three mechanisms (specific provisions, generic provision, and capital add-ons). banks to sell these “problematic assets” The law focus on developments and land (in the books of banks as either both debt and already in the market, in repossessed assets); those are “problematic assets” particular, the very Jesús Varela is the head partner of the banking and real estate departments in Salans’ Madrid office. He on which banks need to take care at once (the new illiquid plots of land “cover” requested for those assets needs to be put joined Salans in 2011 from the real estate department in place by the end of this year as a general rule). of Linklaters in Madrid, where he was also a partner. New property-related assets entering the books of His areas of expertise are real estate financing and Spanish banks after 31 December 2011 will have to structure finance, acquisitions and disposals (including be dealt with under the old accountancy rules, but sale and leaseback transactions) of offices, retail and the clean-up of existing balance sheets will be done shopping centres and industrial warehouses, as well as now by the end of 2012. Banks which decide to joint venture and shareholders’ agreements and turn- undertake a merge instead will be able to buy some key construction projects. He has recently advised on extra time (until 31 December 2013 at the latest) a number of significant restructurings and refinancings to put the new “cover” in place. and also on some of the most important (in terms of New “Bad Bank-Like” Property volume and technical difficulties) trades of commercial Companies debt in the Spanish market. Banks are also required to create property Jesús regularly advises a wide range of banks (RBS, companies (“Sociedades de gestión de activos”) Crédit Agricole, Deutsche Pfandbriefbank, Santander, where they will allocate and warehouse all BBVA, HBOS, La Caixa, Natixis) as well as domestic repossessed assets: and international institutional investors (Morgan Stanley, Pramerica, Henderson, UBS, AXA, MEAG (a) Plain Vanilla Companies. They will be private and Apollo). corporates (“sociedades de capital”), with no regulatory or other requirements; Jesús is top ranked by Chambers Europe 2012 as a leading individual in the real estate practice in (b) Value of REOs at Entry. The entry value of the Spain. Clients are resounding in their praise for this property assets will be equal to their “reasonable” “exceptional lawyer” and stress out his “super-deep market value minus the provisions applied under the knowledge of the Spanish real estate sector,” excellent New Regulations (the assets will be transferred after commercial awareness and negotiation skills, and the provisions have been effectively made by incredible work ethic. Peers also recognise him as the banks); “a superb real estate finance lawyer who looks for a (c) Deadline. The transfer shall be completed by win-win solution and always has a dynamic approach.” 31 December 2012 (with the exception of merging Jesús speaks Spanish, English, French and German. banks, which will have 12 months after the merging plan is approved by the Bank of Spain); (d) Business Plan. The property companies will be obliged to sell at least 5% of their assets every year (which implies a de facto maximum 20-year duration); (e) Off-Balance Sheet. These companies will deconsolidate if (i) they hire an independent manager and (ii) other investors unrelated to the bank hold a stake of at least 51%; and

(f ) Tax Neutrality. There are some other benefits residential properties (completed or not) from including tax “neutrality” and reduced notary and Spanish banks with significant discounts. But returns Land Registry fees. are likely to be low if investors cannot access vendors’ or other acquisition financing to leverage the deals, The new law has been envisaged as a triggering and their key “management issue” post-completion event, and its ultimate goal (declared by the law still lies in the big amounts of land held by banks and itself, in its preamble) is to push Spanish banks to what to do with them (an issue which goes beyond sell these “problematic assets” in the market, in accountancy and to which Spanish authorities at all particular, the very illiquid plots of land. Everyone’s levels should probably give some thought). expectations are that it will open a new, definitive opportunity window for players interested in buying Jesús Varela, Partner, Head of Real Estate Spain

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Termination of Loan Agreements in Case of Loss of Value of Secured Real Property (LTV-Covenant Breaches) Pursuant to German Law

Within the context of commercial financing of real property so-called Financial Covenants are agreed upon in loan agreements between the financing institutions and the borrower.

In doing so, the borrower undertakes to observe The LTV ratio The most serious consequence, however, is the right the defined financial ratios in particular regarding the to terminate the whole loan agreement by the lender ability to service the loan (DSCR, Debt Service Cover doesn’t necessarily (Event of Default) as agreed in most of the loan Ratio), the ability to service interest payments (ICR, allow conclusions on agreements. Interest Cover Ratio) and the ratio between loan the other solvency capital and market value of the secured real property Contractual Right of Termination in Case (LTV, Loan to Value). The loan agreement usually of the borrower on of Breach of LTV-Ratio contains a LTV covenant stating that a borrower a regular basis and The issue as to whether the termination right, in case will not permit the LTV ratio to exceed a specified thus on the future the LTV-ratio is breached (LTV-Breach), can lawfully percentage (as defined in the loan agreement). be agreed upon is particularly disputed in the German service of the loan jurisdiction and is not answered consistently, although Furthermore, such loan agreements usually do but, at the same this issue will gain more and more importance in contain clauses stipulating that the borrower would time, exceeding the the future. have to provide valuations of the secured property on a regular basis, which enables the financing agreed LTV ratio While banks often financed real estate with high institution to monitor the LTV ratio as agreed in the may be the first sign LTV-ratios (in some cases more than 90%) during the loan agreement. The term market value is legally of the loan’s financial years of the housing boom before the global financial defined in § 16 para. 2 sent. 3 PfandBG (Pfandbrief crises, the LTV-ratios could in many cases no longer Act) and means the estimated amount as to which imbalance be maintained during the following years of crises. a lending object can be sold on the effective date of However, breaches of LTV-ratios had been regularly evaluation between a seller ready to sell and a buyer tolerated by the banks. ready to buy after an adequate period of marketing by a transaction in the ordinary course of business; Meanwhile, however, the demand for commercial whereby each party acts with expertise, prudence property has grown again noticeably and banks now and without necessity. expect to be able to realize the outstanding loan amount in case of a liquidation or seizure of the However, the LTV ratio does not necessarily allow secured property. In addition, with respect to the conclusions on the other solvency of the borrower reform package Basel-III and the related strengthening on a regular basis and thus on the future service of of the regulations of equity requirements of banks the loan. At the same time, exceeding the agreed and financing institutions as a consequence of the LTV ratio may be the first sign of the loan’s financial European sovereign debt crises, several banks have imbalance. an increased interest to reduce funding in particular in cases in which breaches of financing covenants have The consequences of a breach of one of the occurred and have not been remedied. financial ratios can be shaped differently in the loan agreements. It is possible to include an obligation Furthermore, and as a result of the on-going of the borrower to make additional contributions sovereign debt crises and the current economic of equity (equity injections), a liability to provide climate, both borrowers and financing institutions subsequent and additional security, additional are becoming increasingly concerned about the redemption covenants or access to cash-flow- likelihood of a breach of an LTV covenant in the surpluses (cash-sweep), temporary payments to a loan agreement. Consequently, the possibility of secured bank account (cash-trap) or also a rise of termination for breach of LTV-ratios becomes more spread in favour of the bank due to an increased risk and more attractive to many banks. of loan default. Direct consequences of a breach of However, legal experts’ opinions as to whether financial ratios from the Financial Covenants can be a termination can (only) be based on a breach of the right to withdrawal by the financing institution respective LTC-clauses diverge. with respect to other loan commitments of the borrower or the blocking of further release of cash or pay-outs within the sequential financing procedure.

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Cause for the discussion hereby is especially the Consequently, also the question as to whether the repayment of expressiveness of the LTV-ratios as usually agreed in the loan is at risk. According to the opinion of many loan agreements. the possibility of professional authors, the contractual termination right, termination for which only regards the LTV-ratio exceeding, deviates The Legal Problem breach of LTV-ratios substantially from important legal guiding principles of From a legal point of view, two issues are important: becomes more and the contractual law on loans, stating that such a clause Is it possible, on the one hand, to conclude an may be ineffective. effective agreement on a termination right for cause more attractive to Other authors argue that this interpretation may be of breach of LTV-ratio while the rest of the service of many banks too narrow and does not satisfy the particularities the loan is according to the rules without any other of a loan business by use of Financial Covenants, as breaches of financial covenants or regulations of the the used ratios are early warning measures of crises. loan agreement, and on the other hand, even in case Financial Covenants place certain obligations on the of an effective agreement of the termination right, its borrower to meet defined financial performance execution is permissible under the said circumstances? measures and enable the financing institution to The Effectiveness of the Agreed Right of review and monitor at regular intervals the ability of Termination Given that Financial Covenants are terms of contract which are pre-formulated by the financing bank for a multitude of contracts and thus general terms and ATTORNEY HIGHLIGHT conditions (AGB), the ineffectiveness of such clauses due to a breach of the German AGB-law (§§ 307 seq. Thomas Kaspelherr German Civil Code (BGB)) is discussed. Basically the Counsel, Germany question is whether the envisaged contractual right of termination of the loan agreement due to breach of LTV-ratio is consistent with essential fundamental ideas of the legal regulations on the contractual law on loan (§ 307 para.1, 2 No. 1 BGB) or not. The issue as to In this respect, it can be stated that the German Thomas Kaspelherr is a Counsel in the Berlin Civil Code (BGB) also provides for an extraordinary whether the office of Salans LLP and member of the firm´s Global termination of the loan agreement in case an essential termination right, in Real Estate, and Banking and Finance Practice Groups. decline regarding the recoverability of a security given case the LTV-ratio Thomas advises national and internation clients on all for a loan occurs or threatens to occur (§ 490 para. 1 aspects of real estate law. His main focus is on advising BGB). However, the prevailing opinion in professional is breached, can clients on acquisitions and sales of real estate, asset publications interprets the legal rule in a way that at lawfully be agreed management and in relation to financing matters. the same time the claim of repayment of the loan upon is particularly Thomas has also acted for various lenders in relation also must be at risk. The result is that according to disputed in the to property financing and loan restructuring. the prevailing legal opinion, an essential deterioration of the financial circumstances is significant for German jurisdiction Thomas joined the company in 2007. Prior to Salans, terminating a loan for cause. If this is not the case, the and is not answered he practiced real estate law at Travers Smith. legal termination right pursuant to § 490 paragraph 1 consistently, BGB does not apply. In 2000 Thomas graduated from the University of although this issue Bielefeld. He is a member of the German-Irish A contractual termination right, agreed in the general will gain more and lawyers and business association and speaks German terms and conditions (AGB), which only aims to and English. the previously fixed LTV-ratio, disregards the other more importance in financial circumstances of the borrower and thus the future

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the borrower to fulfil its payment obligations under To avoid a legal valuation, a 30-day-period examination right should the loan agreement. It may be essential to indicate/ be agreed upon in favour of the borrower. In this know whether the respective ratio is a “feasible dispute with the regard, the parties of the loan agreement should indication” for a remarkably increased risk of default. financing bank also envisage the costs of the valuation in relation However, some authors argue that the LTV-ratio from the outset, an to possible assessment intervals. The bank will be does not fulfil this pre-condition either, as it does not interested to be entitled to demand the presentation give evidence as to whether the loan can be serviced agreeable regulation of a valuation which examines the observance of the in future, but only measures the recoverability of the with the financing LTV-ratio. Depending on the appropriation of costs loan security. bank may be the between the contractual parties, this cannot cause a negligible encumbrance of the borrower. Usually, Effectiveness of the Execution of the Agreed most functional fixed dates should be set (i.e. once per year) or a Termination Right solution for the clause agreed upon, which grants the bank the right Further, there are also part objections with regard borrower to request the presentation of a respective valuation to the execution of a contractual termination right only in case of a changed market situation which in case of breach of fixed LTV-ratios. In this respect, appears to necessitate a re-assessment. a breach of the principle of good faith is discussed, To avoid a legal dispute with the financing bank from because by executing the termination right a legal the outset, an agreeable regulation with the financing position is exercised inappropriately. The whole bank may be the most functional solution for the purpose of Financial Covenant Clauses would be to borrower. react early to identified crises and to minimise the risk of the lender so that the loan cannot be serviced any A “Waiver Letter”, where the bank expressly waives more in the future. However, here it is also pointed the execution of a possible termination right in case out that the LTV-ratio does not permit drawing any of breach of contractually agreed LTV-ratio in future, conclusions on the other financial circumstances of can be an option. However, post-negotiations of the borrower and no prediction in respect of the the loan agreement as a whole would have to be future servicing of the loan is possible. Thus, the expected on a regular basis, e.g., to replace or alter termination would not meet the intended spirit the LTV ratio or other financial covenants in the and purpose anymore and would allow it to appear loan agreement in order to re-structure the improper. This could be regarded as breach of the loan agreement. principle of good faith, which would, in most cases, invalidate the execution of the termination right. Thomas Kaspelherr, Counsel Conclusions for Practice Dr. David Lange, Associate Even though there are serious arguments against an effective termination in case of breach of LTV-ratio, it cannot be excluded that this is assessed and decided otherwise by a German court. To date, no relevant court decision is known; hence extreme caution is necessary in cases of breach of contractually agreed LTV-ratio. The borrower should first scrutinise the valuation report, which technically determines a breach of LTV-ratio. In case of apparent estimated errors, the valuation might not be qualified to prove a breach of LTV-ratio and a termination for cause. Ideally, this should already be considered at the time the agreement is concluded, and with respect to the

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Tenant’s Servitudes in the Practice of German Real Estate Law

Over the past years, tenant’s servitudes developed to widely used means of security in particular for long-term commercial lease contracts on supermarkets and shopping malls or within the framework of sale-and-lease-back transactions.

