Real Estate 2018

ICLG The International Comparative Legal Guide to: Real Estate 2018

13th Edition A practical cross-border insight into real estate law

Published by Global Legal Group with contributions from:

Attorneys-at-Law Project Law Ltd Machado, Meyer, Sendacz e Opice Advogados BKA Attorneys at Law Maples and Calder Brulc Gaberščik & Partners, Law Firm, Ltd. Meyerlustenberger Lachenal AG BSA Ahmad Bin Hezeem & Associates LLP Nishimura & Asahi Cordero & Cordero Abogados Norton Rose Fulbright South Africa Inc. Cushman & Wakefield Osler, Hoskin & Harcourt LLP Gianni, Origoni, Grippo, Cappelli & Partners PAV Law Offices Greenberg Traurig Grzesiak sp.k Prieto Cabrera & Asociados SRL Greenberg Traurig, LLP Ropes & Gray LLP GSK Stockmann Shepherd and Wedderburn LLP Gürlich & Co. Simon Reid-Kay & Associates Hogan Lovells Tirard, Naudin Howard Kennedy Toronto CREW Konečná & Zacha Tughans Kubes Passeyrer Attorneys at Law Ziv Lev & Co. Law Office The International Comparative Legal Guide to: Real Estate 2018

General Chapters:

1 Real Estate Joint Ventures: New Paradigm or Passing Fashion? – Iain Morpeth, Ropes & Gray LLP 1

2 Serviced Offices: The Changing Face of the Real Estate Market – Rebecca Davison & Nicky Stewart, Howard Kennedy 5

Contributing Editor 3 Toronto CREW and an Outlook on the Canadian Market for 2018 – Rosalyn Wallace, Toronto CREW Iain Morpeth, & Stuart Barron, Cushman & Wakefield 9 Ropes & Gray LLP

Sales Director Country Question and Answer Chapters: Florjan Osmani 4 Austria Kubes Passeyrer Attorneys at Law: Dr. David Kubes & Mag. Marko Marjanovic 12

Account Director 5 Brazil Machado, Meyer, Sendacz e Opice Advogados: Maria Flavia Candido Seabra Oliver Smith & Fatima Tadea Rombola Fonseca 20 Sales Support Manager Toni Hayward 6 Canada Osler, Hoskin & Harcourt LLP: Heather McKean & Stella Di Cresce 30

Senior Editors 7 Costa Rica Cordero & Cordero Abogados: Hernán Cordero B. & Rolando Gonzalez C. 43 Caroline Collingwood & Suzie Levy 8 Czech Republic Gürlich & Co.: JUDr. Richard Gürlich, Ph.D. & Mgr. Kamila Janoušková 53

Chief Operating Officer 9 Dominican Republic Prieto Cabrera & Asociados SRL: Aimée Prieto 60 Dror Levy 10 England & Wales Ropes & Gray International LLP: Carol Hopper & Partha Pal 70 Group Consulting Editor Alan Falach 11 Finland Attorneys-at-Law Project Law Ltd: Matias Forss & Sakari Lähteenmäki 81 Publisher Rory Smith 12 France Tirard, Naudin: Maryse Naudin & Jean-Marc Tirard 89

Published by 13 Germany GSK Stockmann: Olaf Jacobsen & Sascha Zentis 99 Global Legal Group Ltd. 59 Tanner Street London SE1 3PL, UK 14 Hong Kong Simon Reid-Kay & Associates: Simon Reid-Kay & Leslie Kaczmarek 109 Tel: +44 20 7367 0720 Fax: +44 20 7407 5255 15 India PAV Law Offices: Kiron Prabhakar & Navin B. Singh 119 Email: [email protected] URL: www.glgroup.co.uk 16 Ireland Maples and Calder: Diarmuid Mawe & Craig Kenny 129 GLG Cover Design F&F Studio Design 17 Israel Ziv Lev & Co. Law Office: Moshe Merdler & Ziv Lev 143 GLG Cover Image Source iStockphoto 18 Italy Gianni, Origoni, Grippo, Cappelli & Partners: Davide Braghini 153 Printed by Ashford Colour Press Ltd 19 Japan Nishimura & Asahi: Hideaki Ozawa & Yujin Gen 163 December 2017 20 Northern Ireland Tughans: David Jones & Luke Thompson 175 Copyright © 2017 Global Legal Group Ltd. All rights reserved 21 Poland Greenberg Traurig Grzesiak sp.k.: Agnieszka Stankiewicz & Barbara Pancer 183 No photocopying 22 Scotland Shepherd and Wedderburn LLP: David Mitchell & Scott Ritchie 192 ISBN 978-1-911367-86-4 ISSN 1749-4745 23 Slovakia Konečná & Zacha: Mgr. Vladimír Kordoš, LL.M. 205

Strategic Partners 24 Slovenia Brulc Gaberščik & Partners, Law Firm, Ltd.: Damijan Brulc & Marjetka Kenda 216

25 South Africa Norton Rose Fulbright South Africa Inc.: Pieter Niehaus 224

26 Spain Hogan Lovells: Emilio Gómez Delgado 233

27 Switzerland Meyerlustenberger Lachenal AG: Wolfgang Müller & Christian Eichenberger 243

28 Turkey BKA Attorneys at Law: Göktuğ Can Burul & Onur Atakan 251

29 UAE BSA Ahmad Bin Hezeem & Associates LLP: John Peacock 258

30 USA Greenberg Traurig, LLP: Christina Braisted Rogers 268

Further copies of this book and others in the series can be ordered from the publisher. Please call +44 20 7367 0720

Disclaimer This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.

WWW.ICLG.COM EDITORIAL

Welcome to the thirteenth edition of The International Comparative Legal Guide to: Real Estate. This guide provides corporate counsel and international practitioners with a comprehensive worldwide legal analysis of the laws and regulations of real estate. It is divided into two main sections: Three general chapters. These are designed to provide readers with a comprehensive overview of key issues affecting real estate, particularly from the perspective of a multi-jurisdictional transaction. Country question and answer chapters. These provide a broad overview of common issues in real estate laws and regulations in 27 jurisdictions. All chapters are written by leading real estate lawyers and industry specialists and we are extremely grateful for their excellent contributions. Special thanks are reserved for the contributing editor Iain Morpeth of Ropes & Gray LLP for his invaluable assistance. Global Legal Group hopes that you find this guide practical and interesting. The International Comparative Legal Guide series is also available online at www.iclg.com.

Alan Falach LL.M. Group Consulting Editor Global Legal Group [email protected]

PREFACE

It is a pleasure to have been asked to provide the preface to The International Comparative Legal Guide to: Real Estate for 2018, which is now in its thirteenth edition. The Guide has become a well-established benchmark for international real estate transactions and is one of the most comprehensive available. The 2018 edition now contains contributions covering 27 countries round the globe. With investment capital flowing round the world so much more freely than in the past, an understanding of the diverse ways in which transactions in the real estate market are dealt with in different jurisdictions has become an increasingly important requirement for the international investor. We hope you find the Guide a useful reference point when faced with a question concerning cross-border real estate transactions and we encourage you to contact us with suggestions to improve future editions.

Iain Morpeth Partner Ropes & Gray LLP Contributing Editor Chapter 1

Real Estate Joint Ventures: New Paradigm or Passing Fashion?

Ropes & Gray LLP Iain Morpeth

Some investors also carried out their own refurbishment or 1 Introduction redevelopment of obsolete investment stock when occupational leases came to an end, particularly the larger quoted property One of the notable developments in the international real estate companies that had development portfolios in addition to investment market over the last 15 years has been an explosion in the use of and trading portfolios. But most redevelopment activity was carried joint ventures in property transactions. A piece of legal technology out by entrepreneurial developers with smaller balance sheets who will often go through rapid periods of growth before falling out of bought up obsolete stock, obtained planning permission, pre-let, fashion but, as investment flows become more international and the redeveloped and then sold, often back to the pension funds and size of transactions in the real estate world grows, is this a structural assurance companies from whom they had bought in the first place. shift or just a passing fashion? Investors predominantly held prime assets yielding core returns. A joint venture can be regarded as an arrangement by which two or The more risky process of redeveloping carried out by property more parties together carry out a common transaction and we should companies enjoyed a higher, more opportunistic, but more volatile, not be restrictive about the form that the arrangement can take. The level of return for the risk they were taking. structure chosen for a transaction will often be influenced by the need to achieve tax transparency and avoid double taxation, as well Contrast that to the position today. In the first place there are as by the jurisdiction in which it is established, but common forms multiple sources of capital across the whole risk spectrum from include limited partnerships, limited companies and, increasingly, core, core plus through value added to opportunistic. Capital is fund structures because of their tax neutrality. Nevertheless, international. Equity capital can come from private funds, specialist whatever legal form the arrangement takes, the same issues have private equity real estate funds, pension funds, investment banks, to be addressed. assurance companies, endowments, family offices, sovereign wealth funds, private property companies, REITs or retail funds. Debt is This chapter considers: available from credit and debt funds, as well as from banks and ■ some changes in the real estate world; other financial institutions, and can be provided at any level in the ■ differing types of joint venture; capital structure. ■ UK joint venture structures; This has enabled capital to flow internationally and into a far ■ governance; wider group of asset types than traditional commercial real estate, ■ funding and capital calls; including hotels, leisure, pubs, food and beverage, care homes and ■ exit and the need for a liquidity event; healthcare, and has resulted in a far wider spread of transaction types. Many deals are now done indirectly, many involve the ■ transfer restrictions; and creation of real estate operating businesses and many adopt different ■ distributions and promote/carry structures. capital and funding structures. This has had an effect in the legal world, too. The increasingly 2 Changes in the Real Estate World international nature of transactions has started to drive a convergence of what documentation should contain in order to Historically, the real estate market in most countries has been satisfy the debt funding market and to facilitate secondary market characterised by its domestic nature, the limited types of property sales. Transactions can no longer be regarded as domestic. invested in and the limited number of participants in it. In the UK, investors tended to be assurance companies, pension funds and a few listed property companies and the classic investment product 3 Differing Types of Joint Venture was a freehold or long leasehold interest in the target property let to a tenant, or multi-let to several tenants, with a good covenant There are many reasons why a party may decide to execute a project on an FRI (full repairing and insuring) lease for a term of 20 or in a joint venture rather than on its own. These include: more years with upwards only rent reviews. This resulted in much ■ sharing risk; UK investment property having almost bond-like characteristics. ■ the need to raise equity; The principal types of asset that investors held were office, retail, ■ leveraging expertise; warehouse and light industrial. ■ combining skills and capital; and ■ avoidance of competing bids.

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A project may be too large for one investor either to fund the equity capital on its own or to take the risk of carrying out on its own. If the 5 Governance project is very large, there may need to be a consortium of investors The first is how the venture is to be governed. Commercially, it is participating in the project to raise the equity required to fund it. usually expected that the sponsor manages the joint venture on a Another common reason for international investors to joint venture day-to-day basis. transactions is that they have capital but lack local knowledge and The board (or its equivalent) will have the responsibility for managing expertise in foreign markets. The solution is to partner up with a the entity. Unlike the US, where it is common for Delaware LLCs local operating partner who has both. to be used and for there to be a designated managing member, the The capital partner/operating partner model is a common form of typical form is for day-to-day management and the implementation joint venture. In this model, the equity capital is predominantly of the business plan to be delegated by the joint venture entity to an provided by the investor with the operating partner, or sponsor, asset manager, invariably an affiliate of the sponsor, under an asset providing a small amount of capital which the investor judges is management agreement. sufficient to hurt the sponsor were the project to fail. The sponsor Decision-making will therefore be split between the asset is then tasked to manage the project in accordance with the agreed manager, the board and shareholders and the key documents, the business plan and receives a management fee. On exit, the sponsor management agreement and the shareholders’ agreement, will have receives a percentage of the surplus that is disproportionate to its to work together. There will be matters reserved to the board or equity entitlement, the difference being referred to as a “carry” or to shareholders, often called “reserved matters”, which will require a “promote”. the approval of both investors. These will include the adoption of From a sponsor’s point of view, another attraction of the capital a new business plan, major disposals, acquisitions, certain changes partner/operating partner model is that it can put less capital at risk to the articles and the like. It should be remembered that, where the and leverage its skills to obtain a carried interest/promote. manager has delegated authority to implement the business plan, Another popular form is the “platform” or “programmatic” joint the power of initiating changes to the business plan lies with the venture. Here the investor commits to provide an equity line to manager. a joint venture and the sponsor commits to originate transactions What happens if you disagree on a reserved matter, perhaps the within the business plan parameters with a view to building up a large new business plan for next year? On this sort of deadlock, if the portfolio of assets. The exit is usually expected to be an IPO, a trade parties cannot resolve it amicably after a short period, there needs sale of the shares or a bulk asset sale. Again, the sponsor manages to be a definitive resolution. Sometimes, the venture is required the portfolio as it is being assembled and is paid a promote on exit. to continue under the old business plan, possibly with indexation The advantage for a sponsor is that it can have the confidence to bid uplifts to the spending schedules, and this can be a sensible proposal for assets knowing that it already has the equity available. where the term of the venture is short. But the more common way Of course, in deciding to joint venture a transaction, a party will of resolving a deadlock is to unwind the joint venture. have to accept that it is giving up control of the decision-making There are a number of alternatives. There can be: process to a large extent and that its joint venture partner will have ■ a mandatory, orderly realisation of the properties over a six- to be kept comfortable throughout the project. month period, which has the advantage of avoiding a party The relationship between joint venture partners will differ depending having to invest money to buy the other out; on the equity percentage that each holds. A 50:50 joint venture ■ a buy/sell arrangement, which is the most common method; between two large investors will look very different to a capital or partner/operating partner model where the shareholdings are 95:5. ■ a Texas shootout. Under a buy/sell, one party serves a buy/sell notice specifying a 4 UK Joint Venture Structures price for the assets and the other has the choice either of buying the shares of the first party for the price for its shares derived from that There are many different structures that can be used in the UK for number, or of selling its shares to the first party for the price for them a joint venture (and often more than one is used in combination). derived from that number. It will be apparent that the initiating party These include: does not know whether it will be a buyer or a seller so, other things ■ partnerships; being equal, it ought to bid a reasonable market price. This “keep honest” dynamic breaks down where other things are not equal; for ■ limited partnerships; example, where the shareholding relationship is so different that the ■ co-ownerships; minority shareholder will be unable to afford to buy out the bigger ■ Jersey/Guernsey property unit trusts; shareholder. ■ limited companies; Under a Texas shootout, a procedure is set up with a third-party ■ limited liability partnerships; scrutineer under which each party bids a price and the highest bidder ■ equity sharing leases; and is required to buy out the other at that price. ■ contractual arrangements. The choice will depend on a number of factors including the desired 6 Funding and Capital Calls tax treatment and the likely exit. It will be apparent that there is a substantial difference between a horizontal structure, such as a Most property joint ventures involve a single asset and so only require limited partnership or a limited company, and a vertical structure, an initial funding of the equity required to purchase the property and such as equity sharing leases, but whilst the documentation may to pay associated costs. On development or repositioning projects, take a materially different form, the same commercial issues will however, there will be a need to fund ongoing costs. In this case, have to be dealt with. a subscription agreement with mutual commitments to fund the Whatever form the joint venture takes, what are the key issues to further equity required under the business plan will be entered into consider? by both parties. These are obligatory capital calls.

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In addition to these mandatory calls, it is often provided that capital ■ no restrictions on pledging shares to secure debt financing for calls for emergency purposes can be made and that a shareholder the project; may, but is not obliged, to fund them. ■ stapling of shares to any shareholder loans; What happens if a party fails to fund a capital call? Failure to fund ■ restrictions on minimum holding by the investor where it a mandatory call is a default so the default provisions will apply sells part; and but the documents will also need to provide a mechanism to allow ■ a right of first refusal over the sponsor’s shares when it is able funds immediately to be made available to the joint venture entity to to sell. avoid insolvency. Typically, the arrangement is a right for the non- One of the principal exit mechanisms for an investor is a sale of all defaulting party to elect to put in the defaulting party’s share by way the shares in the joint venture entity. This is because the sum of of a loan with an interest rate at equity levels of return. If the other the values of the two shareholders’ individual shareholdings may be party fails to repay that loan plus interest within a fixed period, the less than the value of all the shares if offered for sale in one lot. The funding party can decide either to leave the loan in place rolling up difference will usually be down to control and the residual promote interest at the default rate or to convert into equity on a penalty basis payment liability. The investor is therefore given the right to require (e.g.: on a 2:1 basis). the sale of the sponsor’s shares, called a “drag” right, if it is selling Optional funding will be treated in the same way but with a substantially its shares to a third-party buyer. The sponsor may want to remain lower interest rate and a 1:1 or a fair value conversion rate. in the project with the new investor or may want to exit as well and monetise its promote at that point. The agreement will also provide that if the investor does not exercise its drag right, the sponsor can 7 Exit and Liquidity Event require the investor to sell its shares, usually called a “tag” right, so that it exits at the same time. Investment into these structures is illiquid, like most private equity Where the shareholders’ relationship is more equal, investors should investments. So whilst the investor will not usually be restricted think carefully before agreeing to give a drag right to the other party. from selling its shares, it will want to know that it can rely on an exit In a 50:50 JV, does an investor really want to be dragged into an exit mechanism if it is unable to sell. It is not just the investor who has it does not want? an interest in this; the sponsor is also likely to want a mechanism by which it can monetise its promote. Usually the venture has a fixed life and will provide for an exit after 9 Distributions and Promote Structures the agreed period. The typical hold period is regarded as three to five years, with real estate debt being provided for a five-year term. The key provisions in a joint venture will be the economic In addition, the IRR hurdle in the promote encourages an early ones and it is important to get these right in the documents. All retirement of equity, whether through a refinancing or a sale. receipts, whether revenue or capital, net of the sums required to The principal exit mechanics, in addition to the investor’s drag right settle liabilities, are mandatorily required to be paid to investors (see below) are a mandatory, orderly sale of the property or a buy/ immediately after receipt – subject of course to the requirements of sell. any credit agreement. This is driven by the internal rate of return (IRR) basis for the promote calculation. Receipts include rental or operating income, capital proceeds arising 8 Transfer Restrictions from a sale or part disposal and any refinancing surplus. Often, equity is put in by investors through a combination of subscription In a capital partner/operating partner joint venture, the sponsor is for shares and the making of shareholder loans in order to aid treated differently from the investor in relation to transfers. This is this commercial requirement and to avoid restrictions on making because of the need to preserve an alignment of interest throughout distributions on shares where there are legal impediments. the life of the venture. An alignment of interest arises because the Liabilities will include costs of sale, sums required to redeem loans sponsor manages the project and is rewarded by its promote but puts on a disposal, current liabilities (such as other debts and taxes), money at risk via its invested capital which it will lose if the project budgeted expenditure and reserves for contingent liabilities. is unsuccessful – so it stands to lose something as well as to gain something. Accordingly, the sponsor will usually be prevented from The net surplus will go through a waterfall in the shareholders’ transferring its shares until exit by the investor or until the liquidity agreement which will provide for the return of equity, the payment event occurs. In addition, the sponsor will be subject to a change of any agreed hurdle before the promote and then payment of the of control clause so that it cannot avoid its transfer restrictions by balance in the pre-agreed proportions, which gives the sponsor its selling the shares in any single purpose vehicles (SPVs) it has used promote. There are different ways in which these can be written in to invest and manage. heads of terms; is the investor prioritised and is there a catch up; are there multiple layers of promote; is there an equity multiple as well The investor, on the other hand, will usually want to be free to as an IRR threshold? transfer its shares at any time, although it will sometimes agree a lock-in under certain circumstances such as a development project However, a typical waterfall where the sponsor has invested 10% of where parties are often locked in until practical completion. There the equity, for example, might provide for the following: is usually no change of control clause for the investor even though it ■ repayment of shareholder loans pro rata; may invest through an SPV. ■ payment of a sum equal to that subscribed for shares by Typical transfer provisions include: shareholders pro rata; ■ no restrictions on investor transfers outside any lock in; ■ payment to shareholders pro rata until the investor has received an IRR of x% or an equity multiple of 1.5x if higher; ■ no transfers of whole or part by the sponsor until exit or liquidity event; ■ payment to shareholders pro rata in the proportion 80/20 until the investor has received an IRR of y%; and ■ no restrictions on either party’s transfers to affiliates; ■ thereafter payment to shareholders pro rata in the proportion 70/30.

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The difference in the last two payments between the 10% that the sponsor’s shareholding entitles it to and the specified proportions in Iain Morpeth the waterfall is the promote. Ropes & Gray International LLP 60 Ludgate Hill There are some other issues that commonly arise. Does the promote London EC4M 7AW get paid on final exit or on an interim basis when sufficient property United Kingdom sales have occurred that the promote goes positive? Should the Tel: +44 20 3201 1639 sponsor keep its promote if the asset manager is terminated or if it is Email: [email protected] in default? These need to be agreed on a case-by-case basis. URL: www.ropesgray.com

10 Conclusion Iain Morpeth is a partner in Ropes & Gray LLP and is chair of its international private equity real estate practice. He advises private Although this article has only been able to touch on some of the key funds, investment banks, endowments, sovereign wealth funds and issues that crop up in joint ventures, it will be apparent that there other investors, as well as sponsors and operating partners, on real estate related transactions. Iain has a wide experience of transaction is endless flexibility in how these arrangements can be structured, types including real estate M&A, real estate private equity, joint what relationships can be established and what differing economic ventures, co-investment, acquisitions and disposals of shares, debt outcomes can be agreed. In part, this is what makes them so popular. and property assets, development projects, earn outs and PFI as well In a world of international capital flowing across borders it is hard to as preferred equity, mezzanine lending, restructurings, structured see that the need to use joint ventures as a means of accessing new finance, work outs and outsourcing. He is an English solicitor and is located in the firm’s London office. investment will diminish. Returning to the question with which we started, it looks more like a structural shift than a passing fashion.

Ropes & Gray is a pre-eminent international law firm with offices in key financial centres around the world and has over 275 partners and 1,160 lawyers worldwide. It has market leading practices in fund formation, M&A, private equity, real estate, finance, capital markets, investment management, tax, government enforcement, litigation and IP. The firm’s market-leading real estate practice advises private funds, investment banks, endowments, sovereign wealth funds and other investors as well as sponsors and operating partners on the full range of real estate transactions including real estate private equity, real estate M&A, co-investment, joint ventures, real estate finance, acquisitions and disposals of shares, debt and property assets, fund investment/divestment, development projects and earn outs as well as preferred equity, mezzanine lending, restructurings, structured finance, work outs and outsourcing. The practice handles transactions relating to both distressed and non-distressed real estate, at all points of the risk spectrum and across multiple geographies and involving all types of real estate including commercial, leisure, hotels, pubs, care homes, hospitals, student housing and government property as well as portfolios, mortgages and NPLs and construction and development projects. The firm has over 90 legal professionals, including 50 lawyers specifically focused on real estate transactions, who routinely handle market-leading tax structuring and complex debt and equity financing structures and exit strategies. The firm’s clients include some of the most sophisticated investors in the property industry and regularly look to it for advice on their complex, high-value real estate investment and financing transactions. Last year, the firm’s international real estate practice handled matters with an aggregate transaction value in excess of $22 billion.

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Serviced Offices: The Changing Face of Rebecca Davison the Real Estate Market

Howard Kennedy Nicky Stewart

very plausible option for the bigger corporates, such as finance Introduction firms and banks, which are looking to take serviced office space for designated departments such as IT, as a temporary solution in The face of the UK real estate investment market has changed in order to carry out designated projects. Serviced office space gives recent years, with the demand for serviced office space in 2017 companies confidentiality and enables them to deal with the (often showing no signs of slowing. Whilst nearly 40% of the global sudden) fluxes in levels of employees and staff. market is currently based in the UK, many of the European markets are now beginning to take hold. Countries such as the Netherlands, Germany and Ireland have all shown particular signs of growth as Why Companies are Turning to Serviced they begin to make ground and catch up with the UK and US markets, Offices the traditional field leaders. News that nearly 50% of employees 1 worldwide spend less than half of their time in the office each week, Perhaps one of the most significant differences between taking a either working from home or at various locations, means that the lease of office space and a licence of serviced offices is flexibility. serviced office sector, which once may not have been an attractive Traditionally, tenants of office space have been expected to take leases investment option or even warranted consideration for corporate for fixed terms, often for periods of say 10 to 15 years (although occupiers, is now a serious contender as service providers offer an recent evidence suggests lease terms have lowered to approximately innovative approach to the use of space, cutting edge technology six years), subject to five-yearly upwards open market rent reviews, and, most importantly, increased flexibility to occupiers. without any break options, or, if a break option is agreed, subject In this chapter we consider: to strict conditions and penalties. The institutionally acceptable ■ Who is using serviced offices? full repairing and insuring lease, upon which the UK investment ■ Why are companies turning to serviced offices? market has relied for so many years, offers landlords and investors a guaranteed income stream for the term of the lease, with the ■ How is flexibility achieved for occupiers? original tenant remaining liable under the original tenant covenant ■ Why invest in serviced offices and service office providers? or under an authorised guarantee agreement. However, modern- ■ Considerations to be made by investors. day businesses now require flexibility as enterprises struggle with ■ Key trends and market impressions – where does it go from their long-term strategic plans; for example, the concept of a five- here? year lease term does not fit with a one year (or less) business plan. The key for companies today is to be flexible; to have the ability to expand and contract, extending or terminating agreements as and Who is Using Serviced Offices? when necessary to keep overheads down and respond to business needs. They do not want to be tied into long-term leases or locations, With increased pressure on modern businesses to combine cost particularly given many European countries’ current political and effectiveness with providing an inviting and attractive workspace to economic instability. a new generation of discerning employees, the flexible work space has adapted and developed over recent years. In particular, small Other immediate benefits to businesses include the speed of entry to medium enterprises (SMEs) and start ups appear to have thrived into new premises, with simple user-friendly contracts that can be in the collegiate atmosphere that serviced offices and flexible signed immediately without requiring legal advice or fees and fixed working spaces have promoted. In providing leading technology monthly overheads (inclusive of business rates, service charge and and encouraging free thinking, flexibility and social working, the dilapidations). In addition, as competition between serviced office serviced office space provides something that the conventional providers increases, the offering has become more specialised. office dynamic does not offer.2 With recent figures showing that the Different providers have come to rest their reputations on their UK leads rankings on the number of new start-up companies, it is of technological offerings, additional benefits and general fit out, with no surprise that the take up in serviced office space has also shown serviced offices increasingly being located in prestigious locations double digit growth over the last few years. close to good transport connections. This allows businesses to impress clients and employees alike. Providers are also offering Although industries such as the technology and creative industries other types of services including co-working arrangements and were the first to adopt the more flexible way of working provided virtual offerings such as postal addresses and telephone answering by serviced offices, the serviced office sector has now become a services.

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of the term. Whilst a tenant under a full repairing and insuring How is Flexibility Achieved for Occupiers? lease can expect to find itself liable to the landlord for terminal dilapidations, which may not only include the cost to the landlord Lease or Licence? of making good the premises following the end of the term but also any losses, including loss of rental income, incurred by the landlord Whilst co-working agreements are often dealt with by way of in doing so, the serviced office licence does not. At the end of the membership or similar arrangements not discussed in this chapter, licence period, the occupier is expected to vacate the designated serviced office accommodation is documented by way of a personal space simply making good any damage caused to the premises. A licence or short fixed term flexi lease giving both service provider deposit is taken at the beginning of the licence period which, in the and occupier some level of certainty, whilst also providing flexibility. event the designated space is not returned in a suitable condition at the end of the licence period, may be used by the serviced office The type of arrangement used will more often than not depend on provider to remedy any defect. the proposed length of occupation period but can largely be split into two categories: short term, i.e., those covering a licence period from one month up to 24 months; and long-term arrangement usually no Why Invest in Serviced Offices or Serviced more than three years. However, as the market continues to mature Office Providers? and the large corporates look to take on serviced office space, the maximum term is likely to extend to periods of up to five years. With an increased pressure on both corporate employers and landlords Unlike the traditional office lease in which an exclusive right to to provide enhanced workspaces for employees and tenants alike, the possession of land is granted, a licence provides licensees with the serviced office sector has been a trailblazer in innovative design a contractual right or privilege to use the relevant serviced office of office space providing communal break out areas and leading IT space which, without that permission, would be an act of trespass. investment. To date in 2017 serviced office and co-working providers No further rights of security of tenure, which are created in a normal are widely reported to have accounted for the largest share of space business tenancy by virtue of the UK Landlord and Tenant Act 1954, leased in Central London, with providers such as WeWork increasing are granted and the licence remains personal between the service its presence in two of the largest transactions of 2017. The sector is provider and occupier, meaning that the licence will terminate in now attracting all forms of investors from global real estate funds to the event the service provider, either as a tenant under a lease or Asian institutional investors and family offices. owner of a freehold title, disposes of its interest in the premises. In Where funders have previously been nervous of the serviced office a licence the service provider always retains the right to “substitute” sector, viewing serviced office providers as a last resort tenant taking the designated space for other offices. This is to ensure that the up vacant properties at cheaper rents in a downturn, property investors licensee does not enjoy exclusive possession or occupation of the are now not only looking to act as landlord to existing and established office in question which is one of the key tests for establishing serviced office providers but also investing in established operators, as whether a tenancy exists. Whilst creating some uncertainty for evidenced by Blackstone’s acquisition of the Office Group, and even the tenant, this is usually outweighed by the benefits of the licence venturing into the market themselves; for example, British Land’s (already discussed in this chapter). own offering, the Storey concept. Although some hesitation remains regarding the sector and its unpredictability, a number of funders Licence Fees are now more comfortable with providing corporate funding to operational businesses as opposed to traditional property companies. Serviced office licences tend to have one all-encompassing licence fee, covering not only the rental fee but also services such as: Considerations to be Made by Investors ■ utilities; ■ communal facilities; An increase in the number of serviced office providers and a boom ■ payment of business rates; in companies taking up serviced accommodation has meant that ■ repair and maintenance; landlords not only need to consider how premises are held but also the tenant mix. Some key considerations for investors both when ■ buildings insurance; investing in premises with serviced office providers in occupation or ■ photocopying, mail handling and telephone answering on the grant of a new lease to a service provider are: services; ■ Investment value – The investment value of a premises ■ internet; and with a serviced office provider is perhaps not as simple to ■ security. ascertain as with a traditional lease. With a large amount of These services are available on a 24/7 basis. variables in place, the investment risk may be seen as greater. As yet, there is no universally agreed way of valuing service Whilst additional charges may be made for any further services providers, despite a call for one. Therefore, until such time provided over and above the basic inclusive services, the occupier as this is agreed, a full assessment of the service provider’s is able to budget fairly accurately for annual outgoings relating to a financial standing and reputation in the market, as wellas serviced office, unlike leased premises where charges for items such the standard investigations of title relating the property, is as insurance, business and other rates, and service charges are more advised. often than not defined as separate rents, which can be difficult to ■ User – As a landlord or tenant wishing to underlet to a ascertain until a formal demand is received. serviced office provider, consideration needs to be taken as to whether an occupational lease allows for multi-occupation. In the main, traditional office leases only permit group Dilapidations company sharing with a complete prohibition on the sharing of occupation or possession of the premises with third parties. Perhaps one of the most significant differences between the service Whilst leases can be varied to accommodate this, this may office licence and a traditional lease is what happens after the end come at a premium.

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■ Non-compete – The serviced office sector is fiercely The new lease accounting standards due to come into force on competitive and, as more and more serviced office providers 1 January 20193 will require all companies reporting under the enter the market, investor landlords will increasingly need International Accounting Standards Board to include information to consider whether to include non-compete clauses in in relation to leasing on their balance sheet inflating assets and their leases in order to provide comfort and satisfy provider liabilities. Currently viewed as off-balance sheet, from 2019 all requirements as the threat of competition from other serviced rents and lease payments are required to be listed on the balance office providers in the same building or business centre will act as a deterrent to many. Whilst this may impact on rental sheet, meaning companies will be seeking to reduce these liabilities value at rent review, it may be necessary to attract the larger where possible. Whilst companies could choose to buy the office and more well-established service providers. space they occupy or even seek to agree a proportion of turnover ■ Lender obligations – Whether a premises is owner occupied rent in order potentially to bring rents down in line with profits, or forms part of an investment portfolio, if lending is in place it seems more likely that they will seek to increase flexibility and it is more than likely that covenants will have been given to be seen to be reducing unnecessary expenditure when having to the lender not to let out, share space or allow anyone in it to account to shareholders. occupy it without the consent of the bank in order to ensure All of this combines to make the serviced offer sector increasingly that it is able to repossess in the event of default. attractive to corporates, either as a partial or complete solution to their needs (generally depending on the size of the corporate Key Trends and Market Impression – concerned). In short, one can expect this sector to continue to grow Where Does it go From Here? and to evolve in the types of offerings it presents.

With the workplace environment rapidly evolving and advances Endnotes in technology increasingly affecting the way companies are run, both investors and employers alike are well advised to familiarise 1 Regus: The impact of remote working on commercial real themselves with the serviced office market. estate. The Brexit referendum, subsequent UK election and continued 2 Costar.com. economic and political instability in many other EU countries is 3 IFRS 16, Leases (https://www.iasplus.com/en-ca/projects/ leading occupiers to seriously consider their options, with a drive ifrs/completed-projects-2/leases). for increased flexibility and the ability to make changes rapidly, as situations, markets and economies alter.

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Rebecca Davison Nicky Stewart Howard Kennedy Howard Kennedy No. 1 London Bridge No. 1 London Bridge London SE1 9BG London SE1 9BG United Kingdom United Kingdom

Tel: +44 20 3755 6000 Tel: +44 20 3755 6000 Email: [email protected] Email: [email protected] URL: www.howardkennedy.com URL: www.howardkennedy.com

Rebecca is a Senior Associate with Howard Kennedy specialising Nicky is Partner in the Real Estate department and has over 25 years’ in a broad range of non-contentious commercial real estate matters experience dealing with commercial property deals. She specialises in including acquisitions and disposals, asset management (including landlord and tenant, retail, business property acquisition and disposal, portfolios) and landlord and tenant issues. Rebecca also advises asset management portfolio work particularly in the serviced office corporate occupier clients on the acquisition, re-gearing and disposal market sector and general property investment work. of their occupational property interests.

Howard Kennedy is a leading London law firm with over 55 partners and over 150 lawyers, offering a broad range of services and expertise across a wide range of sectors. The firm comprises a vibrant and innovative team of lawyers, well versed at handling all types of property, corporate and commercial transactions for clients. Accounting for nearly half of the firm, Real Estate forms a significant part of the practice. The teams are focused on achieving commercial results for their clients and offer a full range of services across the property life cycle. They are considered to be a ‘real alternative’ to City firms and have undergone huge change over the last few years, encompassing two mergers and culminating in our move to stunning offices on the river at No.1 London Bridge.

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Toronto CREW and an Outlook on the Rosalyn Wallace Canadian Market for 2018

Toronto CREW / Cushman & Wakefield Stuart Barron

Toronto Commercial Real Estate Women Will Rising Interest Rates Stifle Growth?

Toronto Commercial Real Estate Women (“Toronto CREW”) Canada’s office and industrial real estate markets are at apoint is dedicated to empowering women to excel, influence and lead of inflection. Shifting economic fundamentals, particularly throughout their commercial real estate careers. Toronto CREW rising interest rates, threaten expansionary momentum in non-oil- members are key decision makers of some of the most influential producing markets. corporations in Canada, representing almost all the disciplines in How do we gauge the impact of this change? Who will be most commercial real estate. Members have immediate connections to heavily affected? Will the fundamentals driving the hottest markets high-performance professionals across all disciplines of commercial such as Vancouver, Toronto and Montreal, continue to drive growth real estate in Toronto. in 2018 and beyond? Committed to bringing more women into commercial real estate, It is critical for tenants, asset owners, and investors to answer these Toronto CREW is focused on creating programs that educate young key questions to determine what space commitments make sense women about the career opportunities available to them. Toronto and how to shape their portfolios in tomorrow’s market. CREW hosts an annual event for young women in high school where they can interact with women from different backgrounds and fields currently working in the commercial real estate industry and Counterweights to Softening Growth learn about the industry itself. For those young women who enrol in post-secondary commercial real estate education programs at a There are two key counterweights that will help buoy demand in university or college level, Toronto CREW continues its support for tomorrow’s markets, even as growth across traditional sectors wanes: young women focused on careers in commercial real estate through 1. Expanding Tech Sector. Office markets, with an established its scholarship program. Once graduated and new to the commercial tech sector and related educational institutions that produce a real estate industry, Toronto CREW assists these young women by growing talent pool, will help drive growth. facilitating a mentorship program that provides female mentors. 2. E-com Escalation. The ongoing metamorphosis of retail and Toronto CREW is not only focused on educating up and coming related growth in online sales, driven by a more sophisticated talent in the commercial real estate industry. Building effective omnichannel environment, will continue fuelling demand for leaders is key to advancing the commercial real estate industry. logistics and distribution facilities in key industrial markets. Toronto CREW dedicates resources to providing members with high-level leadership development training and opportunities Low Oil Costs and Low Interest Rates to serve on global boards and committees to develop and hone leadership skills. Women looking to move into the C-Suite can Polarised Canadian Real Estate Markets participate in the Toronto CREW leadership certificate program or the board readiness program along with a number of other one-off The oil price decline in mid-2014 had a polarising effect on Canadian sessions on specific leadership skills development. office and industrial markets. Oil-producing markets experienced an unprecedented contraction of demand strength. Calgary, which Facilitating business networking and deal making among our multi- got hit the hardest, saw 6.5 million square feet of office space return disciplinary membership is the cornerstone of the Toronto CREW to market in the two years that followed the oil shock and now sits organisation. Each month, there are multiple opportunities for with a CBD office availability rate of 22.0% (all classes). Edmonton members to meet and network with each other. Strong relationships and St. John’s also felt the pain of weak oil prices, and now have lead to smoother transactions and quick and efficient referrals. availability rates of 15.3% and 21.9%, respectively. There is a saying in Toronto CREW that no call to a member is a cold call. Toronto CREW members view even the shortest of Back when the oil price ordeal began, the Bank of Canada lowered interactions as an opportunity to develop their network. interest rates to record lows in response to plunging real GDP growth. With the rocket fuel of low interest rates, combined with Over the last 21 years, Toronto CREW has developed strong support low energy costs, a strong U.S. economy and weak domestic dollar, for its mission through partnerships with and sponsorships from demand gained momentum across non-oil-producing Canadian corporations in all commercial real estate fields in the industry. office and industrial markets. Cushman & Wakefield is one of the organisations that supports the Toronto CREW mission through sponsorship. Read below for an Since then, we’ve seen unprecedented growth in Vancouver and industry outlook prepared by Cushman & Wakefield. Toronto, and to a lesser extent, in Montreal.

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Industrial Market Revival So, What About Rising Interest Rates?

Industrial markets saw a huge acceleration in growth due to a variety Canadian markets sit at an inflection point. While opinions differ, of factors. The ongoing evolution of retail and related growth in the consensus among economists is that the economy will slow over logistics facilities were crucial drivers. In addition, low energy the next few years. Oxford Economics is projecting that real GDP costs, strong demand from a robust U.S. economy, and a competitive will soften to 1.9% in 2018 from an estimated 3.0% in 2017, with Canadian dollar, propelled overall growth across industrial markets. long-run interest rates rising to 2.62% in 2018 from 1.81% in 2017. Toronto’s industrial markets have seen expansionary momentum There are many conflicting views on where interest rates will go, with catapult by almost 200% since Q3 2014, averaging an impressive 2.1 forecasts clearly dependent on the Bank of Canada’s policy. Clearly, million square feet (msf) of absorption per quarter. This translated any material slowdown in the economy would impact profitability and into 27.1 msf of positive absorption since the oil price decline. slow expansionary momentum across office and industrial markets; Vancouver, relative to the size of its inventory, saw even faster however, we remain optimistic that growth from tech and e-com will growth than Toronto, with 11.3 msf of absorption over the same help counterbalance the impact of slowing demand in other sectors. period. And while Montreal tends to lag on the recovery side, the momentum of growth over the past year has been dramatic, with Solid Performance Ahead over 8.2 msf of space absorbed since mid-2014. There is no question that Canadian office and industrial markets will Surging Downtown Office Markets see a slowing of overall momentum as real GDP softens over 2018 and 2019. However, the counterbalancing factors in this report should Interestingly, CBD office markets have parallelled the stellar growth buoy demand growth against a general moderation in demand strength. of industrial markets, with Vancouver, Toronto, and Montreal From an industrial perspective, Vancouver, Calgary, Toronto, and leading the Canadian pack. While record new supply reshaped these Montreal will likely perform well as we move through 2018 and markets between 2014 and 2017, space was rapidly absorbed in 2019. Calgary is seeing its first signs of a strengthening industrial Toronto and Vancouver, and demand strength has driven availability sector, and will benefit significantly from the continued evolution of to record lows in CBD markets. ecommerce. Toronto is another key industrial market that will see Central Vancouver has seen the strongest absorption levels in continued growth as a result of this counterbalancing factor. 25 years and now has an availability rate of 5.0%. Downtown Both markets are expected to experience continuing land scarcity, Toronto, which has seen ferocious demand give rise to 10.5 msf of tight availability, and moderate growth, which will exert continued new buildings downtown since 2009, is now faced with a record- upward pressure on rental rates. It is astonishing to consider that low vacancy rate of 3.0%. Montreal has also seen a significant Toronto, with its 773 msf of industrial inventory, now has an all- strengthening of expansionary demand momentum. time low availability rate of 2.5%. Like other gateway office markets around the world, key cities in From an office perspective, the non-oil-producing CBD markets are Canada have seen traditional demand drivers ease as new growth expected to see continued growth, also at a moderate pace. Markets leaders such as technology pick up steam. A 2017 Cushman & with a deeper technology sector will see a greater offsetting impact Wakefield study shows that the technology sector in downtown from technology and stronger overall growth. Toronto is an example Toronto has a footprint of more than 10 msf. Though this ranks of such a market. second behind banking and finance, the tech sector accounted for Downtown Toronto has been a story of unparallelled growth. With more than 22% of the growth in downtown Toronto across 2016. an overall availability rate at a record low of 3.0%, this impressive Technology isn’t just a downtown Vancouver and Toronto story. market should see upward pressure on rental rates over the next few The impact of the sector is reverberating across Canada in other years, in advance of the next wave of new developments arriving at markets such as suburban Vancouver, suburban Ottawa, downtown market, including the much anticipated 81 Bay Street. Montreal, Kitchener-Waterloo, and suburban Toronto. Expect more Across Canada, many markets have a substantial technology transformation from this dynamic sector through 2018. footprint, and its size and the ecosystem supporting continued growth of the technology sector will be a powerful offsetting influence as traditional sectors see moderate growth.

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Rosalyn Wallace Stuart Barron Toronto CREW Cushman & Wakefield P. O. Box 350, Ernst & Young Tower 161 Bay Street, Suite 1500 Toronto-Dominion Centre Toronto, ON M5J 2S1 Toronto, ON M5K 1N3 Canada Canada Tel: +1 416 359 2652 Tel: +1 416 729 6071 Email: [email protected] Email: [email protected] URL: www.cushmanwakefield.com URL: https://torontocrew.org

Rosalyn is the 2017 Toronto CREW President and Director of Real Stuart Barron oversees the collection and dissemination of research Estate and Transactional & Legal Services at Magna International information supporting the Canadian markets. Stuart is supported Inc. (“Magna”). Magna is one of the largest global auto parts by a knowledgeable research team stretching from Vancouver on manufacturers. In terms of real estate, Magna’s portfolio consists of the west coast to Newfoundland & Labrador on the east coast. One over 600 properties in 29 countries, where Magna is predominately of the key priorities of research is to drive out market intelligence in the role of tenant in industrial space. Rosalyn leads a global team across asset classes including office, industrial, retail, capital markets that assists in the day-to-day management and operation of all of and multifamily. In support of intelligence output, Stuart interviews Magna’s facilities and with all acquisitions, disposition and leasing and engages with experts across the Canadian markets to gain matters. In her role at Magna, Rosalyn is also part of the construction perspective and identify unique observations about changing market team that leads the site selection and RFP process and negotiation of conditions. Cushman & Wakefield prides itself on the depth of its construction contracts. Prior to joining Magna in 2015, Rosalyn was in market intelligence, as evidenced by Mr. Barron’s private and public private practice with a national Canadian law firm for 10 years where speaking engagements, which connect the dots between changing her practice focused on all aspects of commercial real estate, with a economic fundamentals and the impact of anticipated change on the particular focus on leasing. Canadian real estate markets. Mr. Barron graduated from the University of Western Ontario with a Bachelor in Economics and has achieved the designation of Chartered Accountant.

Toronto CREW Toronto CREW is a chapter within the larger CREW Network which has over 11,000 members in 72 chapters across North America and the United Kingdom. The CREW Network is actively engaged in influencing the success of the commercial real estate industry by advancing the achievements of women. The CREW Network is the world’s leading researcher on women in commercial real estate. Research initiatives produce white papers annually and a benchmark study every five years, delivering data and action items to advance women in commercial real estate and positively impact the industry. Cushman & Wakefield Cushman & Wakefield is a leading global real estate services firm that helps clients transform the way people work, shop, and live. Our 45,000 employees in more than 70 countries help occupiers and investors optimise the value of their real estate by combining our global perspective and deep local knowledge with an impressive platform of real estate solutions. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $6 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. 2017 marks the 100-year anniversary of the Cushman & Wakefield brand. 100 years of taking our clients’ ideas and putting them into action. To learn more, visit www.cushwakecentennial.com, www.cushmanwakefield.com or follow @CushWake on Twitter.

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Austria Dr. David Kubes

Kubes Passeyrer Attorneys at Law Mag. Marko Marjanovic

1 Real Estate Law 2 Ownership

1.1 Please briefly describe the main laws that govern 2.1 Are there legal restrictions on ownership of real estate real estate in your jurisdiction. Laws relating to by particular classes of persons (e.g. non-resident leases of business premises should be listed in persons)? response to question 10.1. Those relating to zoning and environmental should be listed in response to Austria has a total of nine different Acts regulating Land Transfer to question 12.1. Those relating to tax should be listed in Foreign Nationals (Ausländergrundverkehrsgesetze). The various response to questions in Section 9. conditions that a non-Austrian or non-EU citizen must meet in order to be permitted to acquire real estate assets differ from Province In Austria, the following Acts concerning real estate law have to be to Province. If a person from a non-EU country buys real estate, borne in mind with every real estate transaction: the purchase contract must be signed subject to the condition of ■ the Austrian Civil Code (Allgemeines Bürgerliches obtaining approval from the competent land transfer authority Gesetzbuch, ABGB); (Ausländergrundverkehrsbehörde). As a rule, such persons will ■ the Land Registry Act (Grundbuchgesetz); be permitted to acquire real estate assets in Austria only if they ■ the Condominium Ownership Act (Wohnungseigentumsgesetz); furnish proof that the centre of their lives (i.e. their main place of and residence) is in Austria and that by purchasing the real estate they ■ the Real Estate Developer Act (Bauträgervertragsgesetz). will deliver a certain added value to the Austrian State. Therefore, pure investments in real estate on the part of non-EU citizens need to be supported by complex schemes involving one or more companies 1.2 What is the impact (if any) on real estate of local common law in your jurisdiction? because there is very little chance of approval by the land transfer authorities in most cases. Local legislation plays a huge role in the context of real estate transactions. In Austria, all development regulations 3 Real Estate Rights (Bebauungsbestimmungen) and possible solutions concerning the rehabilitation of real estate and the construction of new buildings are subject to the detailed descriptions and restrictions provided 3.1 What are the types of rights over land recognised in for in Regional Planning Acts (Raumordnungsgesetze) and your jurisdiction? Are any of them purely contractual Building Codes (Bauordnungen). The adoption of Zoning Plans between the parties? (Flächenwidmungspläne), which stipulate the maximum height of real estate buildings, is monitored by the respective Provincial Austria has a comprehensive nationwide land register where all Government, whereas the individual cities and municipalities are in landowners and all rights of third parties can be entered. Purely charge of the Building Codes. contractual rights in respect of real estate are not protected, because Austrian land registry law is based on the understanding that all material rights and obligations of owners of real estate are entered 1.3 Are international laws relevant to real estate in your into the land registry. If a relevant right is not entered into the land jurisdiction? Please ignore EU legislation enacted registry, it will protect the contracting parties from misuse but any locally in EU countries. third party may acquire a real property in good faith (bona fide acquisition) because the principle of publicity of the Austrian land Apart from EU Directives, international laws are of very little registry provides that only rights entered into the land registry are relevance to real estate transactions in Austria. to be relied on. Therefore, rights that have not been entered into the land registry offer no protection against bona fide acquisition by third parties.

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not) is acquired through a transaction constituting an obligation, 3.2 Are there any scenarios where the right to a which is usually a contract, and through a mode, which is usually real estate diverges from the right to a building the actual delivery of the purchased object (principle of “title and constructed thereon? modus”). In case of real estate, the modus consists of the owner registering with the land registry. If the owner has not registered In Austria, there is the construct of a “Baurecht” (Leasehold). their right with the land registry, the owner may sell or otherwise The real estate owner can grant a leasehold interest and then, in dispose of the real property on account of the contractual agreement, accordance with the law, a building can be erected on that leasehold. but protection against third persons that may have rights in respect of As a matter of principle, the leasehold must be annotated in the land the real property is not yet afforded. Under Austrian law, the right of registry. Another possibility to separate ownership of a building from ownership will take full effect only after the buyer named as such in ownership of the land is provided by the so-called “Superädifikat” the purchase contract has also been registered with the land registry. Austria (a legal term referring to non-permanent buildings on third-party All other rights that can be entered into the land registry will also land – superaedificates). All deeds relating to buildings erected as develop a protective effect against third parties upon entry of the superaedificates are deposited with the land registry, but are not right. Under Austrian law, every buyer of real estate is obligated actually entered into the land registry. For this reason, erecting a to take a look into the land registry before signing the purchase superaedificate is possible, and permissible, only if the building contract. All rights, encumbrances or obligations entered into the erected on the piece of land is not meant to remain there permanently. land registry are deemed to be generally known and thus their bona Therefore, it must be pointed out in the respective agreement on the fide acquisition is no longer possible. If rights are not entered into establishment of a superaedificate that removing the building again the land registry, they will apply exclusively inter partes; such after the expiration of a certain period of time is very well possible, both restrictions or obligations will not be valid vis-à-vis third parties. physically and in terms of law, if both the building and the contracts and agreements have been designed accordingly. Superaedificates are not entered into the land registry and in most cases one is unable to 4.4 What rights in land are not required to be registered? see from the land registry extract (Grundbuchauszug) if the building on a piece of land is the landowner’s property or a superaedificate. All rights relating to a real property must be registered in order to To make sure that land and the buildings constructed on such land take full effect vis-à-vis third parties. Rental agreements are the only have the same owner, it is necessary to check the collection of deeds exception. These may be registered but there is no obligation to do (Urkundensammlung) which is kept at the respective land registry but so. In Austria, a rental agreement will usually only be annotated in the is not available online. land registry if an entire building is rented for a very long time or if very high advance payments on the rent are made. Rental agreements are the only contracts that do not have to be entered into the land 3.3 Is there a split between legal title and beneficial title registry and whose entry does not provide any particular advantage. in your jurisdiction and what are the registration consequences of any split? 4.5 Where there are both unregistered and registered land In Austria, one has the possibility to split the legal title and the or rights is there a probationary period following first beneficial title. Only the legal owner can apply for the registration registration or are there perhaps different classes in the land register and has the power to dispose of the real estate. or qualities of title on first registration? Please give details. First registration means the occasion upon It is advisable that the legal and beneficial owners create an inter which unregistered land or rights are first registered partes agreement and agree on their reciprocal rights and duties. in the registries.

As the registration of all rights is required in Austria, there is not a 4 System of Registration significant difference. All registered rights have priority. In case of non-registered rights, there is no protection against bona fide 4.1 Is all land in your jurisdiction required to be acquisition by third parties. Rental agreements are automatically registered? What land (or rights) are unregistered? transferred to a buyer since they are attached to the real estate and as a general principle under Austrian law, the sale of a real estate does Austria has a comprehensive, nationwide land registry: every real not grant a reason to terminate a lease or rental contract. property, every public road, every lake and every wood is recorded and registered in the land registry. 4.6 On a land sale, when is title (or ownership) transferred to the buyer? 4.2 Is there a state guarantee of title? What does it guarantee? In Austria, the transfer of title takes place upon entry of the buyer into the land registry. Under Austrian law, entry into the land registry is regarded as the mode for the acquisition of title. The acquisition becomes final and 4.7 Please briefly describe how some rights obtain absolute after the expiration of a four-week period following entry, priority over other rights. Do earlier rights defeat later at which point the registered ownership is deemed to be guaranteed. rights?

4.3 What rights in land are compulsorily registrable? Austrian land registry law follows the principle of strict priority. What (if any) is the consequence of non-registration? Every entry is given a consecutive number, including the year. The earlier of two entries will always rank prior to a later one. In respect Under Austrian law, the right of ownership must be entered into the of the pledging of real estate, an advance in the ranking may be land registry. Under Austrian law, title to a property (moveable or agreed among the secured creditors with the consent of all registered

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secured creditors. However, all registered creditors whose secured compensation, proceedings based on the Act on Public Liability claims become subordinated must consent to such subordination in (Amtshaftungsgesetz) must be instituted against the Republic of writing. Austria.

The Austrian land registry is an electronic online register that is linked to all notaries’ offices and law firms. Only notaries and 6.2 How and on what basis are these persons attorneys who are authorised to represent parties may submit remunerated? electronic filings to the land registry. Regarding the entry of changes affecting the right of ownership, all documents by which The remuneration of the escrow agent is 1.5% of the purchase price rights or encumbrances are created require notarisation. The notary plus 20% VAT. In general these costs must be borne by the buyer. or attorney-at-law must scan the notarised documents and save them electronically to the central archive, the so-called “Archivium”. In 6.3 Do you feel there is a noticeable increase in a special program of the WEB-ERV service (a web-based system the availability of capital to finance real estate of paperless communication with courts), the corresponding transactions in your jurisdiction, whether equity or registration certificates (Registerbescheinigungen) for the respective debt? What are the main sources of capital you see deeds are transmitted to the land registry which can retrieve the active in your market? corresponding documents from the central register after identifying them by the codes. This procedure was established in Austria in Due to the low interest rates available today, 90% of all real estate order to avoid the sending of original documents and to make all transactions are financed through loans, and on average 70% of the important documents available directly online in a register. It did market value of a real estate transaction is financed by a loan. not involve, however, any change to the formal requirements to be met by the original documents. 6.4 What is the appetite for investors and developers Purchase contracts, pledge agreements and all contracts that should in your region to look beyond primary real estate be entered into the land registry (use and occupation agreements markets and transact business in secondary or even (Benutzungsvereinbarungen), contracts on third party rights tertiary markets? Please give examples of significant (Servitutsverträge), toleration agreements (Duldungsvereinbarungen)) secondary or tertiary real estate transactions, if relevant. must bear the notarised signatures of all contracting parties in order to be valid. In Austria, the principle applies that an entry into in the land registry may be made only on the basis of a notarised signature. In Austria, the primary real estate market has a yield of 1.5% to 2% and investors pay for prestige rather than a return on investment. Secondary or tertiary markets provide a yield up to 6% or 7%. 5.4 Can compensation be claimed from the registry/ Recently, logistic centres and shopping malls have been sold at a registries if it/they make a mistake? yield of 6.5%.

Compensation for mistakes committed by the land registry court is a matter of ordinary public liability in Austria; to claim such

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7 Liabilities of Buyers and Sellers in Real Austria ownership. Estate Transactions

7.6 What (if any) are the liabilities of the buyer (in addition 7.1 What (if any) are the minimum formalities for the sale to paying the sale price)? and purchase of real estate? The liabilities of a buyer besides the payment of the purchase price The minimum formality for the sale and purchase of real estate is a are: written contract with legalised signatures containing the “essentialia 1. the payment of the real estate transfer tax; negotii” of a contract, which are: 2. the payment of the registration fee; and 1. the object; and 3. the payment of the escrow agent fee. 2. the sales price. Furthermore, under Austrian law, rental contracts are automatically The Austrian civil law provides for subsidiary regulation for all transferred to a buyer and he must take on all rental contracts as relevant matters, such as allocating liability if there was no mutual they are. agreement in the contract.

7.2 Is the seller under a duty of disclosure? What matters 8 Finance and Banking must be disclosed? 8.1 Please briefly describe any regulations concerning All information that is known to the seller and might influence the lending of money to finance real estate. Are the the purchase decision of a “standard buyer” must be disclosed. rules different as between resident and non-resident However, requesting the following information from any seller persons and/or between individual persons and before buying real estate is recommended: corporate entities? 1. An excerpt of the land register. In general, a total of 70% of the market value of real estate can be 2. The lease and rent contracts of tenants. financed through a loan with Austrian banks. 3. The last protocol of the general meeting of the owner community. Banks in general register a pledge in the land register in the amount of 130% of the amount borrowed. 4. A statement of the property management company on expected repair work of the building. The registration fee is 1.2% of the registered amount. 5. The current balance of the repair fund of the building. For bank financings there is no difference for residential or non- Carrying out research regarding possible contamination is advisable, residential persons or corporate or individual persons. For all especially if the construction or renovation of a building is intended. buyers the same KYC procedures exist and the ranking of the bank in order to determine the amount to be financed always depends on the credit worthiness of the buyer, irrespective of its residency. 7.3 Can the seller be liable to the buyer for misrepresentation? 8.2 What are the main methods by which a real estate Yes, depending on the misrepresentation, a price reduction or even a lender seeks to protect itself from default by the borrower? cancellation of the contract is possible.

The most common protections are: 7.4 Do sellers usually give contractual warranties to the ■ the registration of a pledge; buyer? What would be the scope of these? What is the function of warranties (e.g. to apportion risk, to ■ the security assignment of a lease, if any; give information)? Are warranties a substitute for the ■ the security assignment of all building insurances; and buyer carrying out his own diligence? ■ additional collateral such as a life insurance. In addition, the following protections exist: Usually the contractual warranties give a potential buyer a scope of the costs he will face when developing the real estate, or confirm ■ signing of an enforceable notarial deed for the unconditional and immediate payment of all outstanding loan or realisation important issues that are crucial for a buyer to consider when of a mortgage; deciding to purchase real estate. ■ an agreement on the free sale of the real estate in case of a default; or ■ a power of attorney for the sale of the real estate in favour of the lender.

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8.3 What are the common proceedings for realisation of 9.3 Are transfers of real estate by individuals subject to mortgaged properties? Are there any options for a income tax? mortgagee to realise a mortgaged property without involving court proceedings or the contribution of the In respect of the profit a person makes out of the sale of real estate, mortgagor? a “Real Estate Profit Tax” was introduced in Austria in 2012. As of 1.1.2016, a flat tax in the amount of 30% of the net profit of a real In general, a mortgage must be realised through court proceedings estate transaction is due for payment. If a real estate was purchased and court auction. Any other way of realisation of a mortgage must before 2002, the flat rate of tax is 4.2% of the purchase price. be agreed in writing between the lender and the pledgee.

Austria In case of an enforceable notarial deed, court proceedings will not take 9.4 Are transfers of real estate subject to VAT? How place and the court will immediately start the auction of the real estate. much? Who is liable? Are there any exemptions?

8.4 What minimum formalities are required for real estate Real estate transfers are exempt from VAT. However, a seller may lending? opt into a VAT sale if the real estate was subject to renovation and the seller has claimed back VAT out of the renovation of the building. The minimum requirements for real estate lending is the registration If a real estate owner claims back VAT for renovation or construction of a bank and an escrow agent that registers the pledge for and work, such VAT has to be paid back on a pro rata basis calculated behalf of the financing bank. over 10 years if he does not opt into a VAT sale. VAT in Austria is 20%. 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other creditors? 9.5 What other tax or taxes (if any) are payable by the seller on the disposal of a property? The real estate lender is protected by the registration of a pledge in the land register. The land register provides for a ranking of all There are no additional taxes other than those mentioned above. claims according to the date of registration. All registered pledges that rank prior to a pledge will be paid off in full first. 9.6 Is taxation different if ownership of a company (or other entity) owning real estate is transferred? 8.6 Under what circumstances can security taken by a lender be avoided or rendered unenforceable? Real estate owned by companies is not subject to the Real Estate Profit Tax. The profit of a real estate sale is standard profit of the Once a security is registered in the land register, it can only be company and, therefore, subject to standard corporation tax. avoided or rendered unenforceable if the documentation of such security that was used for its registration was void or fake. 9.7 Are there any tax issues that a buyer of real estate should always take into consideration/conduct due diligence on? 8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? The real estate buyer has to pay 3.5% real estate transfer tax and a Actually there are no actions to frustrate the enforcement action 1.1% registration fee. For debt financings, a mortgage usually has by the lender; the borrower just has the possibility to delay the to be registered in the land register where the register fee amounts enforcement if he claims an extension of the grace period for to 1.2% of the amount registered. The purchase of real estate is payment or a lack of formal prerequisites. exempt from VAT but the seller has the opportunity to opt into VAT.

9 Tax 10 Leases of Business Premises

9.1 Are transfers of real estate subject to a transfer tax? 10.1 Please briefly describe the main laws that regulate How much? Who is liable? leases of business premises.

When transferring real estate, 3.5% real estate transfer tax and 1.1% Under Austrian law, part I of the general rent act is applicable for the registration fee are due. In general, these taxes and fees are borne by leasing of business premises, in addition to the general provisions the buyer; however, both parties of a sales contract are liable for the of the Civil Code. payment of the real estate transfer tax towards the tax authorities. The registration fee is payable by the buyer only. 10.2 What types of business lease exist?

9.2 When is the transfer tax paid? Under Austrian law, limited and unlimited leases exist.

The real estate transfer tax and the registration fee are normally paid to the escrow agent together with the purchase price and the escrow agent files all tax papers and pays the transfer tax and the registration fee upon registration of the buyer as the new owner.

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unlimited or 10 years. Austria Green leases are not very common in Austria. However, real estate (b) Rent increases developers started to construct “green buildings” and try to reduce Rent is normally only indexed based on the consumer price the consumption of energy. index. In order to contribute to green leases, the Austrian government (c) Tenants right to sell or sublease introduced the requirement of each landlord to provide a technical Subleasing is normally not allowed in standard leases – only report on the energy efficiency of each building (“Energieausweis”). upon prior written consent of the owner. This report is obligatory and the results (class of energy efficiency, (d) Insurance heating demand and use of electricity) must be disclosed to each Insurance must be provided by the tenant. tenant. (e) (i) In case of a change of control of the tenant, the owner is entitled to raise the rent up to the market value if the agreed rent is below market value. 11 Leases of Residential Premises (ii) Mergers are normally accepted if the beneficial owner does not change or the credit worthiness is not lowered after 11.1 Please briefly describe the main laws that regulate the merger. leases of residential premises. (f) Repairs Maintenance must be provided by the tenant, repairs by the The main laws for the leasing of residential premises are the Austrian owner. Civil Code (ABGB, Allgemeines Bürgerliches Gesetzbuch) and the Austrian Tenancy Act (MRG, Mietrechtsgesetz). 10.4 What taxes are payable on rent either by the landlord or tenant of a business lease? 11.2 Do the laws differ if the premises are intended for multiple different residential occupiers? Lease agreements are subject to stamp tax. Stamp tax is due for payment after the lease has been signed. For (i) limited lease No, there is no difference. contracts, it is 1% of the aggregated lease amount (a cap of 17 years exist), or (ii) for unlimited lease contracts, 1% of the aggregated lease amount of the first three years. 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the 10.5 In what circumstances are business leases usually tenant’s rights to remain in the premises at the end of terminated (e.g. at expiry, on default, by either party the term; and (d) the tenant’s contribution/obligation etc.)? Are there any special provisions allowing a to the property “costs” e.g. insurance and repair? tenant to extend or renew the lease or for either party to be compensated by the other for any reason on The Austrian Tenancy Act (MRG) is considered to be one of the termination? most complicated and divided conglomerate of regulations that exists in Austria and for years has been subject to ongoing changes Business leases usually terminate at expiry or upon request of and attempts to straighten out past incongruences implemented by the tenant; extending and renewing leases is subject to a mutual different governments. agreement with the landlord. In case of an early termination, the The Austrian Tenancy Act is not applicable in the following cases: landlord is entitled to compensation for the remaining rent period. ■ for hotels or hosting rooms, forwarding rooms, student residences or nursing homes; 10.6 Does the landlord and/or the tenant of a business ■ apartments or individual rooms of charitable institutions; lease cease to be liable for their respective obligations under the lease once they have sold their ■ official residences or apartments given in the context with an interest? Can they be responsible after the sale in employment relationship; respect of pre-sale non-compliance? ■ secondary residences for the purpose of vacation; ■ if the building has not more than two independent apartments All liability is limited to outstanding payments to the government or business spaces; and and/or outstanding payments to the owner community in case of ■ if the lease encompasses a whole enterprise. co-ownership. Additional liability has to be agreed upon between There is also the possibility of the partial application of the Tenancy the parties. Act (namely of the most important provisions like cost control and protection against dismissal). This applies in the following cases: ■ if the rented area is located in a building built with a building permission after 30.6.1953 and without subventions;

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■ for rooftop extensions completed with a building permission Waste Management Act (AWG, Abfallwirtschaftsgesetz) contains after 31.12.2001; and regulations regarding waste recycling, waste avoidance and different ■ for apartments in a condominium as defined in the Austrian duties of waste owners; the conservation laws of the federal states Condominium Act (WEG, Wohnungseigentumsgesetz) if the regulate the protection of species and the flora and fauna. building permission was granted after 8.5.1945.

Buildings built before 1945 are considered “old buildings” and the 12.2 Can the state force land owners to sell land to it? If maximum rent is governed by an index of EUR 7.50 per square so please briefly describe including price mechanism. metre plus a list of benefits that entitles the landlord to increase such rent (for example, if the building is in a good neighbourhood, has a Yes, in case of necessity (e.g. for road or building construction) the beautiful view, is on a quiet street, has additional bathrooms, etc.). Austria state can force owners to sell land. In an administrative proceeding, (a) According to the Austrian Tenancy Act (MRG) the rental an expert evaluates the price to be paid to the owner. contract can provide an unlimited term but can also provide a temporary length of term. In case of a temporary term the law orders a rent reduction of 25%. 12.3 Which bodies control land/building use and/or occupation and environmental regulation? How do (b) The parties can mutually agree on the increase in the rent. The buyers obtain reliable information on these matters? one-sided rent increase is only permitted in limited ways, for example if the rent can be linked to a reference index, usually the Consumer Price Index (VPI, Verbraucherpreisindex) or Primarily responsible for such regulations at community for the financing of certain maintenance works. level is the mayor and the administrative authorities The arbitration board (Schlichtungsstelle) controls, upon the (Bezirksverwaltungsbehörden) at federal state level. Most authorities request of the tenant, if the rent is adequate. provide support and the possibility of an informal meeting where (c) After expiry of the term, the tenant has no right to remain buyers obtain reliable information. in the premises; only in case of a mutual agreement can he remain in the accommodation. 12.4 What main permits or licences are required for (d) The tenant has to pay the operating expenses, including, for building works and/or the use of real estate? example, water charges, fire insurance, liability insurance, costs of cleaning and chimney sweepers, sewage fees and Most building works require a building permit appropriate to the waste collection charges. building regulations of the particular federal state where the building is located. After the finalisation of the building works, the owner 11.4 Would there be rights for a landlord to terminate a needs the notification of completion. In case of a preservation order residential lease and what steps would be needed a permit from the Monument Protection Authority is required. to achieve vacant possession if the circumstances existed for the right to be exercised? 12.5 Are building/use permits and licences commonly obtained in your jurisdiction? Can implied permission The Austrian Tenancy Act (MRG) protects tenants and only allows be obtained in any way (e.g. by long use)? landlords to terminate a residential lease if there is an important enough reason. Such important reasons include, for example, By fulfilling all necessary prerequisites the owner has the enforceable default of payment, vandalism of the apartment or if the landlord legal right to a permit. Building works without a permit are illegal urgently needs the apartment for himself or his relatives in order to and an implied permission can’t be obtained by long use or any avoid homelessness. other way; in this case the authorities will order the demolition of In case of termination of a residential lease, the landlord has to the building works. file a claim with the competent court. In general, the protection of tenants under Austrian law is very high and courts do tend to render decisions in favour of tenants. 12.6 What is the appropriate cost of building/use permits and the time involved in obtaining them?

12 Public Law Permits and Obligations Commonly the duration of a proceeding takes about four months. If, for example, neighbours have different veto rights, the duration of proceedings can be significantly longer. The proceeding itself 12.1 What are the main laws which govern zoning/ is not expensive but if expert opinions are required (e.g. to fight permitting and related matters concerning the use neighbourly vetos), the costs can extend to several thousand euros. and occupation of land? Please briefly describe them and include environmental laws. 12.7 Are there any regulations on the protection of historic In Austria, every federal state has its own laws according to the use monuments in your jurisdiction? If any, when and how and occupation of land. The surface dedication plan divides the land are they likely to affect the transfer of rights in real into different categories, e.g. residential areas, industrial areas or estate? grassland. The Austrian Heritage Protection Act (DMSG, Denkmal- The provincial jurisdiction also provides detailed regulations on schutzgesetz) regulates the protection of historic monuments construction law. and affects the transfer of rights in real estate subordinately. The Austria does not have a unique environmental law but a Primary Heritage Protection Act affects building works on historic fragmentation of different environmental categories. The Austrian monuments, so that the owner needs a permit of the responsible Climate Protection Act (KSG, Klimaschutzgesetz) regulates the authority. Such authority can also attach conditions to its approval. maximum amount of greenhouse gas emissions; the Austrian

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12.8 How can e.g. a potential buyer obtain reliable 13 Climate Change information on contamination and pollution of real estate? Is there a public register of contaminated land in your jurisdiction? 13.1 Please briefly explain the nature and extent of any regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions There is an environmental liabilities register in Austria. Such trading scheme). register contains information about the contamination of real estate with hazardous materials and substances. There are no regulatory measures for reducing carbon dioxide emissions. Austria 12.9 In what circumstances (if any) is environmental clean- up ever mandatory? 13.2 Are there any national greenhouse gas emissions reduction targets? In cases where contamination has occurred, a clean-up is obligatory. The primary polluter is responsible for the clean-up and has to bear Currently there are no mandatory reduction targets. its costs. If the polluter is not detectable the owner of the real estate is subsequently liable for the decontamination. 13.3 Are there any other regulatory measures (not already mentioned) which aim to improve the sustainability of 12.10 Please briefly outline any regulatory requirements both newly constructed and existing buildings? for the assessment and management of the energy performance of buildings in your jurisdiction. Local government provides for promotions and financial aid for owners who are willing to improve the energy performance of their In Austria an energy performance certificate contains all essential buildings. Some of these costs are deductible from tax in order to information (e.g. thermal insulation, noise protection, energy give an incentive to landlords. requirement) regarding the energy performance of a building. This energy performance certificate is necessary to acquire building permission and during the sale of a property a seller must provide such certificate to the buyer.

Dr. David Kubes Mag. Marko Marjanovic Kubes Passeyrer Attorneys at Law Kubes Passeyrer Attorneys at Law Gutenberggasse 1/10 Gutenberggasse 1/10 1070 Vienna 1070 Vienna Austria Austria

Tel: +43 1 526 5000 Tel: +43 1 526 5000 Fax: +43 1 526 5000 50 Fax: +43 1 526 5000 50 Email: [email protected] Email: [email protected] URL: www.kpnet.at URL: www.kpnet.at

Dr. David Kubes started specialising in real estate matters in 2005, Mag. Marko Marjanovic is a law graduate of Vienna University. He directly after the foundation of Kubes Passeyrer attorneys at law. As worked several years in an office specialising in business law. legal advisor to one of the major real estate developers in Austria, After he successfully completed the bar examination he joined Kubes a wide range of projects were successfully closed over the past Passeyrer Attorneys at Law and focused on real estate and business 10 years. In addition, lenders and foreign investors used Kubes law. In addition he frequently advises clients in civil law and represents Passeyrer attorneys at law for their real estate projects in Vienna. In them in court trials. 2008, Austria’s first Sharia-compliant real estate financing was led by Dr. Kubes in cooperation with a Swiss investment fund and Qatar Mag. Marko Marjanovic speaks German, English and Croatian. National Bank.

Kubes Passeyrer Rechtsanwaelte PLC focuses on aviation law and real estate transactions as well as international tax law. Legal consultancy is offered in English, French, Spanish and Portuguese. Due to this specialisation and more than 10 years of experience, we can guarantee the highest level of quality and relevance. Today’s economy is changing faster than ever and, therefore, being up to date and specialised in certain special areas is our basis for meeting our clients’ needs and expectations. Our ongoing national and international legal training and worldwide cooperation with experts in the same fields of specialisation are part of our philosophy. Our aim is to establish long-term client relationships and provide personal and individual solutions to our clients.

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Brazil Maria Flavia Candido Seabra

Machado, Meyer, Sendacz e Opice Advogados Fatima Tadea Rombola Fonseca

1 Real Estate Law 1.2 What is the impact (if any) on real estate of local common law in your jurisdiction?

1.1 Please briefly describe the main laws that govern real estate in your jurisdiction. Laws relating to This is not relevant as our legal system is based on civil law. leases of business premises should be listed in response to question 10.1. Those relating to zoning 1.3 Are international laws relevant to real estate in your and environmental should be listed in response to jurisdiction? Please ignore EU legislation enacted question 12.1. Those relating to tax should be listed in locally in EU countries. response to questions in Section 9.

There are no international laws competent to real estate in Brazil. Real estate in Brazil is primarily guided by the Brazilian Civil Code (Law No. 10,406/2002), which provides that the ownership of real estate property may be acquired by either acquisition, adverse 2 Ownership possession, accession or succession rights. The Brazilian Civil Code also establishes other rights that are associated with real estate but not based on any personal relationship (“in rem rights”), which 2.1 Are there legal restrictions on ownership of real estate by particular classes of persons (e.g. non-resident are available against third parties, such as surface rights, easements, persons)? usufruct, use, housing, among others. Moreover, other federal laws govern real estate in Brazil. They Brazilian law imposes restrictions on the acquisition, ownership and include the following: possession of rural land in Brazil by foreign investors. According The Real Estate Development Law (Law No. 4,591/1964), which to the legal opinion of the Federal General Counsel (“AGU”), the approaches two main subjects: (i) the development of real estate Brazilian Foreign Ownership Land Control Law, which governs enterprises comprised by autonomous units; and (ii) building the acquisition and use of rural lands by: (i) foreigners who have condominiums. permanent residency in Brazil; and (ii) foreign legal entities authorised to operate in Brazil, shall also apply to Brazilian The Land Statute (Law No. 4,504/1964) regulates the use, companies controlled by foreigners. Federal Act No. 5,709/1971 occupation and rural land relations in Brazil. The referred law and its regulatory Decree No. 74,965/1974 provide some of the provides the State’s responsibility and obligation of guaranteeing restrictions applicable to the acquisition of rural property by foreign the right of access to rural land for those who live and work there. legal entities authorised to operate in Brazil, as follows: The City Statute (Law No. 10,257/2001) provides urban land (i) Foreign legal entities may only acquire rural property policies in general, as well as other instruments that aim to help the allocated for the implementation of agricultural, livestock, implementation of urban development. industrial or colonisation projects related to their corporate The Parceling of Real Estate Property Law (Law No. 6,766/1979) purposes. Such projects must be approved by federal entities concerns urban spaces that are destined for building and specifically on a case by case basis. targets the urbanisation of individual plots of land, by dividing (ii) The sum of rural areas belonging to foreign individuals or redeploying them into parcels intended for the exercise of or entities may not exceed 25% of the surface area of the elementary urbanistic functions and building. Municipality where the areas are located, evidenced through a certificate from the Land Registry. Public Registry Law (Law No. 6,015/1973) regulates any kind of (iii) Entities or individuals with the same nationality may not public registry in Brazil, including the registration of real estate own, in the same Municipality, more than 40% of the limit ownership by the Land Registry. referred to in item (ii) above, representing 10% of the total It is worth noting that certain real estate matters are regulated by area of each Municipality. either state or municipal laws, rather than by federal laws, such as (iv) The acquisition of an area greater than 100 indefinite real estate taxes, real estate registry proceedings, and zoning and development modules (which may vary depending on environmental regulations. the characteristics of each region in Brazil) requires prior approval of the National Congress. (v) The acquisition shall necessarily be formalised by means of public deed.

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(vi) The acquisition of rural real estate located in the region close to the Brazilian border (the internal 150 kilometre-wide strip 4.2 Is there a state guarantee of title? What does it parallel to the border of the national territory) will depend guarantee? on the fulfilment of additional requirements, such as prior consent from the Brazilian Defense Council. Brazil does not have any state guarantee of title. In view of a The transfer of the possession of rural real estate property, by means real estate transaction, the potential buyer/acquirer of rights shall of a rural lease, is also subject to the same restrictions listed above. perform a proper and prior legal due diligence in order to verify Acquisition of rural land in violation of the restrictions contained in material issues that may affect the intended transaction. Moreover, the Foreign Ownership Land Control Law is deemed to be null and the corresponding title must be registered before the competent Land Registry in order to be effective against third parties. void and the State Public Notaries (responsible for drafting the title), Brazil as well as the Land Registry, are liable for the non-observation of such restrictions. 4.3 What rights in land are compulsorily registrable? What (if any) is the consequence of non-registration?

3 Real Estate Rights The in rem rights over real estate, including ownership, must be registered before the competent Land Registry. In the event of 3.1 What are the types of rights over land recognised in lack of registration, the right shall take effect only between the your jurisdiction? Are any of them purely contractual contracting parties and, therefore, third parties will not be forced to between the parties? comply with it. Moreover, according to Brazilian Lease Law, recording a lease Brazilian law recognises the owner’s rights over its own real estate agreement on the respective real estate title certificate grants to (ownership and possession), rights over third parties’ real estate the lessee: (i) the right to maintain the lease in the event that the (surface, easement, use, possession, usufruct, among others) and property is sold to a third party during the lease term, provided that collateral (mortgage and conditional sale). the agreement expressly sets forth the effectiveness clause; and (ii) Possession is an exercise, complete or partially, of the powers in case of a breach of the lessee’s right of first refusal, the right to inherent in ownership, which may arise from a purely contractual retrieve the leased real estate transferred to a third party. relationship between the parties (i.e. lease, free lease, use) or an in rem right (i.e. ownership, easement, surface). 4.4 What rights in land are not required to be registered?

3.2 Are there any scenarios where the right to a As a general rule, possession rights are not required to be registered. real estate diverges from the right to a building constructed thereon? 4.5 Where there are both unregistered and registered land or rights is there a probationary period following first Such scenarios exist in Brazil through surface and slab (“laje”) rights. registration or are there perhaps different classes The surface right grants a person the right to plant or build on a third or qualities of title on first registration? Please give party’s land for a determined period of time. After this period, the details. First registration means the occasion upon plantation and/or the building constructed on the real estate shall be which unregistered land or rights are first registered incorporated and belong to the landowner (grantor), unless otherwise in the registries. established by the parties. The Federal Law No. 13,465/2017 establishes a new in rem right in the Brazilian Civil Code: the slab There is no probationary period or a different class related to the right (“direito de laje”), which is an in rem and autonomous right to first registration. The Land Registry shall analyse the documents the upper or lower surface of a base-construction. It will be subject submitted and carry out the registration or request pending to a separate recording with the Land Registry and may be sold to requirements within 30 days. third parties. It may even be subject to a security interest. 4.6 On a land sale, when is title (or ownership) transferred 3.3 Is there a split between legal title and beneficial title to the buyer? in your jurisdiction and what are the registration consequences of any split? The transfer of ownership occurs when the transfer title is duly registered before the competent Land Registry. There is no formal split between legal title and beneficial title in Brazil. However, the Brazilian Civil Code provides the usufruct, 4.7 Please briefly describe how some rights obtain which is an in rem right similar to the title split, by which the right priority over other rights. Do earlier rights defeat later holder is entitled to possess, administer and gather the fruits and rights? benefits arising from the real estate owned by a third party. The date and order number given to the title by the Land Registry at 4 System of Registration the time of the filing for registration grants priority among different rights. In this sense, earlier rights, if duly registered, defeat later rights. 4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered?

Yes, it is. The Public Registry Law provides that each property must be recorded before the competent Land Registry.

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Land Registry Office. Nevertheless, proper due diligence is 5 The Registry / Registries recommended. Such due diligence includes the analysis of other documents, such as (i) court certificates, (ii) real estate tax clearance 5.1 How many land registries operate in your jurisdiction? debt certificates, and (iii) permits applied to the building, among If more than one please specify their differing rules others. and requirements.

In Brazil, each judiciary district (comarca) has at least one Land 6 Real Estate Market Registry Office, since each property must be recorded before the

Brazil Land Registry Office responsible for the area where the real estate 6.1 Which parties (in addition to the buyer and seller is located. In larger cities, the Land Registry is divided into several and the buyer’s finance provider) would normally offices, as defined by the competent state law. be involved in a real estate transaction in your Brazilian Registry Law regulates the general rules, but each State, jurisdiction? Please briefly describe their roles and/or duties. through its internal affairs (corregedoria), may issue specific rules and requirements relating to the registration proceedings. It would depend on the complexity of the transaction. In general, a broker is involved, which will be the link between the parties. 5.2 Does the land registry issue a physical title document Moreover, it is usual to have a technical team responsible for to the owners of registered real estate? performing due diligence related to the construction issues of the building and an environmental team in order to evaluate the The competent Land Registry issues a title certificate (certidão de existence of environmental damage and/or liabilities involved. matrícula) with the data of the real estate’s current owner(s) and its title chain, boundary description, liens and encumbrances. Each title certificate is identified by a specific number. 6.2 How and on what basis are these persons remunerated?

5.3 Can any transaction relating to registered real estate The commission of the broker is normally a percentage of the price, be completed electronically? What documents need payable by the seller at the closing, unless otherwise agreed by the to be provided to the land registry for the registration parties. With respect to the technical and environmental teams, the of ownership right? Can information on ownership of registered real estate be accessed electronically? price of their services is normally agreed upon based on the size and complexity of work, as well as the characteristics of the real estate. Transactions relating to real estate cannot yet be completed electronically in Brazil. For the sale of real estate worth 30 6.3 Do you feel there is a noticeable increase in minimum wage units and/or the transfer of in rem rights related to the availability of capital to finance real estate such real estate, it is necessary to enter into a public deed executed transactions in your jurisdiction, whether equity or by a Notary Public. debt? What are the main sources of capital you see active in your market? Usually, the documents that have to be submitted to the Land Registry are the ownership title, the personal documents of the The Brazilian market has been stressed due to the economic parties involved/their representatives, and the evidence of payment instability and the uncertain political scenario. As a result, real of the real estate transfer tax. estate transactions have been directly affected by high interest It is only possible to obtain information on ownership of registered rates, the growth of inventories of repossessed properties and real estate electronically in certain judiciary districts (i.e. Land rescinded sales, diminishing governmental subsidies and the lack Registry Offices of São Paulo State). of credit. However, the devaluation of the Brazilian currency and the deterioration of the local market are making Brazil an attractive 5.4 Can compensation be claimed from the registry/ option to foreign investors. registries if it/they make a mistake? 6.4 What is the appetite for investors and developers If there is any proven damage, compensation can be claimed. in your region to look beyond primary real estate However, it is possible that the Land Registry corrects the mistake markets and transact business in secondary or even on its own initiative and authority. tertiary markets? Please give examples of significant secondary or tertiary real estate transactions, if relevant. 5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he The appetite of investors and developers is higher when related might reasonably need regarding encumbrances and to the primary real estate market. Besides this, the governmental other rights affecting real estate? housing programme “Minha Casa, Minha Vida”, which was created in 2009 to decrease the Brazilian housing deficit, has strongly There are no restrictions on public access to the register in Brazil. encouraged real estate transactions on secondary and tertiary However, it is necessary to pay a fee in order to obtain the certificates markets. This programme aims to subsidise the construction and issued by the Land Registry. acquisition of affordable housing for people with low income and, Before entering into real estate transactions, the buyer is able to therefore, involves tax benefits and credit with lower interest rates. obtain the information related to the real estate upon the analysis of The Government may further adjust this programme in order to its title certificate (certidão de matrícula) issued by the competent increase the number of transactions.

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The function of the warranties is to provide information to the 6.5 Have you observed any trends in particular market parties and to apportion risks between them. However, since sub sectors slowing down in your jurisdiction in the representations and warranties provide a limited amount of terms of their attractiveness to investors/developers? information, they are not a substitute for the buyer’s due diligence. Please give examples. The due diligence of the buyer is important in order to attest its good faith in case the transaction is challenged by a third party in The Brazilian real estate market has been affected by the economic the future. crisis, as discussed in question 6.3 above. In the current scenario, it is possible to indicate that the sub sector most affected is the development of residential and some kinds of commercial 7.5 Does the seller warrant its ownership in any way? buildings. There is a lack of credit for this sector, the buyers are Please give details. Brazil more conservative and the number of repossessed properties and rescinded sales have been growing due to the indebtedness of the The seller warrants its ownership upon presentation of all of the middle class. required documents to the buyer to evidence that the chain of title of Moreover, it is possible to indicate that the lease market of corporate the real estate is legal and complete. buildings and office spaces is also slowing down due to the low It is important to note that the Brazilian Civil Code sets forth that demand and the high cost of vacant properties. in case the ownership of the buyer is affected due to the existence of a third party legitimate right over the transferred real estate, the seller is liable before the buyer for eviction, unless otherwise agreed 7 Liabilities of Buyers and Sellers in Real by the parties. Estate Transactions 7.6 What (if any) are the liabilities of the buyer (in addition 7.1 What (if any) are the minimum formalities for the sale to paying the sale price)? and purchase of real estate? In addition to paying the sale price and the real estate transfer tax The acquisition title must be recorded before the competent Land (“ITBI”), the liabilities and obligations of the buyer can all be Registry, and for the sale of real estate worth 30 minimum wage agreed upon by the parties in the acquisition title. units, the title must be a public deed executed by a Notary Public. Moreover, it is necessary to present the evidence of the collection of the real estate transfer tax, the updated title certificate of the real 8 Finance and Banking estate and the tax clearance certificate of the real estate and the seller (if the seller is a company). For rural real estate, additional 8.1 Please briefly describe any regulations concerning documents are required, such as the Certificate of Rural Real the lending of money to finance real estate. Are the Estate Registration (“CCIR”) and the evidence of georeferencing rules different as between resident and non-resident proceedings. persons and/or between individual persons and corporate entities?

7.2 Is the seller under a duty of disclosure? What matters There are 2 (two) main current systems created by Brazilian law must be disclosed? which govern the lending of money to finance real estate.

There is no specific legal provision in this regard. However, The Housing Finance System (Sistema Financeiro de Habitação), or according to the good faith principle, which governs all negotiations SFH, created by Law 4,380/64, as amended, is the older one and was in Brazil, the seller should fully disclose to the buyer all facts and/ designed to facilitate and promote the construction and acquisition or acts that may affect the value, use and/or the ownership of the of home ownership, focusing on the low-income population. The real estate. In general, the disclosures involve environmental financing funds within the scope of the SFH originate primarily from damages, encumbrances and liens, claims involving the real estate, the Employee’s Time-In-Service Guarantee Fund (Fundo de Garantia irregularities relating to the construction and the existence of third do Tempo de Serviço), or FGTS, and from savings account deposits. parties occupying the real estate. CMN Resolution No. 3,932/10, which deals with the channeling of funds raised through savings account deposits by member-entities of the Brazilian Savings and Loan System (Sistema Brasileiro de 7.3 Can the seller be liable to the buyer for Poupança e Empréstimo), or SBPE, regulates the main conditions misrepresentation? to be observed when channeling funds to real estate financing. The following apply to financing transactions within the scope of the SFH: The seller can be liable for misrepresentation if, as a result, the ■ the property being financed must be for the use of the buyer suffers a loss. borrowers themselves; ■ the unit value of each loan, covering principal and auxiliary 7.4 Do sellers usually give contractual warranties to the expenses, is limited to 80% of the value of the property; buyer? What would be the scope of these? What is ■ the maximum appraisal value of the property must be the function of warranties (e.g. to apportion risk, to R$1,500,000 (depending on the State where the real estate is give information)? Are warranties a substitute for the located and the date of the financing transaction); buyer carrying out his own diligence? ■ the effective maximum cost to the borrower, including charges such as interest, commissions and other financial Usually, sellers grant contractual warranties to the buyer relating charges, except the costs of taking out certain insurance to title, past use of the real estate, licensing status, the lack of third policies and any monthly loan management fee charged, must party rights over the real estate, tax and environmental issues. not exceed 12.0% per annum;

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■ should there be any outstanding balance at the end of the negotiated term, it will be the borrower’s responsibility, and 8.4 What minimum formalities are required for real estate the payment term may be extended by half the originally lending? agreed term; and ■ the borrower must provide one or more of the following Please refer to the answers to questions 8.1 and 8.2. Apart from securities: (1) a first mortgage on the property being financed; those formalities, real estate lending follows the legal requirements (2) the conditional sale of the property being financed; (3) established for any lending transaction, such as the execution of a a first mortgage or conditional sale of another property lending contract between a lender and a borrower. belonging to the owner or a third party; or (4) other guarantees at the discretion of the financing agent.

Brazil 8.5 How is a real estate lender protected from claims More recently, Law No. 9,514/97, as amended by Law No. 10,931/04, against the borrower or the real estate asset by other established the Real Estate Financing System (Sistema Financeiro creditors? Imobiliário), or SFI, providing for the granting, acquisition and securitisation of real estate loans. The primary objective of these Real estate lenders normally have more protection from claims rules was to foment the primary and secondary markets (loans against the borrower or the real estate asset by other creditors and derivatives of real estate receivables, respectively) to finance whenever the documents executed in the lending transaction real estate properties by creating more competitive capital-raising comply with the law and regulations, including requirements for the conditions and protecting creditors’ rights. validity of the documents, as capable parties, or for the perfection The SFI includes real estate loan transactions carried out through of securities over real estate property, including registration with government savings banks, commercial banks, investment banks, the competent Land Registry, as mentioned below in question 8.6. banks with real estate financing portfolios, real estate loan companies, savings and credit associations, mortgage companies and other 8.6 Under what circumstances can security taken by a entities authorised to operate by the Monetary National Council lender be avoided or rendered unenforceable? (Conselho Monetário Nacional), or CMN. Law 9,514 also introduced changes in the securitisations of Both the mortgage and the fiduciary assignment of real estate real estate assets, rendering its structure more accessible and property are perfected upon the registration of the relevant document attractive. The securitisation of credits under the SFI is carried out with the relevant Land Registry Office. Generally, security taken by through securitisation companies – in other words, non-financial a lender can be avoided or rendered unenforceable when formality incorporated institutions, with the purpose of acquiring and requirements are missing in the creation document or the security is securitising real estate loans for later issuance and placement on the not duly registered with the relevant Land Registry Office. government bonds financial market, including certificates of real estate receivables (CRI). 8.7 What actions, if any, can a borrower take to frustrate The SFI is more flexible as it is directed to every kind of real estate enforcement action by a lender? financing, not only to individuals housing as is the case with the SFH. Under Brazilian law, the borrower can always undertake judicial Both systems are only available for residents. measures to discuss or attempt to stop enforcement action by lender. Notwithstanding, jurisprudential understandings have been developed in courts in order to avoid merely postponing the acts of 8.2 What are the main methods by which a real estate borrowers. lender seeks to protect itself from default by the borrower? 9 Tax Pursuant to CMN Resolution No. 4,271/13, which sets forth the general criteria for the extension of real estate financing, the financial institution must previously conduct the evaluation of the transaction 9.1 Are transfers of real estate subject to a transfer tax? risk, which includes ensuring the securities are sufficient (in general, How much? Who is liable? mortgage or fiduciary assignment of real estate property), and the borrower’s capacity to pay the debt. The transfer of real estate is subject to the Real Estate Transfer Tax (Imposto sobre Transmissão Inter Vivos de Bens Imóveis – “ITBI”), which is charged on the remunerated transfer, on any account and by 8.3 What are the common proceedings for realisation of any title, of a real estate or in rem rights related to a real estate, with mortgaged properties? Are there any options for a the exception of collateral. The ITBI is a municipal tax, which is a mortgagee to realise a mortgaged property without involving court proceedings or the contribution of the percentage of the transaction or the appraised value of the property, mortgagor? usually from 2% to 5%, as defined by each Municipality. The ITBI shall be borne by the buyer, unless agreed otherwise by the parties. Accordingly to Brazilian law, the enforcement of mortgage If transfer results from legal or testamentary inheritance and (hipoteca) is always conducted in a court proceeding but does not donations, the transaction is subject to the Inheritance and Donations depend on the contribution of the mortgagor. In such proceeding, Transfer Tax (“ITCMD”). ITCMD is a state tax and its rates usually the property will be sold at a public auction conducted by the judge. vary from 1% to 8% of the assessed value of the transferred asset. The ITCMD shall be borne by the grantee of the right. On the other hand, the creditor of a fiduciary assignment of real estate (alienação fiduciária de imóvel) enforces its security by In view of a real estate transaction, it is important to analyse the means the promotion of up to two non-judicial auctions for the specific legislation of the place where the intended real estate is sale of the property, pursuant to the procedures defined in Law No. located in order to verify the rules that govern the collection of the 9,514/97. referred real estate transfer taxes.

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8,245/1991, as well as by the general rules of the Brazilian Civil 9.2 When is the transfer tax paid? Code. Property leases may be executed either in writing or verbally.

Usually, the ITBI must be paid before the drawing up of the public 10.2 What types of business lease exist? deed by the Notary Office and the ITCMD must be paid up to 30 days after the ratified decision that determines the payment, ina causa mortis transfer, or before the execution of the corresponding There are either residential leases or commercial leases. With contract, in a donations transfer. respect to commercial leases, the Brazilian Lease Law provides specific rules for leased properties constructed or refurbished by the For details about how each ITBI and ITCMD are paid, the analysis lessor in accordance with the needs and specifications of the lessee of each Municipality and state legislation is necessary. Brazil (“Built to Suit Agreements”) and Shopping Centre leases.

9.3 Are transfers of real estate by individuals subject to 10.3 What are the typical provisions for leases of business income tax? premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or If there is a difference between the asset’s sale price and its cost of sub-lease; (d) insurance; (e) (i) change of control of acquisition, the seller is subject to income tax at a rate that varies the tenant; and (ii) transfer of lease as a result of a from 15% to 22.5% of such difference. Moreover, in case of non- corporate restructuring (e.g. merger); and (f) repairs? residents domiciled in low tax jurisdictions, the rate is 25%. It should be noted that Brazilian tax law provides specific exemptions (a) Length of term: and calculation basis reductions for capital gains. Lease agreements may be entered into for definite or indefinite terms. 9.4 Are transfers of real estate subject to VAT? How (b) Rent increases: much? Who is liable? Are there any exemptions? Although not mandatory by law, rents in Brazil are usually paid on a monthly basis. Moreover, rents in Brazil must be established in No, they are not. the Brazilian national currency (Reais) and the lessor is forbidden from requiring advance payments from the lessee (e.g., six months upfront payment). 9.5 What other tax or taxes (if any) are payable by the seller on the disposal of a property? Lease agreements are usually readjusted on an annual basis, vis-à- vis the variation of an official consumer or a market price index. In addition to ITBI or ITCMD, if the seller is a Brazilian company, Regardless of any price adjustment mechanisms provided in the it will be subject to Corporate Income Tax (IRPJ) and Social agreement, Brazilian Lease Law provides that, after three years into Contribution on Net Profit (CSLL), generally charged at a joint rate the agreement, the lessee and lessor may each judicially request the of 34%. Additionally, depending on the activity of the company, the rent to be reviewed in order to reflect current market prices. purpose of the asset and company’s tax regime, PIS/COFINS may (c) Tenant’s right to sell or sub-lease: also be charged. As a rule, the assignment of the lease agreement and the sublease On the other hand, if the seller is an individual or a non-resident in of the leased real estate depend on prior and written approval of Brazil, it will be subject to Income Tax. the lessor. (d) Insurance: 9.6 Is taxation different if ownership of a company (or As a rule, the lessor must get insurance against fire and other damages other entity) owning real estate is transferred? for the leased property. It is, however, common to contractually establish that the payment of such insurance shall be made by the There is an exception for ITBI if a property is transferred to the lessee during the term of the agreement. assets of a legal entity as paid-in capital, or rights resulting from (e) Change of control of the tenant and transfer of the lease as a a spin-off, merger, consolidation, or dissolution of a legal entity, result of a corporate restructuring (e.g. merger): except if, in such cases, the buyer develops a real estate activity as Most Brazilian leases do not mention this matter. However, its main business (i.e. purchase and sale of real estate properties or provisions regarding change of control and transfer of the lease are rights, or, residential or commercial lease). commonly negotiated by the parties according to their specific case. (f) Repairs: 9.7 Are there any tax issues that a buyer of real estate should always take into consideration/conduct due According to the Brazilian Lease Law, improvements performed in diligence on? real estate may be classified as (i) necessary (when performed for safety purposes), (ii) useful (when performed to improve the use of The tax arising from the ownership of urban real estate (“IPTU”) and the property), or (iii) decorative (when superficial or for decorative rural real estate (“ITR”) should always be taken into consideration. purposes). As a rule, (i) necessary improvements performed by the lessee shall be reimbursed by the lessor, even when performed without prior 10 Leases of Business Premises authorisation, (ii) useful improvements performed by the lessee are only reimbursed when previously authorised by the lessor, and (iii) decorative improvements performed by the lessee are not subject 10.1 Please briefly describe the main laws that regulate leases of business premises. to reimbursement by the lessor, but may be removed by the lessee upon expiration of the agreement. Different conditions may be established by the parties in the lease agreement. Real estate urban leases in Brazil are regulated by Federal Law No.

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Please note that Built to Suit Agreements and lease of spaces in new to the Brazilian real estate market, there are not yet any legal shopping centres, as indicated in the answer to question 10.2 above, responsibilities provided in Brazilian legislation related to such are subject to specific rules. “green obligations”. With that said, the “green obligations” are usually connected to international certificates of sustainability granted to the whole building and, therefore, to be enforced, must 10.4 What taxes are payable on rent either by the landlord or tenant of a business lease? be provided in the building’s Condominium Bylaws, which must be observed by all lessees. The lessors are required to pay income tax on the profits of the lease. Lessees, on the other hand, do not pay any taxes. Legally, current 11 Leases of Residential Premises Brazil owners are liable for real estate property tax, but lease agreements may establish that the lessee shall be responsible before the lessor for payment during the term of the lease. 11.1 Please briefly describe the main laws that regulate leases of residential premises.

10.5 In what circumstances are business leases usually Leases of residential premises in Brazil are regulated by the same terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a legislation as commercial leases. tenant to extend or renew the lease or for either party to be compensated by the other for any reason on 11.2 Do the laws differ if the premises are intended for termination? multiple different residential occupiers?