The purpose of tenant’s servitudes is to maintain Tenant’s servitudes not an illegitimate circumvention. In the professional the tenant’s right of use of the leased object and to are limited personal legal literature, it is argued that the loyal tenant is secure the investments costs of the tenant for the particularly in need of protection vis-à-vis the creditor leased object, also in cases of compulsory auction servitudes which pursuing the compulsory auction. The tenant could or sale of the leased object by the insolvency will be entered into mostly not be held responsible for the compulsory administrator in the event of the landlord’s the land register of auction on the assets of his lessor, and basically is not insolvency, because in these cases, the purchaser able to protect himself thereof. On the one hand, the of the real property is entitled to an extraordinary the respective real loss of his right of use of the property, in particular if termination right pursuant to § 57a ZVG property it is commercial property, brings about considerable (Zwangsversteigerungsgesetz, Compulsory Auction of disadvantages for the tenant (e.g. lost profits and lost Immovable Property Act). investment costs). On the other hand, the successful Purpose of Tenant’s Servitudes bidder is entitled to the full lease payment, thus the continued use of the property by the tenant is not Tenant’s servitudes are limited personal servitudes an economic disadvantage for the successful bidder. which will be entered into the land register of the Insofar, the effectiveness of the tenant’s servitude with respective real property. The registration of a limited regard to the extraordinary termination right pursuant personal servitude enables the tenant to protect to § 57a ZVG is supported by the majority view. himself against the execution of the extraordinary termination right by the potential purchaser in case ii) Prior-Ranking or Lower-Ranking Tenant’s of compulsory auctions or sales of the real property. Servitude? Although the purchaser can terminate the lease, the tenant, however, keeps his right of use of the Basically, tenant’s servitude can be designed as property that accrued from the tenant’s servitude prior-ranking or lower-ranking to the encumbrances registered with the land register. (land charge, mortgage) to be registered with the land register. Tenant’s Servitude in Case of Compulsory Auction Lower-Ranking Servitude An important reason for registration of a tenant’s In case the tenant’s servitude is agreed and registered servitude is the extraordinary termination right as lower-ranking to land charges, and the compulsory pursuant to § 57a ZVG. Although the successful auction is executed by the prior-ranking land charge, bidder for the leased object becomes the new the tenant’s servitude will not be subject to the so- lessor, he is however entitled to a proper notice of termination of the lease by observing the legal called “lowest bid”. The “lowest bid” is the minimum termination period. bid that has to be reached in order to be admitted by the court competent for the compulsory auction. This raises the question as to whether a tenant’s The amount of this minimum bid has to be sufficient servitude is invalid, because it constricts the successful to cover certain prior-ranking rights. This concerns bidder’s legal right of termination pursuant to § 57a in particular the rights registered in the land register ZVG. This could be regarded as breach of mandatory prior to the one of the creditor. The rights ranking legislation. lower to those of the enforcing creditor, however, are not covered by this “lowest bid” and expire by i) Effectiveness of Tenant’s Servitude in Respect acceptance of the bid. This is disadvantageous for the to § 57a ZVG tenant as he may be threatened with the loss of his So far, there is no jurisprudence of higher courts right of use of the property if the successful bidder is regarding this issue in Germany. From the existing executing his extraordinary termination right, and he legal decisions, however, which allude to this topic will only be satisfied from the rest of the proceeds only marginally, a tendency can be deducted to the of the compulsory auction after the land charge effect that the registration of a tenant’s servitude is creditors have been satisfied.

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Prior-Ranking Servitude The purpose of encumbrances. Additionally, it is argued that in case tenant’s servitudes of an overall view, the legislator would give priority Hence, from the perspective of the tenant, the to the holder of a real property right, like a tenant’s registration of a prior-ranking servitude, which in case is to maintain the servitude over public protection of creditors’ interest. of compulsory auction by the lower-ranking creditor tenant’s right of use of encumbrance (the bank) is covered by the lowest ii) Defeasibility of the Tenant’s Servitude in bid (and also keeps the tenant from extraordinary of the leased object Case of Insolvency termination right by the successful bidder of the and to secure the insolvency procedure), makes sense. The lowest bid investments costs of As a matter of principle, agreements can be appealed covers only those rights that are prior ranking to that impose disadvantages to a party in case of his those of the executing creditor. From the perspective the tenant for the insolvency which exceed the legal consequences of the banks, legal problems in relation to coverage leased object, also in and are not primarily necessary for achieving the and lending value may occur in addition to the risk of cases of compulsory contractual purpose. However, an appeal will lower profit in case of liquidation, because the tenant regularly fail for a pure formal reason to do with the cannot be given notice and therefore the loan may auction or sale of fact that the periods of appeal have already expired. not be returned completely. the leased object The registration of the servitude also may not be by the insolvency a deliberate disadvantage. One probably cannot Therefore, tensions exist between the interest of imagine a practical case where the lessor registered a the tenants in registration of prior-ranking tenant’s administrator in tenant’s servitude in order to detriment his creditors. servitude and the interest of the financing bank in its the event of the This view is shared by a considerable part of the prior-ranking registered land charges. landlord’s insolvency professional literature. Tenant’s Servitude in Case of Principles of the Association of German Insolvency of the Lessor Mortgage-Lending Institutions In case of insolvency of the lessor, basically two questions gain importance with respect to tenant’s Since the beginning of the financial crisis, loans servitude. The first question is whether the tenant’s for real estate investments are granted almost servitude can effectively be registered with regard exclusively by mortgage lending institutions. As to a possible circumvention of the extraordinary mortgage lending institutions refinance themselves termination right pursuant to § 111 InsO. The other solely through German covered bonds (Pfandbriefe) question is whether the insolvency administrator which are subject to the strong requirements of can appeal against the registration of the tenant’s regulations amended with effect of 26 March 2009 servitude. of the Pfandbrief Act. The issuance of covered bonds is in particular tied to the coverage and thus to i) Effectiveness of Tenant’s Servitude in Respect the assessment of loans secured by mortgage. The to § 111 InsO charging of a real property by prior-ranking tenant’s So far, there is no jurisprudence of higher courts servitudes is regarded increasingly as negative by the regarding a possible illegitimate circumvention of mortgage lending institutions. Therefore, since the the extraordinary termination right. However, the middle of 2009, the mortgage lending institutions prevailing opinion in professional literature with have increased the requirements with respect to the respect to § 111 InsO tends also to accept the servitude on securing leases for granting loans. The effectiveness of the registration of tenant’s servitudes. tenants who insist on including servitudes on securing Though, the extraordinary termination right pursuant leases are often retail store chains with strong to § 111 InsO cannot be contractually excluded, and negotiating abilities and therefore anchor tenants the agreement of a tenant’s servitude could factually whose leases are a precondition for the repayment thwart the extraordinary termination right. However, of loans secured by land charge. Investors of such the tenant’s servitude would not pose a major commercial properties have to make efforts to obstacle for liquidation than would other existing compromise between the anchor tenants and the

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financing bank with respect to servitudes on securing Already existing possible, VDP advises a more intense review of the leases in order to ensure their financing. value of the real property and the hereon based tenant’s servitudes lease agreement. The “Working Group tenant’s servitude” of the which do not Association of German Mortgage-lending Institutions meet the criteria iv) Covenant Under Law of Obligation (“VDP”-Verband deutscher Pfandbriefbanken) published a resulting paper in July 2009 which provides of the resulting Finally, VDP recommends including a regulation according to which the parties of the lease agreement recommendations on how mortgage-lending paper could lead commit themselves also vis-à-vis the land charge institutions may deal with tenant’s servitudes. to disadvantageous creditor and with regard to the content in rem of the In order to get an acceptable compromise regarding evaluations of the tenant’s servitude. the above described conflicts between the interest of property with Conclusions for the Legal Practice the tenant and the interest of the financing bank, the following corner points are suggested: respect to financing The importance of tenant’s servitudes will increase or re-financings, in the near future. VDP’s resulting paper might be i) Compensation relevant for most financing banks with respect to which might dealing with tenant’s servitudes. Already existing It is recommended to arrange the tenant’s servitude only be avoided tenant’s servitudes which do not meet the criteria against payment according to the regulations of the by subsequently of the resulting paper could lead to disadvantageous lease agreement in order to insure that the tenant evaluations of the property with respect to financing will only be able to use the property also in case of accepting the or re-financings, which might only be avoided by termination of the lease agreement against payment observance of VDP’s subsequently accepting the observance of VDP’s on the basis of the tenant’s servitude. requirements requirements. However, each amendment of the ii) Maximum Amount already agreed tenant´s servitude requires further negotiations with the tenant and amendments of the Further, the VDP recommends setting a maximum existing lease agreement. amount as compensation for lost value through compulsory auction pursuant to § 882 BGB (German Thomas Kaspelherr, Counsel Civil Code). In case of a compulsory enforcement from an encumbrance prior-ranking to the tenant’s Dr. David Lange, Associate servitude, this agreement on a maximum amount leads to the effect that the tenant’s servitude will only be satisfied with the set maximum amount and the creditors ranking after the tenant’s servitude in the land register can more effectively determine the feasibility of their satisfaction in case of compulsory auction. iii) Condition Subsequent/Trust Solution According to VDP’s point of view, it has to be ensured that the content of the tenant’s servitude cannot be amended without the approval by the other encumbrance creditors. This can be done by a regulation in rem of all reasons for a rescission which will be registered in the land register. VDP holds the view that by registration of real causes for a rescission in the land register, the risk of the lower- ranking creditors would decrease. If this should not be

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Asset-Backed Securities and Refinancing of Mortgage Debt

At a time when a large number of loans financing the great waves of highly leveraged acquisitions in the years 2006-2008 are maturing (and may be extended), securitisation by the issuance of debt instruments such as asset-backed securities could present certain interesting opportunities for their refinancing.

There are quite a few advantages with this kind of At a time when ATTORNEY HIGHLIGHT operation, for the borrower, who gains access to a less expensive loan thereby optimising the profitability a large number of loans financing Jean-Luc Bédos of his investment, and for the lender as well, who Partner, Co-Head – Global gains the benefit of sureties with an assured value and the great waves of Private Equity Group whose enforcement resists bankruptcy. Finally the new constraints imposed by the Solvency II directive highly leveraged and the Basel III agreements can only add to its acquisitions in the interest. years 2006-2008 Securitisation by the asset-backed securities (ABS) are maturing, method consists of the contribution (or transfer) by securitisation by Jean-Luc Bédos is a partner in Salans’ Paris office. a company to a securitisation vehicle (securitisation He co-heads Salans’ Global Private Equity practice institution or OT) of a portfolio of receivables which the issuance of and is a member of the M&A group in Paris. Jean-Luc is backed by a bond issue enabling this acquisition to debt instruments concentrates on M&A/Private Equity and stock-market be financed or the contribution to be remunerated. could present transactions. Payment of the interest and repayment of the borrowed capital are ensured by the portfolio of certain interesting Jean-Luc Bédos has been working in the Private Equity receivables and the flows of funds it generates, in this opportunities for sector for more than 20 years, mainly representing case the rents according to the diagram shown below. investment funds in the negotiation and establishment their refinancing of leveraged acquisitions (LBO, MBO, OBO, MBI, etc.). He works alongside executive teams in the negotiation and structuring of management packages. Diagram of Securitisation by Asset-Backed Securities: He also operates M&A transactions and corporate reorganisation for large French groups, including listed companies. He regularly advises clients on acquisitions and fund structuring in North and Sub-Saharan Africa.

Before joining Salans in 2010, he was a partner at Lefèvre Pelletier & Associés (from 1999). Jean-Luc practised law in the Paris and New York offices of Debevoise & Plimpton (1987 – 1989) as well as White & Case (1983 – 1987). In 1995 he founded the Association “Droits d’Urgence”, the largest French legal aid society.

He graduated from the University of Paris II (Doctor of Law, PhD), Harvard Law School (Master of Law, LL.M.), University of Paris, DESS Droit Commercial International and DEA Droit Public Approfondi as well as the University of Toulouse (Master of Law and Master of Political Science). Jean-Luc speaks French and English.

Given the costs inherent in setting up such a structure, it is generally only contemplated for an asset or portfolio of assets where the financing is considerable, in practice at least €500 million or more.

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Asset Revaluation and Best Price Financing Securitisation by forms, to guarantee the mortgage loan which the When the ownership of assets to be financed, the asset-backed lenders had granted it at the same time as such forms, which might have a very low book value in view left the borrower’s assets to become part of the of depreciation, is transferred to a company of the securities method lenders’ assets. The logical result was that the start of group (NewCo), they can be revalued at their market consists of the a safeguard procedure implicating the borrower could value and thereby improve the group’s balance sheet. contribution (or not have any effect on the exercise of this kind of In addition, as each transaction is a separate one in surety, which confirms its efficacy and therefore its value. NewCo, the resulting debt is not reflected in the transfer) by a transferor’s balance sheet. Finally, this securitisation company to a The above position adopted by the Court of has the effect of reducing the financing costs by securitisation vehicle Appeal, which was not appealed, could support the lowering the required equity levels. of a portfolio of lenders’ position, which seems to have prevailed, in a recession context where the value of financed real Estimating the Value of the Sureties receivables which is estate stagnates or even falls, of attaching particular with the Upward Variation of the Cost of backed by a bond importance to the capacity of these assets to Construction Index issue enabling this generate revenues able to cover the interest on the When the rents whose receivables are assigned loan (ICR ratio), rather than complying with the loan- are indexed, as is almost always the case, the acquisition to be to-value ratio (LTV ratio). Thus the mortgage loan surety granted to the OT is improved. The INSEE financed or the market over the last two years has been animated by cost of construction index (ICC), which is still contribution to be a considerable number of loan term extensions for very predominant in commercial leases, has been high-performance portfolios. increasing quite consistently by more than 3% a year remunerated over the last 20 years, 5% a year over the last 10 The Solvency II Constraints and years and almost 7% over the last year. This long Basel III Agreements term variation as viewed by the rating agencies can On the eve of the entry into force of the Solvency justify a better risk note being given to the instrument II directive and the Basel III agreements on 1 January issued by the OT, even taking into account the risk 2013, the banks, which are traditional lenders, are inherent in the option allowed to tenants, which are already being forced to increase the percentage the debtors of the securitised receivables, to obtain a of their equity in their financing commitments, if reduction of their rent on the basis of Article L145-39 they have not already done so, to be ready for the of the Commercial Code (these provisions allow the beginning of 2013. For each new financing project, parties to a lease, in practice the tenant, whose rent particularly real estate, the banks will now have to has varied by more than 25%, to ask for the rent to analyse its impact on their global debt equity ratio and be fixed at the rental value). On the other hand, a allocate a separate risk note to it. To reduce the scale significant downward variation of the ICC can never of this readjustment, the banks will therefore certainly be ruled out and must be provided for. have to collateralise their transactions and, to do so, find a way to enhance the value of the underlying Sureties which Resist Bankruptcy assets. A portfolio of good quality rent receivables The 25 February 2010 judgment (CA Paris, 9th ch. could turn out to be a reliable asset to do so. 25 February 2010, Nos. 09/22756 and 09/21184 – RDBF No. 3 May-June 2010) of the Paris Court of Antoine Mercier, Partner Appeal in the Cœur Défense case is an illustration of the practical scope of the discussion that had been closed by the French Supreme Court on 7 December 2004 (Com., 7 December 2004, JCP. E. 2005. 231, note S. Raby). The Court of Appeal confirmed that the rent receivables which had been assigned by the borrower to the lenders by means of so-called Dailly

59 WESTERN EUROPE

Commercial Lease Break Clauses

Set against the background of a persistently chilly economic climate, estate rationalisation is still very much at the forefront where cost-saving measures and estates strategy are concerned.

The decline of the market has meant that supply The decline of the accepted had not been formally demanded, remained often outstrips demand for commercial leases. unpaid on the break date. This makes finding and keeping tenants fiercely market has meant competitive. Tenants want flexibility for their business that supply often The default position in respect of any payment is that it must be made by legal tender (which a cheque while landlords are keen to maintain cash flow and outstrips demand avoid the hardship of empty rates. is not). The court decided, however, that because for commercial the landlord had previously accepted cheques on So, in trying to find a delicate balance between two leases. This makes a regular basis, this established course of dealing competing interests, the right to break early is an operated to displace the general rule and that the often used incentive by the landlord which can be a finding and keeping tenant had successfully paid the break fee. big draw for tenants, but there do need to be checks tenants fiercely and balances; break clauses can offer a way out, but competitive The court held that there was no obligation on the only if exercised properly. landlord formally to demand interest to trigger the tenant’s liability to pay it. The lease was clear in that The recently reported cases of Avocet Industrial interest was payable whether formally demanded or Estates LLP v Merol Limited Tudor Rose International not. The tenant had therefore failed to pay all sums Limited [2011] EWHC 3422 (Ch) and NYK Logistics due under the lease at the break date, leaving it liable (UK) Limited v Ibrend Estates BV [2011] EWCA Civ for rent of over £67,000 per year and all the onerous 683 both provide a very harsh reminder to tenants lease obligations for the remainder of the term – a seeking to exercise a right to terminate their lease further five years. early that any pre-conditions attaching to that right must be fully satisfied to bring the lease to an end In NYK Logistics v Ibrend, a break clause requiring successfully. The cases also raise a number of points vacant possession of premises at the purported which will be of interest to investors and those termination date was found not to have been managing investment property on their behalf. exercised correctly where a tenant, NYK Logistics, had remained on the premises carrying out In Avocet Industrial Estates LLP v Merol Limited dilapidation repairs after the specified date. The Tudor Rose International Limited, the tenant had a requirement for vacant possession was not satisfied 10 year lease of a commercial property containing a by the fact that the tenant had no intention of conditional break clause under which it was entitled excluding the landlord from access to and occupation to bring the lease to an end after five years, subject of the premises during that time. to the tenant having first complied with certain conditions. These included a requirement to pay a The break clause in the tenant’s lease provided that break fee and to have settled all amounts outstanding for it to be effective, the tenant had to have delivered under the lease at the break date. Elsewhere, the up vacant possession of the premises on the break lease required the tenant to pay interest on any sums date, 9 April 2009. The tenant gave the Landlord, paid late. Historically, the tenant had occasionally Ibrend, notice of its intention to terminate the been late with its quarterly rent payment and the lease on 9 April 2009. The landlord commissioned landlord had sometimes, but not always, demanded a schedule of dilapidation repairs which were to interest on the late payment. The tenant served a be performed pursuant to the tenant’s obligations break notice in accordance with the lease and, on the under the lease. The tenant agreed to carry out the day before the break date, handed over a cheque for outstanding dilapidations and indicated that it would the break fee and the keys to the property. send someone to collect the keys to the premises, although this did not happen before the termination The landlord argued that the tenant’s break was date. The tenant’s contractors completed the repairs ineffective because (a) it had paid the break fee six days after the termination date. The landlord by cheque rather than cleared funds into its bank issued proceedings against the tenant seeking a account by the break date and/or (b) interest on declaration that the break had not been executed various amounts due under the lease, which it validly and confirming its entitlement to rent, which

60 UNITED KINGDOM

ATTORNEY HIGHLIGHT The recently by midnight on the designated date and not a minute reported cases later. The concept of “vacant possession” in that Sarah Rochelle context was not complicated: it meant that at “the Associate, London provide a very harsh moment that “vacant possession” is required to be given, reminder to tenants the property is empty of people and chattels and that seeking to exercise the purchaser is able to assume and enjoy immediate and exclusive possession, occupation and control of it”. a right to terminate their lease early that The court went on to say that with regard to chattels left in the property, this is only likely to invalidate any pre-conditions the break clause if such chattels substantially prevent Sarah Rochelle joined as an associate in Salans’ attaching to that or interfere with the enjoyment of the right of London office in June 2012. She is a member of the possession of a substantial part of the property. firm’s Global Real Estate Group. right must be fully satisfied to bring NYK Logistics v Ibrend demonstrates the importance, Sarah qualified as a solicitor in March 2012, having the lease to an end where a break option is subject to giving the landlord completed her training contracted at Jeffrey Green “vacant possession”, for the tenant to make suitable Russell and having previously worked at Macfarlanes successfully arrangements, well in advance of the break date, and Blake Lapthorn. to vacate. In addition to classic English real estate work, she is Service of Break Notices involved with global real estate matters and cross The case of Orchard (Developments) Holdings practice group engagements. Sarah’s experience plc v Reuters Ltd [2009] EWCA Civ highlights the includes acquisitions and disposals of properties importance of not leaving service of the break notice within the leisure and retail, office and warehousing until the last minute. sectors. She also has experience in landlord and tenant matters. The lease contained a tenant’s break clause after the fifth and tenth years of the term, by giving the landlord six months’ notice. The lease also provided that unless the receiving party or its authorised agent acknowledged receipt, the break notice would only be valid if it was sent by registered post or by recorded delivery. the tenant had continued to pay on a without The last date for the service of the break clause in prejudice basis from April to December 2009 when the lease was 30 July 2005. The tenant issued the it was common ground that the lease was validly break notice on 29 July 2005, serving it by hand terminated. to the landlord’s address, which turned out to be The judge found that the tenant had not delivered up the wrong address. Further copies of the notice vacant possession of the premises at the termination were subsequently sent by fax on 29 and 30 July date in April 2009, and that by offering to send 2005, which, under the terms of the lease, had to someone to collect the keys from the landlord, had be acknowledged by the landlord or its agent to be not waived the requirement for vacant possession. effective. The faxes arrived at the landlord’s offices He therefore concluded that the break clause was after the offices had closed for the weekend. not validly exercised and so, the tenant was liable for The landlord subsequently refused to acknowledge the rent from April to December 2009. receipt of the faxes until after the break date had The tenant appealed on the basis that it was unjust to passed and the tenant vacated the property ceasing have found that modest repairs which it undertook to pay rent to the landlord. The landlord disputed following the termination date resulted in a failure to the validity of the tenant’s break notice, but did have given vacant possession since, during that time, admit later that the faxes had been received. The it had no intention of excluding the landlord from tenant claimed that the landlord had retrospectively access and occupation of the premises. The tenant acknowledged receipt of the faxed notices and was also argued that its statement about the keys had not entitled to frustrate the break notice provisions effected a sufficient waiver of the vacant possession simply by refusing to acknowledge receipt of requirement. the notice. The court of appeal held that if the tenant was to The Court of Appeal held that it was too late for the satisfy the vacant possession condition in the break landlord to make an invalid informal notice effective option, it had to give such possession to the landlord by acknowledging it after the break date.

61 WESTERN EUROPE

This case was unusual in that few leases will require Tenants should 5. Do not leave preparation and service of that receipt of a break notice is acknowledged before the break notice until the last minute. Seek legal the notice can become effective. However, it is a be mindful of the representation and/or advice well in advance of the useful example of how a court is likely to construe a fact that even a break date. break clause strictly and/or deem time to be of the very minor failure essence in relation to service of a break notice, if not Practical Advice for Landlords expressly stated. The case also emphasises the need to satisfy a break 1. Landlords receiving cheques must return them to consider the effect of a break clause together with condition will immediately if they do not want to risk being found the general notice provisions, if the break clause does prevent the effective to have accepted payment by this method. not deal separately with service of a break notice. exercise of the 2. Landlords may be able to rely on non-payment Practical Advice for Tenants break option of interest due on past arrears to thwart the exercise 1. Tenants should be mindful of the fact that even a of a break option, but they would be unwise to do so very minor failure to satisfy a break condition (in the on this ground alone until a higher court (either the case of Avocet Industrial Estates LLP v Merol Limited Court of Appeal or Supreme Court) has considered Tudor Rose International Limited for example, only the point. about £130 of interest was due) will prevent the effective exercise of the break option. This extends 3. Landlords should not simply refuse to engage not only to payments of all sums due, but also to with a tenant seeking to ensure that it will have any other conditions, such as compliance with lease satisfied all conditions attached to its break right if it obligations and giving up possession of the property. takes certain steps, as a court might take a dim view of this and find a way to find in favour of the tenant 2. Where a break is conditional on all monies as the Court of Appeal did in Fitzroy House Epworth having been paid, tenants should establish whether Street (No.1) Ltd v The Financial Times Ltd [2006] any interest may be due on late payments in the EWCA Civ 329 where the landlord refused to visit past, right back to the start of the lease if necessary. the property to confirm whether the tenant had fully If the landlord will not give a categorical answer complied with its repairing obligation until after the to the question, the tenant should do its own break date. calculations and err on the side of caution by paying a sum in excess of those calculations and seeking 4. Do not leave preparation and service of reimbursement subsequently; better to risk the loss of Landlords should the break notice until the last minute. Seek legal a small sum than remain liable under the lease. representation and/or advice well in advice of the not simply refuse break date. 3. If payments have been routinely made by to engage with a cheque and accepted by the landlord, payment of tenant seeking to any outstanding sums by cheque normally will be Sarah Rochelle, Associate acceptable. However, to avoid any dispute, the ensure that it will prudent approach is to ensure that the landlord is have satisfied all in receipt of cleared funds on the break date either conditions attached by a direct credit to its bank account or delivery of a cheque well in advance. to its break right if it takes certain steps, 4. The best protection for tenants is to have an appropriately worded break clause in the lease in as a court might take the first place. The tenant will have paid a price for a dim view of this the right to terminate its lease early, whether this is and find a way to through a higher rent or, the requirement to pay a break fee; this right should, therefore, only be denied find in favour of in very limited circumstances. the tenant

62 UNITED KINGDOM

Changes to UK REIT Regime in the Finance Bill 2012

The UK REIT regime was launched in 2007, with the aim of creating a tax efficient vehicle in which to encourage investment into Real Estate, similar to REIT structures in other countries.

However, with only a limited number of companies The Government has Comment making the conversion to REIT status, the sought to improve The barriers to entry have been significantly reduced Government has sought to improve the regime by the regime by with the abolishment of the entry charge and the reducing barriers to entry, encouraging investment relaxation of listing and ownership rules. With these into REITs, and reducing the costs of complying with reducing barriers to barriers addressed, there are a variety of other the regime. The Finance Bill 2012, which received entry, encouraging companies who may now wish to convert to REIT status: AIM and foreign listed companies who do not Royal Assent on 17 July 2012 has brought in a investment into wish to incur the cost of main market listing; family number of changes which are designed to meet these REITs, and reducing property companies considering succession planning; aims, the most pertinent of which are listed below: the costs of and property companies seeking equity investment. complying with Furthermore, with the relaxation of the close the regime company requirements, companies that do convert have time to seek investors, whilst also enjoying the tax benefits of their REIT status. Due to the change in the diverse shareholders requirement, once they do find investors, they do not need to be concerned if only a small pool of institutional investors become their shareholder base. These changes could also encourage fund managers to incorporate new fund ventures as a REIT rather than a traditional Existing Position New position fund structure and certain types of institutional investors (such as authorised unit trusts, open-ended Companies converting to REIT status Entry charge abolished. investment companies, pension schemes and other must pay an entry charge of 2% of such collective investment schemes) could establish the gross market value of their wholly-owned REITs. property assets. The company must be listed on a Companies that are trading on AIM Richard Benson, Associate recognised stock exchange (such as or PLUS markets and their foreign the main market of the London Stock equivalents can convert to a REIT. Exchange and some parts of PLUS) to qualify as a REIT. REITS cannot be close companies There is to be a 3 year grace period for (controlled by 5 or fewer people, albeit the REIT to comply with this provision, there is no specific restriction on the allowing a company to convert and then size of any one shareholding). seek to widen its shareholder base. As part of the restriction on being a close The restrictions will be relaxed so that company, a REIT is required to have a a REIT will not be considered a close diverse shareholder base. company simply because it has one or more qualifying institutional investors. At least 75% of a REIT’s total assets Cash and gilts held can be added to the value must relate to its property value of assets for the purpose of rental business. this test. A tax charge is levied on the REIT if the The ratio will be based on loans only and profit ratio to financing costs falls will exclude the cost of arranging finance below 1.25:1. and other finance costs.

63 ATTORNEY FEATURE

Henry Lazarski

Henry Lazarski is a senior member of the Global Real Estate Team in Paris, having joined Salans in 2004 after a distinguished career at Clifford Chance. Rated as a “Senior Statesman” in the French real estate market by Chambers Europe, Henry continues to focus on transactional work for top real estate private equity clients, funds and developers.

Eric Rosedale sat down with the “Dean” of the French Real Estate Bar for a rare interview. ER: Henry, you started not shared by all the people I worked for. practicing law in France in 1971. At the end of my traineeship, my boss’s How would you characterise parting words to me were: “One thing is the French real estate legal certain you are not made for the law!” profession at that time? Most of my friends are in the real estate HL: Apart from notaries, who dealt business in one capacity or another. with conveyance, there were no lawyers And I do know some lawyers who specialising in transactional real estate. became leading names in the real estate Most of us were general practitioners. For business…but not in France. Many a number of years, at least the first half of lawyers hold the mistaken belief that they any meeting was devoted to establishing can do their clients’ job as well as they what each lawyer thought the law actually can, not realising that they are privy to said. By the way, time sheets did not exist! only one aspect of their work. Conversely when I say to someone outside the legal ER: On a personal note, what profession that he or she would make a drew you to the law in the good lawyer, it could be a back-handed first place, and have you ever compliment! More to the point, I do not contemplated going into the real believe I have the qualities required to be estate business? a successful entrepreneur in real estate. For example, and with hindsight, one of HL: Between leaving school and going the qualities I lack is the ability to foresee to Edinburgh University, I spent three the end of a cycle and the beginning of years as an officer in the British army another one. (reaching the elevated rank of lieutenant). On leaving the army at the age of 21, I ER: Along with remarkable thought I should study something which changes in the legal profession, may come in useful, so I chose law. I had how has the French real estate certainly no wish to become a lawyer. market fundamentally changed Having spent three years mainly outdoors,

A and developed over the years? the thought of being ‘cooped up’ in an office all day did not really appeal to me. HL: We have become part of a As I had a certain amount of free time at global market. Whereas when I started, university, I decided to become a trainee the French market was fairly simple solicitor. The firm I joined was, even by the and consisted mainly of developers who prevailing standards at the time, an old built the real estate and institutional & fashioned one whose clients were mainly investors (pension funds, insurance land owners. It is there that I became companies) who bought it once leased; fascinated – and remain to this day the number of players has not only fascinated – by the multiple facets of law grown considerably but they have become and the quasi daily challenges which its much more sophisticated. Real estate is practice offers. Clearly what I thought was now a financial product like any other. my natural predisposition for the law was Nevertheless, an in-depth knowledge Q