Considering commercial leases executed for a specific period of No, they do not. time, the lessee has the right to early terminate the lease at any time, upon a 30-day prior notice period and the payment of a penalty proportional to the remainder of the term of the lease agreement. 11.3 What would typical provisions for a lease of It is a general understanding of Brazilian courts that, as a rule, the residential premises be in your jurisdiction regarding: value of such penalty must not exceed the sum of three monthly (a) length of term; (b) rent increases/controls; (c) the tenant’s rights to remain in the premises at the end of rents. On the other hand, the lessor, during the lease term, is not able the term; and (d) the tenant’s contribution/obligation to terminate it in advance without cause. to the property “costs” e.g. insurance and repair? Moreover, the lessee has the right to obtain, by means of a judicial procedure (filed within one year, at most, and six months, at least, Length of term: prior to the expiration date of the respective lease agreement), There is no provision in the Brazilian legislation regarding a specific the compulsory renewal of the lease agreement, if the following term for residential leases. However, it is important to mention that requirements are complied with: (i) the lease agreement was entered the Brazilian Lease Law grants the tenant certain protections in in writing and for a definite term; (ii) the minimum term of the lease residential lease agreements executed for a minimum of a 30-month agreement (or the sum of its consecutive terms) is of at least five term. years; and (iii) the lessee performs its activities in the same industry for at least three years without interruption. Tenant’s right to remain in the premises at the end of the term: In case of commercial lease agreements entered into for indefinite For residential lease agreements executed for a minimum of 30 terms, each party may terminate the agreement without any penalty months, at the end of the agreed lease term, the lessor can recover by means of 30 days prior written notice. the property without stating reasons and is not obligated to renew the contract. However, if the lessee remains in the property after such a term for more than 30 days without being given notice to 10.6 Does the landlord and/or the tenant of a business leave by the lessor, the lease is automatically renewed, but with an lease cease to be liable for their respective undetermined period. obligations under the lease once they have sold their interest? Can they be responsible after the sale in The rules that govern the rent increases/controls: the tenant’s respect of pre-sale non-compliance? contribution/obligation to the property “costs” e.g. insurance and repair are the same as those applied to commercial leases, which are In case of a sublease by the lessee to a third party, the lessee shall detailed in the answer to question 10.3. remain liable before the lessor for the obligations arising from the lease agreement. 11.4 Would there be rights for a landlord to terminate a residential lease and what steps would be needed to achieve vacant possession if the circumstances 10.7 Green leases seek to impose obligations on existed for the right to be exercised? landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please The residential lease agreement with a term of less than 30 months briefly describe any “green obligations” commonly can be terminated by the lessor for their own use, or their spouse, found in leases stating whether these are clearly ascendant or descendant, that does not have its own residential real defined, enforceable legal obligations or something estate and if the uninterrupted term of the residential lease exceeds not amounting to enforceable legal obligations (for five years. The steps that would be needed to achieve vacant example aspirational objectives). possession are: (i) send a 30-day prior notice to the lessee; and (ii) file an eviction lawsuit for their own use. Commercial buildings in Brazil have been adopting a more green and sustainable approach. However, since this concept is still

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Natural Parks, amongst others), the management of the conservation 12 Public Law Permits and Obligations units must be consulted or – depending on the case – authorise the interference therein. At federal level, the Instituto Chico Mendes de 12.1 What are the main laws which govern zoning/ Conservação da Biodiversidade (“ICMBio”) manages most of the permitting and related matters concerning the use federal conservation units. and occupation of land? Please briefly describe them and include environmental laws. 12.4 What main permits or licences are required for building works and/or the use of real estate? In Brazil, zoning and related matters concerning the use and

occupation of land are governed by the competent state laws, Brazil Work Permit: municipal zoning regulations and by local building codes. Each Municipality, therefore, has its own regulations and specifications. The Brazilian public administration requires a licence to construct, which is obtained by each specific Municipality, according to Regarding environmental laws, the Complementary Law No. its local laws and regulations. In order to obtain such licence, 140/2011 and the Resolution No. 237/1997 may be deemed the main the developer shall make a formal request to the Municipality, regulations at the federal level. presenting the documents related to the intended building, such as According to the Complementary Law No. 140/2011, the jurisdiction blueprints, construction projects, etc. of the Federal environmental agency, the Brazilian Institute of Work Conclusion Certificate (“Habite-se”): the Environment and Renewable Natural Resources (Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis or The Work Conclusion Certificate is issued by the competent “IBAMA”), applies to the licensing of the activities with significant Municipality and (i) certifies the compliance of the building with environmental impact on a regional or international level, or located the Work Permit that has authorised its construction and the good in certain protected areas such as indigenous land and territorial standing of the construction, and (ii) authorises the occupation of waters, among others. The municipal environmental entities, on the building. the other hand, are responsible for the licensing of undertakings, The Fire Department Inspection Notice (“AVCB”): which have a local impact. The state environmental authorities have This Notice certifies the compliance of the building with firefighting subsidiary jurisdiction to conduct the licensing process of activities requirements, pursuant to effective state rules. the impact of which is restricted to their territory, as well as to Installation and Operation License (“LIF”): impose the pertinent conditions, restrictions and control measures. This licence is issued by the competent Municipality, and it authorises the exercise of certain activities in certain locations. 12.2 Can the state force land owners to sell land to it? If so please briefly describe including price mechanism. Regarding the environmental aspects, we may mention: (i) the environmental licences (preliminary licence, installation licence and operation licence), which are necessary for each phase of a According to the Brazilian Federal Constitution the property must potentially polluting enterprise; (ii) water grants, in case the use respect its social function. Therefore, if the social function of the of water resources is necessary; (iii) special authorisations for the real estate becomes of public or social interest, the state is allowed interference in Permanent Preservation Areas (Áreas de Preservação to expropriate it, subject to a corresponding indemnification to the Permanente or “APPs”); (iv) authorisations for vegetation removal; owner of the land. The State is also allowed to use private property (v) consent from the management body of conservation units, in in case of imminent public danger. In this case, in the event of any certain cases; (vi) authorisations for the transportation of certain damages, the owner will be subject to further indemnification. waste materials; (vii) authorisations for the handling of fauna; and (viii) authorisations to research and handle archaeological and 12.3 Which bodies control land/building use and/or historical/cultural heritage assets; amongst others. occupation and environmental regulation? How do buyers obtain reliable information on these matters? 12.5 Are building/use permits and licences commonly In Brazil, land/building use and/or occupation and environmental obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)? regulations are governed by the Municipality where the property is located. The buyer must request the necessary permits and Yes, building/use permits and licences are commonly obtained in licences to build, remodel the building and/or operate before the Brazil. competent Municipality according to the specific zoning rule. As per the environmental regulation, as described above, the From an environmental law standpoint, depending on the activities Complementary Law No. 140/2011 established the main aspects of performed on the site, proper environmental licences and permits the environmental licensing jurisdiction. Therefore, the body that must be issued (see question 12.4). The main document, as mentioned controls the environmental licensing (federal, state or municipal) in question 12.1, is the environmental licence (preliminary licence, will depend on the specifics of the project, including the activities installation licence and operation licence). Each environmental that will be performed and the location thereof. licence is applicable to each phase of a potentially polluting project. Therefore, installation may only be commenced after the proper Other environmental authorities, however, might have a say in some Installation License is issued and the operation may only be started environmental themes. For example, in case an enterprise uses after the issuance of an Operation License. The preliminary licence water resources (e.g. impounding and discharge of effluents in water is issued in the initial stage of the project, by means of which the bodies), agencies responsible for water use must be consulted and competent environmental agency (federal, state or municipal, issue a proper water grant. At federal level, the water use agency is depending on the case) validates the feasibility of the location the Agência Nacional de Águas (“ANA”). Each state, on the other, proposed by the entrepreneur for the project. has its own water use agencies. Similarly, in case an enterprise entails interference with a conservation unit (e.g. Biological Reserve,

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12.6 What is the appropriate cost of building/use permits 12.10 Please briefly outline any regulatory requirements and the time involved in obtaining them? for the assessment and management of the energy performance of buildings in your jurisdiction. The answer to such matter varies with each different state and Municipality, as well with the complexity of the intended enterprise. There are no regulatory requirements in Brazil for assessment and management of the energy performance of buildings.

12.7 Are there any regulations on the protection of historic monuments in your jurisdiction? If any, when and how 13 Climate Change

Brazil are they likely to affect the transfer of rights in real estate? 13.1 Please briefly explain the nature and extent of any There are restrictions related to the use and disposal of real estate regulatory measures for reducing carbon dioxide properties that are considered as historical monuments or having emissions (including any mandatory emissions cultural significance. trading scheme).

In line with the policies outlined by the United Nations Framework 12.8 How can e.g. a potential buyer obtain reliable Convention on Climate Change (“UNFCCC”), as well as according information on contamination and pollution of real to the goals established when the Kyoto Protocol was put into estate? Is there a public register of contaminated land in your jurisdiction? force, Brazil has developed its own guidelines and objectives on the reduction of greenhouse gas emissions, mainly by means of the National Policy on Climate Change (Federal Law No. 12,187/2009). Certain states have public registries of contaminated areas. In the The legislation in force provides for specific guidelines on air State of São Paulo, for example, the state environmental agency emissions, as well as on emission standards. Pursuant to such (Companhia Ambiental do Estado de São Paulo or “CETESB”) legislation, the Brazilian government has committed to a voluntary provides a list of contaminated areas that can be accessed online target on the reduction of greenhouse gas emissions, which has been by the following link: http://cetesb.sp.gov.br/areas-contaminadas/ copied at State and Municipal levels. However, no emissions trading relacao-de-areas-contaminadas/. scheme has been implemented so far by the public authorities. Additionally, during the environmental licensing process, the 12.9 In what circumstances (if any) is environmental clean- competent authorities may require the adoption of control measures up ever mandatory? by the entrepreneurs, the improvement of existing equipment and the periodic monitoring of the emission of gases. In case contamination is identified in an area, remediation is mandatory due to the Brazilian civil liability legal framework. Civil liability due to environmental issues is ruled by the Federal Law 13.2 Are there any national greenhouse gas emissions No. 6,938/1981 (“Brazilian Environment Policy Act”). Such law reduction targets? sets forth the civil strict liability relevant to environmental damages. Also, joint and several liability is applicable at the civil level. The National Policy on Climate Change sets as target the decreasing Therefore, in case more than one individual or legal entity is deemed of projected greenhouse gas emissions from 36.1% to 38.9% by responsible for redressing a damage, the public authorities may seek 2020. the full remediation from any one of them. The aggrieved party will have the right of recourse against the other joint and severally liable 13.3 Are there any other regulatory measures (not already parties that were not prosecuted. mentioned) which aim to improve the sustainability of We must also highlight that certain states have specific laws for both newly constructed and existing buildings? addressing contamination issues. In the State of São Paulo, which might be deemed a pioneer in the subject matter, the State Law No. Due to the drought faced in many Brazilian states in the past few 13,577/2013 regulates the rehabilitation of contaminated areas. years, state and local environmental agencies have been imposing According to such local law, the following persons may be held and enforcing stringent requirements for water use. Therefore, jointly and severally liable for remediation measures due to an water grants have been reviewed in order to adapt the allowed environmental contamination identified in a certain area/property: quantities to the new reality, conditions to establish more efficient (i) the one that caused the contamination and its successors; (ii) water use systems are being imposed by environmental agencies the owner of the land; (iii) the person legally entitled to the use or in the environmental licences of potentially polluting enterprises, fruition of the land; (iv) the one that effectively uses the land; and amongst others. (v) those who directly or indirectly benefit from the land. Therefore, the liability for environmental damages in the civil Acknowledgment sphere is joint and several, including for damages caused by former occupants due to water and land contamination. In sum, anyone who The authors would like to acknowledge the assistance of their has contributed to the contamination, currently occupies (legally or colleague Juliana Andrade Ribeiro in the preparation of this chapter. in fact) or benefits or was benefited from a contaminated area can be held liable for its remediation.

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Maria Flavia Candido Seabra Fatima Tadea Rombola Fonseca Machado, Meyer, Sendacz e Opice Advogados Machado, Meyer, Sendacz e Opice Advogados Brigadeiro Faria Lima Avenue, 3144 Brigadeiro Faria Lima Avenue, 3144 São Paulo São Paulo Brazil Brazil

Tel: +55 11 3150 7428 Tel: +55 11 3150 7490 Email: [email protected] Email: [email protected] URL: www.machadomeyer.com.br URL: www.machadomeyer.com.br Brazil

Partner and Head of the Real Estate practice. Maria is a specialist in Fatima is a specialist in real estate transactions, mostly incorporations, real estate law, provides legal assistance in the structuring of several condominium institutions, real estate developments, real estate real estate businesses, such as property acquisition operations, partnerships, acquisitions, lease agreements, built to suit, construction leasings, built to suit, and investments in the real estate sector around contracts and work site management, and guarantee instruments, the country, as well as in the structuring of real estate development, such as mortgages, chattel mortgages, and institution of rights of regularisation of properties, financing and guarantee in structured building. Her practice encompasses the structuring, terms review and operations. Maria has extensive experience in registry matters and is implementation of pure real estate transactions. Fatima also supports a member of the Diversity Committee of Machado Meyer, leading the the identification of the different models adopted in infrastructure, group’s initiatives in the office. Ranked, in the 2018 edition, as one of energy, mergers and acquisitions, and financial contracts projects, the best lawyers in Real Estate Law by the publication Chambers Latin taking part in structured transactions, conducting and assessing the America. According to the yearbook, Maria Flavia has demonstrable drafting of contracts that encompass, directly or indirectly, real estate. strengths in real estate development and registry matters. Sources Fatima has previous experience in the areas of knowledge of logistics describe her as “an extremely talented and knowledgeable lawyer” operators, constructors, developers, banks, investment vehicles, and who “is consistently doing high-quality work”. technology companies. Ranked, in the 2018 edition, as highly recommended as a leading lawyer in Real Estate Law by the publication Chambers Latin America.

We have been building our history for 45 years, inspired by sound ethical principles, the technical skills of our professionals, and close relations with our clients. We are ranked as one of the major law firms in Brazil, with over 750 professionals. We have chosen our focus: business. It is in this segment that we use our legal potential, always looking for innovative solutions, capable of anticipating scenarios and making business possible. An integrated service that combines expertise in various areas of law. Broad knowledge of legislation and a thorough understanding of business. And which go beyond simple problem-solving to create and preserve value for companies. We work doggedly to offer intelligent legal solutions that contribute to the business growth of our clients and transform realities.

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Canada Heather McKean

Osler, Hoskin & Harcourt LLP Stella Di Cresce

Ontario, Québec and British Columbia require foreign entities to 1 Real Estate Law obtain a licence to own and operate real estate. In 2017, in order to deal with rapidly rising housing prices, British 1.1 Please briefly describe the main laws that govern Columbia enacted a 15% transfer tax on foreign persons purchasing real estate in your jurisdiction. Laws relating to residential property in Metro Vancouver. However, this year British leases of business premises should be listed in Columbia exempted international residents with provincial work response to question 10.1. Those relating to zoning permits from the 15% transfer tax. Vancouver city council also and environmental should be listed in response to question 12.1. Those relating to tax should be listed in passed a vacancy tax of 1% of the assessed value of vacant homes. response to questions in Section 9. Similarly, due to rapidly rising housing prices in the greater Toronto area, Ontario instituted a 15% non-resident speculation tax on The main laws that govern real estate in Canada are the statutes of foreign buyers of residential property in Toronto and surrounding each provincial and territorial government. In each province, there areas. Permanent residents, as well as refugees and spouses of are separate real estate laws, which, save for Québec, are based on citizens or permanent residences that will occupy the premises as common law. In Québec, property law is governed by the Civil their principal residence are exempt from this tax. There are rebates Code of Québec (“CCQ”), which is based on civil law and derived available to foreign nationals that become a permanent resident of from the Napoleonic Code. Federal laws including competition, Canada within four years, those enrolled in full time studies for at criminal, and interest rate laws apply to real estate. least two years and foreign nationals legally working full-time in Ontario continuously for at least one year since the date of purchase. Other provinces have strict restrictions on land ownership by 1.2 What is the impact (if any) on real estate of local non-residents. For example, in Prince Edward Island, the Land common law in your jurisdiction? Protection Act generally restricts, inter alia, the amount of land that a non-resident of Prince Edward Island may own to five acres. With the exception of Québec, property law throughout Canada has In Alberta, the Agricultural and Recreational Land Ownership Act developed through the English common law process and is greatly restricts non-Canadians, including non-Canadian corporations and reflected in jurisprudence throughout Canada. In Québec, the law partnerships, from acquiring controlled land, which generally refers is based on civil law. to large parcels of land outside of urban areas, such as farm land or rural recreational land. The provinces of Québec, Saskatchewan 1.3 Are international laws relevant to real estate in your and Manitoba also restrict ownership of real estate by non-residents. jurisdiction? Please ignore EU legislation enacted Recently the federal government has expanded efforts to catalogue locally in EU countries. property information such as sale price and owner demographics to better understand the real estate markets. International laws do not directly impact Canadian real estate laws. In certain circumstances, orders of foreign courts may be enforceable in Canada. 3 Real Estate Rights

2 Ownership 3.1 What are the types of rights over land recognised in your jurisdiction? Are any of them purely contractual between the parties? 2.1 Are there legal restrictions on ownership of real estate by particular classes of persons (e.g. non-resident In Canada, there are both freehold and leasehold rights. A leasehold persons)? right confers a right of exclusive possession on a tenant, which is enforceable against all, even the lessor. Both freehold and leasehold There are both federal laws, such as the Investment Canada Act interests may be held on a co-ownership basis as a tenancy in and Competition Act, and provincial laws, which vary by province, common or joint tenancy. which may restrict the ownership of real estate by non-residents. Licences are purely contractual rights between the parties. A licence Some provinces do not have any direct restrictions, but may impose given by the licensor to the licensee allows the licensee to use the licence, taxes, registration and reporting requirements. For example, land in a manner specified in the contract but does not create an

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interest in the land. Easements, restrictive covenants and servitudes Currently, most common law provinces and territories use the land are additional rights in land. An easement provides one party a right titles system or are in the process of converting title from a registry to use a specific portion or land for a specific purpose, such as a right system to a land titles system. of way. A restrictive covenant is a contract where one party agrees not to use its land for certain purposes or in a manner specified in 4.2 Is there a state guarantee of title? What does it the contract. A servitude is an interest in land where an owner’s guarantee? possessory rights are burdened by another’s non-possessory rights. In Québec, usufruct, servitudes, superficies and emphyteusis are As indicated in question 4.1, there is a provincial guarantee of among the types of rights giving limited rights in land. indefeasible title under the land titles systems but not under registry

systems. This guarantee of title, subject only to fraud in acquiring Canada 3.2 Are there any scenarios where the right to a the interest, is the fundamental difference between land titles real estate diverges from the right to a building systems and registry systems. Under provincial land titles systems, constructed thereon? if a person has been wrongfully deprived of land or of some estate or interest in land through fraud or errors and omissions of the There are many exceptions where the right to real estate can land registration system, such person can apply to a provincially indeed diverge from the right to a building constructed on the real administered assurance fund for limited compensation for the estate. One method is by lease between contracting parties. This wrongful deprivation. However, the amount of recovery is quite can provide the tenant with exclusive rights to the building, while limited. Title insurance is often used to insure against fraud. the landlord retains ownership of the lands. Another increasingly common method of separating the real estate from the building in 4.3 What rights in land are compulsorily registrable? Canada is through strata title ownership, which is common with What (if any) is the consequence of non-registration? condominiums. In these instances, a condominium owner may own a portion of the building, its condominium unit, but the condominium Rights in land are not compulsorily registrable; however, corporation will own the real estate and retain the common elements pragmatically, most rights in land are always registered for several of the building. Superficies is a similar concept used only in Québec, reasons, including establishing priority, providing notice to third where a portion of the property either above or below ground is parties (since a third party without notice is typically not bound by owned. In Québec, an emphyteusis is a dismemberment of the right interests that are not registered) and ensuring eligibility for available of ownership for a specified period of time. The emphyteutic lessee provincial assurance funds in case of wrongful deprivation of land enjoys all of the rights attaching to the status of an owner during or an interest in land through fraud or errors and omissions of the emphyteusis but does not actually have the status of an owner. land registration system. Notwithstanding the above, new Ontario corporations are required 3.3 Is there a split between legal title and beneficial title to maintain a register of their ownership interests in Ontario real in your jurisdiction and what are the registration property. This requirement will apply to all existing Ontario consequences of any split? corporations by December 2018. In some provinces, there can be a split between the legal title and the beneficial title, wherein the legal title is held by the registered 4.4 What rights in land are not required to be registered? titleholder who holds the property in trust for the beneficial owner. As such, a search of title may not disclose the true owner of the Pursuant to provincial land titles legislation, certain interests do not property in the case where legal title and beneficial title are split. In need to be registered in order to be effective against the owner of the Alberta, a beneficial owner can register a caveat on title indicating land and third parties. In certain provinces, leases that do not exceed its beneficial ownership interest. Beneficial interest holders are not three years where there is actual occupation under the lease need otherwise recorded, however, depending on whether land transfer not be registered. Similarly, there are also governmental, utility tax on a transfer of a beneficial interest is payable in a particular and railway rights that do not need to be registered against land, jurisdiction, transfers of beneficial interests may have to be disclosed such as municipal taxes, certain easements, railway mortgages, to the province and/or municipality where the real estate is located. expropriation rights and provisions of land planning and subdivision statutes. 4 System of Registration 4.5 Where there are both unregistered and registered land or rights is there a probationary period following first 4.1 Is all land in your jurisdiction required to be registration or are there perhaps different classes registered? What land (or rights) are unregistered? or qualities of title on first registration? Please give details. First registration means the occasion upon which unregistered land or rights are first registered All land owned in Canada is registered in a public land registry in the registries. through either a registry system, a land titles system or a combination of both in the applicable province. As indicated in There are different procedures in each province throughout Canada question 3.3, beneficial ownership is not usually registered apart for first registration; the rules vary between the provinces. In Ontario, from legal ownership. The registry system is a public record of but not all other provinces, the title granted upon first registration documents evidencing transactions affecting land where buyers and (conversion) in the land titles system may be absolute, qualified or other inquirers must determine the quality of title themselves. In the leasehold title, depending on the circumstances. In some provinces, land titles system, the applicable provincial government determines a first registration may be later amended if there was fraud, a the quality of the title, and essentially guarantees (within certain wrongful act or mistake. In Ontario, there is no probationary period important statutory limits) the title to, and interests in, the land. following first registration in land titles. However, upon registering For such properties, the province has all original title documents.

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individual instruments in Ontario and most other jurisdictions, there is a certification process which can result in an instrument being 5.3 Can any transaction relating to registered real estate rejected after the fact. be completed electronically? What documents need to be provided to the land registry for the registration of ownership right? Can information on ownership of 4.6 On a land sale, when is title (or ownership) transferred registered real estate be accessed electronically? to the buyer? The rules regarding electronic registration of real estate documents On a land sale, ownership is generally transferred to the buyer when vary across provinces, as each land registry, whether electronic or the deed or transfer is registered in the applicable land registry paper-based, is administered provincially. Canadian provinces are

Canada office, subject to the possibility of an instrument being rejected after generally shifting towards electronic registration, which is permitted the fact. This risk is often dealt with through title insurance. or mandatory in most provinces. To register an ownership right in the land registry, typically a deed or transfer must be provided to the land registry. Most jurisdictions have a prescribed form of deed or transfer 4.7 Please briefly describe how some rights obtain priority over other rights. Do earlier rights defeat later that must be used. Information on ownership of registered real estate rights? can be obtained electronically in most jurisdictions. However, under the registry system, any such ownership information can only be Generally, priority of registration prevails. A right first registered obtained by accessing the records at the land registry office. will have priority over a subsequent registered right. However, there are some exceptions to this general principle, which may include 5.4 Can compensation be claimed from the registry/ the following: i) certain unregistered rights may have priority over registries if it/they make a mistake? registered rights, where the registered interest holder had knowledge of the unregistered right at the time of registration; ii) rights that As stated in questions 4.2 and 4.3, common law jurisdictions under arise by prescription may take precedence over registered rights the land titles system generally have a very limited assurance fund (such as in the case of adverse possession); iii) legislation, such to compensate victims if the land registry or land registration system as bankruptcy legislation, or legislation pertaining to personal makes an omission or error (or there is a fraud) that wrongfully property, including security interests in fixtures, may provide for deprives a person of land or of an estate or interest in land. different priority rights; iv) construction liens; and v) parties may also contract to subordinate their interest to a subsequent registered 5.5 Are there restrictions on public access to the right. register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and other rights affecting real estate? 5 The Registry / Registries There are no restrictions on public access to the information 5.1 How many land registries operate in your jurisdiction? contained in a Canadian land register. A buyer or other interested If more than one please specify their differing rules party can retrieve most but not all information they will reasonably and requirements. need regarding encumbrances and other rights affecting land. Some claims in respect of real property work orders, taxes or utilities can Each province and territory in Canada has its own land registry also constitute encumbrances despite not being registered on the title system, whether it is a land titles system, a registry system or a to the property. There may also be other claims by public authorities combination of both. Each system has its own rules, although the or unregistered rights that may affect the property. Such rights may land titles systems in British Columbia, Alberta and Saskatchewan only be discoverable upon inquiring with the various governmental have similar rules and requirements. The registry system applies authorities, which may require the consent of the owner, or upon in Prince Edward Island and Newfoundland and Labrador, and a an examination of additional documents such as a municipal similar system applies in Québec. Ontario has largely converted planning report from a third party consultant, an up-to-date survey, from registry systems to a land titles system and Manitoba, Nova environmental assessment or building condition assessment. In Scotia and New Brunswick are in various stages of the conversion Ontario, the previous purchase price on a deed may not be revealed process. on the land register if the previous buyer paid land transfer taxes directly to the Ministry of Finance and City of Toronto. In such cases, a subsequent inquirer can only determine the previous purchase price 5.2 Does the land registry issue a physical title document to the owners of registered real estate? by inquiring directly with the Ministry of Finance or City of Toronto.

Typically, land registries throughout Canada do not issue a physical 6 Real Estate Market document to the owners of registered real estate. A transfer of ownership is actualised by registering, either physically or electronically (depending on the applicable land registry system), 6.1 Which parties (in addition to the buyer and seller a deed or transfer with the applicable land registry office or land and the buyer’s finance provider) would normally registrar, copies of which can be obtained from the relevant registry be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or office, often electronically. Once registration is complete, a copy of duties. the transfer (if in the land titles system) or deed (if in the registry system) or a copy of a certificate of title is issued to the owner to a) Selling and purchasing agents (referred to as real estate confirm the registration and status of title. brokers or agents) Typically, a person who wishes to acquire or dispose of real estate will seek the assistance of a real estate broker. Real estate brokers are

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subject to special regulation in Canada. Each province has legislation regulating the trade in real estate, designed to protect consumers and 6.3 Do you feel there is a noticeable increase in instil confidence in the buying and selling of real estate. the availability of capital to finance real estate transactions in your jurisdiction, whether equity or b) Lawyers debt? What are the main sources of capital you see Lawyers play a significant role in commercial real estate transactions. active in your market? If title insurance is not being obtained, lawyers will examine title to the property and conduct off-title searches and inquiries in order to With commercial real estate transactions at a record level in the determine the status of the property and whether there are any issues first half of 2017, capital remains readily available to finance such or deficiencies. Lawyers can hold payment and closing documents transactions, particularly for assets in Ontario and British Columbia,

in escrow until the transaction has been completed. In commercial both in private equity and debt. Large Canadian pension funds are Canada transactions, lawyers are frequently involved in drafting and settling expected to continue to increase their allocation of total investments the terms of the purchase agreement and closing documents, and to real estate in the next five years, consistently providing a large will attend to registration of the transfer of the property. Lawyers injection of equity into the market. There have been particularly can also assist with negotiation of a title insurance policy and will high volumes of office transactions in Toronto and Vancouver, such conduct limited diligence on title and off-title matters as required by as Dream Office REIT’s sale of its 50% interest in Scotia Plaza to the title insurance company. a joint venture between AIMCo and Kingsett Capital and Cadillac c) Notaries Fairview’s sale of a 50% interest in 12 office towers and Pacific Centre shopping mall in Vancouver to the Ontario Pension Board Generally, notaries do not play a large role in real estate transactions and the Workplace Safety and Insurance Board. Although interest in Canada other than in Québec. Notaries are commonly used in rates have risen in 2017, rates remain low and attractive to those Québec, and must be retained for anything that requires a notarial purchasing real estate. Some Chinese investors have faced increased act. A gift of immovable property or hypothec on immovable difficulty investing in Canada this year due to regulatory constraints property (i.e. a mortgage) are two documents that require a notarial in China and increased taxation in Canada. act to be valid. A contract of sale of immovable property does not require a notarial act; however, notaries are involved in the registration of the deed of sale. 6.4 What is the appetite for investors and developers d) Surveyors in your region to look beyond primary real estate markets and transact business in secondary or even In the event that an existing survey of the property does not exist tertiary markets? Please give examples of significant or the survey is out of date, a surveyor may be retained to provide secondary or tertiary real estate transactions, if a new survey. Surveys are often required to obtain a mortgage or relevant. to determine whether the building is in compliance with applicable setback requirements and to confirm the size, shape, boundaries Again in 2017, the appetite for large investors and developers to and location of the property, the building and other improvements look beyond the primary real estate markets in Canada and transact thereon. in secondary or even tertiary markets is low. Many of the large real e) Title insurers estate companies, investors and developers are looking to move out Title insurance is not mandatory but is frequently used in residential of these markets. However, the exit by these companies from these and commercial transactions. A title insurer provides an insurance markets has proven attractive to local buyers, smaller to medium policy in favour of an owner or a lender of real property. Such size public entities and private families. To illustrate, RioCan REIT insurance can protect an owner from losses related to survey and is selling $2 billion of real estate in secondary markets to reallocate municipal issues, encroachment issues, title fraud and intervening this capital to the country’s six largest cities. Dream Office REIT registrations between the time of closing and registration, if such over the last two years has sold assets in such secondary markets and gap exists. Similarly, it can protect a lender from losses associated reduced its portfolio to focus on core assets located in downtown with title. Toronto, downtown Montreal and downtown Calgary. Sears Canada Inc., one of the country’s largest retail department store f) Third party consultants chains, filed for creditor protection and is in the process of closing Third party consultants, such as environmental consultants, all of its stores, many of which are located in secondary markets. In engineering consultants and planning consultants, are often used Toronto, Vancouver, Montreal and Ottawa, office vacancy rates are in commercial real estate transactions. Environmental consultants much higher in suburban areas than downtown locations. determine the environmental status of a property, engineering consultants determine that the building and improvements are in good condition or in the condition represented by the seller, and 6.5 Have you observed any trends in particular market sub sectors slowing down in your jurisdiction in planning consultants ensure that the planned or existing development terms of their attractiveness to investors/developers? will comport with local laws and regulations. Please give examples.

6.2 How and on what basis are these persons Interest in Alberta’s commercial real estate seems to be stabilising, remunerated? albeit at a much lower level, after a period of market corrections due to continued low oil prices. In Calgary and Edmonton, while Real estate brokers are typically remunerated on the basis of vacancy rates for offices properties remain very high, vacancy rates commission which is generally paid out of the purchase price that have stabilised or slightly decreased for both office and industrial would otherwise go to the seller upon the transfer. Fees of lawyers space from a year ago. To the contrary, industrial rental rates are are charged based on hours worked or, increasingly, through rising and vacancy rates are low throughout the country. Commercial alternative fee arrangements. Surveyors are typically paid a flat real estate markets in Vancouver and downtown Toronto continue to fee. Title insurers are paid based on the value insured. Third party gain strength and have set new record levels in excess of previous consultants are typically paid a flat fee. record levels set in 2016.

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that the seller has disclosed outstanding work orders and disputes 7 Liabilities of Buyers and Sellers in Real with tenants. Representations and warranties are important as they Estate Transactions provide information to the buyer and allocate the risk as between buyer and seller; however, they usually provide a limited amount of information. Thus, representations and warranties are not a 7.1 What (if any) are the minimum formalities for the sale and purchase of real estate? substitute for the buyer carrying out its own due diligence. A buyer’s due diligence should include searching title to identify any existing A transfer or deed of land must be accepted in written or electronic registered encumbrances and liens. In Québec, as noted in question form by the applicable land registry office for the purchase and sale 7.2, certain warranties are imposed unless excluded by contract.

Canada of real estate. An agreement of purchase and sale must be in writing to be enforceable. Québec has additional requirements, including, 7.5 Does the seller warrant its ownership in any way? for some transactions, an endorsement from a notary. Please give details.

Generally, a seller will warrant that it is the owner of the land and 7.2 Is the seller under a duty of disclosure? What matters must be disclosed? that it has good and marketable title to the land free and clear of all liens and encumbrances, save for those specifically permitted by the agreement of purchase and sale. A warranty of ownership is implied The starting principle in common law jurisdictions is caveat emptor, in Québec unless specifically excluded. meaning buyer beware; however, there are many exceptions to this principle which require certain disclosures to be made by a seller. First, the seller must disclose latent defects in the property 7.6 What (if any) are the liabilities of the buyer (in addition that render the property dangerous, a health hazard or unfit for to paying the sale price)? habitation. Latent defects are defects which cannot be discovered upon a reasonable inspection of the property. Second, environmental In addition to paying the purchase price for the sale of real property, contamination must be disclosed by the seller. Third, caveat emptor the buyer has additional financial and non-financial obligations. In does not apply to fraud, and if such fraud is found to exist, a court terms of financial obligations, the buyer will be responsible for land may impose remedies that do not exist in the contract. Additionally, transfer tax and registration fees. In terms of non-financial obligations, there are increased disclosure requirements on developers of the buyer will assume and be bound to perform the covenants and condominiums. The civil law regime in Québec imposes certain obligations of which they have notice or that run with the land, warranties which pertain to title, encumbrances and compliance including mortgages, leases, options and municipal agreements. with the law; however, these warranties may be excluded or limited by contract. 8 Finance and Banking

7.3 Can the seller be liable to the buyer for misrepresentation? 8.1 Please briefly describe any regulations concerning the lending of money to finance real estate. Are the Sellers can be liable to buyers for misrepresentation unless rules different as between resident and non-resident persons and/or between individual persons and representations merge on closing. The liability of the seller corporate entities? and remedies available to the buyer also depend on whether the misrepresentation was innocent, negligent or fraudulent. Remedies Some provinces require persons who lend money to be licensed. that may be available to the buyer include damages and rescission. For example, in Ontario, the Mortgage Brokerages, Lenders and In Canada there is a general principle (established by the Supreme Administrators Act, 2006 requires a person carrying on the business Court of Canada) of good faith in contract law, requiring honest of dealing or trading mortgages, or carrying on business as a and reasonable performance of contractual duties, and a specific mortgage lender, to obtain a licence issued by the Superintendent duty of honest performance with respect to all contracts in Canada, of Financial Services. Financial institutions are regulated federally requiring that parties do not lie or knowingly mislead each other by the Bank Act, Insurance Companies Act and through regulations regarding matters directly linked to the performance of the contract. imposed by the Office of the Superintendent of Financial Institutions (OSFI). Generally, there are no particular differences for individual 7.4 Do sellers usually give contractual warranties to the persons and corporate entities. Some jurisdictions require that buyer? What would be the scope of these? What is foreign corporations be registered under provincial legislation in the function of warranties (e.g. to apportion risk, to order to hold a mortgage. give information)? Are warranties a substitute for the OSFI recently enacted stricter mortgage lending regulations which buyer carrying out his own diligence? come into effect as of January 1, 2018. These regulations make it more difficult for certain buyers to qualify for a mortgage, are Sellers sometimes provide contractual representations and warranties designed to ensure that home owners are not over-leveraging their to buyers. In commercial transactions, sellers sometimes sell on finances through a mortgage and are a response to high household an “as is” basis with limited or no representations and warranties. indebtedness and record low housing affordability across Canada. The scope of the warranties provided depends on numerous factors, mainly pertaining to market forces and the bargaining power between the buyer and the seller. They typically relate to the seller’s 8.2 What are the main methods by which a real estate knowledge of the property, agreements related to the property and lender seeks to protect itself from default by the borrower? matters that cannot be easily discovered by the buyer on its own. For example, a seller will generally provide a representation that all leases, contracts and environmental reports have been provided and The primary protection to a lender from default by the borrower comes by registration of the mortgage in the applicable land registry

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office. Registration establishes the priority ranking of the lender’s possible ways include through obtaining a stay of proceedings interest in the land and makes the lender a secured creditor. A through a restructuring filing under the Companies’ Creditors lender will often take additional security, generally in the form of Arrangement Act (Canada) or the Bankruptcy and Insolvency Act an assignment of rents and a general security agreement, notice of (Canada). In Canada, a court overseeing insolvency proceedings which may be registered in the personal property registry system of can grant a charge on the assets of a debtor in priority to existing the applicable province. A lender may also require that the loan be security interests to secure certain payments, such as interim or full recourse to the borrower and/or may require a guarantor. “DIP” financing, and there are also narrow instances where statutory claims or deemed trusts “prime” (take priority over) security. If a lender subsequently materially alters the terms of a loan, for 8.3 What are the common proceedings for realisation of example by advancing additional funds to a borrower, this may,

mortgaged properties? Are there any options for a Canada mortgagee to realise a mortgaged property without in some instances, render a prior guarantee unenforceable if the involving court proceedings or the contribution of the guarantor was not notified of and did not consent to the additional mortgagor? advance and the terms of the guarantee did not waive the guarantors right to be notified of and consent to such material alterations. Proceedings regarding the realisation of mortgaged properties vary significantly between the provinces. The following five remedies 8.7 What actions, if any, can a borrower take to frustrate are common, but not consistent, in Canadian provinces: foreclosure; enforcement action by a lender? power of sale; judicial sale; action on covenant (suing the borrower); and possession. Power of sale is a contractual remedy by which, In addition to the actions mentioned in question 8.6, before taking pursuant to legislated processes, the lender can sell the mortgaged enforcement action on demand facilities, a lender must make property for fair market value to the public, without involving a reasonable demand to its borrower for payment and give the court proceedings or the cooperation of the mortgagor. Québec borrower reasonable time to pay, even if the borrower waived such has separate remedies which are analogous to those listed above. right; if not, the borrower can defend on these grounds. Lender Remedies in Québec include a sale by the secured creditor, sale enforcement actions may also be frustrated or even result in liability by judicial authority, taking the property in payment of claim and for damages if the lender breaches the statutory rules for seizing and possession for purposes of administration. selling secured assets, such as complying with notice requirements (including the 10-day notice requirement under the Bankruptcy and 8.4 What minimum formalities are required for real estate Insolvency Act (Canada)) or satisfying the duty to act in good faith lending? and in a commercially reasonable manner.

To ensure that a mortgage protects the lender’s interest in the land, a mortgage must be in writing, duly executed and registered against 9 Tax title to the land. In Québec, a mortgage is referred to as a deed of immovable hypothec, which must be executed in the presence of a 9.1 Are transfers of real estate subject to a transfer tax? notary. How much? Who is liable?

8.5 How is a real estate lender protected from claims Land transfer tax is payable on the transfer of real property in against the borrower or the real estate asset by other most jurisdictions throughout Canada, including upon the creation creditors? or assignment of a long-term lease. Land transfer tax is typically imposed at the provincial level; however, in certain jurisdictions A real estate lender is protected from claims made by other creditors it may also be imposed at the municipal level. There are some by the registration of its mortgage. This renders the lender a secured exemptions available for beneficial transfers of title that are not creditor, and gives it priority over all unsecured creditors, subject to registered. certain exceptions for debts payable to the government, fraud, some Each jurisdiction has a different rate of land transfer tax. In construction liens and certain other exceptions pursuant to legislation. Ontario, the land transfer tax will be approximately 2% of the The lender is protected from claims against the borrower through total consideration, except that in the City of Toronto, located the remedies available to the lender in the mortgage and those in the province of Ontario, imposes an additional land transfer prescribed by legislation. While remedies vary in each province tax. On commercial properties, the tax was increased in 2017 to throughout Canada, in all provinces, where the loan is payable on approximately 1.5% of the total consideration up to $400,000 demand, the lender is obliged to provide reasonable notice before (Canadian) and 2% on the consideration greater than $400,000. making demand for payment. Depending on the remedy being Therefore, in the City of Toronto, where a provincial and municipal executed, in a demand or term loan, the lender may have to give land transfer tax is imposed, the total rate of land transfer tax on notice under the federal bankruptcy legislation. The lender may a commercial property will likely be almost 4%. Ontario and also have the right to appoint a receiver either privately or by court Toronto have each recently increased the rebate of land transfer tax appointment. Most provinces have legislation prescribing rights to available to first time home buyers. As mentioned in question 2.1, one or more of the following remedies: foreclosure; power of sale; there are additional 15% land transfer taxes on some foreign entities and judicial sale. In power of sale and judicial sale proceedings, the that purchase residential property in Toronto and surrounding borrower will remain liable for any deficiency. areas and Greater Vancouver Regional District. Land in Alberta, Newfoundland and Labrador, and some municipalities in Nova 8.6 Under what circumstances can security taken by a Scotia is not subject to land transfer taxes. However, registration lender be avoided or rendered unenforceable? fees will typically apply in such jurisdictions. In most provinces, the buyer is liable to pay the land transfer tax. Provided that security is properly registered/perfected, there are limited ways to avoid a lender’s enforcement of security. Some

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occupation of the property. Ontario has recently amended a 9.2 When is the transfer tax paid? land transfer tax regulation that previously exempted transfers of partnership interests where a person acquired an interest in a The land transfer tax is typically paid when the transfer is registered partnership that did not give rise to an entitlement of more than with the land registry office, or in respect of a beneficial transfer, the 5% of the profits of the partnership. Québec recently revoked land transfer tax may be paid within a specified time following such exemptions for transfers of real property between closely related transfer if an exemption is not available. In Québec, land transfer entities. On a sale of shares, one-half of any capital gain realised on tax is paid following the receipt of an invoice from the municipality the sale of the shares will be subject to income tax. issued after: (i) if the transfer is registered, the registration of the deed of transfer at the land registry office; or (ii) further to recent

Canada 9.7 Are there any tax issues that a buyer of real estate legislative amendments, if the transfer is not registered on title, should always take into consideration/conduct due when the municipality receives the mandatory notification and diligence on? disclosure of the transfer of the real property with the required disclosure information. A buyer of real estate should always diligence whether the owner of the real estate is a non-resident of Canada. If the owner of the real 9.3 Are transfers of real estate by individuals subject to estate is a non-resident of Canada, it is necessary to obtain a clearance income tax? certificate under the Income Tax Act (Canada) prior to closing. If such a certificate is not obtained, the purchaser is jointly and severally Transfers of real estate by individuals are subject to income tax liable for the vendor’s tax liability arising from the disposition of the unless the property being sold is the individual’s principal residence. real estate. The purchaser will be subject to a 25% withholding tax An exemption exists for the sale of a principal residence, which can to the extent the purchase price relates to land and a 50% withholding reduce or eliminate the capital gains tax payable by the individual. tax to the extent the purchase price relates to the building. A buyer Recently, the federal government enacted legislation to provide that will need to know whether they need to be registered for GST/HST the principal residence exemption is only available on one home per and whether the supply of the property to the buyer will be taxable for year and only to individuals who reside in the home being sold in GST/HST purposes. Additionally, a buyer will always inquire with the year the home is sold. In addition, recent changes have resulted the applicable municipality to ensure that there are no outstanding in foreign investors who are not residents of Canada being required realty taxes that form a prior lien on the property. to pay capital gains tax on residential property. 10 Leases of Business Premises 9.4 Are transfers of real estate subject to VAT? How much? Who is liable? Are there any exemptions? 10.1 Please briefly describe the main laws that regulate Generally, transfers of commercial and new residential real estate leases of business premises. throughout Canada are subject to a 5% Goods and Services Tax (“GST”). In some provinces, the federal GST has been harmonised There are two main sources that make up the body of law surrounding with the provincial sales tax to form the Harmonized Sales Tax commercial leases. First, there is the common law, which has (“HST”). Québec has its own separate sales tax, which is applicable evolved to provide a series of principles which set out the basic to transfers of commercial and new residential real estate, called obligations of a landlord and tenant. Second, a number of provinces the Québec Sales Tax (“QST”). In provinces where there is HST, have enacted legislation to supplement the common law principles. the rate will be the 5% federal tax plus the provincial tax rate, In Ontario, the Commercial Tenancies Act defines the relationship which varies by province but in Ontario is 8% (for a total of 13% between a landlord and tenant in relation to commercial properties in Ontario). If the buyer is registered for GST/HST purposes, it and sets out some of the rights, responsibilities and remedies of each may be permitted to self-assess the GST/HST. If not, the seller party to a lease. Similarly, in Québec, the Civil Code of Québec will remit the applicable taxes which are collected from the buyer. governs the relationship between a landlord and tenant in respect of Used residential properties are generally exempt from these taxes. commercial leases. Subject to some exceptions, a commercial buyer can recover the GST/HST that was paid. 10.2 What types of business lease exist?

9.5 What other tax or taxes (if any) are payable by the While every lease is different and should be tailored to the specific seller on the disposal of a property? use, there are two main categories of leases: gross leases; and net leases. Generally, in a gross lease, the tenant agrees to pay a fixed Gains on the disposal of real estate are subject to taxation. To the amount of rent that includes all operating costs and real estate taxes. extent tax depreciation was claimed in respect of a building when In a net lease, in addition to a basic rent, the tenant is responsible for that building is sold, the tax depreciation previously claimed will certain expenses that are not personal to the landlord in respect of be included in the vendor’s income and subject to income tax. In the operation and management of the building, including real estate addition, one-half of any capital gains realised on a sale of the land taxes, insurance, repairs, maintenance and upkeep of the building and building will be subject to income tax. and common areas. Although those are the two main categories of leases, the structure of a lease and the payments required under such lease can also vary depending on a number of factors, including 9.6 Is taxation different if ownership of a company (or other entity) owning real estate is transferred? the type of property, the tenant’s use of the property, the identity of the parties, and their relative bargaining power. In many retail leases a tenant will pay basic rent, additional rent and a portion of Land transfer tax is not generally paid on the sale of shares unless the tenant’s revenues (known as percentage rent). such a sale includes the right to the shareholder to exclusive

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the expense of the tenant. Often, the lease requires that the landlord 10.3 What are the typical provisions for leases of business undertake repairs of a structural nature or repairs required to the roof premises in your jurisdiction regarding: (a) length of of the building which may be at the tenants’ expense in a net lease. term; (b) rent increases; (c) tenant’s right to sell or sub-lease; (d) insurance; (e) (i) change of control of the tenant; and (ii) transfer of lease as a result of a 10.4 What taxes are payable on rent either by the landlord corporate restructuring (e.g. merger); and (f) repairs? or tenant of a business lease?

Though provisions in commercial leases vary significantly, some Since provinces and territories in Canada have their own tax usual provisions include: regimes, the types of taxes payable, as well as the amount, will

(a) Length of term depend on where the property is situated. GST, HST and/or QST Canada The length of a term of lease varies, depending on the tenant’s are all payable by tenants under commercial leases. If the tenant is a intended use. A common term of a lease between a landlord and GST, HST and/or QST registrant, the tax will likely be recoverable tenant entering into a new relationship is five years, with the tenant by the tenant but the landlord is still responsible for collecting it on having the right to renew or extend the lease for additional terms. behalf of the tax authorities. The rent received by a landlord will Shorter and longer terms are not uncommon. In some provinces, be subject to income tax, after deductible expenses are subtracted. land transfer tax is payable on long-term leases. Some jurisdictions impose business taxes on leased premises in addition to real estate taxes. (b) Rent increases The rent payable under a lease will often increase throughout the term, particularly in the case of longer term leases. The amount 10.5 In what circumstances are business leases usually may be set in advance, but it is also common to see future rent set terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a in accordance with “prevailing market rates”. This is often the case tenant to extend or renew the lease or for either party for renewal or extension terms. The determination of the increased to be compensated by the other for any reason on amount of rent is not always simple, and leases may contain dispute termination? resolution provisions to deal with situations where the landlord and tenant cannot agree on the new amount. Generally, commercial leases terminate at the end of their term, on (c) Assignment or sub-lease by tenant default, or unilaterally on the exercise of a contractual termination right. It is quite common for leases to require the landlord’s consent before Other circumstances that may result in the contractual termination a tenant can assign or sublet the premises. Common provisions of a lease include a landlord’s decision to withhold consent to an in a lease include the procedure to follow to obtain the landlord’s assignment or sublet, or major damage to the building. If the tenant consent, payment by the tenant of the landlord’s fees in connection has a termination right, often a termination payment is negotiated. with the proposed assignment or sublet, and the rights of the landlord following a tenant’s request for consent. The landlord 10.6 Does the landlord and/or the tenant of a business may negotiate for the right to terminate the lease upon a request lease cease to be liable for their respective for assignment and sublet. Often the landlord will require that the obligations under the lease once they have sold their original tenant remain liable under the lease despite the assignment. interest? Can they be responsible after the sale in (d) Insurance respect of pre-sale non-compliance? Insurance provisions in a lease can be extensive and complex, setting When a landlord assigns its interest in a lease on a sale of the out both the landlord’s and tenant’s obligations to maintain insurance. property, the assignee landlord automatically becomes obligated to Landlords are usually responsible for insuring the building as a whole, perform all covenants made by the original landlord and is entitled and any liability with respect to the common areas. Tenants are to all benefits from all covenants made by the tenant, that run with usually responsible for maintaining liability insurance and property the land. When a tenant assigns its interest in a lease, the tenant insurance to cover personal property and leasehold improvements, as is not typically released from its obligations under the lease unless well as business interruption insurance. The tenant is responsible for the lease provides for such a release. Leases generally provide the cost of its own insurance and in a net lease, for its proportionate that the landlord is released upon sale of the property. Typically share of the cost of the landlord’s insurance. upon sale of the property, the assignee landlord will request an (e)(i) Change of control of the tenant estoppel certificate from the tenant in order to flush out any issues The restrictions on a tenant’s right to transfer often restrict changes of that the tenant may have with the existing landlord. A buyer will control in addition to assignments and subleases, though there can be also include an indemnity in the assignment agreement wherein exceptions to the consent requirement for changes of control generally, the existing landlord will indemnify the buyer for any pre-existing inter-company re-organisations, or for publicly traded companies. claims that the tenant may have under the lease. (ii) Transfer of lease as a result of a corporate restructuring (e.g. merger) 10.7 Green leases seek to impose obligations on It is common to negotiate an exception to requiring the landlord’s landlords and tenants designed to promote greater consent for a transfer of the lease as a result of a corporate sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please restructuring, subject to the landlord receiving notice and certain briefly describe any “green obligations” commonly assurances. found in leases stating whether these are clearly (f) Repairs defined, enforceable legal obligations or something Leases will generally provide that it is the tenant’s obligation to repair not amounting to enforceable legal obligations (for example aspirational objectives). the premises during the term of the lease, and to repair any damage before vacating the premises. If a tenant does not carry out repairs in accordance with the lease, the landlord may be able to do so at Examples of “green obligations” that are found in commercial leases include targets for electricity use, natural gas consumption, water

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consumption, waste diversion and carbon dioxide levels. Whether (c) In Ontario, subject to a landlord’s right to terminate for green obligations are enforceable between the parties depends on certain reasons set out in question 11.4, the tenant has the how such obligations and the remedies relating to the same are right to remain in the premises at the end of the lease on a described in the lease. For example, while failing to comply with month to month basis. In Alberta, residential tenancies can “green obligations” could constitute an event of default under a lease, be either fixed term or periodic tenancies (no fixed end date). In Québec, the lease of a dwelling is generally renewed the obligations as set out in the lease may merely require a party automatically and there are no obligations for an exchange of to use commercially reasonable efforts to meet targets and consult notices between a landlord and tenant. with the other party on how to best achieve the objectives. The (d) Leased residential premises must be kept by the landlord enforceability of such clauses will also depend on the bargaining in a good state of repair and fit for habitation, with the power of the parties. A landlord with greater bargaining power

Canada landlord being responsible for complying with health, safety, will make the tenant’s obligations to comply with the landlord’s housing and maintenance standards as well as providing green obligations binding covenants whereas it may make its own vital services. Tenants are typically responsible for ordinary objectives, for instance achieving a Leadership in Energy and cleanliness and repairing undue damage caused by wilful Environmental Design (“LEED”) standard, aspirational. However, a or negligent conduct of the tenant or its invitees. Usually a tenant with greater bargaining power may hold the landlord to certain tenant will insure its belongings and the landlord will insure “green obligations” including achieving a LEED standard, and may the premises. Each will obtain their own liability coverage. negotiate for certain self-help remedies if they are not achieved. In Alberta, the landlord must ensure that the premises meet at least the minimum standards prescribed for housing premises. It is a prescribed part of that residential tenancy 11 Leases of Residential Premises agreement that the tenant will not do or permit significant damage to the premises or the common areas. Outside of damages caused or permitted by the tenant, it would be up 11.1 Please briefly describe the main laws that regulate to the parties to determine who will pay for property costs leases of residential premises. such as insurance and everyday repairs. The Civil Code of Québec sets out the repair and maintenance obligations of Leases of residential premises are regulated provincially. In Ontario each party. The landlord is bound to deliver a dwelling in and Alberta, the Residential Tenancies Act, of the respective good habitable condition and is bound to maintain it in that condition throughout the term of the lease. The tenant is province, is the main law that regulates leases of residential bound to keep the dwelling in clean condition. The tenant premises. In Québec, the Civil Code of Québec, articles 1892 and will take out rental insurance as required and the parties will following, regulate leases of residential premises. determine whether rent paid includes certain services from the landlord or utilities. 11.2 Do the laws differ if the premises are intended for multiple different residential occupiers? 11.4 Would there be rights for a landlord to terminate a residential lease and what steps would be needed Throughout Canada, there may be different laws for non- to achieve vacant possession if the circumstances profit housing co-operatives, residential complexes owned bya existed for the right to be exercised? government or government agency, care homes, developmental services homes and mobile homes. Generally, in most provinces, Under provincial laws, a landlord may have the right to terminate subject to different safety and maintenance standards for various a periodic residential lease (subject to certain prescribed notice types of buildings, the residential leasing laws are very similar for periods) if certain criteria are met. In Ontario, landlords have such premises for single or multiple tenants. One variation in Ontario rights upon the occurrence of certain events including the non- is that for premises with no more than three residential units, a payment of rent, if a landlord or a relative (or a purchaser or its landlord has greater termination rights. relative) intends to occupy the premises, the tenant has committed an illegal act, the tenant wilfully or negligently causes damage to the rental unit, upon extensive renovations or a demolition, 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: conversion to a use other than for residential purposes or if the (a) length of term; (b) rent increases/controls; (c) the tenant substantially interferes with the reasonable enjoyment of tenant’s rights to remain in the premises at the end of other tenants or the landlord. In Alberta, landlords have such rights the term; and (d) the tenant’s contribution/obligation if a landlord or a relative (or a purchaser or its relative) intends to to the property “costs” e.g. insurance and repair? occupy the premises or for a demolition or major renovation of the premises, if there is an intention to use the premises for a non- (a) In Ontario and Alberta the length of the initial term is residential purpose, and to convert the premises to a condominium. typically one year, with tenants typically electing month- In Ontario, a landlord shall not recover possession of the unit unless to-month renewals or one year renewal terms thereafter. In the tenant has vacated or abandoned the unit or the landlord has Québec, the length of term is typically at least one year. an order of the Landlord and Tenant Board authorising recovery of (b) In Ontario, caps on rent increases, which tie maximum possession. increases to inflation and cap them at 2.5%, now apply to all private rental units. This new law has led to over 1,000 Obtaining vacant possession in Alberta may require an application new construction units that were planned rental units being to court or to the Residential Tenancy Dispute Resolution Service. converted to condominiums, which can provide greater Under Québec law, under the right to maintain occupancy, residential returns to developers. Alberta does not have any rent leases essentially do not have unrenewable terms. A landlord may control legislation, provided a landlord cannot increase the terminate a lease by way of repossession and may also evict the rent payable under a residential tenancy agreement unless tenant to subdivide the dwelling, enlarge it substantially or change at least 365 days has passed since the last increase (if any). its use. An owner can retake possession of the dwelling if they wish Rent increases in Québec are controlled, particularly for a continuing tenant. to live there themselves or have certain family members live there.

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There are more complex rights and rules regarding repossession by a landlord if the tenant and/or landlord is over 70 years of age. The 12.3 Which bodies control land/building use and/or owner-landlord must send the tenant a written notice informing the occupation and environmental regulation? How do buyers obtain reliable information on these matters? lessee of his or her intention to retake possession of the dwelling by specific deadlines with required notice information. Land/building use is regulated primarily at the municipal level with oversight from the province, as set out in question 12.1. 12 Public Law Permits and Obligations Environmental matters are subject to provincial and federal legislation, with such legislation administered by federal and provincial ministries (for example, the Ontario Ministry of the

12.1 What are the main laws which govern zoning/ Environment and Climate Change) and, in some cases, local Canada permitting and related matters concerning the use conservation authorities. Buyers can obtain reliable information and occupation of land? Please briefly describe them and include environmental laws. from applicable government authorities concerning the permitted uses under applicable zoning regulations, existence of work orders and open building permits. Buyers should acquire information Property zoning/permitting and related matters concerning the regarding environmental contamination independently, by occupation and use of land are regulated primarily by municipalities retaining an environmental consultant to conduct environmental with oversight from the province. Each province enacts statutes site assessments. Environmental liability can arise merely from granting municipalities jurisdiction over land use planning and the ownership of contaminated property, despite the contamination development within their boundaries in accordance with approved taking place before a party acquires ownership. Buyers may need provincial and municipal planning policies. Municipalities typically to commission a municipal planning firm to ascertain if buildings control land development through such planning instruments as comply with certain zoning requirements, such as setbacks, density, official plans, zoning by-laws, subdivision, severance and site number of parking spaces and compliance with the building code development controls. Municipalities are also empowered to issue and fire and health regulations. The buyer may also require an up- building and development permits, and to impose conditions on to-date survey. A property that is in a flood plain area may have development, including the payment of development charges or restrictions on development. levies. In some provinces, municipal planning decisions can be appealed to provincial tribunals, although there is a trend under existing and proposed provincial legislation (e.g. Ontario) to limit 12.4 What main permits or licences are required for the scope of such appeals and to provide greater deference to building works and/or the use of real estate? municipalities. Construction of new projects is also subject to provincial and The construction, renovation or demolition of a building requires municipal legislation. In addition to regulating the maintenance a demolition and/or building permit. The specific permits required of existing structures, building codes set specific standards for the and additional licensing requirements depend on the type of construction of buildings. Before construction commences, most construction, renovation or demolition project proposed. municipalities require that building permits and all regulatory approvals be acquired. 12.5 Are building/use permits and licences commonly Environmental legislation may be enacted federally or by the obtained in your jurisdiction? Can implied permission provinces. Environmental legislation, particularly provincial be obtained in any way (e.g. by long use)? environmental legislation, governs land use and occupation through permitting and approval requirements for certain commercial and Building permits are generally required before carrying out industrial activities and, in some cases, by restricting the ability construction or renovation, and failure to obtain a permit can to change land use to a more sensitive use (e.g., from industrial constitute an offence. Environmental permits and approvals are to residential) without a regulatory process. Local conservation typically required prior to commencing certain commercial and authorities may also have the ability, through provincial legislation, industrial operations, and permits may be required if construction to impose land-use and development restrictions where proposed or renovation is to take place on or near environmentally-sensitive developments are located near environmentally sensitive areas. areas. Obtaining the required permits and licences can be a time-consuming process, and can involve coordination with the municipality, as well as specific local, provincial or federal agencies 12.2 Can the state force land owners to sell land to it? If if, for example, there are environmental concerns. If the use of so please briefly describe including price mechanism. land or a building does not conform with the current laws, but the use was permitted before the enactment of such laws, and has There is no constitutional protection of property rights in Canada. continued uninterrupted, the owner may have a right to continue a Federal, provincial and municipal governments, as well as public non-conforming use. utilities, can force land owners to sell them their land, or interests therein, such as easements, through expropriation. This can generally occur for public purposes only. Generally, each expropriation must 12.6 What is the appropriate cost of building/use permits be approved by an approving authority, which in most statutes is the and the time involved in obtaining them? Minister responsible for administration of the act or the council of the municipality (if the municipality is executing its expropriation The cost and time it takes to obtain a building permit and any powers). Expropriation statutes also provide for compensation additional approvals depends on a number of factors, including to land owners when their property interests are expropriated. where the proposed construction is taking place, the type of building Compensation is usually determined based on the market value of or structure being constructed, the area of the building or structure, the land, any damages attributable to disturbance or for injurious the cost of the project, the complexity of the project, and which affection and any special difficulties of the owner in relocation. approvals are required. Municipalities may require payment of development charges and conveyances of part of the property (for

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parkland or road-widening, for example) as a condition of approval. of rules relating to environmental clean-up. Typically, provincial After an application is submitted, the review process can take a environmental Ministries have the power to order environmental matter of days to many months, and once a permit is obtained there clean-ups against current and former owners of contaminated may be regular inspections during the construction. property (or the source of contamination that has migrated off- property) and current and former occupiers of such property who have caused the contamination. For example, in Ontario, 12.7 Are there any regulations on the protection of historic monuments in your jurisdiction? If any, when and how the Ministry of the Environment and Climate Change ensures are they likely to affect the transfer of rights in real compliance with environmental laws and standards, and under estate? Ontario’s Environmental Protection Act, when there is damage or where damage to the environment, animal life or human health or Canada Each level of government, federal, provincial and municipal, has safety is likely, the person responsible or the person in control of the a role to play in protecting heritage sites. For example, municipal property can be ordered to repair or prevent it. by-laws can set requirements for the preservation of heritage sites and may limit the extent to which renovations can be carried out, 12.10 Please briefly outline any regulatory requirements or whether buildings or structures can be demolished. Regulations for the assessment and management of the energy are usually enacted to conserve historic properties as opposed to performance of buildings in your jurisdiction. preventing transfers from occurring. Generally, upon purchasing a historic property, the new owner will have to provide notification A large part of the ongoing assessment and management of the pursuant to provincial or municipal legislation of the area in energy performance of buildings is done through third party rating which the property is situated. Some historical monuments, such programs. These include Leadership in Energy and Environmental as railway stations, grave sites and lighthouses, are protected by Design (“LEED”) and the “Go Green” program, administered federal legislation. At the municipal level, the City of Toronto can by BOMA BESt® (Building Environmental Standards) which, designate individual properties to protect their heritage attributes, as among other things, evaluate and certify the energy performance well as culturally and/or historically significant neighbourhoods as of buildings. While there are no regulations pertaining to the Heritage Conservation Districts to maintain the character, history, energy performance of existing buildings, provinces, such as British cultural values and integrity of such districts. Property owners must Columbia are beginning to adopt standards that must be achieved obtain a permit before altering property that has been individually in newly-constructed buildings. These standards arise pursuant to designated for heritage protection or that is located within a Heritage the National Energy Code of Canada for Buildings 2011, which is Conservation District. Cities such as Vancouver and Calgary have a set of federal standards for energy efficient buildings that must be instituted policies to compensate owners of properties designated adopted provincially to come into force in that specific province. as heritage properties without the consent of such owners, either through tax breaks or density rights that can be sold and transferred to other developments. Similarly, the City of Toronto provides 13 Climate Change tax breaks for maintenance and conservation to properties that are within a Heritage Conservation District or designated under the 13.1 Please briefly explain the nature and extent of any Ontario Heritage Act. regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions 12.8 How can e.g. a potential buyer obtain reliable trading scheme). information on contamination and pollution of real estate? Is there a public register of contaminated land Canada has ratified the Paris Agreement, an international agreement in your jurisdiction? to keep the global temperature increase below 2 degrees Celsius. Canada has also entered into an international agreement to phase As discussed in question 12.3, conducting independent down the use of hydrofluorocarbons, a potent greenhouse gas used investigations, often through environmental site assessments of the in air-conditioning and refrigeration. The federal government property in question by an environmental consultant, is the best way currently has regulations in place which pertain to transportation, to determine if land is contaminated or polluted. To some extent, electricity and renewable fuels. Regulations to limit emissions environmental risk can also be allocated in the contract through from cars and light trucks are projected to reduce greenhouse gas representations, disclosures, indemnities, releases or remedial emissions by 50% on such vehicles made in 2025, from those made work. One cannot contract out of liability for contamination but in 2008. Gasoline in Canada is required to contain 5% renewable one may have remedies against the counterparty through the types content and diesel fuel is required to contain 2% renewable content. of contractual provisions described above. Although there are The federal Reduction of Carbon Dioxide Emissions from Coal-fired provincial registries of properties with known contamination issues, Generation of Electricity Regulations sets the performance standard

and certain public and private databases of other environmental at 420 tonnes of carbon dioxide per gigawatt hour (CO2/GWh) for issues (for example, known spills), these registries and databases coal-fired electricity generation units. Further, in Ontario the Green are not comprehensive and generally contain information Energy Act creates financial incentives for the development of provided by the property owner. Thus, referring to a registry can renewable energy. confirm contamination but cannot confirm a property is free from In December 2016, the federal government announced that it is contamination, pollution or environmental issues. imposing a minimum price for carbon or equivalent emissions of $10 per tonne in 2018 and rising incrementally to $50 per tonne 12.9 In what circumstances (if any) is environmental clean- of carbon by 2022. All provinces will have to design their own up ever mandatory? carbon tax or cap and trade system that is stringent enough to meet or exceed the federal benchmark. If provinces do not have such a Environmental regulation takes place at the federal and provincial system in place, the federal government will implement a carbon level, and different jurisdictions within Canada have their own sets price in that jurisdiction.

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Other key federal commitments announced in the 2017 Pan- Canadian Framework on Clean Growth and Climate Change, include 13.2 Are there any national greenhouse gas emissions completely phasing out coal by 2030, developing increasingly reduction targets? stringent building codes starting in 2020, developing a clean fuel standard based on a full life-cycle analysis, implementing methane As mentioned in question 13.1, to fulfil international obligations regulations with the goal of reducing methane emissions by 40 and reach government goals with respect to climate change and –45% by 2025, and reducing federal government greenhouse gas greenhouse gas emissions reductions, the federal government has (GHG) emissions by 40% below 2005 levels by 2030 or sooner. set a floor price of $10 per tonne of carbon by 2018 which will rise to $50 per tonne by 2022. Provinces can enact their own carbon tax The provinces of Québec and Ontario have a cap and trade system or cap and trade policy but it must meet such federal minimum price that is harmonised with California’s cap and trade system and or the federal government will impose a tax on such provinces to Canada implemented through the Western Climate Initiative. The cap and make up the difference, returning the funds to the province. trade system is established through a legislative framework which requires emitters to quantify and report their GHG emissions and submit allowances and credits to match the reported emissions at the 13.3 Are there any other regulatory measures (not already end of each compliance period. In Québec the cap and trade program mentioned) which aim to improve the sustainability of was implemented in 2013 and the province is currently in its second both newly constructed and existing buildings? compliance period, which culminates this year. In Ontario, the first compliance period began in 2017 and continues for three years. In Canada, there are numerous policies and programmes which There are industries and classes of companies that must register and aim to monitor and improve the sustainability of newly constructed participate in the cap and trade system, including companies in Québec and existing buildings. Most of the standards and certifications commonly advertised by new and existing buildings in Canada were and Ontario that emit 25,000 metric tonnes or more of CO2 equivalent annually. In Ontario, fuel suppliers that sell more than 200 litres per market-driven initiatives as opposed to real property laws imposed year of fuel and importers of electricity are also required to participate by a level of government. in the programme. Companies that are subject to such regulations The Building Owners and Managers Association created BOMA must track their emission allowances in a database called CITSS used BESt® (Building Environmental Standards), a national, independently by all Western Climate Initiative system participants. The CITSS verified, four-level certification programme regarding energy and system initially sets an emissions ceiling which is lowered each year environmental performance of buildings. The Canada Green Building by reducing the number of emission units in circulation each year. Council developed the LEED rating system to recognise sustainable There are enforcement mechanisms for regulated participants whose site development, water savings, energy efficiency, materials selection emissions exceed their allowances or credits. and indoor environment quality in buildings. LEED has four levels of certification, to accommodate a variety of sustainable building In 2017, Alberta enacted the Climate Leadership Implementation strategies. All newly constructed federal office buildings are required Act, which implements a carbon levy on fuels. The carbon price to attain a LEED® Gold standard for environmental performance. At was set at $20/tonne for 2017 and will rise to $30/tonne on January the provincial and municipal level, there are incentives for LEED- 1, 2018, followed by an increase in real terms, suggested to be certified buildings. LEED Canada CS is a standard that a building inflation plus 2%, each year after that. The levy applies throughout owner can obtain that pertains only to the core and shell of the the fuel supply chain. Alberta has also committed to phasing out building, notwithstanding interior fit up standards, which a landlord of coal-fired electricity generation and, beginning in 2018, coal-fired an office tower may not have control over. Other privately developed generators will pay a $30/tonne carbon price based on an industry- certifications, such as the WELL Building Standard®, which aims to wide performance standard. The oil sands will also be subject improve the wellness of people in various types of buildings, are in an to a legislated emissions limit of 100 mega tonnes (Mt) per year earlier stage of development. The City of Toronto has developed the under the Oil Sands Emissions Limit Act. Today, the oil sands emit Toronto Green Standard (TGS), which is a two-tier set of performance approximately 70 Mt per year. measures regarding sustainable site and building design. Tier 1 is Other provincial jurisdictions have committed to a variety of mandatory for new construction and Tier 2 is voluntary and provides initiatives to combat climate change. British Columbia has partial refunds of development charges. Achieving Tier 1 and Tier 2 legislation targeting coal-based electricity generation facilities performance provide LEED credits. and liquefied natural gas facilities by stating a GHG emissions Although there are widely used market-developed initiatives, there benchmark and requiring operators that exceed the benchmark to are also many government created policies and programmes aiming purchase offset credits. Manitoba initially announced plans to adopt to improve the sustainability of new and existing buildings in a cap and trade program for large industrial emitters to be linked with Canada. The Energy Efficiency Act gives the federal government Ontario and Québec’s cap and trade systems, but the Province has the authority to prescribe energy efficiency standards. The since back-tracked on this commitment and is, instead, considering federal government of Canada has developed an “EnerGuide” the implementation of a carbon tax. Nova Scotia has also announced mark to label appliances and heating and cooling equipment with that it will be implementing a cap and trade system, beginning in a label to indicate its energy efficiency. Along with other federal 2018, across all sectors of its economy. Newfoundland & Labrador programmes, EnerGuide was designed to promote energy efficiency passed the Management of Greenhouse Gas Act in 2016, which in the Canadian marketplace. Although there are no building sustainability standards imposed nationwide, these and many other requires facilities that emit 15,000 tonnes of CO2 equivalent per year to report their emissions to the government. The underlying purpose programmes, certifications and regulations constitute a quickly of the reporting requirement is for Newfoundland & Labrador to developing sustainability regime in Canada. develop appropriate reduction targets to reduce the Province’s overall emissions. Acknowledgment The authors greatly appreciate the contribution of Matthew Ritchie, an Associate in the Real Estate Group at Osler, Hoskin & Harcourt LLP, to this chapter.

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Heather McKean Stella Di Cresce Osler, Hoskin & Harcourt LLP Osler, Hoskin & Harcourt LLP 100 King Street West 100 King Street West 1 First Canadian Place 1 First Canadian Place Suite 6200, P.O. Box 50 Suite 6200, P.O. Box 50 Toronto, ON M5X 1B8 Toronto, ON M5X 1B8 Canada Canada

Tel: +1 416 862 6612 Tel: +1 416 862 5957 Email: [email protected] Email: [email protected] URL: https://www.osler.com/en/ URL: https://www.osler.com/en/

Canada team/heather-mckean team/stella-di-cresce Heather is a Senior Partner and past National Chair of the Real Estate Stella’s practice involves all aspects of commercial property Practice Group at Osler, one of the top commercial real estate law transactions, including the acquisition, disposition and financing of firms in Canada. Her practice encompasses a wide range of top real commercial real estate, joint ventures, property management and estate transactions and debt financing transactions, in the mixed use, leasing of office, retail and industrial space. She has developed retail, office, manufacturing and hospitality sectors. Heather is keenly particular expertise in portfolio acquisitions and dispositions for interested in the application of legal technologies, AI and automation in real estate investment trusts (REITs), publicly-traded real estate the area of commercial real estate, and led the development of Osler’s companies and other institutional investors. Based in Toronto, Stella Automated Real Estate Purchase Transaction tool, a streamlined and is lead real estate counsel to the Dream group of companies (formerly technology-enabled process and package of services for business Dundee) including Dream Unlimited Corp., Dream Industrial Real transactions. Estate Investment Trust, Dream Global Real Estate Investment Trust, Dream Office Real Estate Investment Trust and Dream Hard Asset Heather has served on the Board of Directors of the Toronto Alternatives Trust. Stella also advises on the real property aspects of Commercial Real Estate Women (CREW) and as Canada’s insolvency and security enforcement transactions, as well as on real delegate to the U.S.-based CREW Network, and continues to be a property matters as part of corporate acquisitions, reorganisations and member. For three years, Heather served as Managing Partner of insolvency restructurings. Osler, with responsibility for business strategy and client relationship management, and as a member of the Firm’s Executive Committee. She is the author of Purchasing Real Estate in Canada in the European Lawyer Reference Series. Heather is listed in Euromoney’s Expert Guides of The World’s Leading Women in Business Law and The World’s Leading Real Estate Lawyers; she is also ranked as a leading commercial real estate lawyer by Chambers Global, Chambers Canada and The Best Lawyers in Canada.

Osler’s Real Estate Group has acted on some of the most significant real estate transactions in Canada in the last five years. Osler is counsel to Sears Canada Inc. et al in its insolvency proceedings, which includes complex commercial real estate issues. We advised Target stores on its entry into and exit from Canada and Fast Retailing Co. Ltd. and Uniqlo Canada Inc. on the expansion of Uniqlo into Canada, marking the brand’s first entry into the country. We recently advised Dream Office REIT in connection with the sale of its remaining 50% interest in Scotia Plaza (a 68-storey office and retail complex in the Toronto financial core) to KingSett and AIMCo, and the sale of a portfolio of 35 properties across Canada to KingSett. We were counsel to Dream Office REIT and H&R REIT on their original acquisition of Scotia Plaza from The Bank of Nova Scotia in 2012 and the sale of a 50% interest in Scotia Plaza to KingSett and AIMCo in 2016. We regularly advise on commercial real estate portfolio acquisitions, divestitures, joint ventures and investments, as well as real estate financing arrangements and commercial leasing. Osler is a leading business law firm providing business-critical advice to Canadian, U.S. and international clients. Founded in 1862, Osler has over 450 lawyers working together from offices in Toronto, Calgary, Montréal, Ottawa, Vancouver and New York.

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Costa Rica Hernán Cordero B.

Cordero & Cordero Abogados Rolando Gonzalez C.

is an individual right strongly protected by our Constitution. This 1 Real Estate Law same protection is also granted by the Constitution to non-resident persons and/or foreigners. The only exception to the general rule 1.1 Please briefly describe the main laws that govern is with regards to shoreline property. The Maritime Zone Law real estate in your jurisdiction. Laws relating to specifically limits ownership of properties located within the first leases of business premises should be listed in 200m adjacent to the shoreline for: i) foreigners that have not response to question 10.1. Those relating to zoning resided in the country for at least five years; ii) corporations with and environmental should be listed in response to bearer shares; iii) corporations registered or established abroad; iv) question 12.1. Those relating to tax should be listed in corporations and/or entities constituted or established by foreigners; response to question in Section 9. or v) corporations in which more than 50% of the stock capital is owned by foreigners. The main laws that govern real estate in Costa Rica are: a) the Civil Code; b) the Notarial Code; c) the National Registry Regulations; d) the National Cadastral Law; e) the Transfer Tax Law; f) the General 3 Real Estate Rights Law of Urban and Sub-Urban Leases; g) the Adverse Possession Law; h) the Maritime Zone Law; i) the Regulatory Law of the Touristic Gulf of Papagayo; and j) the Income Tax Law. 3.1 What are the types of rights over land recognised in your jurisdiction? Are any of them purely contractual between the parties? 1.2 What is the impact (if any) on real estate of local common law in your jurisdiction? In Costa Rica, the types of rights available are: a) ownership rights: those that have been formally registered before the Property Registry The impact is low. Local custom is a non-written source of our legal and are subject to transfer, mortgage and liens, guarantees and system, which shall only be used to make interpretations, to limit development possibilities such as subdivisions and condominium; and/or integrate the recognised written sources. Judicial precedence b) possession rights: those acquired through an occupation of rights or “jurisprudence”, as it is commonly known in our system, is not that can also be transferred following formalities, but which have a source of our private law legal system, which is primarily based no public effect in front of third parties. Such possession has to be on statutory law. proven as being public, pacific and without interruption for more than 10 years; and c) use rights: those which grant only the use and 1.3 Are international laws relevant to real estate in your enjoyment of a property, such as i) “usufruct” in which the person jurisdiction? Please ignore EU legislation enacted that uses the property is not the owner but has a right to use and locally in EU countries. benefit during a certain defined timeframe, ii) “lease agreements” in which someone has right to use the property by means of a International laws are not directly relevant to real estate in our formal rental relationship with the owner, iii) transformation and jurisdiction. However, international treaties duly approved by the disposition of the right, and iv) exclusion and defence rights. The Costa Rican Congress rank higher than local laws, thus they should usufruct and the lease right are both contractual between the parties. be considered (if applicable). There are also international laws that may become relevant, especially those related to taxes. 3.2 Are there any scenarios where the right to a real estate diverges from the right to a building constructed thereon? 2 Ownership Yes, there are several scenarios where the right to a real estate 2.1 Are there legal restrictions on ownership of real estate diverges from the right to a building constructed thereon. The first by particular classes of persons (e.g. non-resident example is pursuant to the “Accession Right”. This right establishes persons)? that property does not limit itself to the land, as it also extends to whatever is located above or below it. It allows the owner or a The general rule is that there are no legal restrictions on ownership third party to build whatever is legally authorised on the land and of real estate by particular classes of persons. Real estate ownership it shall belong to the land where it was built. If a third party builds

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something on such land, the construction belongs to the land on on a rebuttable presumption that grants the registered rights over which it was built. real estate the condition of valid rights. Another example is pursuant to a registered “Usufruct Right” over a property where the real estate diverges from the right to a building 4.3 What rights in land are compulsorily registrable? constructed. Thus the owner of the absolute fee simple title over the What (if any) is the consequence of non-registration? land may grant a third party the usufruct right in order for this third party to use and enjoy the land and/or the construction thereon as In general, all rights in land are compulsorily registrable to have his/hers, for a specific time period or for his undetermined lifetime. legal effect against third parties. Article 459 of the Civil Code establishes the following rights in land as compulsorily registrable: 3.3 Is there a split between legal title and beneficial title a) titles of dominion over property; b) all liens, encumbrances or Costa Rica in your jurisdiction and what are the registration rights that limit property, such as usufruct rights, easements and consequences of any split? any other real estate rights or limitations that affect land; c) lease agreements (may be registered); d) condominium or co-property Yes. In accordance with our legislation, there are two types of split rights; and (e) mortgages. The most immediate and significant between legal title and beneficial title. consequence for non-registration of these rights and/or limitations to land is that they may not be enforceable before third parties. The first type is known as “usufruct” and “bare ownership”. Chapter III, Articles 287–289 and 335, of the Costa Rican Civil Code, regulate these types of title forms. 4.4 What rights in land are not required to be registered? Usufruct is the real right of use that someone has on the property/ asset that belongs to another person for a certain period during their Possession rights are not required to be registered, unless they need lifetime. to be enforced before third parties. Bare ownership is the right that the person has on a property/asset in which their relationship with it is only to be the owner. As an owner, 4.5 Where there are both unregistered and registered land he/she has a controlling ownership over the property/asset, but does or rights is there a probationary period following first not hold the possession or enjoyment as this has been assigned on registration or are there perhaps different classes behalf of a third person in the form of a usufruct. or qualities of title on first registration? Please give details. First registration means the occasion upon The bare owner will have the full property (title, possession and which unregistered land or rights are first registered enjoyment) when the usufruct beneficiary dies or the timeframe in the registries. lapses. The second type is “trust ownership”, which is regulated by means Yes, there is a probationary period following first registration, of the Commercial Code under Article 633 and others. provided in Article 16 of the Adverse Possession Law, which is of In accordance with the trust ownership, one or more persons transfer three years, meaning that during this period any affected party can a property/asset to another natural person or legal entity which will oppose and challenge such registration in front of the same Judge serve for a defined timeframe as a “Trustee”. This agent shall that handled such registration. administer the property/asset for the benefit of the person or persons that transferred title, but shall retain an administration or guarantee 4.6 On a land sale, when is title (or ownership) transferred on behalf of a third party called the beneficiary. to the buyer? A trust ownership shall have a limited term and shall be operated by means of conditions, responsibilities and obligations, with Our Civil Code establishes that ownership of land is transferred the prerogative that upon fulfilment of the conditions it shall be upon the execution of the purchase and sales deed granted by both returned to the original owner or follow instructions on behalf of seller and buyer before a Costa Rican Notary Public (in Costa Rica, the beneficiary. Notaries Public must be registered attorneys-at-law and fulfil a much more complex function than what Notaries Public usually fulfil in common law countries. For example, only Notaries Public can 4 System of Registration execute the purchase and sales deed required to formally transfer the real estate property at the Property Registry). This purchase and sales deed shall be filed and registered before the National Registry 4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered? in order for it to be valid, effective and enforceable against third parties. However, upon execution of the purchase and sales deed, the transfer of ownership is enforceable by both parties. Title registration in Costa Rica is based on a Registry System. This system applies to the entire territory and therefore all properties must be registered in it. Notwithstanding the above, not all properties 4.7 Please briefly describe how some rights obtain have been registered to this date. In order to be able to register priority over other rights. Do earlier rights defeat later this unregistered land, a Civil or Agricultural Adverse Possession rights? Proceeding must be implemented. Pursuant to Title VII, Chapter I of our Civil Code, the Real Property Registry shall apply the general principle of “first in time, first in 4.2 Is there a state guarantee of title? What does it priority”. Upon registration of a document with the establishment guarantee? of right (transfer or property, lien or limitation), the Real Property Registry shall provide “real time” publicity to these acts or contracts. There is no state guarantee of title per se. Our Registry System operates under the principle or notion of “good faith” and is based Notwithstanding the above, acts which obtain a first priority over others (subsequent acts or contracts) may be challenged during an

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established statutory period which will depend on the act or contract being granted and registered. In addition, there are certain liens that 5.5 Are there restrictions on public access to the might have a priority interest over a previously registered right, such register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and as liens imposed due to taxes and/or condominium fees in arrears. other rights affecting real estate?

5 The Registry / Registries There are no restrictions on public access to the information in the National Registry. A buyer can in fact obtain all the information they might reasonably need regarding encumbrances and other 5.1 How many land registries operate in your jurisdiction? rights affecting real estate. If more than one please specify their differing rules

and requirements. Costa Rica 6 Real Estate Market As established in question 4.5 above, the official registration of real property is made through one centralised Registry System that is administered by the Real Property Registry of the Costa Rican 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally National Registry. This system applies to the entire territory and be involved in a real estate transaction in your therefore all properties must be registered in it. jurisdiction? Please briefly describe their roles and/or duties. 5.2 Does the land registry issue a physical title document to the owners of registered real estate? Other parties involved in real estate transactions are: (a) Notaries Public (which are, as indicated above, registered attorneys-at- Properties are identified before the Real Property Registry through a law): responsible to execute the purchase and sales deed which specific real estate number (“folio real” in Spanish). A certification is registered before the National Registry; (b) attorneys-at-law: (consultation document issued by the Real Property Registry) of execute the due diligence process and provide legal advice on legal the real estate number will provide all the information pertaining matters and make disclosures that may affect the transaction. Both to the property, such as, but not limited to location, current owner, Notaries Public and attorneys-at-law are usually the same person boundaries, registered area, cadastre plat number, as well as all and/or work together; and (c) Real Estate Brokers: assist both the rights and liens affecting the property. This real estate number buyer or seller or both, to buy or sell a property. It is customary certification and the information it contains is publicly available for Brokers to provide advice and/or services related to: fair market information and can be obtained physically at the National Registry value; inspection of the property; follow-up on closing details, etc. and/or electronically.

Based on the above, the Real Property Registry does not issue a 6.2 How and on what basis are these persons physical title document to the owners of a registered real estate; remunerated? however, upon request, it can issue a real estate number certification together with the above-indicated information, including the owner (a) Notaries Public are remunerated at closing. Their legal fees and relevant information. are established pursuant to a pre-established table and are approximately 1% of the real estate transaction amount; and 5.3 Can any transaction relating to registered real estate (b) Real Estate Brokers are also remunerated at closing, pursuant be completed electronically? What documents need to a previously negotiated real estate commission. Although to be provided to the land registry for the registration this real estate commission is not legally established, it is of ownership right? Can information on ownership of normally between 5% and 6% of the real estate transaction registered real estate be accessed electronically? amount. It is also customary that the Real Estate Broker receives from the parties the equivalent to 13% sales tax for Unfortunately, at this moment in time, transactions relating to the real estate commission, which he collects and pays to the the registration of real estate cannot be completed electronically. Government. However, this is expected to become a reality soon. Some areas of the National Registry are exclusively working with electronic 6.3 Do you feel there is a noticeable increase in documents for consultation purposes only. the availability of capital to finance real estate In order to register ownership rights before the National Registry, transactions in your jurisdiction, whether equity or a true first copy of the purchase and sales deed executed byand debt? What are the main sources of capital you see between the parties before a Notary Public should be filed, along active in your market? with confirmation of payment of the applicable transfer tax and registration fees. Court rulings or resolutions which grant ownership In general terms, the main sources for real estate financing are: (a) to a specific party are documents that also have to be filed for real Public and Private Banks; (b) Private Lenders (not registered as estate-related rights to be recorded. banks or financial entities); and (c) Private Funds or Investors. As indicated above, information on ownership of registered real Yes, we believe that in recent years there has been an increase in the estate can be obtained both physically and electronically. availability of capital to finance real estate transactions in Costa Rica. This increase has been more noticeable through the availability of funds from Private Lenders, who offer loans to buyers or developers 5.4 Can compensation be claimed from the registry/ registries if it/they make a mistake? in order to acquire the land or finance part of the acquisition of real estate. These funds from Private Lenders are usually targeted to foreigners and/or informal buyers, who do not have access to capital Yes, compensation can be claimed from the National Registry if it – readily available – through the local banking system, due to the makes a mistake. All compensation claims need to be filed through highly strict regulations applicable to Public and Private Banks. an Administrative Law Suit against the National Registry.

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Commercial and rental property has been more likely to sell due to a section of the population, jointly with an important foreign 7.3 Can the seller be liable to the buyer for investment component, looking to expand their real estate portfolio misrepresentation?

Costa Rica abroad. The current economy encourages taking risks, turning markets like ours into a very appealing alternative. As well as Costa Yes, the seller can be liable to the buyer for misrepresentation. Rica having been known worldwide mainly for its stable democracy that abolished its army in 1948, the country has welcomed 7.4 Do sellers usually give contractual warranties to the foreigners, is located three to five hours away from most major U.S. buyer? What would be the scope of these? What is cities, has a low property tax compared to other countries, and has a the function of warranties (e.g. to apportion risk, to very good quality of life. give information)? Are warranties a substitute for the buyer carrying out his own diligence?

6.5 Have you observed any trends in particular market Sellers do not usually give contractual warranties to the buyer. sub sectors slowing down in your jurisdiction in Based on our civil law legal system, warranties are usually found terms of their attractiveness to investors/developers? Please give examples. in the law. Nevertheless, these warranties are never a substitute for the buyer to carry out their own due diligence, which begins by retaining the services of a reputable real estate attorney before Since the crisis of 2008, the real estate market in Costa Rica has entering into an agreement. been undergoing a slow but steady recovery process. In most market subsectors, we have seen important growth in the past few years. Nevertheless, due to significant development in the 7.5 Does the seller warrant its ownership in any way? Greater Metropolitan Areas where the capital of San José is located Please give details. (“GAM”), specifically in the housing, commercial, office and retail submarkets, some of these areas are experiencing excessive The seller warrants their ownership by confirming they are the same supply and as a result, some slowdown is being perceived. This is person or entity registered in the Registry as an owner. The Notary particularly true with regards to the commercial, office and retail Public must perform a verification of identity to make sure the seller submarkets. Nevertheless, there is still a mild appetite for these is the actual owner of the real estate. subsectors, but with a higher dose of caution. In areas outside of the GAM, such as the Central Pacific 7.6 What (if any) are the liabilities of the buyer (in addition (“Puntarenas”) or North Pacific (“Guanacaste”), there has also been to paying the sale price)? a slowdown in submarkets such as housing (second homes) and leisure (hotel and resort development). Nonetheless, this slowdown The buyer’s only responsibility is to come up with funds for the has not been due to excessive supply or lack of appetite but instead closing to pay for the sale price. The buyer must act based on the due to a lack of new products because of a lack of infrastructure established principle of “good faith”. such as roads, water and aqueduct systems. Thus, there is still an increase of investors from abroad looking for these products, both 8 Finance and Banking for investment purposes and for retirement purposes.

8.1 Please briefly describe any regulations concerning 7 Liabilities of Buyers and Sellers in Real the lending of money to finance real estate. Are the Estate Transactions rules different as between resident and non-resident persons and/or between individual persons and corporate entities? 7.1 What (if any) are the minimum formalities for the sale and purchase of real estate? The main regulation concerning lending money to third parties for real estate purposes is the Civil Code of Costa Rica. Additionally, The minimum formalities for the sale and purchase of real estate other parties such as SUGEF (Regulatory Bureau for Financing are: both buyer and seller should have sufficient power of attorney Entities) and the Central Bank of Costa Rica (regulator of all to sell and buy, respectively; and they must execute a transfer deed exchange and interest rates in Costa Rica) may also apply. There before a Notary Public. The transfer deed needs to be executed in is no legislation that regulates lending specifically to finance real Spanish, and it shall include the following basic information: proper estate. Basic lending guidelines and regulations that SUGEF identification of the parties; description of the transaction; purchase applies to financial institutions are going to apply to any typeof price; and a complete description of the property’s information. financing. In addition, there are no specific differences in these This transfer deed shall represent both parties’ clear intent to sell and lending guidelines (between residents and foreigners) even though buy the property, respectively. Once the transfer deed is executed, during the last few years, lending institutions have tightened their the Notary Public shall file a copy before the National Registry. All internal procedures to lend to foreigners as a result of the 2008 transfer taxes and registration fees must be duly paid in order for the economic crisis and increasing compliance rules and regulations. transfer to be recorded. This will also apply to individual and corporate entities.

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agreement, the lender shall then execute each collateral or security 8.2 What are the main methods by which a real estate according to the established procedure in the Collection Law (Ley lender seeks to protect itself from default by the de Cobro Judicial). This law establishes a summary proceeding borrower? for these types of securities in which the lender will not have the right to take direct or automatic possession over the assets given There are several ways in which a lender can take securities or as collateral. Instead, they will have to request the execution of a collateral in Costa Rica in order to guarantee a loan. Some of the public auction and shall obtain payment from the funds obtained at most common securities or collaterals are described as follows: the auction(s). With regards to Guarantee Trusts, the trust agreement a) Common Mortgages: The borrower provides a property as a itself shall create the enforcement procedure in case a borrower security for a specific loan. In the mortgage agreement, the lender breaches the terms of the loan agreement. For this purpose, the and borrower agree on all terms such as: mortgage grade; lender’s Guarantee Trust shall validly create an execution proceeding similar Costa Rica name; borrower’s name; loan amount; term; advance payment to that established in the Costa Rican Collection Law; however, it penalty; interest; loan currency; place of payment; waiver of being executed directly by the same Trustee. This procedure shall previous proceedings in case of an auction; and the characteristic take less time than the regular enforcement of a registered security. contractual clauses that will govern the operation. The mortgage As mentioned above, there are recently approved legislations and lien imposed over a registered property is also recorded before the guidelines that prevent all lending transactions from using Guarantee National Registry in the Mortgage Section of the Real Property Trusts as a security. This would require a further analysis in order to Registry. The mortgage will be recorded and it will appear on the verify who is the lender, who is the creditor and who is the borrower. property’s real estate number certification and the recording will last until it is either: a) cancelled by the lender due to full payment 8.4 What minimum formalities are required for real estate from the borrower; or b) adjudicated by a Judge due to a foreclosure lending? process in which it is legally proven that the borrower has not paid or has violated any of the loan terms. The minimum formalities to secure a real estate loan – if formally b) Mortgage Certificates: A mortgage certificate has the same secured – shall be according to the Civil Code and Property Registry legal force as a Common Mortgage. The Real Property Registry which requires signing and constitution, in favour of the lender, a issues the mortgage certificate that identifies the amount for which Common Mortgage, a Mortgage Certificate imposing a lien on the certificate is issued and unlike the Common Mortgage where the property offered as a first degree guarantee, or transferring the there is an established lender, these certificates may be transferred property into a Guarantee Trust guarantee that will hold such real by mere endorsement. In such cases, the mortgage certificate will estate in “fiduciary ownership” during the length of the loan. also appear as a lien on the property’s ownership entry. This type Other formalities include that the owner of the property should have of guarantee is used mainly for bank transactions due to the fact sufficient power of attorney to impose such lien on the property, and that the “Certificates” can be exchanged as commodities, meaning must execute a deed before a Notary Public as established above. that any person that holds such title when the loan term expires is The deed needs to be executed in Spanish, and it shall include the entitled to collect the amount owed. It is important to note that following basic information: loan amount; payment information; the mortgage certificates have a 10-year statute of limitations, which lender’s information; and a complete description of the property’s needs to be reviewed in time in order to avoid a non-payment from information. Once the deed is executed, the Notary Public shall file the borrower. There is no limit as to the amount on a Common a copy before the National Registry. All taxes and registration fees Mortgage or a mortgage certificate. Before agreeing to this type must be duly paid in order for the lien to be recorded. of guarantee, the lender usually requests a formal appraisal on the property, in order to identify the approximate value of the property. Once the lender has this information, he will be able to determine 8.5 How is a real estate lender protected from claims in accordance with loan politics the amount that he should lend. In against the borrower or the real estate asset by other any of the above-indicated securities, the lender is not allowed to creditors? take automatic possession on the assets mortgaged or pledged if the borrower is at default. In such cases, the lender has to execute the The real estate lender is protected from claims based on the guarantee through an established judicial process. registration proceedings and recording in the Registry. Formalisms and proper documents – when the loan is granted – are mandatory c) Guarantee Trusts: According to the Costa Rican Commercial and the guarantee deeds shall be registered in order to have legal Code, all legal assets or rights that are subject to commerce may be effect before third parties. This means that if the lien (Common placed in a trust. Under this structure, a third-party Trustee shall Mortgage, Mortgage Certificate) is duly registered, the lender shall hold the title of the assets placed in trust and shall execute the Trust have a priority interest over any other lender. Notwithstanding Agreement according to the instructions expressly indicated in the above, there are certain legal liens, which might have priority such document. There are new legal guidelines that apply for Trust interest over a secured loan, such as liens imposed due to taxes and/ Guarantees, which will affect if these could be used as a guarantee or condominium fees in arrears. on behalf of a Private Lender.

8.6 Under what circumstances can security taken by a 8.3 What are the common proceedings for realisation of lender be avoided or rendered unenforceable? mortgaged properties? Are there any options for a mortgagee to realise a mortgaged property without involving court proceedings or the contribution of the The main circumstances are those directly linked with mistakes mortgagor? of procedure or defect of form in which the correct process is not drafted, executed or followed correctly. Once the lender has secured securities such as a Common Mortgage, In Costa Rica, all documents that need to be recorded for publicity a mortgage certificate, or a pledge over registered assets and the purposes such as, but not limited, to mortgages, trust property borrower breaches the terms and conditions established in the loan or other warranties, shall follow formalities to comply in a form

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of a public deed. If the deed is not drafted fulfilling the specific In Costa Rica, capital gains are not taxed except when the activity requirements that the law indicates, or if it does not comply with the that generates the income is “habitual”, or the gain is generated as a correct formalities, including bad legal advice or lack of registration, result of the transfer of assets subject to depreciation for corporate these could cause the lender to proceed and claim defects, demurrer income tax purposes. or exceptions of different kinds.

Proper notification procedures may also cause delays or even 9.6 Is taxation different if ownership of a company (or extinguishment of the right to collect or claim such security. It is other entity) owning real estate is transferred? recommended when lending or granting securities to foreigners to have a valid notification domicile in Costa Rica. The taxation is identical if ownership of a company (or other entity) owning real estate is transferred. Costa Rica 8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? 9.7 Are there any tax issues that a buyer of real estate should always take into consideration/conduct due The main actions would be those related to procedural deferments diligence on? or delays that cause an impossibility to notify the defendant, ruled by the Judicial Notification Law “Ley de Notificaciones Judiciales When executing a due diligence, buyers, depending on their Ley 8687”. nationality, should take several important considerations, such as, Another action would be a defect or lack of formalities on the but not limited to: notification, causing the borrower to file for an invalidity or ■ In the case of Nationals of Costa Rica, they shall consider if nullity of such notification, according to Article 9 of the Judicial they plan on renting (leasing) the property or not, developing Notification Law. it or remaining as raw land and any other possible use of the real estate. Additionally, it is important to determine if The third type of actions are those such as exceptions regulated such property will be generate a “deductible” expense for within Article 298 of the Costa Rican Civil Code, such as the owner and its implications within time, such as possible prescription, payment exception, expiration, and others. These can capital gains or not, repayment of the investment, expenses to cause a delay in any foreclosure process. be deductible – if applicable – towards income tax. ■ In relation to foreigners, in addition to the above-mentioned – when applicable – it is important to understand each 9 Tax country’s requirements for filing tax information forms, pass through or check-the-box benefits – if applicable – topics such as repatriation of funds and capital gains, withholding 9.1 Are transfers of real estate subject to a transfer tax? taxes and dividend taxes when sending funds back to their How much? Who is liable? home country. Another topic that is important to take into account relating to taxes In accordance with the Transfer Tax Law, transfers of real estate are in is a proper preparation of estate planning, as this will impact any fact subject to a transfer tax equal to 1.5% levied on the highest of: a) acquisition and should be included as part of the due diligence. the fiscal value of the property; and b) the established sales price. The seller and buyer are both liable in equal parts. However, payment of It is important for foreign investors to check with their local advisors transfer tax is commonly part of the negotiation between the parties. and correspond with Costa Rican attorneys to make sure that the correct acquisition vehicle is used.

9.2 When is the transfer tax paid? 10 Leases of Business Premises The transfer tax shall be paid within 15 business days of the date and time of the transfer deed (taxable event). 10.1 Please briefly describe the main laws that regulate leases of business premises. 9.3 Are transfers of real estate by individuals subject to income tax? The main law that regulates lease of business premises is the General Law of Urban and Sub-Urban Leases. Our Civil Code is Transfers of real estate by individuals are not subject to income supplementary to this law. It is important to understand and to take tax, unless the business activity of the individual is to buy and sell into consideration that there are a vast number of rules in the General real estate habitually and/or that individual has taken advantage of Law of Urban and Sub-Urban Leases that cannot be waived, even if depreciation as a deductible expense. the parties agree to do so. Moreover, all rights granted by this law in favour of the tenant cannot be relinquished. 9.4 Are transfers of real estate subject to VAT? How much? Who is liable? Are there any exemptions? 10.2 What types of business lease exist?

Transfers of real estate are not subject to VAT. The General Law of Urban and Sub-Urban Leases is applicable to commercial leases, industrial leases, etc. 9.5 What other tax or taxes (if any) are payable by the seller on the disposal of a property?

No other taxes are payable by the seller on the disposal of a property in our jurisdiction.

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10.3 What are the typical provisions for leases of business 10.7 Green leases seek to impose obligations on premises in your jurisdiction regarding: (a) length of landlords and tenants designed to promote greater term; (b) rent increases; (c) tenant’s right to sell or sustainable use of buildings and in the reduction of sub-lease; (d) insurance; (e) (i) change of control of the “environmental footprint” of a building. Please the tenant; and (ii) transfer of lease as a result of a briefly describe any “green obligations” commonly corporate restructuring (e.g. merger); and (f) repairs? found in leases stating whether these are clearly defined, enforceable legal obligations or something Typical provisions for lease of business premises are: (a) length of not amounting to enforceable legal obligations (for example aspirational objectives). term: a minimum three-year term in favour of the lessee (able to terminate the lease with a three-month notice); (b) rent increases: to Green provisions are not typically part of lease agreements in our be determined by the parties. All types of increases are authorised, Costa Rica always with a reasonable limit to avoid abusive increases; (c) an jurisdiction. However, parties to a lease agreement could include express authorisation from the landlord is required for the tenant to them at will. Recently, these have been included on land subject to sub-lease. However, it is possible for the tenant to transfer their lease wind and solar projects in accordance with Energy Law No. 7200. rights if they sell the business through a “commercial establishment sale”, following all the formal legal requirements established by the 11 Leases of Residential Premises Commercial Code; (d) insurance: parties to the contract are allowed to determine who shall be responsible for insurance; (e) if the tenant is an entity, chance of control of the entity shall not affect the lease 11.1 Please briefly describe the main laws that regulate agreement; for all legal effects, the entity remains the tenant. If leases of residential premises. the tenant is an individual, they will not be allowed to assign or sublet without the previous and express authorisation from the The main laws that regulate lease of residential premises are: a) the landlord, unless this possibility has been included as a provision General Law of Urban and Sub-Urban Leases; b) the Civil Code; c) in the lease agreement; and (f) repairs. The landlord has the legal Law No. 9160; and d) the Code of Civil Procedure. duty to provide to the tenant a peaceful enjoyment of the premises and to keep it this way. All required repairs to keep this condition 11.2 Do the laws differ if the premises are intended for shall be performed by the landlord. These repairs are known as multiple different residential occupiers? “required”. Parties to the contract are allowed to determine who shall be responsible for repairs that are required due to ordinary tear No, the laws do not differ in cases where the premises are intended and wear but this obligation must be stated in the contract, otherwise for multiple different residential occupiers. it will become the landlord’s responsibility as well.