64 ATTORNEY FEATURE Q&A

of real estate is still essential to be a a few property cycles, and each time ER: If you had one piece of successful operator in this field. foreign investors began to invest massively advice to give to a new university in French provincial towns, it was the graduate deciding on whether ER: Real estate owners and sign of an over-heating economy, and to become a real estate investor investors are facing a tightening a downturn of the commercial property or a real estate lawyer in today’s debt environment, with fewer market was not far behind… world, what route would you say banks making fewer and smaller holds a brighter future? loans. How are our French clients ER: This year we are facing responding to this difficult lending the real prospect of fundamental HL: I am not the best person to environment, and are you seeing changes in the Euro and advise on a choice of career as I have new sources of debt in the French Eurozone in the midst of never regretted my choice but, as in market? extremely challenging sovereign every profession, many changes have debt problems. In such uncertain taken place over the 30+ years I have HL: At present ‘cash is king’, banks economic and political times, do been in practice. Law has now become a will rarely lend more than 50% of the commodity, and the legal market is highly you think investors see French value of the real estate. A number of competitive with a constant downward real estate as a safe harbour or a funds now provide mezzanine finance or push on fees. In order to “distinguish risky bet? participating loans, so the lack of bank yourself from the pack,” you must be able finance has not, yet at any rate, driven the HL: Real estate has always been to offer an added value to your clients prices down. However, many loans made considered to be a safe investment and not merely follow instructions and/ in 2007/2008 will soon mature and will especially in the medium to long term. It or see your role as putting down in legal need to be refinanced or the property sold is experiencing a considerable revival of form what the parties have agreed. to repay them. This may lead to some ‘fire This necessitates both a good overall interest in the present economic climate sales,’ of which cash-rich investors will no knowledge of all aspects of the law fraught with uncertainty. This is true for doubt take advantage. (including tax) and a deep knowledge both commercial and residential property. of real estate law, all of which must be ER: Paris is considered the With regard to the latter, prices in Paris constantly updated as well as a good prime destination for “core” are still reasonably cheap compared to understanding of the industry in which your cross-border real estate those of other major world capitals, but clients operate. So if you are prepared investors. Do you see French real they are catching up fast. “to go that extra mile” you will have a estate opportunities outside of long, interesting, and extremely rewarding ER: You are known as an avid Paris? career as a real estate lawyer. You will cyclist. How does your love of have understood what I believe… that HL: Difficult question, apart from cycling compare with your love of the practice of law still holds a very bright logistics buildings and shopping centres, I the law? future, provided you are willing to make believe the commercial real estate market the effort. is really centred on Paris and its region. HL: Cycling and the practice of law France is still very centralised and in spite both offer constant challenges. Thanks of what may be said from time to time, to cycling I have built up stamina and the French provincial market, with regard endurance which has helped and still to offices for example, does not have helps me to withstand the stress which, the fluidity of, for instance, the English unfortunately in these times of economic provincial towns. I have lived through quite uncertainty, forms part of our daily routine.

65 CIS

Tell Me What I Need to Know About Russian Pledge and Mortgage Law Reforms: “Welcome Back to Court”

On 7 March 2012, a new Russian law (No. 405-FZ – the “New Law”) entered into force. It radically changed the game for Russian pledges and mortgages. It affects real estate lenders and borrowers alike, principally impacting on how security may now be created and enforced.

Though the New Law includes many different It is a prevailing view 7 March 2012. If a lender insists on having a truly changes, its principle ramifications may be summarised enforceable out-of-court foreclosure right for existing as follows. Although the New Law is vaguely drafted that any out-of-court security (which will in any event be subject to the and has yet to be tested in practice or interpreted by enforcement of a risk of interference as mentioned above), the lender the Russian courts, practitioners are drawing some pledge or mortgage will have to face the tough choice of terminating and conclusions (often gloomy for the lender). re-executing such security (with notarisation thereof), will now be possible hence risking its priority as well as re-triggering It is a prevailing view that any out-of-court (i.e. only if the lender, (insolvency) hardening periods. self-help) enforcement of a pledge or mortgage will now be possible only if the lender, following a following a default, Because notaries are now in charge of the process default, obtains a special endorsement from a Russian obtains a special of creating security (if the lender wants self-help), notary – known as an ispolnitelnaya nadpis (an endorsement from a documents will now need to be discussed and agreed “Endorsement”). Previously, a lender could foreclose with the notaries in advance. Notaries’ comments will by way of out-of-court enforcement by merely Russian notary need to be taken into account and properly reflected notifying the security-giver of the default and the in the agreements – otherwise they will simply refuse lender’s decision to foreclose. to notarise them. This may well impact on standard lender-protection provisions seen in Russian-law The procedure for obtaining an Endorsement in security commonly used in large commercial real and of itself is not straightforward. Under the New estate deals, such as representations and warranties, Law, the notary (not the lender) must notify the negative covenants and the like (not native to security-giver and give him fourteen days to respond Russian law but often included by international law before acting. The notary can then only issue the firms in Russia, and particularly in the cross-border Endorsement if the security-giver does not challenge commercial real estate finance context). This will the default. In case of a disputed default, the notary lengthen the overall timing for putting Russian security will most likely refuse to issue the Endorsement or risk into place, as security must now be agreed not personal liability for violation of the security-giver’s only between lenders and borrowers but also with rights. In that case, the lender may foreclose only Russian notaries. through the courts. This means lenders can no longer count on a smooth out-of-court enforcement – in Notarial fees must also now be included in the practice borrowers must always cooperate (or at budget. Interestingly, so far there is no unified least not interfere) in the foreclosure process. approach among Russian notaries on pricing such fees. Accordingly, for now this is likely to be handled It is also expected that Russian notaries will issue on a case-by-case negotiation with individual notaries. Endorsements only if the relevant security itself was notarised from the outset. Given that notarisation of security was not previously required as a general rule (with the exception of pledges of shares in Russian limited liability companies and some other limited cases), most currently existing security has never been notarised. The question arises – can this security now be notarised after the fact? So far, the general Lenders will in all position of notaries on the market is that they will likelihood be unable likely refuse to notarise existing security as well as any amendments made after the New Law entered to enjoy out-of- into effect (under Russian law, an amendment to court enforcement an existing contract should, as a rule, be made in on most security the same form as the original contract). As a result, lenders will in all likelihood be unable to enjoy out- signed before of-court enforcement on most security signed before 7 March 2012

66 RUSSIA

Conclusion Because notaries are ATTORNEY HIGHLIGHT It is yet to be seen how the New Law will be now in charge of the implemented in practice. Its aim was clearly to process of creating Timothy Stubbs streamline and make the foreclosure process more Partner, Russia transparent. The involvement of notaries can be security (if the lender seen as legislative intent to place an independent wants self-help), intermediary between lenders and borrowers in documents will now the enforcement of security. However, the practical effect of the New Law is that lenders can no longer need to be discussed rely on out-of-court enforcement, as this will depend and agreed with the on security-givers’ (i.e. borrowers’) cooperation notaries in advance Tim Stubbs is a member of Salans’ Global Real Estate (or at least non-interference). In the ‘rough-and- Group and heads its Banking & Finance Group in tumble’ Russian business environment (and taking Russia. Tim concentrates on cross-border real estate into account that notaries will be personally liable for financings, M&A deals and restructurings. violation of security-givers’ rights), we anticipate that at least for now lenders are likely to find themselves Tim is listed as a leading practitioner (taking first place in court more often than not. for real estate finance in CIS/Russia) by Who’s Who Legal CIS 2011. He is also highly ranked by Chambers Welcome Back to Court. 2012 for banking and finance (in particular, real estate finance) and private equity in Russia, and in project Sergey Trakhtenberg, Associate finance in Central and Eastern Europe. Tim is also recommended as a leading expert in banking and finance by The Legal 500 2012 and in project finance by PLC Which Lawyer? 2012.

Tim’s history with Salans dates back to 1991, when he moved to Moscow having previously practiced in Chicago and New York for six years. In 1993 Tim then moved to St. Petersburg, to open and co-manage the firm’s office there. In 2001-2002 Tim took a two-year working sabbatical at the Office of General Counsel (OGC) of the European Bank for Reconstruction and Development (EBRD) and re-joined the firm in 2003, moving back to its Moscow office in 2004.

Tim tries to approach each transaction thinking as the client would – “The client needs to know you know their business as well as they, and you have their interests firmly planted in your heart and mind.” Tim is as passionate about practicing law as he is about his music – in his spare time, when not leading client deals, Tim heads a piano jazz trio.

67 CIS

Concessions in Russia: Further Legislative Developments

The Russian Federal Law on Concession Agreements was adopted in Russia in the summer of 2005. Since then nine sets of amendments have been made, most of which were substantial and had considerable legal significance. Despite this, the concession structure remains unpopular and is not widely used in practice.

The 10th amendment package has made another The primary The Law on Concession Agreements provides that attempt to change the situation and make it more the public partner may undertake to pay a part of flexible and attractive to investors. purpose of Law No. the cost of building (constructing) and/or renovating 38-FZ is to establish and operating the concession properties, and may Federal Law No. 38-FZ on Amendments to the a special legal provide the concessionaire with state or municipal Federal Law on Concession Agreements and article guarantees. In addition to these general provisions, it 16 of the Federal Law on State Company Russian procedure governing is provided that a concession agreement with respect Highways, and Amendments to Certain Legal Acts concession to Highway Infrastructure Facilities may also provide of the Russian Federation (“Law No 38-FZ”) was agreements for the public partner to make a certain payment to adopted on 25 April 2012. The primary purpose the concessionaire, provided that: of Law No. 38-FZ is to establish a special legal with respect to procedure governing concession agreements with roads or sections (1) the public partner’s payment under the concession agreement must be determined in the respect to roads or sections thereof, protective thereof, protective and artificial road structures, industrial facilities used criteria of the tender for the right to conclude the in capital repairs, repairs or maintenance of roads, and artificial agreement, and facilities for collecting payment and road services road structures, (2) a concessionaire receiving such payment (“Highway Infrastructure Facilities”). At the same time, industrial facilities from the public partner shall not have the right Law No. 38-FZ makes amendments to certain general used in capital to collect payments from other parties for the provisions of Federal Law No. 115-FZ on Concession creation, renovation, or operation of the Highway Agreements (“Law on Concession Agreements”), repairs, repairs or Infrastructure Facilities. applicable to other facilities. maintenance of This means that it effectively provides for the Below we provide a brief summary of the key roads, facilities for conclusion of concession agreements in the form of changes in Law No. 38-FZ: collecting payment “life-cycle contracts”. This form should be desirable for building and operating “free” (public) roads. The If a concession agreement is concluded with respect and road services public partner’s failure to perform the obligation to to Highway Infrastructure Facilities, then at the pay under the concession agreement constitutes a time the agreement is concluded, the facilities may material breach of agreement, which may result in belong not only to the Russian Federation, members termination of the agreement by court decision. (constituent subjects) of the Russian Federation, municipalities, or State Company Russian Highways, It is established that if the concessionaire raises funds which are expressly recognised as public partner from creditors for the performance of its obligations entities in the Law on Concession Agreements, but under a concession agreement with respect to also to state or municipal enterprises and/or state Highway Infrastructure Facilities, the rights of the budget-funded enterprises holding the facilities under concessionaire under the agreement may be used operational management or economic management. to secure the performance of the concessionaire’s These enterprises are now able to act for the obligations before creditors in the manner and public partner in undertakings under a concession on the terms stated in the concession agreement. agreement, and to exercise certain powers of the Moreover, in this case it is possible to conclude a public partner along with the public partner itself (i.e., trilateral agreement: among the public partner, the the Russian Federation, Russian Federation members, concessionaire, and the pool of creditors, which, municipalities, State Company Russian Highways). In inter alia, can resolve issues relating to liability for this connection, additional rules are provided with non-performance or improper performance by the respect to termination of the rights of state budget- concessionaire of its obligations under the concession funded enterprises to Highway Infrastructure Facilities agreement. (However, at the same time, Law No. and transfer of Highway Infrastructure Facilities to the 38-FZ excludes the ability previously provided in the concessionaire. Law on Concession Agreements for concessionaires to use a similar mechanism in agreements with respect to public utilities systems and infrastructure.)

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For the first time it becomes possible to replace the As can be seen, expenses arise during the creation and/or renovation concessionaire without holding a new tender, if (a) of the concession property, or use/operation of the concessionaire’s non-performance or improper these amendments the concession property. At the same time, if the performance of its obligations resulted in a material are important, concession agreement provides that the public breach of the concession agreement and/or (b) relevant, and partner must pay a part of the cost of creating and/ caused death or harm to individuals, or threatens intended to improve or renovating the concession property, use/operation to do so; a resolution of the RF Government is of the concession property, or make payments required upon either condition for replacement the concession under the concession agreement, the size of such without a tender arising, which shall be issued with structure – to make expenses and payments of the public partner must be consideration for the opinion of creditors. it more attractive established in the tender criteria. When replacing parties to a concession agreement to private partners New provisions have been added to the Law on it is not permitted to amend the conditions of the and financing Concession Agreements governing the procedure agreement determining the technical characteristics of for concluding concession agreements after a tender. the concession property. organisations Law No. 38-FZ establishes that after the members of the tender commission have signed the report It is clarified that the term of the concession on the results of the tender, the authorised public agreement is established with consideration for the partner shall, on the basis of a resolution on the performance of the public partner’s obligations, as conclusion of the concession agreement, conduct well as the concessionaire’s. negotiations in the form of joint meetings with the winner, or another party with whom it was decided The list of dispositive conditions that may be included to conclude the concession agreement, to discuss the in the concession agreement now includes (a) the conditions of the concession agreement and potential size, conditions, procedure, and terms of payment amendments upon the results of negotiations. (These of penalties for breach of the concession agreement; amendments effectively fix the existing practice.) and (b) the procedure for determining the amount of Conditions that were tender criteria and/or were reimbursement of the parties’ expenses in the event determined on the basis of the bid by the party of early termination of the concession agreement chosen to conclude the concession agreement in the cases provided in the Law on Concession cannot be amended in negotiations. The term and Agreements. procedures for the negotiations shall be set out in the A rather important amendment is that when tender documentation. The tender documentation must state which conditions of the concession concluding concession agreements for Highway agreement are not negotiable, and/or conditions Infrastructure Facilities in federal ownership, the which may be amended in accordance with the model agreements provided in the Law on Concession procedure provided in the tender documentation. Agreements do not have to be used. Notice of the conclusion of the concession The Law on Concession Agreements now provides agreement shall be published. that the conditions of a concession agreement based As can be seen, these amendments are important, on the resolution on conclusion of the agreement relevant, and intended to improve the concession and the concessionaire’s bid in accordance with the structure – to make it more attractive to private tender criteria may be amended by agreement of partners and financing organisations. Unfortunately the parties on the basis of a resolution of the the amendments are the result of lobbying and the public partner. most “progressive” amendments concern mainly a A new ground for termination of a concession narrow range of subjects – Highway Infrastructure agreement has been introduced. The agreement Facilities. Furthermore, a significant number of legal may now provide for early termination by decision issues impeding the use of concessions in Russia of the public partner, if the concessionaire’s non- (such as limited arbitration clauses, insufficient tariff performance or improper performance has resulted regulation, short-term budget planning, etc.) remain in death or harm to individuals, or created a risk of unresolved. Therefore, regrettably, it is unlikely there such harm. will be any boom in concession PPPs following the adoption of these amendments. Provisions have been added to the Law on Concession Agreements establishing criteria for tenders for the conclusion of a concession agreement. As criteria, the tender may establish obligations to be undertaken by the concessionaire Karina Chichkanova, Partner, Head of St. Petersburg if the expected income from use/operation of the Real Estate and Russian PPP Groups concession property is not received; additional Olga Lovtsov, Of Counsel

69 CIS

New Lease Termination Powers

Plans by the Governments of Moscow and St. Petersburg for a review of planned and on-going construction projects became clear at the beginning of this year.