11.3 What would typical provisions for a lease of 10.4 What taxes are payable on rent either by the landlord residential premises be in your jurisdiction regarding: or tenant of a business lease? (a) length of term; (b) rent increases/controls; (c) the tenant’s rights to remain in the premises at the end of Income tax is to be paid on income generated by rent by the landlord the term; and (d) the tenant’s contribution/obligation of a business lease. The landlord must also pay property or real to the property “costs” e.g. insurance and repair? estate taxes. (a) Length of term: the General Law of Urban and Sub-Urban Leases contains a mandatory term of a minimum of three 10.5 In what circumstances are business leases usually years. This term must be interpreted in favour of the terminated (e.g. at expiry, on default, by either party tenant, who is allowed to terminate the contract prior to the etc.)? Are there any special provisions allowing a expiration of this mandatory term with written notice given to tenant to extend or renew the lease or for either party the landlord three months in advance; and to be compensated by the other for any reason on termination? (b) rent increases/controls: when the rent is in foreign currency, the rent must remain the same for the whole term of the contract. When the rent is in Colones, the rent will be revised Commercial leases are usually terminated upon expiration of the at the end of each year of the contract, based on the rules term and/or by either party. There are circumstances in which contained in Article 67 of the General Law of Urban and Sub- payment default forces early termination of a lease. Provisions Urban Leases. In general terms, if the accumulated inflation related to extensions or renewals are typically included in the lease rate of the 12 months prior to the expiration of each year of agreements. the term of the contract is equal to 10% or less in that country, the landlord can increase the rent up to 10% per year. If the rate is above 10%, a Government office shall determine the 10.6 Does the landlord and/or the tenant of a business increase but it cannot a) be less than 10%, or b) more than the lease cease to be liable for their respective inflation rate. obligations under the lease once they have sold their interest? Can they be responsible after the sale in respect of pre-sale non-compliance? 11.4 Would there be rights for a landlord to terminate a residential lease and what steps would be needed Yes, the landlord and/or the tenant of a business lease cease to be to achieve vacant possession if the circumstances liable for their respective obligations under the lease once they have existed for the right to be exercised? sold their interest, if they have sold following the legal procedures established by law. Nevertheless, they will be liable for pre-sale Yes, there would be rights for a landlord to terminate a residential non-compliance even after the sale. lease. The main or principal right would be lack or non-payment of the rent. The necessary steps to achieve vacant possession if the

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circumstances existed for the right to be exercised are outlined in use and/or occupation. The National Institute of Housing and Law No. 9160, which is a special law that contains the proceedings Urbanism is the entity that controls land/building use at national for small claims related to very specific matters related to leases. level. Environmental regulations are overseen by the National There are only two reasons that will allow a landlord to access this Environment Technical Secretariat (“SETENA”) and the Ministry expedited process: a) expiration of the contract’s term; and b) lack of Environmental and Energy (“MINAE”). of rent payment, utilities and/or Condominium Owners Association fees. Other rights must be exercised based on the Code of Civil 12.4 What main permits or licences are required for Procedure. Article 6 of Law No. 9160 indicates that once the Court building works and/or the use of real estate? has admitted the claim, the eviction order shall be issued along with the preventive retention of the tenant’s assets if requested by the The main permit required for building works would be a building petitioner. Fifteen days will be granted to the defendant to present Costa Rica permit. Requesting and obtaining a zoning authorisation from the admissible, relevant and useful evidence. The tenant must continue Municipal Government is the way to start. A water availability letter to deposit the rent in the Court’s account. The defendant will only from the Water Department is also indispensable. Special licences be authorised to object to the claim based on payment, statute of may be required if a commercial activity is to be developed on the limitations and non-expiration of the contractual term. Within 15 real estate. The Health Department must issue a sanitary permit for days after the objection is filed, the Court must call for an oral the Municipal Government to issue a business licence, and liquor hearing. This is considered as a very positive change versus the licences are required for sale of liquor. previous “paper” hearings.

12.5 Are building/use permits and licences commonly 12 Public Law Permits and Obligations obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)?

12.1 What are the main laws which govern zoning/permitting Yes, building/use permits are commonly obtained in this jurisdiction and related matters concerning the use and occupation of land? Please briefly describe them and and granted by the local Municipality, including zoning and final include environmental laws. construction permits. Implied permission cannot be obtained in any way. The main laws which govern zoning, permitting and related matters concerning the use and occupation of land are: the Constitution; 12.6 What is the appropriate cost of building/use permits the Urban Planning Law; the Organic Environmental Law; the and the time involved in obtaining them? Expropriation Law; the Construction Law; the Condominium Law; the Architectural Heritage Law; and local regulatory plans. In Costa The building permit fee is 1% of the project value. The time involved Rica, the administrative organisation in charge of urbanism is the in obtaining a building permit is generally within four weeks of Urbanism Directorate (part of the National Institute of Housing the initial application. This timeframe extends considerably if the and Urbanism) and the Ministry of Planning. These two entities approval of SETENA is required. have the legal power to elaborate the National Plan for Urban Development. However, the implementation of national policies is 12.7 Are there any regulations on the protection of historic in fact developed at Municipal level. monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real 12.2 Can the state force land owners to sell land to it? If estate? so please briefly describe including price mechanism. Yes, there are regulations on the protection of historic monuments Yes, the Government can force landowners to sell their land. in this jurisdiction. The National Museum of Costa Rica through Nevertheless, Article 45 of the Constitution includes an essential its Archaeology Department, the National Environment Technical guarantee to one of the most relevant rights there is: private Secretariat and the Ministry of Environmental and Energy regulate property. This Article reads: “Property is inviolable; no one may be all matters concerned with historical monuments. This can affect the deprived of its property except for a legally proven public interest transfer of real estate or the development of such property. There is upon prior compensation in accordance with the law...”. The price a by-law that establishes the process to request an inspection from set-up mechanism is established by law based on certain appraisals the National Museum in order to verify if the historical monument executed in accordance with the standardised price table issued can be saved or preserved. By law, all property that is affected by by the Tax Administrator. The owner of a property, who is being historical monuments is subject to a lien and prohibited from being expropriated by the Government, in accordance to the General developed unless authorised by such entity. Administrative Public Law and its by-law, can challenge such appraisal. Such law will also regulate the process and the way in 12.8 How can e.g. a potential buyer obtain reliable which the landowner gets paid once the final resolution is issued. information on contamination and pollution of real Due to the established Constitutional right, these processes normally estate? Is there a public register of contaminated land take significant time. in your jurisdiction?

Information pertaining to contamination and pollution of real estate 12.3 Which bodies control land/building use and/or occupation and environmental regulation? How do is not easy to obtain. Perhaps an Environmental Impact Assessment buyers obtain reliable information on these matters? (“EIA”) process is the proper way to obtain this kind of information. The main objective of an EIA is to determine the environmental For the most part, real estate and construction departments of the feasibility and impact of the project. There is no public register of Municipal Governments are in charge of controlling land/building contaminated land in our jurisdiction.

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the National Geo-Environmental Information Center (“CENIGA”) 12.9 In what circumstances (if any) is environmental clean- of the Ministry of Environment and Energy, with the goal to promote up ever mandatory? an open data policy for all relevant climate information available for any citizen. The Paris Agreement, coming out of COP21, will be According to SETENA and MINAE, any party that affects the legally binding for Costa Rica starting in 2020. Under the aforesaid environment is subject to strong sanctions and fines. Clean-up Agreement, our country will be part of, starting in 2016 and until requirements and procedures are issued and enforced by these 2020, a process of legal, institutional and organisational change. two entities and it is mandatory to compensate for any pollution, Costa Rica has internationally committed to have a National economically or through the restitution of damaged areas. Adaptation Plan ready by 2018.

12.10 Please briefly outline any regulatory requirements 13.2 Are there any national greenhouse gas emissions Costa Rica for the assessment and management of the energy reduction targets? performance of buildings in your jurisdiction. Yes, there are national reduction targets for greenhouse gas emissions. The new Code of Construction issued by the Engineering and On September 30th, 2015, under the United Nations Convention Architectural Bureau regulates and enforces new constructions based framework for Climate Change, Costa Rica submitted its Intended on their environmental impact, including energy-saving measures Nationally Determined Contribution with an unconditional target to and security patterns. Additionally, there are new electric guidelines keep net greenhouse gas emissions below 9.37 MtCO2e emissions on interconnection to the grid based on the Distributed Energy by- by 2030. Costa Rica reconfirmed its aspirations to become carbon law, which was recently introduced, allowing net metering though neutral by 2021. self-generation of solar and wind renewable energy.

13.3 Are there any other regulatory measures (not already 13 Climate Change mentioned) which aim to improve the sustainability of both newly constructed and existing buildings?

13.1 Please briefly explain the nature and extent of any Yes, there is a new Code of Construction issued by the Engineering regulatory measures for reducing carbon dioxide and Architectural Bureau which regulates and enforces new emissions (including any mandatory emissions trading scheme). constructions based on their environmental impact, such as energy- saving measures, water consumption components, waste treatment plant requirements and the possibility to reuse water through Costa Rica has adopted an Open Government Policy. The National recollection of rainwater procedures. Environmental Information System (“SINIA”) was created under

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Hernán Cordero B. Rolando Gonzalez C. Cordero & Cordero Abogados Cordero & Cordero Abogados Terraforte Tower, 2nd Floor Plaza Futura, Office 8, st1 Floor PO Box 5998-1000 Liberia, Guanacaste Escazu, San José Costa Rica Costa Rica Tel: +506 2668 1717 Tel: +506 2201 6640 / +506 2668 1717 Email: [email protected] Email: [email protected] URL: www.corderoabogados.com URL: www.corderoabogados.com

Costa Rica Hernán joined Cordero & Cordero Abogados in 1994 and is currently the Rolando joined Cordero & Cordero Abogados’ Guanacaste Office in Managing Partner of the firm. His experience in directing transactions 2005. He is one of the Senior Associates who has strengthened the ranges from of-counsel legal work for international banking institutions Liberia Office Real Estate and Corporate Practices. Before joining the to transactional work with foreign investors dealing with the tourism firm, Rolando had experience practising law as an attorney in Liberia, and real estate industry. Recently, he has been actively involved on where he also worked as General Manager for an important Hotel and renewable energy, joint ventures, free trade zone parks and general Tourism Group. He was also the Head In-house attorney for a hotel, corporate law. He is an active member of the Energy Committee at tourism and agricultural entity in Guanacaste. He has been involved AMCHAM. From 2000 to 2002, he was appointed by the President in several Guanacaste real estate and hospitality developments as of the Republic as General Consul and Commercial Advisor to the well as: I.C.T. concession land; day-to-day legal advice to real estate Ambassador in Madrid, Spain. and commercial developers; providing legal advice to U.S. companies doing business in Costa Rica; and conducting highly complex real Education: Instituto de Empresa, Madrid, Spain (Master’s Degree estate transactions. in E-business and Telecommunications Transactions); Universidad de Costa Rica (Attorney at Law, Notary Public and various courses Education: Universidad de Costa Rica (Attorney at Law, Notary Public); on Business Administration); Seminars on Investment, Tax Law and Universidad de Costa Rica (Master’s in Business Administration Condominium Regimes, etc. Executive Program; focused courses on Business and Marketing). Professional Associations: Costa Rican Bar Association; American Professional Associations: Costa Rica-American Chamber of Bar Association and Costa Rica-American Chamber of Commerce. Commerce; and the Costa Rican Bar Association. Languages: Spanish and English. Languages: English and Spanish.

Cordero & Cordero Abogados is a full-service law firm that specialises in Business and Financial Law in Costa Rica. Among our main areas of practice are: Banking & Finance; Corporate and Contract Law; Foreign Investment; Real Estate; Insurance & Reinsurance; Mergers & Acquisitions; Civil Litigation Practice; Intellectual Property; Labour & Immigration; Energy; and Information Technologies & Telecommunications. The firm, established in 1940, currently has offices in San José and Guanacaste, and has been ranked by international directories such as Chambers & Partners, ILFR and The Legal 500 and is currently referred to by the U.S. Commercial Service as well as other regional bar associations. Cordero & Cordero Abogados is a member of the prestigious International Lawyers Network (www.iln.com), an association of 91 high-quality, full-service law firms with over 5,000 lawyers worldwide.

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Czech Republic JUDr. Richard Gürlich, Ph.D.

Gürlich & Co. Mgr. Kamila Janoušková

possession rights (for example, lease and usufructuary lease); and rights 1 Real Estate Law in rem, e.g. rights for things of others (right of superficies, servitude, servitude of profit, pledge and right of first refusal). Purely contractual 1.1 Please briefly describe the main laws that govern rights, for example reservation of resale, may also be established. real estate in your jurisdiction. Laws relating to Each of these should be entered into the Land Registry. leases of business premises should be listed in response to question 10.1. Those relating to zoning and environmental should be listed in response to 3.2 Are there any scenarios where the right to a question 12.1. Those relating to tax should be listed in real estate diverges from the right to a building response to questions in Section 9. constructed thereon?

The area of real estate is mainly governed by: Yes, it is possible to establish the right of superficies. In this case, ■ Act No. 89/2012 Sb., the Civil Code (“Civil Code”); and the ownership of the building diverges from ownership of the land ■ Act No. 256/2013 Sb., on the Land Registry (“Act on Land as the beneficiary of this right is entitled to have a building on/under Registry”). the land the beneficiary does not own. The Civil Code establishes the right of first refusal for both – the owner of the building and the owner of the land in case one of them decides to sell the property. 1.2 What is the impact (if any) on real estate of local common law in your jurisdiction? 3.3 Is there a split between legal title and beneficial title There is not any local common law in the Czech Republic. in your jurisdiction and what are the registration consequences of any split?

1.3 Are international laws relevant to real estate in your A split between legal title and beneficial title may occur if the real jurisdiction? Please ignore EU legislation enacted estate was sold but an application for the transfer of ownership locally in EU countries. wasn’t filed with the Land Registry. In such a case the new owner cannot use his property rights. This split is unfavourable. Besides EU legislation, international law is not particularly relevant to real estate in the Czech Republic. However, bilateral treaties on protection of investments may apply. 4 System of Registration

2 Ownership 4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered?

2.1 Are there legal restrictions on ownership of real estate In general, all buildings and land must be registered. However, by particular classes of persons (e.g. non-resident there are exceptions, especially for minor buildings which do not persons)? have to be registered if the law does not require them to be. Rights having a contractual nature (for example, a lease) do not have to Nowadays, there are no restrictions on ownership of real estate be registered; however, the registration depends on the agreement by non-residents; transitional periods limiting ownership of non- between parties. Rights in rem are also required to be registered. resident persons no longer apply.

4.2 Is there a state guarantee of title? What does it 3 Real Estate Rights guarantee?

3.1 What are the types of rights over land recognised in Yes, there is a state guarantee since Article No. 11(1) of The Charter your jurisdiction? Are any of them purely contractual of Fundamental Rights and Basic Freedoms stipulates that everyone between the parties? has the right to own property. Each owner’s property right shall have the same content and enjoy the same protection. Inheritance Rights over land recognised in the Czech Republic are: ownership; is also guaranteed.

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The last person listed in the Land Registry is considered to be the owner, without any regard to changes based only on an unregistered 5.2 Does the land registry issue a physical title document contract. to the owners of registered real estate? In addition, the Civil Code states in Section 980 (2) that if a right No; however, basic information about the registered real estate are is registered in a public register it is presumed that it was entered announced on the website of the Land Registry (http://www.cuzk. in accordance with real legal status (this has relevance in possible cz/en) which is freely accessible to the public. The owner can litigation). request an official document confirming the title; it can be obtained via the website for a small fee. 4.3 What rights in land are compulsorily registrable? What (if any) is the consequence of non-registration? 5.3 Can any transaction relating to registered real estate be completed electronically? What documents need Czech Republic Czech legislation orders compulsory registration of ownership of to be provided to the land registry for the registration land and rights in rem (besides the right of first refusal which may of ownership right? Can information on ownership of remain purely contractual). The registration is necessary for the registered real estate be accessed electronically? rights to be properly established. In addition, Section 37 (1) (d) of the Act on Land Registry states In case the submitted documents are signed with a verified electronic that owners are obliged to notify the Land Registry of any changes signature, electronic access may be used; the Land Registry is fully in the registered data concerning their real estate. If the owner fails accessible online to the public. A person has to provide a document to notify the Land Registry, he or she will be subject to a fine up to proving the change of ownership with verified signatures of parties CZK 50,000 if he is a natural person or CZK 100,000 if the owner and a verified translation if the document is in a foreign language. is a legal entity. Also, a proper application (form of the Land Registry) must be completed and submitted. Other documents may be required depending on the right being registered or the person submitting the 4.4 What rights in land are not required to be registered? application for the new entry.

Contractual rights are not required to be registered in order to become 5.4 Can compensation be claimed from the registry/ properly established (for example, a lease or usufructuary lease). registries if it/they make a mistake?

4.5 Where there are both unregistered and registered land Yes, compensation may be claimed against the state in case the or rights is there a probationary period following first Land Registry Offices issue an unlawful decision or in the case of registration or are there perhaps different classes maladministration. or qualities of title on first registration? Please give details. First registration means the occasion upon which unregistered land or rights are first registered 5.5 Are there restrictions on public access to the in the registries. register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and No. With regard to the first registration, there is no probationary period other rights affecting real estate? nor are there any different classes or qualities of the registered title. There are no restrictions on public access to basic information about real estate. However, detailed information (for example, the name 4.6 On a land sale, when is title (or ownership) transferred of the beneficiary from a pledge or servitude, on which basis the to the buyer? encumbrance was established and for how long) are provided for a small fee. The title is officially transferred when the change of ownership is entered into the Land Registry, with effect as of the date that the application to execute the change was filed. 6 Real Estate Market

4.7 Please briefly describe how some rights obtain 6.1 Which parties (in addition to the buyer and seller priority over other rights. Do earlier rights defeat later and the buyer’s finance provider) would normally rights? be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or Generally speaking, the registered right obtains priority over duties. unregistered rights and the earlier established right obtains priority over later established rights. Earlier established rights are usually Usually, only the buyer (with the finance provider) and the seller stronger and can be exercised without any regard to the latter. are involved in the transaction; a real estate agency may mediate the contact between the parties or be party to the reservation contract (i.e. the contract ensuring the specified period of time during which 5 The Registry / Registries the seller and the real estate agency are not entitled to offer the real estate to another prospective buyer). Supervision of lawyers is always advisable. 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules and requirements.

Only one Land Registry operates in the Czech Republic.

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6.2 How and on what basis are these persons 7.3 Can the seller be liable to the buyer for remunerated? misrepresentation?

Such parties are often remunerated on the basis of a commission or Yes, liability for existing defects applies. If a defect occurs, the hourly fee. buyer must report it as soon as possible (exceptions apply) in order to derive the reparatory rights (especially the right to a discount). Contractual penalties can be claimed based on the provisions of the 6.3 Do you feel there is a noticeable increase in the availability of capital to finance real estate particular contract. transactions in your jurisdiction, whether equity or debt? What are the main sources of capital you see 7.4 Do sellers usually give contractual warranties to the active in your market? buyer? What would be the scope of these? What is the function of warranties (e.g. to apportion risk, to Czech Republic Judging from the number of real estate transactions we have helped give information)? Are warranties a substitute for the with during the past year, an increase in the availability of capital buyer carrying out his own diligence? may be seen. In the Czech Republic’s real estate market, its source consists mainly of bank loans and a private capital of individual The seller usually guarantees ownership of the purchased object, as buyers. well as non-existence of any third party rights or incumbent debts related to the object. The function of warranties is to inform the buyer and also to accept liability for incorrect statements should 6.4 What is the appetite for investors and developers in your region to look beyond primary real estate the contract state accordingly. Provision of incorrect information markets and transact business in secondary or even may lead to a contractual penalty or liability for resulting damage. tertiary markets? Please give examples of significant However, due diligence of the buyer is also expected. secondary or tertiary real estate transactions, if relevant. 7.5 Does the seller warrant its ownership in any way? Please give details. We are of the view that the secondary real estate market is becoming more and more popular. Investors are usually interested in buildings Yes, the Purchase Contract usually includes the owner’s statement which need to be renovated or otherwise adjusted and can be of ownership; the statement may be confirmed online in the Land subsequently used for business or accommodation purposes. Prague Registry. and its close surroundings remain the most attractive locations for developers and investors since there is a significant demand for real estate for housing and business as well. 7.6 What (if any) are the liabilities of the buyer (in addition to paying the sale price)?

6.5 Have you observed any trends in particular market The buyer is obliged to take over the purchased object and check it sub sectors slowing down in your jurisdiction in terms of their attractiveness to investors/developers? for possible defects. The buyer is also obliged to pay the transfer tax Please give examples. for the acquisition of the real estate. The Purchase Contract usually sets up further liabilities relating to payment or the completion of In our opinion, the attractiveness of the real estate market subsectors the Land Registry application. to investors/developers remains steady, possibly with a slight decrease in the construction sector. New projects are being discussed 8 Finance and Banking at government level in order to support affordable housing.

The seller is obliged to inform the buyer of any defects (physical or legal) of the purchased object. Furthermore, the seller has to disclose all documents relating to the purchased object.

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8.2 What are the main methods by which a real estate 9 Tax lender seeks to protect itself from default by the borrower? 9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable? The main methods by which a real estate lender seeks to protect itself from default by the borrower include pledges burdening the Yes, transfer tax amounts to 4% of the value of the real estate. The real estate or guarantees by third parties. buyer is liable to pay it to the authorised Tax Office.

8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a 9.2 When is the transfer tax paid? mortgagee to realise a mortgaged property without Czech Republic involving court proceedings or the contribution of the The transfer tax has to be paid within three months following the mortgagor? month in which the change of ownership was entered into the Land Registry. Mortgaged property is usually secured by a pledge in favour of the mortgagee. If the mortgagor does not perform his obligations 9.3 Are transfers of real estate by individuals subject to towards the mortgagee, the mortgagee can sell the pledged property income tax? under conditions agreed in advance. If there is no such prior agreement, a mortgagee can sell the property at public auction or by The transfers themselves are not subject to income tax but the means of judicial enforcement upon prior written notice. Similarly, income from such a transfer may be taxed (for example, when a if the debtor fails to perform, a guarantor may be asked to perform recently bought real estate is being put up for sale again). instead of him or her.

9.4 Are transfers of real estate subject to VAT? How 8.4 What minimum formalities are required for real estate much? Who is liable? Are there any exemptions? lending?

No, they are not subject to VAT, as long as transfers are not provided The Contract on Loan does not have to be executed in writing; as a service. however, the vast majority of them are written. The Contract should specify the terms of the loan, payments and interests. The loan is usually secured by a pledge and then the Contract on Pledge has to 9.5 What other tax or taxes (if any) are payable by the be made in writing and entered into the Land Registry. seller on the disposal of a property?

The seller is not liable to pay any other taxes when selling his 8.5 How is a real estate lender protected from claims property. An owner is obliged to pay the property tax each year. against the borrower or the real estate asset by other creditors? 9.6 Is taxation different if ownership of a company (or The lender usually seeks the strongest position among the borrower’s other entity) owning real estate is transferred? creditors, which is provided by registering the pledge as the first beneficiary since the first registered right takes precedence over the Czech legislation regarding changes of ownership does not later registered. Further guarantees or promissory notes may also distinguish between natural and legal entities; however, differences be requested. may apply when it comes to taxes. For example, natural persons may be exempt from paying the income tax. 8.6 Under what circumstances can security taken by a lender be avoided or rendered unenforceable? 9.7 Are there any tax issues that a buyer of real estate should always take into consideration/conduct due One of the rights in rem is the negative pledge (prohibition of diligence on? alienation and encumbrance). Real estate with this right cannot be secured by a pledge. On the other hand, mortgage lenders often give A buyer of real estate who intends to rent this real estate must a negative pledge to their terms and consequently may be a problem remember that rental income is subject to income tax. with mortgage refinancing or the sale of real estate. 10 Leases of Business Premises 8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? 10.1 Please briefly describe the main laws that regulate The borrower may attempt to transfer the property to another person leases of business premises. (relative, friend) or sell it. However, this transfer is void without the lender’s consent if the property is secured by a pledge (registered in Leases of business premises are mainly governed by Act No. the Land Registry). 89/2012 Coll., the Civil Code.

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10.2 What types of business lease exist? 10.6 Does the landlord and/or the tenant of a business lease cease to be liable for their respective Czech legislation differentiates between leases of business obligations under the lease once they have sold their interest? Can they be responsible after the sale in premises, business leases of movables, leases of vehicles, leases of respect of pre-sale non-compliance? accommodation premises and usufructuary leases. Unless it has been agreed differently, the Civil Code states that if 10.3 What are the typical provisions for leases of business there is a change of ownership, all rights and duties (including those premises in your jurisdiction regarding: (a) length of resulting from non-compliance) of the landlord are automatically term; (b) rent increases; (c) tenant’s right to sell or vested in the new owner, except for provisions on landlords’ duties, sub-lease; (d) insurance; (e) (i) change of control of which are not stipulated by law and which were not known by the the tenant; and (ii) transfer of lease as a result of a

corporate restructuring (e.g. merger); and (f) repairs? new owner in advance. Czech Republic

If the tenant continues to use the object of lease after the lease 10.7 Green leases seek to impose obligations on expires, the Lease Contract renews under similar conditions, for a landlords and tenants designed to promote greater maximum of one year, provided that the landlord does not object to sustainable use of buildings and in the reduction of such a procedure within a one-month period. The Lease Contract the “environmental footprint” of a building. Please briefly describe any “green obligations” commonly may include various modifications to this rule. found in leases stating whether these are clearly With regards to rent increases, the Lease Contract may include defined, enforceable legal obligations or something provisions regarding changes to the rent (for example, depending on not amounting to enforceable legal obligations (for inflation), but generally speaking, the increase of the rent is limited example aspirational objectives). by the law. Lease contracts do not usually include “green” provisions; Typical provisions of a sub-lease include agreement on compulsory nonetheless, there are no obstacles to parties agreeing otherwise. or non-compulsory consent of the landlord with regards to subletting. Otherwise, the sub-lease is permitted without the consent, provided the tenant permanently dwells in the premises. The tenant is 11 Leases of Residential Premises typically not entitled to sell the leased object. Provisions on insurance often concern insurance of damage caused by the tenant. 11.1 Please briefly describe the main laws that regulate leases of residential premises. When it comes to change of subjects or their control, the provisions usually deal with the question of whether or not the lease ceases to Leases of residential premises are mainly governed by Act No. exist upon such changes. 89/2012 Coll., the Civil Code. Small defects are often repaired by the tenant himself and the bigger repairs are carried out and paid for by the landlord. 11.2 Do the laws differ if the premises are intended for multiple different residential occupiers? 10.4 What taxes are payable on rent either by the landlord or tenant of a business lease? The landlord may enter into a Lease Contract with multiple tenants. This may be advantageous if a tenant does not pay the The landlord is obliged to pay income tax and also property tax rent, the landlord can then enforce payment from any of the tenants. for the leased real estate. If the lease is provided as a service (for The tenants act together the agreement between one tenant and example, lease of vehicles), VAT may apply as well. the landlord is valid for all tenants. The law does not distinguish between a tenant renting and joint tenants renting. 10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party 11.3 What would typical provisions for a lease of etc.)? Are there any special provisions allowing a residential premises be in your jurisdiction regarding: tenant to extend or renew the lease or for either party (a) length of term; (b) rent increases/controls; (c) the to be compensated by the other for any reason on tenant’s rights to remain in the premises at the end of termination? the term; and (d) the tenant’s contribution/obligation to the property “costs” e.g. insurance and repair? Business leases are usually terminated upon expiry, by agreement or by a notice of termination. Please see our answer to question 10.3. There is no difference Generally speaking, if the tenant uses the object of a lease after the between business premises and residential premises in this context. lease expires, the Lease Contract renews under similar conditions, for a maximum of one year, provided that the landlord does not 11.4 Would there be rights for a landlord to terminate a object to such a procedure within a period of one month (exceptions residential lease and what steps would be needed apply). Different agreements between parties may also apply. to achieve vacant possession if the circumstances If the landlord of a business premises gives notice of termination to existed for the right to be exercised? the tenant, the landlord or the tenants’ successor has to compensate the loss of tenants’ customers caused by the given notice. Again, The landlord may only terminate the lease for statutory reasons, the compensation provisions may be modified by the agreement of for example when he needs an apartment for his own needs (or for the parties. a relative) or when the tenant grossly violates his/her obligations. Termination must be given in writing to the tenant and must include

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instructions so that the tenant may raise objections and seek review by the court. Such notice period is usually three months. 12.5 Are building/use permits and licences commonly obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)? 12 Public Law Permits and Obligations Yes, permits and licences are commonly obtained. Implied permission can be obtained for exceptions listed in the Act No. 12.1 What are the main laws which govern zoning/ 183/2006 Coll., on Urban Planning and Construction Regulations permitting and related matters concerning the use (for example, small buildings and distribution nets). and occupation of land? Please briefly describe them and include environmental laws. 12.6 What is the appropriate cost of building/use permits The issue of zoning and related matters concerning the use and and the time involved in obtaining them? Czech Republic occupation of land is mainly governed by: ■ Act No. 89/2012 Coll., the Civil Code; The cost of a permit and the time necessary for obtaining it depend ■ Act No. 256/2013 Coll., on the Land Registry; on the particular building in question (the financial costs usually amount to CZK 5,000). ■ Act No. 183/2006 Coll., on Urban Planning and Construction Regulations; ■ Act No. 184/2006 Coll., on Expropriation; 12.7 Are there any regulations on the protection of historic ■ Act No. 334/1992 Coll., on Protection of Agricultural Land monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real Resources; estate? ■ Act No. 44/1988 Coll., on Protection and Use of Mineral Resources; and The protection is governed by Act No. 20/1987 Coll., on State ■ Act No. 114/1992 Coll., on Protection of Nature and Historic Monuments Care. The Act provides many duties for sellers Landscape. and purchasers. For example, there is the right of first refusal of the state in case the monument is being sold; furthermore, the seller 12.2 Can the state force land owners to sell land to it? If is obliged to inform the purchaser about the status of a historic so please briefly describe including price mechanism. monument.

Yes, the state may appropriate land. According to Article No. 11 12.8 How can e.g. a potential buyer obtain reliable (4) of Charter of Fundamental Rights and Freedoms, expropriation information on contamination and pollution of real or other mandatory limitation of property rights are permitted in the estate? Is there a public register of contaminated land public interest, on the basis of law and so long as compensation in your jurisdiction? is provided. The matter is closely governed by Act No. 184/2006 Coll., on Expropriation. The price mechanism is based on expert Yes, there is the Integrated Pollution Registry of dangerous appraisal; the compensation is usually financial and should fully substances leakage; however, not everyone is obliged to fill in the repair the sustained loss of ownership. necessary information. Such obligations usually apply to operators of potential dangerous services. It is highly advisable for the buyer 12.3 Which bodies control land/building use and/or to hire an expert for technical aspects of the real estate (including occupation and environmental regulation? How do land pollution, if applicable in the area) to give his expert opinion buyers obtain reliable information on these matters? and to hire a lawyer for analysis of legal threats and issues connected with the purchase. In the Czech Republic, municipalities serve as the bodies responsible for control of building development and fulfilling environmental 12.9 In what circumstances (if any) is environmental clean- standards. The Czech Environmental Inspectorate oversees such up ever mandatory? standards. The Ministry of Regional Development, Ministry of Agriculture and Ministry of Environment supervise their particular Environmental clean-up is mandatory in certain circumstances fields too. Credible information can be obtained from respective stipulated by the applicable legislation; for example, after mining legislation when it comes to the matter in general or by request for when the exploitation is finished. information submitted to official bodies. Documents relating to urban planning and other useful information are also accessible to the public online. 12.10 Please briefly outline any regulatory requirements for the assessment and management of the energy performance of buildings in your jurisdiction. 12.4 What main permits or licences are required for building works and/or the use of real estate? An energy performance certificate is required. The certificate, issued by an expert, has to be submitted upon purchase or lease. It depends on the particular building and its size. Generally Furthermore, in special cases (for example, construction of heating speaking, a new construction has to be notified to the Building systems), further investigation of energy performance is necessary. Development Office (a particular municipality usually serves as a Building Development Office) or needs a permit issued by the Office. Alternatively, it may not require any of these. Depending on the kind of real estate, an occupancy permit may apply.

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13 Climate Change 13.3 Are there any other regulatory measures (not already mentioned) which aim to improve the sustainability of both newly constructed and existing buildings? 13.1 Please briefly explain the nature and extent of any regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions According to obligations arising from European Union legislation, trading scheme). various obligatory requirements for newly-constructed buildings and renovations apply, as well as special constructional requirements Act No. 383/2012 Coll., on Conditions of Emissions Trading, (for example, with regards to mechanisms and quality of isolation governs the issue of emissions trading schemes; the system is based materials). on the Kyoto trading system. National allocation plans determine Furthermore, a certificate on the energy performance of a building how many emission allowances can be allocated and how many of has to be obtained. them are allocated to the particular operator. Operators can trade the Czech Republic allowances between themselves.

13.2 Are there any national greenhouse gas emissions reduction targets?

Yes, the target is set by European Union legislation; it shall result in a 20% decrease by 2020.

JUDr. Richard Gürlich Ph.D. Mgr. Kamila Janoušková Gürlich & Co. Gürlich & Co. Politických vězňů 19 Politických vězňů 19 110 00, Prague 1 110 00, Prague 1 Czech Republic Czech Republic

Tel: +420 222 101 591 Tel: +420 222 101 591 Email: [email protected] Email: [email protected] URL: www.akrg.cz URL: www.akrg.cz

Richard Gürlich is the managing partner and founder of Gürlich & Co. Kamila Janoušková is an associate at Gürlich & Co. She graduated He is a graduate of the Law Faculty of Charles University in Prague from the Law Faculty of Charles University in Prague. She is a member and a member of the Czech Bar Association and The International of the Czech Bar Association. Her expertise includes commercial law Association for Contract & Commercial Management (IACCM). and business corporations, bankruptcy, civil law, civil procedure and real estate law. Richard has extensive experience in public procurement in the European Union, corporate law and business transactions, and his expertise also includes legal matters relating to real estate (i.e. the arrangement of developer projects, property transfers, lease and sublease agreements, etc.) and labour law. Richard Gürlich was awarded “Best Lawyer” of the year by ICFM Leading Lawyer 500 in 2016 and by LegalComprehensive in 2017.

GÜRLICH & Co. is a developed law firm with expertise in various branches of law. The firm’s main specialties include public procurement in the European Union, intellectual property, real estate, corporate and business law. Our law firm also organises seminars and lectures on the issues of intellectual property, public procurement and on the Civil Code. Our law firm is a member of the Association of European Lawyers (AEL) and as such we are part of an extensive network of independent law firms who work together on cross-border transactions and multi-jurisdictional casework. We have been the winners of many prestigious awards in various areas of Law since 2010. As for the newer ones, in 2015 we were awarded “The Best Law Firm” of the year by LegalComprehensive Golden Global Awards and “Law and Real Estate Law Firm” of the year in 2016 by Corporate INTL Magazine. In 2014 we were awarded “The Best Law Firm” of the year by Intercontinental Finance Magazine and “World Wide Financial Advisor” in 2013 by DealMakers. Richard Gürlich was awarded “Best Lawyer” of the year by ACQ Law Awards and as a Leading Lawyer by Intercontinental Finance Magazine. We provide legal services in both Czech and English.

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Dominican Republic

Prieto Cabrera & Asociados SRL Aimée Prieto

foreigners have the same rights as nationals and, therefore, can 1 Real Estate Law freely acquire land. However, to acquire land foreigners must register before the Dominican Tax Authorities and comply with all 1.1 Please briefly describe the main laws that govern applicable tax obligations. real estate in your jurisdiction. Laws relating to leases of business premises should be listed in response to question 10.1. Those relating to zoning 3 Real Estate Rights and environmental should be listed in response to question 12.1. Those relating to tax should be listed in response to questions in Section 9. 3.1 What are the types of rights over land recognised in your jurisdiction? Are any of them purely contractual In the Dominican Republic, the main laws governing real estate between the parties? (property rights and title to land) are the Constitution, the Property Registry Law No. 108-05 (the “Property Registry Law”), as The Dominican Republic Constitution (Article 51) establishes that amended and its implementing regulations, and the Condominium all persons have the right of enjoyment, use, and disposal of their Law 5038 of 1958, as amended. properties. The law also provides for long-term lease contracts, The Property Registry Law is complemented by regulations and as well as other rights that affect lands, such as easements and rules, as follows: mortgages. ■ Dominican Civil Code (DCC). Real property rights are divided into main real property rights, and ■ Resolutions issued by the Supreme Court of Justice and the accessory real property rights. Main real property rights are the Judiciary Council. right of ownership and its derivations (disposal, use, habitation, easements and long-term lease (enfiteusis) for which real property ■ Supplemental laws including: Incorporation of Family Asset Law No. 1024-1928, Conditional Sale of Real Estate Law No. rights are recognised. 596-1941, Expropriation Law 344-1943, National Cadastral Accessory real property rights include mortgages, pledges, liens and Law No. 317-1968, and Mortgage Market and Trust Law No. encumbrances, also real property security rights are recognised as 189-11. accessory real property rights. 1. Easement (Articles 637 and following of Dominican Civil 1.2 What is the impact (if any) on real estate of local Code). It can be imposed by law, due to the situation of the common law in your jurisdiction? properties or by agreement between the parties. 2. Usufructo (Disposal). (Articles 578-624 Dominican Civil The Dominican Republic is a civil-law jurisdiction. Common law Code). Can be given as guarantee or transferred. It can be has no impact on real estate in this jurisdiction. imposed by law or by agreement between parties. 3. Use and room (Dominican Civil Code, Articles 625-636). Limited as its name implies. Cannot be transferred or 1.3 Are international laws relevant to real estate in your assigned in any way. It is a contractual right. jurisdiction? Please ignore EU legislation enacted locally in EU countries. 4. Comodato (Loan for Use). (Articles 1875-1891, Dominican Civil Code). Contract where one of the parties delivers one thing to another for use, with the obligation to return it after Real estate law in the Dominican Republic is territorial. Therefore, having used it. international laws are not relevant for real estate. 5. Enfiteusis (type of real estate leasing with its origins in France). This is an eminently personal right that lasts between 2 Ownership 18 years and 99 years. It is only valid if it is recorded in the Title Registry. When registered, it can be offered as collateral and transferred. 2.1 Are there legal restrictions on ownership of real estate 6. Guarantees (mortgages, privileges, bond, pledge, anticresis, by particular classes of persons (e.g. non-resident conditional sale of real estate, leasing real estate). Articles persons)? 9095; 2011; 2071-2072; 2073-2084; 2085-2091 of Dominican Civil Code. According to the Dominican Republic Constitution and laws,

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6.1 Mortgages. The Dominican Civil Code provides for three In this regard, the Property Registry Law established a Guarantee types of mortgages: legal (Articles 2121-2122); judicial Fund in order to ensure the payment of an indemnity to any owner (Article 2123); and conventional (Articles 2124-2133). that results prejudiced without fault, because of the application of Among the legal mortgages, which provide a de facto right the law. Therefore, pursuant to the Property Registry Law when without the need of an agreement or judicial intervention, are: registering new real estate properties or conveyances of real estate (i) the mortgage of the wife over all assets of her husband; (ii) rights, the interested party must pay a contribution to the Guarantee the mortgage of minors over all the assets of their tutors; and (iii) the mortgage of the state, municipalities and other public Fund. However, to this date, this fund has not been enforced. establishments over the assets of collectors and administrators. 7. Improvements. Constructions made on land. 4.3 What rights in land are compulsorily registrable? Furthermore, principle V of Property Registry Law indicated that What (if any) is the consequence of non-registration? the law supersedes any private agreements. All conveyances of real property, all liens and encumbrances as well as other interests in real property (e.g. easements) must be recorded Dominican Republic 3.2 Are there any scenarios where the right to a in the Title Registry in order to be enforceable against third parties. real estate diverges from the right to a building constructed thereon? Pursuant to the Property Registry Law (Article 89) the rights in land that are compulsorily registrable are: Dominican law follows the principle of superficies solo cedit, where ■ Those which constitute, transmit, declare, modify or the owner of a land also owns the buildings and constructions extinguish real property rights. thereon built by a third party (Civil Code, Articles 551-553). If the ■ Those which impose encumbrances, liens and provisional owner does not want the improvement constructed on his land he measures on the land. may request that it be demolished, at the expense of the builder. If, ■ Those with administrative and legal limitations of a particular however, he decides to keep the building, he must pay for materials nature, such as easements, declarations of cultural heritage used and cost of labour (Civil Code, Article 554). and others that in any way limit or restrict the freedom of disposition of the property. ■ The rights of the condominiums on their exclusive unit, as 3.3 Is there a split between legal title and beneficial title well as the proportional part in the common areas. in your jurisdiction and what are the registration consequences of any split? Article 90 of the Property Registry Law indicates that registration is constitutive and valid of law, for liens or encumbrances registered, Under Dominican Law there is no split between legal title and making them enforceable against third parties. beneficial title; there is only one title deed for the owner. However, the doctrine and jurisprudence (as indicated above) have 4.4 What rights in land are not required to be registered? incorporated to the Dominican legal order the French figure of enfiteusis which is a real property right (in rem – on the property) Most rights in land are required to be registered, including that implies the assignment of the useful domain of a property for a mortgages, encumbrances and easements. The registration of leases long period of time, in exchange for the payment of a fee, transferring is not required by law; however, they can be registered. to said third party the charges and the operating risks of the leased property. Consequently, the owner of the property maintains the legal title of the real property while the enfiteuta holds the beneficial title 4.5 Where there are both unregistered and registered land and can, therefore, dispose (modify the property, build improvements, or rights is there a probationary period following first grant and acquire easements, transfer the right, use as collateral, registration or are there perhaps different classes or qualities of title on first registration? Please give among others), during the duration of the agreement of the property. details. First registration means the occasion upon which unregistered land or rights are first registered 4 System of Registration in the registries. There is no probationary period following first registration. 4.1 Is all land in your jurisdiction required to be Pursuant to Dominican Law, property rights are ranked according registered? What land (or rights) are unregistered? to the maxim “prior in tempore, potior in iure”, first in time, first in right. The priority corresponds to the first one to register. In According to the law, the Dominican State is the original proprietor the case of mortgages, it is possible to register as many ranks as of all lands of the national territory. All lands over which no person mortgage creditors exist. The lender in first rank will collect before can prove to have ownership shall be registered in the name of the any other lender. Dominican State. Therefore, in the Dominican Republic, all land must be registered 4.6 On a land sale, when is title (or ownership) transferred in the corresponding Title Registry. Any documents or agreements to the buyer? that establish or modify a property right are subject to registration; without registration, they are not enforceable against third parties. Ownership shall be deemed to be transferred as soon as the parties reach an agreement regarding the object and the price of the sale. 4.2 Is there a state guarantee of title? What does it However, it will only be enforceable against third parties upon guarantee? registration of the transfer with the corresponding Title Registry and after the payment of taxes. Dominican law establishes that any right registered in accordance Transfer of title is formalised in a public deed of sale and purchase with the law is irrevocable and enjoys the protection and absolute before a notary public or a private purchase and sale agreement guarantee of the State.

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between parties (the private agreement must be notarised). After that, the purchaser shall pay the transfer taxes and then register the 5.5 Are there restrictions on public access to the title with the corresponding Title Registry to protect the title against register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and third parties. other rights affecting real estate? However, if there is a right of first refusal through an option-to- purchase agreement, the beneficiary can register the right of The law establishes that the information contained in the Title first refusal in the land registry prior to executing the sale. This Registry is publicly accessible to anyone interested in knowing the registration protects his right to acquire the property against other legal status of a property. potential purchasers. The land jurisdiction has been in the process of being digitised since 2005. All new transactions are scanned. Each registry has 4.7 Please briefly describe how some rights obtain consultation room units where the registry’s electronic database is priority over other rights. Do earlier rights defeat later available to the public. The Title Registry’s also issue a legal status rights? Dominican Republic certification at the request of an interested party. However, it is highly recommended to contract an attorney and a land Please see the answer to question 4.5. surveyor for the due diligence and a more thorough investigation of the technical and legal aspects related to the real property. 5 The Registry / Registries 6 Real Estate Market 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules 6.1 Which parties (in addition to the buyer and seller and requirements. and the buyer’s finance provider) would normally be involved in a real estate transaction in your The National Title Registry Directorate is in charge of coordinating, jurisdiction? Please briefly describe their roles and/or directing and regulating the functions of the Title Registry Offices, duties. which are located throughout the country. Each office has limited jurisdiction over its land district, as assigned by the National Title The parties involved in real estate transactions in the Dominican Registry Directorate. As of August 2017, there are 27 Title Registry Republic are the following: Offices in the Dominican Republic. ■ Lawyers, to conduct the corresponding due diligence, to draft The Land Jurisdiction forms part of the Judiciary of the Dominican legal documents and to provide legal advice. Republic. ■ A Notary Public is required to legalise the signature of the parties in the purchase agreements and ancillary documents if applicable or to issue the public deed of transfer, as indicated 5.2 Does the land registry issue a physical title document before both instruments are valid. to the owners of registered real estate? ■ Real estate agents may facilitate the transaction. Yes, a physical title deed is issued to the owner of a registered real ■ Land surveyors are advisable to confirm the technical status of the land, and to conduct land survey procedures or updates, estate property. if required. ■ Any parties that have rights over the real estate property. 5.3 Can any transaction relating to registered real estate ■ Title Guaranty Companies, to provide escrow services in need. be completed electronically? What documents need to be provided to the land registry for the registration of ownership right? Can information on ownership of 6.2 How and on what basis are these persons registered real estate be accessed electronically? remunerated?

Transactions relating to real estate property cannot be completed Each party is responsible for the costs of its own advisors. These online. remunerations are freely negotiated with the service providers and However, the status of the requests filed in the Title Registries, the may be determined as a percentage of the purchase price or a fixed requirements, forms and services fees can be accessed at http:// remuneration. ji.gov.do/index.php/servicios-en-linea. Information of ownership of registered real estate can only 6.3 Do you feel there is a noticeable increase in be obtained personally at the consultation room unit of the the availability of capital to finance real estate corresponding Title Registry where the registry’s electronic database transactions in your jurisdiction, whether equity or is available to the public. However, this information will only be debt? What are the main sources of capital you see printed to the owner or an authorised representative. active in your market?

The main sources for real estate financing are: (a) Financial 5.4 Can compensation be claimed from the registry/ Institutions; (b) Private Lenders; and (c) Private Funds or Investors. registries if it/they make a mistake? “Foreign investment in the real estate sector grew about 35% during 2015, registering an amount of US$ 411.7 million. This sector The Property Registry Law (Article 39) establishes a Guarantee accounted for 18.5% of total investments at the national level, Fund to ensure the payment of an indemnity to any owner that as a result of the development of new projects and expansions” results affected without fault, as a consequence of the application (Behaviour of Foreign Direct Investment in the Dominican Republic. of the law. CEI-RD 2015).

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In 2016, the real estate sector had a direct foreign investment of US$ ■ for legal entities, a corporate authorisation, which shall 586.6 million, and during the first quarter of 2017 the investment include: authorisation of the transaction, appointment of legal was of US$ 145.2 million (statistics published by the Central Bank representative for the transaction, accurate description of the of the Dominican Republic on flow of funds from foreign direct real property, duly certified by the corresponding mercantile investment 2010–2017). registry; ■ evidence of payment of the price (for transactions over Also, with the Mortgage Market and Trust Law No. 189-11, created RD$1,000,000.00). The Anti-Money Laundering Law to improve the Dominican mortgage market and to cover more prohibits the payment in cash of any sale of real property over sectors of the population, the government has promoted policies and RD$1,000,000.00; and tax exemptions to facilitate the development of low-cost housing. ■ other taxes and stamps.

6.4 What is the appetite for investors and developers 7.2 Is the seller under a duty of disclosure? What matters in your region to look beyond primary real estate must be disclosed? markets and transact business in secondary or even Dominican Republic tertiary markets? Please give examples of significant secondary or tertiary real estate transactions, if The seller must act in good faith without concealing any information relevant. that, if known by the purchaser, would prevent the purchaser from completing the transaction. Articles 1116 and 2268 in the Capitals in credit portfolios have gone to various projects of Dominican Civil Code establish that “good faith” is presumable construction of new structures, remodelling of existing ones and the and the jurisprudence from Dominican Republic Supreme Court of acquisition of land for new tourism development initiatives. Justice sustains that the acquisition of a property that is supported Moreover, the Central Bank was recently authorised to implement by a deed free of liens and encumbrances is presumed as good faith. a mechanism to facilitate the financing of the massive construction of affordable housing by financial intermediation entities, both 7.3 Can the seller be liable to the buyer for to support public-private trusts for the development of low- misrepresentation? cost housing projects that are created under the provisions of the Mortgage Market and Trust Law No. 189-11, and to support other Under the Dominican Republic Civil Code, the owner of the initiatives for the construction of such housing projects. property must guarantee the purchaser or tenant against hidden defects (vicios ocultos) and against eviction. 6.5 Have you observed any trends in particular market The seller may be liable for losses and damages arising in connection sub sectors slowing down in your jurisdiction in with a misrepresentation if the misrepresentation involves material terms of their attractiveness to investors/developers? information, which would have changed the purchaser’s consent if Please give examples. known prior to the transaction. Also, contractual warranties are normally binding on the seller as After the 2008–2009 economic crisis, the real estate market has essential conditions which the purchaser has relied upon to consent been picking up and showing dynamic growth over the last few to the agreement, and as a result if any of them are proven to be years. Government incentives in the tourism sector, policies that false, this would effectively provide cause for the purchaser to facilitate the development of housing, as well as a steady increase unilaterally terminate the agreement. in tourists visiting the Dominican Republic and investors interested in new projects, have helped to diversify investment in the market. 7.4 Do sellers usually give contractual warranties to the buyer? What would be the scope of these? What is 7 Liabilities of Buyers and Sellers in Real the function of warranties (e.g. to apportion risk, to Estate Transactions give information)? Are warranties a substitute for the buyer carrying out his own diligence?

7.1 What (if any) are the minimum formalities for the sale The parties may agree on any provision within the contract without and purchase of real estate? prejudice to any public order matters. However, the sale agreement must necessarily include the price and the form of payment, a The minimum formalities for the sale and purchase of real estate are description of the property and of the parties. the following: There are other customary provisions, such as representations and ■ the purchase sale contract must be duly legalised by a notary warranties, including those against hidden defects on the property; public or a public deed of purchase must be issued by a notary delivery of the property; and a “privilegio del vendedor no pagado”, public; which is a lien against the purchaser if the price was not paid in ■ an original deed certificate for the corresponding property; full to the seller but the title deed was effectively delivered to the ■ a receipt of payment of the real estate property transfer tax; purchaser at closing. ■ an original certification from the Dominican Tax Authorities Other representations and warranties clauses are: the seller has all legal indicating that the property is current with the applicable rights with respect to the property and good title, and the property is taxes or that applies for a tax exemption; free of any liens and encumbrances; the property has not been leased, ■ a copy of the identity card or passport of the parties or their given as put-option, nor is it in use or occupied, whether legally or representatives, or tax ID certification issued by the Tax not, by any third party; the seller is up to date in any and all payments Authorities and Certificate of Mercantile Registry if a party of tax and for utility services in connection with the property; right is a legal entity. (Registration in the Mercantile Registry and of peaceful ownership, which stipulates that there are no claims of Tax Authorities is required for legal entities – local or foreign ownership by third parties regarding the real estate property; and there – with a commercial activity in the country); are no claims or litigation in progress that may affect the property.

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Warranties are not a substitute for buyers carrying out their own due The common proceedings for both legal and conventional mortgages diligence, since any actions against a misrepresentation or warranty are either: (i) amicable sale of the property if the mortgagor agrees would have to be presented before a judge in order to obtain relief on the purchase price (decision of the court to validate the purchase and the buyer would have to await a favourable sentence and then price); or (ii) sale by auction (decision of the court to initiate and initiate the execution process in order to obtain execution of the control the auction process). judgment.

8.4 What minimum formalities are required for real estate 7.5 Does the seller warrant its ownership in any way? lending? Please give details. There are no legal formalities or requirements for real estate lending All purchasers require the title deed or certificate of title and a by private parties. certification of status of liens and encumbrances on the property However, financial institutions require certain documents prior to issued by the land registry where the property is located. The Dominican Republic the authorisation of a loan and execution of the corresponding loan purchaser may require other evidence, such as surveys and tax and other ancillary agreements, such as: certifications. 1. Identity document of the debtor, if a married spouse’s identity document is required. 7.6 What (if any) are the liabilities of the buyer (in addition 2. Income documents (letters of employment, financial to paying the sale price)? statements, statements of accounts, etc.). 3. Appraisal of the property by an authorised appraiser. The purchaser is responsible for the payment of the purchase 4. Credit report or credit score. price and the applicable taxes, and must also proceed with the 5. To have a savings account with the lending bank. formalisation of the transfer of the property under his/her name in the corresponding title registry. 6. Title Deed of the property which has to be land-surveyed. 7. Certification of legal status of the property issued bythe corresponding title registry. 8 Finance and Banking 8. Certification from the Dominican Tax Authorities indicating that the property is current with the applicable taxes or that it applies for a tax exemption. 8.1 Please briefly describe any regulations concerning 9. Receipt of payment of the real estate property transfer tax. the lending of money to finance real estate. Are the rules different as between resident and non-resident 10. For legal entities, a copy of the bylaws and other incorporation persons and/or between individual persons and documents, a current Mercantile Registry certificate, all corporate entities? duly certificated by the corresponding Mercantile Registry Department of the Chamber of Commerce, a Tax ID There are no governmental permissions, approvals or licences certification, corporate authorisation for the sale and purchase of the property, duly registered before the corresponding required for foreign or domestic persons or entities to make real Mercantile Registry. estate loans secured by real property. For financial intermediation institutions restrictions may apply as provided by the Financial and 11. Life insurance policy, for personal loans. Monetary Law No. 183-02, and its amendments. Additionally, the Anti-Money Laundering Law includes obligations 8.5 How is a real estate lender protected from claims regarding source of funds. against the borrower or the real estate asset by other creditors?

8.2 What are the main methods by which a real estate See question 8.2 above. Mortgages grant a privilege to the registered lender seeks to protect itself from default by the creditor regarding unsecured creditors. borrower?

The customary real estate security instrument is the mortgage, 8.6 Under what circumstances can security taken by a which shall be registered before the corresponding Title Registry to lender be avoided or rendered unenforceable? be enforceable against third parties. If the security is not recorded before the corresponding title registry, the security could not be enforceable against third parties with 8.3 What are the common proceedings for realisation of privilege and, consequently, would have to concur with all other mortgaged properties? Are there any options for a mortgagee to realise a mortgaged property without creditors in case of execution of the real property. involving court proceedings or the contribution of the mortgagor? 8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? In respect to conventional mortgages only, there is an option for a mortgagee to realise a mortgaged property by direct attribution The debtor may attempt different actions, such as incidental claims of such property without involving court proceedings under two (with or without basis). Normally these claims tend to delay the conditions: (i) the attribution must be provided for in the deed of process, and postpone the sale in public auction. Among these mortgage; and (ii) in case of attribution, an expert will assess the incidental claims are the following: the nullity of the bailiff act value of the property listed before the competent court (judicial serving the notice of payment, repairs to the specifications of the expert). sale of the property filed in court, etc. If they are unfounded, the court must reject them and become aware of the sale at public

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auction. In some locations, the judge decides the incidental lawsuits the Taxing Authority can prove that the sale has been implemented and does not sell the property on the same day. When the judge as a share deal, the only purpose of which was to avoid transfer tax. issues a judgment, and does not sell on the same day, the debtor could appeal those decisions, and at the hearing of a sale, could 9.7 Are there any tax issues that a buyer of real estate request a dismissal, because those decisions of incidental lawsuits should always take into consideration/conduct due were appealed. There are judges who suspend the sale until all the diligence on? incidents are decided, although it is not the rule. In practice, they accumulate the incidental claims to decide them on the day of the The buyer, in his due diligence, must verify that the real estate public sale. On the day of the sale they read the final judgment and property tax (IPI), consisting in a 1% of the value of the property, on the same day, they sell in auction. The sale makes it difficult for is up to date and/or settled by the seller at the time of purchase, the debtor to appeal or appeal in cassation. Incidental claims should or the Tax Authorities may transfer the tax obligation and debts, not be appealed, although in practice it is a time-consuming tactic. with charges and interest, to the buyer at the time of payment of the transfer tax of the property on his behalf. Dominican Republic 9 Tax The buyer can request this information to the Taxing Authority by consent of the Seller.

9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable? 10 Leases of Business Premises

Transfer tax is 3% of the sale price or the value of the real estate 10.1 Please briefly describe the main laws that regulate property as appraised by the taxing authorities, whichever is highest. leases of business premises. Transfer taxes are due by the purchaser, although parties may freely provide otherwise in the purchase agreement. The main legal instrument for leases is the Dominican Civil Code.

9.2 When is the transfer tax paid? 10.2 What types of business lease exist?

The 3% transfer tax must be paid within six months of having There are no specific provisions in Dominican law regarding executed the document by which the transfer of the property business leases. operates, if not penalties will apply.

10.3 What are the typical provisions for leases of business 9.3 Are transfers of real estate by individuals subject to premises in your jurisdiction regarding: (a) length of income tax? term; (b) rent increases; (c) tenant’s right to sell or sub-lease; (d) insurance; (e) (i) change of control of Other than the transfer tax, no additional tax is paid in connection the tenant; and (ii) transfer of lease as a result of a to the transfer of real estate property. However, individuals may be corporate restructuring (e.g. merger); and (f) repairs? liable to pay capital gains for the sale of real estate property (see further in question 9.5 below). a) Length of term There are no legal restrictions on a minimum or maximum term, however, a term must be included and shall be agreed on by the 9.4 Are transfers of real estate subject to VAT? How much? Who is liable? Are there any exemptions? parties. b) Rent increase See question 9.3. Lease agreements usually provide a yearly increase in the rent in a fixed percentage or with reference to the national annual inflation set forth by the Dominican Central Bank. 9.5 What other tax or taxes (if any) are payable by the seller on the disposal of a property? c) Tenant’s right to sell or sub-lease The Civil Code allows tenants to assign the Lease Agreement Capital gains arising from the sale or transfer of property are subject or to sublease the property if it is not expressly forbidden in the to a capital gains tax at a flat rate of 27%. The taxable gain is agreement. computed by deducting the acquisition cost as adjusted by inflation d) Insurance from the gross selling price or the market value. Security deposit provisions are customary. It is also standard practice to include a provision regarding tenants’ obligation to cover damages. 9.6 Is taxation different if ownership of a company (or The law does not require insurances for leases, although it may be other entity) owning real estate is transferred? agreed by contract to include it. e)(i) Change of control of the tenant In addition, capital gains realised on sales of shares are subject to Change of control provisions may be provided for in commercial a 1% withholding tax. This has to be analysed on a case-by-case leases. Unless a change of control provision is included in the lease, basis. In principle, due to a recent reform, in cases where the object a change in the control of the shares of the tenant in and of itself of the transfer is the shares of the company owning the property, the does not cause the termination of the agreement. transfer is free of VAT and transfer tax if the underlying real property asset is connected to a business activity (e.g. lease activity), unless

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(ii) Transfer of lease as a result of a corporate restructuring (e.g. merger) 10.6 Does the landlord and/or the tenant of a business lease cease to be liable for their respective If the sale of the property is not a cause of termination in the lease obligations under the lease once they have sold their agreement, the purchaser is bound to the lease. The Dominican interest? Can they be responsible after the sale in Republic Civil Code states that the purchaser has to serve notice to respect of pre-sale non-compliance? the tenant in order for the transfer to be executed in his favour and against third parties (Article 1690). Unless otherwise provided for, landlord/tenants generally do not f) Repairs remain liable for their obligations, once they have conveyed their According to the Dominican Civil Code the tenant is obligated, interest. upon the termination of the Lease Agreement, to return the property in the same condition as it was originally received. As a result, the 10.7 Green leases seek to impose obligations on tenant must perform, at its own cost, the corresponding repairs, as landlords and tenants designed to promote greater

Dominican Republic needed. sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please briefly describe any “green obligations” commonly 10.4 What taxes are payable on rent either by the landlord found in leases stating whether these are clearly or tenant of a business lease? defined, enforceable legal obligations or something not amounting to enforceable legal obligations (for a) Tax on rental income example aspirational objectives). Rental income is subject to an income tax of 27% for legal entities and a 10% retention tax for individuals, the tax must be retained and No green lease obligations as such are provided for in the Dominican submitted to the Tax Authorities by the landlord. Republic’s legislation. b) Valued added tax (VAT) Leases are subject to 18% VAT. The landlord must submit the tax 11 Leases of Residential Premises retention to the Dominican Tax Authorities. c) Other taxes due by individual owners 11.1 Please briefly describe the main laws that regulate Owners may be subject to an annual property tax of 1% of the amount leases of residential premises. of their taxable real estate holdings exceeding RD $7,019,383.00 (approx. US$150,000.00). The main laws that regulate leases of residential premises are the Trusts are also subject to a 1% tax on the value of their taxable real following: estate holdings. ■ The Dominican Civil Code. ■ 4807 Decree on Rental and Control of Eviction of May 16, 10.5 In what circumstances are business leases usually 1959. terminated (e.g. at expiry, on default, by either party ■ Law No. 4314 dated October 22, 1955 that regulates the etc.)? Are there any special provisions allowing a provision and application of the securities in the tenancy, tenant to extend or renew the lease or for either party modified by Law No. 17-88 dated February 5, 1988. to be compensated by the other for any reason on termination? 11.2 Do the laws differ if the premises are intended for Leases are usually terminated in the following circumstances: multiple different residential occupiers? ■ term of the lease without renewal; No, the laws do not differ if the premises are intended for multiple ■ default or failure to comply with payment obligations and residential occupiers. other breaches of contract expressly provided for; ■ mutual consent; ■ destruction of the leased property; 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: ■ unauthorised use of the property, in the event that such (a) length of term; (b) rent increases/controls; (c) the situation negatively affects the landowner; tenant’s rights to remain in the premises at the end of ■ if the tenant subleases the property in whole or part if the term; and (d) the tenant’s contribution/obligation expressly prohibited; and to the property “costs” e.g. insurance and repair? ■ if the tenant performs modifications to the property without landowner consent. Typical provisions for a lease of residential premises are: Notwithstanding the Civil Code provisions regarding tacit or a) One year automatically renewable for the same time, in case automatic renewal of lease agreements, renewal or extension of the neither party notifies their interest in the termination, with a lease term, as well as compensation for termination, can be mutually period of 60 days in advance usually. agreed upon by the parties. b) An estimated annual increase of five to ten per cent (5–10%) in monthly payments. However, if there is a lease in force and effect, and the landlord and tenant agreed that the sale of the property was a cause of termination, c) The obligations of the tenant will persist until the real and effective delivery to the owner of the rented property and its the tenant shall have to negotiate a new lease agreement with the keys, delivery that will be verified by written receipt of the new owner as landlord, but the tenant is entitled to claim damages owner. from the seller under the rules provided by the Civil Code.

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d) The common services of electricity, water, garbage, cable, Information can be obtained online, on-site at the corresponding telephone and other taxes and/or general or municipal taxes, institution or at the One-Stop-Shop for Investment (www.cei-rd. are usually paid by the tenant. On the other hand, the tenant gob.do/en/investment/one-stop-shop/). is obliged to maintain the property in good condition; all the damages that occur during the term of the lease agreement shall be fixed and/or replaced at its only cost. 12.4 What main permits or licences are required for building works and/or the use of real estate?

11.4 Would there be rights for a landlord to terminate a The main permits and licences for building works and the use of real residential lease and what steps would be needed to achieve vacant possession if the circumstances estate are as follows: existed for the right to be exercised? ■ Certification of Non-objection of the use of Land issued by the corresponding city or municipal hall. Pursuant to Decree 4807, a landlord can only terminate a residential ■ Construction Permit duly issued by the Ministry of Public

lease and vacate the property under the following circumstances: Works. Dominican Republic ■ failure to pay due rent; ■ Certificate of Non-objection of use of Land issued by the Ministry of Environment and Natural Resource, if required. ■ use of the rented property for purposes different to what was agreed, if it affects the owner, public order or good manners; ■ Certification of Non-objection of use of Land issued by the Ministry of Tourism (if required). ■ total or partial sublease of the property if prohibited in the agreement; ■ Certification of approval by the National Bureau of Architectural Heritage (if required). ■ modification of leased property; ■ Approved waterworks plans by the Santo Domingo Water ■ if the property will subject to reparation, remodelling or new and Aqueduct Corporation or the National Institute of Potable construction; and Water and Sewers, as applicable, for residential developments ■ if the property will be occupied by the owner, his/her spouse of more than 10 housing units or in excess of 10,000 square or relatives. metres (107,639.1 square feet). ■ In the event that construction is performed within 60 metres 12 Public Law Permits and Obligations of the shoreline, a presidential authorisation is required.

12.1 What are the main laws which govern zoning/ 12.5 Are building/use permits and licences commonly permitting and related matters concerning the use obtained in your jurisdiction? Can implied permission and occupation of land? Please briefly describe them be obtained in any way (e.g. by long use)? and include environmental laws. Construction permits are commonly obtained in the Dominican Law No. 975-44, of June 29, 1944, sets forth the main legal Republic. Implied permission cannot be obtained in any way. provisions pertaining to zoning and the use of land. In addition, Law No. 64-00, of July 25, 2000, sets forth provisions 12.6 What is the appropriate cost of building/use permits regarding zoning in specific regions of the national territory, and and the time involved in obtaining them? also includes a series of limitations with regards to the use of lands declared as national parks or protected areas. The time involved in obtaining the building and use permits ranges from two to five months. It can take longer depending on the number of permits and the complexity of the plans filed for approval. 12.2 Can the state force land owners to sell land to it? If so please briefly describe including price mechanism. The cost of obtaining the necessary permits depends on the scale of the project. The Dominican Constitution (Article 51) establishes eminent domain powers on behalf of the Dominican government. The compensation 12.7 Are there any regulations on the protection of historic is determined by an agreement between the government and the monuments in your jurisdiction? If any, when and how landowner or by a ruling issued by the competent court. are they likely to affect the transfer of rights in real Property Registry Law provides that when real estate is expropriated estate? by the government, the corresponding land registry will not proceed to register the transfer of any rights regarding such property until The Dominican Republic Constitution (Article 64.4) provides that proof of compensation is provided. the cultural heritage of the Nation, material and immaterial, is under the protection of the State that will guarantee its protection, enrichment, conservation, restoration and value. The assets of the 12.3 Which bodies control land/building use and/or cultural heritage of the Nation, owned or acquired by the State, are occupation and environmental regulation? How do inalienable and unencumbered, and such ownership, imprescriptible. buyers obtain reliable information on these matters? Law No. 318-1978 for the Cultural Heritage of the Nation, provides that the State shall regulate all matters relating to the protection, All constructions must comply with building codes established by conservation, enrichment and utilisation of the cultural heritage of the Ministry of Public Works and, in tourist areas, by the Ministry the Nation. Furthermore, Law 492-1969 declares the Colonial Zone of Tourism. Land use and zoning permits are issued by the of Santo Domingo to be protected as cultural heritage. municipalities, the Ministry of Environment, and the Ministry of Tourism (if the property is located in a tourist zone).

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Dominican Republic Dominican Environmental Law requires that any person that causes mandates a review of targets to reduce emissions every five years damage to the environment or natural resources is held liable and until 2030. Additionally, it states that GDP must increase by 140% must repair such damage at their own cost. over the period 2010–2030. Also, the National Council on Climate Change and Clean 12.10 Please briefly outline any regulatory requirements Development Mechanism (NCCCDM), chaired by the President for the assessment and management of the energy of the Dominican Republic, is responsible to formulate policies to performance of buildings in your jurisdiction. prevent and mitigate GHG emissions and promote the development of programs, projects, and strategies for climate action. Ultimately, Currently there are no regulatory requirements in place for the the Council is responsible to ensure compliance with climate change assessment and management of energy performance of buildings commitments agreed with the United Nations. in our jurisdiction. However, Law No. 57-07 on Incentives for Renewable Energy grants incentives for the use of renewable 13.2 Are there any national greenhouse gas emissions energy, depending on the renewable energy technology associated reduction targets? with each project; up to 75% of the cost of equipment is granted, such as a single income tax credit, to owners or tenants of family The Dominican National Development Strategy 2030, signed into law dwellings, commercial or industrial buildings that change or expand in January 2012, sets the goal to reduce emissions by 2.8 tons per capita for renewable energy systems in the provision of their own private for 2030. Executive vice-president of the National Council for Climate energy consumption, and whose projects have been approved by the Change and the Clean Development Mechanism (CNCCMDL), competent government agencies. reported that in 2017 the Dominican Republic emitted 3.28 tons of CO2 per capita, according to the National Inventory of Greenhouse Gases carried out within the framework of the Third National Communication on Climate Change, which puts the Dominican Republic among the countries with the least gases emitted of Latin America.

13.3 Are there any other regulatory measures (not already mentioned) which aim to improve the sustainability of both newly constructed and existing buildings?

We are not aware of any other regulatory measures to improve the sustainability of either newly constructed or existing buildings.

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Aimée Prieto Prieto Cabrera & Asociados SRL C/Haim Lopez Penha No. 19, Paraiso Santo Domingo Dominican Republic

Tel: +1 809 541 1444 Email: [email protected] URL: www.prietocabrera.com

Dr. Aimee Prieto is partner at Prieto Cabrera & Asociados, a leading firm in real estate transactions and asset recovery in the Dominican Republic.

Dr. Prieto is a Certified Fraud Examiner (CFE) and an attorney from the Dominican Republic Dominican Republic with over 15 years of practice. She specialises in real estate transactions, asset recovery and investigations, and litigation management and supervision. In addition to providing legal services to foreign investors to purchase real properties and businesses in the Dominican Republic, Dr. Prieto’s recent representation includes serving as local counsel to the recovery of real estate acquired through fraudulent acts committed in the United States of America, and invested in the Dominican Republic and other countries of Latin America. Dr. Prieto is a listed arbitrator for the Centre for Alternative Dispute Resolution of the Chamber of Commerce and Production of Santo Domingo. “Aimee Prieto is highly responsive and the safest pair of hands in the Dominican Republic.” Who’s Who Legal, 2016.

Prieto Cabrera & Asociados, a leading firm in real estate transactions and asset recovery in the Dominican Republic. Prieto Cabrera & Asociados has ample experience providing legal services on: (i) real estate transactions (including acquisitions, sales, leases, condominiums, fractional ownerships, liens, mortgages, loans, foreclosures, negotiations, closings, etc.); (ii) foreign investment in the Dominican Republic; (iii) asset recovery and investigation in the DR and abroad; (iv) litigation management and supervision; (v) business organisation and corporate transactions; (vi) intellectual property; (vii) contractual documents review, draft and advice; and (viii) technology, privacy and data protection. Prieto Cabrera & Asociados is Dominican Republic’s only member of FraudNet, the fraud prevention network of the International Chamber of Commerce (ICC) Commercial Crime Services. FraudNet has been recognised by Chambers Global as the world’s leading asset recovery legal network.

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England & Wales Carol Hopper

Ropes & Gray International LLP Partha Pal

bribery and corruption control, (b) merger control (especially where 1 Real Estate Law real estate interests are held in a joint venture or co-investment vehicle), (c) economic sanctions, and (d) data privacy laws. 1.1 Please briefly describe the main laws that govern real estate in your jurisdiction. Laws relating to leases of business premises should be listed in 2 Ownership response to question 10.1. Those relating to zoning and environmental should be listed in response to question 12.1. Those relating to tax should be listed in 2.1 Are there legal restrictions on ownership of real estate response to questions in Section 9. by particular classes of persons (e.g. non-resident persons)? The main laws governing real estate in England and Wales are the Law of Property Act 1925 and the Land Registration Act 2002. No, there are not. The 1925 legislation simplified the system of legal and equitable interests in land such that from 1926 onwards only two types of 3 Real Estate Rights legal estate exist: (a) fee simple absolute in possession (usually referred to as freehold); and (b) leases (or leasehold). The land registration system was fully established in England and 3.1 What are the types of rights over land recognised in Wales by the Land Registration Act of 1925 and the Land Charges your jurisdiction? Are any of them purely contractual between the parties? Act of the same year. Since 1926 there remain only a small number of interests that do not require registration in order to bind a purchaser. These would usually be addressed by pre-transaction A large number of rights are recognised over land. The first are the enquiries raised by the purchaser’s solicitors. only estates (or interests of ownership) that can exist as legal estates being (a) freehold, and (b) leasehold. The Land Registration Act of 1925 has been replaced by the Land Registration Act 2002. It requires compulsory registration of the Secondly, there are a number of legal and equitable rights that can transfer of any freehold interest and the creation or transfer of be created over land owned by a third party. The vast majority any leasehold interest where there is more than a seven-year term of these must be registered (either at the Land Registry or in the remaining, as well as on the creation of a legal mortgage. Local Land Charges Register) in order to bind any purchaser. These include legal mortgages and restrictive covenants. The Law of Property (Miscellaneous Provisions) Act 1989 is the statute governing the formalities for the creation of land contracts Some rights can be created in contract only. The most significant which must be in writing, must incorporate all the terms relevant to of these are: (a) licences to occupy; and (b) options/rights of pre- the purchase in one document and be signed by both seller and buyer emption. (although this can be in identical counterparts). There are also a very limited number of rights that can be created without the need for a contract or registration, the main one of these is proprietary rights of anyone in actual occupation but there are 1.2 What is the impact (if any) on real estate of local others, such as customary rights (being those enjoyed by long users common law in your jurisdiction? in the local community but not the public at large) and public rights (such as in respect of fishing and navigation of water systems). Although a considerable amount of the legal framework for real These are considered to be rights that are capable of discovery either estate is statutory, English law is a common law system, so its by inspection or enquiry. interpretation and application is subject to common law and equitable principles. 3.2 Are there any scenarios where the right to a real estate diverges from the right to a building 1.3 Are international laws relevant to real estate in your constructed thereon? jurisdiction? Please ignore EU legislation enacted locally in EU countries. No, there are not. To a limited extent. In particular, those concerned with (a) anti-

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3.3 Is there a split between legal title and beneficial title 4.4 What rights in land are not required to be registered? in your jurisdiction and what are the registration consequences of any split? The main ones are proprietary rights protected by actual occupation, customary and public rights and other rights established by long users Yes, the legal title and beneficial title are distinct. The registration and leases for seven years or less. See the response to question 3.1. system to date has only been concerned with recording the details of the legal title to real estate. In the near future the registration system will be amended such that the beneficial title to real estate will have 4.5 Where there are both unregistered and registered land to be registered where the legal title is held by a non-resident entity. or rights is there a probationary period following first registration or are there perhaps different classes This change has been consulted on and the results of the consultation or qualities of title on first registration? Please give and the draft legislation are awaited. The change is driven by the ever details. First registration means the occasion upon increasing desire for transparency in the global fight against corruption.

which unregistered land or rights are first registered England & Wales It is supplemented by existing legislation that requires companies in the registries. and partnerships in England and Wales to keep a register of those persons who have “significant control” over the entity concerned. In England and Wales there are four different classes of title. However, on the transfer of a legal title, the beneficial title if divided Title absolute is the best quality of title and establishes the owner from it, say because it is held on a trust, will be overreached. The as having an indefeasible right to the legal estate described in the beneficiaries (the owners of the beneficial title) will have rights in register (whether freehold or leasehold). The majority of titles are relation to the resulting proceeds from the sale but would not have registered with title absolute. rights to overturn the sale. Possessory title is usually only granted where the person applying is either in actual possession of the land (or in receipt of the rents 4 System of Registration and profits from it) but where the title is based on a possessory claim rather than any documentary evidence. For more detail on claims based on adverse possession, see below. 4.1 Is all land in your jurisdiction required to be Qualified title is very rare. It has a similar effect to title absolute registered? What land (or rights) are unregistered? save for the part of the title that has been “qualified”; where the identified defect effectively falls outside the registered estate. There is a compulsory registration system for land in England and Good leasehold title occurs only in leasehold titles and when the Wales. This is triggered by any transaction involving the transfer or Land Registry has not been able to approve the landlord’s title to mortgaging of land (even if not already registered). The country- grant the lease. wide compulsory registration system came into effect in 1990 (and for some areas, pre-dated that date). Title based on adverse possession historically was established by proving at least 12 years’ adverse possession (that is, actual Around 80% of land in England and Wales is registered and the possession of the land in question or receipt of the rents and profits in remaining unregistered title is mainly in rural areas. respect of it and a clear indication of the claim to ownership, such as the erection and maintenance of boundary features). However, since 4.2 Is there a state guarantee of title? What does it 2002 a completely new system has been established for registered guarantee? land. In the case of a registered estate, however long the period of adverse possession may be, the only right a “squatter” has to register Yes, in effect for all registered titles, since the register can only be any rights is a right to apply to be registered as proprietor after 10 altered in certain limited circumstances, in order to correct a mistake, years of adverse possession. If the registered proprietor objects but any registered proprietor who suffers loss in consequence then the application will be unsuccessful (save for very limited (assuming no fraud or lack of proper care) would be entitled to an circumstances). Where a squatter’s application to be registered as indemnity from the Land Registry. proprietor of the property has been rejected, the registered proprietor must then evict the squatter (or legitimise their occupation by the grant of an appropriate interest) within two years, failing which the 4.3 What rights in land are compulsorily registrable? What (if any) is the consequence of non-registration? squatter may re-apply and, provided he has continued in adverse possession for those two years, his application will succeed. The transfer of any freehold interest and the creation or transfer of any leasehold interest where there is a term remaining of more than 4.6 On a land sale, when is title (or ownership) transferred seven years, as well as on the creation of a legal mortgage, are all to the buyer? compulsorily registrable. The effect of non-registration is that: In the case of an unconditional contract for sale (with a later date set for completion), the equitable (or beneficial) title passes at exchange (a) for a freehold transfer of the legal estate, the transfer is void and the legal estate reverts back to the seller who holds it on of contracts. a bare trust for the buyer; and If there is a simultaneous exchange and completion, the equitable (b) for the grant or transfer of a lease or the creation of a legal (or beneficial) title passes at completion. mortgage, the transaction has effect as a contract made for Legal title will only pass on completion of the registration of the valuable consideration to grant the lease or mortgage. transfer at the Land Registry. For both, the effect is that the transaction takes effect in equity, but The main significance of this is that the property will be “on risk” not law. The failure to register means that the transaction could for a purchaser from the date on which the beneficial title transfers. lose priority as against a subsequent transaction and may not bind successors in title.

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the party registering applied for it to be so and the Land Registry 4.7 Please briefly describe how some rights obtain accepted the reason for requesting that it remain confidential). priority over other rights. Do earlier rights defeat later rights? A buyer will obtain a lot of key information from a search of the Land Register, but would need to carry out other searches and enquiries to obtain all the information he would reasonably want to ascertain Generally the priority of rights is determined by the date of creation. regarding encumbrances and rights affecting any real estate. If, however, a right must be registered and it is not, within the priority period of a Land Registry search, a later right will not be subject to it. 6 Real Estate Market In the context of legal and equitable rights, legal rights will generally take subject to rights in equity that have already been created therefor. 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally England & Wales There are exceptions to this. One of the main exceptions is that be involved in a real estate transaction in your a later legal charge will rank ahead of an earlier equitable charge. jurisdiction? Please briefly describe their roles and/or duties.

5 The Registry / Registries Selling or letting agents who (depending on the type of transaction) market the land and negotiate the main commercial terms of the 5.1 How many land registries operate in your jurisdiction? transaction with the buyer or the buyer’s agent. Agents usually If more than one please specify their differing rules operate on a commission or fixed fee basis (sometimes calculated and requirements. by reference to the price) which is payable at completion. Lawyers who, for the buyer, carry out the title investigation There is one registry for land ownership, known as the Land (including raising the necessary searches and enquiries) and, for Registry, and formerly known as HM Land Registry. both parties, who negotiate the legal documentation to give effect to the transaction and attend to exchange and completion of that documentation and all post-completion matters. Lawyers are 5.2 Does the land registry issue a physical title document to the owners of registered real estate? remunerated on a time or fixed fee basis payable at completion. Surveyors are usually engaged to carry out structural and condition No longer. The register is now electronically available to anyone surveys of the property and possibly detailed environmental or other wishing to search it. technical due diligence matters. They will generally be paid a fixed fee on completion of their work.

5.3 Can any transaction relating to registered real estate Accountants may be instructed to advise on structuring and tax be completed electronically? What documents need mitigation matters (although often this will be dealt with by lawyers). to be provided to the land registry for the registration Notaries are not required in any real estate transactions in England of ownership right? Can information on ownership of and Wales. registered real estate be accessed electronically?

The intention for the future is for there to be electronic signatures and 6.2 How and on what basis are these persons full electronic conveyancing to be available but currently, no deeds remunerated? can be completed electronically save for very limited exceptions, such as for the discharge of a registered charge. Rules are in place See the response to question 6.1 above. to allow this in the future for legal charges also. Applications to register any completed transaction can be submitted 6.3 Do you feel there is a noticeable increase in electronically and most are. A copy of the document of transfer (on the availability of capital to finance real estate the correct Land Registry form) would be included in the application transactions in your jurisdiction, whether equity or together with appropriate statements from the solicitor submitting it debt? What are the main sources of capital you see active in your market? as to possession of the original. The application must be submitted on the correct Land Registry form and must also include a certificate Data from 2016 indicates that there was a further slowdown in of payment of the stamp duty land tax triggered by the transaction. overall real estate activity (although activity remained 12% above The registers at the Land Registry are fully accessible electronically. the 10-year average). The market has undoubtedly stabilised following the UK’s vote to leave Europe (Brexit) and whilst it has 5.4 Can compensation be claimed from the registry/ had some impact on certain markets, notably the London office registries if it/they make a mistake? market, its impact has been far less significant than first feared and London in particular, continues to benefit from significant capital Yes. See the response to question 4.2 above. flow, especially from Asia, led by Hong Kong, Chinese and Korean investors.

5.5 Are there restrictions on public access to the As far as the availability of debt finance, it is clear that traditional register? Can a buyer obtain all the information he providers of real estate finance have retrenched somewhat under the might reasonably need regarding encumbrances and greater capital constraints imposed by increased regulation since other rights affecting real estate? the global financial crisis, but this has created an opportunity for other interested parties, particularly in the private equity field, and There are no restrictions on access to the register (although some the number of debt funds generally (including in real estate) has information in some registered deeds may have been obscured if increased significantly.

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sale (either on its face or by identifying the document that contains 6.4 What is the appetite for investors and developers the remaining terms). The contract must be signed by both seller in your region to look beyond primary real estate and buyer (although this can be done in counterparts of the same markets and transact business in secondary or even document and usually is). tertiary markets? Please give examples of significant secondary or tertiary real estate transactions, if A transfer (and some other land documents) must be by deed duly relevant. executed by the seller (and usually by the buyer, who normally provides indemnity covenants on title matters). Where registered Since the UK voted to leave Europe, there is less appetite for risk; land is involved, the form of documentation must follow that however, secondary (and even tertiary) markets remain of interest required by the Land Registry. as the scarcity of supply and continued high prices in prime markets To obtain a legal estate, the transfer must be registered at the Land means opportunities in prime areas are reduced. The search for Registry within the correct priority period post-completion. product for many investors has focused on alternative sectors, as investors seek to diversify. England & Wales 7.2 Is the seller under a duty of disclosure? What matters Notable beneficiaries of this search include student accommodation, must be disclosed? senior living accommodation and the private rented sector. Others that have delivered a higher than average return include industrial There is no general duty of disclosure on a seller, but the buyer and logistics. would usually raise enquiries of the seller and the seller would be Many investors profess a reticence to invest in retail, as the impact under a duty not to give any misleading answers. The title covenants of e-commerce continues to influence that sector. imposed on a transfer also mean that the seller will be under a duty Examples include the purchase by the development arm of Mace to disclose encumbrances of which it is aware and any defects in of a 2.5 acre site in central Sheffield with proposals to turn this title not apparent on an inspection. into a 550-bedroom student accommodation scheme. In addition, it was reported early in September this year that Crosslane Student 7.3 Can the seller be liable to the buyer for Developments has started work on a student accommodation misrepresentation? development in a former car park, located to the north-west of Leeds city centre, after successfully completing another 437-bedroom Yes, if the untrue statement induced the buyer to purchase and the development in Sheffield in that month. buyer suffers loss as a result. In the private rented sector, the Angel Gardens development, the flagship scheme of Moda Living – a partnership between Caddick 7.4 Do sellers usually give contractual warranties to the Developments and Generate Land – in the centre of Manchester, buyer? What would be the scope of these? What is received planning committee approval earlier this year. the function of warranties (e.g. to apportion risk, to It will include 466 apartments and 20,000 sq. ft. of mixed-use give information)? Are warranties a substitute for the commercial space across 35 floors. buyer carrying out his own diligence?

On an asset purchase it would be unusual for the seller to give 6.5 Have you observed any trends in particular market contractual warranties but there would be implied title covenants sub sectors slowing down in your jurisdiction in terms of their attractiveness to investors/developers? confirming the seller has the title that it purports to hold and has Please give examples. not encumbered it (save as disclosed) and the seller would reply to a usual comprehensive set of enquiries and be liable for any In terms of slow down, the most significant areas would be London misrepresentation in replying (see the responses to questions 7.3 offices and retail, but even here there remains a reasonable amount and 7.5). of activity and the impact is more on volume of transactions than If the entity that owns the real estate is acquired (rather than the underlying value per se. property itself) then it would be usual for contractual warranties to Examples of activity in these sectors include: be given and these would cover title, ownership matters, disputes, notices, planning, and if the property is let, usual landlord and tenant The London Fruit and Wool Exchange, being one of the largest matters. Warranties are designed to both allocate risk between the developments in London, adjacent to Spitalfields Market in E1. The parties for some key elements but also to flush out information. scheme will deliver 320,000 sq. ft. of new grade A space, including They are not considered a substitute for doing buyer due diligence 260,000 sq. ft. of office and 40,000 sq. ft. of retail, restaurant, café, and a normal title investigation would also usually be carried out. SME and community space, and is due for completion in Spring This would still be the case where warranty and indemnity insurance 2018. Other notable developments in the heart of the City include is obtained in respect of the warranty protection provided (which is 22 Bishopsgate, 100 Bishopsgate and The Scalpel, all delivering the norm in the commercial real estate market now). multi-storied office and retail space, set for completion between the end of 2017 and 2019. 7.5 Does the seller warrant its ownership in any way? Please give details. 7 Liabilities of Buyers and Sellers in Real Estate Transactions Yes. In the implied title covenants on an asset sale. There are two forms of statutory warranty.

7.1 What (if any) are the minimum formalities for the sale Full title guarantee, where the seller warrants he has the title he and purchase of real estate? purports to sell and it is free from charges, encumbrances and third party rights (other than those the seller does not know and could not A written contract must be exchanged that contains all the terms of reasonably be expected to know about).

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Limited title guarantee, where the seller warrants he has the title where the asset is subject to a development or operating agreement). he purports to sell and that he has not encumbered, charged or Occasionally, a lender will require a guarantee from the sponsor of created third party rights over it. the borrower or from a credit-worthy third party or will require a Most sales would be with full title guarantee. cash reserve to be created to cover a specifically identified risk. On a sale of the entity owning the real estate asset it would be usual Financial Covenants: generally, a lender will require that there are for the seller to warrant he is the legal and beneficial title holder financial covenants imposed on the borrower which relate tothe free from encumbrances, charges and third party rights other than financial performance of the asset which is being financed. The first as disclosed or he could not be reasonably expected to be aware of. type of covenant (known as an interest cover ratio or debt service cover ratio) compares the income generated by an asset to the cost of servicing the debt, in each case over prescribed periods. The second 7.6 What (if any) are the liabilities of the buyer (in addition type of covenant (known as a loan-to-value ratio) compares the to paying the sale price)? principal amount of the debt to the value of the asset being financed. England & Wales A prudent lender will set both a default level test for the financial It would be usual for a buyer to give indemnity covenants in relation covenants (at which point a loan will default though there may still to any ongoing liability that the seller has post-sale, such as in be sufficient cash flow/value for payment to be made in full) and relation to landlord covenants. a cash trap level test (at which point no surplus cash flow will be returned to the borrower but will be trapped in a cash reserve as 8 Finance and Banking additional security for the obligations in respect of the loan).

8.3 What are the common proceedings for realisation of 8.1 Please briefly describe any regulations concerning mortgaged properties? Are there any options for a the lending of money to finance real estate. Are the mortgagee to realise a mortgaged property without rules different as between resident and non-resident involving court proceedings or the contribution of the persons and/or between individual persons and mortgagor? corporate entities? In the UK, enforcing security interests through court proceedings is The lending of money in the UK for the purposes of financing the exception and not the rule. Both under the applicable law (the investment in commercial real estate is generally not subject Law of Property Act, 1925) and under the contractual instruments to regulation. The exception to this is where the borrower is an that create the security interests, the lender will have the right to individual. In these circumstances, the lending may be subject to appoint a “receiver” following the occurrence of a default. The the Consumer Credit Act, 2006, though there are a number of safe receiver has the power to dispose of the asset and realise value for harbours that may apply to exempt such lending from regulation. the benefit of the lender. The receiver will have a similar power in In addition, lending institutions that are regulated by the Financial respect of the ownership interests of the borrowing entity. No court Conduct Authority, one of the UK’s financial regulators, will be proceedings are required to do this. While the receiver is the agent subject to undertaking their business activities in accordance with of the borrower, its primary duties are owed to the lender and it does the standards prescribed by it. not require input from the borrower or orders from the courts in For completeness, the lending of money to finance the purchase of order to exercise the rights it has. residential real estate assets is a regulated activity.

8.4 What minimum formalities are required for real estate 8.2 What are the main methods by which a real estate lending? lender seeks to protect itself from default by the borrower? There are no formalities. The grant of security interests have certain formalities that must be complied with such as security documents This depends on the approach the lender takes to risk management having to be executed by way of deed rather than under hand and (and different lenders adopt different approaches). However, the having to be registered in accordance with applicable statutory most common ways are as follows: requirements. As described above, the provisions of the Law of Structure of the Transaction: lenders will generally require that Property (Miscellaneous Provisions) Act have to be adhered to in the assets that they are financing are held by entities whose activities undertaking any dealings in the context of real estate assets. are limited to owning, managing and financing those assets. By imposing this limited purpose obligation on borrowing entities, 8.5 How is a real estate lender protected from claims lenders seek to minimise the risk that these entities will incur against the borrower or the real estate asset by other financial liabilities which are unrelated to the assets that they are creditors? financing. Security Package: there is a package of security interests that is As indicated above, the first protection is ensuring that the borrower generally required by lenders. The key elements of this are a charge is prohibited from having creditors that are unconnected with the by way of legal mortgage over the assets that are being financed ownership, management and financing of the assets. The second (usually simply referred to as a “mortgage”) and a charge over all of protection is managing the cash flows generated by the assets that the cash flow generated by the assets which must be collected into are being financed to ensure that liabilities that have arisen through bank accounts which are controlled by the lender or the security the borrower owning, managing and financing the assets are paid off agent appointed by it, thus minimising the possibility that there before any surplus cash flow is released to the borrower. The third is cash flow leakage or misapplication. In addition, the security protection is the security package. The security package prevents package will include a charge over the ownership interests in the other creditors from making claims in respect of the assets (though borrowing entity and a charge over contractual rights (particularly not the borrower itself).

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8.6 Under what circumstances can security taken by a Rate per band Consideration band lender be avoided or rendered unenforceable? 10% £925,001–£1,500,000 12% £1,500,001+ There are several theories on which this can happen. The first is where a specific transaction avoidance theory applies (a transaction In addition, a supplemental 3% SDLT charge applies to each rate avoidance theory is one which generally applies when a transaction band for purchases of second or additional residential properties. is undertaken within a prescribed period of time before a borrower A higher rate of 15% applies to residential purchases over £500,000 becomes subject to an insolvency process). The most common of by certain corporate vehicles though a number of exemptions and these are (a) transactions at an undervalue, which could apply if reliefs are available including, for example, for genuine property the security granted is disproportionate to the debt owed, and (b) investors, developers and traders. preferences, which would apply if the security has been granted in In Scotland, SDLT has been replaced with the similar Land and favour of one creditor to benefit it over others. A security interest Buildings Transaction Tax. In Wales, it has been announced that England & Wales can also be avoided where it contravenes the principle of pari SDLT will be replaced with a new tax on land transactions from passu distribution (which would happen if the security came into April 2018. existence only on the advent of winding up); if the security interest was not registered in accordance with the applicable legislation; if the security was granted to defraud creditors; or if the security 9.2 When is the transfer tax paid? secures an extortionate credit bargain. Generally, lenders obtain comfort through the financial and legal due diligence processes that Payment of any SDLT due is required to be made within 30 the circumstances which give rise to these situations will not apply. days of the “effective date” of a transaction. The effective date of a transaction is the earlier of completion of the transaction or 8.7 What actions, if any, can a borrower take to frustrate “substantial performance” of the contract (the point at which the enforcement action by a lender? buyer takes possession of the whole or substantially the whole of the subject matter of the transaction or where a substantial amount In the UK, these are operational rather than legal in nature. The of any non-rental consideration is paid or the first payment of rent most common step that borrowers can take involves withholding is made). information that a lender may require in order to take enforcement action. For example, if the lender requires an up-to-date rent roll 9.3 Are transfers of real estate by individuals subject to in order to start a sales process, the borrower may not provide this. income tax? Another very common step that borrowers take is mismanaging the asset by not complying with maintenance obligations or obligations The transfer itself will not be subject to income tax, but if the to collect rent or insure the asset. Finally, where the asset manager is transfer represents a sale in the course of a trading activity, then an affiliate of the borrower, the asset manager may take prejudicial the individual is liable to pay tax on any profit made from the sale. action in respect of tenants, such as granting concessions in terms of rent, just to make the asset less attractive to a subsequent buyer. It is thus important that a lender has the right to exercise effective 9.4 Are transfers of real estate subject to VAT? How operational control. much? Who is liable? Are there any exemptions? A lender will usually take practical precautions to protect itself against these possibilities, including often having a third party asset In general, supplies of commercial real estate are exempt from VAT. manager with a duty of care owed to the lender. An election can be made to opt to tax commercial real estate which makes the property which is opted subject to VAT at the standard rate (currently 20%). Any sale of land which is subject to an option 9 Tax to tax is subject to VAT. It is common practice for owners of UK commercial real estate to opt to tax. Sales of incomplete commercial buildings, and sales of new freehold commercial buildings (being 9.1 Are transfers of real estate subject to a transfer tax? less than three years old) by persons who did not construct them, are How much? Who is liable? automatically standard rated. Where VAT applies to a transaction, the consideration is usually expressed as exclusive of any VAT Buyers of land are required to pay stamp duty land tax (“SDLT”). such that VAT is paid in addition to the consideration. The seller is For leases, specific rules govern the calculation of SDLT by required to account to the UK tax authority for the VAT. reference to the rent due. The current SDLT rates for non-rental consideration for commercial or mixed use properties are: Where a sale is of a commercial property which is let, the sale can be treated as being outside the scope of VAT by virtue of being a Rate per band Consideration band transfer of a letting business as a going concern (commonly known as a “TOGC”) provided that the buyer continues the letting business, 0% £0–£150,000 also opts to tax the property and notifies the UK tax authorities of 2% £150,001–£250,000 such option. 5% Over £250,000 Transfers of residential real estate are exempt from VAT. For residential properties the rates of SDLT are:

Rate per band Consideration band 9.5 What other tax or taxes (if any) are payable by the seller on the disposal of a property? 0% £0–£125,000 2% £125,001–£250,000 UK resident companies pay corporation tax at the rate of 19% (to be 5% £250,001–£925,000 reduced to 17% in April 2020) on any capital gain which arises from

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the transfer of property held as an investment. If property is held case there is no right to remain or a new lease at the end of the term as an item of trading stock, profits realised from its transfer will be of the lease, nor any right to compensation. subject to corporation tax on income at the same rate. The Landlord and Tenant (Covenants) Act 1995 applies to all Non-trading individuals who are liable to UK income tax at the leases (known as “new leases”) granted on or after 1 January 1996 top marginal rate and trustees pay capital gains tax at the rate of (unless created pursuant to an agreement that pre-dates that date). 28% subject to applicable reliefs and exemptions including private It amends the previous “privity of contract” rule that made the residence relief. original parties bound to the commitments entered into as landlord Non-UK residents (companies or individuals) generally pay no or as tenant for the duration of the lease term, even after they had tax on the disposal of a property where that property is held as an sold their interest or those obligations had been varied. investment, although (i) disposals of high-value (over £500,000) For so-called “new leases”, any tenant is automatically released residential properties by non-UK companies and other corporate from its obligations as tenant on a sale (provided, if landlord’s prior vehicles may be subject to a type of capital gains tax (known as

England & Wales consent is required, it has been obtained) and a landlord would be ATED-related CGT), currently at the rate of 28%, and (ii) from released on a sale if it is reasonable in the circumstances and the April 2015, non-resident CGT applies to all sales of residential correct release procedure is followed. properties by non-residents at the rate of 28% (20% for non-resident Any outgoing tenant is likely to remain liable on the tenant covenants companies), in each case subject to various exemptions and relief under a lease, however, until his purchaser sells (with the landlord’s and without double counting if ATED-related CGT is payable as consent if this is required), as it is market practice for the outgoing that takes priority. tenant to guarantee the obligations of its purchaser until that point.

9.6 Is taxation different if ownership of a company (or other entity) owning real estate is transferred? 10.2 What types of business lease exist?

Yes. Stamp duty at a rate of 0.5% is charged on a sale of shares Those with the benefit of security of tenure and those without. See in a UK incorporated company. SDLT does not apply to indirect the response to question 10.1 above. As to the form of lease, there purchases of real estate (i.e. the purchase of shares in a corporate is no “standard” and these are negotiated documents, although vehicle owning real estate as opposed to a purchase of the real estate market practice has evolved such that there are “typical” or market itself). VAT is not payable on a share purchase. The taxation of any standards. See the response to question 10.3 below. gain arising from a disposal of a company rather than a property may also be different to the taxation of a gain arising from a direct 10.3 What are the typical provisions for leases of business disposal of real estate. premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or sub-lease; (d) insurance; (e) (i) change of control of 9.7 Are there any tax issues that a buyer of real estate the tenant; and (ii) transfer of lease as a result of a should always take into consideration/conduct due corporate restructuring (e.g. merger); and (f) repairs? diligence on? “Typical” is very sector driven. It also reflects the age, type and A buyer of real estate should always consider: condition of the property concerned. ■ the VAT position of a commercial property and its seller; Length of term. Office leases are “typically” 10 years (sometimes ■ any capital allowances (the tax equivalent of depreciation for longer but no more than 15 years usually; possibly with break rights capital expenditure) that may be available to reduce future tax at fixed points) and sometimes shorter; increasingly more tech-based on income; and tenants are looking for shorter terms, including co-working space on ■ SDLT. very short-term leases. Retail, logistics, warehousing, industrial and others also might have a 10- or possibly a 15-year term, but may negotiate break rights tied to rent reviews. 10 Leases of Business Premises Rent reviews. These would typically be every five years on an upwards-only basis to open market rent (but again, it is becoming 10.1 Please briefly describe the main laws that regulate increasingly common to have annual increases tied to an inflationary leases of business premises. increase only). Fixed increases are also sometimes negotiated. Tenant’s right to sell. It would be very usual for a tenant to be able The Landlord and Tenant Act 1954 gives security of tenure to to sell the lease but for the landlord’s consent to be needed (not to be occupying tenants of business premises at the contractual end date of unreasonably withheld). It is also usual for other conditions to be their lease. It allows an occupying tenant to remain in the business imposed on a sale and for most of these to be pre-agreed and set out premises and to call for a new lease of them, unless the landlord in the lease – such as the rent being fully paid. can show a limited number of grounds for requiring the property Rights to sublet are often dictated by the size of the space, although back. The main ground for a landlord in claiming back a property a right to sublet whole would be considered usual. The landlord’s is because it wishes to redevelop the whole or a substantial part of consent would again be required (not to be unreasonably withheld). the property and needs vacant possession in order to do so. If the Again, pre-agreed conditions would be usual. The number of landlord successfully proves that he is entitled to take the property subleases is often controlled. back, the occupying tenant has a right to compensation in most Insurance. The normal position would be for the landlord to circumstances, but not where the reason for the landlord succeeding insure but then to recover the costs of doing so from the tenant(s). is due to the tenant’s default. Occasionally, in a lease of whole, the tenant may insure but then It is possible to contract out of the security of tenure regime will also take on commitments regarding re-instatement and have described above, provided certain procedures are followed, in which an unqualified obligation to repair.

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Change of control. It would be very unusual indeed for there to be any control or notice requirements on change of ownership of the 10.7 Green leases seek to impose obligations on tenant or merger activity. landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of Repairs. The tenant is likely to be responsible for all repairs if the the “environmental footprint” of a building. Please letting is of whole, or to be liable for the interior of its demise and briefly describe any “green obligations” commonly to contribute its fair contribution to these costs for the exterior and found in leases stating whether these are clearly structure, if it is a letting of part. defined, enforceable legal obligations or something not amounting to enforceable legal obligations (for example aspirational objectives). 10.4 What taxes are payable on rent either by the landlord or tenant of a business lease? Green lease obligations are not normal in the UK market, although some institutional landlords did require some provisions when the VAT will be payable on rent by a tenant of a commercial property environmental legislation regarding the CRC Energy Efficiency England & Wales where the landlord has elected to waive the VAT exemption (that would Scheme was first introduced. otherwise apply to all land transactions). The landlord will be required It may be that these provisions will increase, given that 2018 to account for such VAT to the UK tax authority. The tenant may be legislation is to come into effect that will restrict lettings of buildings able to recover the VAT depending on its VAT recovery position. with energy performance certificates with F or G ratings. Rent will be seen as income in the landlord’s hands and subject to Some leases do seek to add restrictions controlling alterations UK corporation tax or UK income tax (as applicable). The rent that are considered to have an adverse impact on the rating of the should be a deductible expense for the tenant. building for both its EPC certificate and compliance with the CRC SDLT is payable by the tenant assessed against the overall rental regime. sum due but with a discount for later rent payments.

11 Leases of Residential Premises 10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a 11.1 Please briefly describe the main laws that regulate tenant to extend or renew the lease or for either party leases of residential premises. to be compensated by the other for any reason on termination? The Rent Act 1977 (RA 1977), the Housing Act 1988 (HA 1988) Business leases can be terminated by a landlord on default by the and the Housing Act 1996 (HA 1996) are the primary statutes that tenant (subject to a general equitable right to make good the defect, regulate leases of residential premises. Until January 1989 most and resurrect the lease as a consequence, where the defect is capable residential tenancies were regulated by the RA 1977 and a tenant of remedy). These default rights are usually tied to non-payment of under the RA 1977 is a regulated tenant. Assured tenancies were rent, material tenant breach or tenant insolvency. introduced by the HA 1988 (which came into force on 15 January 1989) and from that date, a tenancy was automatically an assured Tenants and (less often) landlords may negotiate a contractual right tenancy if the conditions set out in the HA 1988 were met, though to break a lease at specific points during the term. Tenant’s rights a landlord could serve notice on the tenant stating that the tenancy may be subject to some conditions such as prior notice and rent would be an AST (assured shorthold tenancy, which is a type of being paid up to date. assured tenancy). The HA 1996 reversed the default position so that Otherwise, leases only terminate if a surrender is negotiated between an assured tenancy granted after 28 February 1997 (when the HA the landlord and tenant (which is likely to involve a payment by the 1996 came into force) would automatically be an AST. tenant) or at the end of the term. Rights to renew are addressed in the answer to question 10.1. 11.2 Do the laws differ if the premises are intended for multiple different residential occupiers? 10.6 Does the landlord and/or the tenant of a business lease cease to be liable for their respective The Management of Houses in Multiple Occupation (England) obligations under the lease once they have sold their Regulations 2006 apply in addition to properties that qualify as interest? Can they be responsible after the sale in HMOs (House in Multiple Occupation), i.e. a house in which three respect of pre-sale non-compliance? or more unrelated tenants live as at least two separate households, and where the tenants share basic amenities such as a toilet, For an original landlord there is no automatic release, but for leases bathroom or kitchen facilities. granted on or after 1 January 1996, there is a right to request a release and, if reasonable, the tenant would be obliged to agree; however, this may need court action to establish. 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: For subsequent landlords, if the lease is granted before 1 January (a) length of term; (b) rent increases/controls; (c) the 1996 then liability remains only for the time that they are landlord. tenant’s rights to remain in the premises at the end of For leases granted on or after 1 January 1996, the position is the the term; and (d) the tenant’s contribution/obligation same as for an original landlord of such a lease. to the property “costs” e.g. insurance and repair? For a tenant, whilst there is an automatic release of the tenant’s obligations qua tenant, market practice is such that most leases will (a) A tenancy can either be for a fixed-term (running for a set require the tenant to act as guarantor of the obligations of the buyer period of time) or periodic (running on a week-by-week or of the lease (until that buyer sells the lease with landlord’s consent month-by-month basis). to another if that consent is required).

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(b) The RA 1977 set up a system for registering “fair rents” for residential properties. Fair rents are assessed by a rent 12 Public Law Permits and Obligations officer, who is an official with the Valuation Office Agency, and once a fair rent has been registered, it is the maximum 12.1 What are the main laws which govern zoning/ rent that a landlord may charge for that property (even if a permitting and related matters concerning the use tenancy agreement provides for a higher rent at the date it and occupation of land? Please briefly describe them is entered into). Either the landlord or tenant can apply to and include environmental laws. the rent officer for a rent to be registered or they can apply jointly. Once a fair rent has been registered, it will apply until either party applies for a reassessment. The landlord can The Town and Country Planning Act 1990 and the Planning Act apply one year and nine months after the effective date of the 2008 set out a framework for maintaining planning control in last registration but the new registered rent will not become England & Wales. The Planning (Listed Buildings and Conservation effective until a two-year period has elapsed. An application Areas) Act 1990 imposes a stricter regime for the demolition of or

England & Wales can be made at any time if it is made jointly by the landlord alterations to buildings with historic or architectural significance. and tenant or there has been a change of circumstances that The Housing and Planning Act 2016 introduces various planning means the old rent is no longer fair. A fair rent may be lower reforms which simplify the requirements for neighbourhood and than the market rent as the rent officer will assume that there local planning, thereby aiming to facilitate a quicker supply of is no shortage of properties available to rent in the area. housing, including introducing a concept of permission in principle. During the fixed-term of an assured tenancy (including an The Environmental Protection Act 1990 regulates the deposit, AST), the amount of the rent will be governed by the terms treatment and disposal of waste and imposes obligations in respect of the lease. If the tenancy is periodic (either a contractual of contaminated land. periodic tenancy or a statutory periodic tenancy), the landlord can propose an increased rent, except in the case of a non-statutory periodic tenancy if the agreement 12.2 Can the state force land owners to sell land to it? If contains contractual provisions for increasing the rent. If so please briefly describe including price mechanism. the tenant disagrees with the proposed rent, the tenant may ask the Residential Property Tribunal in England (or a rent The Compulsory Purchase Act 1965 and the Acquisition of Land assessment committee in Wales) to assess the open market rent for the property. Act 1981 outline the conditions under which a statutory body or local authority may forcibly require land owners to sell their land. In (c) See the response to question 11.4 below. order for a compulsory purchase order to be issued, the owner of the (d) Such costs will likely be borne by the tenant. Where a property must be fairly compensated and the acquisition of the land building comprises several flats or residential premises, the must be for the public benefit. Compensation is assessed based on responsibility for conducting repairs of common areas or procuring insurance for the block may indeed fall on the the market value of the land, though additional compensation may landlord, but the costs will likely be divided amongst the be available for losses to a home or for costs incurred in relocating tenants and recovered by the landlord via a service charge or business premises. included within the “rent” figure. 12.3 Which bodies control land/building use and/or 11.4 Would there be rights for a landlord to terminate a occupation and environmental regulation? How do residential lease and what steps would be needed buyers obtain reliable information on these matters? to achieve vacant possession if the circumstances existed for the right to be exercised? Land use and occupation is primarily overseen by the local planning authority (LPA), i.e. the relevant district, city or borough council At the end of the contractual term for a regulated tenancy, the within which a property is located. In certain circumstances, the tenancy will continue as a statutory tenancy. To recover possession, Secretary of State can ‘call in’ planning applications to make final the landlord must obtain a court order for possession. The grounds decisions, but will likely only do so if the application conflicts for possession are set out in Schedule 15 to the RA 1977. Some of materially with national policy or it relates to a nationally significant the grounds are discretionary, so the court can only order possession infrastructure project. Buyers can obtain information on planning if the court considers it reasonable. The remaining grounds are matters by raising enquiries electronically or in person of the mandatory, so the court must grant an order for possession if the relevant LPA. landlord can prove the ground. The principal bodies responsible for the regulation, protection and At the end of a fixed-term assured tenancy, the tenant has the right to general improvement of the environment include the Environment remain in the property, unless the landlord can establish one of the Agency (EA), the Natural Resources Wales (NRW), the Health grounds for possession in Schedule 2 to the HA 1988. A court order and Safety Executive and local authorities. Buyers can obtain would be required to recover possession. information on environmental matters by searching records held by The landlord of an AST has the right to regain possession of the the relevant local authority, but they may also choose to commission property at the end of the fixed term (or, if the fixed term is less independent surveys with environmental specialists depending on than six months, six months after the tenancy began), as long as the any risks identified. landlord gives two months’ notice. If a tenant remains in occupation of a property after the fixed term of an AST expires, a statutory 12.4 What main permits or licences are required for periodic tenancy will arise. building works and/or the use of real estate?

Planning permission is generally required for any “operational development” (that is building, engineering, mining or other operations in, on, over or under land, including demolition) or a

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material change of use of land. Building regulations approval may be considered of historical or architectural significance. Similarly the required to certify that the relevant works comply with construction Ancient Monuments and Archaeological Areas Act 1979 prohibits standards as provided for in the Building Act 1984. It is possible the demolition, destruction, damage, removal, repair or alteration that both or neither, if the criteria for exemption are met, may be of nationally important monuments, though certain works affecting required. Some changes to the use of a building are permitted under them may be permitted with the Secretary of State’s consent. a general statutory order without the need for express planning Due to the limited ability to deal with listed buildings, historic permission. A development consent order is required (rather than monuments and properties in conservation areas, their commercial planning permission) for projects that are nationally significant value will likely be affected, though the very nature of the real estate infrastructure projects. does not prevent it from being transferred. Where activities could potentially cause pollution or adversely affect the environment, an environmental permit may also be 12.8 How can e.g. a potential buyer obtain reliable required. These are most commonly issued by the EA and NRW, information on contamination and pollution of real however, they may also be granted by a local authority depending estate? Is there a public register of contaminated land England & Wales on the activity and potential pollution risk. in your jurisdiction?

12.5 Are building/use permits and licences commonly Local authorities are required to make publicly available a register obtained in your jurisdiction? Can implied permission of identified contaminated land. Exclusion from the register is be obtained in any way (e.g. by long use)? not by any means an assurance that the land is not contaminated though as it may be that land has simply not been inspected. Buyers It is usual for planning permissions and building regulation consents can carry out desktop environmental searches, which will collate to be obtained in England & Wales. If they are not, the Planning information from publicly available sources and list current and past and Compensation Act 1991 specifies the period of time within uses of the property and neighbouring properties which might have which planning control contraventions can be acted upon by a local led to contamination, thereby helping buyers to determine whether authority. If no enforcement action is taken within these time limits more detailed independent surveys, e.g. of soil or groundwater, (which vary depending on the breach), the building or activity will might be required. become immune from further enforcement action upon expiry of the relevant period. For planning permissions those periods are: 12.9 In what circumstances (if any) is environmental clean- ■ four years for works carried out that constitute operational up ever mandatory? development; ■ four years for a change of use to a single dwelling house; and Upon identification of contaminated land, water pollution or ■ 10 years for most other breaches, including breach of a environmental damage, the appropriate local authority will issue planning condition or a material change of use. a remediation notice to the appropriate persons to enforce clean- up action. For the more serious infractions, the EA or NRW will usually enforce the clean-up action. It is a criminal offence not to 12.6 What is the appropriate cost of building/use permits and the time involved in obtaining them? comply with the terms of the notice once it has been served. A planning authority may also impose it as a condition of a planning permission that environmental clean-up is carried out before a The cost varies depending on the scale, complexity and nature development can proceed. of the work to be carried out, though the method for calculating is provided for in the Town and Country Planning (Fees for Applications, Deemed Applications, Requests and Site Visits) 12.10 Please briefly outline any regulatory requirements (England) Regulations 2012. for the assessment and management of the energy performance of buildings in your jurisdiction. The LPA should make all decisions within the statutory time limits, specified in the Town and Country Planning (Development Management Procedure) (England) Order 2015, unless a longer An Energy Performance Certificate (EPC) is required for any period is agreed in writing with the applicant. The more complex property that is constructed, altered, sold or let. These are issued applications will include more evidentiary support thereby by commercial energy assessors and provide information about the increasing the response time. The statutory time limit is usually energy efficiency of the premises and detail where improvements 13 weeks for applications for major development and eight weeks can be made to increase the rating and improve the energy efficiency for all other types of development (unless the works are likely also of the premises. It is mandatory for any building occupied by to impact the environment, in which case a 16-week limit applies public authorities or institutions providing public services to show as the EA or NRW will also review the application). Where a a Display Energy Certificate (DEC) giving details of the energy planning application takes longer than the statutory period to decide efficiency of the building. and an extended period has not been agreed with the applicant, the government’s planning guarantee requires the decision to be made 13 Climate Change within 26 weeks at the most.

13.1 Please briefly explain the nature and extent of any 12.7 Are there any regulations on the protection of historic regulatory measures for reducing carbon dioxide monuments in your jurisdiction? If any, when and how emissions (including any mandatory emissions are they likely to affect the transfer of rights in real trading scheme). estate?

The CRC (which stands for Carbon Reduction Commitment) The Planning (Listed Buildings and Conservation Areas) Act 1990 Energy Efficiency Scheme (CRC) obliges private and public sector protects against the destruction or alteration of buildings that are

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organisations, primarily on the basis of whose energy consumption qualifies as significant (amongst other inclusion criteria), to monitor 13.3 Are there any other regulatory measures (not already and report carbon emissions and purchase carbon allowances for mentioned) which aim to improve the sustainability of both newly constructed and existing buildings? every ton emitted. Following a UK government announcement in 2016, the scheme will cease to operate by 2019. It is not yet clear whether or not there is going to be a replacement for CRC. The Minimum Energy Efficiency Standards (MEES) Regulations came into force from 1 April 2016 and prohibit landlords from Some UK organisations are subject to participation in the EU granting, extending or renewing any tenancy on or after April 2018 Emissions Trading System (EU ETS). There is a collective cap or continuing thereafter to let domestic and non-domestic private on the total amount of emissions allowed by all participants in the rented properties that do not comply with the regulations. system – members can purchase additional allowances from other members or take steps to reduce their carbon emissions. England & Wales 13.2 Are there any national greenhouse gas emissions reduction targets?

The Climate Change Act 2008 provides a target to reduce greenhouse gas emissions, when compared against 1990 baseline levels, by at least 80% by 2050.

Carol Hopper Partha Pal Ropes & Gray International LLP Ropes & Gray International LLP 60 Ludgate Hill 60 Ludgate Hill London EC4M 7AW London EC4M 7AW United Kingdom United Kingdom

Tel: +44 20 3201 1500 Tel: +44 20 3201 1641 Email: [email protected] Email: [email protected] URL: www.ropesgray.com URL: www.ropesgray.com

Carol Hopper is a partner in Ropes & Gray’s Real Estate Investments Partha Pal is a partner in Ropes & Gray’s Real Estate Investments and and Transactions Group based in London. She advises funds, Transactions Group. He specialises in banking and structured finance investors, bank and non-bank lenders and corporate clients on a wide transactions, with a particular focus on commercial real estate assets. variety of domestic and international real estate based transactions. Mr Pal is highly experienced in complex cross-border transactions, She has a breadth of experience acting for investors at all levels of having practised in London, New York and Singapore. He is also the capital stack across the full risk spectrum, within and outside involved in the work of the Commercial Real Estate Finance Council Europe and in a wide range of sectors from office, industrial, logistics, having served as co-chair of its Hedging Sub Committee and as a residential, hotel, co-working, senior living and leisure to infrastructure current member of the PRS/BTR Sub Committee. and public/private finance transactions. Carol joined the firm in January 2015. She is a current member of the Commercial Real Estate Finance Council’s PRS/BTR Sub Committee.

Ropes & Gray is a pre-eminent international law firm with offices in key financial centres around the world and has over 275 partners and 1,160 lawyers worldwide. It has market leading practices in fund formation, M&A, private equity, real estate, finance, capital markets, investment management, tax, government enforcement, litigation and IP. The firm’s market leading real estate practice advises private funds, investment banks, endowments, sovereign wealth funds and other investors as well as sponsors and operating partners on the full range of real estate transactions including real estate private equity, real estate M&A, co-investment, joint ventures, real estate finance, acquisitions and disposals of shares, debt and property assets, fund investment/divestment, development projects and earn outs as well as preferred equity, mezzanine lending, restructurings, structured finance, work outs and outsourcing. The practice handles transactions relating to both distressed and non-distressed real estate, at all points of the risk spectrum and across multiple geographies and involving all types of real estate including commercial, leisure, hotels, pubs, care homes, hospitals, student housing and government property as well as portfolios, mortgages and NPLs and construction and development projects. The firm has over 90 legal professionals, including 50 lawyers specifically focused on real estate transactions, who routinely handle market-leading tax structuring and complex debt and equity financing structures and exit strategies. The firm’s clients include some of the most sophisticated investors in the property industry and regularly look to it for advice on their complex, high value real estate investment and financing transactions. Last year, the firm’s international real estate practice handled matters with an aggregate transaction value in excess of $22 billion.

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Finland Matias Forss

Attorneys-at-Law Project Law Ltd Sakari Lähteenmäki

1 Real Estate Law 3 Real Estate Rights

1.1 Please briefly describe the main laws that govern 3.1 What are the types of rights over land recognised in real estate in your jurisdiction. Laws relating to your jurisdiction? Are any of them purely contractual leases of business premises should be listed in between the parties? response to question 10.1. Those relating to zoning and environmental should be listed in response to Rights over land can be separated to title, special rights that can be question 12.1. Those relating to tax should be listed in registered, easements and mortgages. Purely contractual rights are response to questions in Section 9. recognised, but not given preference over registered rights. A lease on land is considered a special right that can be registered. Other The Code of Real Estate (Fi: maakaari) regulates the acquisition special rights include an agreement between the joint titleholders of and registration of real estate and liens on real estate. The Real a real estate on the possession of the real estate or the right to extract Estate Formation Act (Fi: kiinteistönmuodostamislaki) regulates mineral resources. the formation of real estate units, the creation of easements and other cadastral procedures. The Real Estate Register Act (Fi: Kiinteistörekisterilaki) regulates the real estate register. 3.2 Are there any scenarios where the right to a real estate diverges from the right to a building The Housing Companies Act (Fi: asunto-osakeyhtiölaki) regulates constructed thereon? residential housing companies, but can be partially applied to other real estate companies. It is possible to register a delimitation on the components of real The Act on Land Lease (Fi: maanvuokralaki) regulates the leasing estate, so that a building or other construction does not belong to the of land areas. real estate, but has a separate owner. If the divergence in ownership is not registered, creditors have the right to assume that buildings belong to the real estate. 1.2 What is the impact (if any) on real estate of local common law in your jurisdiction? A registered tenant is the owner of the buildings he has constructed.

Finnish real estate laws are codified and courts are under the duty 3.3 Is there a split between legal title and beneficial title to interpret the law. Some rights to natural resources (e.g. fishing) in your jurisdiction and what are the registration on government land have been recognised as local customary law. consequences of any split?

This split is not recognised under Finnish law. 1.3 Are international laws relevant to real estate in your jurisdiction? Please ignore EU legislation enacted locally in EU countries. 4 System of Registration

There are no relevant international laws. 4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered? 2 Ownership All land is required to be registered. All rights in land that bind third parties can be registered. 2.1 Are there legal restrictions on ownership of real estate by particular classes of persons (e.g. non-resident persons)? 4.2 Is there a state guarantee of title? What does it guarantee? There are no restrictions on ownership outside the province of Åland Islands, where ownership is restricted to residents of the province. There is no state guarantee of title, but the law confers public faith in the land register. The state is liable for damages that have been caused by errors committed by officials in upholding land registries.

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4.3 What rights in land are compulsorily registrable? 5.2 Does the land registry issue a physical title document What (if any) is the consequence of non-registration? to the owners of registered real estate?

A land lease right or other use rights pertaining to real estate There is no physical title document issued. Excerpts from the land properties are compulsorily registrable if (i) the right is transferable register are used to prove ownership. to a third party without the permission of the landlord, (ii) there are buildings belonging to the tenant on the leased property, and (iii) 5.3 Can any transaction relating to registered real estate buildings may be built on the property by the tenant. be completed electronically? What documents need to be provided to the land registry for the registration Finland of ownership right? Can information on ownership of 4.4 What rights in land are not required to be registered? registered real estate be accessed electronically?

Rights such as easements, real estate liens (Fi: kiinnitys), joint Electronic real estate transactions became possible in November possession (Fi: hallinnanjako) and joint arrangements (Fi: 2013, and since then it has also been possible to execute real estate yhteisjärjestely) are not required to be registered; however, it is deeds electronically. highly recommended that such rights are registered in order to solidify their status and enforce the right against third parties. Electronic real estate transactions are executed by filling in a form at an online service provided by the National Land Survey of Finland. Online transactions are verified by the parties of the transaction by 4.5 Where there are both unregistered and registered land using online bank user identification. The title to the property in or rights is there a probationary period following first question is transferred to the purchaser automatically and there is no registration or are there perhaps different classes or qualities of title on first registration? Please give need to file for the title. details. First registration means the occasion upon Electronic real estate transactions are, however, seldom used by which unregistered land or rights are first registered real estate investors, construction companies and other professional in the registries. operators.

All land in Finland is registered. 5.4 Can compensation be claimed from the registry/ registries if it/they make a mistake? 4.6 On a land sale, when is title (or ownership) transferred to the buyer? There is a possibility of compensation for mistakes under certain strictly limited circumstances. The title is transferred to the buyer by a deed of sale. The transfer of ownership (and possession) is regularly agreed on in a deed of sale, and usually involves a clause stipulating that ownership and/ 5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he or possession is transferred to the buyer simultaneously with the might reasonably need regarding encumbrances and payment of the purchase price. other rights affecting real estate?

4.7 Please briefly describe how some rights obtain priority There are no restrictions in terms of access to the relevant registers. over other rights. Do earlier rights defeat later rights? The buyer has an opportunity to obtain relevant information without the consent of the seller. In general, it can be stated that earlier rights defeat later rights. In principle this also concerns registered rights, e.g. example easements, real estate liens, joint possession (Fi: hallinnanjako) and 6 Real Estate Market joint arrangements (Fi: yhteisjärjestely). Earlier mortgages pertaining to real estate properties have priority 6.1 Which parties (in addition to the buyer and seller over mortgages registered later. However, the priority order of and the buyer’s finance provider) would normally mortgage rights may be amended by an application which the be involved in a real estate transaction in your mortgage holder has accepted. jurisdiction? Please briefly describe their roles and/or duties. Unregistered earlier rights do not obtain priority unless those who invoke registered later rights have acted in bad faith. A real estate transaction must be verified by a notary. The notary’s duty is to verify the sale and purchase agreement, the ownership/ 5 The Registry / Registries title of the property in question and the identity and the authority to execute the signatory of each party. Typically, other parties involved in real estate transactions are the 5.1 How many land registries operate in your jurisdiction? legal or other advisors of the seller and the buyer, and real estate If more than one please specify their differing rules agents brokering the transactions. and requirements.

It can be said that there are three land registries in Finland. One for 6.2 How and on what basis are these persons the title to the property, one for encumbrances (e.g. mortgages) and remunerated? one for easements, city plans and the origin and formation of the properties. All of these registries are operated by the National Land The notary verifying the real estate transaction is entitled to receive Survey of Finland (Fi: maanmittauslaitos). a small remuneration for their services.

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Legal advisors are often remunerated on an hourly basis. Real estate planning, building permits and restrictions on land use, liens and agents often act on a commission basis. other restrictions on ownership are also specifically mentioned.

6.3 Do you feel there is a noticeable increase in 7.3 Can the seller be liable to the buyer for the availability of capital to finance real estate misrepresentation? transactions in your jurisdiction, whether equity or debt? What are the main sources of capital you see Misrepresentation results, in general, in the liability to return part active in your market? of the sale price as a price reduction or the whole sale price if the sale is cancelled. The seller can also be liable for damages. The In the last few years the real estate market has revived itself and the

buyer is entitled to demand cancellation if the misrepresentation is Finland influx of capital, domestic and foreign, has meant that transaction essential in view of the entire sale. A price reduction is calculated values and volumes have increased. This has seen new players, according to the price that the object of sale should have had at the including domestic and foreign real estate funds, enter the market. time of the sale.

6.4 What is the appetite for investors and developers 7.4 Do sellers usually give contractual warranties to the in your region to look beyond primary real estate buyer? What would be the scope of these? What is markets and transact business in secondary or even the function of warranties (e.g. to apportion risk, to tertiary markets? Please give examples of significant give information)? Are warranties a substitute for the secondary or tertiary real estate transactions, if buyer carrying out his own diligence? relevant.

Seller’s warranties in real estate transactions cover various Real estate investments are mainly concentrated in the capital city areas, such as environmental issues, lease agreements and other area and a few other larger cities. Helsinki’s metropolitan area agreements related to the property, easements and servitudes. The is considered a primary real estate market and the Tampere and purpose of the warranties given by the seller is to give information Turku regions are following behind as secondary markets. There is to the buyer and to protect the buyer from risks that may transpire. considerable interest from investors in secondary and even tertiary Sale and purchase agreements often include a clause wherein the markets, but such investments rarely include international parties. buyer states that they have concluded a due diligence and have been given information on the property. 6.5 Have you observed any trends in particular market sub sectors slowing down in your jurisdiction in terms of their attractiveness to investors/developers? 7.5 Does the seller warrant its ownership in any way? Please give examples. Please give details.

Investors and developers can be considered to be attracted to all The ownership of the seller is warranted by an excerpt from the market subsectors. land register which the notary verifying the deed shall verify in each transaction.

7 Liabilities of Buyers and Sellers in Real 7.6 What (if any) are the liabilities of the buyer (in addition Estate Transactions to paying the sale price)?

7.1 What (if any) are the minimum formalities for the sale In a real estate transaction, the buyer is obligated to pay the transfer and purchase of real estate? tax. To obtain registration of title, the buyer should apply for it after the The Code of Real Estate regulates the formalities for the sale and transaction has been completed. purchase of real estate. A sale of real estate shall be concluded in writing and the deed shall include the following mandatory information: 8 Finance and Banking (1) the intent to convey; (2) the real estate to be conveyed; 8.1 Please briefly describe any regulations concerning (3) the seller and the buyer; and the lending of money to finance real estate. Are the rules different as between resident and non-resident (4) the price or other consideration. persons and/or between individual persons and In addition, each sale and purchase of a real estate is obligated to be corporate entities? verified by a notary. There are no regulations for real estate financing other than banking regulations. 7.2 Is the seller under a duty of disclosure? What matters must be disclosed? 8.2 What are the main methods by which a real estate In the Code of Real Estate, there is a general duty to disclose all lender seeks to protect itself from default by the matters that affect the sale price. Size and condition of buildings borrower? and structures are mentioned as examples. Information on land use A lien on the real estate is usually considered sufficient.

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10 years. The capital gain tax rate is 30–34%, so the seller can pay 8.3 What are the common proceedings for realisation of up to 20% of the purchase price as income tax. mortgaged properties? Are there any options for a mortgagee to realise a mortgaged property without involving court proceedings or the contribution of the 9.4 Are transfers of real estate subject to VAT? How mortgagor? much? Who is liable? Are there any exemptions?

Common proceedings include the executive auction sale of real Transfers of real estate are not subject to VAT. estate, but it is possible even after court proceedings to try to market the property as a regular object for purchase. Without the consent 9.5 What other tax or taxes (if any) are payable by the of the mortgagor, there are no options for enforcement other than Finland seller on the disposal of a property? court proceedings. There are no other taxes. 8.4 What minimum formalities are required for real estate lending? 9.6 Is taxation different if ownership of a company (or other entity) owning real estate is transferred? There is no specific regulation on real estate lending. The transfer tax for the transfer of ownership of a company is 2% 8.5 How is a real estate lender protected from claims of the purchase price. Therefore, it may be tax-efficient to own against the borrower or the real estate asset by other properties within a company and then transfer the ownership to the creditors? company.

The priority order of mortgage liens protects lenders. In case of 9.7 Are there any tax issues that a buyer of real estate a default and a resulting executive auction sale of real estate, the should always take into consideration/conduct due creditors are satisfied in the priority order set out in the register for diligence on? encumbrances. The owner of real estate must pay a yearly real estate tax that is 8.6 Under what circumstances can security taken by a based on the value of the land and buildings. The tax on buildings lender be avoided or rendered unenforceable? is based on the type of building, i.e. the current use of the building and its size and amenities. If buildings have been converted to other Such circumstances are hardly imaginable. The borrower would uses, e.g. industrial to office, the tax administration might not be have to claim fraud of the documents or similar circumstances. informed of the conversion, which may have resulted in too little taxes being paid.

8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? 10 Leases of Business Premises

It is possible to appeal to the district court against measures taken 10.1 Please briefly describe the main laws that regulate by the bailiff; for instance on the grounds that the auction price was leases of business premises. considerably below market price. These kinds of appeals generally do not succeed, but have in some instances stalled enforcement for The Act on the Leasing of Business Premises (Fi: laki liikehuoneiston the duration of the process. vuokrauksesta) comprehensively covers the basic requirements and regulates the tenancy even if the parties do not themselves deem that 9 Tax it is necessary to record every term of the tenancy in an agreement.

10.2 What types of business lease exist? 9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable? The Act on the Leasing of Business Premises covers all types of The transfer of real estate is subject to a transfer tax, which is 4% of business leases, e.g. office spaces, business premises, restaurants the purchase price. According to the Code of Real Estate, the buyer and hotels. The legislation is flexible in terms of the variety of the shall be liable for the transfer-of-assets tax levied on the sale. type of premise leased.

9.2 When is the transfer tax paid? 10.3 What are the typical provisions for leases of business premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or The transfer tax must be paid within six (6) months from the signing sub-lease; (d) insurance; (e) (i) change of control of of the sale and purchase agreement. the tenant; and (ii) transfer of lease as a result of a corporate restructuring (e.g. merger); and (f) repairs?

9.3 Are transfers of real estate by individuals subject to (a) The length of the term of the lease is not regulated. The income tax? length of the term may be either fixed or in force until further notice. The seller must pay an income tax for the profit, which is calculated (b) Rent increases are typically tied to the cost-of-living index of either on the basis of the seller’s purchase price or on 60% of the Finland. The rent is typically adjusted annually or bi-annually. purchase price for real estate that the seller has owned for more than

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(c) A common clause in a lease agreement is that the tenant may not assign the lease, re-let or transfer the possession of 10.7 Green leases seek to impose obligations on the lease to a third party (sub-lease) without the landlord’s landlords and tenants designed to promote greater consent. sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please (d) Most often, the lease agreement obligates the tenant to take briefly describe any “green obligations” commonly out insurance against loss or damage, liability insurance and found in leases stating whether these are clearly loss of profits insurance, insuring the use of the object of defined, enforceable legal obligations or something the lease and the tenant’s property. The landlord shall have not amounting to enforceable legal obligations (for the property insured by conventional full value property example aspirational objectives). insurance.

(e) (i) According to the legislation, the tenant, in case of a Green lease policies are becoming more common to property Finland transfer of business, has the right to transfer the lease right; owners and this is reflected in lease agreements. To accomplish the however, often the clause involving the restriction on the aspiration of sustainability, the terms and conditions of modern lease right to transfer the lease or the possession of the object of the lease includes a stipulation whereby this also applies to a agreements regularly refer to the tenant’s obligation to ensure that transfer of business. all operations within the object of lease are carried out in compliance with environmental legislation and with other environmental (ii) In a corporate merger, lease agreements are transferred by law to the recipient company. recommendations and orders issued by the authorities that are binding upon the tenant. (f) Repairs and maintenance of the object of lease are agreed on a case-by-case basis. Usually a lease agreement involves Eco-efficiency is promoted in lease agreements to ensure support a maintenance rent which covers most of the maintenance for sustainable development. It is common practice to attach of the object of the lease. Alternatively, the lease may be environmental programmes to lease agreements. double net or triple net where the tenant shall assume some or The enforceability of environmental and green policies given by a even all of the maintenance costs. Typically, double or triple landlord has not quite yet been tested in Finland. net leases are involved in properties with a single or a few tenants. 11 Leases of Residential Premises 10.4 What taxes are payable on rent either by the landlord or tenant of a business lease? 11.1 Please briefly describe the main laws that regulate leases of residential premises. Rent is not generally subject to VAT. The parties can choose that the rent is subject to VAT in order to enable the landlord to deduct The lease of residential premises is regulated by the Act on VAT on input costs, if the business in the rented premises is subject Residential Leases (Fi: laki asuinhuoneiston vuokrauksesta). to VAT.

11.2 Do the laws differ if the premises are intended for 10.5 In what circumstances are business leases usually multiple different residential occupiers? terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a tenant to extend or renew the lease or for either party Persons living together as spouses are jointly responsible for the to be compensated by the other for any reason on obligations of a lease agreement, even if the lease agreement has termination? been made in the name of only one of the spouses. Otherwise, the law does not regulate multiple different residential Business leases are usually terminated mutually by the parties or at occupiers. In general, this means that lease agreements are made the expiry of the lease term. jointly by the different occupiers. This can be accomplished by In case the tenant is declared bankrupt and the bankruptcy estate entering into an agreement wherein all of the occupiers are tenants has not underwritten the obligations of the tenant under the lease or by entering into one main lease agreement, in which the main agreement, the landlord has the right to terminate the agreement. tenant then sub-leases to the other occupiers. The bankruptcy estate is responsible for the obligations of the lease if they resume use of the leased premises. 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: 10.6 Does the landlord and/or the tenant of a business (a) length of term; (b) rent increases/controls; (c) the lease cease to be liable for their respective tenant’s rights to remain in the premises at the end of obligations under the lease once they have sold their the term; and (d) the tenant’s contribution/obligation interest? Can they be responsible after the sale in to the property “costs” e.g. insurance and repair? respect of pre-sale non-compliance? (a) The length of the term of the lease is not regulated. The The tenant shall not transfer his leasehold without consent expressed length of the term may be either fixed or in force until further in the lease agreement or given separately by the landlord. notice. However, if the lease is agreed for a fixed period of up to three months twice in a row with the same tenant, the lease Therefore, unless such consent exists, the tenant is liable for their is considered to be in force until further notice. obligations under the lease. (b) Rent increases are typically tied to the cost-of-living index of The landlord has a right to transfer the leasehold to a third party. Finland. If it has been agreed that the lessor may unilaterally determine the date or amount of the rent increase while the lease is in force, such stipulation shall be null and void unless the grounds on which the rent can be increased during the lease agreement’s validity have also been agreed. Before the

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rent increase can take effect, the lessor shall notify the tenant governs nature reserves and protected species. The Environmental in writing of the new rent and the date on which it will take Protection Act governs the permitting of activities that might result effect. in environmental degradation. The Land Extraction Act governs the (c) The removal date shall be the next working day following the extraction of land for construction purposes. lease’s date of termination. The tenant shall vacate half of the apartment for the lessor’s use on the removal date and shall surrender the entire apartment to the lessor on the following 12.2 Can the state force land owners to sell land to it? If day. If a tenant with a non-fixed-term lease encounters so please briefly describe including price mechanism. substantial difficulty in obtaining another dwelling by the removal date, the court can, at the tenant’s request, defer the Municipalities or the state have, according to the Land Use and

Finland removal date by up to one year. Building Act, the right to expropriate land “when the general need (d) At the commencement of the lease and throughout its so demands”. This right has been used, e.g., to acquire land for the duration, the apartment shall be in such condition as purposes of planning industrial premises or residential buildings on the tenant may reasonably require, taking the age of the the land. This kind of expropriation is mostly used in areas without apartment, the local housing stock and other local conditions a detailed plan, because then the expropriation price does not take into consideration, unless otherwise agreed regarding the into account the planned future use of the expropriated land. The condition of the apartment. It may also be agreed that the expropriation price is determined according to Expropriation Act tenant shall be responsible for the upkeep of facilities and and is based on sale prices on similar properties. equipment available to him, her or it under the lease or for obligations associated with the property. The lessor and Municipalities have under the Land Use and Building Act various the tenant can agree on any repairs, alterations or upkeep powers to expropriate land in order to enable the execution of a local measures to be performed in the apartment. The tenant shall detailed plan. The expropriation price is determined according to not have the right to perform any repairs or alterations in the the local detailed plan in question. apartment without the lessor’s permission, except in order to remedy a deficiency. Separately, the Pre-emption Act gives municipalities the right to buy any property that can be developed for residential or recreational use at the same price at which the buyer is willing to buy. 11.4 Would there be rights for a landlord to terminate a residential lease and what steps would be needed to achieve vacant possession if the circumstances 12.3 Which bodies control land/building use and/or existed for the right to be exercised? occupation and environmental regulation? How do buyers obtain reliable information on these matters? The landlord shall have the right to rescind the lease agreement: Municipalities have building inspectors that control permits, (1) if the tenant neglects to pay the rent within the time prescribed by law or agreed on; use and occupation. Environmental regulation is controlled by environmental authorities either on the municipal or state level. The (2) if the leasehold is transferred or the apartment or part of it is municipal building authority (Fi: rakennusvalvonta) is a reliable otherwise assigned for another person’s use, contrary to the provisions of this Act; source of information on the current accepted use of buildings. (3) if the apartment is used for any other purpose or in any other manner than that provided when the lease agreement was 12.4 What main permits or licences are required for made; building works and/or the use of real estate? (4) if the tenant creates a disturbance with his or her way of life or allows others to do so in the apartment; The main permit required for building works or other similar use (5) if the tenant fails to take good care of the apartment; or of real estate is a local detailed plan or a granted right to deviate (6) if the tenant violates provisions or regulations for the from it, or, absent a local detailed plan, a decision on the special maintenance of public health and order in the apartment. preconditions for granting a building permit according to the Land Use and Building Act. Building works also require a building The landlord shall not rescind the lease agreement on grounds permit, which is of a technical nature and only limitedly open to referred to above, if he has not issued the tenant with a written appeal. To change the use of a building requires a building permit if caution. the change is considered significant. Should the tenant not move out of the leased premises once the agreement has been terminated appropriately, the landlord has to apply for a court order to evict the tenant. 12.5 Are building/use permits and licences commonly obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)? 12 Public Law Permits and Obligations Building permits are obligatory and are also required to change the main use of a building. Implied permission can have been obtained 12.1 What are the main laws which govern zoning/ in the first half of the 20th century before changes in legislation, but permitting and related matters concerning the use is not obtainable any more. and occupation of land? Please briefly describe them and include environmental laws. 12.6 What is the appropriate cost of building/use permits The main law that governs zoning and permitting is the Land Use and and the time involved in obtaining them? Building Act, which governs the role of the state and municipalities in land use planning and regulates permits for buildings. The Water If a local detailed plan incurs significant value on real estate, Act governs construction on water, use of ground or surface water the owner is obligated to pay a percentage of it as development and other use of water-covered areas. The Nature Conservation Act compensation to the municipality. The development compensation

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is at maximum 60% of the added value. It is also possible to conclude a land use agreement between the real estate owner and 12.10 Please briefly outline any regulatory requirements the municipality on the details of the increase in building rights and for the assessment and management of the energy performance of buildings in your jurisdiction. the compensation due to the municipality. Changing a local detailed plan or obtaining a deviation from it takes at least a few months and involves significant planning costs. The costs of the permits are not New residential or commercial buildings are under very strict significant in comparison. requirements for energy efficiency. The energy efficiency of old buildings must be improved, if feasible, when carrying out repairs or A building permit is typically obtained in a few weeks. conversion of the building. The requirements are monitored during the granting of building permits.

12.7 Are there any regulations on the protection of historic The energy performance of a building is assessed via energy Finland monuments in your jurisdiction? If any, when and how certificates, which are mandatory for almost all residential and are they likely to affect the transfer of rights in real commercial buildings. estate?

The Act on the Protection of Buildings (Fi: rakennussuojelulaki) 13 Climate Change regulates the protection of historic buildings and monuments. The legislation gives protection not only to buildings but also to their structures and facades. In addition, buildings and their protection 13.1 Please briefly explain the nature and extent of any extends to city planning, and therefore a property development regulatory measures for reducing carbon dioxide project, for example, may encounter difficulties if the planned emissions (including any mandatory emissions trading scheme). structures fail to fulfil the requirements of the protected building.

The European Union Emissions Trading System is the primary 12.8 How can e.g. a potential buyer obtain reliable measure. There is complementary regulation and incentive information on contamination and pollution of real programmes on energy efficiency and the use of renewable materials estate? Is there a public register of contaminated land or sources of energy. in your jurisdiction?

Environmental authorities have a public register on contaminated 13.2 Are there any national greenhouse gas emissions or potentially contaminated soil. Decisions and rapports by reduction targets? environmental authorities are also public and can be obtained by anyone. A goal set out in the Climate Act is to reduce emissions by 80% as compared to 1990 levels by the year 2050.

12.9 In what circumstances (if any) is environmental clean- up ever mandatory? 13.3 Are there any other regulatory measures (not already mentioned) which aim to improve the sustainability of According to the Environmental Protection Act, clean-up is required both newly constructed and existing buildings? when there is danger to health or the environment. The responsibility is primarily on the polluter and secondarily on the occupant of the There are no such measures. contaminated area.

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Matias Forss Sakari Lähteenmäki Attorneys-at-Law Project Law Ltd Attorneys-at-Law Project Law Ltd Museokatu 8 A 8 Museokatu 8 A 8 FI-00100 Helsinki FI-00100 Helsinki Finland Finland

Tel: +358 50 358 7010 Tel: +358 50 514 3656 Email: [email protected] Email: [email protected] URL: www.projectlaw.fi URL: www.projectlaw.fi Finland Matias has been an associate at Attorneys-at-Law Project Law since Sakari has been an associate at Attorneys-at-Law Project Law since 2016. Prior to that, he was a doctoral candidate at the University of 2014 and prior to that worked as a trainee at the firm. Sakari advises Helsinki, and an associate at a similar law firm. Matias advises clients clients in the field of real estate transactions, and has an extensive real in the field of land use planning, real estate law, environmental law and estate portfolio and has worked on many real estate fund projects. In construction law. addition, Sakari assists clients in general corporate and contract law. Sakari also has considerable experience in real estate development Matias has significant experience in dispute resolution concerning projects and provides counsel on different types of agreements related real estate transactions, construction contracts and leases of to land use. business premises. His typical clients are real estate developers and construction companies. Sakari has advised numerous Finnish and international corporations, real estate funds and other investors, as well as Finnish cities and municipalities on real estate transactions, questions arising from jurisprudence on land use, commercial lease agreements and corporate law.

Attorneys-at-Law Project Law serves comprehensively in situations calling for expertise in property law and in the various stages of the life cycle of properties. The firm’s proficiency extends from land use agreements, urban planning and the formation of a property to the planning agreements for construction projects and contract practices in the implementation phase of projects. Project Law’s core areas of expertise are: Business Premise Lease Arrangements and Transactions; Land Use and Real Estate Development; Construction Agreements and Project Delivery; Dispute Resolution; Corporate Law; and Environmental Law. Project Law also counsels on issues related to soil contamination, lease of completed business premises and legal advice on the conversion of intended use of historical buildings. Project Law team has vast experience in the real estate market and the personnel have comprehensive knowledge of the procedures and practices, operators and interest groups of the core areas of expertise.

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France Maryse Naudin

Tirard, Naudin Jean-Marc Tirard

1 Real Estate Law 2 Ownership

In France, real estate is governed by several laws and regulations 3 Real Estate Rights which are codified differently depending on their aims and objectives: ■ The “Code de l’urbanisme” (“Planning Code”) provides rules 3.1 What are the types of rights over land recognised in harmonising the use of French territory which is considered your jurisdiction? Are any of them purely contractual as the common space of the Nation. between the parties? ■ The “Code de la construction et de l’habitation” (“Construction and Housing Code”) consolidates construction, development Several rights over land are recognised in France, some of which are and social housing rules. purely contractual between parties. ■ The “Code civil” (Civil Code) contains rules, among others, First of all, the full ownership (“pleine propriété”) of French relating to the definition of ownership, transfer of ownership real estate can be shared between usufruct (“usufruit”) and bare- for consideration, by gift or by death as well as rules ownership (“nue-propriété”). Several joint-owners may hold the governing the use and lease of real estate properties. usufruct, the bare-ownership and/or the full ownership of the same ■ The “Code de commerce” (“Trade Code”) and the “Code French real estate (“indivision”). rural” (“Rural Code”) include specific rules applying to real On the other hand, mortgages (“hypothèques”) (legal or contractual), estate used for commercial and/or agricultural purposes. and lender’s pledges (“privilège du prêteur de deniers”) can be registered on a French property. 1.2 What is the impact (if any) on real estate of local Real estate rights are also given to the user of the property, whether common law in your jurisdiction? it is used for free (“mise à disposition gratuite”) or rented out. Rights are, however, substantially different depending on the Because France is a civil law country which does not recognise the leasehold: “bail d’habitation” (housing lease); “bail commercial” concept of legal ownership versus beneficial ownership and has (commercial lease); “bail professionnel” (professional lease); “bail never ratified the Hague Convention on the recognition of trusts, a rural” (rural lease) “bail à construction” (construction lease); “bail trust cannot directly own a real property located in France. emphytéotique” (long-term lease); and “concession” (concession). Nevertheless, it does not mean that a trust cannot be used to hold Finally, easements (“servitudes”) granted by the law or ancestral indirectly a French real property. customs may apply to French real estate.

1.3 Are international laws relevant to real estate in your 3.2 Are there any scenarios where the right to a jurisdiction? Please ignore EU legislation enacted real estate diverges from the right to a building locally in EU countries. constructed thereon?

Strictly speaking, international laws are not relevant in France There are some cases where the right to a real estate diverges from in matters of real estate law (in particular in matters relating to the right to a building constructed thereon, such as the “droit de planning, construction and housing rules). superficie” (land tenure) and the “division de la propriété en volume” (division of the property into several units).

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pledges) is also determined depending on the date of completion of 3.3 Is there a split between legal title and beneficial title the purchase agreement. in your jurisdiction and what are the registration consequences of any split? 5 The Registry / Registries As explained in the answer to question 1.2 above, there is no split between legal title and beneficial title in France. Consequently, 5.1 How many land registries operate in your jurisdiction? a trust cannot be registered with the “registre cadastral” (land If more than one please specify their differing rules register) as the owner of a French property. and requirements. France 4 System of Registration The “Cadastre de France” (land register) is a framework of maps and administrative files registering all real estate properties located in each French town. The register was created at the beginning th 4.1 Is all land in your jurisdiction required to be of the 19 century. For historical reasons, the region of Alsace- registered? What land (or rights) are unregistered? Moselle benefits from special treatment.

All lands, as well as all rights relating to French real estate (except 5.2 Does the land registry issue a physical title document lease agreements not exceeding 12 years) should be registered with to the owners of registered real estate? the “Cadastre de France” (land register) in order to be enforceable against third parties. The land registry does not issue a physical title document to real estate owners. The owners receive from the French “notaire” an 4.2 Is there a state guarantee of title? What does it original copy of the purchase agreement bearing a stamp with the guarantee? registration number of the acquisition with the Cadastre.

Strictly speaking, there is no state guarantee of title. 5.3 Can any transaction relating to registered real estate be completed electronically? What documents need to be provided to the land registry for the registration 4.3 What rights in land are compulsorily registrable? of ownership right? Can information on ownership of What (if any) is the consequence of non-registration? registered real estate be accessed electronically?

All rights listed in the answer to question 3.1 above are compulsorily The transfer of French real estate should be registered with the registrable, except lease agreements not exceeding 12 years. register either by a French notaire in the case of a private sale or by a French judge in the case of auction. 4.4 What rights in land are not required to be registered? The information on ownership of registered real estate cannot be accessed electronically. Lease agreements which do not exceed 12 years are not required to be registered. 5.4 Can compensation be claimed from the registry/ registries if it/they make a mistake? 4.5 Where there are both unregistered and registered land or rights is there a probationary period following first No compensation can be claimed from the registry if a mistake has registration or are there perhaps different classes been made. However, in theory the notaire may be held responsible. or qualities of title on first registration? Please give details. First registration means the occasion upon which unregistered land or rights are first registered 5.5 Are there restrictions on public access to the in the registries. register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and There is no probationary period. other rights affecting real estate?

One may obtain information relating to the transfer of French real 4.6 On a land sale, when is title (or ownership) transferred estate by gift, by death and by sale. The date and price of transfer, to the buyer? as well as the identity of each new owner is provided. All mortgages and liens put on the property are also detailed, including their Between parties, the ownership is transferred under the terms of the amounts, dates, beneficiaries and the levees’ date. sale agreement. As a general rule, however, it is enforceable against third parties after the registration of the sale with the “Cadastre de France” (land register). 6 Real Estate Market

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They allow potential purchasers and sellers to meet. They also provide all information on the property to the buyer. As opposed 6.4 What is the appetite for investors and developers to the situation in the UK, no general survey on the property is, as in your region to look beyond primary real estate markets and transact business in secondary or even a general rule, carried out in France. Is it the responsibility of the tertiary markets? Please give examples of significant buyer to find out information regarding the property. Only a few secondary or tertiary real estate transactions, if compulsory survey certificates are issued before the acquisition. relevant. Avocats may be involved in the process of purchasing a property in France, as well as the purchase of shares of a company which owns, Since the beginning of 2017, 33 transactions over €100 million were directly or indirectly, French real estate properties. They represent recorded in commercial real estate in France. The total amount was

their own clients during the negotiation period and the preparation €6 billion. France of the legal documentation. Among the most prominent deals, notably there was the acquisition The French notaires are “officiers ministériels” (ministerial officers) of 50% of the towers “Duo” in Paris by Natixis Assurances for €600 who benefit from a monopoly of executing and registering (with the million, and the acquisition of the building “In/out” by Primonial “cadastre”) all transfers of French properties. The sale of shares of Reim in Boulogne-Billancourt for €445 million. companies (French or foreign) owning directly or indirectly French Investors are particularly looking for new and restructured office real estate having a market value exceeding that of their French properties in Paris and its western suburbs. movable assets, signed outside France, should also be reiterated with a French notaire. Other sales of shares are not in the scope of the notaires’ monopoly. 6.5 Have you observed any trends in particular market sub sectors slowing down in your jurisdiction in Real estate technicians can be appointed by the potential purchaser terms of their attractiveness to investors/developers? in order to carry out the non-compulsory survey and due diligence Please give examples. work on the property. Finally, sales of properties by auction may be executed and Retail property market declined 47% during the first three quarters registered to the “cadastre” by a French judge. of 2017. This can be explained by the scarcity of “prime assets” available in the market and by the sharp decline in the amounts invested in large deals. 6.2 How and on what basis are these persons remunerated? As explained in Section 9 below, the Finance Bill for 2018 provides for the abolition of the wealth tax and the implementation of a new Fees of real estate brokers (between 1% and 5% depending on the tax based on the market value of real estate located in France for nature and amount of the sale price) as well as those of avocats non-resident tax payers and located worldwide for French resident (depending on their diligence) are negotiable. tax payers. As a consequence of this fundamental change in the tax treatment of real estate investments, one may expect either a lack of Notaires receive compulsory fees determined by the law depending interest of investors in French real estate or a new opportunity for on the market value of the property sold. A degressive rate scale those who are confident that President Macron’s challenge will be applies with a marginal rate of 0.825%. When two notaires are successful. involved in the transaction, one representing the seller, the other representing the purchaser (this is our recommendation in order to avoid a conflict of interest), compulsory fees are shared between 7 Liabilities of Buyers and Sellers in Real both notaires. Fees due to the notaires upon the reiteration of the Estate Transactions sale of shares of a company owning a French real estate property signed abroad should, however, be negotiated. 7.1 What (if any) are the minimum formalities for the sale and purchase of real estate? 6.3 Do you feel there is a noticeable increase in the availability of capital to finance real estate transactions in your jurisdiction, whether equity or As explained above, the French notaires’ monopoly means that debt? What are the main sources of capital you see parties rely on them to execute the minimum formalities for the sale active in your market? and purchase of real estate. The notaire should verify that: A stagnation can be observed in terms of commercial real estate ■ the real estate property is duly owned by the seller. For investment volumes in France. Although such investments have example, the apparent owner of the property could only own been high over the last two years (around €25 billion), an estimated the usufruct and the bare-owners may not have been involved €24 billion has been invested in 2016 (approximately the same in the negotiation process; volume as in 2015). With a 37% share of investment, insurers are ■ the mortgages registered on the property being sold do not the most active investors, followed by unlisted investment funds exceed the sale price of the property; and (29%). ■ all compulsory certificates relating to the absence of Approximately four out of five acquisitions are financed by equity legionella, woodworm, lead poisoning and asbestos, as well capital. This proportion obviously varies depending on the size of as the conformity of gas and electrical fittings, etc., have been the operation. Debt is involved in 25% of the transactions between provided by the seller. €30 and €50 million, 15% between €100 and €200 million, and 40% The notaire should also exercise all formalities relating to pre- over €200 million. emption rights that might apply as a result of the law to the town or other public authorities (e.g.: “droit de préemption urbain”, “droit de préemption de la SAFER”).

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It may be appropriate to rely on the notaires for low value transactions relating to French real estate; however we recommend 7.5 Does the seller warrant its ownership in any way? being assisted by a French avocat for larger scale transactions. Please give details. The notaire does not represent either the seller or the buyer, one of As explained before, the seller warrants its ownership of the property. his main tasks being to make sure that taxes are paid. However, this affirmation is automatically verified by the notaire or Assuming the shares of the company owning the real estate are sold, the avocats in checking the “registre cadastral”. The same applies due diligence should be performed by parties in order to verify the when the shares of the company owning French real estate are sold. situation of the French real estate and the financial situation of the company sold. These verifications are performed in practice by

France French avocats. 7.6 What (if any) are the liabilities of the buyer (in addition to paying the sale price)?

7.2 Is the seller under a duty of disclosure? What matters In the case of the purchase of French real estate, the buyer is only must be disclosed? liable for expenses mentioned in the agreement. Assuming the shares of the company owning the French real estate are sold, the The seller has, as a general rule, very few duties of disclosure, and purchaser is liable for known and unknown debts of the company. the notaire will not necessarily protect the purchaser. As explained In order to prevent or limit the liable risk of the buyer, a liability before, it is the responsibility of the purchaser to investigate the guarantee clause along with an escrow clause should be provided in property to their satisfaction. This is always reiterated in the standard the shares purchase agreement. sales agreement proposed by the French notaires. This is why it is recommended for both the seller and the buyer to engage their own avocat to ensure that everything is carried out to their satisfaction. 8 Finance and Banking

7.3 Can the seller be liable to the buyer for 8.1 Please briefly describe any regulations concerning misrepresentation? the lending of money to finance real estate. Are the rules different as between resident and non-resident In France it is rare that a seller is held liable for misrepresentation persons and/or between individual persons and relating to the acquisition of real estate. The buyer would need corporate entities? to demonstrate that the essential reason he/she was interested in purchasing the property was misrepresented in order to invalidate The Finance Bill of 2018 provides that loans granted by family the acquisition, according to the new article 1112-1 of the Civil Code. members to finance a French real estate property would only be Assuming the agreement was valid, it is voidable by application of the taken into consideration for real estate wealth tax (“IFI”) purposes new article 1187 of the Civil Code if at least one condition precedent (see Section 9 below) if the terms and conditions of the loan provided in the agreement was not met before the completion date. agreement are at arm’s length. It should be noted that in France, as a general rule, a private pre- This Finance Bill also provides that for tax payers having a real purchase agreement is signed between parties, providing several estate wealth exceeding €5 million, deductible loans for IFI purposes conditions precedent which should be met prior to the signing of cannot exceed 60% of the value of the real estate. Only 50% of the the purchase agreement before the notaire. After the signing of this amount exceeding this limit would be taken into consideration for agreement, it becomes very difficult to challenge the validity of the the determination of the IFI taxable basis. purchase, except in case of fraud. Finally, loan agreements providing for a “bullet repayment” at However, the seller’s liability is easier to challenge in cases of the maturity (“Balloon Loans”) should be amortised over the duration sale of shares of a company owning French real estate when the of the loan for IFI purposes. The principal of the loan which should share purchase agreement provides representations on the seller have been theoretically amortised is not deductible for the purpose which have not been met. The share purchase agreement can either of determining the net value of the taxable properties. be null and not valid according to article 1112-1 of the Civil Code in case of misrepresentation, or voidable by application of article 1187 8.2 What are the main methods by which a real estate of the Civil Code (see above). lender seeks to protect itself from default by the borrower? 7.4 Do sellers usually give contractual warranties to the buyer? What would be the scope of these? What is The traditional methods by which real estate lenders seek to protect the function of warranties (e.g. to apportion risk, to themselves are the inscription of the “privilège du prêteur de give information)? Are warranties a substitute for the deniers” (lenders’ pledges), registration of the mortgage within the buyer carrying out his own diligence? “registre cadastral” and by means of a pledge on the shares of the company owning the French real estate. The contractual warranties appearing in the “standard” private pre-purchase agreement of French real estate are, as a general 8.3 What are the common proceedings for realisation of rule, very limited and should be checked before the signing of the mortgaged properties? Are there any options for a agreement in front of the notaire. They may concern, for example, mortgagee to realise a mortgaged property without the nature of the building (land to build), the possibility of obtaining involving court proceedings or the contribution of the a construction permit or purchasing a vacant building when it is still mortgagor? occupied. It should also allow the new purchaser to substitute the seller in order to benefit from any building guarantees previously Conventional mortgages as well as “privilège du prêteur de granted. However, warranties are never a substitute for the buyer deniers” (lenders’ pledges) should only be registered in the “registre carrying out his own due diligence.

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cadastral” (see above) by French notaires. There is no need to Transfer of real estate is subject to transfer duties at the rate of involve court proceedings. 5.81%, calculated on the purchase price of the property, and at the One should also be aware that the French tax authorities are allowed rate of 5% on the sale price of shares of an SPI. to put a legal mortgage on French real estate properties if they have Traditionally, transfer duties are due by the purchaser even if it may reason to believe that their owners would not be able to pay their be provided otherwise in the sale agreement. Both the seller and taxes. purchaser are liable for their payment vis-à-vis the FTA.

8.4 What minimum formalities are required for real estate 9.2 When is the transfer tax paid? lending? The notaire levies transfer duties at the time as the property sale France As already explained, the registration of a conventional mortgage agreement is signed. Transfer duties on sale of an SPI’s shares should be executed by a French notaire. It is the same for the should be paid within 30 days of signing the sale agreement. registration of “privilège du prêteur de deniers” (lenders’ pledges).

Pledges over shares should only be registered with the “registre du 9.3 Are transfers of real estate by individuals subject to commerce et des sociétés” (Companies and Trade Registry). The income tax? cost associated with this is very limited in comparison to the fee for the registration of the mortgage. Transfers of real estate are subject to income tax at a flat rate of 19% and social security contributions at the rate of 15.50% for 8.5 How is a real estate lender protected from claims 2017 (which will be increased to 17.20% as of 1st January 2018, against the borrower or the real estate asset by other as provided by the Finance Bill for 2018). An additional tax at creditors? progressive rates varying from 2% to 6% also applies on capital gains exceeding €50,000. Finally, the exceptional contribution on The real estate lender is protected against claims against the borrower high income may also apply at a rate of 3% or 4% depending on or the real estate asset by other creditors by registering a “privilège the annual income and capital gains received by a tax payer during du prêteur de deniers” (lenders’ pledges) and/or a mortgage of first a said year. The marginal rate of taxation for 2018 would reach rank which will allow him to be paid before any other creditors, 46.2%. including the French tax authorities. Exemptions apply depending on the duration of the ownership of the property, under which a total exemption of income tax (at 8.6 Under what circumstances can security taken by a the rate of 19%), an exceptional contribution on capital gains (at lender be avoided or rendered unenforceable? progressive rates from 2% to 6%) and an exceptional contribution on high income (at the rate of 3% or 4%) is granted after 22 years The only circumstance where a security taken by a lender can be of ownership. A total exemption from the social contribution (at the avoided or rendered unenforceable is in case of fraud when the rate of 15.5% for 2017 and 17.2% for 2018) also applies after 30 lender helped the owner to organise his/her insolvency. years of ownership. The same regime applies for residents and non-residents of France. 8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? 9.4 Are transfers of real estate subject to VAT? How much? Who is liable? Are there any exemptions? There is no action a borrower can take except, of course, to demonstrate that the debts owed have been duly refunded to the lender. VAT may only apply (at a rate of 20%) on transfers of land to be built upon, on buildings under completion, and on new buildings completed in the previous five years. All other sales of real estate 9 Tax and SPI shares are subject to transfer duties, as explained in the answer to question 9.1. 9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable? 9.5 What other tax or taxes (if any) are payable by the seller on the disposal of a property? As a general remark, the “Code general des impôts” (“French tax code”) provides specialist treatment which is applied to real Assuming the seller of the real estate is a company subject to French estate located in France and companies owning such real estate corporate tax, capital gains are subject to French corporation tax which is very different from the tax regime applicable to other at a rate of 33.33%. The Finance Bill for 2018 provides for a assets or companies. The concept of “Société à preponderance progressive decrease of the corporation tax rate from 28% on the immobilière” (SPI) (a real estate company) has been introduced for first €500,000 profits for 2018 to 25% on all profits for 2022. A 30% French tax purposes only, which allows France to apply a specific flat tax would apply fromst 1 January 2018 on the distribution of regime on qualified companies. The concept of SPI has a different dividends to French resident individuals. Except when a tax treaty meaning depending on each tax involved. However, the common provides a lower rate, a 12.80% withholding tax would apply on characteristic of the different definitions (either those of the internal distribution of dividends benefiting non-French resident individuals. law or tax treaties) is that in order to be considered as an SPI, the Assuming the seller is a foreign company subject to corporate company (French or foreign) which owns, directly or indirectly, tax, a 33.33% withholding tax applies (for 2017) on capital gains French real estate must have a market value which exceeds that of realised upon the sale of French real estate. One may expect that their movable assets. this withholding tax rate would decrease (as from 2019) at the same pace as the decrease of the corporation tax rate.

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9.6 Is taxation different if ownership of a company (or 10.2 What types of business lease exist? other entity) owning real estate is transferred? As explained above, two main types of business lease exist: Transfers of shares of an SPI, when considered fiscally transparent ■ The “bail professionnel”, which applies to professionals by an individual (resident or non-resident of France) are subject running a civil activity (e.g.: lawyers, doctors…). The to the same regime as described in the answer to question 9.3. professional lease is concluded for a minimum period of However, the taxable capital gain is obtained by finding the six years. It can be renewed for a six-year duration. Each difference between the sale price and the purchase price of the sold party can refuse the renewal of the agreement by notifying SPI shares. The same exemptions for the duration of the ownership the other party six months before its termination date and the France also apply (see the answer to question 9.3). tenant can terminate the lease with six months’ notice. Transfers of shares of an SPI subject to corporation tax by an ■ The “bail commercial” which applies to business activities creating a “fonds de commerce” is described below. individual resident of France are subject in 2017 to progressive income tax scale rates (with a marginal rate of 45%) and social contributions at a flat rate of 15.5%. Some reductions amounting to 10.3 What are the typical provisions for leases of business 50% or 65% may apply, depending on the duration of ownership. premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or The 2018 Finance Bill provides for a flat rate of tax of 30% which sub-lease; (d) insurance; (e) (i) change of control of applies to the sale by French resident individuals of shares of an SPI the tenant; and (ii) transfer of lease as a result of a subject to corporate tax. However, allowances based on the duration corporate restructuring (e.g. merger); and (f) repairs? of ownership will no longer be allowed. Non-French residents would still be subject to the same regime as those applicable in As explained in the answer to question 10.2, only the aspects cases of sale of shares of an SPI considered as fiscally transparent. relating to the “baux commerciaux” will be discussed in these Finally, the special tax on real estate capital gains (ranging from 2% answers. It applies to real estate where the “fonds de commerce” is to 6%; see the answer to question 9.3) also applies in all cases. run. The “fonds de commerce” is characterised by the existence of The transfer of shares of an SPI (regardless their fiscal statute) by a real and independent clientele owned by the tenant. The business a company (French or foreign) subject to corporate tax is taxed at a activity should be run by a tenant registered within the “registre du rate of 33.33%. As explained above, the Finance Bill provides for commerce et des sociétés” (business registry). a progressive reduction of corporate tax to 25% in 2022. Foreign (a) Term companies selling SPI shares are subject to a 33.33% withholding The term of the “bail commercial” should be concluded for at least tax levied upon the sale which can be imputed on the corporation nine years. However, the tenant can terminate the agreement at the tax due. end of each three-year period with a minimum of six months’ notice. (b) Rent increases 9.7 Are there any tax issues that a buyer of real estate The rental fees are freely determined between both parties upon the should always take into consideration/conduct due diligence on? signature of the original “bail commercial”. As a general rule, rental fees can be indexed but no increases may apply before a period of at least three years following the date of first use or of the renewal As explained above, the transfer of real estate is secured in France. of the lease agreement. In addition, the increase is limited in order However, it is important in our opinion to execute survey diligence to protect the tenant. before purchasing even if it is, not yet, a common practice. Assuming the purchase of an SPI’s shares is contemplated, it is important to (c) Tenant’s right to sell or sub-lease conduct due diligence not only on the real estate but also on the tax When business premises are let with a lease to operate a certain and financial situation of the SPI. type of business, the tenant has the right to sell his right to the lease (“droit au bail”). Depending on the provision of the “bail commercial” the landlord should either agree or participate in the 10 Leases of Business Premises sale of the “droit au bail”. The sub-lease should be provided by the “bail commercial” and the landlord should either authorise or participate in the sub-lease agreement’s signature. 10.1 Please briefly describe the main laws that regulate leases of business premises. (d) Insurance Real estate is, as a general rule, insured by the landlord against The statute of “baux commerciaux” (leases of business) provided damage to the building and insured by the tenant again damage to by articles L145-1 to R145-37 of the “Code de Commerce” the premises and equipment. (trade code), is deemed to protect the tenant’s rights. It provides (e)(i) Change of control of the tenant a minimum duration and allows the tenant the right to renew the As a general rule the change of control of the tenant does not interfere agreement at its term. It also makes it possible to limit the increase with the “bail commercial”, except of course if it specifically in rental fees when the agreement is renewed. stipulates otherwise. The statute of “bail professionnel” (professional lease) provided by (ii) Transfer of lease as a result of a corporate restructuring article 57A of the law 86-1290 on 23rd December 1987 and article The “droit de bail” owned by a merged tenant is automatically 1713 of the Civil Code is applicable to professional activities other transferred to the absorber. than businesses. As a consequence, professional premises cannot be used by a tenant running business activities. (f) Repairs Important renovation work, such as structural and internal work is the responsibility of the landlord, while other repairs are the responsibility of the tenant.

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unrelated persons. The same regime applies when assets are owned 10.4 What taxes are payable on rent either by the landlord through a trust. or tenant of a business lease? (e) Reporting obligations (a) Taxation of rental income In order to allow France to levy its taxes and duties, French or foreign companies, as well as by trustees of trusts owning French When the landlord is an individual, French income tax is due assets, including real estate located in France, have a duty to report on rental income on a cash basis. The determination of the changes in ownership. tax basis is different if the building is rented out as furnished or The identity of the ultimate owners of French or foreign companies, unfurnished. Residents and non-residents are subject to income tax regardless of their activities, registered within the French company at progressive rates with a marginal rate of 45%. Non-residents are, and commerce registry should be disclosed. France however, subject to a minimum taxation amounting to 20%. Social contributions are also due at a rate of 15.5% for 2017. They are set An annual 3% tax is due by French or foreign companies owning to increase to 17.2% from 1st January 2018. Finally, the contribution directly or indirectly real estate properties located in France. on high income amounting to 3% or 4% may also apply. Companies disclosing the identity of their owners benefit as a general rule from an exemption. Companies are subject to corporation tax on accrued rental income. The determination of the tax basis is the same as for operational An 80% penalty is due on eluded income tax, wealth tax, IFI tax, companies. The depreciation of the building is deductible. and gift and inheritance tax when the trustees of a trust indirectly The standard rate for 2017 of corporate tax is 33.33%. It will owning assets subject to those taxes fail to report the identity of the progressively decrease from 2018 to reach 25% in 2022, according settlors and beneficiaries as well as all events affecting the trust. to the 2018 Finance Bill. (b) VAT 10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party VAT is due when industrial and/or commercial buildings are rented etc.)? Are there any special provisions allowing a out as furnished. The landlord of an industrial and/or commercial tenant to extend or renew the lease or for either party building rented out as unfurnished may elect for VAT under certain to be compensated by the other for any reason on circumstances. This election allows the VAT to be deducted on termination? construction cost, expenses relating to renting out the property and avoiding the “taxe sur les salaires” (tax on wages). VAT is never As explained above, business leases are usually terminated by the due on residential buildings rented out unfurnished. tenant at the end of a three-year period (see question 10.2 and 10.3). (c) French wealth tax and the new IFI The landlord could also terminate a business lease at the end of a Since 1981, wealth tax has been due every year by resident taxpayers six-year period (“bail professionnel”) or of the nine-year period on their worldwide assets (movable and immovable). Non-resident (“bail commercial”). The parties may always decide to extend and taxpayers are only taxable on their French assets including real renew the lease. The landlord should compensate the tenant if he estate properties owned directly or indirectly through French or terminates the lease before or at its expiry. foreign companies and/or trusts. Wealth tax is due when the net market value of taxable assets exceeds €1,300,000 for 2017. It is 10.6 Does the landlord and/or the tenant of a business subject to progressive tax rates from 0.50% to 1.50% for 2017. lease cease to be liable for their respective The 2018 Finance Bill will replace the wealth tax with a new wealth obligations under the lease once they have sold their interest? Can they be responsible after the sale in tax only due on real estate properties called “Impôt sur la Fortune respect of pre-sale non-compliance? Immobilière” (“IFI”). IFI would be due by resident taxpayers on the worldwide real estate properties owned directly or indirectly, and by Landlords are no longer liable for their obligations once they have non-resident taxpayers only on their real estate properties located sold their real estate. However, the tenants remain responsible if in France, owned directly or indirectly through French or foreign they have sold their interest or sub-leased the real estate. companies or trusts. The rules governing IFI would be largely inspired by the wealth tax regime with new amendments deemed to avoid what the FTA considered as tax avoidance. Among a few 10.7 Green leases seek to impose obligations on other exemptions, participation in a French or foreign operating landlords and tenants designed to promote greater company owning real estate which does not exceed 10% would sustainable use of buildings and in the reduction of be exempted from IFI. As already explained, some limitation of the “environmental footprint” of a building. Please briefly describe any “green obligations” commonly deduction of debts is also provided. found in leases stating whether these are clearly (d) French gift and inheritance tax defined, enforceable legal obligations or something French gift tax and inheritance tax are due on worldwide assets not amounting to enforceable legal obligations (for example aspirational objectives). by resident tax payers and only on French assets by non-resident tax payers. Shares of French or foreign companies qualifying as a “société à prépondérance immobilière” (see question 9.1) and The French Construction Code provides for numerous environmental French real estate owned directly or indirectly by a French or foreign requirements (“green obligations”) relating to leases, such as the company (or a trust) more than 50% of which is owned by the same requirement to include an energy diagnosis performance with all family are, among others, considered French assets. lease agreements, with the exception of agricultural and seasonal lease agreements (Article L.1343-1). The rate at which French gift tax and inheritance tax are due st depends on the relationship between the donor (deceased) and the As of 1 January 2011, all rental (and sale) adverts must also contain donees (heirs). A full exemption of inheritance tax applies between the energy performance grade (from A to G) of the building (article spouses. A similar progressive rates scale applies (from 0 to 45%) R.134-5-1). to donations between spouses and to donations and successions Since 14th July 2013, leases relating to offices or commercial between parents and descendants. A flat tax of 60% applies between buildings with a surface area larger than 2,000 m² must contain a

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“green appendix” (“Annexe environnementale”, article L.125-9 of (f) Repairs the French Environmental Code). This green appendix contains Important renovation work, such as structural and internal work, comprehensive information in respect of the energy equipment of is the responsibility of the landlord, while other repairs are the the building (e.g. waste treatment, heating and lighting system, responsibility by the tenant. water consumption).

11.4 Would there be rights for a landlord to terminate a 11 Leases of Residential Premises residential lease and what steps would be needed to achieve vacant possession if the circumstances existed for the right to be exercised?

France 11.1 Please briefly describe the main laws that regulate leases of residential premises. The protection of the tenants is a very serious issue in France, and therefore strictly regulated. A landlord wishing to terminate a Land use regulation in France is complex. As explained in question residential lease should indemnify the tenants. 1.1, the current frame of the regulation is set out in the Construction Code, the Urban Planning Code, and the Environmental Code. 12 Public Law Permits and Obligations On 20th September 2017, The French Minister of territories’ cohesion set forth a “housing strategy” (“Stratégie du logement”) which provides for numerous propositions aiming at promoting 12.1 What are the main laws which govern zoning/ and simplifying real estate development. It notably includes a permitting and related matters concerning the use and occupation of land? Please briefly describe them commitment not to create any new “technical standards” in building and include environmental laws. legislation and to create a better management of improper claims against construction permits. As already explained, the “Code de l’urbanisme” (“Planning Code”) provides rules harmonising the use of the French territory. 11.2 Do the laws differ if the premises are intended for It governs the location, size and main characteristics of buildings. It multiple different residential occupiers? also provides zoning rules. The “Code de la Construction et de l’habitation” (“Construction The laws do not differ if the premises are intended for multiple and Housing Code”) gathers together construction, development different residential occupiers. Some rules are, however, organised and social housing rules. It provides compulsory specifications and for multiple different residential occupiers which should be agreed proper use of buildings. to and followed by new occupiers (i.e. “Règlement de co-propriété”). The “Code de l’environnement” (“Commercial Code”) provides, They should be attached to all purchase and lease agreements in the among others, rules prohibitions, and requirements for buildings form of an appendix. contractors and owners.

11.3 What would typical provisions for a lease of 12.2 Can the state force land owners to sell land to it? If residential premises be in your jurisdiction regarding: so please briefly describe including price mechanism. (a) length of term; (b) rent increases/controls; (c) the tenant’s rights to remain in the premises at the end of the term; and (d) the tenant’s contribution/obligation The local authorities, and under certain circumstances the State, to the property “costs” e.g. insurance and repair? may exercise their pre-emptive rights upon the sale of real estate properties as already mentioned above. (a) Term They can also force land owners to sell their land. The expropriation The term of the “bail d’habitation” should be at least six years. procedure is provided by an ordinance dated 4th November 2004. However, the tenant can terminate the agreement at the end of each It should, however, only be applied for public utility purposes. three-year period with a minimum of six months’ notice. Evicted land owners receive full compensation, determined either (b) Rent increases by a contractual agreement or settled by the judge. The rental fees are freely determined between both parties upon the signature of the original “bail d’habitation”. As a general rule, 12.3 Which bodies control land/building use and/or rental fees can be indexed but no increases may apply before a occupation and environmental regulation? How do period of at least three years following the date of first use or of the buyers obtain reliable information on these matters? renewal of the lease agreement. In addition, the increase is limited in order to protect the tenant. Lands and building use are under the control of local administrative (c) Tenant’s right to sell or sub-lease authorities. The “Maire” (Mayor) ensures the town planning and grants the “permis de construire” (“prior construction permits”). As a general rule, the tenant cannot sell its rights. The sub-lease The “préfet de région” (“regional prefect”) may also be involved in should be provided by the “bail d’habitation” and the landlord specific circumstances. Other administrative authorities may also should authorise signature of the sub-lease agreement. be included in the process, for example, for historical monuments or (d) Insurance for environment concerns. As a general rule, the landlord insures the property against damage to the building and the tenant insures against damage to the premises 12.4 What main permits or licences are required for and equipment. building works and/or the use of real estate? (e) Change of control of the landlord As a general rule a change of control of the landlord does not Various permits granted by the administrative authorities are required interfere in the “bail d’habitation”. in France for building works as well as for the use of real estate.

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Prior construction permits as well as specific authorisations should be obtained for constructions exceeding 20 m2. Any modification of 12.9 In what circumstances (if any) is environmental clean- the use of buildings should also be authorised. up ever mandatory?

Environmental clean-up is mandatory in case of risk to human health, 12.5 Are building/use permits and licences commonly security and the environment. Public authorities can automatically obtained in your jurisdiction? Can implied permission proceed with the clean-up if a formal demand was unsuccessful. be obtained in any way (e.g. by long use)? The person responsible for such pollution must bear the cost. Compulsory regulations which should be complied with in order to

obtain building/use permits are, as a general rule, well-known by 12.10 Please briefly outline any regulatory requirements France architects. As a consequence, preparing the request for a building for the assessment and management of the energy permit is not particularly difficult. Nevertheless, any obtained performance of buildings in your jurisdiction. administrative permit can be challenged by third parties if they are effected by the contemplated project. As a consequence, it can take A diagnosis of energy performance (so-called “DPE”) must be time to obtain a favourable decision, which is finally given by an attached to the deed transferring the real estate ownership or to the administrative judge. lease agreement (either residential or commercial).

12.6 What is the appropriate cost of building/use permits 13 Climate Change and the time involved in obtaining them?

As any administrative authorisations for building/use permits are 13.1 Please briefly explain the nature and extent of any free of charge, the cost of their request is, as a general rule, included regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions in the architect’s fees. When the building permit is challenged before trading scheme). the administrative court, its cost may become more substantial depending on the importance of the project. France transposed the European Directive 2003/87/EC of 13th As a general rule, the time necessary to obtain the building permits October 2003 establishing a scheme for greenhouse gas emission is relatively short. A two-month period is required for ordinary allowance trading. The French environmental code therefore building permits, three months for construction-development provides for a mandatory emissions trading scheme applicable to permits and six months for high-rise or public access buildings. They energy production activities, civil aviation activities, production can be challenged by third parties within two months following their of paper and carbon, the mineral industry and the production and display on the building site. processing of ferrous metals.

12.7 Are there any regulations on the protection of historic 13.2 Are there any national greenhouse gas emissions monuments in your jurisdiction? If any, when and how reduction targets? are they likely to affect the transfer of rights in real estate? Law n° 2009-967 of 3rd August 2009 (the “Grenelle 1” Act) aims at reducing greenhouse gas emissions to a quarter of current levels As already mentioned, several regulations apply allowing for by 2050. the protection of historic monuments. However, they only apply on renovation work of the building which is considered either as historic or located in an historic area. However, there is no 13.3 Are there any other regulatory measures (not already regulation limiting the transfer of the ownership of such buildings. mentioned) which aim to improve the sustainability of both newly constructed and existing buildings?

12.8 How can e.g. a potential buyer obtain reliable The “Grenelle 1” Act encourages the construction of “low energy information on contamination and pollution of real consumption” buildings (i.e. less than 50 KWh/m²/year) and estate? Is there a public register of contaminated land in your jurisdiction? requires a reduction of energy consumption by 38% by 2020 in the existing building stock. By 2020, all new buildings should produce more energy than they use. Careful investors must exercise due diligence and request a pollution diagnosis from the vendor based on environmental documents. Law n° 2010-788 of 12th July 2010 (the “Grenelle 2” Act) completed and implemented the “Grenelle I” Act, notably by introducing Investors can also ask the “DREAL” (a French public body) for the specific requirements such as the completion of an energy relevant documentation, or consult databases such as “BASOL” and performance diagnosis as of 1st January 2017 for buildings which “BASIAS” which notably identify sites and soils which are polluted have heating or cooling systems, and the requirement to carry out or may potentially be polluted. works to increase the energy efficiency of buildings for commercial use before 1st January 2020.

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Maryse Naudin Jean-Marc Tirard Tirard, Naudin Tirard, Naudin 9, rue Boissy d’Anglas 9, rue Boissy d’Anglas Paris 75008 Paris 75008 France France

Tel: +33 1 53 57 36 00 Tel: +33 1 53 57 36 00 Email: [email protected] Email: [email protected] URL: www.tirard-naudin.com URL: www.tirard-naudin.com France Maryse Naudin is a member of the Paris Bar and the co-founder, in Jean-Marc Tirard is a member of the Paris Bar and the co-founder, in 1989, of Tirard, Naudin. She now has more than 30 years’ experience 1989, of Tirard, Naudin. He is recognised as an authority in French in advising and defending a varied clientele, from multinational and international tax law and has considerable experience in tax and corporations to high-net-worth individuals, in relation to cross-border estate planning for French and foreign high-net-worth individuals. tax and estate planning issues. She has a particular expertise in For more than 40 years, Jean-Marc Tirard has advised on numerous negotiating real estate transactions. She has advised many foreign high-profile corporate transactions. Notably, he has a long experience corporate or private investors acquiring French real estate property, in advising private and institutional investors in structuring their as well as French clients with foreign interests. Maryse Naudin is investments in French real property. also very experienced in setting up and structuring multinational large Mr. Tirard is a member of the International Academy of Estate and and medium sized groups establishing in Europe and has a proven Trust Law, a Fellow of the American College of Trust and Estate expertise in comparative corporate taxation of trading and holding Counsel and the co-founder of the French branch of STEP. He is rated companies within the EU. She is a member of the International as one of the leading tax and private client French lawyers in various Academy of Estate and Trust Law, the co-founder and former surveys and was named Outstanding European Individual of the Year secretary of the French branch of STEP, and a former chairman of the by the Citywealth Magic Circle Awards 2009. “International Estate Planning” commission of the Union Internationale des Avocats.

Co-founded in 1989 by Jean-Marc Tirard and Maryse Naudin, Tirard, Naudin is a boutique law firm which specialises in international taxation. The founding partners are assisted by Ouri Belmin, who is in charge of the team in Paris. Tirard, Naudin is regularly involved in structuring acquisitions of French assets (especially real estate) on behalf of foreign investors. The firm also has proven experience in procedural and tax litigation with a particular emphasis on international tax issues, especially in respect of the major European freedoms and fundamental principles. Finally, Tirard, Naudin has particular expertise in issues related to the use of tools and concepts of Common Law in the context of Civil Law (particularly trusts). Clients of the firm include large companies and foreign institutional investors, as well as a prestigious private clientele. The firm also works as an expert on behalf of French and foreign colleagues.

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Germany Olaf Jacobsen

GSK Stockmann Sascha Zentis

1 Real Estate Law 2 Ownership

1.1 Please briefly describe the main laws that govern 2.1 Are there legal restrictions on ownership of real estate real estate in your jurisdiction. Laws relating to by particular classes of persons (e.g. non-resident leases of business premises should be listed in persons)? response to question 10.1. Those relating to zoning and environmental should be listed in response to In Germany there are no specific legal restrictions on ownership. question 12.1. Those relating to tax should be listed in Every natural or legal person is generally entitled to acquire and response to questions in Section 9. own real estate. The German real estate law is mainly governed by the Civil Code (Bürgerliches Gesetzbuch), the Hereditary Building Rights 3 Real Estate Rights Act (Gesetz über das Erbbaurecht) and the Condominium Act (Gesetz über das Wohnungseigentum und das Dauerwohnrecht). The formal part is, inter alia, governed by the Notarisation 3.1 What are the types of rights over land recognised in Act (Beurkundungsgesetz) and the Land Registration Act your jurisdiction? Are any of them purely contractual (Grundbuchordnung). between the parties? For certain kinds of regulated investors (such as investment Regarding full ownership (Volleigentum) of real estate, German management companies or insurance companies), special law differentiates between several titles of real estate. The most legal provisions, e.g. the Capital Investment Act (Kapitalanl- important kinds of such titles are co-ownership (Miteigentum), agegesetzbuch) or Insurance Supervisory Act (Gesetz über die hereditary building rights (Erbbaurechte) and condominium Beaufsichtigung der Versicherungsunternehmen) apply for their owenership (Wohnungs-/Teileigentum). Besides these kinds of titles, investments in real estate. German law recognises different rights in rem regarding real estate. The most important rights in rem are limited personal easements 1.2 What is the impact (if any) on real estate of local (beschränkte persönliche Dienstbarkeit), ground easements common law in your jurisdiction? (Grunddienstbarkeiten), usufruct rights (Nießbrauchsrecht), registered leases (Dauernutzungsrecht), pre-emptive rights (Vorkaufsrecht), In Germany, an extensive codified legal system exists. Therefore, land charges (Reallasten), mortgages (Grundschulden), accessory common law does not have a significant impact on the German mortgages (Hypothek) and annuity land charges (Rentenschulden). real estate law. However, judgments of the higher regional courts Generally, it is also possible to solely agree on contractual rights (Oberlandesgerichte) and of the federal court (Bundesgerichtshof) regarding a real estate; however in this case the rights do not provide are regularly taken into account regarding the interpretation of legal an in rem effect. provisions.

3.2 Are there any scenarios where the right to a 1.3 Are international laws relevant to real estate in your real estate diverges from the right to a building jurisdiction? Please ignore EU legislation enacted constructed thereon? locally in EU countries. Under German law, ownership of land and ownership of buildings In general, international laws are not applicable to German real constructed thereon generally coincide. However, current German estate law. However, in case that one of the parties to a real estate law recognises two scenarios in which the ownership of land and transaction is governed by foreign law, this may have an impact on the ownership of the building constructed on the land differentiate: certain formalities. the first scenario is a hereditary building right in terms ofthe Hereditary Building Rights Act. In case of a hereditary building right, the beneficiary of the hereditary building right is the owner of

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the building, but the land is owned by the grantor of the hereditary building right; and the second scenario is a building that has only 4.6 On a land sale, when is title (or ownership) transferred been constructed for temporary use by a person exercising a right to the buyer? over that land. This structure is often found in connection with wind power plants which are erected for a certain time on the basis of an The legal title is transferred to the buyer upon proper registration easement. of the transfer of title in the land register. In general, the parties to a purchase agreement contractually agree that the application for the respective registration of ownership is not transmitted to the 3.3 Is there a split between legal title and beneficial title land register before payment of the purchase price. The maturity in your jurisdiction and what are the registration of the purchase price is regularly subject to a couple of conditions consequences of any split? precedent, e.g. the registration of a priority notice of conveyance Germany (Auflassungsvormerkung) in favour of the buyer or a waiver of German law does not have a split between legal and beneficial title. the municipal pre-emption right (Negativatest zum gemeindlichen Vorkaufsrecht). Following the payment of the purchase price, the 4 System of Registration transfer of possession, benefits and burdens/risks (Übergang von Besitz, Nutzungen und Lasten) takes place and the notary files the application for transfer of title with the competent land register. The 4.1 Is all land in your jurisdiction required to be registration process itself could take a couple of weeks or even months. registered? What land (or rights) are unregistered?

4.7 Please briefly describe how some rights obtain priority Generally, all land is registered. However, the law stipulates certain over other rights. Do earlier rights defeat later rights? exceptions, e.g. for land belonging to public entities and churches, and for streets, waterways and railroad tracks. The priority of registered rights is generally determined by the order and time of the registration. The priority of rights registered in 4.2 Is there a state guarantee of title? What does it each division of the land register depends on the timely order of guarantee? registration whereby the rights are registered in order of the filing of the respective application for registration. However, by contractual In Germany, no state guarantee of title exists. However, the land agreement it is also possible to register different rights with the same register is deemed to be correct and complete (“public faith in rank. Moreover, the beneficiary of a right may also agree to step the land register”) so that any person can generally rely on the back in rank in favour of another right. correctness and completeness of the land register unless the person knows about the incorrectness or incompleteness or an objection has been registered against an entry. Public faith does not apply to the 5 The Registry / Registries description of the property; especially not to its size. 5.1 How many land registries operate in your jurisdiction? 4.3 What rights in land are compulsorily registrable? If more than one please specify their differing rules What (if any) is the consequence of non-registration? and requirements.

All titles and all rights in rem have to be registered. In case of a In Germany, no central land register exists. The land registers are non-registration, the right does either not come into effect or does an organisational part of the lower courts (Amtsgerichte). Each land not have any in rem effect. register is responsible to keep the register for the properties located within its district. However, the rules applying for the different land registers are identical throughout Germany as they are codified in 4.4 What rights in land are not required to be registered? the Land Registration Act which is a federal law.

Sole contractual rights (such as lease agreements) are neither 5.2 Does the land registry issue a physical title document required to be registered nor can be registered. Moreover, certain to the owners of registered real estate? statutory rights and restrictions under civil or public law do not have to be registered (e.g. pre-emptive rights under the public building No. The land register does not issue a physical title document. law). However, it is possible to obtain an excerpt from the land register. For certain kinds of mortgages and accessory mortgages, so-called 4.5 Where there are both unregistered and registered land mortgage/accessory mortgage certificates (Grundschuldbrief/ or rights is there a probationary period following first Hypothekenbrief) are issued; this does not apply to the more usual registration or are there perhaps different classes or qualities of title on first registration? Please give book-entry mortgages and accessory mortgages. details. First registration means the occasion upon which unregistered land or rights are first registered 5.3 Can any transaction relating to registered real estate in the registries. be completed electronically? What documents need to be provided to the land registry for the registration Probationary periods as well as different classes or qualities of of ownership right? Can information on ownership of registration do not exist. registered real estate be accessed electronically?

No. This is currently not possible. The registration in the land register in Germany is still a paper-based procedure. However, in certain districts there are pilot projects for an electronic land register.

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In order to be registered as new owner of a property, at least the Legal and tax advisors will also be entrusted by the parties. If following documents are required: the seller decides to sell the asset by way of a structured bidding ■ notarised conveyance of ownership (Auflassung); process, it is more and more common that the legal advisors of the ■ declaration by the competent public authorities that either a seller prepare a legal fact book to facilitate the bidding process. statutory pre-emptive right does not exist or is not exercised; Usually, also the sale and purchase agreement is drafted by the and seller’s advisors. Real estate brokers and investment banks are also ■ clearance notice by the relevant tax authority regarding the a common part of such a sale process. payment of the real estate transfer tax. In certain cases, further documents may be required (e.g. approvals 6.2 How and on what basis are these persons of certain authorities if the property is located within certain urban remunerated? areas; approval of the depositary or the trustee if the property is held Germany by an investment fund or an insurance company). Notaries are remunerated according to the statutory provisions of the In nearly all cases it is possible to have electronic access to the land Code on Court and Notary Costs (Gerichts- und Notarkostengesetz). register extracts; however, there is no electronic access to the land Even if legal and tax advisors are usually remunerated by hourly register files (Grundakten). fees, it is more and more common that the parties agree on lump sum fees or caps. Real estate brokers and investment banks usually agree on a lump sum calculated as a percentage of the deal volume. 5.4 Can compensation be claimed from the registry/ registries if it/they make a mistake? 6.3 Do you feel there is a noticeable increase in the availability of capital to finance real estate In case of mistakes made by the land register, compensations can transactions in your jurisdiction, whether equity or only be claimed on the basis of the so-called government authority debt? What are the main sources of capital you see liability (Amtshaftung). Generally, claims on the basis of the active in your market? government authority liability are difficult to enforce as the legal requirements for such claims are strict. Capital flows into real estate in Germany remain very strong: in 2017, acquisition levels have already matched the already very 5.5 Are there restrictions on public access to the high levels of 2016 and 2015. Activity on the buyer-side continues register? Can a buyer obtain all the information he to be dominated by open-ended real estate funds/special funds. might reasonably need regarding encumbrances and Approximately 50% of capital is invested by foreign investors, other rights affecting real estate? especially foreign private equity funds or sovereign wealth funds. We have also seen a large number of high-net-worth individuals and The land register is generally not publicly accessible. The inspection family offices providing equity or mezzanine capital. of the land register is only permitted for the owner of a property, for those persons who either have been granted a power of attorney by 6.4 What is the appetite for investors and developers the owner of the property and for persons who have a legitimate in your region to look beyond primary real estate interest for the inspection of the land register. The legitimate interest markets and transact business in secondary or even has to be based on objective reasons and has to be proved towards tertiary markets? Please give examples of significant the land register or towards the notary who shall grant access to the secondary or tertiary real estate transactions, if land register. The access for persons who claim a legitimate interest relevant. can and has to be limited to such information which is relevant in view of the claimed interest. Generally, the interest in acquiring a The trend for investment in development projects is likely to property is not a sufficient legitimate interest for an access to the continue, underpinned by robust economic growth, increasing land register. In real estate transactions it is usual that either the take-up, declining vacancy and market conditions largely in favour seller provides an up-to-date extract from the land register or that of landlords. Very low yields show no sign of softening. Former the seller grants to the buyer a power of attorney to inspect the land B-Cities as, for example, Nuremberg seem very attractive. register.

6.5 Have you observed any trends in particular market 6 Real Estate Market sub sectors slowing down in your jurisdiction in terms of their attractiveness to investors/developers? Please give examples. 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally Even if some argue we could now be at the peak of the cycle, we see be involved in a real estate transaction in your no slowing down of activity. With investors still looking to maintain jurisdiction? Please briefly describe their roles and/or or increase their allocation to property, we believe this will keep duties. yields at their current low levels in the year ahead.

If the transaction is concluded as an asset deal or a share deal involving a German GmbH (Limited Liability Company), 7 Liabilities of Buyers and Sellers in Real notarisation of the sale and purchase agreement is mandatory. In Estate Transactions Germany, notarisation takes place before a notary public. The notary also supervises the satisfaction of conditions precedent to the validity of the agreement and the maturity of the purchase price and 7.1 What (if any) are the minimum formalities for the sale will file the necessary declarations with the public register for the and purchase of real estate? transaction to become effective. Any sale and purchase agreement for real estate needs to be

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notarised. The sale and purchase agreement has to contain all land register. The notary is under an obligation to check the land agreements between the parties regarding the sale of the property; register shortly before the notarisation so that the buyer would be side agreements may lead to an invalidity of the sale and purchase aware if the seller is not registered or if there has been an objection agreement. The declaration of transfer has to be made in front of a made against the ownership of the seller. In case the seller is not notary; this declaration is usually included in the sale and purchase yet registered as the owner at the time of the sale, the seller would agreement; however, it could also be declared in a separate notarial usually warrant ownership in the purchase agreement. Also, in case deed. In addition, the transfer of the property has to be registered of a share deal it is common that the seller warrants to be the owner in the land register. of the shares.

7.2 Is the seller under a duty of disclosure? What matters 7.6 What (if any) are the liabilities of the buyer (in addition Germany must be disclosed? to paying the sale price)?

The Civil Code does not explicitly provide any duties of disclosure. Besides the obligation to pay the purchase price, the buyer usually However, based on the principle of good faith, which under has to pay the transaction-related costs of the notary and the land German law is a generally applying provision, the German courts register (other than those arising in connection with the deletion of have deduced a duty of disclosure for sellers. Generally, the seller existing mortgages) as well as the real estate transfer tax. Moreover, is obliged to disclose all information which is of significance for the buyer may have the obligation to initiate or to support the merger the reasonable buyer’s decision to acquire the property and which control procedure if the transaction is subject to merger control. the buyer may expect to be disclosed by a seller under the usual commercial practice (e.g. disclosure of hidden defects, known environmental contaminations, missing building permits, disputes 8 Finance and Banking regarding the property). 8.1 Please briefly describe any regulations concerning 7.3 Can the seller be liable to the buyer for the lending of money to finance real estate. Are the misrepresentation? rules different as between resident and non-resident persons and/or between individual persons and corporate entities? Yes, the seller can be liable for misrepresentation. This applies especially in case of wilful or gross negligent misrepresentations, The German Civil Code contains the main regulations regarding real but also for cases of simple negligence. Especially in a market estate law, loan contracts and the respective security. The Banking situation in which the demand exceeds the offer, sellers often try Act (Kreditwesengesetz) contains regulatory rules regarding to limit the liability for simple misrepresentation; however, this is lending business and bank supervision. There are no different generally not accepted by buyers. rules for resident and non-resident persons, but there are substantial differences for loans granted from corporate entities to consumers 7.4 Do sellers usually give contractual warranties to the (“consumer loans”). buyer? What would be the scope of these? What is the function of warranties (e.g. to apportion risk, to give information)? Are warranties a substitute for the 8.2 What are the main methods by which a real estate buyer carrying out his own diligence? lender seeks to protect itself from default by the borrower? The scope of warranties depends on various factors such as the market situation, the location and situation of the property and the The typical security package for a real estate lender comprises land quality of the documents and information provided by the seller charge(s), rental assignments, assignments of insurance claims and in the due diligence. Generally, sellers try to exclude contractual often account pledges, share pledges and assignments of third party warranties as far as possible; however, it is common that the seller guarantees. In case of real estate project financings, the security accepts certain warranties. This applies especially to tax-related package usually also contains assignments of claims against issues and to the non-transfer of employees. Warranties relating contractors and the agreement of step-in rights to main project to the non-existence of encumbrances and lease agreements and contracts. to public law matters and environmental issues, are typical. Most purchase agreements contain limitations of liability. Warranties are 8.3 What are the common proceedings for realisation of a means to apportion the risks. mortgaged properties? Are there any options for a Warranties do not substitute a proper due diligence, as it is unlikely mortgagee to realise a mortgaged property without that the buyer can reach far-reaching warranties in the purchase involving court proceedings or the contribution of the mortgagor? agreement. Moreover, most purchase agreements exclude warranty claims of the buyer if the buyer could have been aware of the The lender is entitled to realise the mortgage by way of enforced underlying risks by performing a due diligence. administration (collecting the rents) and/or enforced sale (sale by way of public auction). The lender typically obtains the 7.5 Does the seller warrant its ownership in any way? enforcement title (vollstreckbarer Titel) as part of the mortgage deed Please give details. so that no additional court proceedings are required in this respect. The enforced administration and enforced sale are conducted by the In Germany, it is generally not necessary to grant a warranty court in accordance with the Compulsory Auction of Immovable regarding ownership, as the buyer can rely on the correctness of the Property Act (Zwangsversteigerungsgesetz).

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8.4 What minimum formalities are required for real estate 9 Tax lending?

9.1 Are transfers of real estate subject to a transfer tax? In general, there are no special formalities for loans; however, land How much? Who is liable? charges need to be notarised and registered in the land register. Furthermore, consumer loans need to be in writing and contain The transfer of real estate situated in Germany is subject to real estate special revocation rights. transfer tax (RETT; “Grunderwerbsteuer”) pursuant to the real estate transfer tax act (RETT Act; “Grunderwerbsteuergesetz”). RETT has 8.5 How is a real estate lender protected from claims to be paid for the transfer of real estate, for the transfer of at least 95%

against the borrower or the real estate asset by other of the interests in a partnership within five years (if the partnership Germany creditors? holds real estate) and for transactions of the interests of companies (if the company holds real estate). The tax rate depends on the The lender as the land charge beneficiary is granted preferential federal state where the real estate is located. The tax rate currently treatment vis-à-vis the unsecured creditors even in cases of pending varies from 3.5% (Bavaria and Saxony) to 6.5% (Brandenburg, North insolvency proceedings. Proceeds from the realisation of the land Rhine-Westphalia, Saarland and Schleswig-Holstein). The tax is to charge are disbursed to the land charge beneficiaries in the order of be calculated according to the value of the consideration. In case of the ranking of the land charges or mortgages registered in the land an asset deal, the consideration is the purchase price. Normally, the register. purchaser and the seller are liable for the payment of RETT; however, the parties are able to contractually stipulate that RETT shall be borne only by one of the parties (usually by the purchaser). In case of a change 8.6 Under what circumstances can security taken by a lender be avoided or rendered unenforceable? of the partnership of a real estate holding partnership, the partnership itself is liable for the payment of RETT. In case of transactions of the The acts of any person including the creation and enforcement interests of real estate holding companies, the legal entity which holds of security as well as the creation and enforcement of other the economic exposure is liable for the payment of RETT. creditors’ rights and remedies are subject to the legal principles and limitations generally applying to finance and other agreements 9.2 When is the transfer tax paid? and their enforcement under German and foreign law. Any agreement or creditor’s rights arising therefrom may, therefore, A transfer of real estate has to be notified to the local tax office. be invalid, voidable or unenforceable (in whole or in part) under The obligation applies to the purchaser, the seller, the courts, the the applicable bankruptcy, insolvency, moratorium, liquidation, authorities and the notary. After notification, the local tax office will fraudulent conveyance, creditor protection or other legislation issue a tax assessment notice. The purchaser will not be registered of general application, in particular the German Act of Avoiding in the land register until the tax office has issued that RETT was Transactions (Anfechtungsgesetz) or the German Insolvency Code paid. RETT becomes due one month after announcement of the tax (Insolvenzordnung/InsO). assessment notice. Generally, RETT arises upon conclusion of the Enforcement of security interest will not necessarily be enforced sale and purchase agreement (i.e. payment of the purchase price is not in all circumstances in accordance with the terms of security necessary). If the transfer of real estate is subject to the occurrence of documents, in particular under the applicable insolvency laws, e.g.: a condition precedent, RETT arises upon fulfilment of the condition. ■ Under Section 166 (2) of the Insolvency Code, the security In case of the transfer of at least 95% of the interests in a real estate agent (Sicherheitennehmer) may be barred from enforcing the holding partnership, RETT arises upon the transfer of partnership receivables assigned to it and the insolvency administrator interests. In case of RETT-able transactions of the interests of has the right to realise receivables assigned by way of security companies, RETT arises upon fulfilment of the statutory articles. on behalf of the security agent. ■ In the case of realisation of such receivables by the insolvency 9.3 Are transfers of real estate by individuals subject to administrator, the insolvency administrator may deduct his income tax? costs of determination and realisation from the proceeds of enforcement. If an individual holds the real estate as part of his private assets Where the insolvency administrator waives such right of realisation for a period of 10 years or less, income from the sale of the real in favour of the security agent, the security agent is nevertheless estate is subject to income tax and the solidarity surcharge obliged to transfer to the estate out of the enforcement proceeds an (“Solidaritätszuschlag”). The tax rate depends on the individual tax amount equal to the costs of determination as well as the amount of rate of the seller (maximum 47.475%). If an individual holds the any value added tax, if applicable (Section 171 (2) of the Insolvency real estate as part of his private assets for a period of more than 10 Code). years, the sale of the real estate is income tax-free. The transfer of real estate could be subject to trade tax (TT; “Gewerbesteuer”), if 8.7 What actions, if any, can a borrower take to frustrate three or more properties are sold within a period of five years. The enforcement action by a lender? tax rate depends on the municipality and currently varies from 7% to 18%. If an individual holds the real estate as part of his business The borrower may delay the process by disputing court valuations in assets, income from the sale of the real estate is subject to income the course of the enforced sale or commence insolvency proceedings tax (tax rate maximum 47.475%). Additionally, the sale is subject to to increase enforcement costs (see details above). trade tax. There will be no trade tax if the taxpayer is able to fulfil the prerequisites of the extended trade tax deduction. A non-resident is not subject to TT if he does not have a permanent establishment in Germany.