Federal Law No. 427-FZ of 12 December 2011 Plans by the (“Law”) was enforced on 14 December 2011, significantly amending Federal Law No. 137-FZ of 25 Governments October 2001 on the Enactment of the Land Code of Moscow and of the Russian Federation (“LC RF Enactment Law”) St. Petersburg and Federal Law No. 39-FZ of 25 February 1999 on for a review of Investment Activities in the Russian Federation in the Form of Capital Investments (“RF Investment Law”). planned and on- going construction The amendments to the RF Investment Law took effect on 1 February 2012, while the amendments to projects became the LC RF Enactment Law were enforced on clear at the 1 April 2012. beginning of this year The Law provides new grounds for early, out-of- court, unilateral termination by a state or municipal authority of investment contracts and land lease agreements for state-and municipally-owned land plots in Moscow and St. Petersburg that were finalised before January 1 2011. The Law gives the city administration (Moscow, St. Petersburg) the right to unilaterally terminate an investment contract and/or land lease agreement on the new grounds provided two conditions are met: the land plot must be allocated for the purpose of construction or renovation of a property; and there must have been a material breach of the agreement, or a material change in the circumstances under which the parties entered into the agreement. The material breaches of an investment contract or land lease agreement that permit unilateral termination by a state or municipal authority are as follows: failure of the tenant to perform the obligation to There were more build/renovate the property by the time specified in the land lease agreement or investment contract. than 700 land plot If no date is specified, then within the term of the town planning plans construction/renovation permit. To serve as grounds issued between for early termination the construction readiness of the 2008-2010 which property on the last day of the stated term must be less than 40% of the scope provided for in the design are up for review by documentation; and the Moscow Town not having obtained a construction permit after Planning and Land 5 years have elapsed from the end of the land Commission

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lease agreement or investment contract, if the The Law provides There were more than 700 GPZUs issued between relevant agreement does not provide a deadline new grounds 2008-2010 which are up for review by the Moscow for completing construction or renovation of the Town Planning and Land Commission. property. for early, out-of- court, unilateral Under the applicable law, the permitted use of According to the Law, for a land lease agreement the land plots and the limiting parameters of permitted only case of a material change in the circumstances termination construction or renovation of capital structures under which the agreement was finalised is when by a state or are determined by the town-planning regulations in addition to the land lease agreement the state or municipal authority established with respect to a particular territorial municipal authority, or other state- or municipally- zone. The town-planning regulations are contained owned entity, and the tenant also finalised an of investment in the Land Use and Development Rules, which have agreement on the construction or renovation of a contracts and land not been adopted yet in Moscow. In the absence of property on the said land plot, and that agreement lease agreements the approved Moscow Land Use and Development was then terminated for any reason. Rules, information on the permitted use of a land for state-and plot is contained in the GPZU of a land plot and is According to the Law, for an investment contract a municipally-owned determined on the basis of the following documents: material change in the circumstances under which the land plots in the Moscow General Plan; territorial and sector contract was finalised is the inability to perform the schemes; draft territorial and demarcation plans, obligations to build or renovate the property because Moscow and St. town-planning regulations, and others. Where no the land plot cannot be allocated in accordance with Petersburg that town-planning regulations or draft territorial plans Russian Federation law, or due to encumbrances or have been approved, the GPZU for such territories were finalised before will be issued or revised in accordance with the third party property standing on the land plot that 1 January 2011 impede the construction or renovation. existing territorial regulations. The information previously stated in land plot permitted use In these cases, the Moscow or St. Petersburg city certificates, land development plans, or land lease administrations will notify the counterparty of the agreements finalised before 1 January 2012 are not unilateral termination of the investment contract binding when elaborating GPZUs. or land lease agreement. The parties to the The abovementioned legal acts therefore allow the investment contract or land lease agreement have Moscow and St. Petersburg authorities, subject to a one-month period to submit written objections certain conditions, to unilaterally terminate investment to the termination of the agreement. If the state or contracts and/or land lease agreements. The Moscow municipal authority does not receive such objections Town Planning and Land Commission has also gained within the one-month period or does not agree to the right to amend or revoke previously issued them, the relevant agreement is deemed terminated GPZUs. Many experts see these legal acts as Sergei as of the date the state or municipal authorities sent Sobyanin’s “political answer” to “Luzhkov favourites”, the termination notice for the agreement. with the intention of transferring investment opportunities to developers more loyal to the Furthermore, Moscow Government Resolution No. “new regime”. It remains an open question whether 139-PP of 17 April 2012 on Measures to Ensure market participants that have never had particularly Cooperation among Executive Authorities of the close relations with the city authorities will also City of Moscow in the Implementation of Certain feel the effects of these decisions. We believe that Resolutions of the Moscow Town Planning and Land there is potential for an increase in litigation relating Commission, adopted pursuant to amendments to to the early termination of investment contracts the Moscow Town Planning Code (Moscow Law No. and land lease agreements, as well as the financial 12 of 11 April 2012), determines that the Moscow consequences of such terminations. Town Planning and Land Commission has the authority to amend or revoke previously issued land plot town planning plans (“GPZU”). Anna McDonald, Head of Real Estate Russia

71 Bringing International Real Estate Leaders Together

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Our Roundtables provide a unique opportunity to exchange the latest market intelligence and investment trends, and debate the historic opportunities and challenges that face real estate managers in these tumultuous times.

For more information about our European Real Estate Leaders Roundtables contact: Scott Thomson, Head of Marketing, Global Real Estate Group at: [email protected].

72 UKRAINE

The Procedure for State Registration of Land Lease Agreements in Ukraine Has Been Simplified

A new and official clarification of the State Agency of Land Resources confirms that the practice of submitting exchange files (obminni fayly) for the State registration of land lease agreements is illegal.

This appeared on the website of the State Agency A new and official It must be mentioned separately that clause 16-3 of Land Resources (see link http://www.dazru.gov.ua/ establishes that a territorial body of the State Agency terra/control/uk/publish/article?art_id=135734&cat_ clarification of the of Land Resources shall refuse to perform State id=97786) on 22 May 2012. State Agency of Land registration of a land lease agreement for privately owned land plots if: Despite the existing practice of territorial bodies Resources confirms of land resources and structural subdivisions of the that the practice of 1. not all documents have been submitted; State Enterprise “Centre of State Land Cadastre”, submitting exchange which requires submitting exchange files (obminni 2. the submitted documents do not correspond to fayly) in XML format for the State registration of land files for the State the requirements established by this procedure. lease agreements for privately owned land plots, the registration of land Therefore, the requirements of territorial bodies of new clarification rejects this practice based on the lease agreements the State Agency of Land Resources or structural following: is illegal subdivisions of the State Enterprise “Centre of Pursuant to paragraph 2 clause 16-1 of the State Land Cadastre” with respect to submission of Procedure for keeping the Book of records pertaining exchange files (obminni fayly) by the applicant (in case to State registration of State acts for ownership rights of changes to their content, structure, format (In-4, to a land plot and for permanent rights to use a land Xml)) for State registration of land lease agreements plot, land lease agreements, approved by resolution for privately owned land plots are contrary to of the Cabinet of Ministers of Ukraine dated regulatory legal acts currently in force, in cases where 9 September 2011 No. 1021 “On approval of the the State registration of the said land plots took procedures for maintaining the Land Record book place earlier. (Pozemelna Knyha) and the Book of records pertaining to State registration of State acts for ownership rights to a land plot and for permanent rights to use a land Anzhelika Shtukaturova, Associate plot, land lease agreements” (the “Procedure”), State registration of a land lease agreement for privately owned land plots is performed after State registration of a land plot. Clause 16-2 of the Procedure stipulates the complete list of documents necessary for State registration of a land lease agreement for privately owned land plots, in case the State registration of a land plot took place at the stage when the title document to a land plot was issued and the data about the plot was entered into the computerised system. The said Procedure prohibits requiring the submission of documents and data not stipulated by this clause. The said Procedure Requirements with respect to submission of land organisation documents which include a land plot prohibits requiring plan and have data about coordinates of turning the submission of points of the boundaries of the portion of a land plot documents and data and an exchange file (obminnyi fayl) correspond to the Procedure only in case of State registration of a not stipulated by sublease agreement for the portion of a land plot. this clause

73 CIS

Close-Ended Mutual Funds: A New Era in Real Estate Development in Azerbaijan?

Recent years have seen a dramatic increase in legislative activity in the field of real estate, perhaps in a bid to catch up with the construction boom that has swept the country during approximately the same period.

New laws were passed, inter alia, regulating In our view, the A Close-Ended Mutual Investment Fund is a fund mortgages, requiring that construction contractors that sells and redeems its shares upon the expiration buy third party liability insurance, reforming ground most important legal of the term for which such fund was created. The for acquisition titles for immovable property, etc. update was passing assets of a Close-Ended Mutual Investment Fund may However, in our view, the most important legal the modern Law On consist of money, securities and real estate. It is the update was passing the modern Law On Investment Investment Funds only type of Mutual Investment Funds that is allowed Funds (the “Investment Funds Law”). to invest into real estate. In this article we will attempt to provide an Finally, one of the most distinctive features of Mutual introduction to the only type of investment funds that Investment Funds in Azerbaijan is that they do not is allowed to invest in real estate – the close-ended have the status of legal entity. This means that Mutual mutual fund. Investment Funds are not subject to the Azerbaijani corporate profit tax, which applies only to legal Introduction entities, including limited liability companies and Except for activities conducted by the State Oil Fund partnerships. of Azerbaijan (SOFAZ), investment fund activity has Despite Mutual Investment Funds not having the been almost non-existent in Azerbaijan, even though status of a legal entity, the participants in such the pervious Law On Investment Funds (1999) has funds are not liable for their obligations, and losses been in force for many years. In fact, according to incurred by them as a result of a change in the information concerning the registered names of legal market value of the funds’ assets are limited to their entities available on the official website of the Ministry respective contributions to the fund. Likewise, Mutual of Taxes, only three investment funds have ever been Investment Funds are not liable for the obligations of registered as such in Azerbaijan. And even those their participants, the creditors of which may direct were probably registered when the old law was their claims only against the shares actually owned by in force. such participants. The rationale behind passing the new Investment Funds Law was painfully clear – the old law On Investment Funds was grossly outdated and, given the small number of investment funds registered, not working very well. Passing the new Investment Funds Law was an action indicative of the efforts of the Azerbaijani government to establish the legal basis for, and to encourage engagement in, this type of activity The rationale behind in Azerbaijan. passing the new Key Features of Close-Ended Mutual Investment Funds Investment Funds Law was painfully The Investment Funds Law defines an investment clear – the old law fund as a financial institution established in the On Investment form of either a joint stock investment fund or a Funds was grossly mutual investment fund, created for the purpose of generating profit by making investments using the outdated and, given capital it has raised in accordance with an investment the small number declaration. Further, a Mutual Investment Fund is of investment funds defined as a professionally managed pool of funds owned by the participants in such fund under a right registered, not of common property. working very well

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How Do They Operate? A Close-Ended their shares, including information on composition, Establishing the Close-Ended Mutual Mutual Investment structure and value of the fund’s assets; its net assets; Investment Fund then current value of the funds’ shares; and its audited Fund is a fund that annual accounts. Mutual Investment Funds are created by a decision of the investment fund manager, and are considered sells and redeems Additionally, the law goes so far as to require that the formed when they have succeeded in raising the its shares upon the investment fund manager or professional participants minimum capital, currently set at AZN 500,000 expiration of the in the securities market (i.e., underwriters) provide (approximately US$ 635,000), or set forth in the investors with a separate risk statement and have funds management rules, whichever is higher. The fund term for which such them countersign the statement. If the investment must then be registered with the Registry maintained fund was created fund manager or the underwriter fails to do so, they by the State Securities Committee (the “SSC”), also may be liable to the investors for any losses from acting as the Regulator, made upon the registration of such investment. the Management Rules of the fund. The fund and the investment fund manager must also be licensed. As a general rule that the advertising of the investment fund manager must not be inaccurate, Shares in the fund must be denominated in misleading, or contrary to the investment declaration. Azerbaijani manats (AZN), paid for in cash, and Importantly, the law requires the disclosure of any have no nominal value (value is then calculated in material information, which is necessary for making a accordance with the SSC rules). These shares may not decision by an investor, along with the risks associated serve as an asset base for the issuance of derivatives, with the investment. nor can they be offered to potential participants before the Management Rules are registered and Finally, all advertising and sales materials must be published. The number of shares in a Close-Ended submitted to the SSC, which, upon discovery of any Mutual Investment Funds is limited to that set forth in illegal content, may order that the dissemination of its Management Rules. such materials be ceased. Liability of the Investment Fund Manager Conclusion While passing the law and adopting rules The Investment Fund Manager is liable for losses implementing provisions of the law are just the first incurred by the participants of the fund as a result of steps, they are important steps in the right direction. the manager’s violation of the relevant provisions of Laying out the legal framework is crucial to provide the law or the fund’s management rules. No liability potential investors with more confidence and to on the part of the Investment Fund Manager is encourage their investment. However, it remains envisaged for fluctuations in the value of the fund’s to be seen how effective these measures will shares due to the shift in the market price of the One of the be ultimately. fund’s assets. most distinctive Reporting, Disclosure and Marketing features of Mutual Kamal Mammadzada, Partner Mutual Investment Funds must prepare financial Investment Funds reports in accordance with international financial Ulvia Zeynalova-Bockin, Associate reporting standards and an independent auditor must in Azerbaijan is that approve such reports. Such independent auditor must they do not have comply with the standards set forth by the regulator the status of legal of the auditor’s profession, as well as those of the SSC. entity and thus are not subject Mutual Investment Funds must make available certain information to investors in the offices where such to the Azerbaijani funds accept orders for the sale and redemption of corporate profit tax

75 CIS

Regulation of Trunk Pipelines in Kazakhstan: Current Issues and Trends

Subsoil users need transportation, including for export purposes, for the oil recovered from oil fields. Without reliable transportation routes and means, a subsoil use right would lose its value. A basic way of transporting oil and gas is trunk pipelines.

Despite the fact that this method of transportation There are serious Proposed Amendments is highly used in Kazakhstan (compared to concerns in the To address and clarify these and other practical transportation via oil tankers or by railroad), there problems, a draft Law on Trunk Pipelines (the are serious concerns in the industry regarding industry regarding “Draft”) has been elaborated and is currently under Kazakhstan’s lack of comprehensive legislation Kazakhstan’s lack consideration in the Parliament. It is anticipated that pertaining to trunk pipelines. of comprehensive the Law on Trunk Pipelines will further develop the exploration and exploitation of oil deposits and The ambiguities in relation to the status of trunk legislation pertaining facilitate business activities in general. pipelines, whether they are movable or immovable to trunk pipelines properties, have deepened the concerns. The very Issues of Legal Status practical problem of registering trunk pipelines The Draft appears to address the issue of the legal is a result of such uncertainties. The current status of a trunk pipeline by viewing it as a complex legislation states that immovable property has to entity consisting of different elements each with be registered in the oblast (administrative-territorial different legal status. unit in Kazakhstan) where such property is located. However, one of the peculiarities of trunk pipelines Thus, the Draft provides that a trunk pipeline is an integrated industrial-technological complex is that they can extend through the territory of which consists of a lineal part and objects ensuring several oblasts. secure transportation of production (facilities, If the view is taken that a trunk pipeline is an integral constructions, buildings). The lineal part of a trunk item of immovable property, legal rights to it should pipeline references underground, submerged, surface, be registered in one procedure and in respect of and above-ground pipelines, which are used for the trunk pipeline as a whole. However, the existing production transportation. The Draft recognises the lineal part of a trunk pipeline as an “object equated immovable property registration system cannot to immovable property”. accommodate the concept that immovable property can be located in more than one oblast. Accordingly, Kazakhstan law already has other examples of there is a practical problem to register one trunk “objects equated to immovable property”. The pipeline in several oblasts since the registration Civil Code (as amended by the Draft) would state agencies in some of the oblasts do not recognise a that “Air and sea vessels, vessels of domestic water trunk pipeline as an immovable property and refuse travel, vessels of river and sea sailing, and cosmic to register it as such. At the same time, other oblasts’ facilities, lineal part of trunk pipelines shall be equated registration agencies freely register pipelines as to immovable objects which are subject to state immovable properties. registration” (Article 117.2).

Another issue with the legal status of trunk pipelines is As to ancillary “objects ensuring secure transportation that Kazakhstan’s Civil Code provides that oil and gas of production”, the Draft does not specifically trunk pipelines are strategic objects, the assignment It is anticipated characterise them. Therefore, these objects can be treated either as immovable or movable property or encumbrance of which needs to be approved that the Law on depending on their characteristics. by the Government of the Republic of Kazakhstan. Trunk Pipelines will Moreover the Republic has a priority right to acquire further develop Obviously, by recognising the lineal part as a stand- trunk pipelines which are up for sale. Therefore a alone object, the legislator is trying to solve the practical problem has been to identify exactly what the exploration problem of registering the entire trunk pipeline, constitutes a trunk pipeline and whether the pipeline’s and exploitation which extends through the territory of several owner must receive the approval of the Government of oil deposits and oblasts. However, the Draft fails to respond fully to in order to sell or encumber the pipeline. the question of whether trunk pipelines are subject facilitate business to registration and how such registration should be activities in general done. In the absence of any reference in the Draft

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to a special registration system for trunk pipeline, Currently, trunk land underlying the pipeline. Much attention is paid to it might seem that there is no need to register the the safety requirements of activities connected with pipeline as a whole. However, from our sources we pipelines may be the use, conservation, and liquidation of pipelines. understand that such registration system is likely to owned by both the be created after the adoption of the Draft. Therefore, State and private The interests of the owners of trunk pipelines are it still remains to be seen whether and how such secured by listing their rights and obligations. One entities. However, of the main obligations of the owners is to provide registration system will be implemented and, more shippers with equal access to the pipeline. This is in importantly, whether it will resolve the uncertainties the Draft introduces order to eliminate possible abuses by the owner of that exist. that ownership of its rights. The Draft contains limited grounds for an Dispute Resolution Issues trunk pipelines by owner to decline shipment of the production or to suspend the fulfilment of the shipment contract, and There is another implication of classifying the private persons and those mainly for safety reasons. linear part of a trunk pipeline as “objects equated foreign legal entities to immovable property”. Under Kazakhstan law, is forbidden Given that Kazakhstan has never had comprehensive disputes associated with immovable property cannot legislation in relation to trunk pipelines, the be referred to arbitration; rather such disputes are subsequent application of the Law on Trunk Pipelines subject to a mandatory jurisdiction of state courts. can undoubtedly reveal problems going forward. It is Accordingly, in any agreements concerning trunk hoped that attempts to solve these problems will be pipelines, parties would be unable to refer the made with more enthusiasm and creativity than has disputes to arbitration. In this sense, the Draft is been proved so far. in line with the policy of the State to extend the jurisdiction of state courts over strategic objects, especially those being part of the oil industry. Birzhan Zharasbayev, Senior Associate Ownership Issues Askar Kaldybayev, Senior Associate Currently, trunk pipelines may be owned by both the State and private entities. However, the Draft introduces that ownership of trunk pipelines by private persons and foreign legal entities is forbidden. From these provisions it is clear that national security concerns will hinder foreigners’ control of strategic objects. One more example of national security issues is evident in the provisions relating to the priority right of the State to acquire a 50% stake in all planned trunk pipelines. The State again tries to exercise further control in the oil and gas industry. The Draft also addresses issues relating to the competence of the government and relevant state bodies, allocation of land plots, projecting, and construction of pipelines. Though these can be seen as mere technical issues, they have significant repercussions in the course of practical implementation. For example, the Draft provides that allocation of land for the purpose of a trunk pipeline shall be made by way of creating servitude over the

77 UNITED STATES

Operating Expenses: Renting Commercial Office Space in New York City

Leasing commercial space in New York City (NYC) is not for the faint of heart. No matter whether the market at the time in question is an up market or a down market, the market itself is based on a healthy competition between landlords who draft leases aggressively favoring the landlord, and tenants, who undertake, with the assistance of their lawyers, to negotiate the landlord’s form into an acceptable and reasonable lease document.

In many cases, tenants are overwhelmed by the In many cases, tenant’s proportionate share of any increases in length of the standard lease document and overlook operating expenses and taxes over a “base year,” the economic impact of certain lease provisions. This tenants are which normally is the current or prior calendar is especially true in the case of operating expenses. overwhelmed by year or tax year. Typically, these leases include While tenants would like to assume that their the length of the mechanisms to increase the operating expenses monthly rent consists of one negotiated sum, most standard lease during the term of the lease. The rationale behind leases call for rent increases based on the operating operating expense escalations is to protect the expenses of the building, which is one element of document and landlord’s profit margin. Thus, by allowing the so-called “additional rent”, which can often be the overlook the landlord to recover typical inflationary cost increases most unpredictable cost element in a lease. While economic impact in building services, the tenants share, on a pro-rata additional rent generally also comprises other items, basis, increases in the operating costs of the building. such as taxes, overtime services or other specific of certain lease Operating expense escalations in leases for NYC charges, this article specifically discusses the nature of provisions. This is office space are commonly calculated in accordance operating expenses and some of the ways in which especially true in the with one of the following mechanisms: (i) direct they are calculated in typical leases for commercial operating expenses, (ii) the Consumer Price Index, or space in the NYC office market. case of operating (iii) the Porter’s Wage. expenses What Are Operating Expenses? Direct Operating Expenses Simply put, operating expenses are the total cost Sometimes also called the direct expense pass- of all goods and services needed to keep a building through, this is the most straightforward method operational. For example, in a typical lease for office of calculating escalations. It is also usually the least space in NYC, operating expenses can include expensive and the most favorable method from a insurance costs, management fees, janitorial services, tenant’s perspective. Under this approach, when a employee salaries and benefits, certain utility charges, property’s operating expenses increase, the tenant is heating, ventilation and air conditioning, landscaping, charged for its proportionate share of the increase and a laundry list of other maintenance charges. based on the ratio of the tenant’s leased square Operating expenses are sometimes referred to as footage to the total square footage of the building. CAM (i.e. common area maintenance) charges, triple For example, if the tenant leases 25,000 square feet net charges, or pass-throughs. in an office space with a total square footage of 100,000 square feet, its proportionate share would How Are Operating Expenses be 25%. Thus, if the operating expenses of a building Calculated in Leases? rise by US$ 100,000 over the base year, the tenant In the real estate market, commercial office leases are would be responsible for paying US$ 25,000. usually referred to as “net” or “gross” leases. Under a net lease, there is no base year, and the tenant is When using this method, the landlord typically will generally responsible for most of the costs associated invoice the tenant monthly for its proportionate with maintaining the property. Under a gross lease, share based on the prior year’s actual operating on the other hand, the landlord agrees to pay for all expenses or on the landlord’s estimate of the building base year expenses normally associated with property operating expenses for the current year. At year’s ownership, such as taxes, insurance and maintenance. end, the landlord will provide the tenant with a The tenant is only responsible for its share of the reconciliation of the actual operating costs versus increases in costs above the base year. The base rent what the tenant was billed. The tenant will be asked will be set depending upon whether the lease is a to pay any shortage within a certain amount of time gross lease or a net lease. or will receive a reimbursement or rent offset for any overpayments. In the NYC office market, the majority of leases are “modified gross” leases, under which the tenant is In negotiating a lease, the tenant’s attorney should responsible for paying base rent, electricity, and the attempt to exclude from the definition of operating

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expenses various landlord costs that are not typically In the New York CPI increase or to provide that only a percentage of included in the pass-through. For instance, a tenant the increase (i.e. 50% or 75%) is to be recognized should not be required to pay a proportionate share City office market, when calculating rent increases under the lease. of the landlord’s costs for leasing commissions paid, the majority of managing agent fees in excess of the then customary leases are “modified Porter’s Wage charges, executive salaries above the grade of gross” leases, under A third common approach for calculating operating building manager, reimbursed or reimbursable expense escalations in NYC is the Porter’s Wage, costs and hazardous waste removal, to name a few. which the tenant which is a method unique to NYC’s real estate One should also be aware of the most customary is responsible market. Porter’s Wage escalations adjust rent by method for limiting costs associated with capital for paying base reference to the increase in hourly wage for union expenditures. If capital expenditures were not so porters and cleaners as negotiated every three years limited, a landlord could renovate the entire building rent, electricity, under their collective bargaining agreement. Usually, and pass along the costs to the tenants, including and the tenant’s a Porter’s Wage escalation clause will require an a tenant who has less than a year left on the term proportionate share increase of one cent per square foot for each one- of its lease. Therefore, as a general matter, capital cent increase in the porter’s wage (i.e. a “penny-for- expenditures are not included in operating expenses of any increases in penny” increase), with the base year typically being unless they are required by law, in which event, the operating expenses the Porter’s Wage index in effect during the first year costs should be amortized over the useful life of the and taxes over a of a lease. Thus, if the Porter’s Wage increases by expenditure. Thus, if a landlord has expenditures of US$ 2 per hour over the base year wage, the rent US$ 1,000,000.00 for capital improvements that are “base year” will go up by US$ 2 per square foot. However, it is permitted to be included as operating expenses, the sometimes possible to negotiate for a lesser Porter’s expense would be amortized over 10 years and the Wage increase, for example, 3/4 of a cent for each tenant would be required to pay its proportionate cent increase. Salans was recently able to achieve share for each year remaining on the term of such a reduction in a substantial lease the firm its lease. negotiated for a large international financial institution. A tenant should also realize that, in preparing its Calculating rent increases using the Porter’s Wage escalation statements, the landlord may seek to is not necessarily detrimental to tenants, particularly pass through operating expenses that conflict with in times of low wage inflation, but can have the the provisions of the lease. Therefore, a tenant opposite effect if wages are increasing at a rate in should always reserve the right to audit escalation excess of actual building operating costs. This is statements in the lease and should utilize such right particularly true if the Porter’s Wage formula includes to confirm that the operating expense escalation fringe benefits (i.e. pensions, medical benefits, amounts billed by the landlord are consistent with seniority bonuses, overtime, scheduled hours versus the terms of the lease. worked hours, etc.). Accordingly, tenants’ attorneys should seek to eliminate fringe benefits when In a smaller lease, the landlord may seek to avoid negotiating leases utilizing the Porter’s Wage for negotiations regarding building operating expenses rent increases. and disputes over escalation statements by using an index formula, such as the Consumer Price Index, or Which Method to Use? by pegging rent escalation to increases in the Porter’s Typically the direct operating expenses approach Wage. As an added benefit to the landlord, these to calculating escalations is the most beneficial and alternative approaches have generally yielded fair for tenants (provided the provisions have been greater rental increases than the building operating properly negotiated), but this does not mean that, expense method. under the right circumstances, the CPI or the Porter’s Wage method may not be a good choice, particularly Consumer Price Index if limited as discussed above. Tenants and landlords Under the second approach, instead of calculating need to consider a variety of factors, including increases in operating expenses over a base year, the market conditions, the size and length of the lease, landlord will require percentage increases in the base Operating expense and their own specific needs and objectives when determining which method of calculating escalations rent, usually on a compounding basis, over the term escalations in leases of the lease. Although sometimes the percentage would ultimately be most advantageous. However, is fixed (i.e. 2-3% per year), often it is pegged to a for New York City in the final analysis, the landlord will generally adopt variable rate, the most popular being the Consumer office space are one method and apply it uniformly to its building. Therefore, it is up to the tenant to negotiate Price Index (CPI). The CPI is a measure of the commonly calculated average change over time in the prices paid by urban appropriate protections in the context of the consumers for a market basket of consumer goods in accordance with method proposed by the landlord in the lease. and services. The CPI is calculated using the costs one of the following of services as well as the cost of products. In this mechanisms: regard, as the price of services tends to rise faster than prices overall, the CPI is more responsive to (i) direct operating swings in inflation, and thus the CPI tends to increase expenses, faster than operating expenses in an inflationary (ii) the Consumer Peter Figdor, Of Counsel environment. One method for tenants to protect themselves against excessive escalation of rent due to Price Index; or Jody Saltzman, Counsel CPI increases is to negotiate for a cap on each year’s (iii) the Porter’s Wage Vasiliki Yiannoulis, Associate

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Corporate Governance in China

Organisations with proper corporate governance have accountability and transparency. The people in authority know that their actions will be noticed and judged by others and, therefore, they are more likely to act in ways that benefit the organisation’s stakeholders rather than themselves personally.