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(“Abgabenordnung”). The purchaser could be liable for so-called 9.4 Are transfers of real estate subject to VAT? How operational taxes (“betriebliche Steuerschulden”) and withholding much? Who is liable? Are there any exemptions? amounts (“Steuerabzugsbeträge”) due from the seller. The purchaser can also be held liable for land taxes in respect of the property. If the transfer of real estate is qualified as transfer of a business as Therefore, the purchase agreement should contain indemnities in a whole, it is not subject to VAT. In the case that the transfer of favour of the purchaser. Real estate could contain some operating real estate is qualified as supply of real estate, it is VAT-exempt. facilities. These operating facilities should be identified. Otherwise, However, the seller usually may opt for the application of VAT and the non-identification poses the risk of excessive RETT and VAT. waive the VAT-exemption for the part of the real estate which is Additionally the lease of operating facilities could jeopardise the used for sales which do not exclude input tax deduction. The tax extended trade tax deduction.

Germany rate is 19%. Due to the reverse charge procedure, the purchaser is liable for VAT. However, the purchaser is able to deduct input tax. Therefore, VAT is a pass-through item. 10 Leases of Business Premises

9.5 What other tax or taxes (if any) are payable by the 10.1 Please briefly describe the main laws that regulate seller on the disposal of a property? leases of business premises.

If the seller of the real estate is an individual, there should be no The Civil Code provides for the authoritative regulations regarding taxes other than income tax (plus the solidarity surcharge and leases of any kind, also including special statutory provisions church tax) and RETT. The tax rate depends on the individual tax with respect to the law of General Terms and Conditions (Recht rate of the seller. der Allgemeine Geschäftsbedingungen). Further special statutory If the seller is a partnership, the transfer of real estate should be provisions besides the Civil Code exist, such as the regulation of subject to income tax (plus the solidarity surcharge) and trade tax (if operating expenses (Betriebskostenverordnung) or the regulation the partnership is not able to fulfil the prerequisites of the extended on price clauses (Preisklauselgesetz), the latter stipulating the trade tax deduction. legitimacy of indexation clauses. If the seller is a corporation, the transfer of real estate should be subject to corporate income tax (CIT; “Körperschaftsteuer”) plus 10.2 What types of business lease exist? the solidarity surcharge. The total tax rate is 15.83%. Furthermore, the seller is subject to TT. Any kind of business premises can be subject to a lease pursuant to the Civil Code including commercial interim leases with respect 9.6 Is taxation different if ownership of a company (or to residential leases. This also includes usufructuary leases other entity) owning real estate is transferred? (Pachtverträge) where the tenant is also entitled to enjoy the fruits of the lease object as income under the rules of proper management. In case of transfers of real estate by the transfer of shares of a real estate holding company, RETT become due if 95% or more of 10.3 What are the typical provisions for leases of business partnership interests in a real estate holding partnership are directly premises in your jurisdiction regarding: (a) length of or indirectly transferred to new partners within a period of five years term; (b) rent increases; (c) tenant’s right to sell or (Section 1 Para. 2a RETT Act). If only 94.9% of the partnership sub-lease; (d) insurance; (e) (i) change of control of interests in a partnership are transferred to new partners within a the tenant; and (ii) transfer of lease as a result of a corporate restructuring (e.g. merger); and (f) repairs? period of five years, RETT will not be triggered in the case at hand. After the five-year period, the outstanding 5.1% of the partnership (a) Term: Business leases in general provide for a fixed term interests could be transferred; nevertheless, RETT will be due on together with the tenant’s right to prolong the lease by a fixed this 5.1%, but the transfers of 94.9% of the interests are RETT-free. term as stipulated in the lease agreement. The maximum term Furthermore, in case of transfers of real estate by the transfer of of a lease is limited by the Civil Code to 30 years. A lease shares of a real estate holding company, RETT becomes due if agreement has to comply with the requirements of written 95% or more of (corporation) shares or (partnership) interests in form (Schriftform) pursuant to Sec. 550 Civil Code if its fixed a real estate holding company are directly or indirectly transferred term exceeds one year. (Section 1 Para. 3, 3a RETT Act). (b) Rent increases: In general, business leases provide for an indexation of the rent linked to the development of the consumer price index. Such indexation is only valid if the 9.7 Are there any tax issues that a buyer of real estate lease is binding for the landlord for at least 10 years (it is should always take into consideration/conduct due sufficient if the fixed term and tenant’s potential prolongation diligence on? options together exceed a term of 10 years) and if increases and decreases of the rent are covered equally. Alternatively, If the transfer of real estate is qualified as transfer of a business as a stepped rents are also – but more rarely – common business whole, the purchaser will continue the legal position of the seller for practice. VAT purposes. Therefore, the purchaser assumes existing periods (c) Tenant’s right to sell or sub-lease: Statutorily the tenant is not that are relevant for the adjustment of input VAT claimed by the entitled to sub-lease without landlord’s prior consent. Such seller. The purchaser needs a necessary documentation within the consent must not be withheld without good reason. Otherwise meaning of Sections 15a Para. 10, 22 Para. 4 Value Added Tax act the tenant might be entitled to extraordinarily terminate the (VAT-Act, “Umsatzsteuergesetz”). Furthermore, if the transfer of lease. The tenant’s obligation to request the landlord’s prior consent can be contractually waived. The tenant’s right to real estate qualifies as transfer of a business as a whole, there is terminate the lease can only be waived by way of a particular a high probability that the transfer will also qualify as a transfer contractual regulation (Individualvertraglich) and not by way of a business within the meaning of Sec. 75 general tax code of general terms and conditions.

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(d) Insurance: Generally business leases stipulate the such obligations assumed by the buyer/new landlord. The former landlord’s obligation to provide for property insurance landlord also remains liable regarding pre-sale non-compliance. (Sachversicherung) and building liability insurance The same applies for the tenant. (Gebäudehaftpflicht). Tenants regularly have to provide for public liability insurance with respect to the conducted The old landlord can gain release from its “post-sale liability” if it business (Betriebshaftpflicht). informs the tenant of the transfer of ownership after the registration of such change in the land register. The liability is released in such (e) (i) Change of control of the tenant: regulations with respect to a potential change of control on tenant’s side are rather case if the tenant does not terminate the respective lease at the unusual; and (ii) Transfer of lease as a result of a corporate earliest possible opportunity. restructuring: leases are statutorily transferred in such cases. Such release does not encompass the old landlord’s liability Additional regulations are accordingly scarce. regarding rent securities assumed by the buyer. (f) Repairs: Statutorily the landlord is obliged to provide Germany maintenance of the lease object on his own expenses. The parties are entitled to deviate from this principle within the 10.7 Green leases seek to impose obligations on framework of legal admissibility. Regarding the majority landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of of business leases, the obligation to maintain the lease the “environmental footprint” of a building. Please object – exclusively used by the tenant – (including minor briefly describe any “green obligations” commonly repairs) is generally transferred to the tenant at its own cost. found in leases stating whether these are clearly Maintenance and repair of the roof and structure generally defined, enforceable legal obligations or something remains with the landlord. not amounting to enforceable legal obligations (for example aspirational objectives). 10.4 What taxes are payable on rent either by the landlord or tenant of a business lease? The market has not yet developed a “green lease” standard. However, the Civil Code and a number of lease agreements cover “green” issues. The rent of real estate is generally exempt from VAT. However, the The Civil Code, for example, provides for regulations according to landlord might waive the tax-exemption and opt to pay VAT if and which the landlord is entitled to conduct modernisation measures insofar the tenant is an entrepreneur for VAT purposes who uses (or with respect to energetic modernisation, to reduce the use of non- intends to use) the real estate to generate turnover which does not renewable energies or to reduce consumption of other resources, etc. exclude the deductibility of input tax. Please note that the landlord might be obliged to correct claimed input taxes if and insofar as he leases real estate which was leased with a waiver of the tax- 11 Leases of Residential Premises exemption in the past, without such a waiver in the future. 11.1 Please briefly describe the main laws that regulate leases of residential premises. 10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a The Civil Code provides for the authoritative regulations regarding tenant to extend or renew the lease or for either party residential leases. Further special statutory provisions besides to be compensated by the other for any reason on the Civil Code exist, such as the regulation of operating expenses termination? (Betriebskostenverordnung).

The parties are entitled to terminate a business lease within the statutory termination periods if the lease has been conducted for an 11.2 Do the laws differ if the premises are intended for indefinite term or if – in case of a potential fixed term – the lease multiple different residential occupiers? agreement does not comply with the written form (see question 10.3 (a)). No such statutory regulations exist. A lease agreement with a fixed term can only be terminated in case of default as provided by statutory regulations (e.g. Civil Code). In 11.3 What would typical provisions for a lease of case a party is in default regarding a lease agreement, it might also residential premises be in your jurisdiction regarding: be obliged to compensate the other party in case of any damages (a) length of term; (b) rent increases/controls; (c) the tenant’s rights to remain in the premises at the end of relating to or following the default. the term; and (d) the tenant’s contribution/obligation A statutory prolongation right of the tenant does not exist. Anyhow, to the property “costs” e.g. insurance and repair? contractual prolongation options in favour of the tenant are common business practice. (a) Residential leases in general provide for an unlimited term. Limited terms are only permissible within the scope of statutorily defined reasons Zeitmietvertrag( ). 10.6 Does the landlord and/or the tenant of a business lease cease to be liable for their respective (b) An adjustment of the rent is only permissible within the scope obligations under the lease once they have sold their defined according to the Civil Code; e.g. indexation according interest? Can they be responsible after the sale in to the consumer price index, a stepped rent or an increase in respect of pre-sale non-compliance? rent up to the reference rent customary in the locality. (c) In general, there are no specific provisions in a lease A lease agreement is statutorily transferred to the buyer as per agreement stipulating a right of the tenant to remain in the registration of the buyer as a new owner in the land register. The premises at the end of the lease term. buyer/new landlord assumes the rights and obligations arising under (d) Operating expenses can contractually be transferred to the the lease agreement for the time of its ownership. The former tenant. This is regularly done by referring to the regulation landlord remains liable – like a guarantor (Bürge) – regarding of operating expenses (Betriebskostenverordnung).

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11.4 Would there be rights for a landlord to terminate a 12.5 Are building/use permits and licences commonly residential lease and what steps would be needed obtained in your jurisdiction? Can implied permission to achieve vacant possession if the circumstances be obtained in any way (e.g. by long use)? existed for the right to be exercised? In case a construction measure complies with the relevant planning The landlord’s rights to terminate a residential lease are statutorily and building law, a permit must be granted. This permit is granted restricted. To achieve vacant possession – if the lease has been irrespective of neighbouring rights determined under civil law. validly terminated – the landlord has to legally enforce an eviction order by the competent court. 12.6 What is the appropriate cost of building/use permits

Germany and the time involved in obtaining them? 12 Public Law Permits and Obligations The costs related to a permission procedure are governed by state law (e.g. Baugebührenordnung Berlin). The absolute costs depend 12.1 What are the main laws which govern zoning/ on the extent of the construction measure. In principle, the time permitting and related matters concerning the use to obtain a building permit also depends on the extent of the and occupation of land? Please briefly describe them construction measures which shall be realised. and include environmental laws.

Public planning law is determined by federal law and mainly 12.7 Are there any regulations on the protection of historic governed within the Federal Building Code (“Baugesetzbuch”) and monuments in your jurisdiction? If any, when and how the Federal Ordinance on Land Use (“Baunutzungsverordnung”). are they likely to affect the transfer of rights in real estate? These laws determine the zoning and planning requirements a construction project must comply with. Besides, the relevant building law is governed within federal state law, mainly within the Each state has governed the law of monumental protection Building Ordinances (“Landesbauordnungen”). These regulations within the Monument Protection Acts (Denkmalschutzgesetze). refer to requirements concerning the actual construction. The Besides requiring a mandatory permit to change or remove a relevant environmental law is governed within federal and protected monument under the applicable Monument Protection state laws. On the one hand, the Federal Soil Protection Act Act, construction measures in the neighbourhood of a protected (“Bundesbodenschutzgesetz”) aims to protect and restore the soil’s monument may also require a permit under the applicable Monument function. On the other hand, this federal law is supplemented by Protection Act. state laws. 12.8 How can e.g. a potential buyer obtain reliable information on contamination and pollution of real 12.2 Can the state force land owners to sell land to it? If estate? Is there a public register of contaminated land so please briefly describe including price mechanism. in your jurisdiction?

In principle, expropriation measures (“Enteignung”) can be The state laws provide a public register of contaminated land. During permissible under certain, strict requirements. As a consequence the standard legal and environmental due diligence procedure, an of the right of property, which is governed in Art. 14 GG, such excerpt from this register is applied for to gain reliable information expropriation must be determined by statutory law. According to on (potential) contamination issues. Art. 14 GG an expropriation may only be justified if the public interest overrides the interest of those affected. If this prerequisite is met, the legal owner must be indemnified by the state via 12.9 In what circumstances (if any) is environmental clean- remuneration payments. up ever mandatory?

It depends on the individual case whether an environmental clean-up 12.3 Which bodies control land/building use and/or is mandatory. In principle, the competent authority may, inter alia, occupation and environmental regulation? How do buyers obtain reliable information on these matters? obligate the polluter and the current legal owner of a property to remediate if, with a sufficient degree of probability in an unhindered course of events, the current situation will result in damage. As a consequence of the federal state system, the competent bodies to control the land/building use and/or occupation and environmental regulation are in general the local/municipal building 12.10 Please briefly outline any regulatory requirements or environmental authority. for the assessment and management of the energy performance of buildings in your jurisdiction.

12.4 What main permits or licences are required for Based on the Energy Saving Ordnance (Energieeinsparverordnung), building works and/or the use of real estate? energy certificates assess the energy performance of a building. These certificates include information on the energy performance The required permits are in general determined by state law. In compared to other buildings and on the energy source used for principle, any construction measures, change of use or removal heating. In principle, energy certificates are mandatory within the measures require a building permit. For certain measures which transfer of a property. are determined by statutory state law, the state laws also govern exceptions from this principle, e.g. for minor changes. Nevertheless, this exception does not release the builder from his duty to comply with the relevant planning and building law.

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13 Climate Change 13.2 Are there any national greenhouse gas emissions reduction targets?

13.1 Please briefly explain the nature and extent of any regulatory measures for reducing carbon dioxide Germany aims to cut greenhouse gas emissions by 40% by 2020, emissions (including any mandatory emissions 55% by 2030, 70% by 2040 and 95% reduction by 2050, compared trading scheme). to 1990 levels. In addition, the share of renewables in gross final energy consumption is to rise to 60% by 2050. Renewables are Germany assumed the obligation to reduce greenhouse gas emissions to make up a minimum of 80% of the country’s gross power as a contractual party to the Paris Agreement. There are various consumption by the middle of the century.

national regulations and incentive programmes to achieve the Germany reduction of greenhouse gas emissions, e.g. the Renewable Energies 13.3 Are there any other regulatory measures (not already Act (Erneuerbare-Energien-Gesetz) and the National Climate mentioned) which aim to improve the sustainability of Protection Initiative. Germany’s electricity supply is becoming both newly constructed and existing buildings? “greener” every year as the contribution made by renewable sources is constantly growing. In 2016, renewable energy already For example, there are various energy efficiency requirements covered roughly 29% of gross electricity generation (total volume imposed by the Energy Saving Ordinance. The objective of these of electricity generated in Germany). requirements is to save energy consumption in buildings that are both newly constructed and already existing. The Ordinance contains provisions on building energy performance certificates. The certificates provide guidance to tenants and buyers informing them of the energy-related data of the building.

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Olaf Jacobsen Sascha Zentis GSK Stockmann GSK Stockmann Taunusanlage 21 Taunusanlage 21 60325 Frankfurt 60325 Frankfurt Germany Germany

Tel: +49 69 710003-0 Tel: +49 69 710003-0 Email: [email protected] Email: [email protected] URL: www.gsk.de URL: www.gsk.de

Germany Olaf Jacobsen is a Local Partner in GSK Stockmann’s Frankfurt office Sascha Zentis is an Equity Partner in GSK Stockmann’s Frankfurt and a member of the Real Estate Practice Group. With 12 years’ office and member of the Real Estate and Banking Practice Groups. experience as a transaction counsel, his practice focuses on the With 14 years’ experience as a lawyer and four years as a notary, representation of real estate investors encompassing all aspects of his practice focuses on the representation of professional real estate German and cross-border real estate transactions (share and asset investors and on advising regulated investment companies as well on deals, portfolio transactions). His practice also involves the set-up real estate as investment law matters. of transaction structures and processes as well as corporate real Sascha Zentis specialises on advising German investment estate matters. Before joining GSK he spent several years with two management companies (Kapitalverwaltungsgesellschaften) in terms international law firms. of the German Capital Investment Act and open-ended funds. Olaf Jacobsen specialises in real estate transactions with a focus on advising German investment companies (Kapitalverwaltung- sgesellschaften) and open-ended funds, including regulatory and investment law matters regarding real estate transactions in Germany. A further focus of his practice is the consultancy of clients regarding asset management.

GSK Stockmann is a leading independent law firm in Germany and Luxembourg, focusing on real estate, corporate, banking/finance and projects & public sector. Today, more than 160 lawyers and tax advisers work at our offices in Berlin, Frankfurt, Hamburg, Heidelberg, Munich and Luxembourg and regularly advise on national as well as cross-border transactions. GSK Stockmann has one of the largest real estate teams, comprising more than 80 lawyers to advise international and domestic clients on the great diversity of real estate issues like real estate transaction and financing, project development, private and public construction, investments funds and tax-driven investment structures, asset management, joint ventures as well as crisis management, real estate restructuring and notarial services. Our clients range from open-ended and closed-end funds, to banks, insurance companies, pension funds, project developers and construction companies, public sector and international asset managers as well as providers of private equity and opportunity funds. GSK Stockmann focuses on sectors like infrastructure and energy, hotel and leisure, healthcare and student housing as well as on real estate capital markets and investment funds. For cross-border transactions and international projects, GSK works closely with a select group of highly respected partner law firms abroad. www.gsk.de

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Hong Kong Simon Reid-Kay

Simon Reid-Kay & Associates Leslie Kaczmarek

1 Real Estate Law 2 Ownership

Conveyancing and Property Ordinance (Chapter 219) (CPO) – 3 Real Estate Rights governs the ownership of, and rights in, property including land and buildings. It makes provisions relating to: conveyancing and the law of property; 3.1 What are the types of rights over land recognised in your jurisdiction? Are any of them purely contractual agreements and deeds relating to land and other agreements; and between the parties? the acquisition and holding of land and other property; providing standard agreements and deeds relating to land; implying certain Almost all Hong Kong land is Government-owned. There is no covenants and other provisions in agreements and deeds relating to privately owned freehold land in Hong Kong (with the exception of land; revising and consolidating certain miscellaneous provisions the St. John’s Cathedral). Individuals or corporations in Hong Kong relating to land and other matters; and connected purposes. are typically granted leasehold interests in the land. New Territories Ordinance (Chapter 97) – consolidated the laws Most land is leased by the Hong Kong Government and “ownership” relating to administration and regulation of the New Territories, of land is governed by a Government Lease or a Government Grant where the continued force of Chinese customary law was recognised. (which is an agreement for lease). Land Registration Ordinance (Chapter 128) – provides for The principal legal interests in land are: registration of instruments affecting real or immovable property, the keeping of Land Registry records, and for other matters relating to (a) legal charge/mortgage; and land registration. (b) easement.

1.2 What is the impact (if any) on real estate of local 3.2 Are there any scenarios where the right to a common law in your jurisdiction? real estate diverges from the right to a building constructed thereon? As Hong Kong law is a common law system, common law plays an important role in the interpretation and application of statutory law. No. The CPO defines land as including:

1.3 Are international laws relevant to real estate in your (a) Land covered by water. jurisdiction? Please ignore EU legislation enacted (b) Any estate, right, interest or easement in or over any land. locally in EU countries. (c) The whole or part of an undivided share in land and any estate, right, interest or easement in or over the whole or part No, international laws are not relevant to real estate in this of an undivided share in land. jurisdiction. (d) Things attached to land or permanently fastened to anything attached to land. An owner of land also owns the airspace above the land and everything beneath the surface, subject to a few exceptions such as minerals or treasure troves.

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Accordingly, land and buildings owned by the same entity are included in the same title. 4.7 Please briefly describe how some rights obtain priority over other rights. Do earlier rights defeat later rights? 3.3 Is there a split between legal title and beneficial title in your jurisdiction and what are the registration Generally earlier rights have priority, except where registration is consequences of any split? required and the owner of the earlier right has failed to register.

There is a split between legal and beneficial titles in Hong Kong. Such split does not give rise to any registration consequences. 5 The Registry / Registries However, unwritten interests (which is sometimes the case in

Hong Kong beneficial title) are not registrable. 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules 4 System of Registration and requirements.

There is one Land Registry. Note that although it is called the Land 4.1 Is all land in your jurisdiction required to be Registry it is really a registry of documents affecting land from registered? What land (or rights) are unregistered? which the relevant parties derive their title to the real estate.

All land which has been granted by the Government was a land grant registered in Hong Kong. 5.2 Does the land registry issue a physical title document to the owners of registered real estate?

4.2 Is there a state guarantee of title? What does it No, the Land Registry does not issue physical title documents to the guarantee? owners of registered real estate.

There is no state guarantee of title in Hong Kong. 5.3 Can any transaction relating to registered real estate be completed electronically? What documents need 4.3 What rights in land are compulsorily registrable? to be provided to the land registry for the registration What (if any) is the consequence of non-registration? of ownership right? Can information on ownership of registered real estate be accessed electronically? No rights are compulsorily registrable as the Land Register only registers deeds to protect priority and not to create title. The (a) Electronic conveyancing is not available. consequence of non-registration of a registrable instrument would (b) The original instrument to be registered has to be provided to be loss of priority as against a registered interest, even if the the Land Registry for registration. It is to be accompanied by registered interest is subsequently created. a memorial form, which is verified, usually by a solicitor. Information on ownership of registered real estate is managed by the Land Registry, which can be accessed online at https://www2.iris. 4.4 What rights in land are not required to be registered? gov.hk/eservices/common/selectuser.jsp. (a) Unwritten interests (e.g. equitable interests arising under a resulting or constructive trust); and 5.4 Can compensation be claimed from the registry/ (b) leases for terms which do not exceed three years are not registries if it/they make a mistake? required to be registered. No, compensation cannot be claimed from the Land Registry where they make a mistake. 4.5 Where there are both unregistered and registered land or rights is there a probationary period following first registration or are there perhaps different classes 5.5 Are there restrictions on public access to the or qualities of title on first registration? Please give register? Can a buyer obtain all the information he details. First registration means the occasion upon might reasonably need regarding encumbrances and which unregistered land or rights are first registered other rights affecting real estate? in the registries. No, there are no restrictions on public access to the register. A buyer There is no probationary period or different classes or qualities of can obtain all the information he might reasonably need regarding title on first registration. all encumbrances and other rights affecting real estate, provided that the same is registered. 4.6 On a land sale, when is title (or ownership) transferred to the buyer?

On a land title, title is transferred to the buyer upon proper execution of an Assignment of the seller’s interest in the relevant Government lease under which the property is held.

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6 Real Estate Market 6.5 Have you observed any trends in particular market sub sectors slowing down in your jurisdiction in terms of their attractiveness to investors/developers? 6.1 Which parties (in addition to the buyer and seller Please give examples. and the buyer’s finance provider) would normally be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or We have not observed any particular market sub-sectors slowing duties. down in terms of their attractiveness to investors/developers. The retail sector had been affected but seems now to be on the rise again. (a) Real Estate agents market the real estate and broker deals. They are usually involved in negotiation of the main

commercial terms of the transaction. 7 Liabilities of Buyers and Sellers in Real Hong Kong (b) Lawyers. Usually both parties will engage their respective Estate Transactions lawyer. The seller’s lawyer will draft the contract of sale with both parties’ lawyers settling it. The purchaser’s lawyer will perform investigation of title and carry out due diligence. 7.1 What (if any) are the minimum formalities for the sale and purchase of real estate? Both parties’ lawyers will then negotiate and draft transaction documentation. They will assist in completion and follow up with post-completion matters. An agreement for sale and purchase of real estate must incorporate (c) Surveyors. They may be involved in carrying out a survey of all the terms that have been agreed between the parties, and be the physical condition of the real estate and/or the building signed by both parties. Such agreement has to be in writing, since which the real estate forms parts of on behalf of the purchaser. an interest in land purported to be created orally does not create any (d) Accountants. They may be involved for financial due legal estate in land. It creates only an interest at will that may be diligence, especially when the transaction concerns sale and revoked at any time. purchase of share(s) in a property holding company or sale Most land transactions must also be completed by a particular type and purchase of property through a single asset company. of document known as a “deed”. Additional formalities are required to be adhered to when entering into a deed. 6.2 How and on what basis are these persons remunerated? 7.2 Is the seller under a duty of disclosure? What matters must be disclosed? Real Estate agents are generally operated on a commission basis (typically calculated by reference to a specified percentage of the The seller does not generally have a duty of disclosure to the buyer, sale price) payable on completion of the transaction. and the principle of “caveat emptor” (let the buyer beware) applies. Lawyers charge on a time costs basis or fixed fee basis, though other While the seller is not under a duty to disclose patent defects, he fee arrangements can be made by agreement. has to disclose any latent defect (i.e. encumbrances and any other Surveyors will generally be paid a fixed fee agreed at the outset of adverse interests which a prospective buyer cannot discover for the transaction. himself by a reasonable inspection). Accountants will generally be either paid a fixed fee agreed at the outset of the transaction or on a time costs basis. 7.3 Can the seller be liable to the buyer for misrepresentation? 6.3 Do you feel there is a noticeable increase in the availability of capital to finance real estate Yes, the seller is liable to the buyer when he makes an untrue transactions in your jurisdiction, whether equity or statement of fact, which the buyer relies upon to enter into the sale debt? What are the main sources of capital you see and purchase and suffers a loss as a result. active in your market?

There has been a noticeable increase in the availability of equity 7.4 Do sellers usually give contractual warranties to the buyer? What would be the scope of these? What is in Hong Kong during the past decade. Investors are getting strong the function of warranties (e.g. to apportion risk, to returns from the real estate compared to the equity market or cash give information)? Are warranties a substitute for the deposit market. Mainland China has recently been the source of buyer carrying out his own diligence? capital being invested in Hong Kong real estate. (a) Sellers in commercial transactions usually give contractual warranties to buyers. 6.4 What is the appetite for investors and developers in your region to look beyond primary real estate (b) The scope of these warranties will typically include (but is markets and transact business in secondary or even not limited to): tertiary markets? Please give examples of significant ■ That the seller has not received any notices adverse to the secondary or tertiary real estate transactions, if seller’s interest in the property. relevant. ■ No third party has any right or interest whatsoever, whether legal or equitable, in the property. The appetite for investors and developers in Hong Kong to look beyond ■ The property is not adversely affected by any primary real estate markets and transact business in secondary or even encumbrances of which the seller is aware or which the territory markets (in both location and asset classes) within Hong seller could have ascertained on reasonable inquiry, other Kong is strong. They strive to circumvent the scarcity of supply and than those: the continued high prices in the prime markets (e.g. Central offices). ■ disclosed in the agreement; or

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■ which the buyer is aware of or could have ascertained ■ Assignment of Insurances. on reasonable inspection of the property. ■ Debenture (incorporating a floating charge over all the ■ Tenancies. assets of the borrower). ■ That the property is not subject to any litigation. ■ Share Charge (over the entire issued shares of the Borrower, ■ Corporate matters. and where applicable, its holding company(ies)). ■ Seller’s capacity. ■ Subordination Deed (incorporating an assignment of loans and advances). ■ Other matters arising out of the due diligence enquiries (b) Guarantee given by the individual or corporate shareholder(s) Whether or not the seller gives the warranties will depend (direct and/or indirect). on the bargaining power of the parties and the commercial imperatives behind the deal. (c) Valuation and LTV covenants. Borrowers may be required

Hong Kong to obtain regular valuations of the real estate and could be Warranties can be limited by: required to provide additional collateral to maintain the ■ Disclosure of specific matters. agreed Loan-to-Value ratio. ■ Time limits. (d) Insurance requiring the borrower/mortgagor to take out (c) Warranties mainly work to apportion risk between the seller insurances over the real estate. and buyer, and to ensure that the seller has disclosed to the buyer all information that might affect the value of the real estate. They do not work as a substitute for the buyer carrying 8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a out his own due diligence. mortgagee to realise a mortgaged property without involving court proceedings or the contribution of the 7.5 Does the seller warrant its ownership in any way? mortgagor? Please give details. The main remedies for lenders in relation to a legal charge or The seller does not warrant its ownership per se. However, usually equitable mortgage by deed are: the seller must give and prove good title to the real estate in ■ Receivership. Section 50 of the CPO implies, in all legal accordance with sections 13 and 13A of the CPO. charges or equitable mortgages by deed, a power for the lender to appoint a receiver of the real estate and the income derived from it when the money becomes due. 7.6 What (if any) are the liabilities of the buyer (in addition ■ Sale. The CPO implies, in all legal charges or equitable to paying the sale price)? mortgages by deed, a power of sale subject to the provisions of the CPO, unless it has been varied or excluded. The title In addition to paying the sale price, it is customary for the parties to to the property can be assigned to a bona fide purchaser free agree in the contract that the buyer is liable to pay all of the Stamp of the mortgage. If the proceeds of sale are not sufficient to Duty on the transaction, and registration fees associated with the cover the debts owed, the borrower is still under an obligation transfer of title of the real estate. to repay the deficit. Please see the response to question 9.1 below. ■ Possession. The receiver will take physical possession of the property so that vacant possession can be delivered to the buyer if the property is sold. If the borrower refuses to 8 Finance and Banking deliver vacant possession to the receiver, the receiver will have to apply to the court for a possession order.

8.1 Please briefly describe any regulations concerning the lending of money to finance real estate. Are the 8.4 What minimum formalities are required for real estate rules different as between resident and non-resident lending? persons and/or between individual persons and corporate entities? (a) For a mortgage/charge over the real estate to pass legal title, it must be made by deed. (a) Money Lenders Ordinance (Chapter 163) – provides for (b) Registration in the Companies Registry. Security over land the control and regulation of money lenders and money- and buildings made by companies incorporated in Hong lending transactions. Kong, and companies incorporated outside Hong Kong but (b) Banking Ordinance (Chapter 155) – regulates banking registered as a non-Hong Kong company under Part 16 of business and the business of taking deposits. the CO, must be registered at the Companies Registry within one month of the date the security is created, or the security The rules are the same as between resident and non- resident persons is void against a liquidator and any creditor of the company. and/or between individual persons and corporate entities. (c) Registration in the Land Registry. The security creating an interest over land must be registered at the Hong Kong Land 8.2 What are the main methods by which a real estate Registry within one month of the security being created or the lender seeks to protect itself from default by the priority of the security may be affected. borrower?

8.5 How is a real estate lender protected from claims (a) Provision of security/guarantee. The security required to be against the borrower or the real estate asset by other given may include: creditors? ■ Legal Charge/Mortgage over the real estate (incorporating a charge over bank accounts into which the proceeds/ (a) Registration of security documents safeguards the mortgagee/ income are paid). lender’s priority as against other creditors in respect of the ■ Assignment of Sales Proceeds and Rental Income. charged assets.

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(b) Notices and confirmations of assignment should be given (b) BSD to the counterparty to the contract, and confirmation/ For purchases on or after 27 October 2012, BSD at a flat acknowledgment of the creation of the security from such rate of 15% of the purchase price would be applicable to all counterparty is desirable. residential property transactions. The buyer is liable to pay (c) The borrower can give a negative pledge in the loan the BSD. agreement not to create any other security interest over the Key Exemptions: (i) a Hong Kong permanent resident charged assets. (HKPR) who is acting on his/her own behalf, and does not own any other residential property in Hong Kong; (ii) joint acquisition by a HKPR with one or more non-HKPR close 8.6 Under what circumstances can security taken by a lender be avoided or rendered unenforceable? relative(s) (i.e. spouse, parents, children, brothers and sisters) each acting on his/her own behalf; (iii) transfer between close

relatives, whether or not they are HKPRs, each of them acting Hong Kong (a) Breach of director’s fiduciary duties in creating the security. on his/her own behalf; and (iv) intragroup transfers of property If the creation of the security does not provide a “benefit” between associated companies may be exempt from BSD. (whether direct or indirect) for the company, and the director, in making the company provide the security has breached (c) SSD his fiduciary duties (e.g. when the provision of the security While AVD and BSD catch acquisition of residential property, is for the director’s own interest at the company’s cost), the SSD targets disposition. security may be rendered unenforceable. Residential property acquired on or after 27 October 2012 (b) Insolvency in the security provider. Generally, security and resold within 36 months will be subject to SSD. The which has been properly structured and created should be applicable SSD rate depends on the date of acquisition and recognised in insolvency, subject to risk periods known as the holding period of the property by the seller. Below is a “hardening periods”. Security is granted subject to the risk table of the SSD rates: of the security being invalid or being attacked by a liquidator appointed to the security provider and rendered unenforceable The property was The property was acquired on or after 20 acquired on or if it is granted in risk periods on or before insolvency or Holding Period winding-up. The length of the risk period varies according to November 2010 and after 27 October before 27 October 2012 2012 the circumstances. Six months or less 15% 20% More than six 8.7 What actions, if any, can a borrower take to frustrate months but for 12 10% 15% enforcement action by a lender? months or less More than 12 The borrower may refuse to deliver vacant possession of the real months but for 24 5% 10% estate, or refuse to assist the lender in coordinating his tenant’s months or less delivery of vacant possession. This may hinder the enforcement More than 24 action, as the lender has to incur additional time and costs in, for months but for 36 - 10% example, obtaining writ of possession and fieri facias combined in months or less court and engaging bailiffs to recover possession.

9 Tax 9.2 When is the transfer tax paid?

Payments of AVD, BSD and SSD should normally be made within 9.1 Are transfers of real estate subject to a transfer tax? 30 days after the date of execution of the instrument. How much? Who is liable?

9.3 Are transfers of real estate by individuals subject to Under the Stamp Duties Ordinance (Cap.117) (SDO) the seller income tax? and/or the buyer may be liable for the payment of ad valorem duty (AVD), buyer’s stamp duty (BSD) and special stamp duty (SSD) No, transfers of real estate by individuals are not subject to income tax. for acquisition and disposition of residential property. Payments of AVD, BSD and SSD are not mutually exclusive. If stamp duty is paid on the agreement for sale and purchase, HK$100 stamp duty is 9.4 Are transfers of real estate subject to VAT? How payable on the assignment. much? Who is liable? Are there any exemptions? (a) AVD No, transfers of real estate are not subject to VAT. For purchases on or after 5 November 2016, AVD at a flat rate of 15% of the purchase price, irrespective of the amount or value of consideration, would be applicable to all residential 9.5 What other tax or taxes (if any) are payable by the property transactions. The seller and the buyer are both seller on the disposal of a property? liable. However, the buyer usually contracts to pay the AVD. Key Exemptions: (i) a Hong Kong permanent resident Please see SSD in the response to question 9.1 above. (HKPR) who is acting on his/her own behalf, and does not own any other residential property in Hong Kong at the time of acquisition will be subject to lower rates (AVD at Scale 9.6 Is taxation different if ownership of a company (or 2 rates); and (ii) intragroup transfers of property between other entity) owning real estate is transferred? associated companies may be exempt from AVD. Yes, neither AVD, BSD nor SSD apply to the purchase of shares in a corporate vehicle owning an asset.

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Rather, stamp duty is payable on each bought note and sold note for a ■ water and fire damage to the tenant’s fixtures, fittings and transfer of shares in a Hong Kong company at the rate of 0.1% of the stock; and purchase price or the net asset value of the shares, whichever is higher. ■ glass in the premises. HK$5.00 is also payable on the instrument of transfer. (e) (i) Often this is expressly deemed to be a breach of the Under the SDO, the seller and the buyer are both liable for the restriction on alienation. payment of such stamp duty. However, under the preliminary (ii) Hong Kong leases do not typically make any provision agreement the buyer usually agrees to pay the stamp duty. for such a transfer. (f) The tenant will generally be obliged to keep and maintain Key Exemptions: Intragroup transfers of Hong Kong shares the interior of the premises and the fixtures and fittings. between associated companies may be exempt from stamp duty. The repairing covenant may be qualified by, for example, the exception from the covenant of fair wear and tear and/ Hong Kong 9.7 Are there any tax issues that a buyer of real estate or inherent/structural defects. The landlord may expressly should always take into consideration/conduct due covenant to keep the structure in good repair and condition diligence on? but often the lease is silent on the matter.

The Hong Kong tax system is simple. Nonetheless, when the 10.4 What taxes are payable on rent either by the landlord buyer/seller is/are foreign company(ies), it is advisable to engage or tenant of a business lease? tax advisors to advise on the structuring of the acquisition in a tax efficient manner. Property tax is payable by the landlord in respect of income received from the leasing of real property. However, a corporate landlord may, and usually will, apply for exemption from property tax on the 10 Leases of Business Premises basis that the income will be assessed to profits tax instead. No taxes are payable by the tenant in consequence of entering into 10.1 Please briefly describe the main laws that regulate the lease. leases of business premises.

10.5 In what circumstances are business leases usually The principal legislation which regulates leases of premises in Hong terminated (e.g. at expiry, on default, by either party Kong, whether business or residential, is the Landlord and Tenant etc.)? Are there any special provisions allowing a (Consolidation) Ordinance (Chapter 7) of the laws of Hong Kong. tenant to extend or renew the lease or for either party Other relevant legislation is to be found in the Conveyancing and to be compensated by the other for any reason on Property Ordinance (Chapter 219) and the Land Registration termination? Ordinance (Chapter 128). Other than termination by expiry, business leases usually provide for termination only where: 10.2 What types of business lease exist? ■ the tenant is in default; ■ the premises or the building are destroyed, damaged, rendered The typical business lease will provide for a base rent and the tenant inaccessible, condemned as dangerous or otherwise closed will also be required to pay management fees/service charges, air by Government act and not repaired, rendered accessible or conditioning charges and also government rates. The tenant will reopened within an agreed period; or also be required to take out certain insurances. ■ the landlord has a right of early termination by notice where Where retail premises are concerned, sometimes a turnover-based it is selling, redeveloping or refurbishing the premises or the rent will be payable in addition to the base rent. building. There are no statutory provisions allowing a tenant to extend or 10.3 What are the typical provisions for leases of business renew its lease or providing for compensation by one party to the premises in your jurisdiction regarding: (a) length of other on termination. term; (b) rent increases; (c) tenant’s right to sell or Options to renew or to terminate can be agreed but options to sub-lease; (d) insurance; (e) (i) change of control of terminate, other than by the landlord under a sale and redevelopment the tenant; and (ii) transfer of lease as a result of a corporate restructuring (e.g. merger); and (f) repairs? clause, are highly unusual.

In general, a tenant can expect to encounter the following terms: 10.6 Does the landlord and/or the tenant of a business (a) Typically three years but shorter or longer terms can be lease cease to be liable for their respective negotiated. obligations under the lease once they have sold their interest? Can they be responsible after the sale in (b) Rent is generally fixed for the first three years of any term. respect of pre-sale non-compliance? Where the term is in excess of three years, the lease would normally provide for the rent to be reviewed to the open market rent at the start of the fourth year. The original contracting parties to the lease each remain liable for the performance of their obligations under the lease even after the (c) The tenant is generally prohibited from either assigning lease has been assigned by a party. the lease or subletting without the landlord’s prior written consent, which is entirely within the landlord’s discretion The covenants which touch and concern land will bind successors to unless the lease provides otherwise. the original parties to the contract. (d) Typically, the tenant will be required to insure in respect of: ■ the tenant’s obligations of indemnity under the lease; ■ third party liability;

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10.7 Green leases seek to impose obligations on 12 Public Law Permits and Obligations landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please 12.1 What are the main laws which govern zoning/ briefly describe any “green obligations” commonly permitting and related matters concerning the use found in leases stating whether these are clearly and occupation of land? Please briefly describe them defined, enforceable legal obligations or something and include environmental laws. not amounting to enforceable legal obligations (for example aspirational objectives). (a) Statutory Outline Zoning Plans set out the designated uses of land. It is not yet common to see “green obligations” in Hong Kong (b) Town Planning Ordinance (Chapter 131) (TPO) and the business leases. Town Planning Regulations make provision for the systematic Hong Kong preparation and approval of plans for the layout of areas of Hong Kong as well as for the types of building suitable 11 Leases of Residential Premises for erection therein and for the preparation and approval of plans for areas within which permission is required for development. 11.1 Please briefly describe the main laws that regulate (c) Town Planning (Appeals) Regulations. leases of residential premises. (d) Town Planning (Taking Possession and Disposal of Property) Regulations. Please refer to question 10.1 as the applicable statutes are the same. (e) Controls under the Buildings Ordinance (Chapter 123) provides for the planning, design and construction of 11.2 Do the laws differ if the premises are intended for buildings and associated works, and controlling the safety of multiple different residential occupiers? buildings. (f) Controls included in the government leases/grants. No. In Hong Kong there is no equivalent concept to the HMO (houses in multiple occupation) as exists in the UK. 12.2 Can the state force land owners to sell land to it? If so please briefly describe including price mechanism. 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: (a) The Land Resumption Ordinance (Chapter 124) (LRO) (a) length of term; (b) rent increases/controls; (c) the grants the government power to acquire land compulsorily, tenant’s rights to remain in the premises at the end of by resumption for public purposes such as the development the term; and (d) the tenant’s contribution/obligation of new towns or infrastructure. to the property “costs” e.g. insurance and repair? (b) Compensation is payable to the former owner and any person having an interest in the land immediately before reversion (a) Length of term: two years. under an instrument registered in the Land Registry. Subject (b) Rent increases/controls: there are no statutory provisions and to other provisions in the LRO, the compensation payable contractual terms would be unusual. will usually be the market value of the land. (c) Tenant’s rights to remain in the premises at the end of the term: none. 12.3 Which bodies control land/building use and/or (d) Tenant’s contribution/obligation to the property “costs” e.g. occupation and environmental regulation? How do insurance and repair: generally none but as with business buyers obtain reliable information on these matters? premises the tenant is typically responsible to keep and maintain in repair the interior of the premises and the fixtures (a) Land use: and fittings with fair wear and tear generally being excepted. ■ The Survey and Mapping Office of the Lands Department is the official land survey and mapping agency for Hong 11.4 Would there be rights for a landlord to terminate a Kong. It maintains the geodetic survey control network residential lease and what steps would be needed and the satellite positioning reference station network, to achieve vacant possession if the circumstances carries out land boundary surveys and aerial surveys, and existed for the right to be exercised? produces maps in both paper and digital forms. ■ A buyer can order the planning documents from the The landlord’s rights to terminate a residential lease are essentially Lands Department office. the same as those noted in respect of business leases in question ■ The Lands Administration Office of the Lands Department 10.5. There are no special procedural steps required to be taken by takes charge of land disposal and acquisition, valuation the landlord simply because the premises are residential. Residential of land and properties for various purposes, lease tenants have no special statutory protection. enforcement, land and squatter control, urban renewal and maintenance of man-made slopes on unallocated and unleased government land. ■ A buyer can obtain the above information from government gazettes.

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(b) Building use/Occupation: ■ The Legal Advisory and Conveyancing Office of the 12.6 What is the appropriate cost of building/use permits Lands Department provides in-house legal advisory and the time involved in obtaining them? services administers the Lands Department Consent Scheme by giving consent to sale of units in uncompleted There are statutory fees for application of building/use permits, developments and approves Deeds of Mutual Covenant. which are updated from time to time. In general, the fees will ■ A buyer can obtain relevant information from the be dependent on the type of permission sought, and the scale and Lands Department office. complexity of the involved development. ■ The Buildings Department sets and enforces safety, health The length of time required to obtain the building/use permits also and environmental standards for private buildings. varies depending on the type of permission sought, and the scale and ■ As regards existing buildings: reducing risks and complexity of the involved development. Developer can refer to Hong Kong nuisances caused by unauthorised building works and the performance pledge of the relevant department for information: advertisement signboards; promoting the importance The Lands Department: http://www.landsd.gov.hk/en/about/pledge. of proper repairs and maintenance of old buildings, htm. drainage and slopes; considering and approving alteration and addition works; processing submissions The Buildings Department: http://www.bd.gov.hk/english/ under the simplified requirements and the household organisation/index_pledge.html. minor works validation scheme of the minor works control system; improving fire safety measures in buildings and advising on the suitability of premises 12.7 Are there any regulations on the protection of historic for the issue of licences for specified commercial uses. monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real ■ As regards new buildings: scrutinising and estate? approving building plans; carrying out audit checks on construction works and site safety; and issuing occupation permits upon completion of new buildings. Antiquities and Monuments Ordinance (Chapter 53) provides for the preservation of objects of historical, archaeological and ■ A buyer can obtain relevant information from the palaeontological interest and for matters ancillary thereto or Buildings Department office. connected therewith. (c) Environmental regulation In theory a declaration of monument will not affect the transfer of ■ The Environmental Protection Department: rights in real estate; in practice, such declaration may affect the ■ formulates policies and plans on environmental marketability of the real estate, as the Antiquities and Monuments protection, energy conservation and the promotion of Office must be consulted before the commencement of any work sustainable development, to implement environmental protection and energy-related legislation and plans; that may affect declared historic monuments. and ■ administers robust environmental impact assessment 12.8 How can e.g. a potential buyer obtain reliable in the planning of new development and major information on contamination and pollution of real projects. estate? Is there a public register of contaminated land in your jurisdiction?

12.4 What main permits or licences are required for There is no public register of contaminated land in Hong Kong, building works and/or the use of real estate? although there is a Guidance Note for Contaminated Land Assessment and Remediation which: (a) sets out the requirements Approval for the building plan: Building works must not commence for proper assessment and management of potentially contaminated before the same has been obtained from the Building Authority. sites; (b) provides guidelines on how site assessments should be Consent for the commencement of building works: Building works conducted; and (c) suggests practical remedial measures that can be must not commence before the same has been obtained from the adopted for the clean-up of a contaminated site. Building Authority. Occupation permit: A new building must not be occupied (except 12.9 In what circumstances (if any) is environmental clean- by no more than two caretakers) before the same has been obtained up ever mandatory? from the Building Authority. Some uses need the permission of the Town Planning Board before Environmental clean-up is not mandatory in Hong Kong. building works can commence.

12.10 Please briefly outline any regulatory requirements 12.5 Are building/use permits and licences commonly for the assessment and management of the energy obtained in your jurisdiction? Can implied permission performance of buildings in your jurisdiction. be obtained in any way (e.g. by long use)? Building Energy Code-Developers, owners or occupiers must Building/use permits and licences (see the response to question 12.4 ensure that the building services installation (air-conditioning, above) are commonly obtained in Hong Kong. Implied permission electrical, lift and escalator, and lighting installations) complies with cannot be obtained, although long use may indicate that the real risk the minimum energy efficiency standards set out in therein. of enforcement against non-permitted use is slim. Further under the Building Energy Code, owners of commercial buildings/portions of a composite building that are used for commercial use must carry out energy audits once every 10 years.

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(c) Air Pollution Control Ordinance (Chapter 311) makes 13 Climate Change provision for abating, prohibiting and controlling pollution of the atmosphere and for matters connected therewith. 13.1 Please briefly explain the nature and extent of any (d) Motor Vehicle Idling (Fixed Penalty) Ordinance (Chapter regulatory measures for reducing carbon dioxide 611) prohibits the idling of motor vehicles; provides emissions (including any mandatory emissions exemptions from the prohibition; imposes a fixed penalty for trading scheme). contravention of the prohibition; provides for recovery of the fixed penalty; and provides for incidental and related matters (a) Ozone Layer Protection Ordinance (Chapter 403) gives effect to Hong Kong’s international obligations under the 13.2 Are there any national greenhouse gas emissions 1985 Vienna Convention for the Protection of the Ozone reduction targets?

Layer and the 1987 Montreal Protocol on Substances that Hong Kong Deplete the Ozone Layer; to provide for the prohibition of the manufacture of, and to control the importation and By 2020, Hong Kong aims to reduce carbon intensity to 50% to 60% exportation of, and to conserve the resources of, substances of the level in 2005. that deplete the ozone layer and of products containing or made with those substances; and to provide for related 13.3 Are there any other regulatory measures (not already matters. mentioned) which aim to improve the sustainability of (b) Buildings Energy Efficiency Ordinance (Chapter both newly constructed and existing buildings? 610) requires compliance with codes of practice concerning the energy efficiency of air-conditioning installations, Please see the response to question 12.10 above. electrical installations, lift and escalator installations and lighting installations and energy audits in respect of several types of buildings and to provide for related matters.

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Simon Reid-Kay Leslie Kaczmarek Simon Reid-Kay & Associates Simon Reid-Kay & Associates 8th Floor, 100 Queen’s Road 8th Floor, 100 Queen’s Road Central Central Hong Kong Hong Kong

Tel: +852 3470 9068 Tel: +852 3470 9011 Email: simon.reid-kay@ Email: leslie.kaczmarek@ srkandassociates.com srkandassociates.com URL: www.srkandassociates.com URL: www.srkandassociates.com

Simon leads Simon Reid-Kay & Associates and has practised and Leslie has practised in Hong Kong since 1985. His core practice Hong Kong been resident in Hong Kong since 1985. He deals with all types of real throughout has been acting for tenants in commercial and residential estate transactions and regularly advises on the real estate aspects of leasing negotiations, mortgagees in the creation and subsequent IPOs, funds (including REITs), securitisations, sale and leaseback and realisation of security and general clients in the purchase and sale portfolio management for substantial Hong Kong-based international of real property including many sales by tender or auction. He also investment banks and conglomerates. He regularly advises private advises private equity clients in their purchase and sale of real estate funds and investment banks on their own and their clients’ real and on the real estate aspects of corporate acquisitions. estate requirements including investments, financing and property management. As well as handling purchases, sales and leases, Simon has advised owners, developers and lenders on the planning and construction aspects of many major developments and infrastructure projects in Hong Kong and the region. He also has extensive experience in government land administration and heavyweight commercial leasing work. Simon is ranked in Chambers Asia-Pacific 2017.

Simon Reid-Kay & Associates (SRKA) is a highly specialised and growing Hong Kong law firm, with expertise in real estate law. SRKA was founded in 2012 by its current principal, Simon Reid-Kay. The team at SRKA are down-to-earth, straightforward and pragmatic; focused on getting results; and keep things simple and understandable. These values are at the core of what makes SRKA a top-tier firm. There are few law firms in Hong Kong that understand the real estate market as well as Simon Reid-Kay & Associates. The team has decades of experience in all aspects of real estate law and covers the full spectrum of real estate legal services, including mortgage-backed lending, conveyancing, acquisitions and disposals, construction, joint ventures, planning and environment, REITs, real estate structuring and organisation, private or commercial leasing, and more.

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India Kiron Prabhakar

PAV Law Offices Navin B. Singh

1 Real Estate Law 1.2 What is the impact (if any) on real estate of local common law in your jurisdiction?

1.1 Please briefly describe the main laws that govern real estate in your jurisdiction. Laws relating to Most of the laws in relation to real estate in India are codified and leases of business premises should be listed in one of the latest examples of that is the enactment of the Real Estate response to question 10.1. Those relating to zoning (Regulation and Development) Act, 2016. However, it is also and environmental should be listed in response to essential to understand that common law is one of the major sources question 12.1. Those relating to tax should be listed in for the judiciary and the statutory authorities to settle matters. response to questions in Section 9. Accordingly, it can be said that both civil and common law have an effective impact on real estate in India. The main laws that govern real estate in India are as follows: (i) Real Estate (Regulation and Development) Act, 2016: 1.3 Are international laws relevant to real estate in your This Act has been enacted to provide a uniform regulatory jurisdiction? Please ignore EU legislation enacted environment for the regulation and promotion of real estate projects locally in EU countries. and to ensure the sale of plots, apartments, buildings and real estate projects in a transparent and legally compliant manner. The core International laws have no implication on the real estate sector objective of this Act is to protect the interest of consumers in the in India. Real estate in India is basically regulated by codified real estate sector. laws enacted in India and common laws relevant to the provincial (ii) Transfer of Property Act, 1882 (“TPA”): jurisdiction in question. TPA validates the voluntary transfer of property by an act of parties. It covers the transfer of property by way of sale, gift exchange, lease 2 Ownership and mortgage. (iii) Registration Act, 1908: 2.1 Are there legal restrictions on ownership of real estate The object of this Act, amongst others, is to provide a method of by particular classes of persons (e.g. non-resident registration of documents in order to educate the general public persons)? about the legal rights and obligations arising or affecting a particular property. As per this Act, an instrument relating to immovable Yes, there are legal restrictions on ownership of immovable property needs to be compulsorily registered in most cases. properties for different classes of persons, i.e. resident, non-resident, (iv) Indian Stamp Act, 1899: persons of Indian origin, and these are as follows: The basic purpose of this Act is to raise revenue for State Non-resident: Foreign nationals of non-Indian origin resident Governments. This Act prescribes the rate of stamp duty to be outside India are not permitted to acquire any immovable property affixed on different kinds of documents including the documents in India unless such property is acquired by way of inheritance from related to real estate transactions. Post stamping such documents is a person who was resident in India. Foreign Nationals of non-Indian given evidentiary value when produced in Court. origin who have acquired immovable property in India by way of inheritance with the specific approval of the RBI cannot transfer (v) Indian Contract Act, 1872: such property without prior permission of the RBI. This Act prescribes the law relating to contracts in India and governs Non-resident Indian and Persons of Indian Origin: FEMA, along the contractual rights and obligations of the parties. with the Foreign Exchange Management Regulations, permits a (vi) Foreign Exchange Management Act (FEMA) and FDI Policy: NRI or a PIO to acquire immovable property in India other than There are restrictions on non-residents acquiring property in India agricultural land, plantation property or a farm house. but no restrictions on non-resident Indians (NRIs) and persons of Foreign companies: Foreign companies who have been permitted Indian origin (PIOs) buying residential and commercial immovable to open a branch or project office in India are also allowed to property in India. However, prior Reserve Bank of India (RBI) acquire any immovable property in India which is necessary for, approval is required if they want to buy agricultural land or a farm or incidental to, carrying on such activity. However, if the foreign house. company has established a liaison office in India, it cannot acquire immovable property.

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Restriction on citizens of certain countries: Citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, 4 System of Registration Macau or Hong Kong cannot acquire or transfer immovable property in India (other than on lease for a period not exceeding five 4.1 Is all land in your jurisdiction required to be years), without the prior permission of the Reserve Bank of India. registered? What land (or rights) are unregistered?

Not all land rights are required to be registered. The land rights 3 Real Estate Rights which must be registered are mainly set out in terms of Section 17 of the Registration Act, 1908. They include: (i) gifts of immovable India 3.1 What are the types of rights over land recognised in property; (ii) any instrument which operates to create, declare, your jurisdiction? Are any of them purely contractual assign, limit or extinguish any right, title or interest of value of INR between the parties? 100 or more related to the immovable property; and (iii) leases of immovable property from year to year or for any term exceeding Rights over land are linked to a person’s capacity to own, use and one year or reserving yearly rent. possess the land. Real estate laws prescribe different kinds of rights Section 18 of the aforesaid Act provides for documents where over the land, which primarily include: registration is not compulsory, but optional. Some of these (i) Ownership rights: It is the absolute right in the title and documents include instruments which acknowledge receipts/ interest of a particular property acquired by virtue of transfer payments of consideration on account of the creation, declaration, of that property. assignment, limitation or extinction of any such right, title or interest, (ii) Leasehold rights: A lease is a limited right to use and possess leases of immovable property not exceeding one year and Wills, etc. a particular property for a certain period. (iii) Licensed rights: A licence is also a limited right to use and 4.2 Is there a state guarantee of title? What does it occupy a particular property for certain period. In a licence guarantee? the legal possession is not transferred. (iv) Mortgage/charges on property: A mortgage or charge creates No, in India the state does not guarantee title. The doctrine of an interest on behalf of the lender on an immovable property. This is used to secure the payment of a loan or money caveat emptor (let the buyer aware) is followed in India. The onus advanced to a borrower. of verification of the title is on the buyer. However, the buyer’s onus to verify the title does not affect the warranties of the seller and the (v) Easement rights: Such rights are enjoyed by the owner of a particular property over an adjacent property (which he/she/it contractually agreed terms between both parties. does not own), i.e., right of way, right to get light, etc. (vi) Benefits/rights arising out of land: An immovable property 4.3 What rights in land are compulsorily registrable? also consists of benefits arising from the land i.e., standing What (if any) is the consequence of non-registration? crops, trees, etc. Any beneficial rights arising from the land can be enforced in India subject to a contractual understanding In terms of Section 17 of the Registration Act, 1908, the following between parties. rights are compulsorily registrable: (i) instruments of gifts of immovable property; (ii) any instrument which operates to create, 3.2 Are there any scenarios where the right to a declare, assign, limit or extinguish any right, title or interest with a real estate diverges from the right to a building value of INR 100 and upwards related to immovable property; and constructed thereon? (iii) leases of immovable property from year to year or for any term exceeding one year or reserving yearly rent. Yes, the following are some scenarios wherein the right to a real If a document for which registration is compulsory is not registered, estate diverges from the right to a building constructed thereon: the immovable property concerned will not be affected. However, the a. when a tenant constructs a building on land that he does not said document cannot be relied upon as evidence in a court of law in own; and any transaction which affects or confers power related to such property. b. when the tenant sub-leases its leasehold rights further to a sub-lessee. 4.4 What rights in land are not required to be registered?

3.3 Is there a split between legal title and beneficial title As mentioned in question 4.1 above, registration is not compulsory, in your jurisdiction and what are the registration but optional, primarily in cases of instruments acknowledging the consequences of any split? receipt or payment of any consideration on account of the creation, declaration, assignment, limitation or extinction of any such right, Yes, in some cases there may be a split between legal title and title or interest in immovable property, Leases of immovable beneficial title of an immovable property. For example, in case of a property not exceeding one year and Wills, etc. co-operative housing society where such a society is the legal owner of the property, but the owners are allotted the shares of the society associated with the particular property and hence are the beneficial 4.5 Where there are both unregistered and registered land owners as they have the right to use and occupy that property. There or rights is there a probationary period following first are registration requirements which must be met by the beneficial registration or are there perhaps different classes or qualities of title on first registration? Please give owners. details. First registration means the occasion upon which unregistered land or rights are first registered in the registries.

There is really no concept of registered or unregistered land in India.

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If a document is compulsorily registered and is not registered, such title document after making it a part of its records. It is noteworthy a document does not affect the immovable property comprised in that upon registration such an instrument becomes a public document that document. However, such a document cannot be received as for anyone to verify and, if required, obtain a certified true copy. evidence in a court of law in a transaction affecting or conferring power with regard to such a property. Thus, on registration, a 5.3 Can any transaction relating to registered real estate compulsorily registrable document gets evidentiary value. be completed electronically? What documents need The concept of a probationary period following the first registration to be provided to the land registry for the registration is not envisaged under Indian law. of ownership right? Can information on ownership of registered real estate be accessed electronically? India 4.6 On a land sale, when is title (or ownership) transferred To date, registration of real estate transactions in the NCR cannot to the buyer? be completed electronically. For registration of a document a party has to physically appear before the registering authority where On a sale of land, title is transferred from the seller to the buyer upon photographs and finger print impressions are submitted. Further, execution of the sale deed, i.e. from the date of execution of the certain documents in a physical form must also be provided: (i) sale deed. Such sale deed can be submitted for registration within ownership documents in original form for verification, along with four months of the date of execution. However, on registration such a photocopy; (ii) Permanent Account Number and Aadhaar Card / document gets evidentiary value and can be produced as evidence in photo identity proof of the parties to the transaction; and (iii) in case a court of law in a transaction affecting such property. of a company, an Aadhaar Card / photo identity proof of authorised signatories in original form and corresponding photocopies. A copy 4.7 Please briefly describe how some rights obtain of any relevant board resolution and the company seal are additional priority over other rights. Do earlier rights defeat later requirements. rights? The information relating to registered real estate transactions can be accessed electronically dating back to the time these documents The ownership right may be transferred from the seller to the were first digitised in the various jurisdictions. buyer through lease deeds/conveyance deeds/sale deeds, etc. Such deeds are required to be registered under the Registration Act, 1908 once stamp duty and registration fees have been paid. Once 5.4 Can compensation be claimed from the registry/ registered, such documents can be used as evidence in a court of registries if it/they make a mistake? law. Unregistered documents are also used for the transfer of property. Typically rights created by registered documents will There are no specific legal provisions on which compensation claims prevail over rights created through unregistered documents. In relating to the registry/registries can rely. However, mistakes can be some cases statutory rights may prevail over contractual rights set rectified upon filing the requisite applications with the concerned out in agreements. Further, earlier rights created by means of non- registries. registered agreements will prevail over rights created by subsequent non-registered agreements. 5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and 5 The Registry / Registries other rights affecting real estate?

On registration, instruments become public documents and anyone 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules on filing an application and payment of the requisite fees can verify and requirements. and get a certified true copy of the document from the concerned Sub-Registrar’s office. Therefore information relating to registered Each state government has appointed Sub-Registrars of Assurances real estate can be accessed electronically. who act in the jurisdiction conferred on them. Every document In respect of real estate and other rights affecting real estate, details pertaining to immovable property which requires registration needs can be obtained from the office of the Sub-Registrar, provided there to be registered in the office of the Sub-Registrar of Assurances in are restraining orders from the Hon’ble Court and these orders have whose jurisdiction the concerned property is situated. been brought to the notice of the concerned Sub-Registrar. Other In the National Capital Region primarily there are Sub-Registrar than the Sub-Registrar’s office, court records and public notices are offices appointed by the governments of Delhi, Uttar Pradesh and other avenues through which the aforesaid details can be obtained. Haryana for the Delhi, Noida, Ghaziabad and Haryana jurisdictions. Each Sub-Registrar’s office follows the rules and regulations 6 Real Estate Market specified by the individual state government.

6.1 Which parties (in addition to the buyer and seller 5.2 Does the land registry issue a physical title document and the buyer’s finance provider) would normally to the owners of registered real estate? be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or On submission of a document for registration, the Office of Sub- duties. Registrar of Assurances endorses the document and returns the document to the owner with the registration number along with Apart from the seller, the buyer and the buyer’s financier, the the book number and page number of the statutory book of records following persons are usually involved in a real estate transaction: (i) in which the document has been included and copied accordingly. witnesses: who witness the execution of the sale deed; (ii) real estate Hence the land registry, in a manner of speaking, issues the physical

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broker/agent: who introduces the buyer and seller to each other and assists in carrying out the transaction; (iii) lawyers: professionals 7 Liabilities of Buyers and Sellers in Real from both sides who have advised and negotiated the transaction Estate Transactions on behalf of their respective clients; and (iv) any other person who has any vested interest in the property, i.e. legal heirs, collaborators, 7.1 What (if any) are the minimum formalities for the sale holders of any charge on the property, etc. and purchase of real estate?

6.2 How and on what basis are these persons The minimum formalities for the sale and purchase of real estate are remunerated? that the seller should have the absolute and marketable title to sell India and the buyer should have capacity to buy. Further, the agreement The aforementioned persons get compensated by the parties should be executed in this regard and registered within the period of depending on their interest and involvement in the transaction. four months of execution of the aforesaid agreement. However, the witnesses typically are known to the concerned parties and therefore are generally not paid/compensated by the transacting 7.2 Is the seller under a duty of disclosure? What matters parties. must be disclosed?

6.3 Do you feel there is a noticeable increase in The seller is under the obligation to disclose all facts about the the availability of capital to finance real estate property in question, including each and every defect and liability of transactions in your jurisdiction, whether equity or the property of which the seller should be aware. Further, the buyer debt? What are the main sources of capital you see is obliged to follow the Latin rule ‘Caveat Emptor’ which means ‘let active in your market? the buyer beware’ and consequently the buyer should conduct due diligence with regard to the property. Yes, there is a noticeable increase in the availability of capital to finance real estate transactions. The main sources of finance for real estate transactions are debt. Domestic finance can be availed: 7.3 Can the seller be liable to the buyer for (i) from the proposed sale of the immoveable property to buyers misrepresentation? before the property is constructed; however, this source of finance is subject to restrictions imposed under the Real Estate Regulation Yes, the seller can be held liable to the buyer for misrepresentation. and Development Act, 2016, in terms of receiving and utilisation of money; (ii) from nationalised and other banks; (iii) from non- 7.4 Do sellers usually give contractual warranties to the banking financial institutions; and (iv) by issuing secured debentures buyer? What would be the scope of these? What is by a corporate developer. Foreign finance can be raised from: the function of warranties (e.g. to apportion risk, to (i) domestic or foreign private equity funds; (ii) foreign portfolio give information)? Are warranties a substitute for the investors; and (iii) external commercial borrowings (ECB), etc. buyer carrying out his own diligence?

Yes, usually sellers give contractual warranties to buyers which 6.4 What is the appetite for investors and developers include: (i) the seller is the absolute owner of the said property and in your region to look beyond primary real estate has a good and marketable title and no third party has any interest, markets and transact business in secondary or even tertiary markets? Please give examples of significant share, right and title thereof; (ii) there is no legal impediment on the secondary or tertiary real estate transactions, if seller to sell, transfer and convey the absolute title in the property relevant. in favour of the buyer; and (iii) the property is free from all kinds of encumbrances and there are no outstanding government dues. With the increase in availability of finance for real estate transactions, There are also covenants from sellers which support these there is an increase in projects in the real estate sector in the NCR warranties, stating that: (i) they convey, sell, transfer and assign all region. Shortage of land in Delhi and the availability of land at of their rights, title and interests in the said property to the buyer reasonable prices has triggered the growth of the real estate sector and they have been left with no right, title or interest of any nature in suburban areas of NCR and Tier II and Tier III cities i.e. Alwar, whatsoever in the said property; and (ii) the property has become Bhiwadi, Neemrana, Mathura, Agra, Dehradun, Haridwar, Jaipur, the exclusive property of the buyer, absolutely and forever, with the Meerut, Karnal and Panipat, Mohali, etc. Further, the existing right to transfer the same by way of sale without any objection from Government has launched a project for the development of smart the sellers. If the seller breaches any of their warranties, a buyer can cities across India which has also caused some traction in the real claim damages. estate sector. These warranties help in providing information. Additionally, if these warranties are found to be misrepresentations then it is easier 6.5 Have you observed any trends in particular market to establish a case of prima facie default against the seller in a court sub sectors slowing down in your jurisdiction in of law. terms of their attractiveness to investors/developers? Warranties from the sellers should not be considered as a substitute Please give examples. for buyers to conduct their own due diligence on the said property for reasons of “let the buyer beware”, etc. As a whole, there is a bit of a slowdown in the real estate sector with regard to projects located in the NCR. One of the underlying reasons could be that the investors/developers are awaiting the full 7.5 Does the seller warrant its ownership in any way? implementation of the provisions of the newly-introduced real estate Please give details. laws, i.e. the Real Estate (Regulation & Development) Act, 2016 (RERA) by the concerned State Governments. Yes, as mentioned in question 7.4, a seller warrants its ownership of

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the property. A seller usually warrants that he is the absolute owner borrower for the outstanding amounts or file a summary suit, of the land and is sufficiently entitled to transfer the property to the as provided for under Order 37 of the Code of Civil Procedure buyer. 1908. Alternatively, the lender may apply for foreclosure of the mortgage where the borrower had provided security by way of a mortgage. Both of these options are time-consuming. In order to 7.6 What (if any) are the liabilities of the buyer (in addition to paying the sale price)? get a speedy remedy, the bank/financial institution can give notice to the defaulting borrower/guarantors under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Some of the main liabilities which affect the buyer are that he/ Interest Act, 2002 (“SARFAESI Act”) to pay the entire outstanding she must: (i) pay the sale consideration through proper banking

amount within the prescribed period. If the borrower fails to pay the India channels; (ii) ensure the accuracy of the identity details he/she outstanding amount within the prescribed period, then the lender provides; and (iii) deposit the tax deducted at source with the can initiate proceedings for recovery without intervention of the concerned authorities and provide the statutory receipt to the seller. court under SARFAESI Act.

8 Finance and Banking 8.4 What minimum formalities are required for real estate lending?

8.1 Please briefly describe any regulations concerning the lending of money to finance real estate. Are the Usually the formalities required for real estate lending are as follows: rules different as between resident and non-resident (i) A due diligence exercise on the part of the lender must be persons and/or between individual persons and conducted to verify the title. corporate entities? (ii) A valuation report from a certified valuer must be obtained to ascertain the value of the property. There is no specific regulation concerning the lending of money to (iii) Execution and proper stamping of the loan agreement, finance the real estate sector. The main source of finance for real guarantee agreement, mortgage deed, hypothecation deed, estate transactions is debt funding. Domestic sources of finance share pledge agreement, documents for issuance of secured consist of: (i) the proposed sale of the immoveable property to debenture and its filing, etc. must be completed. buyers before the property is constructed – this source of finance is (iv) Registration of the mortgage deed, if applicable. primarily regulated by the Real Estate Regulation and Development Act, 2016, which poses restrictions in terms of utilisation and receiving of the money from the customer; (ii) nationalised and 8.5 How is a real estate lender protected from claims other banks; and (iii) non-banking financial institutions (NBFC). against the borrower or the real estate asset by other creditors? Finance from banks and NBFCs are governed by their respective regulations and internal circulars issued in this regard. Funding can also be provided by secured debenture by a corporate developer. By obtaining the senior security rank: The first charge created on This is governed by the Companies Act, 2013. the property shall have priority over the subsequent one and first charge holder may enforce its security interests without any consent Foreign finance can be sourced from: (i) foreign private equity from the other lenders. Hence, the lender should try and obtain the funds; (ii) foreign portfolio investors; and (iii) external commercial first charge over the property, so that its security has the status of borrowing (ECB). The foreign source of finance is essentially the first charge. governed by FDI Policy and FEMA, read along with the Foreign Exchange Management Regulations. 8.6 Under what circumstances can security taken by a lender be avoided or rendered unenforceable? 8.2 What are the main methods by which a real estate lender seeks to protect itself from default by the borrower? Under the following circumstances security taken by a lender may be avoided or rendered unenforceable: Real estate lenders usually secure their loan by creating a charge (i) If title of the property, which was rendered as security, on the property through any type of a mortgage, as provided in the is conferred on any third party prior to the creation of the TPA. Most of these charge-related documents require compulsory security interest by the lender in such property. registration. Mortgage by depositing the title deeds is the most (ii) If the lender has a second or subsequent charge on the security common type of mortgage. rendered and the property fails to generate a surplus over the claim of the first charge holder, the first charge holder may Further, apart from the contractual obligations imposed on the buyer, enforce its security interests without any consent from the other methods commonly relied upon are: (i) taking guarantees/ other lender/s. corporate guarantees from a third party; (ii) issuing secured debenture by a corporate developer; (iii) pledging of shares of the borrowing company; and (iv) issuing post-dated cheques. 8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender?

8.3 What are the common proceedings for realisation of As such no specific right is available to the borrower to frustrate the mortgaged properties? Are there any options for a enforcement action of a lender. However a borrower may take the mortgagee to realise a mortgaged property without following steps to frustrate the enforcement action of a lender: (i) involving court proceedings or the contribution of the mortgagor? submit an application for granting more time to the lender to pay the outstanding amount; (ii) initiate a law suit to grant a stay on In case of defaults in the payment of a secured debt the lender may the enforcement action initiated by lender; or (iii) pay off the total file an ordinary money suit for recovery against the defaulting outstanding amount to redeem the property.

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For the purpose of GST, the property value does not include stamp 9 Tax duty and registration charges. The buyer is liable to pay GST.

9.1 Are transfers of real estate subject to a transfer tax? 9.5 What other tax or taxes (if any) are payable by the How much? Who is liable? seller on the disposal of a property?

The transfer of immovable property may be subject to following On disposal of the property, the seller shall be liable to pay capital taxes: gains tax in accordance with the provisions of the Income Tax (i) Capital gains tax: The transfer of immovable property is Act, 1961. Capital gains tax is required to be paid in the relevant India subject to capital gains tax in accordance with the provisions assessment year corresponding to the financial year in which the of the Income Tax Act, 1961. The transferor is liable to bear immovable property was disposed of. the capital gains tax. Capital gains are further classified as short-term and long-term capital gains, depending upon the period of holding the proceeds of such sale by the seller. Short- 9.6 Is taxation different if ownership of a company (or term capital gains are taxed at normal rates whereas long-term other entity) owning real estate is transferred? capital gains are taxed at subsidised rates of 20%. There are also indexation benefits which can be relied upon in the The ownership of a company owning immovable property can be calculations of long-term capital gains tax. Such indexation transferred by way of the transfer of shares of that company. For the can help in reducing the amount of capital gain tax as it takes purchase of shares of the company a share transfer deed/form must into account the inflated cost of acquisition of the capital assets pertinent at the time of sale of the concerned property. be duly executed both by the transferor and the transferee. (ii) Stamp duty: On every instrument pertaining to transfer of From a stamp duty perspective: A share transfer deed should be duly immovable property the prescribed stamp duty is required stamped with the share transfer stamp at the prescribed rate on the to be affixed. The rate of stamp duty varies from state to value of shares. This share transfer stamp in Delhi, for example, is state. In the absence of any agreement to the contrary, the currently much lower, i.e. 0.25% of the share value, than the stamp purchaser/transferee has to pay the stamp duty. duty levied on documents pertaining to the transfer of immovable (iii) Registration charges: Every instrument pertaining to transfers property. A share transfer deed does not require registration. of immovable property are compulsorily registrable and the From the perspective of capital gains: The sale of shares of the registration charges must be paid accordingly. In the absence company will attract capital gains tax as the sale of shares of the of any agreement to the contrary, the buyer has to pay the company will also amount to the transfer of capital assets. Hence, registration charges. The registration charges also vary from the transfer of shares of the company would be subject to capital state to state. gains tax as mentioned in question 9.1 above, except for the fact that short-term capital gains and long-term capital gains tax will be 9.2 When is the transfer tax paid? decided on the basis of a holding period of 12 months instead of 36 months. (i) Capital gains tax must be paid in the relevant assessment year corresponding to the financial year in which the immovable property was transferred. 9.7 Are there any tax issues that a buyer of real estate should always take into consideration/conduct due (ii) Stamp duty is required to be paid prior to the execution of the diligence on? document for the transfer of immovable property. (iii) The registration fee is required to be paid at the time of Whether or not a property has a completion/occupation certificate, registration of the document. the buyer should always ensure that property tax if any payable on such a property is duly paid. For that purpose property tax receipts 9.3 Are transfers of real estate by individuals subject to should obtained. A visit to the tax authorities is also advisable in income tax? order to confirm if there are any arrears of tax to be paid by the seller. On the other hand, for properties which are under construction, it is Yes, every transfer of immovable property shall be subject to capital important to ascertain the status of the payment of GST. gains tax in accordance with the provisions of the Income Tax Act, 1961. Such tax must be paid by the seller. 10 Leases of Business Premises

9.4 Are transfers of real estate subject to VAT? How much? Who is liable? Are there any exemptions? 10.1 Please briefly describe the main laws that regulate leases of business premises. The Goods and Services Tax Act, 2017 (GST), a single uniform indirect tax, has replaced all central and state indirect taxes like Transfer of the Property Act, 1882, the Registration Act 1908, the service tax, excise, customs, VAT, etc. Relevant provisions of the Indian Stamp Act, 1899 and the Contract Act, 1872 are the main acts GST are as follows: that regulate leases of business premises. Transfer of land and transfer of a building after issuance of a completion certificate or after the building has been occupied will 10.2 What types of business lease exist? not attract GST. However, transfer of a building before its first occupant or prior to issuance of a completion certificate will be Lease deed(s) and the leave and licence agreement(s) are the two subject to GST. main types of business lease. The rate of GST applicable to properties under construction is 12% of the property value.

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accordingly. The landlord is also made responsible in most leases 10.3 What are the typical provisions for leases of business by including an clause which states that lessee will attorn as a lessee premises in your jurisdiction regarding: (a) length of to the new owner and it is the duty of the landlord to protect the term; (b) rent increases; (c) tenant’s right to sell or interest of the lessee vis-à-vis the new owner by providing the sub-lease; (d) insurance; (e) (i) change of control of the tenant; and (ii) transfer of lease as a result of a required documentation in this regard. corporate restructuring (e.g. merger); and (f) repairs? 10.7 Green leases seek to impose obligations on (a) Length of term – this is at the discretion of the transacting landlords and tenants designed to promote greater parties, however, it is pertinent to mention that if a lease is sustainable use of buildings and in the reduction of

for a period of longer than 12 years then the lessee may be the “environmental footprint” of a building. Please India considered as the deemed owner for tax purposes. briefly describe any “green obligations” commonly (b) Rent increases – this is contractually agreed between the found in leases stating whether these are clearly parties. defined, enforceable legal obligations or something not amounting to enforceable legal obligations (for (c) Tenant’s right to sell or sub-lease – only if provided in the example aspirational objectives). lease contract, however, as per the TPA, the lessee has the right to sub-lease the property, if agreed between the parties. To date, the concept of ‘green leases’ is not very common in India. (d) Insurance – generally the lessor is responsible for the However, in 2001, the Indian Green Building Council was formed insurance for the demised premises and the lessee is which is a part of the Confederation of Indian Industry. Its goal is responsible for the insurance of lessee’s fixtures, fittings and personal belongings in the demised premises. “to enable a sustainable built environment for all and facilitate India to be one of the global leaders in the sustainable built environment (e) (i) Change of control of the tenant – as per the contractual by 2025”. In order to promote the green building concepts the agreement between the parties; (ii) in the case of a transfer of lease as a result of a unless specifically excluded. aforementioned council works closely with the State Governments, Central Government, World Green Building Council and bilateral (f) Repairs – the lessor takes care of the major repairs; however, the minor repairs in the demised premises are to be carried multi-lateral agencies. In addition to this, the Leadership in Energy out as per the agreement between the parties. and Environmental Design is the well-known green building rating system known worldwide and is also followed for some projects in India. In keeping with the above requirement, various clauses in 10.4 What taxes are payable on rent either by the landlord relation to “green obligations” are found in leases and some such or tenant of a business lease? clauses are related to light pollution, air pollution, diesel storage, etc. which are clearly defined and are enforceable legal obligations Taxes which are payable on rent either by the landlord or tenant of a as per the contract between the parties. business lease are stamp duty, registration charges and the applicable GST. Also there is a tax deduction at source by the lessee. 11 Leases of Residential Premises

10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party 11.1 Please briefly describe the main laws that regulate etc.)? Are there any special provisions allowing a leases of residential premises. tenant to extend or renew the lease or for either party to be compensated by the other for any reason on termination? Leases of residential premises are regulated by the enactments i.e., the Transfer of Property Act, 1882, the Indian Contract Act, 1872, the Indian Registration Act, 1908, the Indian Stamp Act, 1899 and Leases are either terminated at the expiry of the lease tenure or the local Rent Control Act. upon a default by the parties. There can be special provisions for renewal or extension which are typically subject to an escalation in the rent. Yes, there can also be terms wherein either party can 11.2 Do the laws differ if the premises are intended for be compensated. For example, the landlord often agrees to pay for multiple different residential occupiers? any expenses incurred by the tenant on fixtures and fittings in the premises upon the termination of the lease. Conversely, the landlord To some extent, yes. It depends on the provisions of a particular can also be compensated if there is an abrupt termination of the lease State’s Apartment Ownership Act. by including a lock-in period of the lease, where the rent for the balance of the lock-in period is paid by the tenant when the lease 11.3 What would typical provisions for a lease of is terminated. residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the 10.6 Does the landlord and/or the tenant of a business tenant’s rights to remain in the premises at the end of lease cease to be liable for their respective the term; and (d) the tenant’s contribution/obligation obligations under the lease once they have sold their to the property “costs” e.g. insurance and repair? interest? Can they be responsible after the sale in respect of pre-sale non-compliance? (a) Length of term – this is at the discretion of the transacting parties, however, it is pertinent to mention that if a lease is for No, the landlord and/or the tenant of a business lease are not liable longer than 12 years then the lessee may be considered as the deemed owner for tax purposes. for their respective obligations under the lease once they have sold their interest. However, if a lease specifically states that, in (b) Rent increases – as contractually agreed between the parties. spite of the sub-lease or outright transfer of the lease, the tenant (c) Tenant’s right to remain in the premises at the end of the term will continue to be liable, then such a tenant will be held liable – the tenant has no right to remain in the rented premises after

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the lease has expired. However a tenant, by mutual agreement private land for public use, provided the public nature of the usage with the landlord, may renew the lease for a further period of can be demonstrated unequivocally. Land acquisition in India is time. governed by the Right to Fair Compensation and Transparency (d) The tenant’s contribution/obligation to the property “costs” in Land Acquisition, Rehabilitation and Resettlement Act, 2013 e.g. insurance and repair – the cost of the insurance and repair (LARR). The Government is permitted to use the process of of the rented premises’ structure is usually the responsibility compulsory acquisition only for Government projects and public of the landlord. sector undertaking projects involving a public purpose. The calculation of the amount of compensation is specified in 11.4 Would there be rights for a landlord to terminate a Schedule I, Schedule II and Section 26, Section 27, Section 28, India residential lease and what steps would be needed Section 29 and Section 30 of the LARR. to achieve vacant possession if the circumstances existed for the right to be exercised? 12.3 Which bodies control land/building use and/or A landlord may terminate a residential lease during the lease tenure occupation and environmental regulation? How do buyers obtain reliable information on these matters? with cause when a tenant is not paying rent or when a tenant violates the clauses of a lease or without cause subject to mutual agreement between the parties. For termination with cause, the landlord The Ministry of Environment and Forests regulate the environmental typically has to issue a notice to the tenant as per the agreed notice regulations. period stated in the lease specifying the reasons for termination of The local municipal corporation of each state regulates the usage of the lease. On the other hand, for termination without cause, a notice land/building and/or occupation in their jurisdiction. has to be served to the tenant as per the agreed notice period. If the Buyers can obtain reliable information on these matters through tenant refuses to vacate the premises after the notice period is over, various regulations passed by the state and the central government. then a case for eviction by the landlord would have to be filed in the The buyers can also check these regulations in the offices of the court having the applicable jurisdiction. local municipal corporation.

12 Public Law Permits and Obligations 12.4 What main permits or licences are required for building works and/or the use of real estate?

12.1 What are the main laws which govern zoning/ In accordance with RERA, a builder’s project must be registered permitting and related matters concerning the use with the Real Estate Regulatory Authority. Some of the important and occupation of land? Please briefly describe them and include environmental laws. permits required by a developer for building works are as follows: (a) Sanctioned Building/Floor Plans. There are specific laws which govern the zoning/permitting and (b) Fire NOC from the Local Fire Office. related matters concerning the use and occupation of land. The (c) NOC from the Airports Authority of India, if applicable. National Capital Region Planning Board Act, 1985, is enacted for (d) Certificate of the Pollution Control Board of the State. the constitution of a planning board for the preparation of a plan for (e) Ministry of Environment and Forest Clearance Certificate/ the development of the national capital region and for developing State Environment Clearance Certificate, if applicable, etc. harmonised policies for the control of land use and the development of infrastructure in the national capital region to avoid any haphazard development of that region. Further, to the aforementioned act 12.5 Are building/use permits and licences commonly the National Capital Region Planning Board Rules, 1985 and the obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)? National Capital Region Planning Board Regulations, 1986, have been enacted to clarify the purpose of said Act. Yes, building/use permits and licences are commonly obtained by There is also the Master Plan of Delhi, 2021 which governs the filing an application in the appropriate office from which the permit zoning and related issues of this region. is required. Each state government has its own zoning regulation, The Central environmental legislations in India include the development plan and policy or grant of licence and change of land following: use. Each application for change of land use will be considered in a) The Water (Prevention and control of Pollution) Act, 1974. conformity with the land use proposals of the development plans b) The Air (Prevention and control of Pollution) Act, 1981. and in accordance with the zoning regulations of the respective state. Land use permission must be expressly obtained from the c) The Environment Protection Act, 1986. competent authority. d) The Indian Forest Act, 1927. No, implied permission cannot be obtained for building/use permits e) The Forest Conservation Act, 1980. and licences. f) The National Conservation Strategy and Policy Statement on Environment and Development, 1992. 12.6 What is the appropriate cost of building/use permits and the time involved in obtaining them? 12.2 Can the state force land owners to sell land to it? If so please briefly describe including price mechanism. The cost of building/use permits and the time involved in obtaining such permits depends on the nature of the permits/approvals sought The power to take property from the individual is based on the and several other factors including the size and location of the premise of eminent domain. The doctrine of eminent domain states project. The same also depends upon the usage, i.e. commercial or that the sovereign state can take all steps which relate to public residential usage of the property to be constructed. interest. The doctrine empowers the sovereign state to acquire

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Entry 12 State List and Entry 40 of Concurrent List; India ■ the Ancient Monuments and Archaeological Sites and 13 Climate Change Remains Act, 1958; and ■ the Ancient Monuments and Archaeological Sites and Remains (Amendment & Validation) Act, 2010, and Rules 13.1 Please briefly explain the nature and extent of any framed thereunder. As per this Act persons having buildings regulatory measures for reducing carbon dioxide or houses in the prohibited area (100 metres from protected emissions (including any mandatory emissions monuments) of any centrally protected monument may only trading scheme). undertake repairs and renovation and in case of a regulated area (200 metres further beyond the prohibited area) the The provisions of the Environment (Protection) Act, 1986 persons may undertake construction, reconstruction, repairs provides for the protection and improvement of environment. No and renovation. In both cases activity is only only after person operating any industry, business or procedure is allowed obtaining permission from the Competent Authority and on the recommendation of National Monuments Authority. to discharge or emit any environmental pollutant in excess of prescribed standards. The Government is empowered to take The regulations for protection of historic monuments do not affect measures for laying down standards for the emission or discharge of the transfer of rights in real estate. environmental pollutants. As per the mandatory Emissions Trading Scheme which is a market-based approach to control pollution by 12.8 How can e.g. a potential buyer obtain reliable providing economic incentives to achieve reduction in emissions, information on contamination and pollution of real India has pilot projects in the State of Tamil Nadu, Maharashtra and estate? Is there a public register of contaminated land Gujarat which cover more than 1,000 industries. in your jurisdiction?

There is no specific public register of contamination and pollution 13.2 Are there any national greenhouse gas emissions reduction targets? of real estate. However, the Environment Protection Act, 1986 read with Section 5 (3) of the Hazardous Wastes (Management and Handling) Rules, 1989 provides that every occupier generating India filed a climate action plan with the United Nations Climate nd hazardous wastes and having a facility for collection, reception, Secretariat on 2 October, 2016. This plan proposed to lower the treatment, transport storage and disposal of such wastes shall make emissions intensity of its GDP by 33%–35% below 2005 levels an application to the State Pollution Control Board for the grant by 2030. Further, it pledged to achieve 40% of its installed power of authorisation for any of the said activities. Further, the orders capacity from non-fossil-based fuel sources. India also pledged to and the judgments of the courts ascertain if there is any pending create an additional carbon sink (a carbon sink is anything such as litigation against the developer for contamination and pollution. A forest, ocean and/or any natural environment which soaks up more potential buyer has to conduct its own research in order to obtain carbon than it discharges as carbon dioxide) of 2.5 to 3 billion reliable information regarding contamination and pollution of real tonnes by 2030. estate. 13.3 Are there any other regulatory measures (not already mentioned) which aim to improve the sustainability of 12.9 In what circumstances (if any) is environmental clean- both newly constructed and existing buildings? up ever mandatory?

Apart from the above-mentioned regulatory measures, no There is no specific statutory provision which provides for mandatory other specific regulatory measures are required to improve the clean up of the environment. However, where an industry is held sustainability of both newly constructed and existing buildings. liable for contamination and pollution, and when an order, judgment However, some other regulatory measures/approval/licences may or direction is passed by the National Green Tribunal, any other need to be taken depending upon the facilities/amenities available courts/tribunals and regulatory body set-up under the provision in the building as well as other factors such as the location of the of the various Environmental Laws implemented in India, the building/project, i.e., a diesel storage licence, lift fitness licence, environmental clean-up becomes mandatory. Clearance from the Delhi Metro Rail Corporation and Indian Railways, etc.

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Kiron Prabhakar Navin B. Singh PAV Law Offices PAV Law Offices F-1/11 (Lower Ground Floor) F-1/11 (Lower Ground Floor) Hauz Khas Enclave Hauz Khas Enclave New Delhi -110016 New Delhi -110016 India India

Tel: +91 11 2651 8507 Tel: +91 11 2651 8505 Email: [email protected] Email: [email protected] India

Ms. Kiron Prabhakar, with over 29 years of experience, is the Mr. Navin B. Singh holds a Bachelor’s Degree in Law from the Founder Partner of PAV Law Offices. She holds a Bachelor’s Degree University of Delhi and a Bachelor’s Degree in Chemistry (Honours) in Law from the University of Delhi and a Bachelor’s Degree in Arts from BBA University, Muzaffarpur. He successfully completed the CA – English (Honours) from Lady Shriram College, University of Delhi. intermediate level and CA final (first group) examination. Navin is a Subsequently, she completed her LL.M. in IT and Telecom Laws from member of Bar Council of Delhi. the University of Strathclyde, Glasgow. She has a Diploma in Cyber He has been associated with the firm for over eight years and has Laws from Indian Law Institute, New Delhi. nearly 10 years of in-depth experience in all aspects of real estate Her areas of practice also include property development, leases and laws and corporate laws including opinion, transactional & regulatory licences, conveyances, construction contracts, taxation related to matters and is highly regarded for his ability to comprehensively land and property, the setting up of trusts, providing legal support for address client concerns and provide them with practical advice complying with regulatory requirements related to land and property keeping long-term business interests in mind. and transfer of property under the Indian laws of inheritance. She has With the backup of CA qualification and NCFM certification, he also handled litigation related to real estate matters and has successfully has thorough knowledge of taxation laws, security market regulating completed several major land and property transfers. laws.

PAV Law Offices (“PAVLO”) is a dynamic firm set up in 2008 with the aim of providing expert legal services. We believe in aresult-oriented approach. We focus on addressing client requirements in a holistic manner to facilitate achieving their business objectives. PAVLO is a full service law firm representing major national and global corporations, Fortune 500 Companies, Government of India and high-net-worth individuals. Our practice areas include: • Real Estate & Infrastructure Projects • Information Technology, Media and Entertainment • Employment Laws • Corporate Commercial, Mergers & Acquisitions • Compliances • Environment Laws • Direct and Indirect Taxation • Litigation and Arbitration. PAVLO has competent lawyers and is equipped with the latest infrastructure and networking facilities to remain connected with clients as well as maintain confidentiality. Our reach and depth of services is enhanced through our alliances with specialist law firms in major cities across India.

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Ireland Diarmuid Mawe

Maples and Calder Craig Kenny

1 Real Estate Law 2 Ownership

1.1 Please briefly describe the main laws that govern 2.1 Are there legal restrictions on ownership of real estate real estate in your jurisdiction. Laws relating to by particular classes of persons (e.g. non-resident leases of business premises should be listed in persons)? response to question 10.1. Those relating to zoning and environmental should be listed in response to There are no legal restrictions on the ownership of real estate by question 12.1. Those relating to tax should be listed in non-resident persons in this jurisdiction. However, anti-money response to questions in Section 9. laundering legislation requires that a number of checks be carried out on a potential buyer, and the identity of the buyer, the source of Irish law was historically based on old legislation which predates the funds and the ability to fund the acquisition of real estate will need establishment of the Irish State in 1922, such as the Conveyancing to be verified. Acts, 1881–1911 (the “Conveyancing Acts”) and the Settled Land Acts, 1882–1890. The Land and Conveyancing Law Reform Act, 2009 (the “2009 Act”) replaced much of the old law, including the 3 Real Estate Rights pre-1922 statute law, and modernised the law and conveyancing practice. There is modern legislation governing registration of title (Registration of Title Act, 1964 which was modified by 3.1 What are the types of rights over land recognised in the Registration of Deeds and Title Act, 2006) to facilitate the your jurisdiction? Are any of them purely contractual increasing computerisation of the property registration system in between the parties? this jurisdiction and succession law (Succession Act, 1965). Irish property can be held under freehold title which confers There is extensive statutory protection afforded to family property absolute ownership, or a leasehold title which confers ownership for in particular, which affects conveyancing practice (e.g. the Family the period of years granted by the relevant lease and held from the Home Protection Act, 1976). This is partly due to the fact that owner of the freehold or the owner of the superior leasehold title in Ireland has a written Constitution enshrining certain fundamental the relevant property. A leasehold interest is based on a contractual rights which override any other law, including legislation. Thus it is relationship between the lessor/landlord and the lessee/tenant. not uncommon to find legislation declared by the domestic courts to be unconstitutional and, therefore, null and void. The quality of the title to land generally falls into four categories, namely: ■ Absolute title. 1.2 What is the impact (if any) on real estate of local common law in your jurisdiction? ■ Possessory title. ■ Qualified title. Irish property law is essentially based on both legislation and ■ Good Leasehold title. common law. 3.2 Are there any scenarios where the right to a 1.3 Are international laws relevant to real estate in your real estate diverges from the right to a building jurisdiction? Please ignore EU legislation enacted constructed thereon? locally in EU countries. Real estate in Ireland comprises all immovable property. This There are no international laws of direct relevance to real estate in includes land and any buildings or fixtures on the land. No this jurisdiction. However, as Ireland is a common law jurisdiction, distinction is made between title to land and title to buildings where court decisions made in other common law jurisdictions (such as they are in the same ownership. Typically, the owner of land is also the UK) are often accepted as having persuasive authority by the the owner of any buildings erected on the land. However, there is Irish judiciary. no impediment to having different owners.

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3.3 Is there a split between legal title and beneficial title 4.2 Is there a state guarantee of title? What does it in your jurisdiction and what are the registration guarantee? consequences of any split? A title registered in the Land Registry is guaranteed by the state. There is a split between legal title and beneficial ownership of The Land Registry indemnifies any person who suffers loss through property in Ireland. The 2009 Act provides that the entire beneficial a mistake made by the Land Registry. A buyer, therefore, can accept interest in property passes to the buyer on the making of an the folio as evidence of title without having to read the relevant enforceable contract for the sale or other disposition of land. The deeds. However, the State does not guarantee the conclusiveness of beneficial interest in property can also be held through a traditional boundaries or the area of the relevant property as identified on the

Ireland “off-title” trust. Land Registry maps. In respect of registered land, the Land Registry does not recognise a It should be noted that the Registry of Deeds does not guarantee the split between legal title and beneficial ownership and only the legal effectiveness of a deed nor does it interpret a deed, but only records owner of property will be recorded in part 2 (the ownership section) the existence of the deed. The registration of a deed in the Registry of the folio. A beneficial owner may, however, protect his or her of Deeds governs priorities. interest in the property by registering a caution or an inhibition against the folio in question. The purpose of a caution is to obtain 4.3 What rights in land are compulsorily registrable? notice of dealings by the registered owner so that the cautioner What (if any) is the consequence of non-registration? has an opportunity to assert his or her unregistered right(s). An inhibition, on the other hand, operates as a restriction on registration Any unregistered property (Registry of Deeds) purchased in the that prevents all registrations except those made in compliance with State after 1 June 2011 is subject to compulsory first registration in the terms thereof. In addition, a priority entry may be made by an the Land Registry. intended purchaser, lessee, or chargee of property affording them Registration is also compulsory where land is bought under the priority over other registrations in respect of the folio for a period of Land Purchase Acts or where land is acquired after 1 January 1967 44 days from the date of registration of the priority entry. by a statutory authority.

4 System of Registration 4.4 What rights in land are not required to be registered?

4.1 Is all land in your jurisdiction required to be Except as set out in question 4.3, there is no requirement that registered? What land (or rights) are unregistered? documents or titles be registered, but it is good conveyancing practice that deeds be registered in either the Registry of Deeds or the Land Registry in order to preserve the priority of the deed. The Property Registration Authority (the “PRA”) is the State body responsible for the registration of property transactions in Ireland In the case of registered land, there are certain rights which must and the system of registration of title (ownership) to land in Ireland. be registered in the Land Registry to gain protection; otherwise these rights will not be protected against a bona fidebuyer for value The PRA is a statutory body established on 4 November 2006 under without notice (e.g. rights of residence, restrictive covenants, leases the provisions of the Registration of Deeds and Title Act 2006 (the for a term exceeding 21 years). Section 35 of the 2009 Act provides “2006 Act”). that an easement shall be acquired at law by prescription only on The main functions of the PRA are to manage and control the Land registration of a court order under section 35. Section 35(4) of Registry and the Registry of Deeds and to promote and extend the the 2009 Act provides that the order shall then be registered in the registration of ownership of land. Registry of Deeds or Land Registry as appropriate. The Land Registry was established in 1892. When ownership is Section 37 Civil Law (Miscellaneous Provisions) Act 2011 amended registered in the Land Registry, the deeds are filed with the Land the 2009 Act and the Registration of Title Act 1964 to enable the Registry and all relevant particulars concerning the property and its PRA to register easements without a court order where there is ownership are entered on folios which form the registers maintained no disagreement between the parties concerning entitlement to an in the Land Registry. In conjunction with folios, the Land Registry easement or profit. also maintains maps (referred to as filed plans). Both folios and There are also a number of burdens which affect registered land maps are maintained in electronic form. without registration, such as public rights and occupational tenancies The Registry of Deeds was established in 1707 to provide a system for terms not exceeding 21 years. of voluntary registration for deeds affecting land and to give priority to registered deeds over unregistered but registrable deeds. There 4.5 Where there are both unregistered and registered land is no statutory requirement to register a document in the Registry of or rights is there a probationary period following first Deeds, but failure to do so may result in a loss of priority. The effect registration or are there perhaps different classes of registration is generally to govern priorities between documents or qualities of title on first registration? Please give dealing with the same piece of land. The primary function of the details. First registration means the occasion upon Registry of Deeds is to provide a system of recording the existence which unregistered land or rights are first registered in the registries. of deeds affecting unregistered property. When a deed is lodged in the Registry of Deeds it must be accompanied by the relevant application form (in a prescribed form) which is a summary of the There is no probationary period following first registration. essential information of the relevant deed. As noted at question 3.1, the quality of the title to registered land generally falls into four categories, namely: ■ Absolute title: This is the best type of title to land that can be acquired in Ireland.