Unfortunately, companies in China have a reputation The general The other two main legal formats are the Stock of foregoing transparency, with reports regularly shareholders’ Corporation and the Partnership Enterprise. Herein circulating about misuse of shareholder funds and we will focus on corporate governance for LLCs. disputes between partners only serving to reinforce meeting has final say this image. This is not only true for domestic Chinese over the key issues b) Legal Framework enterprises but also foreign invested enterprises. of the company The legal framework for corporate governance in This has led to many Chinese companies finding China has taken shape at a rapid pace over the past themselves with business frameworks incompatible two decades. The key legal framework for corporate with international practices. Investments in China governance in China consists of the Company Law often increase foreign investors’ risk profile. Risk originally promulgated in December 1993 and management is of increasing concern to boards and the Code of Corporate Governance for Listed management alike of foreign companies conducting Companies (CCGLC) issued by the China Securities business in China. Regulatory Commission and State Economic and Trade Commission in January 2001. This overview Good corporate governance, risk management and focuses on the corporate governance of an LLC effective compliance programs help to mitigate risks which is the most commonly used legal vehicle by in the Chinese business environment. At Salans, we foreign investors. can provide a tailor-made approach that best suits the individual characteristics of each company, all the Corporate Governance Structure while developing and improving our own approach as According to the Company Law, there are four the legal infrastructure in China matures on a yearly tiers of control over a company’s operations: the basis. Effective corporate governance is one key shareholders’ general meeting, the board of directors, element in this regard. the board of supervisors and the management team. Different Legal Formats & a) The Shareholders Current Legal Framework The general shareholders’ meeting has final say over a) Legal Formats the key issues of the company, such as approval of There exist a number of possible different legal the management strategy, the financial budget and formats when setting up a company in China. The key investment plans, and the nomination of the most common of these would be the Limited Liability boards of directors and supervisors. In the general Company (LLC), which forms a separate and distinct meeting, the shareholders decide on the business legal entity. Most LLCs with some sort of foreign direction and investment plans for the company, in influence consist of Foreign Invested Enterprises addition to amending the articles of association of the (FIE); this refers to Chinese entities with at least 25% company when deemed necessary. In general, their foreign investment. FIEs are permitted to conduct role is to review and approve the decisions made by the board of directors. business activities in accordance with the scope Supervisors of their business as approved by the government b) The Board of Directors authorities. Most FIEs take one of the following forms: hold a watchdog position whose The board of directors represents the decision- a Wholly Foreign Owned Enterprise (WFOE), primary function making authority, with the chairman usually in control. an Equity Joint Venture (EJV), is to detect and In order for a board of directors to play their role a Cooperative Joint Venture (CJV), or prevent directors in the running of a company effectively, especially with regard to keeping the corporate governance in exceptional cases, a Foreign Invested and managers from structure intact, they should hold the following duties Partnership Enterprise (FIPE). violating the law and powers:

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Power to convene the shareholders’ meetings The board of clearly in the company’s articles of association and and report to the board of shareholders; management rules which can be adjusted from time directors represents to time. Power to execute the resolutions passed by the the decision-making board of shareholders; authority, with the Fiduciary Duties and Liability The Code on Corporate Governance and the Final decision-maker with regard to business plans chairman usually in Company Law both explicitly underline the duty and investment schemes of the company; control of loyalty and diligence that directors owe to Ability to formulate the annual financial budget the shareholders. If a director violates the law, and accounting plan; a regulation or the company’s by-laws, as such jeopardising the shareholders’ interest, shareholders Ability to formulate the profit distribution and can sue the director in court and ask for loss recovery plans; compensation (Article 153 of the Company Law). Ability to formulate the plan for increase or With the amended Company Law in 2005, the reduction of registered capital and issuance of concept of “duty of care” and “fiduciary duties” came corporate bonds; into legal form, aimed at directors, supervisors and senior management. Article 148 of the Company Power to formulate the plan for a merger, Law provides that both directors and supervisors division, dissolution or change of company must comply with all laws, administrative regulations structure; and the company’s articles of association, as well as Decision-maker on the set-up of internal uphold the “obligations of fidelity and diligence” to management organisation; the company. Basically, this means that they cannot obtain unlawful earnings by taking advantage of Decision-maker on the appointment or dismissal their position or by infringing company property. of company managers and deputy managers, as These fiduciary principles are alternatives to more well as their remuneration; specific regulatory monitoring. They also shift from criminal and administrative penalties to the private Power to formulate the basic management enforcement model that can be found in countries system of the company. such as the United States, the United Kingdom or Germany (Section 93 Para 1 AktG). This list does not purport to be comprehensive, as other duties and powers may be stipulated in the Methods for Reducing and Articles of Association of the company. Avoiding Liability c) The Board of Supervisors As a director or manager in China, in order to enhance the internal risk management of a company, The board of supervisors (in small companies it can we would advise the following: be replaced by one or two supervisors) holds the roles, amongst others, of inspecting the company that the risk profile be understood finances, supervising the performance of directors comprehensively at all levels; and senior management, and making proposals at performing regular risk audits; shareholders’ meetings. Basically, supervisors hold a watchdog position whose primary function is to establishing a risk management system; detect and prevent directors and managers from violating the law. Apart from the provisions of the gaining directors & officers insurance that covers Company Law there is not much guidance as to negligence (although not gross negligence or how a supervisor should execute his duties. Many intentional acts); and supervisors and supervisory boards are not yet making sure that indemnification is defined in active organs. Some foreign invested companies the articles of association and in the employment use the supervisory function to install a compliance contracts of each manager. supervision function in the company. d) Senior Managers Dr. Bernd-Uwe Stucken, Managing Partner Under Company Law, senior managers in an LLC include the general manager, deputy manager, chief financial officer and any other persons listed as such in the articles of association. Registration of the general manager is mandatory. Unless otherwise It is best to clearly provided for in the articles of association, senior managers are appointed by the board of directors. define the scope of The main role of the general manager and the general manager’s other senior managers is to implement the board of authority in the directors’ resolutions and to ensure the running of company’s articles the company’s daily business operations. In order to prevent the general manager from gaining too much of association and power, it is best to define the scope of his authority management rules

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Recent Legal Amendments for the Benefit of Purchasers of Uncompleted Residential Properties in Singapore

The Housing Developers (Control & Licensing) Act (Chapter 130) of Singapore (“HDCLA”) and the Housing Developers Rules (“HDR”) promulgated thereunder regulate housing developers and the sale of uncompleted residential properties in Singapore.

The HDCLA and HDR apply to developments Under the amended with more than 4 units of housing accommodation and are administered by the Controller of Housing HDR, a developer (“Controller”). is required to Recent amendments were made to the HDR by provide more virtue of the Housing Developers (Amendment) detailed information Rules 2012. These amendments came into effect on on the property 18 May 2012 and introduced, inter alia, a requirement for developers to provide certain information to to an intending intending purchasers before accepting a booking purchaser before fee as well as certain changes to advertising the acceptance of requirements that developers would have to comply with. The amendments and proposed amendments the booking fee summarised in this article are applicable to the sale and issuance of the of uncompleted condominium units in Singapore. option to purchase Foreigners are allowed to buy such units. to the intending Information to be Provided to Purchasers purchaser Before Accepting Booking Fee Under the amended HDR, a developer is required to provide more detailed information on the property to an intending purchaser before the acceptance of the booking fee and issuance of the option to purchase to the intending purchaser. The information required to be provided includes: (i) address of the property; (ii) estimated total floor area of the property; (iii) the description of all floor spaces for different uses (like bedrooms, living and dining areas, kitchen, utility room, household shelter, etc.) and other spaces included as part of the property as well as their respective areas comprised in the estimated total floor area; (iv) specifications of the building (such as materials and finishes in relation to walls, floors, doors and windows); (v) location plan of the housing project, which must be drawn to scale, showing the location of housing project, names of streets nearby and prominent buildings, and facilities and other features in the vicinity within a radius of 500 m of the housing project;

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(vi) site plan of the housing project, which must be It is hoped that the Advertisements drawn to scale, showing the approved buildings in amendments to the Under the amended HDR, the definition of the housing project and where applicable, communal “advertisement” has been expanded to include facilities such as guard house, bin centre, electrical HDR and proposed advertisements on websites. The effect of this is sub-station, car park, car parking lots, recreational amendments to that developers must ensure that advertisements facilities, and vehicular entrance and exit to the HDCLA will enable in respect of housing projects on websites do not housing project or car park; contain any false or misleading information and that purchasers/investors any such advertisement must include the following (vii) floor plan of the property, which must be to make better particulars: drawn to scale, showing individual rooms, spaces and features constituting the strata area of the informed decisions (i) the name and licence number of developer; property, such as bedroom, living/dining area/kitchen, when buying bathroom/toilet, utility room or area, household non complete (ii) tenure of the land and encumbrances, if any, to shelter, balcony, bay window, private enclosed space, which the land is subject; roof terrace, planter box, air-conditioner ledge and residential units (iii) the expected date that purchasers can take void area; vacant possession of the property; (viii) a copy of all amendments, deletions and (iv) the expected date when legal title of the alterations to the prescribed sale and purchase property will be conveyed to purchasers; and agreement as approved by the Controller. (Under the provisions of the HDR, developers must use (v) the location of the housing project. prescribed forms of option to purchase and sale and purchase agreement in the sale of uncompleted Proposed Amendments to the HDCLA residential property to purchasers. Any amendments, The Controller has also announced that it is deletions or alterations to the prescribed forms must finalising certain amendments to the HDCLA which be approved by the Controller.); are expected to be implemented in the second half of 2012. The proposed amendments include (ix) conditions, restrictions and requirements, if any, requirements: imposed by the relevant competent authorities which may affect the liabilities of or which are intended (i) for show flats to depict the actual units to be complied with and observed by owners or accurately; and residents of the property and other units of the (ii) for developers to publish transacted prices on a housing project after its completion; weekly basis. (x) where the number of car parking spaces to It is hoped that the amendments to the HDR and be provided in the housing project is less than the proposed amendments to HDCLA will enable number of units in the housing project – purchasers/investors to make better informed (a) the number of housing units in the housing decisions when buying non complete residential units. project; Note: This article is for general information only (b) the number of car parking spaces in the and does not constitute legal advice. Please seek housing project; specific legal advice before acting on the contents set out herein. and Tan Teck Howe, Partner (xi) track record of the developer stating whether the developer or its related corporation has Wong Partnership LLP, One George Street, #20-01 carried out and completed any housing or other Singapore 049145, T dir: +65 6416 8013 development project in Singapore. T: +65 6416 8000, F: +65 6532 5711

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Recent Legal Developments in the Real Estate Sector

The recession of the global markets has also affected the Indian economy. Thus, post 2011 the Indian economy has not grown at the pace at which it was expected in view of the slowdown of the global market, in particular the European market. Another cause for concern is the fall of the rupee to an all-time low of around INR 55.83 to the US $.

The current scenario, along with the policy paralysis The recession of from service tax on affordable cost mass housing in the Government, has affected India’s economic the global markets and from import duties which were levied on growth,which also includes the Real Estate Sector certain equipment, required for various construction under the Infrastructure category. However, the has also affected the purposes. External Commercial Borrowing (ECB) present budget does provide some respite to the Indian economy and and extension of interest subvention has been Real Estate Sector. One of the disappointments is thus, post 2011, the granted with regard to low cost housing. Moreover, the exclusion of the Real Estate Sector from the the increased scope of private sector participation “Industry” category, due to which the real estate Indian economy has in infrastructure demonstrates the clear intent to sector could not avail of the benefits extended to not grown at the enhance urbanisation. the industries. pace at which it was Path Cleared for External The Real Estate sector plays an important part in expected in view of Commercial Borrowing India’s economy. India’s GDP has been around 6.9% the slowdown of in 2011-12 after having grown at the rate of 8.4% in The budget has also taken steps to allow ECB for each of the two preceding years. For the year 2012- the global market, affordable housing, which would help the real estate 13 the GDP is expected to be approximately 7.6%. in particular the sector to tap long term funds and help increase the Despite the lack of adequate infrastructure and the European market liquidity in the sector. Developers today face a cash lack of political will to bring in economic reforms, real crunch in the domestic market as prices of real estate estate in India is the second largest sector after the are soaring. Thus, the initiative of ECB would help agriculture sector and is expected to grow at a rate developers to look for investments from outside of 30% p.a. involving an investment opportunity of the domestic market at substantially lower interest over USD 75 billion over the next 5 years (as per the rates. However, allowing ECB for affordable housing Associated Chambers of Commerce and Industry would have only a cosmetic effect as the definition of India). of affordable housing given by the Government does not consider space starved cities like Mumbai, Foreign Direct Investment in Real Estate Bangalore, etc. The Government’s initiative to The Reserve Bank of India (RBI) has attracted foreign withhold tax on ECB’s for affordable housing from investors in real estate in India by adopting a relaxed 20% to 5% for 3 years in order to ease the liquidity and investor friendly policy allowing foreigners to is also a welcome move. Further, investment linked own property in India. RBI has permitted Foreign deductions available for low cost affordable housing Direct Investment (FDI) up to 100% under the projects have been increased from 100% to 150%. automatic route for townships, housing, built-up This amendment may provide a much needed infrastructure and construction development projects incentive to the affordable housing segment through (which include, but are not be restricted to, housing, a higher rate of deduction on capital expenditure commercial hotels, resort hospitals, educational though the cost of land will be excluded. The 2012- institutions, recreational facilities, city and regional 13 budget also extends the 1% interest subvention level infrastructure) subject to certain conditions. scheme for affordable housing which shows the The Effect of the 2012-13 Budget in the Government’s intention to achieve its goal of Real Estate Sector affordable housing. The union budget for 2012-13 has been a balanced Investment Through Venture budget with respect to business sectors in general. Developers today Capital Funds The fiscal deficit of 5.9% GDP in the year 2011-12, are facing a cash In order to streamline the investments through instead of the estimated 4.6%, is one of the major crunch in the Venture Capital Funds (VCF), the Securities and factors for such a budget. Certain changes have been domestic market Exchange Board of India (SEBI) has formulated proposed in the real estate market to boost one market regulatory norms for Alternate Investment of the key pillars of the Indian economy providing as the prices of real Funds (AIF) thereby repealing the old VCF 6.5% of the GDP. Exemptions have been provided estate are soaring regulations of 1996. These norms are also likely to