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■ Possessory title: This category of title is granted where an applicant does not have paper title to land but is in occupation 5.3 Can any transaction relating to registered real estate of the land and/or in receipt of the rents and profits issuing be completed electronically? What documents need from the land. to be provided to the land registry for the registration ■ Qualified title: This category of title is granted where an of ownership right? Can information on ownership of applicant can only establish title for a limited period and/or registered real estate be accessed electronically? where the title is subject to reservations. ■ Good Leasehold title: This category of title applies where the Transactions cannot be completed between parties electronically. Land Registry has not investigated the title of the lessor to Once completed, all transactions relating to registered real estate grant the lease to the applicant. Note that if the superior title can be submitted to the Land Registry for registration electronically.

is already registered, then the lessee will be registered with an Once the application has been submitted electronically, the Ireland absolute title. Land Registry will issue a dealing number. However, the actual documents must be physically lodged in the Land Registry in order 4.6 On a land sale, when is title (or ownership) transferred to effect the completion of the registration. to the buyer? The documents that typically need to be provided to the Land Registry to effect registration of an ownership right are as follows: The legal title usually passes when the purchase price is paid to the ■ the Land Registry application form; seller and the buyer takes delivery of the transfer deed. To complete ■ the transfer deed; and the effective transfer of ownership of registered land, it is necessary to register the transfer in the Land Registry. ■ the appropriate fees. The 2009 Act provides that the entire beneficial interest in property The Land Registry maintains an electronic database which can be passes to the buyer on the making of an enforceable contract for the accessed electronically. sale or other disposition of land. The concept of electronic conveyancing, or e-conveyancing, was first proposed by the Law Reform Commission in Ireland in 2006 and, since then, both the Irish Government and the Law Society of 4.7 Please briefly describe how some rights obtain priority over other rights. Do earlier rights defeat later Ireland have engaged in consultations and established a Task Force rights? in order to ascertain how e-conveyancing can be regulated and implemented in the future. Where interests are registered, priority will depend on the date of registration. A registered interest will have priority over an 5.4 Can compensation be claimed from the registry/ unregistered interest, even if the registered interest had been created registries if it/they make a mistake? after the earlier unregistered interest. Priority between unregistered interests will be determined by their date of creation. Compensation can be claimed from the Land Registry but not from In order to benefit from the Doctrine of Priority: the Registry of Deeds. Please refer to question 4.2 above. ■ the buyer must be bona fide, since negligence or fraud will deprive the buyer of his priority; 5.5 Are there restrictions on public access to the ■ the buyer must pay consideration, since a voluntary register? Can a buyer obtain all the information he conveyance will deprive the buyer of his priority; might reasonably need regarding encumbrances and ■ the buyer must have acquired a legal interest in order to gain other rights affecting real estate? priority over an equitable interest; and ■ the buyer of the legal interest must have purchased without Any member of the public is entitled to search the Registry of Deeds notice of the earlier equitable interest. index on payment of the prescribed fee. In the Land Registry, members of the public can inspect the index 5 The Registry / Registries of names, the index of lands and the folios (including maps) on payment of the prescribed fees. Applications pending registration can only be inspected by the lodging party or the registered owner 5.1 How many land registries operate in your jurisdiction? of the property or by a prescribed category of persons. If more than one please specify their differing rules and requirements. A buyer, through his/her lawyer carrying out pre-contract diligence, can obtain all the information they might reasonably require Please refer to question 4.1 above. regarding encumbrances and rights affecting land from the seller’s lawyer.

5.2 Does the land registry issue a physical title document to the owners of registered real estate? 6 Real Estate Market

The Land Registry records all relevant particulars concerning the property and its ownership on folios which form the registers 6.1 Which parties (in addition to the buyer and seller maintained in the Land Registry. In conjunction with folios, the and the buyer’s finance provider) would normally be involved in a real estate transaction in your Land Registry also maintains Land Registry maps. Both folios and jurisdiction? Please briefly describe their roles and/or maps are maintained in electronic form. duties. The Registry of Deeds does not issue a physical title document; rather it records the date of registration and the Registry of The relevant property is usually marketed on behalf of the seller by Deeds serial number on the face of the actual deed submitted for an agent who advertises the property and advises on the market value registration. The original deed is then returned to the lodging party. of the property. In commercial real estate transactions, the parties

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often appoint agents to act on their behalf and the commercial terms are negotiated between the parties and their respective agents. Once 6.4 What is the appetite for investors and developers the commercial terms are agreed, they are reduced to a non-binding in your region to look beyond primary real estate markets and transact business in secondary or even heads of terms document. tertiary markets? Please give examples of significant Between heads of terms being agreed and a binding contract being secondary or tertiary real estate transactions, if signed, the parties may put in place exclusivity agreements and relevant. confidentiality agreements (which is becoming more widespread in the sale of commercial real estate). A seller’s lawyer is responsible A number of interesting investment opportunities in Cork for drafting contracts, dealing with pre-contract enquiries raised have come to the market in recent months. The Lynx portfolio

Ireland by the buyer’s lawyers, replying to requisitions on title, redeeming includes the Elysian building (approximately 206 apartments and mortgages/charges and distributing the balance of sale proceeds to commercial space) in Cork city and 165 apartments and retail the seller. A buyer’s lawyer investigates the title, raises requisitions space at Ballincollig, Cork which is guiding €105 million and the on the title, drafts the purchase deed, conducts closing searches, Debenham’s building on Patrick Street, Cork city which is guiding attends the closing appointment and stamps and registers the title. more than €70 million. Surveyors and/or architects may be engaged before the buyer signs Recent investment sales have included the sale of the Capitol contracts to carry out a structural survey of the relevant property. building on Patrick Street, Cork for a reported €45.6 million and Depending on the nature of the transaction, an environmental expert the Leeside student accommodation scheme, Cork for €8.42 million. may also be engaged to provide an environmental report in respect of the property. 6.5 Have you observed any trends in particular market In the sale of commercial real estate asset portfolios, the commercial sub sectors slowing down in your jurisdiction in and legal due diligence is usually facilitated by providing interested terms of their attractiveness to investors/developers? parties with access to information contained in an online data-room. Please give examples. Before access is granted, the interested parties will typically be required to execute a non-disclosure agreement. The recent hike in stamp duty for commercial property in Budget 2018 from 2% to 6% will have an immediate impact on commercial property valuations. The rate increase does not apply to land for 6.2 How and on what basis are these persons remunerated? residential development. Going forward, this may lead to residential developers having lower transaction costs and increasing the rate of residential construction and sale. Selling Agents – normally charge a percentage of the sale price. The Property Services (Regulation) Act 2011 seeks to regulate property Another Budget measure that may change the trajectory of the services provided by auctioneers, estate agents and management property investment market somewhat is the relaxation of Capital agents. The agent must issue a letter of engagement which among Gains Tax relief rules first introduced in 2011. As a result, real other things must set out the amount or the rate of any commission estate assets bought between 2011 and 2014 can now be sold after or any other fee payable by the client under the agreement. a four-year hold period without incurring Capital Gains Tax (as opposed to what was originally a seven-year hold period). This may Lawyers – no standard/fixed price. Fees are normally commensurate lead to property coming to market more quickly. with the value of the property/work involved. Irish lawyers are obliged to set out the basis of their charges under section 68 of the There is significant retail investor demand for property as an asset Solicitors Amendment Act 1994. class. It will be unsurprising if the next year brings the launch of additional REITs and listed entities on the Irish Stock Exchange. Surveyors – no standard/fixed price. Fees are normally commensurate This may provide investors who entered the market prior to 2015 with the value of the property/work involved. with an exit route through capital markets. Environmental Experts – no standard/fixed price. Fees are normally commensurate with the value of the property/work involved. 7 Liabilities of Buyers and Sellers in Real 6.3 Do you feel there is a noticeable increase in Estate Transactions the availability of capital to finance real estate transactions in your jurisdiction, whether equity or debt? What are the main sources of capital you see 7.1 What (if any) are the minimum formalities for the sale active in your market? and purchase of real estate?

Investor appetite for Irish real estate has continued unabated in To ensure consistency in drafting and avoiding protracted 2017 with existing investors and a steady flow of new entrants negotiations, the Law Society of Ireland produces a pro forma continuing to seek opportunities across a range of sectors. These contract for sale for use in real estate transactions, which is designed include some alternatives to the traditionally active sectors that are to give a fair balance of rights between buyers and sellers. now gaining momentum such as the private rented sector, hotel The contract for sale: investment, nursing homes and student accommodation as well ■ Contains a memorandum of the agreed terms of the sale as more traditional sectors. Non-bank lenders continue to be very (parties, price, description of property, and completion date). active in the Irish market. ■ Lists the documentation and searches to be provided by the Ireland’s strong economic backdrop, levels of occupational activity seller. and the potential for further rental growth make Irish real estate an ■ Incorporates the Law Society of Ireland General Conditions attractive investment opportunity. of Sale (the “General Conditions”). The General Conditions make a number of assumptions about the property and place certain disclosure obligations on a seller, which the seller can only exclude by inserting special conditions. This way,

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the buyer is on notice of any deviations from the standard to compensation for any loss suffered by the buyer in respect of contract. The General Conditions were updated in 2017 the sale as a result of an error which includes any omission, non- for use in respect of transactions commencing on or after 3 disclosure, misstatement or misrepresentation made in the contract. January 2017. However, as outlined above, a seller may attempt to exclude/vary The General Conditions deal with formalities such as: this condition by inserting a special condition in the contract for sale ■ The seller’s title. stating that the buyer shall not rely on any representations made. ■ The identity and condition of property. Statutory protection from fraud is provided by the 2009 Act, which ■ Possession. makes it an offence for a seller to fraudulently conceal or falsify ■ The disclosure of notices. material information relating to the title.

■ Planning and development. Ireland ■ Completion of the sale, completion notices and interest due if 7.4 Do sellers usually give contractual warranties to the completion is delayed. buyer? What would be the scope of these? What is the function of warranties (e.g. to apportion risk, to Rescission of the contract. ■ give information)? Are warranties a substitute for the ■ Forfeiture of deposit and resale. buyer carrying out his own diligence? ■ Risk. ■ Boilerplate issues such as apportionment, time limits, notices Please refer to questions 7.2 and 7.3. and arbitration.

The special conditions of sale are typically negotiated between the 7.5 Does the seller warrant its ownership in any way? parties and reflect the nature of the transaction. For commercial Please give details. real estate transactions, it is normal for the seller to seek to limit the warranties being provided. Where the seller’s knowledge of the There are implied covenants as to ownership contained in a purchase property is limited, for example, a sale by a receiver, liquidator or deed. However, a buyer’s lawyer will investigate the seller’s title mortgagee, it is usual to exclude or limit many of the warranties to the relevant property to ensure a buyer will acquire a good contained in the General Conditions. marketable title. The buyer’s lawyer also carries out a number of Another formality that will need to be adhered to is the Conveyancing searches against both the seller and the property. The seller must Conflict of Interest Regulation which prohibits the same firm acting explain and/or discharge any adverse matters resulting from the for both the seller and buyer in real estate transactions, with certain searches which affect the seller and/or the relevant property before very limited and defined exceptions. the completion of the sale can occur.

7.2 Is the seller under a duty of disclosure? What matters 7.6 What (if any) are the liabilities of the buyer (in addition must be disclosed? to paying the sale price)?

The underlying principle is one of caveat emptor (buyer beware). The buyer is also responsible for discharging the following costs: The buyer must be satisfied from its own due diligence that good ■ Stamp duty. marketable title to the relevant property is being offered by the seller. ■ Surveyors’/Architects’ fees. The principle of caveat emptor is diluted somewhat by the General ■ Legal fees. Conditions which place a number of warranties and disclosure ■ VAT (if applicable). requirements on the seller. For instance, the General Conditions include numerous warranties relating to matters such as notices, ■ Registration fees. planning compliance, boundaries, easements and identity and the ■ Commissioner for Oaths’ fees. existence of any other interest in the relevant property. These ■ Search fees. warranties can be excluded or amended by agreement between ■ Local Property Tax. the buyer and the seller. In addition to any specific disclosures, sellers often limit the warranty provided in respect of planning compliance by reference to documentation and opinions/certificates 8 Finance and Banking of compliance in the seller’s possession and produced to the buyer. Where the property is being sold in an enforcement scenario (by a receiver, liquidator or mortgagee), it is usual that many of 8.1 Please briefly describe any regulations concerning the warranties contained in the General Conditions are excluded the lending of money to finance real estate. Are the rules different as between resident and non-resident or limited by reference to the limited knowledge of the receiver, persons and/or between individual persons and liquidator or mortgagee regarding the property. The warranties corporate entities? received a radical overhaul in the General Conditions 2017 edition prompted by the view that vendors were routinely excluding the There are extensive differences between financing real estate as a relevant condition in its entirety or varying it to such a degree that, corporate entity and as an individual, most notably from a practical in effect, no warranty was being given. The new wording provides and legal perspective. that a vendor warrants compliance with planning in respect only of his or her period of ownership. Real estate lenders have little regard as to the residential status of an individual, as long as the real estate is situated in Ireland. The principal Acts, Regulations and Central Bank Codes of Conduct 7.3 Can the seller be liable to the buyer for misrepresentation? concerning the financing of real estate are: ■ Asset Covered Securities Act, 2001. Yes, a seller can be liable for misrepresentation. General Condition ■ Agricultural Credit Act, 1978. 33 of the General Conditions provides that a buyer shall be entitled ■ Bills of Sale (Ireland) Act, 1879.

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■ Central Bank Acts 1942, 1971, 1988, Central Bank Reform December 2009, which compel a lender to go to court to seek an Act, 2010 and the further Financial Services of Ireland Acts, order for possession and an order for sale. These provisions can 2003 and 2004. be and are usually expressly contracted out of for security taken ■ Central Bank Act, 2014. over commercial real estate but they cannot be contracted out of ■ Central Bank (Supervision and Enforcement) Act, 2013. in respect of residential housing loans. Therefore, in the case of ■ The Central Bank and Credit Institutions (Resolution) Act, housing loans and security taken over residential real estate on or 2011. after 1 December 2009, a mortgagee does have to go to court to get an order for sale and possession. A court appearance can be avoided ■ Companies Acts, 1963–2014. if the borrower gives written consent to the sale not more than seven ■ Consumer Credit Act, 1995. days before the power of sale is exercised. Ireland ■ Conveyancing Acts, 1881–1911, the Land and Conveyancing Law Reform Acts, 2009 and 2013. The implementation of the 2009 Act repealed certain of the old statutory provisions that had applied prior to 1 December 2009 (most ■ Credit Union Act, 1997. notably parts of the Conveyancing Acts and the Registration of Title ■ Credit Union and Co-operation with Overseas Regulators Act, 1964). The belief was that the rights and powers conferred on Act, 2012. the existing mortgagees by these statutory provisions had already ■ Credit Institutions (Stabilisation) Act, 2010. been “acquired, accrued or incurred” by mortgagees by virtue of the ■ Criminal Justice (Money Laundering) Act, 2010. provisions of the Interpretation Act, 2005 and therefore the existing ■ Central Bank Consumer Protection Code 2012. mortgagees could continue to rely upon those provisions. A number ■ Code of Conduct on Mortgage Arrears 2013. of high-profile decisions by the Irish courts resulted in a concern in the market that, in essence, the statutory rights which were appealed ■ European Communities (Unfair Terms in Consumer Contracts) Regulations 1995. could not have been “acquired” by existing mortgagees. The Land and Conveyancing Law Reform Act, 2013 was implemented to fill ■ Mortgage Credit Directive (Directive on credit agreements this lacuna by confirming that certain provisions of the Conveyancing for consumers relating to residential immovable property). Acts and the Registration of Title Act, 1964 will continue to apply to mortgages which predate the enactment of the 2009 Act and 8.2 What are the main methods by which a real estate therefore remove the uncertainty in the market. lender seeks to protect itself from default by the Certain provisions of the 2009 Act enable a mortgagee, where it borrower? has reasonable grounds for believing a mortgagor has abandoned a mortgaged property and urgent action is required to prevent A real estate lender will typically seek to protect itself from default deterioration, to apply to court for an order authorising the mortgagee by the borrower by obtaining a contractual suite of covenants, to enter into possession of the mortgaged property. undertakings and representations and warranties from the borrower, the breach of which would lead to an event of default. A real estate lender will provide finance that is secured over the 8.4 What minimum formalities are required for real estate lending? relevant property. The real estate lender will then require that the security is registered as first ranking in the appropriate property register, thereby securing priority of the security for the benefit of If a company has created a charge over real estate, to perfect the the real estate lender. security, a relevant filing must be lodged with the Irish Companies Registration Office (“CRO”) within 21 days of the creation of Where a lender is providing finance for development purposes, it the security. This typically takes the form of a Form C1. If not would be normal for the lender to receive collateral warranties from registered within this time frame, the security will generally be void the members of the professional team such as architects, designers against any liquidator or third party creditor. and engineers. The lender will also typically appoint its own project monitor (at the cost of the Borrower). The Companies Act, 2014 (the “2014 Act”) introduced changes to the procedure in relation to the registration of charges: the one-stage procedure; and the two-stage procedure. The one-stage procedure 8.3 What are the common proceedings for realisation of is similar to the previous regime under the Companies Act, 1963 mortgaged properties? Are there any options for a (the “1963 Act”), while the two-stage procedure involves filing an mortgagee to realise a mortgaged property without initial notice of a company’s intention to register a charge, followed involving court proceedings or the contribution of the mortgagor? by a second filing within 21 days of receipt of the first by the CRO, confirming the creation of the charge. The purpose of the latter The powers of mortgagees under mortgages are derived from procedure is to remove the “blind spot” which exists for 21 days a combination of the terms of the mortgage itself and the law after a charge has been created, during which it may not appear on (including certain relevant statutory provisions). Generally, the CRO searches. Under the 2014 Act, priority of registration speaks same principles apply in relation to enforcement against companies from the date of registration at the CRO and not the date of creation as apply to individuals. Various methods of enforcing security of the charge itself, as was previously the case under the 1963 Act. over real property are available and the ability to avail of these will In addition, it is generally accepted that registration is the depend on the circumstances of each case. appropriate perfection mechanism in respect of security interests In respect of security granted prior to 1 December 2009, there over real estate in Ireland. The specific formalities in relation to is no requirement on a mortgagee to go to court to exercise the real estate in Ireland depend on whether the land is registered or remedies available to it, provided the borrower does not challenge unregistered (refer to section 4 above). There are no specific time the enforcement of the security. However, the 2009 Act contains limits in respect of the registration of security in the Registry of certain provisions in relation to security granted on or after 1 Deeds or at the Land Registry, albeit a delay or failure to register may impact on priority.

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focused on ensuring fairness and transparency to the mortgagor. 8.5 How is a real estate lender protected from claims The following provisions should be considered in determining the against the borrower or the real estate asset by other enforceability of any residential security: creditors? 1. European Communities (Unfair Terms in Consumer Contracts) Regulations 1995 and 2000 If there are other lenders, the parties will typically structure the priority of debts in the following ways: If a term of the relevant security is heavily weighted against the mortgagor, it will be considered “unfair” and in violation of the 1. Contractual subordination Unfair Terms in Consumer Contracts Regulations. This will affect Contractual subordination is common in Ireland. It occurs where the the value of all or part of the lender’s security. senior lender and the subordinated lender enter into an agreement 2. European Communities (Distance Marketing of Ireland as a result of which the subordinated lender agrees that the senior Consumer Financial Services) Regulations 2004 (as debt will be paid out in full before the subordinated lender receives amended) the payment of the subordinated debt. The subordinated lender is If the security is entered into without the lender and the mortgagor contractually subordinated to the senior lender. being simultaneously present it may be regarded as a distance 2. Structural subordination contract and come within the scope of the Distance Marketing Structural subordination is also possible depending on the particular Regulations, if the mortgagor is a consumer. Under these regulations terms of a transaction. Structural subordination arises where the security may be rendered unenforceable if the lender failed to one lender (the senior lender) lends to a company in a group of give certain information to the mortgagor before a binding contract companies which is lower in the group structure than another lender was entered into, such as, details of certain contractual terms and (the subordinated lender). conditions and the total fee to be paid by the mortgagor. 3. Inter-creditor arrangements 3. Protection of the Family Home Inter-creditor arrangements are common in Ireland, depending on As noted in question 1.1, extensive statutory protection is afforded the nature of the particular transaction. Typical parties include a to family property in Ireland which renders the enforcement of senior lender, a junior lender, an inter-group lender and a borrower. security over family homes more difficult for lenders. In Irish law, Typical terms in an inter-creditor agreement include provisions as to a family home is a dwelling in which a married couple ordinarily priorities, standstill, representations and warranties and covenants. resides. Under the Family Home Protection Act 1976 (as amended) As outlined at question 8.4 above, a real estate lender must register a spouse who does not own the family home must give prior written the charge/mortgage with the Irish Companies Registration Office consent to any disposal of an interest in the family home, including in order to perfect the creation of the security. by way of mortgage. If this consent has not been given or was ineffective, any transaction disposing of the family home is at risk of being set aside at the instance of the non-owning spouse within 8.6 Under what circumstances can security taken by a certain time limits. lender be avoided or rendered unenforceable?

The answer depends on whether the security is created by a company 8.7 What actions, if any, can a borrower take to frustrate or by an individual or partnership. enforcement action by a lender? A charge created by a company over its assets (save for certain Case law shows that borrowers have employed a large variety of types of financial asset such as bank accounts, financial instruments arguments in seeking to frustrate enforcement action by a lender. and claims and rights derivative thereof) must be registered with These include: the CRO within 21 days of its creation in accordance with the procedures set out in the 2014 Act. (a) Demonstrating that the instrument appointing a receiver has not been executed in accordance with the security deed. The 2014 Act also sets out the circumstances in which a charge (b) Where the party enforcing the security has purchased the created by a company which is in, or is on the brink of, insolvency, secured debt from an original lender, challenging the title of may be set aside. A charge created by a company in the onset of that person. insolvency may be set aside where it constitutes an improper transfer (c) Proving that the lender has not complied with the procedural of its assets to the detriment of its creditors or a liquidator of its requirements of the MARP process (see below). assets. A floating charge created by a company when it is insolvent (d) On appeal, establishing that the lower court did not engage may be set aside to the extent that no consideration is provided for it. with an Unfair Contract Terms analysis of the underlying In this regard certain hardening periods apply depending on whether loan/security documentation. the floating chargee is connected with the company (e.g. a director or person connected to a director etc.). The Code of Conduct on Mortgage Arrears 2013 (“CCMA”) is particularly relevant when it comes to the enforcement of A charge created by an individual or partnership may be set aside residential security. Under this statutory code, lenders must operate if it constitutes a fraud on its creditors and in this regard the test a four-stage Mortgage Arrears Resolution Process (“MARP”) when is the same as applies to corporate security – namely whether the dealing with customers in arrears or pre-arrears. The four steps are: transaction is an improper transfer of assets to the deprivation of 1) communication; 2) financial information; 3) assessment; and 4) creditors. Where an individual or partnership creates non-possessory resolution. Mortgagors must be afforded considerable support from security over chattels, this must be registered in accordance with the the lender as regards the repayment of their security and offered Bills of Sale legislation – the requirements of which are problematic. a variety of alternative repayment options. Lenders’ compliance There are numerous protections afforded to residential mortgagors with the CCMA will be taken into consideration by the court in under Irish law and onerous obligations are placed on lenders determining whether to grant a request to repossess. This code in terms of enforcing their security. Much of the regulation is requires a high standard of behaviour from lenders and may frustrate attempts to enforce their security.

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the previous five years (“new” property) will be subject to VAT. The 9 Tax sale of “old” property which falls outside these rules is exempt from VAT. In certain cases, where a sale would otherwise be exempt, the 9.1 Are transfers of real estate subject to a transfer tax? buyer and seller can agree that the sale will be subject to VAT in How much? Who is liable? order to avoid a clawback of VAT previously recovered in respect of the relevant property by the seller. The first sale of residential Ireland imposes stamp duty on transfers of Irish real estate and certain property by the person who developed the property is always subject other property. The stamp duty is charged on the consideration to VAT. payable for the property, or the market value in certain instances. The rate of VAT on transfers of real estate is 13.5% (a VAT rate of Stamp duty is generally payable by the purchaser, although in 23% applies to VATable lettings). Ireland certain transactions, such as voluntary transfers, both parties to a contract can be technically liable. There are provisions which apply 9.5 What other tax or taxes (if any) are payable by the to contracts to acquire land, as opposed to actual transfer documents, seller on the disposal of a property? in cases where there is a “resting on contract” position. The rate of stamp duty on transfers of residential property is 1% on The sale of Irish real estate, or of unquoted shares in companies consideration up to €1,000,000 and 2% on consideration over this deriving the greater part of their value from Irish real estate, will threshold. be subject to Irish capital gains tax. The gain is calculated on the Budget 2018 increased the stamp duty rate on transfers of non- proceeds of sale less acquisition and enhancement costs, and less the residential (commercial) property from 2% to 6%. The 6% rate is incidental costs of acquisition and the incidental costs of disposal. applicable to transfers or long leases of commercial property taking Irish capital gains tax is subject to a withholding procedure place after 10 October 2017. Where a binding contract existed on applicable to the seller’s capital gains tax liability. The procedure 10 October 2017, then provided the stampable instrument of transfer requires the buyer to withhold 15% of the consideration and pay this is executed prior to 1 January 2018 and contains a statement, in a amount to Revenue unless the seller provides a clearance certificate form to be specified by the Revenue Commissioners, the 2% rate from Revenue. A capital gains clearance certificate is automatically remains applicable. A stamp duty refund scheme is expected to be available on application to Revenue if the seller is resident in Ireland introduced where land (stampable at the increased rate of 6%) is for tax purposes. A non-resident seller will need to agree and purchased for the purpose of development of residential housing. discharge its capital gains tax liability in order to obtain a clearance certificate. This withholding procedure only applies to a buyer where the consideration payable to the seller exceeds the relevant 9.2 When is the transfer tax paid? threshold current at the date of the transfer agreement (currently €500,000 or €1,000,000 if the asset disposed of is a house). Where an instrument is liable to stamp duty, a stamp duty return must be filed online via Revenue’s e-stamping system. The standard rate of capital gains tax is 33% for disposals made on or after 5 December 2012. The full amount of the stamp duty must be paid within 30 days of the date of execution of the instrument of transfer (typically the deed In 2011, a capital gains tax exemption was introduced which applied of transfer). In practice, Irish Revenue allow a further period of 14 to disposals of land acquired between 7 December 2011 and 31 December 2014 (inclusive), provided the land was held for seven days in which to file an e-stamping return and pay the stamp duty. years. Changes introduced in Finance Bill 2017 have shortened the Failure to file and pay within this 44-day period will result in late holding period to four years. The relief applies to residential and filing and interest charges. non-residential real estate located within any EEA state acquired by an Irish resident during the period set out above. 9.3 Are transfers of real estate by individuals subject to income tax? 9.6 Is taxation different if ownership of a company (or other entity) owning real estate is transferred? The sale of real estate by an individual should not be subject to income tax unless that individual is carrying on the business of Yes. Currently, stamp duty on the transfer of Irish shares deriving trading in properties. their value from real estate is charged at 1% of their value. However, the gains or profits on the disposal of Irish real estate by Disposals by non-Irish residents of shares and securities which an individual may be subject to Irish capital gains tax at a current derive their value from Irish real estate are subject to capital gains rate of 33%. An exemption from capital gains tax is available for tax. Disposals of shares or securities which were quoted on a stock individuals on the sale of the individual’s principal private residence, exchange were exempt from this charging provision. Changes subject to certain conditions. introduced in Finance Bill 2017 restrict this exemption to cases where the shares and securities are actively and substantially traded 9.4 Are transfers of real estate subject to VAT? How on such stock exchange. much? Who is liable? Are there any exemptions?

9.7 Are there any tax issues that a buyer of real estate The sale of Irish real estate may be subject to Value Added Tax should always take into consideration/conduct due (“VAT”). As there are many variations and exemptions under diligence on? the current Irish VAT regime, the matter of VAT applying to the transfer of Irish real estate should be addressed by the appropriate A buyer of Irish real estate will request completion of standard professional advisors pre-contract with the final agreed position Law Society Pre-Contract VAT Enquiries by the seller. These are reflected in the contract. intended to provide the buyer with a history of the VAT treatment Broadly, the sale of land which has been developed in the previous of the relevant property. Buyers should also satisfy themselves that 20 years or buildings which have been developed or redeveloped in any previous transfers of the property have been duly stamped.

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Usually the provisions of a business lease place restrictions on a 10 Leases of Business Premises tenant’s contractual right to assign or sub-let without the landlord’s prior written consent. Under Section 66 of the Landlord and Tenant 10.1 Please briefly describe the main laws that regulate (Amendment) Act, 1980, a landlord cannot unreasonably withhold leases of business premises. consent which will override the contractual terms of any business lease. Historically, Ireland has had special legislation governing the Sharing a business premises with companies in the same corporate relationship between landlords and tenants, e.g., the Landlord group is generally a matter for negotiation between the landlord and and Tenant Law Amendment Act, 1860 (commonly referred to as tenant but it is commonplace for leases to have such a provision Deasy’s Act).

permitting such sharing of occupation, subject usually to a Ireland Since the establishment of the Irish State, a comprehensive and requirement to notify the landlord and provided that the sharing is very wide-ranging code of landlord and tenant legislation has been by way of licence only. enacted. It is less common to see provisions in a lease relating to Commercial business leases are freely negotiated subject only to reorganisation or change of control of the tenant. Again, these are statutory provisions. matters for negotiation. While landlords will generally agree on The introduction of the Commercial Leases Register now requires request to provisions allowing sub-letting to or sharing space with a the particulars and terms of all leases and related documentation to group company without consent, it is rare that a landlord will permit be disclosed on a public register. assignment to a group company without consent. Normally, there are no restrictions on the change of control of a tenant company In 2011, the draft Landlord and Tenant Law Reform Bill was included in a lease. published. While not yet enacted, the Bill is worthy of note as the objective is to consolidate and modernise much of the general law of landlord and tenant under one act going forward, including landlord 10.4 What taxes are payable on rent either by the landlord and tenant obligations and their enforcement, statutory rights and or tenant of a business lease? termination. It is worth noting that Ireland offers a range of tax-efficient regulated investment vehicles and structures to international investors for 10.2 What types of business lease exist? acquiring and holding real estate. Provided certain criteria are met, the investment vehicle will not be subject to Irish tax on income such Typically, a business lease falls into two categories: a lease on as rent. Please refer to question 6.5 for an overview of the recent tax a short-term basis for a term of up to five years; or a lease ona reforms which have impacted such structures and vehicles. medium- to long-term basis, which would generally be considered a term from 10 years to 25 years. Typically, rent paid in respect of Irish real estate will be subject to Irish taxation on account of it having an Irish source, regardless of the identity or location of the landlord. An Irish resident company, 10.3 What are the typical provisions for leases of business or a foreign company that holds real property as part of or on account premises in your jurisdiction regarding: (a) length of of a trade carried on in Ireland, will be subject to Irish corporation term; (b) rent increases; (c) tenant’s right to sell or tax on the rental profits. Income tax is applied to rent received by sub-lease; (d) insurance; (e) (i) change of control of the tenant; and (ii) transfer of lease as a result of a individuals. corporate restructuring (e.g. merger); and (f) repairs? In the case of a commercial/business lease, a landlord can elect to apply VAT, in which case VAT applies to the rent at the relevant rate The term of a lease of business premises has traditionally ranged (currently 23%). from short-term up to 35 years, but recent legislative changes Stamp Duty is incurred by the tenant on business leases. Stamp Duty and market forces are resulting in shorter term leases, with the is currently levied at 1% of the average annual rent (for commercial/ maximum term now being 15–20 years (typically including break business leases not exceeding a term of 35 years) with an additional options exercisable during the term). The structure of a typical fixed charge of €12.50 if the commercial/business lease contains a medium- to long-term (10–25 years) commercial lease usually rent review clause. There is an additional Stamp Duty charge of follows the same traditional format which, in addition to securing €12.50 for each counterpart of the business/commercial lease. rent payments to the landlord, also passes the cost of maintaining, insuring and occupying the relevant property from the landlord to the tenant. This allows the landlord to enjoy the rent without 10.5 In what circumstances are business leases usually deduction. terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a In most cases, tenants will seek to negotiate an option to break or tenant to extend or renew the lease or for either party terminate the term of the lease, i.e. after five or 10 years of the term. to be compensated by the other for any reason on Any business lease granted for a term in excess of five years would termination? typically have a provision for the periodic review of rent to the current open market rents. Usually, a business lease is terminated by the expiry of the term or Most business leases in Ireland are of a full repairing and insuring the exercise of a break/termination option or by agreement between nature, whereby the tenant will be subject to extensive repairing the landlord and the tenant, i.e. by surrender. obligations. These will be imposed directly by a repairing covenant It is standard practice for a business lease to contain a re-entry clause, entered into by the tenant or, in the case of a multi-let development entitling a landlord to forfeit the lease for breach of obligation by the like an office block, shopping centre or business park, indirectly tenant. The procedure in the case of the non-payment of rent (and through a service charge regime which will include reimbursing the other payments for this reason usually reserved as rent, e.g. service landlord for repair works carried out to the structure and common charges and insurance premiums) is straightforward, but rather more areas of the relevant development. complicated (including service of notice on the tenant) in the case of

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breach of the other covenants in the lease. Re-entry can, however, for Rented Houses) Regulations 2008 and the Housing (Standards be effected without a court order, if done peaceably; forcible re- for Rented Houses) (Amendment) Regulations 2009 as regards the entry is, on the other hand, a criminal offence. If the tenant is still in conditions thereof and the facilities available. occupation and resists re-entry, the landlord must seek an ejectment order from the court. The tenant, any sub-tenants and third parties 11.2 Do the laws differ if the premises are intended for like mortgagees can apply to the court for relief against forfeiture, multiple different residential occupiers? which will only be granted on terms designed to correct the default inducing the forfeiture and to protect the landlord’s interest in the No, the RTA applies. future.

Ireland A commercial tenant who has been in continuous occupation for a minimum period of five years has a statutory right to a new tenancy 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: (known as the business equity), and, in certain circumstances, (a) length of term; (b) rent increases/controls; (c) the to compensation for improvements made or for disturbance. tenant’s rights to remain in the premises at the end of Contracting-out of the business equity is permitted and landlords the term; and (d) the tenant’s contribution/obligation typically require a tenant to renounce their entitlement to claim to the property “costs” e.g. insurance and repair? a new tenancy prior to signing a new commercial/business lease. However, it may be the case that market conditions will, at times, (a) Length of Term enable a tenant to resist pressure to provide such a renunciation. In Ireland, a typical residential tenancy agreement would be for a contractual term of 12 months. 10.6 Does the landlord and/or the tenant of a business (b) Rent Increases/Controls lease cease to be liable for their respective A fundamental provision of the original RTA 2004 is that a landlord obligations under the lease once they have sold their interest? Can they be responsible after the sale in may not set rent at an amount greater than the market rent for the respect of pre-sale non-compliance? tenancy in question at the time. “Market Rent” is defined as the rent which a willing tenant not already in occupation would give and a On the assignment of a lease with the landlord’s consent, the willing landlord would take for the dwelling on the basis of vacant assignor has no further responsibility for complying with the lease possession and having regard to: (i) the other terms of the tenancy; and its liability ceases completely. In contrast with the UK, there and (ii) the letting values of dwellings of a similar size, type and is no practice in Ireland requiring an assignor to enter into an character to the dwelling and situated in a comparable area. In late authorised guarantee agreement guaranteeing the performance of December 2016, rent predictability measures were enacted under the new tenant under the lease. the Planning and Development (Housing) and Residential Tenancies Act 2016 for an initial period of three years in an effort to control the rise in rents in the parts of the country (mainly urban areas such 10.7 Green leases seek to impose obligations on as Dublin and Cork) where rents are highest and rising and where landlords and tenants designed to promote greater households have greatest difficulties in finding accommodation sustainable use of buildings and in the reduction of they can afford. In these areas, known as “Rent Pressure Zones”, the “environmental footprint” of a building. Please briefly describe any “green obligations” commonly rents will only be able to rise according to a prescribed formula by found in leases stating whether these are clearly a maximum of 4% annually, subject to certain limited exclusions. defined, enforceable legal obligations or something The new measures regarding Rent Pressure Zones are at all times not amounting to enforceable legal obligations (for subject to the aforementioned overriding principle that rents may example aspirational objectives). not be set at a level higher than the prevailing market rate. (c) Tenant’s Rights to Remain in the Premises at the End of There are currently no specific “green obligations” commonly found the Term in leases in Ireland. Part 4 of the RTA 2004 gave tenants the right to stay in rented The European Union (Energy Performance of Buildings) accommodation for up to four years in total, following an initial six- Regulations 2006–2012 and Statutory Instrument No. 243 of 2012 month period. The term of tenure has recently been increased to a introduced the requirement that all buildings being sold or let must total of six years in respect of tenancies created from 24 December have a Building Energy Rating (“BER”) Certificate with certain 2016. These security of tenure provisions are commonly known as limited exceptions. The aim of the rating is to inform prospective “Part 4 tenancies”. After the first Part 4 tenancy has passed, a new buyers and tenants of the energy performance of the building. The Part 4 tenancy begins entitling the tenant to remain in the dwelling Building Energy Rating Certificate is accompanied by an Advisory for a further six-year term. Where a tenant is in occupation under Report which contains recommendations for improving the energy a fixed term contractual tenancy, the tenant can notify the landlord performance of the relevant building. that it is availing of the security of tenure provisions and is claiming a Part 4 tenancy prior to the expiry of the contractual term. 11 Leases of Residential Premises (d) Tenant’s Contribution/Obligation to the Property “Costs” Under the RTA, it is generally the landlord’s responsibility to effect and maintain insurance in respect of the structure of the dwelling. 11.1 Please briefly describe the main laws that regulate The tenant is not obliged to contribute to insurance costs under leases of residential premises. the RTA, save where the premium payable under such policy of insurance has been increased as a result of any act of the tenant The Residential Tenancies Acts 2004–2016 (the “RTA”) is the or any act of another occupier or visitor to the dwelling which the primary legislation governing leases of residential premises in tenant has permitted, in which case the tenant is obliged to pay the Ireland (not exceeding a term of 35 years). Rented properties must landlord an amount equal to the amount of the increase in premium. also meet the standard prescribed under the Housing (Standards

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The cost of repairs is also generally the landlord’s responsibility regulate the zoning of areas through a variety of development, under the RTA, save where the tenant has caused deterioration to the sustainability, landscape conservation and special amenity plans. dwelling that is beyond normal wear and tear. In these instances the Most of the functions reserved by the Planning Acts are exercised tenant is obliged to make good such damage at his or her own cost. by the local authority in the area where the relevant property is situated. There are currently 31 local authorities in Ireland, each a planning authority for the purposes of the Planning Acts, responsible 11.4 Would there be rights for a landlord to terminate a residential lease and what steps would be needed for monitoring and enforcing compliance with planning laws in to achieve vacant possession if the circumstances relation to property in its area and responsible for making decisions existed for the right to be exercised? regarding applications for planning permission. Where suitable grounds for appeal exist, the decision of the planning authority, Ireland Where the tenant is in occupation under a contractual tenancy or including conditions imposed, may be appealed by the applicant to lease, the tenancy can only be terminated where the tenant is in An Bord Pleanála (the Planning Appeals Board). breach of the terms of the tenancy. Where the tenant has exercised The main laws which govern zoning and related matters are as the security of tenure under Part 4 of the RTA and claimed a Part 4 follows: tenancy, termination by the landlord will then only be permissible in ■ Planning and Development Acts 2010–2017. the following circumstances: ■ The Housing Acts 1966–2014. (a) the tenant has failed to comply with any of his or her The main laws which govern environmental matters are as follows: obligations in relation to the tenancy; ■ The Environment (Miscellaneous Provisions) Act 2015. (b) the dwelling is no longer suitable to the accommodation needs of the tenant and of any persons residing with him or ■ The Environmental Protection Agency Acts 1992–2011. her, having regard to the number of bed spaces contained in ■ The Waste Management Acts 1996–2011. the dwelling and the size and composition of the occupying ■ European Union (Environmental Impact Assessment) household; Regulations. (c) the landlord intends, within three months after the termination ■ The Water Services Acts 2007–2015. of the tenancy, to enter into an enforceable agreement for the The Air Pollution Acts 1987 and 2011. transfer to another, for full consideration, of the whole of his ■ or her interest in the dwelling or the property containing the ■ The Building Control Acts 1990–2007. dwelling; ■ The Building Regulations 1997–2014. (d) the landlord requires the dwelling or the property containing ■ The Building Control Regulations 1997–2015. the dwelling for his or her own occupation or for occupation ■ The Wildlife Acts 1976–2012. by a member of his or her family; ■ Petroleum (Exploration and Extraction) Safety Act 2010. (e) the landlord intends to substantially refurbish or renovate the dwelling or the property containing the dwelling in a way ■ The Finance (Local Property Tax) (Amendment) Act 2015. which requires the dwelling to be vacated for that purpose; or ■ The Climate Action and Low Carbon Development Act 2015. (f) the landlord intends to change the use of the dwelling or the property containing the dwelling to some other use. 12.2 Can the state force land owners to sell land to it? If If termination of the tenancy by the landlord is permissible under the so please briefly describe including price mechanism. RTA, a valid notice of termination must be served on the tenant in order for the landlord to achieve vacant possession. The minimum Local authorities can compulsorily acquire lands in limited notice period required will depend on the duration of the tenant’s circumstances such as (1) where a site is derelict and poses a danger occupation. In order to be valid, the notice must comply with the in the community, (2) for the purpose of developing infrastructure, following requirements: and (3) for conservation/preservation purposes. Where property is ■ be in writing; compulsorily acquired by a local authority, compensation is payable ■ be signed by the landlord or his or her authorised agent; to all persons with an interest in the lands. The assessment of compensation generally falls under a number of headings of claim to ■ specify the date of service of the notice; include the value of the land acquired, compensation for disturbance ■ state the reason for the termination (where the tenancy has and any diminution in value of any retained lands. lasted for more than six months or is a fixed-term tenancy); ■ specify the termination date and also that the tenant has the Section 158 of the National Asset Management Agency Act, whole of the 24 hours of this date to vacate possession of the 2009 (the “NAMA Act”) outlines NAMA’s powers to acquire dwelling; and land compulsorily in certain circumstances where the compulsory ■ state that any issue as to the validity of the notice or the right acquisition is necessary to allow NAMA to deal with the property of the landlord to serve it must be referred to the residential charged to NAMA. tenancies board within 28 days from the receipt of the notice. Section 16 Industrial Development Act, 1986 (the “IDA Act”) enables the Industrial Development Agency (the “IDA”) to acquire lands either compulsorily or by agreement for the purpose of industrial 12 Public Law Permits and Obligations development. A large part of the IDA’s role, under legislation, is acquiring land for development and, as a result, the IDA’s power 12.1 What are the main laws which govern zoning/ to compulsorily acquire land was considered broad. However, in a permitting and related matters concerning the use recent decision of the Supreme Court delivered in November 2015, and occupation of land? Please briefly describe them this view was somewhat curtailed. The IDA sought to compulsorily and include environmental laws. acquire land for which it had no immediate use so that if and when a particular undertaking should seek to develop the land, it would The Planning and Development Acts 2010–2017 (the “Planning be immediately available at such time. The court, considering the Acts”) govern planning and zoning matters. The Planning Acts constitutional protection given to property rights and applying the

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appropriate principles of construction, held that the IDA Act does Where development occurs without planning permission having been not confer any power on the IDA to acquire lands not required for obtained, a party can make an application for retention permission immediate use, but which might be utilised at some future time. save for developments within the scope of the environmental impact assessment regime. If unauthorised development has taken place and the Planning Authority has not issued enforcement proceedings 12.3 Which bodies control land/building use and/or occupation and environmental regulation? How do within seven years, it is prevented from doing so at a later date. buyers obtain reliable information on these matters? Exceptions to this are contained in sections 47 and 48 of the Planning and Development (Amendment) Act 2010 in respect of Land/building use and/or occupation: As per question 11.1 developments involving quarries and peat extraction. above, the relevant local authority is the entity responsible for Ireland controlling land/building use and occupation. An independent 12.6 What is the appropriate cost of building/use permits third party appeals board, An Bord Pleanála, is responsible for the and the time involved in obtaining them? determination of planning appeals. Environmental regulation: The Environmental Protection Agency Each local authority sets a fee for a planning application which is (the “EPA”), the Office of Environmental Enforcement and local dependent on the class of development proposed and the type of authorities are responsible for environmental regulation. permission being sought. The minimum period for determination of an application for 12.4 What main permits or licences are required for planning permission is five weeks beginning on the date of receipt building works and/or the use of real estate? of the application. However, decisions are rarely issued on the expiration of this five-week period. Generally, planning permission is required for any development of Generally, a valid and complete application for planning permission land or property, unless the development is specifically exempted is dealt with within eight weeks from the date of receipt of the from this requirement. The term “development” includes the application. However, this period can vary, particularly if the local carrying out of works (building, demolition, alteration) on land or authority seeks further information from the applicant. Within four buildings and the making of a material change of use of land or weeks of a planning decision being issued, any party who made a buildings. written submission or observation in relation to the application can Planning permission may not be required for certain non-structural appeal the decision to An Bord Pleanála. There are certain limited works to the interior of a building or for works which do not circumstances in which a third party can appeal even where they materially affect the external appearance of the structure. However, did not make any submissions or observations in relation to the in accordance with Building Control Regulations, an application to application. An Bord Pleanála has a statutory objective to determine the local authority for a Fire Safety Certificate may be required. appeals within 18 weeks of receipt of an appeal. Generally the Building Control Regulations require a Public inquiries are not very common. However, public oral commencement notice to be lodged with the local authority prior hearings are sometimes held, particularly in relation to large/ to commencing works, together with plans and specifications, a strategic infrastructure projects. If the planning authority consents preliminary inspection plan and various certificates and notices. It to the application for permission it will issue a decision to grant is an offence not to submit a Commencement Notice and failure planning permission, which is not a full permission. Once the to submit a Commencement Notice cannot be regularised at a later planning authority notifies the relevant parties of its decision, the date. A Certificate of Compliance on Completion must be submitted applicant and any third party who made a submission or observation to and registered by the local authority before the building or works may be opened, occupied or used. in relation to the application have four weeks within which to appeal this decision or any conditions attached to it. If there is no appeal, In addition, certain licences may be required depending on the then the planning authority will issue a formal grant of planning specific type of property and the type of development proposed. permission at the end of the appeal period. These include licences issued under the Environmental Protection Agency Acts 1992 to 2011 (the “EPA Acts”), the Water Services Recent planning legislation has offered a new fast-track planning Acts 2007 to 2015 (the “Water Services Act”), the Air Pollution process for large-scale housing developments called “strategic Acts 1987 and 2011 and the Waste Management Acts 1996 to 2011 housing developments” for a limited period of time – up to 31 (the “WMA”). December 2019. Strategic housing developments will consist of 100 or more houses or 200 or more student bed-spaces on land Furthermore, health and safety legislation must be considered where individuals are engaged to carry out works at a property. The Safety, zoned residential or mixed residential and other uses (provided Health and Welfare at Work Acts 2005 and 2010 must be complied housing constitutes at least 75% of total gross floor area of the with for all building works. development). Under this initiative applicants will undergo a detailed statutory nine-week pre-application planning process, including consultation with the relevant local planning authority and 12.5 Are building/use permits and licences commonly prescribed bodies, prior to the lodgement of a planning application obtained in your jurisdiction? Can implied permission with a new Strategic Housing Division of An Bord Pleanála. Upon be obtained in any way (e.g. by long use)? lodgement, the local planning authority must send its opinions on the proposed development to An Bord Pleanála with a recommendation Planning permission is generally required for any development. as to whether permission should be granted or refused or, propose However, a limited number of exemptions exist, e.g. public works, amendments to the scheme. An Bord Pleanála is subject to a strict certain internal works, works to improve a private road and other 16-week period in the determination of the application and if it fails specific exemptions. In addition, where a local authority fails to to abide by this timeline, it must pay a penalty to the applicant. make a decision on a planning application within a specific time limit, default planning permission is deemed to have been granted pursuant Under the aforementioned recent legislation, an extension of to section 23 of the Planning and Development (Amendment) Act duration of planning permission and the granting of a further 2010. extension of duration of permission by five years has been

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introduced for a limited period of time (again up to 31 December 2019) in circumstances where the local planning authority is 12.10 Please briefly outline any regulatory requirements satisfied that the ‘relevant development’ (20 or more houses) has for the assessment and management of the energy performance of buildings in your jurisdiction. not been completed due to circumstances beyond the control of the applicant. This avoids the cost and time of undertaking a repeat of the initial planning permission process. Since 1 July 2008, a BER certificate and advisory report must be supplied by all sellers/landlords to a prospective buyer/tenant when a building is constructed, sold or rented. A BER certificate 12.7 Are there any regulations on the protection of historic is an energy label for buildings which rates the building from A1 monuments in your jurisdiction? If any, when and how (most efficient) to G (least efficient). Since 9 January 2013, BER are they likely to affect the transfer of rights in real information must also be provided in advertisements for the sale Ireland estate? or rental of property. The Regulations provide for exemptions for certain categories of buildings. Currently, local authorities maintain a Record of Protected Structures (the “RPS”). Inclusion of these structures in the RPS means that they are legally protected from harm and all future 13 Climate Change changes to the structure are controlled and managed through the local development control process. Structures which are listed on the RPS are subject to more restrictive development conditions; 13.1 Please briefly explain the nature and extent of any regulatory measures for reducing carbon dioxide therefore, types of work, which in another building would be emissions (including any mandatory emissions considered exempted development, may not be exempted where trading scheme). the building is a protected structure. The local authority may issue a declaration under the Planning Acts determining the proposed The EU Emissions Trading Scheme (“ETS”) came into operation works would be considered exempt from the requirement to obtain on 1 January 2005. The scheme operates on a “cap and trade” basis. planning permission. However, a declaration cannot exempt any EU Member State governments were required to set an emissions works which would otherwise require planning permission. cap for each installation in the scheme. The number of allowances A search of the RPS will reveal if a structure is protected. If the allocated to each installation must be set down in the National structure is protected, this will limit or restrict the development Allocation Plan for the period in question, which must be approved potential of the structure. by the European Commission. The European Communities (Greenhouse Gas Emissions Trading) 12.8 How can e.g. a potential buyer obtain reliable Amendment Regulations 2010 provided for the revised operation information on contamination and pollution of real of the EU-wide ETS since 2013. While the European Communities estate? Is there a public register of contaminated land (Greenhouse Gas Emissions Trading) (Aviation) Regulations 2010 in your jurisdiction? established a procedural framework for aircraft operators in Ireland to participate in the EU ETS. The EPA is the designated body for Certain statutory bodies are required to publish periodic reports the purposes of the ETS in Ireland. which identify specific properties which are hazardous or which do not comply with certain environmental requirements. However, 13.2 Are there any national greenhouse gas emissions Ireland has no dedicated register of contaminated land. reduction targets? A potential buyer would always be advised to carry out its own due diligence where non-compliance with environmental law is a Ireland ratified the Kyoto Protocol on 31 May 2002, along with the concern. EU and all other Member States. Ireland has adopted two National Climate Strategies in order to meet its commitments under the Kyoto Protocol to reduce its greenhouse gas emissions. These strategies 12.9 In what circumstances (if any) is environmental clean- seek to reduce emissions through a variety of measures. Under the up ever mandatory? Kyoto Protocol, the EU agreed to reduce greenhouse gas emissions to 8% below 1990 levels. Ireland committed to limit the growth in Environmental clean-up is mandatory where a party breaches the annual greenhouse gas emissions to 13% above 1990 levels by the provisions of the Environment (Miscellaneous Provisions) Act 2015 period 2008 to 2012 and to at least 20% of 1990 levels by 2020 as and the EPA Acts, the WMA and the Water Services Act. Sections part of its contribution to the overall EU target. 55 to 58 of the WMA may require that a person who is holding, recovering or disposing of waste be liable for the costs of clean- up and any costs incurred by the relevant regulatory authority in 13.3 Are there any other regulatory measures (not already investigating an incident. A person found guilty of an offence mentioned) which aim to improve the sustainability of both newly constructed and existing buildings? under the WMA, the EPA Acts or the Water Services Act may face criminal prosecution. There is a requirement under the Recast Energy Performance of Buildings Directive that all EU Member States, including Ireland, must ensure that all new buildings will be nearly zero energy buildings (that is, have high energy performance, with energy requirements to a significant extent being met from renewable sources) by 31 December 2020.

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Diarmuid Mawe Craig Kenny Maples and Calder Maples and Calder 75 St. Stephens Green 75 St. Stephens Green Dublin 2 Dublin 2 Ireland Ireland

Tel: +353 1 619 2050 Tel: +353 1 619 2765 Email: [email protected] Email: [email protected] URL: www.maplesandcalder.com URL: www.maplesandcalder.com Ireland Diarmuid is head of the Commercial Property group in Maples and Craig specialises in all aspects of commercial property work including advises on all types of commercial property transactions. the acquisition and disposal of investment property, commercial landlord and tenant, property finance, the property aspects of He has extensive experience advising financial institutions, private liquidations, receiverships and examinerships and the property equity investors and insolvency practitioners on all property law aspects of corporate transactions. He has also acted on loan portfolio aspects involved in the acquisition, management and disposal of transactions, where the loans are secured over commercial property. distressed assets and loan portfolios. Craig has advised financial institutions, private equity investors, Diarmuid also specialises in commercial landlord and tenant law, insolvency practitioners and landlord and tenant clients. advising some of the country’s largest landlords and tenants on their commercial property portfolios. Craig joined Maples and Calder in 2012 having previously worked for a large domestic Irish law firm. Craig has also worked in the legal Diarmuid also has many years of experience advising leading private department of an Irish bank. equity and institutional clients on their respective property portfolios from a commercial property law viewpoint. Craig is recommended in independent legal directories including The Legal 500 where he is described as “very pragmatic”. Diarmuid is recommended in independent legal directories including The Legal 500 where he is described as having “attention to detail in completing due diligence, his business acumen and his industry knowledge are second to none”. Diarmuid joined Maples in 2012 having previously worked for a large domestic Irish law firm. Prior to that, he qualified as an accountant in 1997 and spent several years working for one of Ireland’s leading multinationals before qualifying as a solicitor in 2004. Diarmuid is a graduate of University College Cork (B.Comm. 1994 and B.C.L. 1999). He is an associate of the Chartered Institute of Management Accountants and a member of the Irish Society of Insolvency Practitioners.

Maples and Calder is a leading international law firm advising financial, institutional, business and private clients around the world on the laws of Ireland, the Cayman Islands and the British Virgin Islands. With a reputation as an innovative, entrepreneurial firm, Maples and Calder is known worldwide as a market leader with highly qualified lawyers who are specialists in their respective areas. Our full-service Irish practice advises on all aspects of Irish corporate, finance, funds, litigation, tax and commercial property law, as well as related specialist areas. We combine extensive knowledge and experience of Irish law with a global perspective to deliver best-in-class service. The Maples group comprises over 1,500 lawyers and industry professionals worldwide.

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Israel Moshe Merdler

Ziv Lev & Co. Law Office Ziv Lev

prevent landlords from raising rents and/or evicting tenants onto 1 Real Estate Law the streets. This Act has a diminishing influence, due especially to an amendment which provides that under particular circumstances, 1.1 Please briefly describe the main laws that govern businesses are to pay market-standard rent. real estate in your jurisdiction. Laws relating to Finally, it is also worthwhile mentioning the Pledges Law, which leases of business premises should be listed in regulates, amongst other matters, encumbrances of contractual rights. response to question 10.1. Those relating to zoning and environmental should be listed in response to question 12.1. Those relating to tax should be listed in 1.2 What is the impact (if any) on real estate of local response to questions in Section 9. common law in your jurisdiction?

The Israeli legislative framework consists of “Regular” laws or Israel’s legal system is based on common law derived from the acts and “Fundamental” or “Basic” laws, which are essentially British Mandate period and the Precedents set by the Supreme constitutional in character and effect (although Israel has no Court. The latter is binding on all lower courts. constitution). “Regular” laws are interpreted according to the provisions of “Basic” laws. There are two “Basic” laws which 1.3 Are international laws relevant to real estate in your have an overall effect on real estate matters – Human Dignity and jurisdiction? Please ignore EU legislation enacted Liberty and Israel Lands. The latter was approved on 25 July 1960, locally in EU countries. and prohibits the transfer of ownership of state land (including land owned by state entities such as the Jewish National Fund, which According to the prevailing legislation to date, international altogether consists of more than 90% of Israel’s territory), whereas laws are not relevant to real estate in Israel. Even in the case of the former, approved on 17 March 1992, stipulates that basic human inheritance, local courts are required to give effect to foreign wills rights in Israel are founded on the recognition of human dignity and/or probate orders. and aims to protect human life, a human’s body, property, personal liberty, the right of a person to leave and enter the country, privacy and confidentiality. As such, it defines the right to have a title on 2 Ownership one’s property as a constitutional right. It should be noted that the Israel Lands Basic Law has led to the practice that state-owned land (both residential and commercial) is usually leased for long periods 2.1 Are there legal restrictions on ownership of real estate (usually 49 years with an additional 49-year option). by particular classes of persons (e.g. non-resident persons)? The Land Law is the primary legal instrument used to define rights in real estate property, and the manner in which real estate Legal restrictions only apply to state-owned land, where long- transactions should be executed and registered, whereas the Real term leases require specific approval of Israel Land’s Authority Estate Taxation Law regulates the manner in which real estate (hereinafter: “RMI”). transactions are taxed. The Rental and Borrowing Act regulates the rental of real estate (as well as of chattels) and the Sale Act (Apartments) and the Sale Act (Apartments) (Assuring the 3 Real Estate Rights Investments of Apartments’ Buyers) regulate transactions in newly built apartments (those both built and under construction) with a view to assuring down-payments of purchasers via bank 3.1 What are the types of rights over land recognised in guarantees provided by the constructor, as well as of the building your jurisdiction? Are any of them purely contractual between the parties? quality, by imposing long-term guarantee periods during which the constructor is responsible for repairing any faults or defects in the building and/or apartments. A reminder of the past can be found in As noted, rights over land are defined under the provisions of the Tenant Protection Act, which regulates the rights of tenants the Land Law and they include ownership, leasehold, mortgage, described as “Protected Tenants” in both residential and business easement and pre-emption. premises. Such tenants acquired their status between 1940 and Ownership is the best and most exclusive right, allowing possession 1960, when there were many poor people, resulting in a need to and usage which are only subject to restrictions under law and/or

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agreements. Leasehold provides the right to hold and use, albeit are merely contractual rights rather than proprietary ones and might for a limited period of time. Under Israeli law, there are various lead to conflicts regarding the question of ownership. types of leasehold which are defined by the length of the lease. A lease which is 25 years or longer is regarded as a sub-right subject, 4.4 What rights in land are not required to be registered? amongst others, to taxation. A mortgage is a security interest (pledge) over land and an easement is the right to use land in a As noted, there is no compulsion to register any right. Nevertheless, particular manner without possession. Pre-emption is a right of some rights require registration in order to prove proprietary rights, first offer. such as easements gained through a consecutive use of 30 years or more. Israel 3.2 Are there any scenarios where the right to a real estate diverges from the right to a building constructed thereon? 4.5 Where there are both unregistered and registered land or rights is there a probationary period following first registration or are there perhaps different classes In practice, this scenario does not exist in Israel. Theoretically, this or qualities of title on first registration? Please give might be possible only in the case of an agreement which divides the details. First registration means the occasion upon rights in the described manner, or in a case where the rights diverge which unregistered land or rights are first registered due to practical reasons, e.g. in case a tunnel passes under a plot of in the registries. land. This scenario is only possible in practice in the case of state (RMI)/municipal-owned land which is leased to a third party. There is no probationary period following first registration; however, its conclusion is subject to a notice in the Official Gazette. This is becoming quite rare as unregistered land has become only a fraction 3.3 Is there a split between legal title and beneficial title in your jurisdiction and what are the registration of the land in Israel. consequences of any split? 4.6 On a land sale, when is title (or ownership) transferred One can split between a legal title and a right to benefit from land. to the buyer? In order to secure the beneficiary’s rights one can either register a notice over the legal title and/or a mortgage. Title to beneficiary can Title is transferred once actual registration takes place at the Land only be registered via a lease agreement, signed between the holder Registry. In order to execute the registration, one needs to submit of the legal title and the beneficiary. the sale and purchase deeds and tax certificates (both from the tax authorities and from the local council). It should be noted that, considering the fact that the majority of lands in Israel are state- 4 System of Registration owned lands, they could also be transferred once registration takes place at RMI, in case the lease is not registered at the Land Registry. 4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered? 4.7 Please briefly describe how some rights obtain priority over other rights. Do earlier rights defeat later Israel has a regulated land registry office, which provides rights? computerised services and encompasses the majority of the land in Israel. Under the existing system, there are two categories of land; In principle, an earlier transaction has priority over a later one, firstly Regulated Property, which is land that has been subject to unless the buyer in the later transaction relied on good faith on the a public verification procedure (including boundaries and related registration at the Land Registry and completed the registration rights) and is therefore registered under the Title Registration. before the earlier transaction. Regulated Property is identified by parcel and block numbers. The second category of land is Unregulated Property, which has not been subject to said verification procedure. Accordingly, the registration 5 The Registry / Registries is in the Deeds Registration book and is identified by page numbers.

5.1 How many land registries operate in your jurisdiction? 4.2 Is there a state guarantee of title? What does it If more than one please specify their differing rules guarantee? and requirements.

There is no state guarantee of a title. Title Registration provides There are altogether nine regional offices of the Land Registry and conclusive evidence of the registered right, whereas the Deeds two additional branches which operate on a part-time basis. The Registration book constitutes only a prima facie evidence thereof. rules which govern their operation are the same and they only differ In Israeli law, the principle of good faith has a prevailing effect and, in their geographical responsibility. therefore, a buyer of a right in regulated land, who relied on the registration in good faith and paid consideration, has a prevailing 5.2 Does the land registry issue a physical title document right. to the owners of registered real estate?

4.3 What rights in land are compulsorily registrable? The Land Registry issues certified copies of the extracts. It What (if any) is the consequence of non-registration? also provides stamped excerpts of the deeds submitted in each transaction. There is no obligation to register any rights. However, non- registration of a right results in an exposure to one’s rights which

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5.3 Can any transaction relating to registered real estate 6.3 Do you feel there is a noticeable increase in be completed electronically? What documents need the availability of capital to finance real estate to be provided to the land registry for the registration transactions in your jurisdiction, whether equity or of ownership right? Can information on ownership of debt? What are the main sources of capital you see registered real estate be accessed electronically? active in your market?

Transactions cannot be completed electronically; however, as Since the introduction of the reform of the Israeli financial markets, previously noted, information can be accessed electronically via the whereby the government ceased to issue subsidised government internet. The documents generally required in order to complete a bonds to institutional investors, these same institutional investors transaction are sale and purchase deeds or transfer of lease deeds, have acted not only as investors but also as lenders, creating finance Israel tax certificates (both from the tax authorities and local authority) packages for real estate transactions in Israel and resulting in a and, in the case of a corporation, a protocol of the board of directors/ noticeable increase in the availability of capital to finance real estate governors affirming the sale and a lawyer’s confirmation that the transactions. Furthermore, an additional form of finance is bonds company is operating and in good standing order. issued and traded on the Tel Aviv Stock Exchange. The bonds can be issued without collateral and with limited covenants. 5.4 Can compensation be claimed from the registry/ registries if it/they make a mistake? 6.4 What is the appetite for investors and developers in your region to look beyond primary real estate Under Israeli Tort Law, the state may be held liable for damages. markets and transact business in secondary or even The state is not liable in cases where it acts within its lawful tertiary markets? Please give examples of significant boundaries and in cases where it has reasonable belief that it acted secondary or tertiary real estate transactions, if relevant. within its lawful authorisation.

Considering Israel’s real estate market’s (small) size, investors and 5.5 Are there restrictions on public access to the developers are always looking beyond primary real estate markets. register? Can a buyer obtain all the information he However, opportunities are closely connected with infrastructure might reasonably need regarding encumbrances and development. Accordingly, Afula, a small northern town that hosts other rights affecting real estate? a hospital, has seen a substantial increase in opportunities since connecting transport infrastructure has been constructed. The Land Registry is open to the public and any person (not only the buyer) may obtain extracts, which include details about the title holders’ identity (name and ID, both of present and past holders), 6.5 Have you observed any trends in particular market any notices (such as of a transaction that has been signed regarding sub sectors slowing down in your jurisdiction in the property and/or easements and/or any formal order), and/or terms of their attractiveness to investors/developers? information concerning a third party’s rights, such as in the case of Please give examples. a mortgage. In order to access the deeds, a buyer needs a power of attorney from the seller or a court warrant. Israel’s Parliament has been fighting the high residential prices and their permanent rise, amongst others, by annulling tax benefits and imposing higher stamp duty and other related taxes on residential 6 Real Estate Market investors, thus rendering this form of investment less appealing. On the other hand, the government has been encouraging the development of the residential market in order to increase the 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally availability of residential projects with the view of further lowering be involved in a real estate transaction in your the prices of flats. Accordingly, developers of residential real estate jurisdiction? Please briefly describe their roles and/or projects, especially those aimed at first time buyers and non-luxurious duties. projects, are currently enjoying favourable terms and opportunities.

As is common in other parts of the world, real estate transactions involve one or more of the following: real estate agents and lawyers. 7 Liabilities of Buyers and Sellers in Real Additional parties are, inter alia, constructors, architects, appraisers Estate Transactions and surveyors, with the latter also acting on behalf of the buyer’s finance provider. 7.1 What (if any) are the minimum formalities for the sale and purchase of real estate? 6.2 How and on what basis are these persons remunerated? The Land Law provides that the sale and purchase of real estate requires a written document which should include all of the essential Real estate agents are normally paid anything between 1% and details such as price, terms of payment and a description of the 2% of the sale price, depending on the nature of the deal and its property. complexity, as well as the question of whether they received exclusivity or not. This also determines whether only one or both 7.2 Is the seller under a duty of disclosure? What matters parties pay conveyance fees. Lawyers’ fees are either based on a must be disclosed? fixed percentage of the sale price (such as 1%–2%), an hourly rate, or a combination of both. The remuneration of other professionals One of Israel’s most substantial principles is the obligation to act is also based on either an hourly rate or on a certain percentage, in good faith. Accordingly, any party is under a duty to act in good depending on the deal, the work involved, etc.

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faith when in the course of a contractual relationship, commencing at the negotiation phase through to the actual signing of the contract 8 Finance and Banking and its execution. The extent of disclosure is always a matter of circumstances, and depends, amongst other matters, on the text of 8.1 Please briefly describe any regulations concerning the contract, especially on the buyer representations and warranties, the lending of money to finance real estate. Are the and the relationship between the parties. Without derogating from rules different as between resident and non-resident the aforesaid, especially considering the fact that Israeli courts persons and/or between individual persons and tend to interpret the good faith principle in a very broad manner, corporate entities? the disclosure duty usually includes all the essential facts of the

Israel transactions. Real estate loans are regulated by the Bank of Israel, with special emphasis on the allowed loan-to-value ratio, terms of repayment, guarantees, information to borrowers and more. In general, lending 7.3 Can the seller be liable to the buyer for legislation applies equally to both individuals (whether residents misrepresentation? or foreigners) and corporations. It is worthwhile mentioning that, during the last couple of years, the Bank of Israel has made As noted, especially considering the duty to act in good faith, a seller borrowing more difficult, lowering the allowed loan-to-value ratio. may be found liable for misrepresentation even in a case where he does not provide contractual representations and warranties. It It is also worthwhile mentioning that there are legislative provisions should be noted in this respect that the good faith principle operates which determine the entitlement of residential premises to in both directions, so a buyer who did not rely on a representation subsidiaries. and/or was aware of a problem in a property but decided to contract nevertheless, cannot use non-disclosure or misrepresentation as a 8.2 What are the main methods by which a real estate cause of action. lender seeks to protect itself from default by the borrower?

7.4 Do sellers usually give contractual warranties to the First degree mortgages, registered on the borrowers’ rights in favour buyer? What would be the scope of these? What is the function of warranties (e.g. to apportion risk, to of the lenders, are the most common method used by real estate give information)? Are warranties a substitute for the lenders. Due to the fact that in many cases the borrower is not the buyer carrying out his own diligence? registered owner of the asset at the date the finance is required, the mortgage is often registered on the seller’s rights but subject The answer to this question is a matter of circumstance, but it is to the lender’s guarantee to erase the mortgage in case the deal is quite common that sellers provide representations on essential cancelled and it receives the loan back from the seller, or in case the matters relating to the transaction. Warranties are normally aimed consideration is fully paid – a non-recourse clause. Other methods at providing the seller with information at the pre-contractual of guaranteeing the lender’s rights when registration of a mortgage phase, but do not replace a due diligence inspection by the buyer. is impossible (for example, due to non-completion of the registration Accordingly, and in order to reduce the seller’s exposure, most of a communal house, differentiating each flat as a separate registry) contracts containing representations and/or warranties also contain is to register a notice on the seller’s title (at the Land Registry) and a declaration on behalf of the buyer, stating that he has conducted a pledge is registered over the contractual rights of the borrower. his own due diligence inspection. Purchasers of residential premises are often required to provide In addition, special provisions exist with regard to newly built personal guarantees, as well as to obtain life insurance and structure premises in the Sale Act (Apartments), extending the duty of insurance naming the lender (the Bank) as the beneficiary. representation with regard to the specification of the premises. 8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a 7.5 Does the seller warrant its ownership in any way? mortgagee to realise a mortgaged property without Please give details. involving court proceedings or the contribution of the mortgagor? Despite the fact that a warrant regarding the ownership is a common clause in sale contracts, this is usually buttressed by an extract from Proceedings for the realisation of a mortgaged property are either the Land Register and/or a confirmation letter from the RMI. conducted via the execution office or via court proceedings. In both cases, the lender submits a request to appoint a receiver. The 7.6 What (if any) are the liabilities of the buyer (in addition difference is concerned with the limited authority the head of the to paying the sale price)? execution office has, and therefore more complicated cases are submitted to court. As noted, the principle of acting in good faith extends to the buyer as well. It is customary that a buyer registers a notice regarding the 8.4 What minimum formalities are required for real estate sale and purchase agreement, thus allowing the release of the first lending? instalment, which is normally deposited in an escrow account. In addition, a buyer is subject to a purchase tax. Non-registration of No formalities regarding real estate lending exist, but, in the case of the said notice within a defined period of time (normally a few days) a company obtaining a mortgage, registration must be carried out will result in the release of the deposit. both with the Land Registry and with the Companies Registry in order to bind liquidators and creditors.

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8.5 How is a real estate lender protected from claims 9.3 Are transfers of real estate by individuals subject to against the borrower or the real estate asset by other income tax? creditors? The answer to this question depends on whether the individual is a In a case where a mortgage of first degree is registered with the sole trader and if he deals in buying and selling real estate properties; Land Registry on the borrower’s rights in the property, the lender is in such a case, he is obliged to pay income tax rather than capital regarded as a secured creditor and, therefore, has a prevailing right gains tax (which is referred to in Israel as land appreciation tax; over other creditors’ claims regarding the mortgaged property and hereinafter: “land appreciation tax”). the sale proceeds thereof. Israel

9.4 Are transfers of real estate subject to VAT? How 8.6 Under what circumstances can security taken by a much? Who is liable? Are there any exemptions? lender be avoided or rendered unenforceable? The liability of paying VAT is primarily related to the question There are several causes, which can lead to such a result. First, whether a “dealer” (as defined under the VAT legislation) is there are rules regarding the enforceability of mortgages against involved in the transaction. In general, the sale of residential debtors, requiring a lender to comply with a list of terms and properties between private individuals is exempt from VAT, and conditions prior to execution, inter alia those imposed by the Bank all other transactions involving dealers and/or organisations and/or of Israel regulatory bodies. Other cases, which might lead to the financial institutions are subject to VAT unless the buyer purchases frustration of a security are when a lender has misrepresented the the property for his personal use. The current rate of VAT in Israel terms and conditions of the loan or when the pledged property does is 17%. not belong to the debtor/borrower and he did not have the right to register a mortgage. Without derogating from the aforesaid, such 9.5 What other tax or taxes (if any) are payable by the cases are not common as lenders usually use all necessary measures, seller on the disposal of a property? including during due diligence, to avoid such occurrences.

The seller is subject to land appreciation tax, which is set at various 8.7 What actions, if any, can a borrower take to frustrate rates depending on the period during which the owner has owned enforcement action by a lender? the property. Following the new tax reform, the obligation of paying the appreciation tax has been shifted to the buyer, who is obliged to A borrower/debtor can turn to court and/or to the execution bureau pay a down-payment once 40% of the consideration is due. The and seek an injunction/declaratory judgment against the lender. It sum of the down-payment is determined according to the date the should be noted in this respect that in Israel, as opposed to other property was acquired by the seller – for purchases on or before 7 jurisdictions, measures are legal rather operational in nature. November 2001, the sum is equal to 15% of the consideration; if the Accordingly, a borrower cannot withhold information that a lender property was purchased after 7 November 2001, the sum is equal may require in order to take enforcement action, as it would be, in to 7.5% of the consideration. Furthermore, the calculation of the itself, a breach of the loan agreement and give rise to enforcement tax varies when applied to different periods of ownership. It is also actions. worthwhile mentioning that recent changes in legislation, aimed at reducing the prices of flats, has led to the abolition of different exemptions applied to the sale of flats, e.g. the exemption from land 9 Tax appreciation tax if a flat is sold four years or more after the date it was purchased. 9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable? 9.6 Is taxation different if ownership of a company (or other entity) owning real estate is transferred? Transfers of real estate in Israel are subject to a transfer tax, also referred to as purchase tax, which is imposed on the buyer. The rate A sale of shares in a company which owns real estate does not is determined according to the type of property sold. Purchasers of trigger tax liability unless the company is regarded as a “real estate non-residential real estate, namely commercial properties or land, entity”; namely a corporation all or most of whose activities are are normally subject to a flat rate of 6% of the value of the property, concentrated in the holding of real estate. and purchasers of flats are subject to three-tiered rates ranging from 0% to 10% depending on whether the purchasers own more than one flat, and on the price of the flat. It should be noted that 9.7 Are there any tax issues that a buyer of real estate should always take into consideration/conduct due rates have been recently increased via a legislative change aimed at diligence on? discouraging the purchase of more than one flat. The main tax issues which a buyer has to take into account are 9.2 When is the transfer tax paid? concerned with ensuring that the consideration is used to pay the taxes of the seller. Otherwise, the buyer might find himself in a position It is obligatory to submit a tax calculation within 30 days from the whereby he is unable to register the rights in the property in his name. date on which the sale and purchase agreement has been signed Accordingly, the sale and purchase agreement should include specific (recently shortened from 40 days). Up to 20 days thereafter, the tax provisions for payment of taxes and where necessary – the creation authorities are obliged to provide the purchaser with payment slips, of an escrow account into which the consideration is paid and from and payment becomes due. which taxes are paid. As to due diligence, the buyer has to assess the tax liability of the seller so that the relevant provisions include

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adequate sums to cover the potential tax liability. It should be noted e) (i) Change of control of the tenant that this is not only concerned with land taxation but also with regard (ii) Transfer of lease as a result of a corporate to municipal taxation and payments to RMI (where applicable) – as restructuring (e.g. merger) registration of rights in land are subject to the local council’s/RMI It is common that lease agreements prohibit changes in the control consent. It goes without saying that a buyer also has to assess his own of a tenant without the landlord’s previous acknowledgment and personal tax liability, especially in case finance is required. consent. f) Repairs 10 Leases of Business Premises Tenants often bear the liability of maintaining the premises, except for wear and tear. Israel

10.1 Please briefly describe the main laws that regulate leases of business premises. 10.4 What taxes are payable on rent either by the landlord or tenant of a business lease? Generally speaking, leases are regulated by legislation which governs contractual relationships such as the Contracts (General Rent received by a landlord for a business lease is subject to Part) Law. Specific matters of lease agreements are regulated under income tax and VAT. Furthermore, business premises are subject the provisions of the Rental and Borrowing Act, the Land Law and, to municipal taxation, the tariffs of which are determined according to a limited extent, the Tenant Protection Act. The operation of most to the type of business (banks, insurance companies, retail shops, businesses requires a licence and, therefore, each business is also offices, etc.). Usually the tenant bears the responsibility of paying regulated by the relevant by-laws in each municipality. the municipal taxation.

10.2 What types of business lease exist? 10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a Essentially there are no restrictions under law as to the types of tenant to extend or renew the lease or for either party leases (however, there are specific provisions relating to a business to be compensated by the other for any reason on lease of protected tenants) and these are freely negotiated between termination? property owners and lessors. It is common that under business leases in malls and/or commercial centres the tenant pays maintenance/ In most cases, business leases are terminated upon the term’s expiry. management fees and municipal taxes. There are no special provisions under law allowing the tenant to extend and/or renew the lease. In a case where the lease is tacitly 10.3 What are the typical provisions for leases of business prolonged, each party can terminate at any time, subject to a notice. premises in your jurisdiction regarding: (a) length of The Borrowing and Rent Act provides that termination shall be term; (b) rent increases; (c) tenant’s right to sell or within a period of three months or less. sub-lease; (d) insurance; (e) (i) change of control of the tenant; and (ii) transfer of lease as a result of a corporate restructuring (e.g. merger); and (f) repairs? 10.6 Does the landlord and/or the tenant of a business lease cease to be liable for their respective obligations under the lease once they have sold their a) Length of term interest? Can they be responsible after the sale in Open to negotiation and usually does not exceed 25 years as, in such respect of pre-sale non-compliance? a case, the transaction is subject to tax. b) Rent increase In essence, the answer to this question is negative; namely that Rent increases usually depend on several matters, one of which is rights and liabilities are transferred and vested in the new tenant/ the currency in which the rent is charged. Previously it was popular landlord, although they obviously bear responsibility for the period to charge the rent in US dollars and to link it to the US dollar with a that precedes the transfer of rights. button rate of 4 NIS to 1 US Dollar. Today most leases are charged in NIS and linked to the Consumer Price Index. Rent is periodically 10.7 Green leases seek to impose obligations on increased as frequently as annually up to a five-yearly increase. landlords and tenants designed to promote greater c) Tenant’s right to sell or sublease sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please Under the provisions of the Rental and Borrowing Act, a landlord briefly describe any “green obligations” commonly cannot unreasonably object to an assignment of rights and/or a found in leases stating whether these are clearly sublease and, according to the prevailing precedent, this cannot be defined, enforceable legal obligations or something waived and/or made obsolete in an agreement. Having said that, not amounting to enforceable legal obligations (for there is nevertheless a possibility to limit the tenant’s said rights by example aspirational objectives). setting clear criteria for the assignee and requiring undertakings and guarantees which may render this exercise unpractical. Green leases are not a common phenomenon in Israel. “Green” d) Insurance requirements are becoming part of building permits; however, there are no conclusive or encompassing rules thereof and it is very much Landlords typically maintain property insurance but lease at the discretion of the local planning authority to determine these agreements provide that they are reimbursed by the tenants, who requirements. are also often required to maintain contents, third party and loss of income insurance, as well as employer’s liability and all-risk insurance. This is especially relevant when a tenant carries out construction (adaptation) works.

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which enables him to issue a separate demand regarding the lawsuit 11 Leases of Residential Premises without having to apply for a permission to split the claims.

11.1 Please briefly describe the main laws that regulate leases of residential premises. 12 Public Law Permits and Obligations

The main law that regulates leases of residential premises is the 1971 12.1 What are the main laws which govern zoning/ Lease and Borrowing Act which was recently amended to include permitting and related matters concerning the use more favourable provisions to protect tenants. An additional, and occupation of land? Please briefly describe them historical law, is the 1972 Protection of Tennant Act, which regulates and include environmental laws. Israel the rights of protected tenants who benefit from secured rent rates. Zoning and related matters are governed by the provisions of the Planning and Building Law and the regulations enacted under its 11.2 Do the laws differ if the premises are intended for provisions. It aims at governing the manner in which land is used multiple different residential occupiers? and it has a special emphasis on the manner in which zoning, as well as national plans, are adopted and implemented. Businesses There are no special provisions in cases where premises are intended are also regulated under the Licensing of Businesses Law, which for multiple different residential occupiers. sets conditions regarding the operation of certain businesses in relation to their premises. Planning and Building Regulations 11.3 What would typical provisions for a lease of (Environmental Impact Assessments) incorporate environmental residential premises be in your jurisdiction regarding: considerations in the early stages of the zoning process, and the (a) length of term; (b) rent increases/controls; (c) the Protection of the Coastal Environment Law is aimed at protecting tenant’s rights to remain in the premises at the end of and preserving the coastal environment and natural resources. the term; and (d) the tenant’s contribution/obligation to the property “costs” e.g. insurance and repair? In addition, there are several other laws dealing with specific subject matters which require an environmental permit. For example, the a) Length of term: typically, it would be a 12-month option 1993 Hazardous Substances Law requires any premises selling followed by an option for an additional 12-month period. hazardous substances and any business dealing with poisons to b) Rent increase: commercially negotiable and not limited under obtain a permit. law. Normally it would be around a 5% increase. c) Right to remain: unless the tenant has a specific right to 12.2 Can the state force land owners to sell land to it? If prolong the rent period, they have no right to remain in the so please briefly describe including price mechanism. premises. The landlord is, however, obliged under law to notify the tenant in advance if he wishes to prolong the rent The state can force land owners to sell land to it in cases where it period or not. is used for a public purpose. The process is actually expropriation d) Tenant’s contribution: tenant is required to repair any damage and it exists in various laws, such as the Planning and Building resulting from using the flat in an unreasonable manner. Law, the Land Ordinance, the Water Act, the Law of Building and The landlord is responsible for repairing any other damage in the infrastructure of the premises, such as damage to the Evacuation of Development Areas, the Antiquities Act and more. pipework, electricity, etc., no later than 30 days after it has Usually a particular percentage of land can be expropriated without occurred. In cases where the damage prevents the usage of any compensation, ranging from 25% to 40%. A compensation the premises, the repair must be carried out no later than three mechanism is plainly set via an appraiser, who determines the value days after it occurred. In addition, the tenant is responsible of the land expropriated. for paying any tax and or expense related to the usage of the premises such as council tax, water, electricity, gas and management fees. Tenants are not obliged to bear any 12.3 Which bodies control land/building use and/or insurance costs related to the construction/infrastructure of occupation and environmental regulation? How do the premises nor any conveyancing costs, in case the agent buyers obtain reliable information on these matters? acted on behalf of the landlord. Buyers can obtain reliable information from the local council, via the engineering and local planning and building committee, 11.4 Would there be rights for a landlord to terminate a which controls and supervises land and building use. The local residential lease and what steps would be needed to achieve vacant possession if the circumstances planning and building committee issues permits and licences and existed for the right to be exercised? all the information is contained in the engineering department’s archives, which are open to the public. In addition, the Ministry of The landlord has the right to terminate the residential lease in case Environment operates an information centre which is open to the of a breach or in case such a right is explicitly provided in the rent public. agreement. It should be noted in this respect that the 1971 Lease and Borrowing Act has declared such clauses null and void in case the 12.4 What main permits or licences are required for right to terminate was not granted both to the landlord and the tenant building works and/or the use of real estate? and provided it was subject to a minimal notice term – the landlord not less than 90 days in advance and the tenant not less than 60 Building works require a building permit, which comprises not days in advance. In case a landlord activates his right to terminate only a building plan but a rather long list of plans related thereto and the tenant fails to vacate the premises, the landlord can use a (environmental, transport, sheltered areas, etc.). Once the special procedure, explicitly outlined in the 1984 Civil Ordinance, construction works have finished, additional permits and approvals in which he can obtain a verdict within a period of ca. 90 days and are required both from the local authority and from other authorities,

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such as the police and the fire prevention authorities, in order to allow the use of the newly erected building and connect it to the 12.8 How can e.g. a potential buyer obtain reliable existing infrastructure (water, sewage and electricity). As noted, information on contamination and pollution of real estate? Is there a public register of contaminated land the Licensing of Businesses Law lists ca. 200 businesses which in your jurisdiction? require a permit to operate. This is obtained from the licensing department at the local council but involves an interaction with all There is no public register of contaminated land in Israel. Israel’s the said bodies, namely the local planning and building committee, Knesset approved the Land Contamination Bill at the first reading the Ministry of Health, the Ministry of Environment, the police and at the beginning of August 2011, and 2012 saw further discussions the fire prevention authority. regarding its final approval. The proposed law provides a Israel comprehensive response to the treatment of thousands of pollution 12.5 Are building/use permits and licences commonly spots, which constitute a health and environmental hazard. One of obtained in your jurisdiction? Can implied permission the main provisions of the law is granting the Land Registrar the be obtained in any way (e.g. by long use)? authority to include a notice about the contamination of the land in the Land Registry. Building and use permits as well as business permits are commonly At the moment, information regarding contaminated land exists obtained, albeit there are quite a few problems in the process, in various authorities, including the local authority (at the especially with regard to obtaining business permits. This is usually environmental department), the water authority, the parks and a long and bureaucratic process which entails an internal paradox, nature authority, etc. Under the provisions of the 1998 Freedom of namely that one has to open a business without a permit, because the Information Law, governmental and public authorities are obliged to law requires that the business is up and running before a permit can publish annual reports and the public is allowed access to the relevant be issued. Regardless of the aforementioned, an implied permission data upon which these reports are based. Furthermore, citizens, cannot be obtained and at most it can assist in avoiding criminal as well as public organisations, are allowed access to information proceedings. held by public agencies and public bodies, which include, amongst others, government Ministries, Israel’s Parliament (the Knesset), courts, local government, governmental corporations and statutory 12.6 What is the appropriate cost of building/use permits bodies. Despite the fact that the Freedom of Information Law and the time involved in obtaining them? includes provisions which allow the relevant body or authority to deny access to information, it is obliged to release information on The costs, as well as the time involved in obtaining building/use “substances that were emitted, discharged or released into the permits, depend on various factors; amongst others: how complex environment”, or “results of measurements of noise, odours or the project is and whether its size and shape, as well as the planned radiation measured on public property”. use, fall within the existing zoning plan framework or not. Obtaining Furthermore, the 2009 Freedom of Information Regulations permits is usually a lengthy and bureaucratic procedure which (provision of environment-related information to the public) have takes anything from a few months to years. This, and the ongoing fundamentally increased the public’s ability to access environment- shortage of residential premises, resulting in very high real estate related information. prices and, subsequently, recent protests in Israel, has brought the government to review the recent Planning and Building Act, which was legislated in the 1960s and which, as noted, is characterised 12.9 In what circumstances (if any) is environmental clean- by bureaucratic processes. The new legislation is aimed at up ever mandatory? substantially shortening the process (and subsequently the period) of obtaining a permit, setting it around 90 days. The costs involved Environmental clean-up is indirectly mandatory via orders handed are determined according to the size of the plot and the building, as down according to the laws and regulations of the Business the tolls, building fees and levies are calculated according to square Licensing Law, the Hazardous Substance Law and many others. metres and/or volume. In addition, a land improvement levy may also be imposed in cases where the permit provides an increase in 12.10 Please briefly outline any regulatory requirements the property’s value, for example, or in a case where the permitted for the assessment and management of the energy use deviates from the orders contained in the zoning plan. performance of buildings in your jurisdiction.

12.7 Are there any regulations on the protection of historic There are no regulatory requirements for the assessment and/ monuments in your jurisdiction? If any, when and how or management of the energy performance of buildings in Israel. are they likely to affect the transfer of rights in real However, there are several standards for green and energy- estate? efficiency which are due to become regulatory requirements and are currently being adopted by an ever increasing amount of developers Israel ratified the Convention for the Protection of World Cultural and builders. and Natural Heritage on 6 January 2000, joining the 159 countries who were already party to the convention. Within a short time of ratification, the Israel World Heritage Committee submitted 13 Climate Change a tentative list of 23 properties which it intended to nominate for inscription, followed by two additional sites in 2002. In addition, 13.1 Please briefly explain the nature and extent of any the Antiquities Law was enacted in order to protect Israel’s regulatory measures for reducing carbon dioxide antiquities, which are defined as any object which was made by man emissions (including any mandatory emissions before 1700 CE, or any zoological or botanical remains from before trading scheme). the year 1300 CE. Usually the problem entails building upon land which contains archaeological remains, and not in the transfer of Under the provisions of the Clean Air Law, carbon dioxide rights. (“CO2”) is regarded as a pollutant and the said law, as well as the

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related regulations, are the only existing framework dealing with (2012–2020) on improving air quality in Israel. The programme

CO2. Israel, which is classified as a non-Annex I country under aims to improve air quality in Israel, while reviewing the existing the Climate Change Convention, ratified the Kyoto Protocol in policy on air pollution prevention from transport, industry, energy February 2004 and founded a Designated National Authority and the domestic sector vis-à-vis ambient and target values, and (“NDA”), thus paving the way for implementing CDM projects in determines future policy on abating air pollution from these sources. its territory. The Israeli NDA is formed out of representatives from The programme will be updated every five years. On 11 December a number of Ministries, governmental and public bodies, such as the 2011, the Ministry of Environmental Protection distributed Israel’s Ministry of Transportation, the Ministry of Industry and Trade and first ever multi-annual national programme for the prevention and the Manufacturers’ Association, and its role is to determine whether reduction of air pollution. The programme encompasses a wide

a proposed CDM project complies with sustainable development range of guidelines, the implementation of which should bring about Israel criteria, as per the above-mentioned Article 12. The NDA has a continuous reduction and prevention of pollutant emissions into formulated sustainable development indicators which will be used the air. in the assessment process of the Project Design Document. To date, the NDA has approved several projects for the reduction of 13.3 Are there any other regulatory measures (not already greenhouse gas emissions in the fields of waste, renewable energy, mentioned) which aim to improve the sustainability of production efficiency and wastewater treatment. However, there are both newly constructed and existing buildings? no mandatory emissions trading schemes in Israel to date. Israel is located in an area which is part of the Afro-Syria rift and 13.2 Are there any national greenhouse gas emissions is therefore potentially exposed to earthquakes. Since the 1980s, reduction targets? every new construction has to conform to the Israeli standard for earthquakes, and the National Building Scheme Number 38 provides At COP15 in Copenhagen, former President S. Peres declared that incentives in the form of additional building rights to those who Israel will do its best to reduce GHG emissions by 20% compared strengthen the construction of buildings which were built before the to “business as usual”, by the year 2020. This declaration was 1980s. formalised by a government decision, in March 2010, that also Other measures worth mentioning are the Green Building Standard, established an intergovernmental committee comprising the which applies both to new buildings and to building renovations, and Directors General of relevant Ministries tasked with formulating a was introduced by the Ministry of Environmental Protection in July national plan to reduce GHG emissions. In addition, it should be 2011 and, in addition, the Government Housing Administration’s noted in this respect that the Clean Air Law calls on the Ministry commitment to implementing Israel’s green building standard in all of Environmental Protection to submit a multi-annual programme new government constructions and major renovations.

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Moshe Merdler Ziv Lev Ziv Lev & Co. Law Office Ziv Lev & Co. Law Office 98 Yigal Alon St., Electra Tower 98 Yigal Alon St., Electra Tower Tel-Aviv, 6789141 Tel-Aviv, 6789141 Israel Israel

Tel: +972 3643 0301 Tel: +972 3643 0301 Fax: +972 3643 0302 Fax: +972 3643 0302 Email: [email protected] Email: [email protected] URL: www.lz-law.com URL: www.lz-law.com Israel

Moshe Merdler is a partner at Ziv Lev & Co. Law Office and heads Ziv Lev is the head of our firm and is the founding partner. His practice the Litigation and commercial law department. His areas of practice includes a wide range of civil and commercial law matters, with an include a wide range of civil and commercial law matters, including emphasis on Land and Real Estate Law, Planning Law, Commercial Municipal Taxation, Planning Law, Real Estate and Litigation. Moshe Property, Insolvency Law and Finance. He frequently advises provides legal counsel to individuals, corporations (both private public authorities and governmental bodies, as well as industrial and public ones) and governmental entities, and has considerable and commercial firms (private and public), on issues concerning experience in both non-contentious and contentious work, representing commercial property, infrastructure projects, planning, building and clients before the entire range of Israeli courts. In recent years, Moshe developing commercial property as well as residential projects. Ziv has been involved in many real estate litigation cases and headed Ziv is a highly experienced advocate, who has successfully advised and Lev’s protected housing department. He was born in 1973 in Holon, represented many projects, transactions and cases of high complexity Israel. Moshe is a law graduate of the London School of Economics and diversity. Ziv was born in Jerusalem, Israel, in 1965. He is a law (LL.B.) and King’s College (LL.M. in Intl. Business Law) and is a graduate of Tel Aviv University and is fluent in English, Spanish and member of both the Israel Bar and The Law Society of England & Hebrew. Wales. Moshe is fluent in English, German and Hebrew.

Ziv Lev & Co. Law Office is a commercial and civil law firm, located in the heart of Tel Aviv’s business district. The firm offers the entire range of commercial, corporate and litigation services, with particular emphasis on Real Estate and Commercial Property, Commercial and Corporate Law, Project Finance, Environmental Law and Litigation. The firm represents some of Israel’s most prominent corporations (such as the Elco Group and Liberty Properties), as well as individual entrepreneurs, and also possesses significant international capabilities, with proven experience in the UK, Germany, Eastern Europe, Russia and the US. Ziv Lev & Co.’s Real Estate department has been involved in many high-profile real estate transactions with great success, turning it into one of Israel’s leading firms in this field, as recently acknowledged in the DUN’s 100 rankings. Its work ranges from commercial properties, complicated purchase and planning transactions to yielding properties and its team has all the requisite capabilities to tackle any project or transaction with professional yet intimate and client-oriented service and availability around the clock. The Commercial and Litigation departments comprise, with the Real Estate department, a real ‘one-stop-shop’ to any client’s needs, whilst providing both contentious and non-contentious solutions to any real-estate matter or transaction. In 2016 and 2017, Ziv Lev Law office was involved in several of the leading real estate transactions in Israel, including the closing of the sale transaction of 50% of the rights in the Electra tower (for ca. 650 million NIS), and the closing of sale transaction of the rights in the Elco Complex in Ramat Ha’sharon (for ca. 210 million NIS) as well as a 300 million NIS transaction to build ca. 250 flats in Ramla.

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Italy

Gianni, Origoni, Grippo, Cappelli & Partners Davide Braghini

1 Real Estate Law 1.2 What is the impact (if any) on real estate of local common law in your jurisdiction?

1.1 Please briefly describe the main laws that govern real estate in your jurisdiction. Laws relating to Common law has no impact on Italian real estate. Judicial precedents leases of business premises should be listed in have to be taken into consideration for the interpretation of the law, response to question 10.1. Those relating to zoning but are not binding. and environmental should be listed in response to question 12.1. Those relating to tax should be listed in response to questions in Section 9. 1.3 Are international laws relevant to real estate in your jurisdiction? Please ignore EU legislation enacted locally in EU countries. The main applicable real estate legislation is: The Constitution of the Italian Republic, which states the ■ Only EU legislation may be relevant to real estate in Italy. right to a private property, subject to possible limitations for International law is not relevant since real estate in Italy is regulated public interest. by local law. ■ The Italian Civil Code (Royal Decree no. 262 of 16 March 1942), which regulates freehold title (proprietà), other rights on real estate assets, how to acquire and transfer real estate 2 Ownership and building rights, co-ownership on real estate, registration of title in the land registry and also contains the general regulations for sale and purchase contracts, leases and 2.1 Are there legal restrictions on ownership of real estate mortgages. by particular classes of persons (e.g. non-resident ■ The Italian Navigation Code (Royal Decree no. 327 of 30 persons)? March 1942), which regulates title (in the form of public concession of use) on beaches, marinas, harbours, lagoons, A legal restriction on ownership of real estate applies to foreign basins, channels and any related assets. persons that are not resident in Italy, based on the “reciprocity” ■ The Unified Building Act (Testo Unico dell’Edilizia – principle, i.e., the acquisition of real estate is not possible in principle Presidential Decree no. 380 of 6 June 2001), which regulates for foreigners coming from countries where Italian citizens cannot development, construction and refurbishment of real estate. own real estate and which have not signed reciprocal conventions ■ Legislative Decree no. 122 of 20 June 2005, which with Italy. regulates the acquisition by individuals of properties under development. ■ The Unified Banking Act (Legislative Decree no. 385 of 1 3 Real Estate Rights September 1993) which regulates some aspects of mortgage on real estate connected to bank financing. 3.1 What are the types of rights over land recognised in ■ The various legislation regulating the Cadastral system, which your jurisdiction? Are any of them purely contractual maps all Italian real estate properties (Royal Decree no. 2153 between the parties? of 8 December 1938 on Catasto Terreni, Presidential Decree no. 1142 of 1 December 1949 on Catasto Edilizio Urbano, and Law Decree no. 557 of 30 December 1993 on Catasto Real estate assets can be held by: Fabbricati). ■ freehold, under: Finally, the Governmental Social Housing Plan, which regulates i) full ownership (“proprietà”); or the development of government-supported houses for low-income ii) joint co-ownership (“comunione”); and families and individuals is particularly relevant for the residential ■ various form of title comparable to leasehold, under: real estate market. i) usufruct (“usufrutto”), which grants rights comparable to those of the freehold owner for a limited period of time (up to 99 years); ii) right of use (“uso” and “abitazione”), which grants limited right to a person to use or live in a property;

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iii) right to build (“diritto di superficie”), which grants the Land registries are organised on a local basis and managed by the right to build on or under a given area and acquire full Agenzia del Territorio, an administrative body controlled by the ownership of the building; Ministry of Finance. iv) public concession, which grants rights to use and benefit from a governmental owned asset for a limited period of time (up to 99 years); 4.2 Is there a state guarantee of title? What does it guarantee? v) lease (“locazione”), which may have a maximum term of 30 years; There is no state guarantee of title. Title insurance is not commonly vi) lease of a business (“affitto di azienda”) including real used because the legal system fully protects any person acquiring Italy estate assets; title from the registered owner. vii) bailment (“comodato”), which is a form of limited use Also, any sale of property has to be executed before a notary, who normally without consideration; and has a duty to perform a legal check on the title. viii) rent-to-buy contracts, which allow a person to use a property while paying price instalments to buy the property. 4.3 What rights in land are compulsorily registrable? What (if any) is the consequence of non-registration?

3.2 Are there any scenarios where the right to a real estate diverges from the right to a building Any contracts (i) transferring freehold title on a property, (ii) constructed thereon? creating or transferring a usufruct or a right to build, (iii) creating a co-ownership on a property, (iv) creating or transferring an easement The general principle is that real estate is indivisible and comprises: (i) on a real estate property, (v) waiving any of the above rights, or (vi) land; (ii) buildings; and (iii) everything attached to land or buildings. granting a lease for a term exceeding nine years, must be registered in the land registry. In the absence of registration the title cannot Land and buildings located on it are registered together on the same be opposed to bona fide third parties which may have acquired and title in the competent land registry. validly registered a title on the asset. The way to split the right over the land and the right over the Also mortgages are compulsorily registrable and registration is construction erected thereon (or thereunder) is the right to build required for the validity and existence of the mortgage. (“diritto di superficie”).

4.4 What rights in land are not required to be registered? 3.3 Is there a split between legal title and beneficial title in your jurisdiction and what are the registration consequences of any split? Leases (if their initial term does not exceed nine years), rent-to-buy contracts, financial lease on real estate assets and bailment contracts are not required to be registered in the land registry. All such In principle there is not a split between legal title and beneficial contracts, however, must be recorded in writing and filed with the title under Italian law. However, the Civil Code provides for the local tax office (Agenzia delle Entrate) for registration tax purposes. possibility to limit the freehold title on real estate assets (which The lack of registration of a lease may allow the tenant to claim the is unlimited in time) by granting a usufruct (“usufrutto”), which invalidity of the contract. allows the beneficiary to make full use of the asset and take any A preliminary contract by which the parties undertake to sign a sale economic benefit of it for a limited period of time (which cannot and purchase contract can be registered in order to grant priority to exceed the life of the beneficiary or, for legal entities, thirty years). the future title of the promissory purchaser; however the effects of The usufruct is recorded in the land registry and can be validly the registration are limited to three years. opposed to any third party. Finally, foreign trusts can be recognised in Italy. In this case the title on the assets is recorded in the name of the trustee, indicating 4.5 Where there are both unregistered and registered land or rights is there a probationary period following first his role and the fact that the property shall be managed in the interest registration or are there perhaps different classes of a beneficiary; this annotation, however, can have a maximum or qualities of title on first registration? Please give duration of 90 years. details. First registration means the occasion upon which unregistered land or rights are first registered in the registries. 4 System of Registration There is only one form of registration of a title and no probationary period applies. Limited to mortgages, it is possible to register more 4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered? than one mortgage; in this case, the mortgages registered after the first one are granted a right which is subordinated to the first degree mortgage, unless this latter is cancelled and consequently the second Private ownership of land must be registered. Ownership of real registered mortgage acquires all of the benefits of a first registration. estate is evidenced by the corresponding public deed of sale and purchase or other contracts granting a title on real estate. All such In addition, in some cases it is possible anticipating the effects of contracts, as well lease contracts for a term in excess of nine years, registration by registering a preliminary sale and purchase contract have to be registered in the land registries. When registered, title is or the filing of a judicial suit aimed at ascertaining the title on a enforceable against bona fide third parties with a potential interest property; in these cases, when the title is actually transferred or in the real estate. ascertained, the effects date back to the time of the first registration.