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affect real estate fund managers forcing them to It is estimated that Coastal Regulation Zone adopt new ways to attract investors. As per the new around Rs.4,00,000 The 2011 Coastal Regulation Zone (CRZ) norms, a VCF should have a corpus of minimum notification is a positive move to open up new Rs.20 crores, and the minimum investors should crore investment development potential for the Real Estate Sector not be more than 1000. The minimum investment would be required across the country as the Floor Space Index (FSI) has threshold has been increased from Rs.5 lacs to Rs.1 over the next five been increased from 1.33 to 2.55 and it now allows crore with tenure of 3 years. The VCF sponsors are development of slums. Projects under CRZ would required to have a minimum of 2.5% of the corpus years and another come under the ambit of the RTI (i.e. the Right to or Rs.5 crores. VCF also cannot invest in a single firm US$ 1 trillion Information Act, 2005). These CRZ slum projects can over 25%. would be required only be undertaken through companies which have a government stake of 51% or more. The Ministry Postponement of GAAR to to be spent on of Environment and Forests will have the right to Boost Investments infrastructure appoint statutory auditors. The projects related to The Government also plans to implement the the Slum Rehabilitation Scheme will only be audited proposed General Anti-Avoidance Rule (GAAR) by the Comptroller and Auditor General. which was initially introduced in the current Budget but was deferred by a year. GAAR vests great Pursuant to the aforesaid incentives, Various State powers with the revenue authorities ostensibly to Governments have also commenced with planning keep a check on domestic and foreign tax evaders. for coastal road projects, which is likely to grab the attention of many foreign investors. Tax Exemptions for SMEs State Legislation In 2011, the National Manufacturing Policy proposed granting exemption to Small and Medium The Real Estate Sector comes under the ambit of Enterprises (SMEs) from capital gains tax, which the State. The State has the power to legislate and has now been approved by the Finance Ministry’s also make Rules and Regulations with regard to the Revenue Department. It has been proposed to properties and construction of housing and new bring this principle into practice by exempting tax townships in their states. States such as Gujarat, on capital gains on the sale of residential property Maharashtra and Delhi have seen more foreign where the sale proceeds are invested in equity of investment with regard to the real estate sector. a manufacturing SME Company for the purchase Cities like Bangalore in Karnataka and Pune in of new plant and machinery. Further, the turnover Maharashtra have been getting special attention from limit for compulsory tax audit of accounts and foreign investors with regard to investment in the presumptive taxation is proposed to be raised from Commercial Real Estate Sector. Rs.60 lacs to Rs.1 crore. The Government of Maharashtra has recently taken Real Estate Law in the Offering various steps to boost the housing and commercial real estate sector in the state. The State Government It is estimated that there is a shortfall of around has recently amended the Development Control 40 million residential units in India. This means Regulations (DCR) in order to speed up projects that that India would require huge investments and had been lying in a state of paralysis. These changes infrastructure development to face this deficit. It is would help to create more liquidity and make way for estimated that around Rs.4 million crore investment new investments with projects completed on time. will be required over the next five years and another US $1 trillion will need to be spent on infrastructure. Another bold initiative taken by the State To keep a check on corruption and ease the flow Government is to introduce the Maharashtra of investments in the Real Estate Sector, the Central Housing Regulatory Development Bill. It aims to and the State Governments propose various new create a Regulatory Authority which will include an bills which would further strengthen the flow of Appellate Tribunal and bring in more transparency investment in the Real Estate Sector. in the process of housing construction in the State. The bill directs developers to make full disclosure of The new Real Estate Regulatory Bill, which is their housing projects, register themselves with the scheduled to be tabled soon in the Parliament, authority, and display details on the website of the aims to command certain public disclosure norms; Housing Regulatory Authority. establish a level playing field; and require compulsory registration by the developers before launching Conclusion housing projects. This bill also aims to bring in more The Real Estate The Real Estate Sector in India is presently on the accountability and transparency in land and home Sector in India is brink of change. It is transforming itself into an transactions. This proposed bill also recommends that organised, investor-friendly sector from its earlier developers would have to set up a separate escrow presently on the avatar. Consequently, there is a re-rating of the account wherein 70% of the funds received from brink of change – sector components. buyers would be deposited. it is transforming Aziza Khatri, Partner Mohit Advani, Paralegal The Land Title Bill is another land mark move itself into an towards making the title clearance procedure simple organised, investor- Hariani & Co., Advocates & Solicitors and unambiguous. This bill seeks to do away with 1st Floor, 10, Bruce Street, Homi Mody Street, presumptive title, and it attempts to determine the friendly sector from Fort, Mumbai 400 001, India title of a property in a more transparent manner. its earlier avatar T: +91 22 2278 0600 F: +91 22 2204 6823

85 Salans Global Real Estate Group

“Dazzling...” Chambers Global

86 GUEST CONTRIBUTION – VIETNAM

Vietnam’s Young Real Estate Sector Takes Off

In 2007, Vietnam’s relatively young real estate sector experienced an economic boom as a result of new government policies supporting foreign investments, an increase in domestic demand and spending power, and an increase in foreign demand and foreign investments.

Vietnam’s membership in the World Trade As of 2012, experts VAT, corporate income tax, land rent tax and land Organisation (WTO) in 2007 required the country use tax, and exemption of overdue loan fees. to increase its efforts to open its markets to foreign and insiders believe investors. that the real estate The Silver Lining for Foreign Investors Can sector in Vietnam Be Found Through M&A in Real Estate Within the same year, foreign direct investment (FDI) Many are calling for foreign investment to inject much doubled to US$ 20.5 billion. By 2008, that number is on the road to needed capital into the country’s real estate sector. increased to US$ 57.2 billion. Vietnam during this recovery based Foreign developers and investors that have remained time also enjoyed an economic growth and a stock idle over the past year are tentatively re-entering the market boom. A property craze ensued, with prices on the banks’ and real estate via M&As. Dr. Nguyen Ba An, Deputy on residential condos tripling within a matter of a the Vietnamese Director of Institute for Development Strategy year. In Ho Chi Minh City and Hanoi, office rental government’s (under Ministry of Planning and Investment) also prices reached an all record high. The country’s hotel observed and noted that “This moment is the best one market was also increasing, with room occupancy response for those who have money to invest because the real remaining at almost 100%. In addition, Vietnam was estate market is coming back to real value, virtual values ranked third in the world for retail development. are being eroded away.” Quiet market and declined Vietnam’s Young Real Estate Sector prices are the very opportunity if investors manage Experiences Growing Pains to catch them. Especially for investors with long term capital, they can take the chance of abundant supply Less than a year later, Vietnam’s real estate sector and buy houses at cheap prices, and then wait for plummeted. The country suffered an economic downturn, a dreary stock market and high inflation opportunities to sell later. (19% in 2008 compared to 12% in 2007). Vietnam’s Now is the time for foreign investors to obtain land real estate sector has limited means of raising capital projects at bargain prices. Domestic companies and and relies on bank loans. When the global financial investors from Asia, such as Singapore and South crisis struck at the end of 2008, banks tightened Korea, are already ahead of the game. Recently, credits causing a shortage of funds, and the high Hanoi Electronics Corporation (Hanel) acquired a interest rates prevented potential buyers from 70% stake in a company owned by South Korea’s obtaining property. Daewoo Group that manages a 5-star hotel, office As of 2012, experts and insiders believe that the and apartment complex in Hanoi City. CT Group real estate sector is on the road to recovery based acquired a 200-hectar golf course project in Ho on the banks’ and the Vietnamese government’s Chi Minh City from South Korea’s GS Engineering response. There have been tighter legislations on & Construction Company for US $24 million which gold trading and a decrease in bank deposit rates; originally cost US $42.6 million to develop. In 2011, thus, redirecting the capital flows to the stock and Singapore’s CapitaLand took over three real estate property markets. Banks, such as Bank for Investment projects and the Ascott, a subsidiary of CapitaLand, and Development of Vietnam (BIDV), have also also bought a 90% stake in Somerset Central TD lent a helping hand through credit support packages. Haiphong. BIDV’s credit support packages allowed potential Challenges for Foreign Investors in buyers (up to VND4,000 billion) to obtain houses in projects financed by BIDV, at a lower interest rate M&A Transactions and Investment in (16%), and loan limit up to 85% of the house’s value. Real Estate Business The Vietnamese government also made significant Vietnam’s legal system is still evolving and in the steps in response to the real estate crisis. In February, process of development. Since Vietnam acceded the State Bank of Vietnam issued a directive with to the WTO in 2007, foreign investors have had the goal of loosening mortgage loans, granting loans more opportunities than ever to engage in merger to projects completed after 2012, and withdrawing & acquisition activities (“M&A”) in Vietnam. On the mortgage loans from discouraged one. More other hand, the laws, procedures and policies for importantly, the government allowed a reduction of M&A have become more confusing, complex and

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dynamic, as the Government is struggling to balance Now is the time for There have been some suggestions with respect its interests in complying with the WTO Schedule to current land regulations to attract more foreign and in effectively managing foreign investment. foreign investors to investment. One important proposal is that foreign obtain land projects investors are permitted to acquire land use rights It is expected that there will be more M&A at bargain prices. both by way of land allocation and/or land lease transactions among property projects this year in with the same land use term as domestic investors. order to boost available capital for the projects. Real Domestic companies Currently, domestic investors are entitled to receive estate industry experts such as Savills and CBRE and investors stable and long term land use whereas foreign- observed that the Government’s solutions in the legal invested enterprises are generally only granted a land and financial systems should be synchronized. from Asia, such as Singapore and South use right with a definite term. The regulatory framework for investment, planning, Korea, are already Vietnam’s foreign business community also suggests project approval and land-related procedures on that clearer guidelines are put in place to permit real estate investment projects still need further ahead of the game foreign-invested enterprises to acquire already- improvement. There are often delays associated with developed property for their own use. Currently licensing of projects because too many ministries are a foreign investor may only lease out properties involved and the licensing may take years, in extreme if he invests in construction and development of cases. Land in Vietnam is considered public property. a property project. Under Vietnam’s Law on Real Thus, no person has the right to ‘own land’ in the Estate Business (“LREB”), foreign investors are only sense of a freehold but the right to ‘use’ land may be permitted to engage in the following real estate obtained in several ways: business activities: 1. by allocation from the government, for a definite (a) To invest in the development of houses and or indefinite period; buildings for sale, lease and lease-purchase; 2. by lease from the government; (b) To invest in land improvement and infrastructure 3. by sub-lease from the developer of an industrial works on leased land in order to lease out land with zone or urban zone; completed infrastructures; and 4. by transfer from an existing land user; or (c) To provide real estate services which include property brokerage, property transaction center, 5. by way of capital contribution from an existing property evaluation, property consultancy, property land user. auction, property advertisement and property management. The law makes a distinction between types of land user (Vietnamese, overseas Vietnamese or foreigner), This means that foreign investors may not acquire a which determines the availability of each of the above completed building for selling or leasing out or lease options and the land use rights. As a result, because a completed building for subleasing. The laws of foreign investors have not been given the right to Vietnam do not provide further guidance in relation buy/sell land use rights (a right given to Vietnamese to the requirement of “investing in the development” enterprises), they have two options to land use: 1) of property. The issue is still evolving and remains direct land rental from the government or 2) capital uncertain whether a foreign investor could lease an contribution in land use right from Vietnamese joint almost completed building for further improvement venture companies. and then subsequently sublease such building or part of such building to others.

88 GUEST CONTRIBUTION – VIETNAM

In practice, the licensing authority in Hanoi (in 2009) Vietnam’s good In order for Vietnam to not lose its market issued a license to a foreign investor for leasing a competitiveness and gain further foreign investment, nearly completed building for the subleasing business. demographics experts have called for more professionalism, The objective of this 100% foreign owned company including young transparency, less restrictions on foreign investments, (“FOC”) was to lease incomplete construction floor population, relatively and a more effective legal framework. The spaces, complete the complex and subsequently lease Government now realises the need for a stronger out the retail shops, office and apartments. In this low labour costs, legal framework for land and real estate business, and case, the 100% FOC was able to register the business good location in the Vietnam’s Land Law is in the process of amendment. activities of (i) real estate business; (ii) operating region, and a stable The draft of the Law on amendment to Land Law the business center, office for lease and serviced shall be submitted to the National Assembly of apartments. In 2010 the Ministry of Construction political market Vietnam for deliberation for its next session in also issued two opinions where it generally stated has continued to October 2012. that foreign investors must “invest in property attract many foreign development” in order to sublease. A stable economic environment, cohesive legal investors framework and good investment policies are Another important suggestion to attract foreign among others key factors to strengthen real estate investment and more capital is that foreign investors investment in Vietnam. Hopefully, the regulators will are permitted to purchase and lease all types of take these factors into account when they deliberate properties such as residential, office space, industrial on the amendments to Vietnam’s Land Law. and commercial. Currently, only foreign organisations and individuals permitted to enter into Vietnam for at least three months may lease residential property in Vietnam. In addition, foreign investors also need to Tung Ngo, Founding Partner meet certain criteria to be able to purchase and own VILAF residential property. For example, a foreign individual Kumho Asiana Plaza Saigon, Suite 4.4 with direct investment in Vietnam or hired by an 39 Le Duan Street enterprise currently operating in Vietnam and holding Ho Chi Minh City a managerial position in that enterprise. Vietnam Future of Real Estate Business in Vietnam T: +84 8 3827 7300 F: +84 8 3827 7303 Notwithstanding the challenges and underdeveloped legal framework, there are still plenty of reasons why Vietnam remains an attractive investment destination. Vietnam’s good demographics including young population, relatively low labour costs, good location in the region, and a stable political market has continued to attract many foreign investors. The growth potential of Vietnam also remains attractive with an average 7% annual GDP growth rate. There is still hope that the market within the next few years will likely see a rising number of deals taking place.

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Representative Transactions in 2011/2012

Almaty The Blackstone Group Peakside Capital EUR 203,000,000 EUR 600,000,000 Baku Acquisition from Gecina and financing of a portfolio Acquisition of Allied Irish Bank`s Polish property of 26 logistics centres located throughout France, fund management subsidiary and its interest in Barcelona 1 located in Spain and 1 located in Belgium two Polonia Property Funds France, Berlin Spain, Belgium Poland, Hungary

Bratislava AFI Europe Natixis Zweigniederlassung Brussels Value Confidential Deutschland and ING Bank Sale of the Tulipa Vokovice residential project EUR 190,000,000 located in Prague to Daramis Group Refinancing of the Nova Eventis Bucharest shopping centre near Leipzig

Budapest Czech Republic Germany

Frankfurt Corpus Sireo Real Estate Deutsche Pfandbriefbank AG Istanbul Value Confidential Value Confidential Sale of approx. 4,700 unit residential portfolio to Structure financing for Rockspring/National Degewo AG and Gesobau AG consortium Pension Service of Korea for the Kyiv acquisition of the La Abadía retail and leisure scheme located in Toledo London Germany Spain

Madrid ORCO Property Group Globe Trade Centre Moscow USD 94,000,000 EUR 173,000,000 Sale of the Radio Free Europe building located in Sale of the Platinium Business Park located in New York Prague to a subsidiary of the L88 Companies Warsaw to Allianz Real Estate

Paris Czech Republic Poland

Prague UFG Real Estate Capital & Continental Shanghai USD 47,000,000 Value Confidential Sale of the Bakhrushina House office building located Sale of the Praetorium, a 10,000 sq.m. office building in Moscow to Sponda located in Paris to Caisse d’Assurance St Petersburg Vieillesse des Pharmaciens Warsaw Russia France

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