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with all relevant facts of the property (titleholder and any registered 4.6 On a land sale, when is title (or ownership) transferred third party rights). to the buyer?

Transfer of title has to be formalised in a public deed before a 5.4 Can compensation be claimed from the registry/ registries if it/they make a mistake? notary public. After that, the buyer can register the title with the corresponding land registry to protect the title against third parties. Yes, it is feasible to claim compensation from a land registrar who Title transfers on delivery of the real estate to the buyer, which makes mistakes during the registration process. The registrars are normally occurs (unless agreed otherwise) when a notarial deed is legally liable for all damages and costs they might have caused. signed. It is possible deferring transfer of title to the satisfaction of Italy a condition precedent or until the price is fully paid. 5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he 4.7 Please briefly describe how some rights obtain might reasonably need regarding encumbrances and priority over other rights. Do earlier rights defeat later other rights affecting real estate? rights? There are no restrictions on public access to the register. Any buyer Registered rights prevail over other rights based on priority in or other interested person may obtain information on title and any applying for registration to the competent land registry. As indicated registered encumbrances and also copies of the relevant notarial deed. in question 4.5 above, in some cases it is possible anticipating the effects of registration. 6 Real Estate Market 5 The Registry / Registries 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally 5.1 How many land registries operate in your jurisdiction? be involved in a real estate transaction in your If more than one please specify their differing rules jurisdiction? Please briefly describe their roles and/or and requirements. duties.

Italian land registries are organised and maintained on a provincial Buyers and sellers are usually advised by real estate consultants basis. However, they are managed by the same governmental (one advisor per party) and, in most cases, one of them has acted agency (Agenzia del Territorio) and access is unified through a also as broker of the deal. However, in some cases the broker can national virtual portal. be unrelated to either the purchaser or the seller. In some regions of North-Eastern Italy a somehow different Technical advisors for the due diligence are also commonly used. registration system applies (sistema tavolare), which is managed by A Notary must be involved for the execution of the deed of sale and the local provincial authority. purchase or the lease agreement (if the terms of the lease exceeds Furthermore, the Cadastral registry (“Catasto”) contains useful nine years). information on real estate assets (including indication of the owner/s Legal advisors provide legal support and draft the legal and a map describing the property), but its purpose is determining documentation in major transactions, while in minor transactions it the taxable value of a property and not that of certifying the title on is common for the parties to engage directly with the Notary. the property.

6.2 How and on what basis are these persons 5.2 Does the land registry issue a physical title document remunerated? to the owners of registered real estate? Each party bears the costs of its own transaction advisors. These The land registry may indicate the contents of the registry with respect remunerations are freely negotiated with the service providers and to land titles and other rights – mortgages, liens and attachments – may be determined as a percentage of the purchase price or a fixed over a property but that does not constitute a title document. Title to remuneration. real estate is evidenced by the corresponding public deed. The Notary has to be remunerated by both parties based on a national tariff (which can be negotiated); it is a general principle of 5.3 Can any transaction relating to registered real estate law and common practice that the cost of the Notary is paid by the be completed electronically? What documents need purchaser, who also selects him. to be provided to the land registry for the registration Real estate brokers are entitled to claim a fee from both the seller and of ownership right? Can information on ownership of the purchaser, unless their engagement letter provides differently. If registered real estate be accessed electronically? not differently agreed, their fees are in the region of 2–3% of the price.

Transactions relating to registered real estate must be completed in writing, by means of a notarial deed (“atto pubblico”) or a notary 6.3 Do you feel there is a noticeable increase in certificated contract (“scrittura privata autenticata”). Upon signing, the availability of capital to finance real estate transactions in your jurisdiction, whether equity or the notary is obliged to notify the land registry electronically in debt? What are the main sources of capital you see order to get priority of registration, but this must be confirmed by active in your market? delivering the original title deed for registration. Information on ownership can be accessed electronically through a Foreign equity coming from Sovereign Funds, pension funds and national portal. The competent land registry issues an online excerpt private opportunistic funds has been a main driver of real estate

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transaction in Italy in the last five years. Insurance companies and subsequent binding offers). Pre-contractual arrangements are fully added-value funds are also a main equity player in Italian real estate. binding on both parties limited to the above elements, but usually do not bind the parties to execute the sale contract.

6.4 What is the appetite for investors and developers Vendor due diligence in your region to look beyond primary real estate In some cases the seller engages consultants to conduct a pre- markets and transact business in secondary or even sale technical assessment of the property, aimed at assessing its tertiary markets? Please give examples of significant compliance with zoning, building and environmental regulations, secondary or tertiary real estate transactions, if relevant. compliance with the cadastral data, and investigating any existing encumbrances. In many cases a notary is engaged to conduct a Italy search in the land registry and certify the title of the seller and any Real estate investments are currently mainly focused on Milan. existing encumbrances on the property. Secondary markets are highly considered for logistic, tourism and hospitality assets. High street retail also attracts interest in a few Marketing main cities. For major sale transactions, property companies and institutional investors usually engage a consultancy investment firm to make a pre-assessment of the value of the property, organise marketing 6.5 Have you observed any trends in particular market sub sectors slowing down in your jurisdiction in materials and conduct the sale process. terms of their attractiveness to investors/developers? Commercial negotiation Please give examples. Negotiations usually occur between representatives from both of the parties, supervised by lawyers and real estate advisers. In some Transactions on commercial centres and shopping malls have circumstances, negotiations are directly executed between the somehow slowed down, as investors are fousing more and more on parties’ lawyers and advisers. those commercial centres that are modernising their business model.

7.2 Is the seller under a duty of disclosure? What matters 7 Liabilities of Buyers and Sellers in Real must be disclosed? Estate Transactions The seller must act in good faith without concealing any information that, if known by the buyer, would prevent the buyer 7.1 What (if any) are the minimum formalities for the sale from completing the transaction. and purchase of real estate? The Italian Civil Code allows a buyer to challenge the validity of the contract or to claim for a reduction of the price in case the seller has Formalities wilfully omitted to disclose elements which may affect materially Any contract transferring title on real estate must be executed and the value of the property. recorded in writing. In addition, execution in the presence of a notary is required to file the relevant contract in the land registries Also, the Italian Civil Code allows a buyer to bring legal actions (and, for mortgages, for the validity of the title). against a seller for title defects and lack of conformity of the property. The contract must contain some mandatory information on Buyers also have access to public registries (land registry and the property, including: (a) the cadastral identification; (b) the cadastral office) in order to make their own assessment on the title confirmation of consistency between the cadastral data and the of the seller. effective conditions of the property; (c) the permitted use of the property; (d) the titles on the basis of which the buildings existing on 7.3 Can the seller be liable to the buyer for the property were built; (e) the allegation of the energy performance misrepresentation? certification; (f) the allegation of a seismic compliance certification (not yet applicable on a general basis); (g) the means of payment Yes. Pursuant to the Italian Civil Code a seller is always liable in used to pay the price; and (h) the identification of the broker which case it has wilfully omitted to provide information to the buyer has intermediated the transaction (if any). which could be relevant for the determination of the price or even The execution of the notarial sale contract is often preceded by the for determining the decision to buy. signing of a preliminary contract. The liability of the seller regarding elements not known to it can be Preliminary contract mutually agreed among the parties in the contract. The parties may A preliminary sale and purchase contract is usually executed once also agree that the seller is released from any liabilities, other than the parties agree the terms and conditions and satisfactory due in case of lack of title (“evizione”). diligence have taken place. The preliminary contract contains the transactions terms and 7.4 Do sellers usually give contractual warranties to the conditions, including: (i) the object of the sale; (ii) the purchase buyer? What would be the scope of these? What is price; (iii) any conditions precedent; (iv) the timing for closing; (v) the function of warranties (e.g. to apportion risk, to the payment of a security deposit (“caparra confirmatoria”); and give information)? Are warranties a substitute for the (vi) the seller representations, warranties and indemnities. buyer carrying out his own diligence? Additional steps of a sale process may include: The Italian Civil Code provides that the seller is liable in case of Pre-contractual arrangements lack of title (total or partial), third parties right on the properties and Arrangements are usually related to: (i) confidentiality and non- lack of conformity of the property (“garanzia per vizi”). However disclosure; (ii) temporary exclusivity for due diligence and the liability of the seller for lack of conformity under the Civil Code negotiation purposes; and (iii) making offers (initial offers and is limited to one year after the sale and claims are subject to a short

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deadline (eight days from discovery). For this reason, it is usual that charge over receivable rents; (iii) a charge over all bank contracts for major transactions contain a negotiated set of seller’s accounts into which all rents must be paid; and (iv) a charge representations and warranties and indemnification obligations, over all relevant contracts including leases, insurance policies which add to (or even replace) those provided in the Civil Code. and construction guarantees. The warranties most frequently given by the seller relate to: (b) Corporate guarantees. Corporate guarantees are sometimes demanded by lenders if the borrower is using SPVs. (i) powers of the seller to enter into the transaction; (ii) the non- existence of charges and encumbrances other than those registered (c) Insurance coverage. Lenders will require the borrowers to at the land registry; (iii) tenancy status and validity of the main take out appropriate buildings insurance. conditions of the lease; (iv) compliance with applicable planning (d) Covenants. The loan documentation will also contain both rules; (v) compliance with environmental legislation; (vi) regular financial covenants (loan to value, debt service cover) and Italy nonfinancial covenants (obligations to maintain the asset in payment of any applicable property tax; (vii) validity of property good state of repair or disposal limitations) to be granted by insurance policies; and (viii) the absence of legal disputes or court the borrower in order to ensure that the value of the asset is proceedings affecting the property. maintained.

7.5 Does the seller warrant its ownership in any way? 8.3 What are the common proceedings for realisation of Please give details. mortgaged properties? Are there any options for a mortgagee to realise a mortgaged property without The warranty on title is provided for by law (the Civil Code) and involving court proceedings or the contribution of the cannot be waived by the parties. In any event, purchasers are fully mortgagor? protected if, acting as a bona fide purchaser, they acquire a title from a registered owner. As a general rule, the lender with a secured loan needs to start a foreclosure proceeding, where the main step is the public auction of the asset. 7.6 What (if any) are the liabilities of the buyer (in addition to paying the sale price)? There are two types of proceedings: (i) judicial proceeding, to be followed before the Italian courts; and (ii) extrajudicial proceedings, The buyer is responsible to pay the purchase price and any applicable to be followed before a Notary Public. The extrajudicial proceeding transfer taxes, and pay its portion of the broker fees (if any). may only be followed if agreed upon by the parties. According to a recent legislation, a credit facilities contract may provide for the right of the lender to take possession of the mortgaged 8 Finance and Banking asset or any other assets in case of payment default and sell it on the market: in case the market value or the sale price exceeds the 8.1 Please briefly describe any regulations concerning residual debt, the lender must transfer the excess to the borrower; on the lending of money to finance real estate. Are the the contrary, in case the sale price is less than the residual debt, the rules different as between resident and non-resident borrower is released from any residual obligation. persons and/or between individual persons and corporate entities? 8.4 What minimum formalities are required for real estate lending? The Italian Civil Code provides general regulation of loans, while the Unified Banking Act (Legislative Decree no. 385 of 1 September A mortgage over real estate must be granted in a notarial deed and 1993) regulates bank financing and some aspects of mortgage loan. is only valid when registered with the land registry. The draw of Different rules (in particular regarding information duties and the money under the facilities agreement must also be recorded in a enforcement in case of payment default) apply to loans to individual notarial deed, in order to have a direct enforcement title against the persons acting as ‘consumers’ and corporate entities. borrower, without having to conduct proceedings in court in order to There are not different provisions regarding the lending to non- obtain an enforcement title. resident persons, but a number of additional formalities may apply A charge over income arising from lease tenants is usually notarised, (e.g., a non-resident person shall obtain an Italian tax ID code). but notarisation is not mandatory. The tenants must be notified of EU resident banks are also allowed to provide real estate financing the existence of the pledge in order to make it enforceable against at the same conditions as Italian banks, but the payment of interests them. on loans can be subject to taxation in Italy. In share deals, it is common to grant a pledge over the shares of the SPV acquired by the buyer; this must be granted before a notary 8.2 What are the main methods by which a real estate public. lender seeks to protect itself from default by the borrower? 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other Loans for minor transactions often do not contain any provisions creditors? supplementing those provided by the law for mortgage loan, but often the lender seeks additional protection requesting a bank The protection of a real estate lender depends on the priority deposit, a personal guarantee by the borrower or any borrower in ranking of the secured loans and this priority is subject to the related person and a life and disability insurance on the borrower. registration principle, unless mutually agreed between the borrower Structured financing for major transactions usually include: and the lender. In some cases tax authority claims for unpaid taxes (a) Security package. A security package for a real estate loan have priority over the lender’s mortgage. will usually comprise: (i) a mortgage over the asset; (ii) a

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In case VAT applies, the seller charges VAT to the buyer and the 8.6 Under what circumstances can security taken by a seller then pays the VAT to the tax authorities. In some cases a lender be avoided or rendered unenforceable? reverse charge mechanism applies, allowing the buyer not to disburse the VAT amount. In case bankruptcy of the borrower is declared within 10 days of The general rate of VAT is 22%. However, a reduced rate of 10% the creation of the mortgage, the mortgage can be challenged by applies to some residential and instrumental buildings; a further the bankruptcy officers. Other securities can also be challenged in reduced 4% rate applies to the sale of residential properties which case of bankruptcy, if it appears that the lender was aware of the becomes the primary house of the buyer. insolvency of the borrower. Italy 9.5 What other tax or taxes (if any) are payable by the 8.7 What actions, if any, can a borrower take to frustrate seller on the disposal of a property? enforcement action by a lender?

The seller is responsible for income tax on the capital gain. The A borrower can file an objection against the enforcement action by seller is also jointly liable with the buyer for the payment of transfer the lender if it is able to demonstrate that no default occurred or taxes. that the lender omitted any of the formalities required to commence enforcement proceedings. 9.6 Is taxation different if ownership of a company (or other entity) owning real estate is transferred? 9 Tax Taxation of share deals is completely different and, normally, 9.1 Are transfers of real estate subject to a transfer tax? significantly lower. However, tax authorities scrutinise with How much? Who is liable? attention real estate share deals in order to ascertain whether the parties have simulated a share deal only to reduce the taxation of the Any contract transferring or granting right on real estate is subject transaction, while their real purpose was transferring title on a real to a nominal stamp duty (“imposta di bollo”), to registration estate asset or portfolio. tax (“imposta di registro”), which is regulated by the Unified Registration Act (Presidential Decree no. 131 of 26 April 1986) and 9.7 Are there any tax issues that a buyer of real estate to mortgage and cadastral taxes (“imposta ipotecaria e catastale”). should always take into consideration/conduct due Stamp duty is applied on a fixed basis and depends on the number of diligence on? standardised pages composing the contract. Registration tax is normally applied on a percentage basis, on the value A buyer is always jointly and severally liable with the seller (and or price of the transaction (depending on various circumstances). the notary) for the payment of the transfer taxes, regardless of any Standard rates vary from 2% to 9%. Registration tax applies on a allocation agreement between the seller and the buyer. fixed nominal basis in case the transaction is subject to VAT. In case the seller omitted to pay any applicable property tax or Mortgage tax has a standard rate varying from 2% to 3% and transfer tax, the tax authorities may enforce a lien on the relevant Cadastral tax standard rate is 1%. Such rates are reduced by 50% property which prevails over a mortgage. in case of transactions involving real estate funds or SIIQ (Italian REITs). Mortgage and Cadastral taxes can also apply on a fixed nominal basis in case the transaction is subject to VAT. 10 Leases of Business Premises

9.2 When is the transfer tax paid? 10.1 Please briefly describe the main laws that regulate leases of business premises. Transfer taxes have to be paid within 30 days of transfer. Payment is usually made by the Notary, which is jointly liable with the seller The following laws regulate the lease of business premises: and the buyer for payment. ■ the Italian Civil Code; and ■ Law no. 392 of 27 July 1978, which regulates leases of urban 9.3 Are transfers of real estate by individuals subject to properties. income tax? 10.2 What types of business lease exist? The capital gain on disposal (i.e., the difference between the sale value and the original acquisition value, including all costs) is fully There are mainly three types of business leases: taxable, unless the asset was used as primary house or was acquired ■ leases regulated by the mandatory rules contained in the Law more than five years before the disposal. no. 392/1978; ■ major leases (i.e., where the annual rent exceeds Euro 9.4 Are transfers of real estate subject to VAT? How 250,000) for which the parties may freely negotiate departing much? Who is liable? Are there any exemptions? from the mandatory rules of the Law no. 392/1978; and ■ leases of business concerns, to which the Law no. 392/1978 VAT is payable subject to option by the seller for all sales or does not apply and are regulated by the Civil Code. purchases of real estate when the transaction takes place in the framework of a business activity. VAT is compulsory in case the sale is executed by a construction company within five years of the construction or refurbishment of a building.

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10.3 What are the typical provisions for leases of business 10.6 Does the landlord and/or the tenant of a business premises in your jurisdiction regarding: (a) length of lease cease to be liable for their respective term; (b) rent increases; (c) tenant’s right to sell or obligations under the lease once they have sold their sub-lease; (d) insurance; (e) (i) change of control of interest? Can they be responsible after the sale in the tenant; and (ii) transfer of lease as a result of a respect of pre-sale non-compliance? corporate restructuring (e.g. merger); and (f) repairs? In case the tenant assigns the lease, it remains jointly liable with the In leases regulated by the Law no. 392/1978 the following mandatory assignee for any unpaid costs related to period before the assignment. provisions apply: Italy (a) the term cannot be less than six years, renewable for six- 10.7 Green leases seek to impose obligations on year periods (nine years for tourism, hospitality and most landlords and tenants designed to promote greater entertainment properties); sustainable use of buildings and in the reduction of (b) rent increases are ordinarily limited to 75% of the annual the “environmental footprint” of a building. Please consumers’ inflation index; briefly describe any “green obligations” commonly (c) the tenant’s right to assign the lease or sub-lease is subject found in leases stating whether these are clearly to consent by the landlord; however, the tenant can always defined, enforceable legal obligations or something assign the lease or sub-lease the property jointly with the not amounting to enforceable legal obligations (for assignment or lease of its business concern; example aspirational objectives). (d) property insurance normally has to be paid by the landlord, while the tenant can be requested to buy tenant insurance; The main “green obligation” lies with the landlord, since he is (e) change of control of the tenant and corporate restructuring obliged to provide an energy performance certificate to the tenant do not affect the continued validity of the lease, until specific before signing the lease contract. provisions are included in the lease contract; and Recent leases of grade “A” properties often contain a best efforts (f) the tenant is responsible for ordinary maintenance, while provision by the tenant to maintain energy efficiency policies and landlord is responsible for any extraordinary maintenance to provide information to the landlord on its energy consumption and repairs. levels.

10.4 What taxes are payable on rent either by the landlord or tenant of a business lease? 11 Leases of Residential Premises

Business leases are subject to registration tax with a standard 2% rate 11.1 Please briefly describe the main laws that regulate (reduced to 1% in case landlord is subject to VAT). leases of residential premises. In addition, the landlord may opt for the application of VAT, at the standard 22% rate. The following laws regulate the lease of residential business premises:

10.5 In what circumstances are business leases usually ■ the Italian Civil Code; terminated (e.g. at expiry, on default, by either party ■ Law no. 392 of 27 July 1978, which regulates leases of urban etc.)? Are there any special provisions allowing a properties; tenant to extend or renew the lease or for either party ■ Law no. 431 of 9 December 1998, which regulates leases of to be compensated by the other for any reason on residential properties; termination? ■ Law Decree no. 133 of 12 September 2014, which regulates rent-to-buy contracts; As a general rule, upon expiry of the initial six-year (or nine-year) term only the tenant may avoid the automatic renewal of the lease. ■ Law no. 208 of 28 December 2015, which regulates financial leasing of residential properties; and The Landlord may avoid the renewal only in case it intends to use the property for its own business or to carry out a major refurbishment ■ Legislative Decree no. 206 of 6 September 2005, which of the property. regulates contracts granting a time share right on a real estate property. Also, the Law no. 392/1978 provides that only the tenant can be granted an early termination right; such a right can be granted to the landlord only in major leases. 11.2 Do the laws differ if the premises are intended for multiple different residential occupiers? The contract can contain provisions allowing either party to terminate the lease in case of material breach of contract by the other party. No, the same legislation applies to premises for single tenants and For retail leases, in case the landlord denies the renewal of the lease, premises intended for multiple residential occupiers. under the provisions of the Law no. 392/1978 the tenant is entitled to receive a compensation for loss of business continuance and has Different regulations may apply with respect to the lease of state or a right of first refusal on any new lease. The tenant has also a right Municipality owned houses offered to low income families, and to of first refusal in case the landlord intends to sell the leased property. temporary leases for touristic purposes.

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■ granting authorisations for special local planning, new 11.3 What would typical provisions for a lease of constructions, refurbishment of existing buildings and change residential premises be in your jurisdiction regarding: of the permitted use of land and buildings; and (a) length of term; (b) rent increases/controls; (c) the ■ expropriating land for public use. tenant’s rights to remain in the premises at the end of the term; and (d) the tenant’s contribution/obligation The protection of the environment and the implementation and to the property “costs” e.g. insurance and repair? application of the national environmental law (Legislative Decree no. 152 of 3 April 2006) is also delegated to local agencies and The following mandatory provisions apply to residential leases: legislation, organised at Regional and Municipality level. (a) the initial term cannot be less than four years, renewable for Italy four-year periods (the initial term may reduce to three years, 12.2 Can the state force land owners to sell land to it? If with a renewal of at least two years, for leases that comply so please briefly describe including price mechanism. with local agreements aimed at containing rent increases); (b) rent increases are ordinarily limited to 100% of the annual Yes; land owners can be forced to sell land which is included in consumers’ inflation index; a planning sector or has to be dedicated to construction of public (c) at the end of the initial term the landlord may avoid the renewal infrastructure or public service/utility facilities and buildings. The only in limited circumstances: direct use of the premises for living purposes; refurbishment of the building; the tenant authority to expropriate land is attributed not only to the central has another house available in the same Municipality; the Government, but also to Regions, Municipalities and other public landlord intends to sell the premises provided that he does agencies. not have other properties available; and provided that he The compensation for the owner is determined by the authority that grants the tenant a right of first refusal. At the end of the first has promoted the expropriation process on the basis of cadastral renewal period any of the parties may commence a renewal or termination procedure; and values and other publicly available information; the owner may challenge the proposed remuneration, which in such case is finally (d) tenant is generally responsible for ordinary maintenance, while landlord is responsible for any extraordinary determined by an expert appointed by the local court. maintenance and repairs. National agreements between It must be taken into account that in most cases that valuation will owners’ and tenants’ associations provide criteria for the not be consistent with the open market value of the land at that time. allocation of operating costs to the tenant and landlord.

12.3 Which bodies control land/building use and/or 11.4 Would there be rights for a landlord to terminate a occupation and environmental regulation? How do residential lease and what steps would be needed buyers obtain reliable information on these matters? to achieve vacant possession if the circumstances existed for the right to be exercised? As indicated in question 12.1, land and building use and occupation is controlled by the local municipalities and local police. Local The landlord can terminate the lease early in cases where the tenant agencies at Regional and Municipal level (ARPA – Agenzia Regionale is in default of payment of the rent (for even only one monthly Protezione Ambiente and ASL – Azienda Sanitaria Locale) and the instalment) by commencing special proceedings (“sfratto per local Fire Brigade are in charge of supervising and controlling the morosità”). However, the tenant may stop proceedings (up to four correct application of environmental law and building regulations times in a four-year period) by paying any amount due to the landlord that are relevant to human health. before or during the proceedings. Once the eviction of the tenant is confirmed by the court, if the tenant does not release the premises, Buyers may obtain information on the permitted use of a land/ the landlord may need to commence an enforcement procedure to building, building permits and local public constraints through obtain vacant possession, which may stay for a number of months. access at the local Municipality offices. Obtaining information on the actual status of a property and its environmental compliance is usually more complicated and collaboration by the owner is required. 12 Public Law Permits and Obligations

12.4 What main permits or licences are required for 12.1 What are the main laws which govern zoning/ building works and/or the use of real estate? permitting and related matters concerning the use and occupation of land? Please briefly describe them Building works and include environmental laws. Permits required for building works differentiate considerably depending on the relevance of works and their impact on the Regions and municipalities in Italy are responsible for country and building/land. town planning in their designated territory. Consequently, there are multiple local planning systems in Italy. However, these systems are The development of a new building is always subject to a prior inspired by the same planning law system. Therefore, the systems permit granted by the local Municipality, or to a previous special have common institutions and regulations. planning agreement with the Municipality which sets the framework for subsequent construction. Municipalities are the most important authorities concerning town planning and are responsible for the following: Refurbishment of existing buildings can require a building permit if the permitted use of the building is affected, or its total surface or its ■ determining the local planning system (“PRG – Piano Regolatore Generale” or “PGT – Piano di Governo del aspect are materially changed; in most cases, however, construction Territorio”), which provides for the permitted use of land; works can be commenced without requesting a permit, provided that the relevant project is notified to the local authorities before the ■ approving the local building regulation (“Regolamento Edilizio”), which sets the standard to be met in constructions works are commenced. (in compliance with national guidelines and legislation and the general provisions of the Civil Code);

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Once construction is terminated, certification must be obtained attesting that the building is fit for occupancy, complies with anti- 12.8 How can e.g. a potential buyer obtain reliable seismic regulation and fire prevention regulation. As to occupancy information on contamination and pollution of real estate? Is there a public register of contaminated land and seismic compliance, the certification of technical consultants in your jurisdiction? engaged by the developer in most cases replaces the need of a certification by the Municipality, while fire prevention compliance Legislative Decree no. 152 of 3 April 2006 delegates the Regional needs to be certified by the local Fire Brigade. authorities to maintain a register of sites interested by an Use of real estate environmental clean-up procedure. Use of real estate may require an authorisation by the local authorities However, only major contaminations that were ascertained by Italy depending on the nature of such real estate (e.g., the use of public or denounced to the competent authorities are recorded in such areas and other state owned infrastructures or natural resources and registers. Access to information on minor contamination is normally areas is subject to a concession) or the activity to be conducted in limited to the owner. the property (e.g. restaurant, retail, entertainment, hospitality, health assistance, etc.). 12.9 In what circumstances (if any) is environmental clean- up ever mandatory? 12.5 Are building/use permits and licences commonly obtained in your jurisdiction? Can implied permission Environmental clean-up is always mandatory as from the be obtained in any way (e.g. by long use)? declaration of contamination by the environmental authorities until the remediation is complete. As a general rule the originator of As indicated in question 12.4, in many cases permits and licences the contamination is responsible for the clean-up; however, under can be replaced by a certification of a technical consultants. given circumstances the owner of a contaminated site can also be However, in all cases where a permit or licence must be granted by responsible for the clean-up. In addition, in case the parties that the Municipality, no implied permissions are allowed. are responsible for the clean-up are in default, the public authorities In some cases the procedure to obtain a permit or licence can be may carry out the clean-up procedure and create a charge on the facilitated if the law provides that in case the Municipality fails to contaminated land to cover the relevant costs. reply within a given deadline, the permission/licence is intended to be granted (“silenzio-assenso”). 12.10 Please briefly outline any regulatory requirements for the assessment and management of the energy 12.6 What is the appropriate cost of building/use permits performance of buildings in your jurisdiction. and the time involved in obtaining them? Legislative Decree no. 192 of 19 August 2005 provides for the The fees for obtaining the relevant permits are defined locally by assessment of the energy performance of any building containing municipal authorities and normally include: (a) a contribution for electrical and heating systems. The relevant energy performance urbanisation works strictly related to the project; (b) a contribution certificate issued by authorised consultants must be disclosed to the for more general urbanisation works; and (c) a fee remunerating the purchaser and to the tenant of a property. allowed surface of the building. In addition, local regulations adopted at Municipality levels may Contributions under (a) and (b) are often replaced by the undertaking provide for the granting of benefits in terms of additional permitted of the developer to carry out the relevant infrastructure works. surface or for discounts on construction costs for new or refurbished The standard term for obtaining a building permit is in the region of buildings that meet specific energy performance requirements. three months from the complete filing. However, the term can be delayed considerably in case the opinion of different commissions, agencies or entities is required (e.g., opinion on the landscaping impact 13 Climate Change of the project, opinion of the local agency of the Ministry of Culture in case of historical buildings, opinion of the Fire Brigade, etc.). 13.1 Please briefly explain the nature and extent of any regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions 12.7 Are there any regulations on the protection of historic trading scheme). monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real estate? EU Directive no. 31/2019 and Italian Legislative Decree no. 63 of 2013 provide that within the end of 2020 all new buildings must The Cultural Heritage and Landscape Act (Codice dei beni culturali meet the quite “zero energy consumption” standards. The deadline e del paesaggio – Legislative Decree no. 42 of 22 January 2004) is anticipated to be 2018 for public buildings. provides for limitations on the ownership, transfer and refurbishment Various Italian Regions are implementing local schemes aimed at of real estate assets having historical value and those characterising accelerating the implementation of the above legislation. or having a significant impact on the landscape.

In particular, the Ministry of Culture and other local agencies have a 13.2 Are there any national greenhouse gas emissions right of first refusal in case of transfer of a property which was declared reduction targets? of historical, architectural or landscaping interest; accordingly, the deed of sale must be notified to the relevant authorities, which Please see question 13.1 above. normally have 60 days to exercise the right of first refusal.

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13.3 Are there any other regulatory measures (not already Davide Braghini mentioned) which aim to improve the sustainability of Gianni, Origoni, Grippo, Cappelli & Partners both newly constructed and existing buildings? Piazza Belgioioso 2 20121 Milan Local regulations adopted at Municipality levels may provide for Italy the granting of benefits in terms of additional permitted surface Tel: +39 02 763741 or for discounts on construction costs for new building that meet Email: [email protected] specific energy performance requirements. URL: www.gop.it

Italy Additional requirements for “green housing” are set by private organisations (e.g. LEED, Casa Clima) and can be adopted on a Davide Braghini is an Italian lawyer, member of the Bar of Milan since voluntary basis. January 1997, and a partner at law firm Gianni, Origoni, Grippo, Cappelli & Partners, Milan office. Davide specialises in mergers and acquisition and investments with a focus on the real estate industry. His practice includes negotiating sale and purchase of real estate assets and companies, co-investment and joint venture agreements, real estate investment funds and alternative investment vehicles, negotiating the relevant management agreements and investment agreements, advising on real estate development projects, construction, property management and lease agreements. He has worked on the legal side of the most complex real estate transactions that have taken place in the last few years, including the development of the Porta Nuova area in Milan. Davide lectures on a regular basis on real estate law matters. He is fluent in English and has an excellent knowledge of Spanish and French.

Gianni, Origoni, Grippo, Cappelli & Partners has developed a unique experience in real estate transactions. The firm real estate group engages in a multi-disciplinary practice. With an integrated network of leading individuals, we have the resources and the know-how to successfully handle all aspects of a real estate transaction. Experts of corporate law and practice, zoning and building regulations, protection of the environment, corporate finance, tax laws and capital markets work together to get the deal done. Some of the transactions in which we have been involved in the last decade are milestones in the Italian real estate industry. Our integrated approach allows us to assist our clients in a full range of issues including development, financing, listing in capital markets, construction of large-size projects, creation and management of real estate funds, corporate reorganisations and assets spin-offs.

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Japan Hideaki Ozawa

Nishimura & Asahi Yujin Gen

securities under the Financial Instruments and Exchange Law and, 1 Real Estate Law accordingly, the Financial Instruments and Exchange Law governs the transactions of such trust beneficial interests. 1.1 Please briefly describe the main laws that govern 9 Resident Lodging Business Act (Jutakushukuhakujigyoho) real estate in your jurisdiction. Laws relating to The Resident Lodging Business Act regulates residential building leases of business premises should be listed in rental business during the owner’s absence. The act would be response to question 10.1. Those relating to zoning and environmental should be listed in response to enforced by January 2018. question 12.1. Those relating to tax should be listed in response to questions in Section 9. 1.2 What is the impact (if any) on real estate of local common law in your jurisdiction? In Japan, it is mainly the Civil Code that governs real estate transactions. Real estate property rights are subject to the law of Under the Constitution, local governments are authorised to enact property rights in Book 2 of the Civil Code. This law regulates local regulations within the scope of the law, and some of these local ownership, joint ownership, assignment and other relevant matters. regulations substantially affect the use of land. Real estate contract transactions are subject to the law of contracts in Book 3 of the Civil Code. This law regulates the formation of contracts, the rights and duties of the parties and other relevant 1.3 Are international laws relevant to real estate in your matters. jurisdiction? Please ignore EU legislation enacted locally in EU countries. Other laws relevant to real estate: 1 The Commercial Code There are no international laws relevant to real estate in Japan in any The Commercial Code has several provisions on real estate material respect. transactions between companies. 2 The Land Lease and House Lease Law 2 Ownership The Land Lease and House Lease Law governs the relationship between the landlord and the tenant. This law applies to leases of business premises, as well as residential premises. 2.1 Are there legal restrictions on ownership of real estate 3 The Law of Real Estate Registration by particular classes of persons (e.g. non-resident persons)? The Law of Real Estate Registration governs the registration process of real estate. In general, there are no legal restrictions on the ownership of real 4 The Law for Condominiums (Kubunshoyuho) estate by particular classes of persons. However, it should be noted The Law for Condominiums governs the relationship between unit that under the Foreign Exchange and Foreign Trade Law, non- owners of a building. residents in Japan are, in certain cases, required to report real estate 5 The Real Estate Transactions Business Law transactions to the relevant governmental entity after such non- (Takuchitatemonotorihikigyoho) residents have acquired real estate. The Real Estate Transactions Business Law governs the brokerage real estate business. 3 Real Estate Rights 6 The Building Standard Law The Building Standard Law provides standards concerning the 3.1 What are the types of rights over land recognised in construction of buildings. your jurisdiction? Are any of them purely contractual 7 The City Planning Law between the parties? The City Planning Law regulates land development and zonings. 8 Financial Instruments and Exchange Law Ownership The trust beneficial interests under a property trust agreement by Under Japanese law, land and buildings are considered to be which real estate is entrusted to a property trustee are recognised as separate and independent real properties and ownership of land

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and the building which stands on such land can belong to different persons. Accordingly, if A owns land and B owns a building on the 3.3 Is there a split between legal title and beneficial title land, it is necessary that B leases the land or obtains the superficies in your jurisdiction and what are the registration consequences of any split? (see below) in order to secure his ownership of the building. If B leases the land, this lease is called a land lease. Legal title and beneficial title of real estate cannot be split directly. Ownership is defined as a right to use, make a profit from and dispose However, legal title and beneficial interest can be deemed to be of real estate under the Civil Code. Ownership is categorised as a split by entrustment of real estate. If real estate is entrusted to a real right. A “real right” (bukken) is a right that a person has over a trustee, the legal title of the real estate is acquired by the trustee, thing and is distinguished from a “right arising out of obligational and the trust beneficial interest of the real estate is acquired by the Japan relationships” (saiken), which arises out of the relationships between trust beneficiary. The entrustment should be registered after the persons. Real rights can be claimed against any other persons after entrustment, and when the trust beneficiary can be identified. their perfection by registration; hence, in this regard, ownership is not purely contractual. Under Japanese law, ownership can be held by several persons. 4 System of Registration Such ownership is called joint ownership (kyoyu) and is subject to the Civil Code. Unit ownership (kubunshoyu) of a building under 4.1 Is all land in your jurisdiction required to be condominium ownership is subject to the Law for Condominiums, registered? What land (or rights) are unregistered? as well as the Civil Code. Other property rights to use another person’s real estate: Almost all land is already registered, except for government 1 Superficies (Chijyoken) property. With regard to buildings, such are required to be registered Superficies is a property right to use another person’s land for the under the Law of Real Estate Registration but, in practice, some purpose of the buildings and other structures thereon. Superficies buildings remain unregistered until it becomes necessary to perfect can be created for installations underground or above the land. the ownership against a third party (e.g. at the time of the purchase Superficies is not purely contractual due to its character as a property of the building). right. 2 Servitude (Chiekiken) 4.2 Is there a state guarantee of title? What does it Servitude is defined as a property right to use another person’s land guarantee? for the convenience and benefit of one’s own land (e.g. right of way). Servitude is not purely contractual due to its character as a There is no state guarantee of title. However, under case law, any property right as well. interests which are registered are deemed to be true and the burden of proof is imposed on the party who argues that the registered Leases: interests are null and void. 1 Lease with rents (Chintaishaku) A lease is categorised as a contractual right and obligation under the Civil Code. However, under the Land Lease and House Lease Law: 4.3 What rights in land are compulsorily registrable? What (if any) is the consequence of non-registration? (i) a tenant of the land who owns a registered building on the land may assert his right against a new owner of the land; and (ii) a tenant of the building who was given possession of the building may assert No rights over land are compulsorily registrable. It should be noted his right against a new owner of the building. Hence, in practice, a that real estate transactions take effect upon the mutual agreement lease is not purely contractual. of the parties and no formalities, including registration, are required. However, the holder of a real estate interest cannot assert its interest 2 Lease without consideration (Shiyotaishaku) in real estate against third parties if such interest is not registered. The Land Lease and House Lease Law does not apply to leases Therefore, in practice, interests in real estate are likely to be without consideration. Hence, under a lease without consideration, registered. a lessee can only make claims against the lessor.

4.4 What rights in land are not required to be registered? 3.2 Are there any scenarios where the right to a real estate diverges from the right to a building See the answer to question 4.3 above. constructed thereon?

As described in question 3.1 above, land and buildings are considered 4.5 Where there are both unregistered and registered land to be separate and independent real properties, and therefore, to be or rights is there a probationary period following first accurate, the right to the plot of land does not diverge from the registration or are there perhaps different classes or qualities of title on first registration? Please give right to a building constructed thereon. However, it is considered details. First registration means the occasion upon that a lessee who leases a building can use the site as well in such which unregistered land or rights are first registered a manner as needed for the normal use of the building without a in the registries. specific lease or superficies for the site. This right of a lessee of a building originates from the right of the lessor of the building to use There is no probationary period following first registration and there the site. In that context, we can say that there is a scenario where are no different classes of title on first registration. the right to the plot of land diverges from the right to a building constructed thereon.

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4.6 On a land sale, when is title (or ownership) transferred 5.4 Can compensation be claimed from the registry/ to the buyer? registries if it/they make a mistake?

Ownership is transferred to the buyer in accordance with the Under the State Compensation Law, compensation can be claimed contract. In practice, sale and purchase agreements normally from the registry if the relevant officials make a mistake in the provide that ownership is transferred to the buyer once the buyer course of registration, either negligently or intentionally. makes full payment of the purchase price.

5.5 Are there restrictions on public access to the

4.7 Please briefly describe how some rights obtain register? Can a buyer obtain all the information he Japan priority over other rights. Do earlier rights defeat later might reasonably need regarding encumbrances and rights? other rights affecting real estate?

No real estate interest (except for a building lease interest, which can There are no restrictions on public access to the registry. However, be perfected by delivery, and certain liens) can be perfected without it should be noted that one should examine written agreements in registration. Namely, no real estate interest has priority until it has order to obtain all of the information one might need because the been registered over any real estate interests created on the real details of interests over real estate, including leases or mortgages, do estate. Further, priority among registered real estate encumbrances not necessarily fall within the scope of registrable matters. (e.g., mortgages) is determined, in general, by the order in which they were registered. Earlier registered encumbrances have priority over later registered encumbrances. 6 Real Estate Market

6.1 Which parties (in addition to the buyer and seller 5 The Registry / Registries and the buyer’s finance provider) would normally be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or 5.1 How many land registries operate in your jurisdiction? duties. If more than one please specify their differing rules and requirements. a) Selling and purchasing agents (or realtors) One real estate registry, the Legal Affairs Bureau, operates in Japan. The real estate broker, named “takuchitatemono-torihikigyosha”, would normally be involved in real estate transactions in Japan. He makes it his business to act as: (i) an intermediary between the seller 5.2 Does the land registry issue a physical title document and buyer; or (ii) an agent of the seller or buyer. Governmental to the owners of registered real estate? approval is required to engage in such business as a broker. A real estate broker owes a duty of care to his buyer or seller client under Yes, the Land Registry issues a physical title document to the the Real Estate Transactions Business Law, including, without owners of registered real estate. limitations, the duty to disclose important information about the subject property. It should be noted that a real estate broker may 5.3 Can any transaction relating to registered real estate work for both his buyer client and his seller client simultaneously be completed electronically? What documents need when he acts as an intermediary and that, in such cases, he may to be provided to the land registry for the registration receive fees from both parties. of ownership right? Can information on ownership of b) Lawyers registered real estate be accessed electronically? Lawyers would normally be involved in real estate transactions Legally, transactions relating to registered real estate can be which are complicated and sizable in amount. completed electronically. However, please note that, in reality, c) Notaries in many cases the transaction cannot be completed electronically It is unusual for notaries to be involved in real estate transactions. because many documents necessary for registration have not yet d) Others been digitised. Judicial Scriveners (shihoushosi) are involved in almost all real When the ownership of real estate is transferred by sale and estate transactions. They are professionals of the registry and it purchase, in order to apply for the registration of the transfer of the is commonly understood that one cannot complete the registration ownership of the real estate in writing instead of online application, process without their involvement. the following are required: (i) information certifying the cause of registration (toki gennin shomei jouhou), such as the sale and purchase agreement or the document summarising the necessary 6.2 How and on what basis are these persons information; (ii) information for registration identification (touki remunerated? shikibetsu jouhou) or a title document of the seller; (iii) a certificate of a seal impression of the seller; and (iv) a power of attorney The upper limit of compensation for a real estate broker is: (i) 6% from each of the seller and buyer. When the application for the of the amount of a transaction if he acts as an agent; and (ii) 3% of registration is made electronically (i.e., online application), (iii) can the amount of a transaction if he acts as an intermediary under the be replaced by the electronic certificates. Real Estate Transactions Business Law. In the case of (ii), he can be compensated by both the seller and the buyer if both are his clients, Almost all information on ownership of registered real estate can be hence compensation may amount to 6%. accessed electronically. With regard to other persons, it depends on the person as to how and on what basis they are remunerated.

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6.3 Do you feel there is a noticeable increase in 7 Liabilities of Buyers and Sellers in Real the availability of capital to finance real estate Estate Transactions transactions in your jurisdiction, whether equity or debt? What are the main sources of capital you see active in your market? 7.1 What (if any) are the minimum formalities for the sale and purchase of real estate? While we feel there continues to be a gradually increasing trend in the availability of debt finance, we feel the availability of equity The transfer of real estate takes effect upon the mutual agreement of finance is levelling off. The market share prices of the investment the parties and no formalities are needed. Japan equities of J-REITs (investment corporations under the Act on Investment Trusts and Investment Corporations) show a gradually 7.2 Is the seller under a duty of disclosure? What matters decreasing trend. The reason is that it has become difficult to must be disclosed? acquire commercial real estate under the current circumstances for J-REITs. In addition, the Guidelines for IPOs of J-REITs were In general, the seller is not under a duty of disclosure. However, revised by the Tokyo Stock Exchange, because the performance of it should be noted that, under the Civil Code, the seller is liable the J-REITs that conducted IPOs last year was poor. Accordingly, for any latent defects, latent encumbrances and loss of ownership the validity of the offering price is to be reviewed strictly, and IPOs (hereinafter collectively referred to as the “Defects”), even if there have become more difficult than ever before. With regard to loans are no warranties to cover the Defects. The buyer may seek damages for real estate made by Japanese banks, a year-to-year comparison for the Defects and if, as a result of the Defects, the buyer cannot of new loans in the same period this year as of March, 2017 were attain the purpose for which he purchased the property, he may higher than those in the previous fiscal year and the total value of also cancel the agreement. In the event that the real estate broker new loans has continued to show a gradually increasing trend. The is involved in real estate transactions, such real estate broker shall balance of the loans for the real estate industry became the highest provide certain material information of real estate in writing to the ever at the end of March 2017. buyer under the Real Estate Transactions Business Law. From April Our information is based on the survey reports with regard to 1, 2018, the real estate broker is required to provide information Japanese real estate issued by the Ministry of Land, Infrastructure, concerning whether an inspection of the building was conducted Transport and Tourism and other reports issued by the association for and the inspection report for the building (if any) to its client, if the real estate securitisation, trust banks, asset management companies subject property is an existing building. and other companies related to real estate businesses.

7.3 Can the seller be liable to the buyer for 6.4 What is the appetite for investors and developers misrepresentation? in your region to look beyond primary real estate markets and transact business in secondary or even If the seller induces the buyer to enter into a real estate transaction by tertiary markets? Please give examples of significant secondary or tertiary real estate transactions, if fraudulent misrepresentation, the buyer may cancel such transaction relevant. and/or seek damages under the Civil Code.

Land prices in Tokyo and Nagoya, which are primary real estate 7.4 Do sellers usually give contractual warranties to the markets in Japan, and land prices in secondary real estate markets buyer? What would be the scope of these? What is in Japan (Sapporo, Sendai, Hiroshima and Fukuoka) have shown an the function of warranties (e.g. to apportion risk, to upwards trend in residential areas. Land prices in Osaka, which is give information)? Are warranties a substitute for the a primary real estate market in Japan, have not changed compared buyer carrying out his own diligence? with last year. Land prices in the primary real estate markets in Japan (Tokyo, Osaka, and Nagoya) and land prices in secondary real As we mentioned in question 7.2, the seller is liable for the Defects estate markets in Japan (Sapporo, Sendai, Hiroshima and Fukuoka) even if there are no warranties to cover the Defects. Hence, in have shown an upwards trend in business areas. In provincial areas, practice, warranties normally cover those matters about which land prices have continued to decrease; however, the rate of such the buyer has special concerns. The seller is liable for any decreases in land prices has slowed, and the range of decrease is the misrepresentation. It depends on the parties as to whether warranties least in 24 years. Recently, the scale of construction and acquisition are a substitute for the buyer carrying out his own due diligence. of hotels and logistics in local areas has been increasing. 7.5 Does the seller warrant its ownership in any way? Please give details. 6.5 Have you observed any trends in particular market sub sectors slowing down in your jurisdiction in terms of their attractiveness to investors/developers? As we mentioned in question 7.2, the seller is liable for the Defects Please give examples. or loss of ownership even if this is not expressly provided for in the agreement. We believe that there has been no specific trend indicating a slowdown in particular market sub-sectors. 7.6 What (if any) are the liabilities of the buyer (in addition to paying the sale price)?

In general, the buyer has no liabilities in addition to paying the sale price.

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property. That is, upon receiving an allegation from the mortgagee, 8 Finance and Banking a manager can be appointed by the court to manage the properties under compulsion, and the mortgagee can collect receivables from 8.1 Please briefly describe any regulations concerning the earnings (shu-eki shikkou). However, this procedure is not used the lending of money to finance real estate. Are the often due to its high cost of management. rules different as between resident and non-resident persons and/or between individual persons and corporate entities? 8.4 What minimum formalities are required for real estate lending?

In general, under the Money Lending Business Law (kashikingyoho), Japan a grant from the relevant governmental authorities must be obtained Theoretically, no formalities are required for real estate lending; in order to engage in the money lending business, including the however, in practice, a written form is usually used in real estate lending of money to finance real estate. However, there are no lending transactions. regulations concerning the lending of money specifically to finance real estate. 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other creditors? 8.2 What are the main methods by which a real estate lender seeks to protect itself from default by the borrower? The main method is a mortgage or base mortgage (neteito) on the real estate under the Civil Code. If the mortgage or base mortgage The main method is a mortgage on the real estate under the Civil is registered in the registry, the real estate lender as a mortgagee Code. The base mortgage (neteito) is also a popular method of may assert its rights of mortgage or base mortgage against the protecting a lender from default by the borrower. The base mortgage borrower or other creditors who do not register their mortgage or secures the unspecified obligation of the borrower; however, the base mortgage right prior to the real estate lender’s registration. amount to be secured under the base mortgage is limited to the specified amount (kyokudogaku) prescribed under the mortgage 8.6 Under what circumstances can security taken by a agreement. lender be avoided or rendered unenforceable?

Under circumstances where a security on the subject property is 8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a established by the property owner to the prejudice of third parties mortgagee to realise a mortgaged property without and a third party exercises its right of avoidance of fraudulent involving court proceedings or the contribution of the actions, the established security may be rescinded under the Civil mortgagor? Code. Under circumstances where a security on the subject property is established by the property owner after the property owner has There are two types of proceedings for the realisation of mortgaged become unable to pay debts or a petition for the commencement properties. of bankruptcy proceedings has been filed, the established security One way is a foreclosure (keibai) whereby the mortgagee can collect may be avoided under the Bankruptcy Act, Civil Rehabilitation Act. receivables secured by the mortgage from the proceeds of sale of the mortgaged properties through a legal process involving court 8.7 What actions, if any, can a borrower take to frustrate proceedings. The contribution of the mortgagor is not necessary enforcement action by a lender? for the foreclosure. As those who would like to buy mortgaged properties cannot investigate the property (especially inside the Enforcement action under a legal process involving court building to ascertain whether there is an unlawful occupant) and proceedings is governed by the Civil Execution Act. If the borrower have no choice but to depend on a simple report on the properties considers that the enforcement action has no grounds, the borrower prepared by a court execution officer, they cannot judge the value of can object to the enforcement under the Civil Execution Act. the properties (including the risk associated with them) accurately. Therefore, the sale price at an auction tends to be lower than the actual market price. 9 Tax The second way is a voluntary sale (nin-i baikyaku), whereby a mortgagee can call in the receivable from the proceeds of the sale 9.1 Are transfers of real estate subject to a transfer tax? of the mortgaged properties without involving court proceedings. How much? Who is liable? A mortgagor can sell the properties at a price close to the market price. The contribution of the mortgagor is indispensable for this The seller is an individual: process. Voluntary sales are more advantageous to both mortgagee 1 Income tax and individual inhabitant tax and mortgagor than foreclosures in the light of cost, number of days necessary for the realisation and the amount of the proceeds of the If the seller is an individual, income tax and individual inhabitant tax sale, and therefore, voluntary sales are commonly used. are levied on the seller. The tax base of the income tax is broken into two categories: the long-term capital gain; and the short-term capital Furthermore, without taking the above procedures, mortgagees gain. The long-term capital gain is derived from real estate owned can collect their receivable by seizing the rental income of the for more than five years and the short-term capital gain is any capital mortgaged properties at very low expense (butsujo daii). However, gain other than the long-term capital gain. In the case of the long- as the mortgagees do not have the right to manage the mortgaged term capital gain, the tax rate is 20.315% (15% income tax, 0.315% properties, if the mortgagor abandons the administration of the special income tax for reconstruction and 5% individual inhabitant properties, it may be difficult for the mortgagee to collect the rent. tax). In the case of the short-term capital gain, the tax rate is 39.63% There is also another way to execute against earnings from the

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(30% income tax, 0.63% special income tax for reconstruction and 9% individual inhabitant tax). 9.5 What other tax or taxes (if any) are payable by the seller on the disposal of a property? 2 Stamp tax

A stamp tax is levied on the parties to the contract. This tax can be As we mentioned in question 9.1, the income tax, individual up to 600,000 yen. inhabitant tax, corporation tax, corporate inhabitant tax and 3 Registration and licence tax enterprise tax may be payable by the seller on the disposal of a A registration and licence tax is levied on the applicant for property. A registration and licence tax is payable by the seller and registration. This tax rate is 2% of the tax base of the value as the buyer under the law. However, it should be noted that the parties always agree in practice that such tax be borne fully by the buyer. Japan recorded in the tax rolls (approximately 70% of the market value if the property is land). It should be noted that a tax rate of 1.5% shall apply to the applicant for registration in relation to a transfer of land 9.6 Is taxation different if ownership of a company (or which occurs between April 1, 2015 and March 31, 2017. other entity) owning real estate is transferred? 4 Real property acquisition tax A real property acquisition tax is levied on the person acquiring the Theoretically, there is no difference. If the ownership of a company subject property. This tax rate is 4% of the tax base of the value (“Y”) owning real estate is transferred by a parent company (“X”), as recorded in the tax rolls. It should be noted that a tax rate of the corporation tax, corporate inhabitant tax and enterprise tax are 3% shall apply if the subject property is land or housing acquired levied on X on the basis of the capital gain that results from the between April 1, 2006 and March 31, 2018. transfer of ownership. Capital gains that result from the transfer of The seller is a corporation: ownership by X are theoretically equal to the capital gains that result from the transfer of real estate by Y if Y has no assets other than the 1 Corporation tax, Corporate inhabitant tax and Enterprise tax real estate. Furthermore, there is no difference theoretically if X is an individual, provided that Y has no assets other than the real estate. Corporation taxes, corporate inhabitant taxes and enterprise taxes It should be noted that in the case of a transfer of ownership which are levied on net income. The total amount of these tax rates is satisfies legal requirements under the Special Taxation Measures Law lower than 30% from April 1, 2016. (e.g. approximately 70% of all assets of a company is real estate), a 2 Stamp tax, Registration and licence tax, and Real property stakeholder may be taxable as if such stakeholder transfers real estate. acquisition tax A stamp tax, registration and licence tax, and real property 9.7 Are there any tax issues that a buyer of real estate acquisition tax, as we mentioned above, may also apply to the should always take into consideration/conduct due transfer of real estate. diligence on?

9.2 When is the transfer tax paid? In general, there are no tax issues that a buyer of real estate should always take into consideration/conduct due diligence on, other than Income taxes and individual inhabitant taxes become due on March the above. 15 of the year following the transfer of the real asset. Corporation taxes, corporate inhabitant taxes and enterprise taxes 10 Leases of Business Premises become due within two months after the end of the corporation’s business year. The stamp tax is paid by affixing a stamp on the documents. Such 10.1 Please briefly describe the main laws that regulate leases of business premises. stamps are sold in post offices. The registration and licence tax is paid on the occasion of an entry. The real property acquisition tax is paid after the transfer by the date specified by the tax bureau. The Land Lease and House Lease Law (hereinafter referred to as the “Law” in this section 10 and section 11) and the Civil Code regulate matters concerning the lease of real estate. The Law applies to land 9.3 Are transfers of real estate by individuals subject to leases for owning buildings and building leases, including office income tax? buildings and residential buildings. The Civil Code governs the lease of real estate for the purpose of any temporary use to which the See the answer to question 9.1 above. Law does not apply, and land leases for purposes other than owning buildings. 9.4 Are transfers of real estate subject to VAT? How much? Who is liable? Are there any exemptions? 10.2 What types of business lease exist?

A consumption tax is applied to the transfer of the ownership of Business premises leases are categorised as follows: a building. The tax rate increased from 5% to 8% (6.3% national Land lease for owning a building consumption tax and 1.7% local consumption tax) on April 1, 2014, and is expected to increase to 10% (7.8% national consumption tax 1 Ordinary land lease and 2.2% local consumption tax) on October 1, 2019. A taxpayer The Law specifically regulates matters concerning the period, is an enterprise which transfers taxable assets; however, the tax validity, renewal and legal proceedings related to changes in amount is normally added to the price of the assets and is ultimately conditions of the ordinary land lease for owning a building. It borne by consumers. The transfer of land is not taxable and the should be noted that under the Law, an ordinary land lease for lease of residential buildings and land is not taxable. owning a building is automatically renewed and the landlord cannot object to such renewal without a justifiable reason. Such justifiable

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reasons are not easily found. Hence, under an ordinary land lease, d) Insurance the landlord’s refusal to renew the lease is subject to strict control. In general, there is no provision in relation to insurance in the lease 2 Fixed-term land lease agreement and both the lessor and the lessee purchase insurance at A fixed-term land lease for owning a building is not renewable their own expense to cover their properties. under the Law. The fixed-term land lease was introduced because of e)(i) Change of control of the tenant concerns that the strict controls over the landlord’s refusal to renew The lease agreement usually does not prohibit the change of control the lease could inhibit the effective use of real estate. There are of the tenant. three types of fixed-term land lease: (i) the general fixed-term land (ii) Transfer of lease as a result of a corporate restructuring lease available for both residential purposes and businesses; (ii) the (e.g. merger) land lease with a special agreement on building assignments; and Japan The lease agreement usually prohibits the transfer of the lease as a (iii) the fixed-term land lease for businesses under the Law. result of a corporate restructuring. Building lease f) Repairs 1 Ordinary building lease The Civil Code provides that the landlord is liable for all repairs Under the Law, the renewal of an ordinary building lease cannot be necessary for the use of the premises, and some lease agreements rejected by the landlord without a justifiable reason, which is not provide for this as well. However, if the parties agree in a way easily found. that differs from this provision, their agreement prevails over such 2 Fixed-term building lease provision under the Civil Code. Usually, the lease agreement A fixed-term building lease is not renewable under the Law. stipulates that the landlord is required to make repairs.

10.3 What are the typical provisions for leases of business 10.4 What taxes are payable on rent either by the landlord premises in your jurisdiction regarding: (a) length of or tenant of a business lease? term; (b) rent increases; (c) tenant’s right to sell or sub-lease; (d) insurance; (e) (i) change of control of If the landlord is an individual, income tax and individual inhabitant the tenant; and (ii) transfer of lease as a result of a tax are levied on the landlord. The income tax rate of such tax is corporate restructuring (e.g. merger); and (f) repairs? progressive. a) Length of term If the landlord is a corporation, corporation taxes, corporate inhabitant taxes and enterprise taxes are levied on the landlord. Land lease for owning a building 1 Ordinary land lease A consumption tax is applied to business building leases. Under the Law, the term of the ordinary land lease for owning a building shall be 30 years, and when a term longer than 30 10.5 In what circumstances are business leases usually years has been provided, such term shall be effective. terminated (e.g. at expiry, on default, by either party 2 Fixed-term land lease etc.)? Are there any special provisions allowing a tenant to extend or renew the lease or for either party Under the Law, the term of the general fixed-term land lease to be compensated by the other for any reason on for owning a building shall be 50 years or more. With regard termination? to a lease with a special agreement on building assignments, the right to assign the building to the landlord at a reasonable consideration in order to terminate the ordinary lease can be Cancellation exercised more than 30 years after the commencement of the Under the Civil Code, in the event that a party breaches a lease lease. With regard to the fixed-term land lease for businesses, agreement, the other party can cancel that lease agreement provided the term of the lease shall be 10 years or more but less than 50 that the party has required the breaching party to cure the breach years. within a reasonable period, if such cure is possible. However, under Building lease case law, the landlord cannot cancel a lease agreement if a tenant 1 Ordinary building lease can establish the existence of any special circumstance under which The term of the ordinary building lease depends on the there still remains a relationship of mutual trust between the landlord agreement. and the tenant even after the breach. It should be noted that under 2 Fixed-term building lease case law, non-payment of rent may entitle a landlord to terminate the lease, because such non-payment may destroy a relationship of The term of the fixed-term building lease depends on the agreement. mutual trust between the landlord and the tenant. b) Rent increases Renewal Under the Law, if rent becomes inadequate (especially if it differs As we mentioned in question 10.2, under the Law, a landlord of an significantly from the market rent), the landlord or tenant may request ordinary lease cannot object to a renewal without a justifiable reason an increase or decrease in the amount of rent. This applies to both if such renewal is requested by the tenant. Such justifiable reasons land leases for owning buildings and building leases. The right to are not easily found. Hence, under an ordinary lease, a landlord’s request an increase can be modified in the lease agreement. It should refusal to renew the lease is subject to strict control. It should be be noted that the right to request a decrease cannot be excluded from noted that an offer of compensation by a landlord may be considered the agreement, except in the case of fixed-term building leases. The when the court finds that there is a justifiable reason. Hence, in provisions with respect to rent increases or decreases are prepared practice, if a landlord desires to reject the renewal of a lease in any taking into consideration the above legal restrictions. way, it is likely that the landlord will make such an offer. c) The tenant’s right to sell or sub-lease On the contrary, a fixed-term lease is not renewable and terminates upon the expiration of the lease term. The lease agreement usually prohibits the tenant from assigning the lease or sub-leasing without the consent of the landlord.

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b) Rent increases/controls 10.6 Does the landlord and/or the tenant of a business The same answer as set out for question 10.3 above. lease cease to be liable for their respective obligations under the lease once they have sold their c) The tenant’s rights to remain in the premises at the end of interest? Can they be responsible after the sale in the term respect of pre-sale non-compliance? Land lease for owning a building 1 Ordinary land lease No, the landlord and/or the tenant of a business lease do not cease A lessee under an ordinary land lease may renew the lease to be liable for their respective obligations under the lease once they unless the lessor objects to the renewal with a justifiable have sold their interests, because any obligations arising out of the reason, which is difficult to establish. Japan lease prior to the transfer of the lease cannot be assigned without any 2 Fixed-term land lease specific agreement. They can be responsible in respect of pre-sale non-compliance. A lessee under a fixed-term land lease may not renew the lease. Building lease 10.7 Green leases seek to impose obligations on landlords and tenants designed to promote greater 1 Ordinary building lease sustainable use of buildings and in the reduction of A tenant under an ordinary building lease may renew the lease the “environmental footprint” of a building. Please unless the landlord objects to the renewal with a justifiable briefly describe any “green obligations” commonly reason, which is difficult to establish. Where the building found in leases stating whether these are clearly has deteriorated and the earthquake resistance of the building defined, enforceable legal obligations or something is not adequate, if the building owner offers to pay adequate not amounting to enforceable legal obligations (for compensation for the removal of the tenant, a justifiable example aspirational objectives). reason may be established. 2 Fixed-term building lease Currently, there are no such “green obligations” commonly found A tenant under a fixed-term building lease may not renew the in leases. lease. However, please note that the Tokyo Metropolitan government d) The tenant’s contribution/obligation to the property requires the owners of certain large greenhouse gas emitters, “costs”, e.g. insurance and repair including office buildings, to reduce greenhouse gas emissions. The Civil Code provides that the landlord is liable for all repairs This local regulation also requires tenants to cooperate with the necessary for the use of the premises, and some lease agreements owners of buildings on the reduction of greenhouse gas emissions. provide for this as well. If the parties agree in a way that differs from Therefore, the owners of buildings may add certain provisions this provision, their agreement prevails over the provisions under relating to energy efficiency to the leases to impose some “green the Civil Code; however, such an agreement is rare under a lease obligations” on tenants in the future. of residential premises. A tenant would, therefore, not purchase an insurance policy with respect to the property. 11 Leases of Residential Premises 11.4 Would there be rights for a landlord to terminate a residential lease and what steps would be needed 11.1 Please briefly describe the main laws that regulate to achieve vacant possession if the circumstances leases of residential premises. existed for the right to be exercised?

Same as the answer to question 10.1 above. See the answer to question 10.5 and 11.3 (c) above regarding the right for a landlord to terminate a residential lease. In general, if a 11.2 Do the laws differ if the premises are intended for lessee does not vacate a building, a building lessor may appeal to multiple different residential occupiers? a court to carry out a compulsory execution, which is executed to release the building from the lessee’s possession and have the lessor There is no difference in the laws whether or not the premises are acquire the possession of such building. intended for multiple, different, residential occupiers. 12 Public Law Permits and Obligations 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the 12.1 What are the main laws which govern zoning/ tenant’s rights to remain in the premises at the end of permitting and related matters concerning the use the term; and (d) the tenant’s contribution/obligation and occupation of land? Please briefly describe them to the property “costs” e.g. insurance and repair? and include environmental laws.

a) Length of term Zoning Land lease for owning a building The City Planning Law is the main law which governs real property Under the Law, the term of the ordinary land lease for owning a development and zonings. In general, in urbanisation control building shall be 30 years, and when a term longer than 30 years has areas (shigaikachouseikuiki), the development of land is subject to been provided, such term shall be effective. strict control. In areas designated for urbanisation (shigaikakuiki), development may be allowed if such development satisfies the Building lease requirements for development under the City Planning Law. The The same answer as set out for question 10.3 above. Building Standard Law regulates the land use of the designated area,

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the ratio of the total floor area to the site area (yosekiritsu), the ratio of the building area to the site area of the building (kenpeiritsu), and 12.7 Are there any regulations on the protection of historic other relevant matters. monuments in your jurisdiction? If any, when and how are they likely to affect the transfer of rights in real Environmental law estate? The Soil Contamination Countermeasures Law is the main environmental law concerning land. Under this Law, if the land is Yes, there are regulations on the protection of historic monuments designated as contaminated to an extent that may harm the health of in Japan, such as the Act regarding the Protection of Cultural inhabitants in the neighbourhood through underground water, etc., Properties. Under the law, owners of important cultural properties the prefectural governor may order the owner of such land to take (such as old temples and castles) or registered tangible cultural appropriate measures, including the clean-up of such land. properties (such as old buildings and monuments) are required to Japan It should be noted that the owners of buildings are sometimes manage and repair them. Even if the owner would like to sell such required to take appropriate measures to remove the health risks to important cultural properties to a third party for a certain price, they inhabitants of buildings associated with the presence of asbestos. will be required to give a right of first refusal to the Commissioner for Cultural Affairs for the same price. If the Commissioner accepts the offer within 30 days, a sale will be carried out between 12.2 Can the state force land owners to sell land to it? If so please briefly describe including price mechanism. the seller and the Commissioner. On the other hand, there is no legal restriction on the transfer of the ownership right of registered tangible cultural properties. The seller is only required to deliver In general, the state may not force land owners to sell land to the state. However, under the Land Expropriation Law, the state is entitled to the registration certificate of the property initially delivered by the take land in exercise of the right of eminent domain in specified Minister of Education, Culture, Sports, Science and Technology to cases (e.g., such land is located in the area specified for planned the buyer. public facilities such as roads). The price process is controlled under the Land Expropriation Law, and the relevant governmental 12.8 How can e.g. a potential buyer obtain reliable authority may determine such price in accordance with the Land information on contamination and pollution of real Expropriation Law, considering the fair market prices, etc. estate? Is there a public register of contaminated land in your jurisdiction?

12.3 Which bodies control land/building use and/or occupation and environmental regulation? How do Information about designated contaminated areas under the Soil buyers obtain reliable information on these matters? Contamination Countermeasures Law is made public at the offices of prefectural governments. Such information is also available on The city, town and village control land/building use and/or the website of the Ministry of the Environment or other prefectural occupation, and environmental matters, in accordance with the laws governments. Please note that under the Soil Contamination and local regulations. The buyers can obtain information concerning Countermeasures Law, while areas containing amounts of these matters in cities, towns and villages. contaminating substances greater than the amount stipulated in the relevant criteria detected as a result of legally compulsory investigations shall be designated as contaminated areas, areas containing amounts of 12.4 What main permits or licences are required for contaminating substances exceeding such criteria found as a result of building works and/or the use of real estate? voluntary investigations will not be designated as such areas without the voluntary application for such designation by the owner, the In general, confirmations under the Building Standard Law are manager or the occupant of the land. As designated contaminated required for building works and the use of real estate. In the case areas have been found usually due to voluntary investigations and of land development, permits under the City Planning Law and cases where such voluntarily applications were made are limited, such relevant laws are required. The Agricultural Land Law governs the designated contaminated areas are only a part of the contaminated use of farmland. areas in Japan. Therefore, buyers should take their own steps to survey land suspected of being contaminated or have the seller survey the land 12.5 Are building/use permits and licences commonly before they purchase it. obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)? 12.9 In what circumstances (if any) is environmental clean- up ever mandatory? A building/use confirmation can be obtained if the building/use satisfies the requirements under the relevant law. In cases where Under the Soil Contamination Countermeasures Law, in the one seeks more benefits for the building/use (e.g., a greater ratio of case of: (i) the abolition of manufacturing factories using certain total floor area to site area), special permits are necessary and such hazardous materials; or (ii) a prefectural governor’s order, which permits are not necessarily easily obtained. Implied permission may be delivered if the prefectural governor decides that land cannot be obtained. contamination may injure the health of the inhabitants, land surveys shall be implemented. In addition, under the Soil Contamination 12.6 What is the appropriate cost of building/use permits Countermeasures Law, if a land owner intends to develop a large and the time involved in obtaining them? area of land (at least 3,000 square metres), the land owner is required to notify the governor of each prefecture of the development at least It depends on each case. It should be noted that under the Building 30 days before beginning any changes. If the governor determines Standard Law, the building official shall give notice that the building that the land is possibly contaminated and orders the land owner plan conforms to the regulations within a specific period, depending to investigate, the landowner must comply. If the results of such on the nature of the building. In addition, qualified private citizens land surveys do not satisfy the relevant regulations, the prefectural may give confirmation for the building/use.

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governor can designate such land as a contaminated area. The Countermeasures and the Energy Saving Law. Under these laws, prefectural governor can order the land owner to clean up such land a company that uses more energy than the equivalent of 1,500 if it is located within an area designated as contaminated and if there kilolitres of oil in a previous year at its combined business buildings is a risk to the health of people. and factories located in Japan, and a franchisor that uses more energy than the equivalent of 1,500 kilolitres of oil in the preceding year at its combined business buildings (including the franchisees’ 12.10 Please briefly outline any regulatory requirements for the assessment and management of the energy business buildings) located in Japan, are obliged to submit reports performance of buildings in your jurisdiction. detailing their greenhouse gas emission amounts. Owners of buildings in Tokyo where more energy than the equivalent

Japan The Act on the Improvement of Energy Consumption Performance of 1,500 kilolitres of oil in a previous year was used are required to of Buildings aims to strengthen energy efficiency measures in submit regular reports about greenhouse gas emission amounts to buildings. When construction clients attempt to undertake new the Tokyo Metropolitan Governor. construction/extensions/renovations on buildings at or over a certain 4 Increase of renewable energy size (at least 300 square metres of floor space), they must acquire From July 1, 2012, the Feed-in Tariff Law, establishing a fixed a certification of conformity with energy efficiency standards, or price buy-back programme for renewable energy, such as solar notify the administrative agency with jurisdiction depending on the power, hydraulic power, geothermal power and the like, became use and size and type of the building. Large-scale, non-residential effective. Under this programme, electric utilities are obliged to buildings that are not compliant with energy efficiency standards enter into power purchase agreements (“PPAs”) and grid connection become ineligible for certification of the Building Standards Law. agreements when they are requested to do so by a renewable electricity producer, unless electric utilities can establish that they 13 Climate Change have justifiable reasons described in the related regulation. For three years, beginning from the effective date, special consideration to the profitability of producers will be given when prices and terms to be 13.1 Please briefly explain the nature and extent of any applied to the PPA are determined. In this regard: (a) 40 yen/kWh regulatory measures for reducing carbon dioxide (excluding consumption tax) and a 20-year term can be applied to a emissions (including any mandatory emissions PPA for solar power generation facilities (having an output of 10kW trading scheme). or more), if (i) certification for the facility has been obtained from the Minister of Economy, Trade and Industry by March 31, 2013, 1 Nationwide mandatory emissions trading scheme and (ii) submission to an electric utility of a written application for There is no nationwide mandatory emissions trading scheme in a grid connection agreement is completed by the same date; (b) Japan. 36 yen/kWh (excluding consumption tax) and a 20-year term can 2 Regional mandatory emissions trading scheme in Tokyo be applied to a PPA for solar power generation facilities (having The Tokyo Metropolitan government requires the owners of an output of 10kW or more), if (i) the certification above has been greenhouse gas emitters, including office buildings, which have obtained between April 1, 2013, and March 31, 2014, and (ii) the used more energy than the equivalent of 1,500 kilolitres of oil submission above is completed between the same periods; and (c) for the previous three successive years, to reduce greenhouse gas 32 yen/kWh (excluding consumption tax) and a 20-year term can emissions from April 1, 2010. The target for the first compliance be applied to a PPA for solar power generation facilities (having period (April 2010 to March 2015) was set at 6% or 8% (according an output of 10kW or more), if (i) the certification above has been to the type of building) below base emissions and the target for the obtained between April 1, 2014, and March 31, 2015, and (ii) the second compliance period (April 2015 to March 2020) has been submission above is completed between the same periods. set at 15% or 17% (according to the type of building) below the After April 1, 2015, the requirement used to determine the prices base emissions. The Tokyo metropolitan government plans to set and terms for a project that has not yet been secured, changed. subsequent compliance periods every five years, with targets to The prices and terms will be fixed as of the later of: (i) the date the reduce emissions during each period. In order for the owners of grid connection agreement is executed (or the 270th day after the large buildings to fulfil this requirement, they are mandated not applicable grid connection application is filed if a grid connection only to reduce greenhouse gas emissions from their respective agreement could not be executed due to a reason not attributable to buildings, but also permitted to trade in certain Tokyo Metropolitan the renewable electricity producer); and (ii) the date the amendment government-sanctioned credits (the “Tokyo Credits”). They cannot to the certification from the Minister of Economy, Trade and use the Kyoto Credits (such as CERs) to accomplish their targets. Industry (the “METI Certification”) is issued, if applicable. The Where the owners of large buildings cannot meet their obligations prices and terms that can be applied to a PPA for solar power for greenhouse gas emission reductions, the Governor of Tokyo may generation facilities (having an output of 10kW or more) will be: order the owner to obtain additional Tokyo Credits according to a (a) 29 yen/kWh (excluding consumption tax) with a 20-year term, formula that multiplies the amount of the unfulfilled obligation by if prices and terms are fixed between April 1, 2015, and June 30, 1.3. Furthermore, where the owners of large buildings fail to obtain 2015; (b) 27 yen/kWh (excluding consumption tax) with a 20-year these additional Tokyo Credits, they will be punished. In addition, term if prices and terms are fixed between July 1, 2015, and March the Governor of Tokyo may publish the fact that the owner has failed 31 2016; and (c) 24 yen/kWh (excluding consumption tax) with a to do so, obtain the credits in place of the owners, and subsequently 20-year term if prices and terms are fixed between April 1, 2016, may charge the owner for the cost of the purchase. and March 31, 2017. 3 Reporting obligation On May 25, 2016, an amendment to the Feed-in Tariff Law (the The only major legislative preparations that the Japanese amendment shall hereinafter be referred to as the “Amended Act”) government has made with respect to global warming so far are the was enacted and came into force on April 1, 2017. Under the reporting obligations with respect to the amount of greenhouse gas Amended Act and its operations, it should be noted in particular emissions, pursuant to the Act on Promotion of Global Warming that: (i) if the project has not executed a grid connection agreement

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by no later than April 1, 2017, the METI Certification for the project if prices and terms are fixed between April 1, 2017, and March 31, will generally lapse; and (ii) if the project executes a grid connection 2018. Under the Amended Act, there is a bidding system to fix the agreement on and after August 1, 2016, a mandatory commercial applicable FIT price for solar power projects (solar power projects operation commencement date will be set for the project (three with power generation volume of over 2,000 kWh are initially years from the issue date of the METI Certification, for projects subject to the bidding system) to address the fact that among other having an output of 10kW or more). Moreover, renewable sources of renewable electricity there has been too much focus on electricity producers newly applying for a METI Certification must solar power projects, and to reduce the increasing economic burden obtain the METI Certification for their business plans, rather than of the consumers of electricity. their facilities. Under the Amended Act, renewable electricity

producers have to obtain and also maintain the METI Certification Japan 13.2 Are there any national greenhouse gas emissions of the business plan, and a renewable electricity producer must reduction targets? satisfy certain requirements under the Amended Act, including the following requirements: On July 17, 2015, the Government of Japan decided to set Japan’s (i) the business meets certain standards under the applicable Intended Nationally Determined Contribution for greenhouse rules; gas emissions at the level of a reduction of 26.0% by fiscal year (ii) the business is likely to be conducted with efficiency and 2030 compared to fiscal year 2013 (25.4% compared to fiscal year certainty, which includes whether it has obtained the utility’s 2005) (approximately 1.042 billion t-CO eq. as 2030 emissions), consent to grid connection; and 2 and submitted it to the United Nations Framework Convention on (iii) the power generation facility meets certain standards under Climate Change (UNFCCC) Secretariat. the applicable rules. On May 13, 2016, the Government of Japan decided to set Japan’s Further, renewable electricity producers which have obtained a level of reduction of greenhouse gas emissions at 80.0% by 2050. METI Certification for their facilities before April 1, 2017, and have secured an interconnection agreement with the relevant utility by the end of March 2017, will be deemed to have received a METI 13.3 Are there any other regulatory measures (not already Certification under the Amended Act, and in general, such renewable mentioned) which aim to improve the sustainability of both newly constructed and existing buildings? electricity producers must submit their respective business plans by September 30, 2017. After April 1, 2017, the prices and terms for producers newly applying for a METI Certification will be fixed as The Tokyo Metropolitan government requires owners who intend of the date the METI Certification is issued. The prices and terms to construct or refurbish buildings with a total floor space of over that can be applied to a PPA for solar power generation facilities 10,000 square metres to take measures to meet certain energy (having an output of 10kW or more and less than 2,000kW) will efficiency criteria. be 21 yen/kWh (excluding consumption tax) with a 20-year term,

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Hideaki Ozawa Yujin Gen Nishimura & Asahi Nishimura & Asahi Otemon Tower, 1-1-2 Otemachi Otemon Tower, 1-1-2 Otemachi Chiyoda-ku, Tokyo 100-8124 Chiyoda-ku, Tokyo 100-8124 Japan Japan

Tel: +81 3 6250 6200 Tel: +81 3 6250 6200 Email: [email protected] Email: [email protected] URL: www.jurists.co.jp/en URL: www.jurists.co.jp/en Japan

PARTNER since 1996. ASSOCIATE since 2015. Admitted: Japan 1980; New York 1992. Admitted: Japan 2015. Education: Columbia University School of Law (LL.M., 1991). Legal Education: Legal Training and Research Institute of the Supreme Training and Research Institute of the Supreme Court of Japan. The Court of Japan (2015). Chuo University (LL.B., 2015). University of Tokyo (LL.B., 1978; Master of Engineering, 1985). Practice Areas: Structured Finance, Real Estate Finance, Real Professional Experience: Dewey Ballantine, New York, 1991–1992. Estate. Practice Areas: Real Estate, Environmental Law, Construction Law. Languages: Japanese and English. Papers/Publications: Author: Real Property for Corporations, Shojihomu, 2017; Hot Spring Law-Special Thesis on Underground Water Law, Hakuyosha, 2013; Soil Contamination Countermeasures Law and Civil Liability, Hakuyosha, 2011; Asbestos in Buildings and the Law, Hakuyosha, 2006; U.S. Condominium Laws, Hanrei Times, Vols. 997, 999, 1999; Very Deep Underground Use System as a Bypass, Jichi-Kenkyu, Vol. 74, No. 9, 1998. Co-Author: Japan Chapter, The ICLG to: Environment & Climate Change Law 2013; Japan Chapter, The ICLG to: Real Estate 2013; Japan Chapter, PLC: The Environment multi-jurisdictional guide 2012/13 (Japan Chapter); Tokyo’s Greenhouse Gas Regulation and Emissions Trading, Hakuyosha, 2009; Corpus Juris Finance Update, Shojihomu, 2006; Corpus Juris Finance, Shojihomu, 2003; Memories of Cities, Hakuyosha, 2002; Fixed Term Building Leases, Jyutaku-shimpo-sha, 2000. Languages: Japanese and English.

Nishimura & Asahi is one of Japan’s premier full-service law firms, covering all aspects of domestic and international business and corporate activity. The firm currently has more than 500 Japanese and foreign lawyers and employs over 600 support staff, including tax accountants, and one of the largest teams of paralegals in Japan. Through the enhancement of professional and organisational synergies, resulting from the firm’s expansion, an unprecedented level of client service is made possible in highly specialised and complex areas of commercial law. Nishimura & Asahi understands its clients’ growing needs and its fully integrated team of lawyers and professional staff are proud to share the same fundamental philosophy: an uncompromising commitment to excellence. Offices: Tokyo, Nagoya, Osaka, Fukuoka, Bangkok, Beijing, Shanghai, Dubai, Hanoi, Ho Chi Minh City, Jakarta*1, Singapore, and Yangon, Hong Kong*2. *1 Associate office *2 Affiliate office Key areas of practice: Corporate: General Corporate; M&A; Compliance; Start-up Businesses; Labour Law; and Real Estate/Environmental. Finance: Banking, Capital Markets; Asset Management; Structured Finance/Securitisation; Asset Finance; Acquisition Finance; Insurance; and PFI/Project Finance. Restructuring/Insolvency: Restructuring/Insolvency. Cross-Border Practice: International Transactions; International Trade; International Disputes; and International Taxation. Dispute Resolution: Civil & Commercial Disputes; IP Disputes; Administrative Disputes; and Specialised Disputes. IT/ IP: IP Transactions; Venture Capital/Entrepreneurial Services; and Telecommunications/Media. Corporate Crisis Management: Corporate Crisis Management. Antitrust: Antitrust. Tax: Tax Counselling; and Tax Controversy and Litigation. Trusts & Estates: Trusts & Estates. Asia: China; Hong Kong; India; Indonesia; Korea; Singapore; Taiwan; Thailand; Vietnam; and Rest of Asia. Middle East: Saudi Arabia; U.A.E.; and Rest of Middle East/ Islamic Transactions. Public Interest Activities: Assistance to Administrative Organisations; and Education and Professional Activities. Managing Partner: Mr. Masaki Hosaka. Languages: Japanese, English, Chinese (Mandarin) and French. Total number of lawyers: 568. Email: [email protected]

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Northern Ireland David Jones

Tughans Luke Thompson

covenants or inhibitions on the title to individual properties that 1 Real Estate Law impose restrictions.

1.1 Please briefly describe the main laws that govern real estate in your jurisdiction. Laws relating to 3 Real Estate Rights leases of business premises should be listed in response to question 10.1. Those relating to zoning and environmental should be listed in response to 3.1 What are the types of rights over land recognised in question 12.1. Those relating to tax should be listed in your jurisdiction? Are any of them purely contractual response to questions in Section 9. between the parties?

The main real estate legislation is the Landlord and Tenant Specific rights over land will include rights of way, rights of Law Amendment Act (Ireland) 1860 (or “Deasy’s Act”); the support, rights to light and/or air, wayleaves and profit-à-prendres. Conveyancing Acts, 1881–1911; and the Settled Lands Act 1882– Rights that are expressly included or implied into a contract will be 1890. The Prescription Act 1832 deals with prescriptive easements purely contractual between the parties unless it is stated that they in Northern Ireland; 20 years being the length of time required to are given by and for the successors to the parties. These rights can acquire an easement through prescription. The most significant also be acquired by necessity or prescription. A grant of a licence or modern real estate legislation includes the Property (NI) Orders 1978 tenancy at will also creates contractual rights over land. & 1997 and the Criminal Damage (Northern Ireland) Order 1977, along with the Business Tenancies (Northern Ireland) Order 1996. 3.2 Are there any scenarios where the right to a real estate diverges from the right to a building constructed thereon? 1.2 What is the impact (if any) on real estate of local common law in your jurisdiction? No, there are not. Northern Ireland is a common law jurisdiction and therefore the courts do have an impact on real estate law. The Lands Tribunal 3.3 Is there a split between legal title and beneficial title has extensive powers to extinguish historic covenants that would in your jurisdiction and what are the registration “unreasonably” affect the enjoyment of land. The case law of consequences of any split? England will also be persuasive, but not binding, in Northern Ireland; save for where Northern Irish law specifically differs. Yes, there are two ways in which legal title can be held. Firstly, legal title can be held as joint tenants meaning that should one tenant survive the other, the deceased’s share will automatically pass to the survivor 1.3 Are international laws relevant to real estate in your by the right of survivorship. However, if the title is held as tenants in jurisdiction? Please ignore EU legislation enacted locally in EU countries. common there is a split between the legal and beneficial title and the right of survivorship no longer automatically applies. For example, if property is held as tenants in common the beneficial interest may No, save for certain UK-wide legislation in areas such as tax and be held by a beneficiary under a will or a third party under a contract. competition law that can impact on real estate. Trustees can also hold legal title on trust for beneficial owners, who do not appear on the public register. 2 Ownership 4 System of Registration 2.1 Are there legal restrictions on ownership of real estate by particular classes of persons (e.g. non-resident persons)? 4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered? There are no general restrictions on ownership of property, for example to overseas entities. However, it is possible to have restrictive Not all land in Northern Ireland is registered. From 2003, there has

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been a system of compulsory first registration in place – when a with a fee farm grant or lease made at least 15 years prior to transaction takes place involving unregistered land, the title must be registration and the grantor’s/lessor’s title has been fully examined. registered at the Land Registry post completion. The exceptions to Good Fee Farm Grant – title will be registered as good fee farm this rule are: transactions with no consideration; mortgages; leases grant when land is held by way of a fee farm grant that commenced for a term of less than 21 years; exchanges or partitions of land 15 years prior to registration, but the title of the grantor has not been (involving no consideration); dealings with reversionary interests; proved. The only difference from absolute fee farm grant title is and the surrender of leases. There are also a number of burdens as that registration will not prejudice any estate arising by virtue of any set out in Schedule 5 of the Land Registration Act (Northern Ireland) superior grant. 1970 that will affect registered land without being registered. Good Leasehold Title – in Northern Ireland, only a lease with a term of more than 21 years remaining outstanding can be registered 4.2 Is there a state guarantee of title? What does it at the Land Registry, although shorter term leases can still be guarantee? voluntarily noted against superior titles. A lease will be registered Northern Ireland with good leasehold title when the leaseholder has not proved the Information contained on the Title Register at the Land Registry is superior title. The only difference from absolute leasehold title is considered to be conclusive evidence of title. This is supported by that registration will not affect the enforcement of any rights adverse a state guarantee of title, which enables compensation to be claimed to the title of the lessor to grant the lease. for errors and omissions in the Title Register. However, although Qualified Title – granted to either freehold or leasehold title if the the Land Registry provides a map-based system to support the Title title is unable to meet the requirements for an absolute, good fee Register, the boundaries shown on the Land Registry maps are not farm grant or good leasehold title. The Land Registry may also guaranteed. confer a qualified title if they are not satisfied that registration with an absolute, good fee farm grant or good leasehold title is justified. 4.3 What rights in land are compulsorily registrable? Possessory Title – granted for an application to register land that What (if any) is the consequence of non-registration? has been acquired by way of adverse possession. Possessory title will not affect the enforcement of any right adverse to the title of In Northern Ireland, rights in land are registered at the Land Registry the owner. as burdens on title. Part 1 of Schedule 6 of the Land Registration Act (Northern Ireland) 1970 has a list of the burdens registrable 4.6 On a land sale, when is title (or ownership) transferred on the Title Register. If two burdens are created at the same time to the buyer? (after first registration), the burden that is registered first at the Land Registry will receive priority over the other burden and any burden A transfer/conveyance/assignment deed documents a transfer, but created subsequently. If a registrable burden is not registered, a does not operate to validly transfer the land until the transferee bona fide purchaser for value without notice will not be subject to it. is registered as the owner at the Land Registry, if such transfer is registrable. 4.4 What rights in land are not required to be registered? If unregistered land is transferred and the transaction meets the criteria for compulsory first registration, an application to register In Northern Ireland, rights in land are registered at the Land Registry the title must be made within three months. An application not as burdens on title. Part 1 of Schedule 5 of the Land Registration made within this timeframe will become void and title can revert to Act (Northern Ireland) 1970 has a list of the burdens that will affect the seller. Although the seller, having received the purchase money, registered land without registration on the Title Register. As not should then hold the land as a trustee for the buyer; and it is possible all land in Northern Ireland is registered, rights in land that affect that the buyer’s equitable interest in the land can be defeated by unregistered land will not be registered. prior equitable interests.

4.5 Where there are both unregistered and registered land 4.7 Please briefly describe how some rights obtain or rights is there a probationary period following first priority over other rights. Do earlier rights defeat later registration or are there perhaps different classes rights? or qualities of title on first registration? Please give details. First registration means the occasion upon which unregistered land or rights are first registered Rights affecting registered land will receive priority in the order in the registries. in which they are registered. This rule of priority does not apply to rights over registered land created prior to first registration Depending on the nature of the title held, an applicant for first of the title or those included in Part 1 of Schedule 5 of the Land registration may apply to be registered with one of the following Registration Act (Northern Ireland) 1970. five classes of title: Absolute Title – generally refers to freehold title and is the best 5 The Registry / Registries class of registered title. It is usually only granted if an applicant can demonstrate that their title commenced with a disposition made at least 15 years previously. 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules A recent practice direction issued by the Registrar of the Land and requirements. Registry has introduced an exception – where an application is made in relation to freehold land acquired under the Ground Rents Act There is only one Land Registry in Northern Ireland. In order to (NI) 2001, the applicant will receive absolute title. have title to land registered, a solicitor will need to inspect the title There is also a class of absolute title for land held by way of a fee and certify it before submitting a registration application to the farm grant or lease. This will only be granted if title commences

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Land Registry. Registered titles are considered conclusive and are backed by a state guarantee. However, the mapping system that 6 Real Estate Market accompanies the register is not considered conclusive and therefore is not backed by a state guarantee. 6.1 Which parties (in addition to the buyer and seller A branch of the Land Registry is known as the Registry of Deeds, and the buyer’s finance provider) would normally running in tandem with the main land register. The Registry of be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or Deeds is simply a register of deeds. It is not tied to the land; it duties. records details of deeds by noting them against the entities who are parties to the respective documents. This is the only register that Real estate transactions will also involve a solicitor acting for the can be searched when dealing with unregistered property. buyer, a solicitor acting for the seller and, at times, a surveyor/estate agent.

5.2 Does the land registry issue a physical title document It is a requirement for any conveyance of land to be carried out Northern Ireland to the owners of registered real estate? by a solicitor in this jurisdiction. The role of a solicitor will vary depending on which party they are acting for. In very brief terms, Historically, a Land Registry issued Land Certificate was required the solicitor for the seller will provide title to the real estate, draft when applying to register any dealing with land at the Land Registry. the contract, provide search results and negotiate terms on behalf of However, following a policy of dematerialisation since 2011, Land the seller. The solicitor acting for the buyer will review and report Certificates are no longer required. on the title and negotiate terms on behalf of the buyer. Details of registered land are held within “Folios”, copies of which Although it is not a requirement, a seller often uses a surveyor/estate can be obtained from the Land Registry. However, it is important agent, whose role will typically involve valuing and marketing the to note that any copy Folio produced is only a representation of that property and liaising with potential interested buyers at the pre- Folio on the date it was issued. contractual stage.

5.3 Can any transaction relating to registered real estate 6.2 How and on what basis are these persons be completed electronically? What documents need remunerated? to be provided to the land registry for the registration of ownership right? Can information on ownership of registered real estate be accessed electronically? Surveyors/estate agents are generally remunerated following completion, based on a percentage of the sale price. It is not possible for a transaction relating to land, registered or not, In relation to lawyers, a common basis for remuneration is connected to be completed electronically. The relevant physical documents to time spent, based on an hourly rate. However, an agreed fee based to any transaction must be executed or signed by the parties to the on a predetermined scope of work is also common. The solicitor transaction. and their respective client should agree a basis for payment prior to If the title is registered, a transfer of ownership will be registered a transaction commencing, with payment of all such fees generally when the Land Registry is provided with a correctly completed made upon completion, unless interim billing is necessary. transfer in the prescribed form. If the title is unregistered, the process of first registration must be 6.3 Do you feel there is a noticeable increase in completed, meaning all relevant title to the land must be provided the availability of capital to finance real estate and certified by a solicitor. transactions in your jurisdiction, whether equity or debt? What are the main sources of capital you see The information on ownership of registered land is publicly active in your market? accessible and can be accessed electronically for a fee. There is a definite increase in the availability of capital to finance 5.4 Can compensation be claimed from the registry/ real estate transactions in Northern Ireland. The local banks are registries if it/they make a mistake? starting to appear in the market again, albeit quite tentatively. There is a significant growth in funds, new private investors and mezzanine The information contained on the Title Register is considered lenders in the local market, across various sectors. conclusive title to land and is backed by a state guarantee. Therefore, compensation for loss arising out of a mistake on a registered title 6.4 What is the appetite for investors and developers is recoverable, but not in relation to the mapping system, as referred in your region to look beyond primary real estate to previously. markets and transact business in secondary or even tertiary markets? Please give examples of significant secondary or tertiary real estate transactions, if 5.5 Are there restrictions on public access to the relevant. register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and other rights affecting real estate? Both developers and investors are slowly moving back into the secondary and tertiary real estate markets. Tughans has acted in the majority of the most significant examples of such transactions in the The information contained at the Land Registry relating to registered last 12–24 months – e.g. the acquisition of the Flagship Shopping land is publicly accessible. Any potential buyer can obtain all the Centre, Bangor and the acquisition of the Tower Centre, Ballymena. information they should reasonably need regarding encumbrances Castlecourt Shopping Centre in Belfast has also changed hands and other rights to land provided that information is registered. recently. However, there is still a significant amount of unregistered land where it can be impossible to access any details.

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6.5 Have you observed any trends in particular market 7.5 Does the seller warrant its ownership in any way? sub sectors slowing down in your jurisdiction in Please give details. terms of their attractiveness to investors/developers? Please give examples. The seller can state that it is transferring its interest in the real estate as beneficial owner and this will imply covenants regarding the Most sub-sectors are still in recovery/growth mode at present. nature of its title. Although political and economic uncertainty around Brexit and other global factors has created a lull in prime investment activity. 7.6 What (if any) are the liabilities of the buyer (in addition to paying the sale price)? 7 Liabilities of Buyers and Sellers in Real Estate Transactions Buyers will be subject to stamp duty land tax, following the same Northern Ireland rules as in England and Wales, along with Land Registry registration fees. 7.1 What (if any) are the minimum formalities for the sale and purchase of real estate? 8 Finance and Banking Any sale or purchase of real estate must be completed by way of a written contract. A Law Society produced standard form of contract, 8.1 Please briefly describe any regulations concerning tailored by the inclusion of special conditions, is often used on lower the lending of money to finance real estate. Are the value, more straight forward transactions. However, it is really rules different as between resident and non-resident designed for residential conveyancing, rather than commercial. persons and/or between individual persons and corporate entities? 7.2 Is the seller under a duty of disclosure? What matters must be disclosed? The same financial regulations that affect England and Wales apply in Northern Ireland, including the same anti-money laundering A seller has a duty to provide a good and marketable title but the regulations. principle of ‘caveat emptor’ also applies to real estate transactions. There is a responsibility on the buyer to carry out its own due 8.2 What are the main methods by which a real estate diligence. Therefore, as a general rule, the seller has no duty of lender seeks to protect itself from default by the disclosure; but there are exceptions and a degree of disclosure is borrower? standard practice. The seller has a duty to disclose latent physical defects or latent defects in its title which it is aware of or should Lenders will generally seek security through a fixed charge registered reasonably be aware of. A latent defect is a defect which is not against the real estate and in some cases will go further and require reasonably discoverable from inspection of the property or the debentures, personal guarantees, cross company guarantees, funder materials supplied to the buyer. warranties from contractors and a professional team, etc.

7.3 Can the seller be liable to the buyer for 8.3 What are the common proceedings for realisation of misrepresentation? mortgaged properties? Are there any options for a mortgagee to realise a mortgaged property without For a seller to be liable to the buyer for misrepresentation, three involving court proceedings or the contribution of the mortgagor? grounds must be proved: (i) the misrepresentation occurred prior to the contract being formed; (ii) the misrepresentation was of fact and not opinion or law; and (iii) the misrepresentation induced the The most common method is the appointment of a fixed charge purchaser to enter into the contract. receiver, who can sell the property without requiring lengthy court proceedings or a mortgagor contribution. Depending on the nature The seller can be liable for either fraudulent or innocent of the security, an administrator or administrative receiver can also misrepresentation. If liable for fraudulent misrepresentation, the be appointed, or the lender can exercise a power of sale itself. buyer can seek damages or rescission prior to completion of the contract; or apply to have the contract set aside or seek damages after completion. If the seller is liable for innocent misrepresentation, the 8.4 What minimum formalities are required for real estate remedies available are more limited. However, the buyer may still lending? seek rescission and the Misrepresentation Act (NI) 1967 provides the courts with discretion to award damages in lieu of rescission. The minimum formalities are an offer letter/facility letter from the lender, the lender familiarising itself with the title and a mortgage/ charge deed. 7.4 Do sellers usually give contractual warranties to the buyer? What would be the scope of these? What is the function of warranties (e.g. to apportion risk, to 8.5 How is a real estate lender protected from claims give information)? Are warranties a substitute for the against the borrower or the real estate asset by other buyer carrying out his own diligence? creditors?

In general, save as referred to in question 7.5 below, warranties are The principle lender will usually have a first ranking fixed charge only used when there is a corporate element to the transaction – i.e. registered against the title, along with an inhibition, preventing any the transfer of shares in a company that owns the real estate. dealings with the title without the lender’s consent.

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8.6 Under what circumstances can security taken by a 9.5 What other tax or taxes (if any) are payable by the lender be avoided or rendered unenforceable? seller on the disposal of a property?

Depending on the circumstances, security taken by a lender may Depending on the seller’s circumstances and the nature of the be avoided or rendered enforceable where documents have not transaction, capital gains tax or income tax may be payable by the been executed correctly by the necessary parties. In addition, if seller. The tax rules follow England and Wales and specialist tax security documentation is not registered with the appropriate body advice should always be sought. (i.e. Land Registry of Northern Ireland and Companies House (if applicable)) it may not have priority over future dealings with the 9.6 Is taxation different if ownership of a company (or real estate. Also, where independent legal advice is not provided other entity) owning real estate is transferred? when circumstances dictate (e.g. spouse using the family home as

security for capital investment into company). Northern Ireland Yes, if the shares in a company are transferred, rather than the real estate itself, stamp duty will be payable by the buyer on the share 8.7 What actions, if any, can a borrower take to frustrate price at a rate of 0.5% currently. enforcement action by a lender?

9.7 Are there any tax issues that a buyer of real estate A borrower may try to frustrate enforcement action by providing should always take into consideration/conduct due evidence in court: of their ability to make repayments; that they diligence on? were pressurised into executing the security documents; that the lender has treated them unfairly; that the lender has not followed the Yes, a buyer should always consider the value added tax position, the correct pre-action protocol; or that the security is defective and does stamp duty land tax position, the availability of capital allowances entitle the lender to take the proposed action etc. and capital gains tax implications.

9 Tax 10 Leases of Business Premises

9.1 Are transfers of real estate subject to a transfer tax? 10.1 Please briefly describe the main laws that regulate How much? Who is liable? leases of business premises.

Stamp duty land tax is payable in accordance with the same ■ Criminal Damage (Northern Ireland) Order 1977 – deals with legislation as in England and Wales. damage caused to premises as a result of civil unrest; and ■ Business Tenancies (Northern Ireland) Order 1996 – deals 9.2 When is the transfer tax paid? with security of tenure rights for business tenants and bringing such leases to an end. Within 30 days following the effective date of the transaction (generally the completion date). 10.2 What types of business lease exist?

9.3 Are transfers of real estate by individuals subject to The most typical types of business lease are: a lease of a whole income tax? building, with the tenant taking full repairing liability; or a lease of part, with the landlord responsible for looking after the structure and Income tax will only be payable on the sale of real estate by an common parts, then recharging a fair and reasonable proportion of individual if the individual operates a business for the purpose such costs to the tenant through a service charge. of buying and selling properties and that individual operates the In both cases, the landlord will generally insure and recharge the business as a sole trader or partner. premium to the tenant as insurance rent.

9.4 Are transfers of real estate subject to VAT? How 10.3 What are the typical provisions for leases of business much? Who is liable? Are there any exemptions? premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or sub-lease; (d) insurance; (e) (i) change of control of The rules in Northern Ireland are the same as England and Wales, and the tenant; and (ii) transfer of lease as a result of a so real estate is exempt from VAT. However, an owner can choose corporate restructuring (e.g. merger); and (f) repairs? to waive the exemption and charge VAT on commercial property, this is called an ‘option to tax’. Once this option is exercised, it (a) Typically three to 20 years depending on the deal. cannot be revoked for 20 years, but the option is personal and does (b) Typically open market or index-linked rent reviews every not transfer with the property. Commercial property that is under five years. three years old will also be subject to VAT. If payable, VAT will (c) Typically permitted, subject to landlord approval and other generally be charged at the standard rate, currently 20% and the restrictions, but subletting is more restricted. buyer will pay it on top of the purchase price. The most common exemption from VAT on investment transactions is to treat the deal (d) Landlord generally insures and charges tenant insurance rent. as a transfer of a going concern. (e) Leases are often silent on change of control and restructuring. (f) Repairs can be dealt with in a number of ways and are very deal/property-specific.

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The parties are no longer liable once they have transferred their interest. 12.1 What are the main laws which govern zoning/ permitting and related matters concerning the use and occupation of land? Please briefly describe them 10.7 Green leases seek to impose obligations on and include environmental laws. landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of The main laws are the Planning Act (Northern Ireland) 2011 and the the “environmental footprint” of a building. Please Planning (Use Classes) Order (Northern Ireland) 2015, along with briefly describe any “green obligations” commonly found in leases stating whether these are clearly EU-driven environmental legislation. defined, enforceable legal obligations or something not amounting to enforceable legal obligations (for 12.2 Can the state force land owners to sell land to it? If example aspirational objectives). so please briefly describe including price mechanism.

Tughans has attempted to encourage the use of such leases in Certain public sector bodies have compulsory purchase powers, Northern Ireland and a couple of landlords have adopted some light- with compensation based on the rateable value of the property. touch aspirational objectives, but nothing too hard-hitting yet.

12.3 Which bodies control land/building use and/or 11 Leases of Residential Premises occupation and environmental regulation? How do buyers obtain reliable information on these matters?

11.1 Please briefly describe the main laws that regulate The local authorities control the planning system and the NI leases of residential premises. Environment Agency controls environmental regulation. Buyers obtain reliable information on such issues through the local The main legislation that regulates residential leases is the Landlord authority and regional property certificates, along with statutory and Tenant Law Amendment Act (Ireland) 1860 (or “Deasy’s Act”) charge searches that the seller will order and pay for as part of the and the Conveyancing Acts, 1881–1911. However, following the title pack provided pre-contract. Property (NI) Orders 1997, a residential lease for a term greater than 50 years can no longer be granted. Typically, long term residential leases are used for apartments given their nature. 12.4 What main permits or licences are required for building works and/or the use of real estate?

11.2 Do the laws differ if the premises are intended for Planning permission and building regulation approval. In some multiple different residential occupiers? cases, conservation area consent and listed building consent may also be required. No, the laws do not differ.

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12.5 Are building/use permits and licences commonly 12.10 Please briefly outline any regulatory requirements obtained in your jurisdiction? Can implied permission for the assessment and management of the energy be obtained in any way (e.g. by long use)? performance of buildings in your jurisdiction.

Generally, planning permission is obtained, but enforcement The energy performance regulations follow those in England and action cannot be taken once a change of use or development has Wales. been in existence for a certain period of time, depending on the circumstances. 13 Climate Change

12.6 What is the appropriate cost of building/use permits and the time involved in obtaining them? 13.1 Please briefly explain the nature and extent of any

regulatory measures for reducing carbon dioxide Northern Ireland The cost and time involved are dependent upon the nature of the emissions (including any mandatory emissions trading scheme). application and the timing is very dependent on the particular local authority involved. The position follows that in England and Wales.

12.7 Are there any regulations on the protection of historic monuments in your jurisdiction? If any, when and how 13.2 Are there any national greenhouse gas emissions are they likely to affect the transfer of rights in real reduction targets? estate? This follows the UK, with separate regional targets. Buildings and monuments can be listed to varying degrees, restricting what can be done to them and imposing repairing obligations. Such 13.3 Are there any other regulatory measures (not already restrictions run with the property, so will apply to a buyer when the mentioned) which aim to improve the sustainability of property is transferred. both newly constructed and existing buildings?

12.8 How can e.g. a potential buyer obtain reliable Building regulations attempt to incorporate some sustainability information on contamination and pollution of real measures where buildings are being constructed or renovated and estate? Is there a public register of contaminated land legislative changes are due that will prevent buildings with poor in your jurisdiction? energy performance ratings from being sold or let until the rating is improved. An environmental survey can be requisitioned prior to entering into Building regulations attempt to incorporate some sustainability contract. measures where buildings are being constructed or renovated and legislative changes are due that will prevent buildings with poor 12.9 In what circumstances (if any) is environmental clean- energy performance ratings from being sold or let until the rating up ever mandatory? is improved.

The NI Environment Agency can force pollution to be cleaned up.

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David Jones Luke Thompson Tughans Tughans Marlborough House Marlborough House 30 Victoria Street 30 Victoria Street Belfast BT1 3GG Belfast BT1 3GG Northern Ireland Northern Ireland

Tel: +44 28 9082 0531 Tel: +44 28 9055 3316 Fax: +44 28 9055 0096 Fax: +44 28 9055 0096 Email: [email protected] Email: [email protected] URL: www.tughans.com URL: www.tughans.com

David has experience of all aspects of commercial property in England Luke began working in Tughans in August 2013. Luke spent two and Wales and Northern Ireland, including the acquisition and disposal years training in different practice areas before qualifying into the Real

Northern Ireland of development and investment properties, leasing and property Estate department. management (acting for both landlords and tenants) across all sectors. Luke has experience in a wide range of real estate transactions. This David also works with colleagues in the corporate department on the includes the acquisition and disposal of investment property and the property aspects of business and company sales and acquisitions. leasing of retail, industrial and office space; acting for both Landlord and Tenants. David is dual qualified in England and Wales and Northern Ireland and is on the committee of the Northern Ireland Commercial Property Luke works closely with other departments within Tughans, advising Lawyers’ Association, along with being a member of the Institute of on all property aspects. Recently, Luke provided property advice Directors. for a high value business acquisition which saw a client purchase a number of wind farms from a leading independent national operator of Trained with City of London firm Nabarro Nathanson (now part of renewable energy projects. CMS) and qualified into the commercial property department, working at the firm from January 2002 until September 2007, when he moved back to Belfast to work for Tughans. He now leads the real estate team at Tughans.

Tughans was established in Belfast in 1896 and is the largest full-service commercial law firm in Northern Ireland, with a full range of clients across all major industry sectors, ranging from the largest global businesses (such as Apple), to local, family owned operations. The real estate team is the largest in NI and has been involved in 90% of all the major real estate transactions in the jurisdiction, since the market started to recover and major deals started taking place again.

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Poland Agnieszka Stankiewicz

Greenberg Traurig Grzesiak sp.k. Barbara Pancer

1 Real Estate Law 2 Ownership

The rights over land that are recognised in Poland may be divided 1.2 What is the impact (if any) on real estate of local into two categories: the first category is rightsin rem, which provide common law in your jurisdiction? stronger protection for their holder, and the second category of purely contractual rights. The main rights in the first category The legal system in Poland is uniform for the entire country. A key are ownership, perpetual usufruct right (similar to temporary role is played by local master plans, which may affect ownership of ownership), usufruct rights, easements and mortgages. Purely real estate, in particular the manner of their development. contractual rights include lease, tenancy, leasing, right to use and timesharing. 1.3 Are international laws relevant to real estate in your jurisdiction? Please ignore EU legislation enacted 3.2 Are there any scenarios where the right to a locally in EU countries. real estate diverges from the right to a building constructed thereon? The most important role is played by EU legislation; however, there are several international treaties and numerous bilateral agreements In the case of the perpetual usufruct right, a building constructed to which Poland is a party, including, in particular, bilateral on land owned by the State Treasury or local government is owned investment treaties that provide protection for real estate ownership by the holder of the perpetual usufruct right. The ownership of the rights against unlawful actions by governmental agencies such as building expires together with the expiry of the perpetual usufruct unjustified expropriation. right to the land, and the owner of the land becomes the owner of the building after reimbursing the perpetual usufruct right holder for the value of the building.

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question 4.3 above) and a lack of registration would result in the 3.3 Is there a split between legal title and beneficial title failure to acquire or transfer such right. in your jurisdiction and what are the registration consequences of any split? 4.6 On a land sale, when is title (or ownership) transferred to the buyer? There is no such split in Poland.

A sale of land may involve the sale of ownership or the sale of the 4 System of Registration perpetual usufruct right. A sale of ownership of land is effective upon the execution of a sale agreement. A sale of the perpetual

Poland usufruct right occurs only upon the registration of the buyer in the 4.1 Is all land in your jurisdiction required to be LMR, but such registration is effective from the moment of filing registered? What land (or rights) are unregistered? of the application for the registration of the sale of the perpetual usufruct right in the LMR. All land and all apartments that are separately owned must be registered in the land and mortgage registry (LMR). Ownership 4.7 Please briefly describe how some rights obtain (including ownership of apartments), perpetual usufruct rights and priority over other rights. Do earlier rights defeat later mortgages are required to be registered in the LMR. The remaining rights? rights (both in rem and contractual) may, but do not have to be, registered in the LMR. The concept of priority applies only to rights in rem other than ownership and the perpetual usufruct right, and does not apply to 4.2 Is there a state guarantee of title? What does it contractual rights. The concept of priority is based on a basic rule guarantee? that a right created first has priority over a right created later, whereby priority is decided based on the order of applications for registration There is no state guarantee of title in Poland; however there is the so- in the LMR. Rights for which applications for registration were called “principle of the public credibility of LMRs”. This principle made at the same time have equal priority. gives a guarantee to the person who acquired a right as a result of When establishing rights over real estate, an owner (or holder of a legal act performed with the person disclosed in the LMR as the the perpetual usufruct right) may decide about the priority of such holder of such right. Under the above guarantee the right will be rights in the LMR. In practice, the priority of rights applies mainly acquired even if the legal status of the real estate disclosed in LMR to mortgages. does not reflect the actual status of such real estate. The principle of public credibility does not protect free-of-charge acquisitions or 5 The Registry / Registries acquisition by a buyer acting in bad faith (i.e. who knows, or, acting diligently, should have known that the legal status of the real estate disclosed in LMR does not reflect the actual legal status thereof). 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules and requirements. 4.3 What rights in land are compulsorily registrable? What (if any) is the consequence of non-registration? There are two main land registries in Poland: LMRs; and the land and building register. LMRs are maintained by courts. The land The following rights are compulsorily registrable: ownership and building register is maintained by local authorities. LMRs (including ownership of an apartment), perpetual usufruct rights are created to confirm the legal status of real estate and they carry and mortgages. It should be noted, however, that although the certain guarantees (please see question 4.2). The land and building registration of the ownership of real estate is compulsory, failure to register has an informational purpose. However, the land and do so will not result in failure to acquire ownership (except in the building register is important for LMRs as a description of the real case of ownership of an apartment being established for the very estate registered in the LMR (its location, area, manner of use) is first time). based on information disclosed in the land and building register.

4.4 What rights in land are not required to be registered? 5.2 Does the land registry issue a physical title document to the owners of registered real estate? Any other rights in land (such as easements, usufruct, certain contractual rights such as leasehold, tenancy, right of first refusal, LMRs are available online. Anybody may print out an excerpt etc.) do not have to be registered in the LMR. (evidencing all entries in the LMR), which is considered a formal document. Additionally, an excerpt from an LMR may be issued by the LMR court as a formal document. 4.5 Where there are both unregistered and registered land or rights is there a probationary period following first registration or are there perhaps different classes 5.3 Can any transaction relating to registered real estate or qualities of title on first registration? Please give be completed electronically? What documents need details. First registration means the occasion upon to be provided to the land registry for the registration which unregistered land or rights are first registered of ownership right? Can information on ownership of in the registries. registered real estate be accessed electronically?

Polish law does not recognise different classes or qualities of title Transactions relating to real estate may not be completed on first registration, nor does it recognise any probationary periods. electronically. The transfer of the title to real estate or the Some rights require registration in order to be valid (please see establishment or transfer of a right in rem must be executed in the

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form of a notarial deed. A notary may file the application to the policy on the basis of its terms. Remuneration for the guarantors of LMR electronically. The other interested parties (the owner, holder the seller or the buyer is regulated in separate agreements, which are of the perpetual usufruct right, mortgagee) must file a physical not usually disclosed to the other party. application to the LMR court. The documents attached to the application for entry into the LMR have to support the application, 6.3 Do you feel there is a noticeable increase in e.g. establishment or transfer or a right. Generally, a document the availability of capital to finance real estate with notarised signatures is sufficient to make an entry into the transactions in your jurisdiction, whether equity or LMR. However, any application for a transfer of the title to real debt? What are the main sources of capital you see estate or for the establishment or transfer of a right in rem must be active in your market? accompanied by an agreement or other document executed in the Poland form of a notarial deed. The volume of real estate capital targeting the sector in Central LMRs available online give information about current and past and Eastern Europe should be perceived as stable in comparison to ownership and other registrable rights and are accessible by the previous years. The main source of investor interest continues to be general public. from the international real estate private equity sector. Other major regional real estate investors include British, German and South African real estate funds, insurance companies and pension funds. 5.4 Can compensation be claimed from the registry/ registries if it/they make a mistake? 6.4 What is the appetite for investors and developers Yes, compensation can be claimed for damage resulting from a in your region to look beyond primary real estate markets and transact business in secondary or even breach of the law by the authority which maintains the registry. tertiary markets? Please give examples of significant secondary or tertiary real estate transactions, if 5.5 Are there restrictions on public access to the relevant. register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and There is a trend throughout Europe for real estate investors and other rights affecting real estate? developers to seek out opportunities in secondary and tertiary markets. There are an increasing number of transactions in cities LMRs are available to the general public and the law introduces other than Warsaw (in particular, Wrocław, Kraków and Gdańsk) the presumption that each party to a real estate transaction is aware and such transactions include investments in less popular sectors of the contents of the LMR. Each LMR is accompanied by a file such as student housing and self-storage. where all documents based on which entries are made in LMRs are archived. Such files may only be reviewed by persons who prove 6.5 Have you observed any trends in particular market that they have a valid legal interest in doing so and by a notary sub sectors slowing down in your jurisdiction in public. terms of their attractiveness to investors/developers? Please give examples. 6 Real Estate Market We have not observed any such slowdown.

6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally 7 Liabilities of Buyers and Sellers in Real be involved in a real estate transaction in your Estate Transactions jurisdiction? Please briefly describe their roles and/or duties. 7.1 What (if any) are the minimum formalities for the sale Apart from the abovementioned parties, the following parties are and purchase of real estate? usually involved in a real estate transaction: (i) an escrow agent (usually a bank), which receives the purchase price for the real The sale and purchase of real estate requires an agreement in the estate from the buyer prior to the closing of the transaction and form of a notarial deed or, in the case of the sale of an apartment by releases such purchase price to the seller after being presented the owner of a building (usually a developer), an agreement on the with the agreed proof that the transaction was closed; (ii) a title establishment of separate ownership of the apartment and its sale. insurer, which provides a good title policy, as required by default The registration of the sale is compulsory but only the sale of the by some buyers, or a specific indemnity policy to cover the title perpetual usufruct right and the first sale of an apartment require risks disclosed during due diligence; (iii) a provider of Warranty registration in the LMR in order to be valid. & Indemnity insurance for the representations and warranties made by the seller in the property sale agreement; and (iv) a guarantor 7.2 Is the seller under a duty of disclosure? What matters (usually a parent company or other affiliate of the seller) for the must be disclosed? seller’s obligations to indemnify the buyer under the sale agreement. The seller is obliged to inform the buyer of the facts and legal rights 6.2 How and on what basis are these persons relating to the real estate being sold. There is a rule that the seller is remunerated? liable for the physical and legal defects in the real estate (so-called statutory warranty); however, the seller is not liable for the defects Remuneration for the escrow agent is usually structured as a one- if the buyer knew about such defects at the time of the property sale off payment, payable immediately after signing an escrow account agreement. The statutory warranty may be excluded by contract; agreement. Remuneration for title or Warranty & Indemnity insurers however, such exclusion is not effective if the seller deceitfully takes the form of a premium and is payable after the execution of the withheld information from the buyer.

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7.3 Can the seller be liable to the buyer for 8 Finance and Banking misrepresentation?

8.1 Please briefly describe any regulations concerning The seller is liable for misrepresentation in the sale and purchase the lending of money to finance real estate. Are the agreement under statutory warranty if such misrepresentation is rules different as between resident and non-resident related to the seller’s title to the property or the nature of the real persons and/or between individual persons and estate being sold. Statutory warranty is, however, increasingly corporate entities? being excluded by contract and instead the seller is responsible for breach of the given warranties on the basis of freedom of contract, Lending of money to finance real estate is mainly regulated by the Poland or title insurance and Representations and Warranties insurance is Banking Law dated 29 August 1997. The relevant regulations do not obtained. differentiate between resident and non-resident persons or between individuals and corporate entities (except as described below). Under such regulations, in loan agreements banks undertake to lend 7.4 Do sellers usually give contractual warranties to the buyer? What would be the scope of these? What is money to a borrower for a limited period of time and for a defined the function of warranties (e.g. to apportion risk, to purpose, and the borrower undertakes to use the money for such give information)? Are warranties a substitute for the purpose and on the other terms set out in the loan agreement, return buyer carrying out his own diligence? the money together with interest in accordance with the pre-agreed time schedule and to pay other fees due to the bank. Banks are In practice, sellers always give contractual warranties to the buyer obliged to assess the creditworthiness of a borrower before lending which relate to the title to the real estate (both in terms of its money. existence and the absence of encumbrance) in regard to the absence Additional protection is given to individuals under the Consumer of arrears in the payment of taxes and other public dues related to the Law Act dated 12 May 2011. real estate, the absence of contamination (usually limited to actual knowledge), compliance with all laws related to real estate, the absence of pending or threatened proceedings or third party claims, 8.2 What are the main methods by which a real estate lender seeks to protect itself from default by the the validity of leases concluded for the real estate, the compliance borrower? of the buildings developed on the land with the construction laws and laws regulating the maintenance of buildings. Rarely do sellers Real estate lenders protect themselves against default by the give warranties regarding the physical status of the real estate. borrower by demanding that various security instruments be Warranties are given to provide information and describe the real provided by the borrower or third parties. In real estate financing, estate being subject to the transaction and almost never substitute such security instruments are usually a mortgage, a registered pledge due diligence carried out by the buyer. over assets and bank accounts, assignment of receivables from income producing agreements (mainly leases), securities granted by 7.5 Does the seller warrant its ownership in any way? tenants and insurance policies, registered pledge over the shares of Please give details. the borrower and submission to enforcement (an instrument which facilitates and accelerates enforcement). Sometimes, a guarantee The seller warrants its ownership by making relevant representations from a parent company or other affiliate is sought (especially for in the sale and purchase agreement. The representations usually refer development loans). to the exclusive holding of the title, the absence of encumbrances other than those disclosed in the LMR, the absence of any third party 8.3 What are the common proceedings for realisation of rights which might affect the title and the correctness of entries in mortgaged properties? Are there any options for a the LMR vis-à-vis the actual status of the real estate. Additionally, mortgagee to realise a mortgaged property without under statutory warranty the seller is liable if the real estate being involving court proceedings or the contribution of the sold is not owned (or held in perpetual usufruct) by the seller or mortgagor? is encumbered by a third party right unknown to the buyer at the time of the sale. Additionally, sellers are providing title insurance Foreclosure requires enforcement proceedings run by an increasingly often. enforcement authority and supervised by courts pursuant to the Code of Civil Procedure. Enforcement against real estate is carried 7.6 What (if any) are the liabilities of the buyer (in addition out over several stages, including the actual seizure of real estate, its to paying the sale price)? valuation and public tender.

In addition to paying the price, the buyer is obliged to take over 8.4 What minimum formalities are required for real estate the real estate, as well as to proportionally refund part of the fee lending? payable for the perpetual usufruct right and, with respect to leased real estate, to refrain from terminating the leases. A real estate loan is granted pursuant to a loan agreement in a written form. Additionally, the borrower, and sometimes a third party, must establish the security instruments required by the bank which requires the execution of a written agreement (or, in some cases, an agreement in the form of a notarial deed or a form with notarised signatures) and, with respect to a mortgage and registered pledge, also an entry into the relevant register.

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8.5 How is a real estate lender protected from claims 9.3 Are transfers of real estate by individuals subject to against the borrower or the real estate asset by other income tax? creditors? Generally, transfers of real estate by individuals are subject to Real estate lenders protect themselves against claims against the income tax. Under certain conditions, the capital gains obtained borrower or the real estate assets of other creditors by the ranking by individuals on real estate can be exempt from income tax (in of the security instrument. Real estate lenders usually require a first particular if the real estate is sold after being held for a five-year ranking mortgage over the financed real estate, a first ranking pledge period). over rights related to real estate and insist that a claim made by other creditors through court or enforcement procedures constitute an Poland 9.4 Are transfers of real estate subject to VAT? How event of default under the loan agreement. In this way lenders make much? Who is liable? Are there any exemptions? sure that if a claim is made by another creditor and such a claim may diminish the value of the assets that secure the loan, the lenders may Generally, VAT is payable on real estate sold by a taxpayer as part of accelerate the loan and use the proceeds from the execution of the its business activity. If the sale is subject to VAT, the standard VAT security instruments before all other creditors. Real estate lenders rate amounts to 23%. If specific conditions are fulfilled, the sale of also make sure that all the income stream is assigned to them and residential buildings or separate ownership of apartments can also that any affiliated loans are fully subordinated to their loan. benefit from a reduced 8% VAT rate (subject to certain exceptions). Transfer of real estate can also benefit from VAT exemption (under 8.6 Under what circumstances can security taken by a certain conditions). VAT is paid to the tax office by the seller. lender be avoided or rendered unenforceable? 9.5 What other tax or taxes (if any) are payable by the Under the Bankruptcy Law dated 28 February 2003 and the seller on the disposal of a property? Restructuring Law dated 15 May 2015, some actions of the obligors under the finance documentation (borrowers, pledgors, etc.) made No other tax is payable by the seller on the disposal of real estate. in certain periods of time prior to filing a bankruptcy motion (or declaration of bankruptcy) or application for the opening of remedial 9.6 Is taxation different if ownership of a company (or proceedings, as the case may be, may be declared ineffective. This other entity) owning real estate is transferred? applies in particular to: security relating to a not-yet-payable debt; in rem security granted to secure third party debts; assignment of Yes. The rules on taxation of a “share deal” are different from future claims; or security to an extent that exceeds 150% of the taxation of an “asset deal”. In particular, a sale of shares in a secured claim. Polish company is subject to a 1% transfer tax (calculated based on the market value of the shares) payable by the buyer. Moreover, 8.7 What actions, if any, can a borrower take to frustrate generally, a share transaction is not subject to Polish VAT (subject enforcement action by a lender? to certain exceptions).

Under the Polish Civil Procedure Code dated 17 November 1964, 9.7 Are there any tax issues that a buyer of real estate each debtor against which an enforcement proceeding has been should always take into consideration/conduct due initiated may file a counter enforcement lawsuit (in whole orin diligence on? part) where it (among others): (i) questions the existence of the obligation recognised by the enforcement title (in particular if such A buyer of real estate should verify that the purchased real estate enforcement title is not a court decision); or (ii) indicates that an does not constitute an enterprise or an organised part thereof as the event took place after the enforcement title was issued, as a result of tax consequences of such a transfer are different from a transfer of which the obligation expired or cannot be enforced. real estate. The transfer of an enterprise or an organised part thereof is outside the scope of VAT and subject to transfer tax to be borne by the buyer. Transfer tax rates vary from 1% (sale of property 9 Tax rights) to 2% (sale of movable and real estate assets). The tax base is the fair market value of the transferred assets without deduction of liabilities or encumbrances. 9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable? The buyer of an enterprise or an organised part thereof may be held liable for the outstanding tax liabilities of the seller. The buyer (with If a sale of real estate is not subject to VAT or exempt from VAT, it is the seller’s consent) or the seller may submit a formal request to the subject to transfer tax payable by the buyer. The transfer tax is 2% tax authorities for a certificate listing all the tax liabilities which are of the market value of the real estate. transferable to the buyer. The buyer is then liable only up to the value of the tax liabilities presented in the certificate.

9.2 When is the transfer tax paid? 10 Leases of Business Premises A notary is the remitter of the transfer tax on real estate acquisitions. As a result, the notary will collect the transfer tax prior to the 10.1 Please briefly describe the main laws that regulate execution of the sale and purchase agreement. leases of business premises.

Leases of business premises are regulated, as are all other leases, by the Civil Code. The Civil Code leaves a lot of flexibility to

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the parties to the lease agreement to shape their mutual rights and (such reasons generally may not be modified by contract and mainly obligations at will. Only a few regulations relating to leases cannot relate to a default by the other party or the inability of the landlord be modified by contract, in particular the rules for the termination (for any reason) to ensure that the premises are suitable for the of a lease. agreed purpose). Business leases concluded for an undefined period of time may be terminated at any time with three months’ notice. There are no special provisions allowing the tenant to extend or 10.2 What types of business lease exist? renew the lease but lease agreements often provide for the unilateral right of the tenant to do so. There are no special provisions regarding The Civil Code recognises the lease of premises (including compensation in case of early termination (general rules shall apply) residential premises) and the lease of any other object. but parties often provide for contractual penalties in such case. Poland

As a general rule, neither the tenant nor the landlord are permitted Provisions typical for leases of business premises are as follows: to sell or transfer the rights and obligations under the lease to a third (a) usually leases are concluded for five years; (b) rent is usually party without the consent of the other party, regardless of whether increased annually based on the increase in the consumer price such sale is a part of the sale of a business or an interest or just a index relevant for the currency of the rent; (c) as a general rule, sale of the lease. As a result, the agreement between the seller and tenants may only sub-let the premises or assign the rights and the buyer of the lease, as well as the consent of the other party to obligations under a lease with the prior consent of the landlord. the lease, will determine to what extent the obligations under the Tenants of larger premises are usually able to negotiate the right lease are transferred to the buyer; they may be transferred in full to sub-lease the premises and to assign the lease to affiliates; (d) (including the liability for pre-sale non-compliance) or relate only the landlord is usually obliged to acquire and maintain third party to the obligations and liabilities commencing as of the date of sale. liability insurance and property insurance for full restitution value. The only exception to the rule that requires the consent of the other The tenant is required to acquire and maintain tenant third party party for the sale of the lease is a sale of real estate by the landlord liability insurance and property insurance for all the tenant’s whereby all leases related to such real estate are transferred to the assets in the premises; (e) (i) change of control provisions are not buyer of the real estate by operation of law. In such a case, the seller very common in Poland. Sometimes, a change of control over a remains liable for non-compliance and related damage incurred by tenant may be a prerequisite for termination of the lease, and (ii) the tenant prior to the sale. as mentioned above, usually a tenant is not permitted to assign its rights and obligations under the lease to a third party, whether such assignment is performed through corporate restructuring or 10.7 Green leases seek to impose obligations on otherwise. However, certain types of restructurings (such as merger, landlords and tenants designed to promote greater demerger, transformation) will result in a transfer of the rights and sustainable use of buildings and in the reduction of obligations under the lease by operation of law; and (f) the landlord the “environmental footprint” of a building. Please briefly describe any “green obligations” commonly is obliged to ensure that the premises are suitable for the agreed use found in leases stating whether these are clearly and to that extent is obliged to repair the premises and the building defined, enforceable legal obligations or something and maintain the building and common areas. The tenant is obliged not amounting to enforceable legal obligations (for to maintain the premises and perform minor non-structural repairs example aspirational objectives). in the premises. Green obligations are still not very common in Poland and they 10.4 What taxes are payable on rent either by the landlord usually relate to certification of a building at a certain level (either or tenant of a business lease? BREEAM or LEED certification) in terms of the energy efficiency of the building, and building materials of a certain quality or As a rule, business leases are subject to 23% VAT. However, lease provenance. Such obligations relate mainly to the construction of residential units for housing purposes is VAT-exempt. Generally, stage and they appear in the leases more as aspirational objectives. entities conducting rental activity (business lease) are subject to income tax. 11 Leases of Residential Premises

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tenant and limiting the flexibility of the parties. Such regulations on real estate; (vi) the Act on the Prevention and Remediation of include: the frequency of rent increases; restrictions concerning Damage to the Environment dated 13 April 2007; and (vii) the termination of the lease by the landlord; and specific obligations of Act on Access to Information Relating to the Environment and the landlord regarding repairs to the premises. its Protection, on Public Participation in the Protection of the Environment and on Environmental Impact Assessments dated 3 October 2008. 11.2 Do the laws differ if the premises are intended for multiple different residential occupiers? 12.2 Can the state force land owners to sell land to it? If No, the laws do not differ if the premises are intended for multiple so please briefly describe including price mechanism. different residential occupiers. Poland Land owners may be deprived of the ownership of land through expropriation. Expropriation is permitted if the land is required for 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: public purposes (mainly roads) and is carried out on the basis of (a) length of term; (b) rent increases/controls; (c) the an administrative decision. Regulations governing expropriation tenant’s rights to remain in the premises at the end of provide that the owner of the expropriated land has to receive the term; and (d) the tenant’s contribution/obligation appropriate compensation reflecting the market value of such to the property “costs” e.g. insurance and repair? land. Therefore, before expropriation-related proceedings are instituted, mediation is organised between the State Treasury or Provisions typical for leases of residential premises are as follows: municipality and the owner, during which those parties negotiate the (a) leases are usually concluded for an indefinite period or for compensation for the land. However, in practice, the compensation one- to three-year periods; (b) rent may be increased every six for expropriated land is determined based on a valuation ordered by months (however, market practice is that the rent is increased at the the expropriating authority and is rarely agreed upon by the parties, beginning of a calendar year or on the anniversary of the lease); (c) which have divergent interests. As a result, the compensation the tenant shall leave the premises no later than on the last day of received by the expropriated owner rarely reflects the market value the termination period; and (d) the tenant shall carry out repairs in of the land expected by such owner. As the appraiser may adopt the premises/if the tenant incurred some costs with the landlord’s various methods of assessing the value of land, challenging a prior consent, the tenant is entitled to the respective reimbursement. valuation in Poland is difficult.

11.4 Would there be rights for a landlord to terminate a 12.3 Which bodies control land/building use and/or residential lease and what steps would be needed occupation and environmental regulation? How do to achieve vacant possession if the circumstances buyers obtain reliable information on these matters? existed for the right to be exercised? Control of the technical condition of buildings rests with The landlord is entitled to terminate a residential lease if the tenant: governmental authorities; mainly construction supervision (i) despite receiving a written notice, uses the premises contrary to authorities. Control of real estate from the perspective of the lease agreement or the premises or property are damaged as a environmental protection rests with local governments and Regional result of the tenant’s neglect; (ii) is in arrears in payment of rent Directors of Environmental Protection. Based on the Act on for at least three months; or (iii) subleased the premises without the Access to Public Information, all information about governmental prior written consent of the landlord. To obtain vacant possession, authorities, including local governments, their powers and duties, the landlord shall deliver a written notice to the tenant giving a decisions issued, etc. may be accessed by anyone and, upon an minimum notice of one month. application, the authorities should provide such information to the enquiring party. Therefore, a buyer may always apply to the competent authorities to obtain information about the land or the 12 Public Law Permits and Obligations buildings that they contemplate acquiring.

12.1 What are the main laws which govern zoning/ 12.4 What main permits or licences are required for permitting and related matters concerning the use building works and/or the use of real estate? and occupation of land? Please briefly describe them and include environmental laws. The following are the main permits in the construction process: (i) zoning permit (which is not required if there is a binding master plan The main laws governing zoning and related matters include: (i) for the real estate); (ii) decision on environmental assessment; (iii) the Act on Spatial Planning and Development dated 27 March building permit; and (iv) occupancy permit. 2003, based on which municipalities prepare and adopt local master plans which define the manner of the use of the land in a given municipality; (ii) the Act on Monument Protection dated 23 12.5 Are building/use permits and licences commonly July 2003 which imposes limitations on developments in areas obtained in your jurisdiction? Can implied permission classified as protected due to existing monuments; (iii) the Law on be obtained in any way (e.g. by long use)? the Protection of Agricultural and Forest Land dated 3 February 1995 which imposes limitations on developments on agricultural or Building permits and occupancy permits are commonly obtained forest land; (iv) the Environmental Protection Law dated 21 April in Poland. Minor construction works (or reconstruction works) 2001 which is the main environmental law in Poland and provides, do not require such permits (but need to be notified to the among others, a procedure for land remediation in case of existing competent authorities). If a building has been developed without a contamination; (v) the Waste Management Act dated 14 December building permit, the owner of the building may be required by the 2012 which imposes certain obligations related to waste generated construction supervision authorities to execute certain works or to

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prepare documentation with the aim of confirming that the building breach of the environmental laws. In such case, an administrative was built in accordance with the law (the so-called legalisation decision may be issued by the competent authorities imposing the procedure). If the owner does not or cannot comply with the obligation to remedy such breach on the entity that contaminated obligations imposed by the construction supervision authorities, the land. Additionally, remediation of land is mandatory if the the authorities may require that the building be demolished. If contamination represents a threat to the health of people and the building is occupied without the necessary occupancy permit, the environment. In such case, the obligation to carry out land a penalty may be imposed on the occupier. There is no implied remediation rests with the owner of the land, regardless of whether building permission or occupancy permission in Poland. such owner is responsible for the contamination, and it is limited to removal or decrease of the contaminating substances in the soil, ground and water, controlling or limiting their further spread – all

Poland 12.6 What is the appropriate cost of building/use permits and the time involved in obtaining them? to the extent required to ensure that the contaminated land ceases to constitute a threat to the health of people and the environment. The administrative procedure to obtain a building permit or an occupancy permit is generally free of charge. However, the 12.10 Please briefly outline any regulatory requirements application for a building permit requires the obtainment of a number for the assessment and management of the energy of other minor permits and notifications (such as agreements with performance of buildings in your jurisdiction. utility providers, decisions from the road authority), which may carry significant costs. The building permit should be issued within According to the act of 29 August 2014 on the energy performance 65 days of an application. The occupancy permit should be issued of buildings, save for certain exceptions, each building which is within 30 days of an application. to be sold or leased should have an energy performance certificate confirming its rating relating to energy efficiency. Additionally, owners or managers of buildings are obliged to periodically inspect 12.7 Are there any regulations on the protection of historic monuments in your jurisdiction? If any, when and how the technical condition of all electrical, gas, heat-producing and air- are they likely to affect the transfer of rights in real conditioning equipment to ensure their compliance with the law. estate? 13 Climate Change The protection of historic monuments is governed by the Act on Monument Protection dated 23 July 2003. The above regulations do not limit the transferability of real estate rights. They mainly deal 13.1 Please briefly explain the nature and extent of any with limitations and obligations regarding the development of real regulatory measures for reducing carbon dioxide estate, maintenance and repairs. As a general rule, any actions taken emissions (including any mandatory emissions with respect to any change or development of protected real estate trading scheme). require the consent of the authorities responsible for the protection of historic monuments. Additionally, a municipality has the right The mandatory emissions trading scheme is regulated in the Act of of first refusal for real estate entered on the register of protected 12 June 2015 on the Greenhouse Gas Emissions Allowance Trading historic monuments if such right of first refusal is disclosed in the Scheme. A permit for emissions is issued following an application LMR. from the operator of an installation. The limit on permits to be issued results from EU regulations.

12.8 How can e.g. a potential buyer obtain reliable information on contamination and pollution of real 13.2 Are there any national greenhouse gas emissions estate? Is there a public register of contaminated land reduction targets? in your jurisdiction? The national greenhouse gas emission reduction targets result from Based on the Act on Access to Information Relating to the the EU gas emissions policy. The Emissions Trading System (ETS) Environment and its Protection, on Public Participation in the covers 45% of the EU’s greenhouse gas emissions. The EU ETS Protection of the Environment and on Environmental Impact sets a fixed cap on emissions for each year in the period 2013– Assessments dated 3 October 2008, anybody can obtain information 2020. The 2013 cap on emissions from fixed installations was set about the condition of the environment, including contamination at 2,084,301,856 allowances. This cap decreases each year. The of land. Additionally, based on the Act on the Prevention and remaining 55% of the EU’s greenhouse gas emissions are covered Remediation of Damage to the Environment, the General Director by national emission reduction targets (sectors not covered by ETS). of Environmental Protection maintains a register of direct threats to EU countries have taken on binding annual targets until 2020 to cut the environment that have occurred in Poland. The General Director emissions in these sectors. of Environmental Protection also maintains a register of historic contaminations (which occurred prior to 30 April 2007). Access to both of the above registers is limited to the governmental authorities 13.3 Are there any other regulatory measures (not already charged with protection of environment, however, indirectly, through mentioned) which aim to improve the sustainability of both newly constructed and existing buildings? Act on Access to Information Relating to the Environment and its Protection, the information contained in those registers should also be disclosed to any person applying for disclosure of information The main regulations regarding the above issue are: the Ordinance about the condition of the environment in a given location. of the Minister of Infrastructure dated 12 April 2002 regarding the technical conditions buildings and their location should fulfil, and the Ordinance of the Minister of Internal Affairs and Administration 12.9 In what circumstances (if any) is environmental clean- regarding the technical conditions for the occupancy of residential up ever mandatory? buildings dated 16 August 1999. Additionally, there are numerous regulations provided in the broadly understood construction law and Remediation of land is mandatory if any entity contaminates land in environmental law.

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Agnieszka Stankiewicz Barbara Pancer Greenberg Traurig Grzesiak sp.k. Greenberg Traurig Grzesiak sp.k. Stock Exchange Building Stock Exchange Building ul. Książęca 4 ul. Książęca 4 00-498 Warsaw 00-498 Warsaw Poland Poland

Tel: +48 22 690 6142 Tel: +48 22 690 6132 Email: [email protected] Email: [email protected] URL: www.gtlaw.com URL: www.gtlaw.com Poland Agnieszka Stankiewicz is a partner in the real estate department of Barbara Pancer is a senior associate in the real estate department of the Warsaw office of Greenberg Traurig. the Warsaw office of Greenberg Traurig. She has over 20 years of professional experience in corporate finance Barbara has 15 years of professional experience. She focuses her and real estate transactions. Her practice focuses on assisting a practice on the investment process, including sale agreements, EPC variety of foreign and domestic investors in M&A, takeovers, joint and other construction contracts (also based on FIDIC templates), ventures, corporate and organisational restructuring, acquisitions development and property management agreements and commercial and divestments of real estate or real estate holding companies, the leases. She also advises on matters connected with the development financing and refinancing of real estate acquisitions, forward purchase process, including planning, permit and construction issues. She has and leaseback transactions, all aspects of real estate development broad experience in performing due diligence audits related to the projects as well as the due diligence of companies and assets and the legal aspects of real estate in connection with the sale and purchase of restructuring of their financial indebtedness. real estate, as well as for banks financing acquisitions or development of real estate. Agnieszka has been recognised as one of the leading lawyers in Poland in various legal directories including Chambers Europe and Barbara has been involved in major real estate and infrastructure EMEA Legal 500. She is also listed as a Who’s Who Legal expert in projects on the Polish market. real estate. She graduated from the Faculty of Law at Warsaw University. She She graduated from the Faculty of Law at Warsaw University. She qualified as a legal advisor in 2012. qualified as an advocate in 2001.

Greenberg Traurig is a law firm with over 2,000 attorneys serving Clients from 38 offices around the world. The Warsaw office has a professional team of more than 100 lawyers and is highly ranked in all major practice areas. Our real estate team consists of more than 40 top-rated specialists who cover a broad spectrum of core real estate and related practices, including finance, corporate, M&A, tax and capital markets. This team is one of the largest real estate teams in Poland. We provide a full-service real estate practice, from acquisition, tenant and landlord representation to assisting developers and lenders in seeking to create new real estate development and finance concepts. We also handle dispute resolution arising out of real estate transactions. The team benefits from the support of our market leading real estate practice in the United States.

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Scotland David Mitchell

Shepherd and Wedderburn LLP Scott Ritchie

■ The Climate Change (Scotland) Act 2009 provides 1 Real Estate Law powers to impose requirements on owners of residential and commercial buildings to take active steps to improve the energy efficiency of their properties. 1.1 Please briefly describe the main laws that govern real estate in your jurisdiction. Laws relating to ■ The Land Registration etc. (Scotland) Act 2012 completely leases of business premises should be listed in overhauled the system of land registration in Scotland and response to question 10.1. Those relating to zoning introduced advance notices providing applicants with a and environmental should be listed in response to protected priority period for the first time. question 12.1. Those relating to tax should be listed in ■ The Land and Buildings Transaction Tax (Scotland) Act response to questions in Section 9. 2013 introduced a new tax on land transfers. ■ The Long Leases (Scotland) Act 2015 converted tenants’ Many aspects of real estate law in Scotland are still affected by rights under ultra-long leases to outright ownership. conveyancing and other legislation enacted over the last few centuries. ■ The Legal Writings (Counterparts and Delivery) (Scotland) The Conveyancing (Scotland) Acts of 1874, 1924 and 1938 Act 2015 introduced a statutory form of counterpart execution continue to be relevant. The Conveyancing and Feudal Reform to Scotland and enabled effective electronic delivery of (Scotland) Act 1970 is largely credited with being the starting point traditional hard copy, wet signature documents. for the modernisation of real estate law in Scotland. The 1970 Act ■ The Private Housing (Tenancies) (Scotland) Act 2016 created the “standard security”, which is now the only way in which introduced a new residential tenancy regime and the potential a fixed charge over heritable property in Scotland can be created. for rent control zones. The Land Tenure Reform (Scotland) Act 1974 paved the way for ■ And in the area of land reform, the Community abolition of the feudal system by prohibiting the creation of new Empowerment (Scotland) Act 2015: feuduties, the Land Registration (Scotland) Act 1979 introduced a ■ enacted a number of provisions designed to empower state guaranteed system of land registration, the Housing (Scotland) communities to have a greater say in the decisions Act 1988 introduced a modern form of residential tenancy, and the affecting their locality, acquire publicly owned property; Requirements of Writing (Scotland) Act 1995 provided a statutory and code for validity and probativity of documents relating to the creation, ■ extended the community right to buy to the whole of transfer, variation or extinction of a real right in land. Scotland, In more recent times, and since the creation of the Scottish while the Land Reform (Scotland) Act 2016 set up a Parliament in 1999, much modernising legislation has been enacted, new Scottish Land Commission, introduced proposals for and the Scottish Government’s land reform agenda has also been registering information about persons with controlling influential in real estate law-making in Scotland. Of particular note interests in land, and revised and modernised aspects of are: agricultural tenancies. ■ The Abolition of Feudal Tenure etc. (Scotland) Act 2000, which abolished the feudal system of land holding in Scotland. 1.2 What is the impact (if any) on real estate of local common law in your jurisdiction? ■ The Land Reform (Scotland) Act 2003, which created: rights of public access over most land in Scotland; a pre- emptive right to buy for predominantly rural communities; Much of Scots real estate law is based on the common law. and a crofting community right to buy. ■ The Title Conditions (Scotland) Act 2003, which produced 1.3 Are international laws relevant to real estate in your a statutory code for the way in which title burdens affecting jurisdiction? Please ignore EU legislation enacted land could be created, varied and extinguished. locally in EU countries. ■ The Tenements (Scotland) Act 2004, which provided a statutory scheme, replacing the common law rules relating There are no international laws which are directly relevant. to tenements, and providing for a scheme of management for tenements. ■ The Planning etc. (Scotland) Act 2006 sets out the framework for a strategic planning policy.

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unregistered property will induce a first registration into the Land 2 Ownership Register and other transactions such as the grant of a new registrable lease, or the grant of a standard security will trigger the requirement 2.1 Are there legal restrictions on ownership of real estate for the landlord’s or borrower’s title to be registered in the Land by particular classes of persons (e.g. non-resident Register, if it is unregistered at the time. Eventually the Register persons)? of Sasines will be closed to all deed types. Through this process and voluntary registration in the Land Register of Sasines title, No, there are no such legal restrictions. and a process known as Keeper-induced registration, by which the Registers of Scotland can transfer a Sasine title onto the Land Register, it is intended that all title in Scotland will be registered.

3 Real Estate Rights Scotland Some ancient land rights are not registered in either Register. Often these relate to land rights granted by Royal Charter, such as Burgh 3.1 What are the types of rights over land recognised in lands and some lands held by the older Scottish Universities. your jurisdiction? Are any of them purely contractual between the parties? 4.2 Is there a state guarantee of title? What does it guarantee? Real estate in Scotland can be held under outright ownership (similar to freehold) or a leasehold title under which a person is Yes. Land registered in the Land Register of Scotland benefits entitled to occupy a property under contractual terms agreed with from a state guarantee of title. Titles registered in the Register of the owner of the property. Sasines do not. Under the Land Registration (Scotland) Act 1979, Other rights include: this state guarantee was known as indemnity. The state guaranteed ■ the rights of a heritable creditor to take a standard security that any title registered in the Land Register was a good title, and (fixed legal charge) over a property; and if any person suffered loss as a result of rectification against them ■ the rights of a person to exercise servitude rights (easements) of such a title or in respect of any error or omission in the title, over the land of another or to enforce title burdens such as use they were entitled to receive compensation in respect of that loss. restrictions over another property. Under the Land Registration etc. (Scotland) Act 2012, indemnity is Such rights are real rights in property, not contractual and run with replaced by warranty. Warranty is similar to indemnity in respect the land. that any person who suffers loss is entitled to compensation, but the conditions for establishing loss are slightly different. The Keeper’s warranty is that the title sheet of any property is accurate insofar as 3.2 Are there any scenarios where the right to a it shows the owner to be the proprietor of the property and is not real estate diverges from the right to a building inaccurate insofar as there is omitted from it any encumbrance. constructed thereon? In certain circumstances, for example where there is a known flaw Not generally. Ownership of land includes ownership of any in the title, indemnity or warranty may be excluded. buildings or other structures constructed on the land. An exception to this rule is the law relating to tenements. Unless otherwise 4.3 What rights in land are compulsorily registrable? specified, the owner of the ground floor flat owns the ground (or What (if any) is the consequence of non-registration? “solum”) on which the building is erected, but does not own the whole of the building as a consequence. Each flat in the tenement There is no compulsion, as such, to register property rights, but can be held in separate ownership. registration is the only way that an owner of land or a heritable creditor in a fixed security can obtain a real right of property, as 3.3 Is there a split between legal title and beneficial title opposed to merely a personal one. A heritable creditor’s rights to in your jurisdiction and what are the registration enforce a security, for example, can only be exercised if the security consequences of any split? is registered, and failure to register a security could also mean that the heritable creditor loses priority to a subsequent security that Scots law does not recognise separate estates of legal and beneficial was registered. Failure to register a title to property would mean ownership. that the ownership of that property remained vested in the previous registered or recorded owner. 4 System of Registration 4.4 What rights in land are not required to be registered?

4.1 Is all land in your jurisdiction required to be Commercial leases with a duration of 20 years or less cannot be registered? What land (or rights) are unregistered? registered. Residential leases cannot be registered as there is a statutory prohibition against such leases being longer than 20 years. No. Scotland currently has two Property Registers which exist side Servitudes can be created other than by express grant, through by side: the 400-year-old Register of Sasines and the more modern exercise of the right for a continuous period of at least 20 years, and Land Register of Scotland. Title held in the Register of Sasines is although they can now be added to the title sheet of a registered title described as both “recorded” or “unregistered”. Title held in the they do not rely on such registration for their validity. Public rights Land Register of Scotland is described as “registered”. of way do not require registration. A process is currently under way to ultimately transfer all titles in the Register of Sasines onto the Land Register. Any transfer of

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4.5 Where there are both unregistered and registered land 5.3 Can any transaction relating to registered real estate or rights is there a probationary period following first be completed electronically? What documents need registration or are there perhaps different classes to be provided to the land registry for the registration or qualities of title on first registration? Please give of ownership right? Can information on ownership of details. First registration means the occasion upon registered real estate be accessed electronically? which unregistered land or rights are first registered in the registries. Only in limited circumstances at present. For some years the Land Register has operated a system of Automated Registration of Title There is no probationary period following a first registration. For to Land (ARTL). It was only possible to transact with the whole of already registered titles there is a type of probationary period in titles that were already registered. The Registers of Scotland are Scotland certain very rare cases: this is a protection for good faith purchasers currently operating a system for electronic registration of discharges who buy from someone who is not in reality the true owner of the of standard securities, and are developing that system to be able to land. Provided that person is registered as the proprietor, and is in accept transfers of title (dispositions) and standard securities in the possession of the land, the buyer will obtain a good unchallengeable near future. title after a period of one year has elapsed. That one-year period can If the transaction involves a first registration into the Land Register, include the period of possession of the seller, so if the seller has already then in addition to the disposition in favour of the applicant, been in possession for one year, the title is immediately protected. accompanied by a completed application form, all other documents relative to the title have to be submitted. This may include other 4.6 On a land sale, when is title (or ownership) transferred deeds containing a full description of the property, deeds containing to the buyer? servitudes and burdens, and a plan. If any Land and Buildings Transaction Tax (LBTT) (see Section 9) is payable, payment of this Title and ownership transfer on registration of the transfer at the must be confirmed in the application. Land Register. It is possible to search the Registers through a service provided by the Registers of Scotland, known as Registers Direct. Users 4.7 Please briefly describe how some rights obtain of Registers Direct have to be approved or licensed to use it, and priority over other rights. Do earlier rights defeat later charges are made for accessing documents, so it is not a service that rights? is available to the general public. An updated version of Registers Direct known as ScotLIS was introduced during 2017. The priority of rights is usually determined by the order in which such rights are created, and as a general rule, earlier rights would 5.4 Can compensation be claimed from the registry/ defeat later competing rights. This can be overturned if the later registries if it/they make a mistake? right was protected by an advance notice, and the earlier right was not, provided the later right is registered within the protected period Yes, if the person suffers loss as a result of the mistake, and certain of the advance notice (35 days). conditions apply.

6.1 Which parties (in addition to the buyer and seller 5.2 Does the land registry issue a physical title document and the buyer’s finance provider) would normally to the owners of registered real estate? be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or No. Although under the Land Registration etc. (Scotland) Act 1979 duties. the Land Register would issue a Land Certificate with particulars of the owner, property, and any securities and title conditions affecting Solicitors: usually both the buyer and the seller will instruct their the property, under the Land Registration etc. (Scotland) Act 2012, own solicitors to act for them in the negotiation and preparation the Land Register operates a policy of dematerialisation. The of the contract. The buyer’s solicitor will conduct all necessary owner, or the owner’s solicitor, receives by email a PDF plain copy due diligence in relation to the title, any occupational leases, and of the title sheet. other ancillary matters, including examining legal reports and other searches. The buyer’s solicitor will attend to submission of an

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LBTT return and payment of any LBTT due and to submission of the application for registration and other post completion matters. 7 Liabilities of Buyers and Sellers in Real Estate Transactions Agents: selling or letting agents are usually involved in marketing property, and are often responsible for negotiating the principal heads of terms for the sale with the buyers agents. 7.1 What (if any) are the minimum formalities for the sale Surveyors: a preliminary step in the purchasing process is to and purchase of real estate? establish the physical condition of the property, and a buyer will instruct a survey to carry out an inspection of the property, either A contract for the sale and purchase of the land must be in writing. prior to bidding, or will make its offer conditional on receiving a In Scotland, the contract is usually adjusted between the solicitors satisfactory survey report. acting for the seller and the buyer, who negotiate and then exchange Scotland contract letters (missives) on behalf of their respective clients. Accountants/financial advisers: particularly if there are complex tax or capital allowances issues, the parties may engage specialist Title to the property is transferred by way of a disposition signed advisers. Specialist tax lawyers may be employed for this purpose. by or on behalf of the seller. The purchaser then registers the disposition in the Land Register to complete its title. Other specialists may be required according to circumstances.

7.2 Is the seller under a duty of disclosure? What matters 6.2 How and on what basis are these persons must be disclosed? remunerated?

The seller does not have a duty of disclosure, in general terms, and They will usually render an invoice for their services direct to the the principle of caveat emptor (let the buyer beware) applies, so that client. Agents often operate on a commission basis, agreeing to the buyer must usually conduct its own due diligence and satisfy be paid a certain percentage of the price obtained. Lawyers will itself as to title and other relevant matters in relation to the property. usually agree the basis of their fee at the stage of being instructed, and will invariably have been asked to provide a quote for the work. Surveyors are usually paid a fixed fee, often on a scale of fees 7.3 Can the seller be liable to the buyer for depending on the value of the property, but not always. misrepresentation?

Yes, if the seller makes a false statement, on the strength of which 6.3 Do you feel there is a noticeable increase in the availability of capital to finance real estate the buyer is induced to purchase the property, and the buyer suffers transactions in your jurisdiction, whether equity or loss as a result. debt? What are the main sources of capital you see active in your market? 7.4 Do sellers usually give contractual warranties to the buyer? What would be the scope of these? What is There has not necessarily been a noticeable increase in the the function of warranties (e.g. to apportion risk, to availability of capital, but there has been a change in the origin of give information)? Are warranties a substitute for the capital. In recent years UK institutions have not been investing in buyer carrying out his own diligence? any great volume in Scotland and have been replaced by global investors. Yield differential with English regions saw a number of Limited warranties are given in the contract. Some contracts, trophy assets acquired by investors ranging from the States, Hong particularly of residential properties, will contain a warranty from Kong and India. A similar sentiment can be said of financing; the the seller that the title is valid and marketable. However this does traditional UK lenders have a limited appetite and more often than not replace the buyers’ own due diligence requirements. Some not European lenders are filling the gap. warranties or confirmations are given by a seller in respect of matters which are only within the knowledge of the seller, and are not otherwise ascertainable from the titles or other searches and 6.4 What is the appetite for investors and developers in your region to look beyond primary real estate reports. markets and transact business in secondary or even tertiary markets? Please give examples of significant 7.5 Does the seller warrant its ownership in any way? secondary or tertiary real estate transactions, if Please give details. relevant.

Yes. Usually the seller will grant warrandice in the disposition Secondary/tertiary activity has probably been confined to “flavour transferring the title. of the month” investment classes, e.g. student housing and industrial. Given the onset of Brexit, there may be concerns around There are three types of warrandice: sustainability for both (less students and less consumer spending Absolute warrandice: A grant of absolute warrandice protects the hitting the demand for non-core locations). Hotel investment is also purchaser from the past and future acts and deeds of the disponer, booming given the weak pound (again driven by overseas investors). and from the acts of third parties and is a guarantee from the granter that the title is good, and not subject to unusual conditions of title that are unknown to the disponee. It is expressed by the words: 6.5 Have you observed any trends in particular market sub sectors slowing down in your jurisdiction in “And I/we grant warrandice.” It is the most common form. terms of their attractiveness to investors/developers? Fact and deed warrandice: This is a guarantee against both the Please give examples. future acts or deeds and the past acts or deeds of the granter. In effect it is an undertaking by the disponer that he has not done anything The food and beverage market has recently cooled for all but the best in the past, and will do nothing in the future to prejudice the title locations, presumably driven by a slowdown in consumer spending. granted in the disposition. This type of warrandice is usually given

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by granters acting in some representative capacity, such as executors ■ a standard security (perfected by registration at Registers or trustees, in which case generally they will also bind the trust or of Scotland) over the asset; the executry estate in absolute warrandice. It is expressed by the ■ an assignation of rental income (perfected by intimation words: “And I/we grant warrandice from my/our own facts and to the underlying tenant(s)) by way of security in relation deeds only.” to rental income receivable from the asset; Simple warrandice: This is usual where the property is being ■ an assignation in security (perfected by intimation to transferred for no consideration, e.g. such as a gift, and is implied in the relevant counterparty) of the borrower’s rights in such deeds unless other provision is made. It offers protection from any relevant contracts governed by Scots law such as insurance documents, collateral warranties and other the future voluntary acts or deeds of the granter but not past ones, construction documentation relative to the asset; or third party acts. It is expressed by the words: “And I/we grant Scotland simple warrandice.” ■ a floating charge over all assets of the borrower; ■ (occasionally) a share pledge (perfected by execution It is common for no warrandice to be given in sales by insolvency and delivery of a stock transfer form in the name of the practitioners. lender) of the share capital in the borrower, to the extent the borrower is a Scottish-incorporated company; and 7.6 What (if any) are the liabilities of the buyer (in addition ■ (occasionally) an assignation in security (perfected by to paying the sale price)? intimation to the account bank) of the borrower’s rights in relation to any Scots law-governed transaction bank Usually, a buyer does not have any other liabilities to the seller. accounts. However, it is the buyer’s responsibility to pay any LBTT due in b) Guarantee – guarantees are sometimes given by the respect of the transaction, and the registration dues of the disposition in borrower’s parent company or by other companies in the its favour. If the sale price is liable to VAT, the buyer must pay that too. same group. c) Control accounts – the lender will ensure that any income from the asset is paid into control accounts. Funds from these 8 Finance and Banking accounts will only be released to the borrower after interest and amortisation on the loan has been paid. d) Valuations and LTV covenants – by regularly requiring 8.1 Please briefly describe any regulations concerning valuations of the asset and testing the loan to value (LTV) the lending of money to finance real estate. Are the covenant set out in the loan agreement, the lender will ensure rules different as between resident and non-resident that the value of the asset over which it has security remains persons and/or between individual persons and sufficient in order to repay the loan. corporate entities? e) Insurance – the lender will require the borrower to take out appropriate buildings insurance. This section does not address private lending where various consumer protection provisions may apply. f) Covenants – the loan agreement will contain both financial covenants (financial targets which the borrower undertakes to The Financial Services and Markets Act 2000 (FSMA) (as amended) meet (for example, an interest cover covenant (and, if the loan provides the framework for the UK regulatory regime. It provides is being repaid in instalments, debt service cover covenant)) for the establishment, objectives and ongoing functions of the which aims to ensure that the net rental income from the Financial Conduct Authority, an independent, non-governmental asset will cover all interest and fees (and any repayments of body regulating the provision of financial services. principal) due under the loan agreement in a given period and non-financial covenants (such as covenants to maintain the The Income Tax Act 2007 requires tax to be withheld on payments asset in good repair or covenants restricting disposal) by the of annual interest broadly where that interest is paid by a company borrower to ensure that the value of the asset is maintained. or is paid by any person to a non-resident person. Exemptions are g) Tenants and leases – the lender will require detailed available: undertakings from the borrower in relation to the tenants, a) In relation to interest payable on an advance from a bank, if, the leases and the rental income from the asset (for example, at the time when the interest is paid, the person beneficially to collect the rent and otherwise enforce the tenants’ lease entitled to the interest is liable to pay UK corporation tax on obligations, not to grant new leases nor to accept surrenders the interest or would be so liable but for the fact that it is a of leases, and to provide regular information to the lender bank acting through a foreign branch in respect of which the about the tenants, the leases and the rental income). foreign branch exemption applies. b) If the company paying the interest reasonably believes that the beneficial owner of the interest is a UK-resident company 8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a which carries on a trade in the UK through a permanent mortgagee to realise a mortgaged property without establishment and is liable to UK corporation tax on the involving court proceedings or the contribution of the interest or a partnership of which all the partners are such mortgagor? UK-resident or non-UK-resident companies. c) If the lender has the benefit of a double taxation treaty with a) Power of Sale – Pursuant to the standard security granted the UK reducing withholding tax on interest to zero. over the asset, the heritable creditor/lender has statutory powers of sale and foreclosure in relation to the asset under 8.2 What are the main methods by which a real estate the Conveyancing and Feudal Reform (Scotland) Act 1970. lender seeks to protect itself from default by the These powers are closely regulated and can only be exercised borrower? following the service of a “calling up” notice by the heritable creditor/lender upon the borrower. Service of the “calling up” notice gives the borrower a two-month period in which a) Security package – the security package for a facility secured to repay or satisfy the outstanding debt. If, following expiry on real estate will usually comprise: of the two-month “calling up” notice period, the borrower has

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not repaid or satisfied the outstanding debt then the heritable b) Assignation of rental income – Where the heritable creditor/ creditor/lender can enforce its rights under the standard lender takes an assignation in security of the rental income security, unless the asset is used for residential purposes derived from the asset, this must be perfected by intimation (which can include hotels and student accommodation) in to the underlying tenant(s). Until intimation is given to the which case the heritable creditor/lender must also apply to tenant(s), there is no perfected assignation and therefore no court for a decree to sell or foreclose on the asset. Due to the fixed security over the rental income. The heritable creditor/ time periods and procedure involved in utilising the powers lender must also demonstrate a sufficient degree of control in of sale and foreclosure, it is less common now for heritable respect of the rental income which will ordinarily be achieved creditors/lenders to enforce their rights in this way. Heritable by either (a) having the rental income paid by the borrower creditors/lenders will often (where the borrower vehicle into a blocked bank account, or (b) where the rental income makes it appropriate) seek to realise their security through is collected by a managing agent, having that managing agent

appointment or an administrator or liquidator. enter into a duty of care agreement with the heritable creditor/ Scotland b) Appointment of a receiver – Other than in very limited lender. circumstances, a heritable creditor/lender cannot appoint a c) Other assignations in security – Where the heritable creditor/ receiver under Scots law in relation to the asset. Where the lender also takes an assignation in security of the borrower’s borrower holds multiple assets and has granted a limited assets rights in relation to other contracts or assets governed by floating charge over a Scottish asset, it may be possible for Scots law (such as insurance contracts, bank accounts or the heritable creditor/lender to appoint a “Scottish” receiver construction documentation), such assignation in security (under the Insolvency Act) to the Scottish asset. The location must be perfected by intimation to the relevant counterparty. and jurisdiction of the borrower will also have an impact on Until intimation is given to the relevant counterparty there this ability to appoint a Scottish receiver. Where such an is no perfected assignation and therefore no fixed security appointment is possible, the receiver will have the powers to over the relevant rights/contracts. Similar requirements in sell and manage and realise the property in accordance with relation to control as outlined in relation to assignations of Schedule 2 to the Insolvency Act, plus any additional powers rental income will also apply here. outlined in the floating charge security. d) Scottish share pledge – In the limited circumstances where c) Appointment of an administrator – If the borrower is an the heritable creditor/lender takes a pledge of the share capital appropriate corporate entity then the heritable creditor/lender in the borrower, this must be perfected by execution and could apply for the appointment of an administrator, either delivery of a stock transfer form in the name of the heritable through the courts or, if the heritable creditor/lender has a creditor/lender and registration of the stock transfer form in qualifying floating charge over the borrower, through an the borrower’s register of members. An updated register of out-of-court procedure. One of the effects of administration members and share certificate (showing the heritable creditor/ is that there is a moratorium on proceedings against the lender as the registered shareholder) should also be obtained. borrower (or its property) or security enforcement without Until the stock transfer forms are executed and delivered, the permission of the court or the consent of the administrator. and registered in the register of members of the borrower, An administrator is an officer of the court and has wide the share pledge has not been perfected and there is no fixed powers including powers to dispose of assets. security over the share capital. e) Negative pledge – The loan agreement will contain a negative pledge whereby the borrower agrees not to create any other 8.4 What minimum formalities are required for real estate lending? security interest over the relevant asset (breach of which will be an “event of default”).

The lender will require: a) a report on title (lenders usually require the report to be in 8.6 Under what circumstances can security taken by a a prescribed format called a certificate of title with both the lender be avoided or rendered unenforceable? City of London Law Society or Property Standardisation Group forms being generally accepted); Provided the security has been validly created and properly b) a valuation of the asset; registered, a lender is entitled to take enforcement action in the c) a first ranking standard security over the asset; and appropriate circumstances. d) a floating charge over all assets of the borrower (where the borrower is a special purpose vehicle). 8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender?

8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other In the event of a default under the security, a borrower can take steps creditors? to remedy the default before the expiry of the period in any default notice issued by the lender. If the default is remedied, the lender a) Registration of security package – The security package no longer has a right of enforcement in respect of that instance of referred to in the response to question 8.2 above will be default. perfected by the standard security being registered at Registers of Scotland. Prior to the standard security being submitted for registration, the borrower should submit an 9 Tax “advance notice” against the property title in respect of the standard security, which gives the heritable creditor/lender a priority period of 35 days. The heritable creditor/lender will 9.1 Are transfers of real estate subject to a transfer tax? then have priority as against other creditors in respect of the How much? Who is liable? asset for that period. In addition, if the security is granted by a UK company, such security must be registered against Land and Buildings Transaction Tax (LBTT) is payable by the buyer the company at Companies House within 21 days of creation, of land, and by a tenant of leased property. The tax is charged on a failing which the security will be void against any liquidator progressive basis; that is to say, it is charged only on the proportion or administrator of the company and any third party creditor.

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of the price within and at the different rates set for, the relevant Even when a property has been opted, there are circumstances in band or bands of tax. For leases, the net present value (NPV) of which no tax is payable. This is where the building concerned is the rent must be ascertained, and the tax is then calculated at 1% held by the seller as a going concern (i.e. it is being operated as a of NPVs over £150,000. LBTT may also be payable on chargeable business such as the letting of property). Provided the buyer intends consideration other than rent, such as a premium. to continue to operate the building in the same way, and also opts to tax, the transaction can qualify as a transfer of a going concern The current rates of LBTT for non-residential properties (w.e.f. 1 (TOGC), so that VAT is not payable. April 2015) are:

Purchase price LBTT rate 9.5 What other tax or taxes (if any) are payable by the Up to £150,000 0% seller on the disposal of a property?

Scotland Above £150,000 to £350,000 3% Above £350,000 4.5% UK resident companies pay corporation tax at the rate of 19% The current rates for residential properties (w.e.f. 1 April 2015) are: (expected to be reduced to 17% in April 2020) on any capital gain which arises from the transfer of property held as an investment. Purchase price LBTT rate Profits realised from the transfer of property held as trading stock Up to £145,000 0% will be subject to corporation tax on income at the same rate. Above £145,000 to £250,000 2% Individuals may be liable to capital gains tax on disposal of property Above £250,000 to £325,000 5% Above £325,000 to £750,000 10% at the rate of 20%, or 28% for gains on chargeable residential Over £750,000 12% property.

An additional dwelling supplement (ADS) of 3% applies to 9.6 Is taxation different if ownership of a company (or purchases of second or additional residential properties. other entity) owning real estate is transferred?

9.2 When is the transfer tax paid? Yes. LBTT does not apply to the purchase of shares in a company (or other entity) owning a property asset, unlike the purchase of the LBTT is payable within 30 days of the effective date of a transaction. asset itself. Stamp duty is payable on the transfer of shares in a UK For purchases of property, the effective date usually means the date company at the rate of 0.5%. of completion: when the price is paid. However, it is not possible to register the disposition of the property at the Land Register of 9.7 Are there any tax issues that a buyer of real estate Scotland, unless the LBTT has been paid, or there are in place should always take into consideration/conduct due “arrangements satisfactory” to Revenue Scotland for payment of the diligence on? tax. Arrangements satisfactory mean that payment must be received by Revenue Scotland (by BACS, CHAPs or direct debit) no later A buyer of real estate should always consider the LBTT implications than the fifth working day after the date of submission of the LBTT and for commercial property VAT considerations. Certain purchases, return. For leases, the effective date is the last date of execution such as the acquisition of multiple dwellings, and certain buyers of the lease, or if earlier, when “substantial performance” takes such as charities, registered social landlords, or group company place. This will occur if the tenant takes entry to the property or transfers, may qualify for relief. makes payment of all or a substantial proportion of any non-rental Special LBTT rules apply when works are carried out as part of the consideration, or makes the first payment of rent. consideration for a land transaction. An exemption may apply when works are carried out by the buyer, if certain conditions are met. 9.3 Are transfers of real estate by individuals subject to Particular care is required when works are carried out by the seller. income tax? If the works are carried out under a contract which is closely linked with the land contract, LBTT may be payable on the value of the No income tax is payable on transfers of real estate, although, works as well as the price paid for the land. depending on the nature of the seller’s business, they may be liable The annual tax on enveloped dwellings (ATED) is not a property to pay tax on any profit from the sale. transaction tax as such; it is an annual charge on UK residential property owned by non-natural persons, (mainly companies) that 9.4 Are transfers of real estate subject to VAT? How own UK residential property valued at more than £500,000. The much? Who is liable? Are there any exemptions? annual charge ranges on bands from £3,500 (for values of more than £500,000 but less than £1 million) to £220,350 (for values of more As a matter of law, real estate is exempt from VAT. However, the than £20 million) depending on the value of the property. owner of commercial property can opt to tax it, so that it can treat any supplies it makes in relation to the property subject to VAT at 10 Leases of Business Premises the standard rate (currently 20%). If the seller has opted to tax the property, then the price on sale will attract VAT. It is quite common for owners of commercial property to have opted to tax. In addition, 10.1 Please briefly describe the main laws that regulate sales of newly constructed commercial buildings or civil engineering leases of business premises. works which are less than three years old will be standard rated. Sale contracts will invariably provide for the price to be exclusive There is very little by way of legislation regulating commercial of any VAT, so that if VAT is payable, this must be met by the buyer. leases in Scotland. The Law Reform (Miscellaneous Provisions) It is the liability of the seller to account to HM Customs and Excise (Scotland) Act 1985 makes provision for steps that a landlord must for the amount of the VAT paid on the price. take before it can irritate a lease, requiring the tenant to remove due to some breach.

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In very limited circumstances, a statutory right of renewal is (f) Repairs: Most business leases will proceed on an FRI basis. available under the Tenancy of Shops (Scotland) Act 1949. This How this is effected will depend on the way in which the was designed to protect tenants of shop premises, by allowing the lease is structured. The lease will invariably impose liability tenant to apply to the sheriff court for renewal of the tenancy where for repairs to the premises on the tenant. If the premises a notice to quit has been served on a tenant, and the tenant wants comprise the whole of the building then the tenant will be expected to attend to repairs to both the interior and exterior to continue the tenancy, but has been unable to get a renewal of of the premises. the tenancy from the landlord on satisfactory terms. This is rarely invoked, and it is likely that it will be repealed. For leases of part of a larger building, it is usual for the premises to consist of the internal parts of the area let, and the other parts of For the most part, leases are governed by the terms of the contract the building – the common parts and the exterior – will be repaired between the landlord and the tenant, that constitutes the lease, and

by the landlord, with a proportion of the cost of those repairs being Scotland by common law. recovered from the tenants through service charge.

10.2 What types of business lease exist? 10.4 What taxes are payable on rent either by the landlord or tenant of a business lease? The terms of business leases are usually negotiated between the parties and so the detail of the provisions can vary. However, most (a) Corporation tax: A UK-resident company landlord will be business leases tend to conform to a standard full repairing and liable to pay corporation tax on rental profits calculated on an insuring (FRI) format. accounts basis, but with certain modifications. Some sectors of the real estate industry, representing both landlords (b) Income tax: all other taxpayers will be liable to pay income and tenants are attempting to standardise the terms of leases by tax on rental profits as they arise, also on an accounts basis adopting the format of the Model Commercial Lease (MCL). The but with certain modifications. MCL leases were launched in 2014 and consist of suites of leases (c) VAT: if a landlord has opted to tax a commercial property, for office, retail, logistics/industrial and food/drink premises. These it must account to the UK tax authority for VAT on any rent leases have been generally well received in England and Wales, and and other amounts due to it under a lease of the property. The in 2016/2017, the Property Standardisation Group (www.psglegal. landlord will normally seek recovery of the VAT from the tenant. co.uk) has been involved in producing Scottish law-compliant versions of the MCL leases. The leases are intended as a starting (d) LBTT: Leases may be subject to LBTT. The net present value point for the drafting of a commercial lease, and adopt a balanced (NPV) of the rent must be ascertained, and the tax is then calculated at 1% of NPVs over £150,000. LBTT may also be approach for both parties. payable on chargeable consideration other than rent, such as a premium. The standard non-residential rates and bands apply 10.3 What are the typical provisions for leases of business to such payments; however the nil rate band does not apply to premises in your jurisdiction regarding: (a) length of lease premiums if the average annual rent exceeds £1,000. term; (b) rent increases; (c) tenant’s right to sell or sub-lease; (d) insurance; (e) (i) change of control of the tenant; and (ii) transfer of lease as a result of a 10.5 In what circumstances are business leases usually corporate restructuring (e.g. merger); and (f) repairs? terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a tenant to extend or renew the lease or for either party (a) Length of term: The term of the lease will vary according to to be compensated by the other for any reason on what is negotiated between the parties. However, lease terms termination? have been getting shorter over the past decade or so, and the average term is now likely to be less than 10 years. For a lease to be terminated on the expiry date, either the tenant or (b) Rent increases: Leases will usually provide for a regular the landlord has to give the other a notice to quit, usually at least 40 review of the rent – typically an upwards only review every days prior to the expiry date. If neither party serves notice, the lease five years, based on open market rents prevailing at the time of review. Some leases will link the increases to a fixed may continue on the same terms and conditions for a further year. formula or to the Retail Price Index or Consumer Price Index. This is known as “tacit relocation” and leases can continue this way year by year until one of the parties serves appropriate notice to quit. (c) Tenant’s right to sell or sub-lease: The lease will usually set out in some detail what rights the tenant has to assign the Most leases will contain an irritancy clause, providing that the landlord lease to a new tenant or to sub-let all or part of the premises. will be entitled to terminate the lease in the event of a breach by the Where permitted, assignation or subletting will be subject tenant, on giving notice. A breach may be a monetary one, such as to obtaining landlords consent. There is usually a provision non-payment of rent, or non-monetary such as a default by the tenant that consent is not to be unreasonably withheld, but that will in respect of one or more of its other obligations under the lease, or usually be subject to the landlord being satisfied as to the on the tenant becoming insolvent. The Law Reform (Miscellaneous suitability of the proposed assignee or sub-tenant. Provisions) (Scotland) Act 1985 requires that appropriate notice must (d) Insurance: Usually, the landlord will insure the whole of be given by the landlord to the tenant, and if the breach is a remediable the premises, or the building or estate in which the premises one, the tenant must be given the opportunity to remedy the breach. are located (where the landlord owns the whole building or estate), for full reinstatement value, and for loss of rent for There is no statutory provision allowing a tenant to extend or renew three years. The landlord will then recover the premium and the lease – it will be a matter of agreement between the parties any additional costs from the tenants. whether the lease is extended or renewed, and some leases contain (e) Change of control/corporate restructuring: It is not usual an option to extend or renew. to see any specific provisions in a lease regarding change of There are no rules relating to either party being entitled to control of the tenant or corporate re-structuring involving the compensation from the other on termination. At common law, a tenant tenant. is not entitled to compensation from the landlord for improvements. Unless there is specific provision in the lease, any improvements

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carried out by the tenant and which attach to the premises will fall to of tenancy – the “private residential tenancy” – is the Private be retained by the landlord without compensation. Housing (Tenancies) (Scotland) Act 2016, which came into force on 1 December 2017. From that date, all new private residential tenancies must conform to the requirements of the 2016 Act. 10.6 Does the landlord and/or the tenant of a business lease cease to be liable for their respective Most private residential leases entered into before December 2017 obligations under the lease once they have sold their were assured tenancies or short assured tenancies under the Housing interest? Can they be responsible after the sale in (Scotland) Act 1988. respect of pre-sale non-compliance? Other key legislation in this area includes: (tolerable standard and Once the landlord of a business lease has sold its interest in the ■ Housing (Scotland) Act 2006

Scotland repairing standard for rented accommodation; tenancy property, it will cease to be liable for any obligations under the lease, deposits; licensing of HMOs). unless these have been specifically identified in the terms of the sale. ■ (registered social landlords). Identifying whether there are outstanding liabilities to tenants will Housing (Scotland) Act 2010 form a part of the due diligence of the buyer, who will generally ■ Private Rented Housing (Scotland) Act 2011 (registration seek contractual confirmations from the seller about any outstanding of private landlords). matters. ■ Tenancy Deposit Schemes (Scotland) Regulations 2011 (regulating the treatment of deposits paid by tenants). Usually an outgoing tenant will cease to be liable for any obligations under the lease, and the terms of the assignation to a new tenant will cover the rights and responsibilities of the outgoing and incoming 11.2 Do the laws differ if the premises are intended for tenants between themselves. In some cases the contractual multiple different residential occupiers? arrangement between the parties may reserve liability for any antecedent breach that is not known at the date of transfer, but which Residential tenancies for houses in multiple occupation (HMOs) subsequently comes to light. are regulated by the provisions of the Civic Government (Scotland) Act 1982, and licensing of HMOs became mandatory in 2000 under the Civic Government (Scotland) Act 1982 (Licensing of Houses in 10.7 Green leases seek to impose obligations on Multiple Occupation) Order 2000. The regulation of HMOs was landlords and tenants designed to promote greater consolidated in the Housing (Scotland) Act 2006, with amendments sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please in the Housing (Scotland) Act 2010 and the Private Rented Housing briefly describe any “green obligations” commonly (Scotland) Act 2011. found in leases stating whether these are clearly defined, enforceable legal obligations or something not amounting to enforceable legal obligations (for 11.3 What would typical provisions for a lease of example aspirational objectives). residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the tenant’s rights to remain in the premises at the end of “Green obligations” are still not commonly encountered in business the term; and (d) the tenant’s contribution/obligation leases, although provisions relating generally to energy efficiency or to the property “costs” e.g. insurance and repair? sustainability are starting to appear more often. It would not be unusual to see provisions in a lease or in a licence for works that prohibit the (a) Length of term: Under the Housing (Scotland) Act 1988, tenant from carrying out any alterations to the premises that might the most popular form of tenancy was the short assured have an adverse effect on the energy efficiency rating of the premises. tenancy. The tenancy is required to be for a minimum of six months, and usually the tenancy agreement will provide Green issues are becoming more relevant to landlords of certain for the tenancy to continue on a month-by-month basis until larger buildings due to the introduction in September 2016 of the terminated by either party on giving (usually two months’) Assessment of Energy Performance of Non-domestic Buildings notice. The attraction of the short assured tenancy for the (Scotland) Regulations 2016. The Regulations affect buildings landlord is that it has the right to terminate the tenancy for no or building units of more than 1,000 square metres, which do not reason other than that the period of the tenancy has come to meet the building standards regulations which had effect on or an end. This type of tenancy will cease to be available under after 4 March 2002. On the sale or letting of such buildings the the Private Housing (Tenancies) (Scotland) Act 2016. owner must obtain an Action Plan, containing recommendations for The other form of tenancy under the 1988 Act was the assured improvement measures, which must be carried out. Alternatively, tenancy. These types of tenancy tended to be for longer operational ratings can be measured and must be reported annually. periods, as landlords would use the short assured version for Either alternative requires the cooperation of the tenant, and the shorter term lets. object of the exercise is to improve the energy efficiency of the There is no provision under the Private Housing (Tenancies) (Scotland) Act 2016 for a lease term to be stated. In practice, building and reduce CO2 emissions, based on reduction targets set by the Action Plan. Accordingly landlords are now more inclined to landlords and tenants may negotiate a fixed term, but if the seek to include “green” obligations in new leases. The MCL leases tenant refuses to leave at the end of the term the landlord will contain provisions relating to sustainability issues. have to establish one of the statutory grounds for eviction before the tenant can be removed (see (c) below). (b) Rent increases/controls: A landlord can intimate a rent 11 Leases of Residential Premises increase to the tenant during the course of a private residential tenancy under the 2016 Act, but not more than once in a 12-month period. Notice of the increase must be served on 11.1 Please briefly describe the main laws that regulate the tenant and will apply from the date specified in the notice leases of residential premises. unless the tenant refers the matter to a rent officer, who will then determine the level of rent. There is a right of appeal Residential leases and residential landlords are highly regulated by either the landlord or the tenant to the First Tier Tribunal in Scotland. The latest legislation which introduces a new form (Housing and Property Chamber).

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The 2016 Act introduces the potential for rent controls by local authorities. A local authority may make an application 12 Public Law Permits and Obligations to the Scottish Ministers, asking for all or any part of the areas for which the authority is responsible to be designated as a Rent Pressure Zone. If an area is so designated, then 12.1 What are the main laws which govern zoning/ rent increases may not be applied except in accordance with permitting and related matters concerning the use a capping formula set out in the Act. and occupation of land? Please briefly describe them and include environmental laws. (c) Tenant’s rights to remain in the premises at the end of the term: Under a private residential tenancy, the tenant can (a) Planning and Building Control continue to occupy the premises, even after any contractual expiry date. To remove a tenant who remains in the premises, ■ Town and Country Planning (Scotland) Act 1997 – sets out the landlord will have to establish that one of the grounds for the main framework for planning control in Scotland. Scotland repossession applies. Some of the grounds are mandatory ■ Planning (Scotland) Act 2006 – provides the framework for (M) – if established the First Tier Tribunal (Housing and planning and development strategy. Property Chamber) must grant repossession. Others are ■ Acquisition of Land (Authorisation Procedure) (Scotland) discretionary (D). The grounds are: Act 1947 applies to most of the compulsory purchase ■ The landlord intends to sell the property (M). schemes. ■ The property has been repossessed by the landlord’s ■ Building (Scotland) Act 2003 – regulates the building lender, who intends to sell (M). standards system for construction, demolition and alteration ■ The landlord intends to carry out significantly disruptive works requiring a building warrant. refurbishment work (M). (b) Environmental ■ The landlord intends to live in the property (M). ■ Environmental Protection Act 1990 – provides for the ■ A family member of the landlord intends to live in the identification and remediation of contaminated land. property (D). ■ Control of Asbestos Regulations 2012 – imposes a duty of ■ The landlord intends to use the property for a non- persons responsible for maintenance of properties to manage residential purpose (M). any asbestos in those properties. ■ The property is required for occupation by a person working for a religious organisation (M). 12.2 Can the state force land owners to sell land to it? If ■ The tenant was given the accommodation as an employee so please briefly describe including price mechanism. and is no longer an employee (M). ■ The tenant no longer has a need for supported The Scottish Government and local authorities have powers accommodation (D). of compulsory purchase. Generally, the Acquisition of Land ■ The tenant is not occupying the property (M). (Authorisation Procedure) (Scotland) Act 1947 regulates most ■ The tenant has failed to comply with a condition of the uses of compulsory purchase, although there are several forms of tenancy agreement (D). compulsory purchase procedures, which may come from private ■ The tenant has been in arrears of rent for three or more legislation or by an order under the Transport and Works (Scotland) consecutive months (M). Act 2007. The process is laid down in Scottish Planning Circular ■ The tenant has a conviction for an offence committed by 6/2011. using the property for an immoral or illegal purpose (a Compensation is payable, and is based on valuation. Assessing “relevant conviction”) (M). compensation is governed by continually evolving legislation and ■ The tenant has engaged in anti-social behaviour (D). case law and is a very complex area. Whether a person is entitled ■ The tenant associates in the property with a person who to compensation, and how much compensation they are entitled has a relevant conviction or has engaged in anti-social to, will depend on the circumstances. However, in calculating the behaviour (D). amount of compensation, the following may be taken into account: ■ The landlord is not registered (D). ■ The open market value of the interest. ■ The landlord’s HMO licence has been revoked (D). ■ Compensation for severance and/or injurious affection. ■ An overcrowding statutory notice has been served on the ■ Compensation for disturbance and other losses not directly landlord (D). based on the value of the interest. This includes certain (d) Tenant’s contribution/obligation to the property “costs”: reasonable professional fees. Usually, the tenant does not have to contribute towards the cost of maintenance and repair of the property or the insurance Planning Circular 6/2011 provides basic principles for acquiring of the building and any landlord’s contents. The tenant will authorities to follow when assessing and negotiating the level of usually have to meet the cost of utilities: gas, electricity and compensation due, although specialist valuers are often instructed telephone; and council tax. to progress this aspect.

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the Directorate for Planning and Environmental Appeals (DPEA), Local authorities have enforcement powers to deal with breaches of Scottish Ministers also determine a variety of planning appeals planning control. However, if they fail to take enforcement action, and they may also choose to call in planning applications. Scottish within specified time limits, the development becomes a lawful Ministers also have a role in dealing with listing buildings through development under the Town and Country Planning legislation Historic Environment Scotland. through essentially having implied planning permission. However, At a local level, implementation of Scottish planning policy is the these time limits for enforcement action do not apply to breaches of responsibility of local authorities. They deal with the development the particular statutory controls of listed buildings, tree preservation of local planning policies (local development plans) for their orders or advertisement control systems. area, and are responsible for determining planning applications A four-year time limit applies in situations where there has been and enforcing planning and building control. While the Scottish a breach of planning control consisting of carrying out without Scotland Ministers have the overall responsibility for planning in Scotland, planning permission building, engineering, mining or other the majority of the planning process will be conducted through local operations. The four years starts with the date on which the authorities, at least in the initial stages. The Scottish Ministers can operations were substantially completed. The four-year time limit choose to oversee the development of proposed local development is also applicable where the breach consists of a change of use of plans and the approval of strategic development plans. any building to use as a single dwelling house. All current Scottish planning policies, guidance and local authority For any other breach of planning control, no enforcement action may development plans are available online through the Scottish be taken after the end of the period of 10 years, beginning with the Government website or the relevant local authority. date of the breach. This includes breaches of planning conditions A buyer will obtain initial information about the planning position and circumstances where there has been a material change of use to for a particular property from the seller. The seller will be expected a property. to provide a property enquiry certificate (PEC) as part of the due diligence package. A PEC provides details from local authority 12.6 What is the appropriate cost of building/use permits records about planning applications, whether the property is a listed and the time involved in obtaining them? building or lies in a conservation area or is otherwise designated, for example as a Site of Special Scientific Interest, affected by a If planning permission is required for a development, an application tree preservation order, or an Article 4 direction restricting permitted has to be submitted to the relevant local authority. This process development. The PEC will also provide details of any planning is governed by the Town and Country Planning (Development enforcement notices or other orders and whether the property is Management Procedure) (Scotland) Regulations 2013, which also affected by any planning policies etc. within a draft development set out the time limits for determining planning applications. The plan. A PEC should also detail any recent building control decisions time limit for determination of national or major developments is on applications for the property. four months, with a two-month time limit for all other applications. Various types of planning application can be made: full planning 12.4 What main permits or licences are required for permission; planning permission in principle; approval of matters building works and/or the use of real estate? specified in conditions; variation; retrospective; and planning permission renewal. Planning permission is required where there is “development”, The fees for a planning application vary depending on the type which is defined as “the carrying out of building, engineering, of application under the Town and Country Planning (Fees for mining or other operations in, on, over or under land, or the making Applications and Deemed Applications) (Scotland) Regulations of any material change in the use of any buildings or other land”. 2004. Building warrant fees are regulated by the Building (Fees) There are limited permitted development rights for works that do (Scotland) Regulations 2004. not fall within this definition, such as certain development within the curtilage of a dwelling house, the installation of domestic 12.7 Are there any regulations on the protection of historic micro generation equipment, and agricultural buildings. There monuments in your jurisdiction? If any, when and how are a number of specific classes of permitted development rights are they likely to affect the transfer of rights in real detailed in the Town and Country Planning (General Permitted estate? Development) (Scotland) Order 1992. If planning permission is required for a development, an application has to be submitted to Historic Environment Scotland (HES) carries out statutory functions the relevant local authority. to protect historic buildings and monuments. Under the Ancient The majority of all construction, demolition and other works Monuments and Archaeological Areas Act 1979, HES can schedule will also require a building warrant from the Building Control sites of national importance and take them into state care. Department of the relevant local authority. This may include works In general, properties that are scheduled as historic buildings and that fall within a class of permitted development. Applying for a monuments are not the subject of transfers. building warrant is a separate process from applying for planning HES is also authorised under the Planning (Listed Buildings and permission. The Building (Scotland) Act 2003 and the Building Conservation Areas) (Scotland) Act 1997 to list structures for their (Procedure) (Scotland) Regulations 2004 are the primary statutory architectural or historic significance. The fact that a property is a listed instruments under which the building standards system operates. building does not affect the owner’s ability to transfer ownership of it. Listing does, however, affect what an owner may do with that 12.5 Are building/use permits and licences commonly building and whether they are able to carry out any alterations to it. obtained in your jurisdiction? Can implied permission Any alterations to a listed building, including demolition or extension, be obtained in any way (e.g. by long use)? which would affect the character of the listed building will require listed building consent from the local authority under the 1997 Act, Yes – see question 12.4 above. which is a similar process to that of a planning application.

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The situation has changed for certain non-domestic buildings, due 12.8 How can e.g. a potential buyer obtain reliable to the introduction in September 2016 of the Assessment of Energy information on contamination and pollution of real Performance of Non-domestic Buildings (Scotland) Regulations estate? Is there a public register of contaminated land 2016. The Regulations affect buildings or building units of more in your jurisdiction? than 1,000 square metres, which do not meet the building standards regulations which had effect on or after 4 March 2002. On the A potential buyer can obtain information about the contamination or sale or letting of such buildings, the owner must obtain an Action pollution of land or buildings from a variety of sources. A PEC can, Plan, containing recommendations for improvement measures, although usually only to a limited extent, provide useful information which must be carried out. Alternatively, operational ratings can on any statutory notices served under environmental protection be measured and must be reported annually. The Action Plan also legislation. This includes information on whether a particular site sets energy efficiency and emissions reduction targets, and the Scotland is registered in the relevant local authority’s contaminated land recommended improvement measures must be designed to have the register. Not all land that is contaminated is registered in a public effect over time of meeting those targets. register, however – such registers will only contain details of land that has been identified as contaminated. A PEC will, however, only provide information available within public registers. 13 Climate Change Where there is a possibility of contamination at a site, the prudent course of action is to engage a reputable environmental consultant 13.1 Please briefly explain the nature and extent of any to prepare an in-depth environmental report or a desktop survey, regulatory measures for reducing carbon dioxide depending on the buyer’s needs. It is essential to be clear what level emissions (including any mandatory emissions of reporting is required for each particular transaction so that a site- trading scheme). specific, valuable report is provided. The Carbon Reduction Commitment Energy Efficiency Scheme 12.9 In what circumstances (if any) is environmental clean- (CRC) is a mandatory scheme for the purchase of allowances that up ever mandatory? reflect the amount of emissions that a participant estimates it will make from buildings owned by it. The scheme started in 2010 and The environmental regimes relating to water, contaminated land and applies to large commercial organisations and public sector bodies. waste are each governed by separate statutory regimes. All have one The initial qualification criteria – i.e. whether or not the regime element in common, however: they all follow the “polluter pays” applies to an organisation – is based on electricity consumption. principle. This principle seeks to ensure that those who pollute will Those organisations that use at least 6,000 MWh (megawatt hours) of electricity from half-hourly meters (which affect commercial pay the full costs of any requirement to clean up. sites with a large consumption of electricity where a meter reading Liability for contaminated land and its remediation under the statutory is taken every half hour – allowing for accurate billing). contaminated land regime is contained in Part IIA of the Environmental However, the CRC has not been the success that was hoped for in Protection Act 1990. Under this, local authorities have the duty to reducing emissions and changing behaviour. It is to be discontinued. inspect land and properties within their council boundaries to identify The current Phase which runs until 31 March 2019 will continue, contaminated land. Following such identification, the local authority but then the scheme will end. will notify the Scottish Environment Protection Agency (SEPA), the owner, any occupier and any “appropriate person”. Liability is on the basis of the “appropriate person” who “caused or knowingly permitted” 13.2 Are there any national greenhouse gas emissions the contamination. Under Part IIA, the appropriate person is held liable reduction targets? to carry out remediation works. If, after reasonable inquiry, that person cannot be found, liability then falls on the present owner or occupier. The Climate Change Act 2008 sets a UK-wide carbon emissions reduction target for at least an 80% reduction in emissions from 1990 levels by 2050. It also sets an interim target of a 26% reduction by 12.10 Please briefly outline any regulatory requirements 2020. The Climate Change (Scotland) Act 2009 sets the same 2050 for the assessment and management of the energy target for Scotland, but also sets a more ambitious interim target of performance of buildings in your jurisdiction. 42% reduction in emissions by 2020. An Energy Performance Certificate (EPC) must be obtained for a The Scottish Government intends to introduce a Climate Change building or part of a building when it is sold or let. This applies to Bill during the 2017/18 parliamentary session. The Bill will propose both commercial and residential properties. to increase the ambition of the 2050 target to 90% greenhouse gas emission reduction from the baseline. EPCs were introduced by the Energy Performance of Buildings The Scottish Government also proposes, in line with advice from the (Scotland) Regulations 2008. An EPC is a document that states the independent Committee on Climate Change, to update the interim energy efficiency rating and environmental impact of a building by target for 2020 to at least 56%, and to set new interim targets for at measuring the amount of carbon dioxide estimated to be emitted least 66% in 2030 and at least 78% in 2040. from the building. The energy efficiency ratings are shown on a scale of A (excellent efficiency) to G (very poor efficiency). The EPC must also indicate current carbon dioxide emissions, potential 13.3 Are there any other regulatory measures (not already emissions, the current energy consumption of the building and mentioned) which aim to improve the sustainability of suggested cost-effective improvements. both newly constructed and existing buildings? A recommendation report will also accompany an EPC. This Building standards require newly constructed buildings to meet includes a list of cost-effective measures to improve the building’s certain energy efficiency standards. energy efficiency. It is not mandatory to implement these measures. Scottish Ministers announced in June 2015 that they would take long- term action to reduce the energy demand of, and decarbonise the heat

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supply to, Scotland’s residential, services and industrial sectors, and Acknowledgment designated energy efficiency as a national infrastructure priority. The strategy for this is enshrined in Scotland’s Energy Efficiency The authors would like to thank Ann Stewart, a Property and Programme (SEEP) which is under development and will be rolled Professional Development Adviser and senior professional support out from 2018. SEEP will be a coordinated programme to improve lawyer at Shepherd and Wedderburn LLP, for her invaluable the energy efficiency of homes and buildings in the commercial, assistance in the preparation of this chapter. public and industrial sectors and to decarbonise their heat supply, with an initial estimated overall investment in excess of £10 billion.

Scotland David Mitchell Scott Ritchie Shepherd and Wedderburn LLP Shepherd and Wedderburn LLP 1 Exchange Crescent 1 Exchange Crescent Conference Square Conference Square Edinburgh EH3 8UL Edinburgh EH3 8UL Scotland Scotland

Tel: +44 131 473 5217 Tel: +44 131 473 5761 Fax: +44 131 228 1222 Fax: +44 131 228 1222 Email: [email protected] Email: [email protected] URL: www.shepwedd.com URL: www.shepwedd.com

David is qualified in Scotland and has a broad-based commercial Scott is qualified in Scotland and has extensive experience advising practice. David has particular experience in the field of development on developments, leasing, asset management, acquisitions and having been involved in a number of significant office, retail and mixed disposals. He is known for his strong technical skills and commercial use projects across Scotland. In addition, David advises a number awareness and advises in high-value complex transactions. Clients of UK banks and Insolvency Practitioners on the property aspects of include global investors and funders, developers, hospitality and restructuring and insolvency. leisure operators, and corporate occupiers.

Shepherd and Wedderburn is a leading UK law firm. From offices in Edinburgh, Glasgow, Aberdeen and the City of London, the firm delivers comprehensive multi-jurisdictional legal advice across every business sector as well as offering the full range of private client and wealth management services. Regarded by many as the go-to firm for specialist advice in: real estate; energy and natural resources; and the financial and banking sectors, Shepherd and Wedderburn also has an impressive track record in advising clients from across other industries and sectors. FTSE and AIM companies, large SMEs, and public service organisations are counted among its clients. With 81 partners and more than 500 staff, Shepherd and Wedderburn has the expertise, experience and depth of resource to deliver what our clients need. As a founding member of the World Services Group, Shepherd and Wedderburn is able to respond to clients’ needs swiftly and effectively anywhere in the world. Currently the firm serves clients in 92 jurisdictions.

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Slovakia

Konečná & Zacha Mgr. Vladimír Kordoš, LL.M.

the rights in rem to the real estate positioned in the Slovak Republic 1 Real Estate Law are governed exclusively by the substantial law of the Slovak Republic. Comparably, Slovak courts possess exclusive jurisdiction 1.1 Please briefly describe the main laws that govern over disputes, where the object of such is rights in rem. Thus, there real estate in your jurisdiction. Laws relating to is no or little effect of the national substantive laws on real estate leases of business premises should be listed in law in Slovakia. Though with respect to that, international treaties response to question 10.1. Those relating to zoning and covenants displaying real estate issues can be applicable if and environmental should be listed in response to necessary. question 12.1. Those relating to tax should be listed in response to questions in Section 9. 2 Ownership The governing laws upon real estate in the Slovak Republic consist of: Act No. 40/1964 Coll. the Civil Code; Act No. 513/1991 Coll. the Commercial Code; Act No. 50/1976 Coll. On Territorial Planning 2.1 Are there legal restrictions on ownership of real estate and Building Code (the Building Act); Act No. 162/1995 Coll. on by particular classes of persons (e.g. non-resident persons)? the Land Registry and the Registration of Ownership Titles and Other Rights to Real Estate (Cadastral Act); Act No. 182/1993 Coll. on the Ownership of Apartments and Non-residential Premises; Act Slovak laws permit both natural and legal persons to acquire real No. 116/1990 Coll. on the Lease and Sublease of Non-residential estate as they like. An absence of restrictions on ownership of real Premises; and Act No. 202/1995 Coll. the Foreign Exchange estate exists, though this is subject to exceptions regarding categories Act; and Act No. 140/2014 Coll. on Acquisition of Ownership of of land (see below). Any natural or legal person, a resident or a Agricultural Land. foreigner, is entitled to acquire and own real estate. A resident can be defined as an individual or as a natural person who has their permanent residence in the Slovak Republic, or a legal person who 1.2 What is the impact (if any) on real estate of local has their registered seat in the Slovak Republic. A foreigner is a common law in your jurisdiction? natural or legal person that is not a resident. The new legal regulation of the Act on acquisition of ownership The Slovak Republic is a member of the countries that bestow of agricultural land took over legally binding EU legislation continental legal systems. Hence, real estate rights are regulated represented by the Council Directive 88/361/EEC of 24 June 1988 by generally binding legal norms, specifically statutory acts. Albeit, for the implementation of Article 67 of the Treaty (Special edition court decisions, specifically decisions made by the Supreme Court O. J. EU, Chap. 10/Vol. 1; O. J. EC L 178, 8. July 1988). On one of the Slovak Republic and the Constitutional Court of the Slovak hand, the Act precisely specifies the range of potential acquirers of Republic in matters involving real estate, may represent a vital agricultural land by the establishment of the priority right of the source of interpretation of the respective acts of the provisions. persons conducting business in agricultural production. On the Nevertheless, these court decisions, generally, are not legally other hand, the liberalisation of the Foreign Exchange Act (§ 19 (a)) binding (instead, only binding to the parties to the action in the and the provision § 4 par. 1 of the Act on acquisition of ownership of course where such decision has been executed). agricultural land open up the possibilities of acquiring agricultural land in Slovakia for new persons and entities who, up until now, 1.3 Are international laws relevant to real estate in your have only been allowed to acquire such land by inheritance (for jurisdiction? Please ignore EU legislation enacted instance, the donation or the sale of land to close persons not being locally in EU countries. citizens of the SR and residing outside the territory of the Slovak Republic). Private international law depicted under Slovak legislation Ownership can be restricted furthermore by such special laws (including EU legislation and as Act No. 97/1963 Coll. on Private consisting of the Water Act, the Road Act, the Mining Act, or the and Procedural International Law) allows the parties to have the Cultural Monuments Act. liberty to select the law governing their contracts, along with the court attaining jurisdiction over any possible dispute. Nonetheless,

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implemented in the Land Registry. Furthermore, some other events 3 Real Estate Rights relating to real estate shall also be entered into the Land Registry, in particular orders declaring bankruptcy of the owner of a real 3.1 What are the types of rights over land recognised in estate, commencement of an enforcement proceeding by the sale your jurisdiction? Are any of them purely contractual of a real estate, commencement of expropriation proceedings, and between the parties? interlocutory injunctions prohibiting disposal with real estate. In principle, no contractual rights over real estate shall be entered in The important aspects of rights of land in the Slovak Republic are the Land Registry, with the exception of rights to lease exceeding at listed accordingly: least five years in duration. i) the right of ownership (the different types of ownership Slovakia are exclusive ownership, co-ownership and undivided co- 4.2 Is there a state guarantee of title? What does it ownership of spouses); guarantee? ii) possession; iii) the right to mortgage; In the Slovak Republic, the principle of material publicity (principle iv) the right to lease; and of reliability) applies, according to which information registered v) the right of back purchase. with the Land Registry is deemed as reliable and binding, unless the contrary is proven. It is worth mentioning, however, that in the past The right of ownership in relation to land may be restricted by entries in the Land Registry have been known to be untrue. Since easements such as the right of way or the right to build. the prescription period in the Slovak Republic in the case of real The existence of pre-emption rights over the land either based on estate amounts to 10 years, it is recommended that prior to purchase substantial law or of a purely contractual nature arranged between ownership titles to the respective real estate are verified for the past the parties can be present. The right of lease is solely based upon a 10 years and the closest foregoing acquisition title. Alongside this, purely contractual agreement between the parties. there is room to have an acquisition title insured, albeit, this is not Special rights over land can arise from the administration of property common practice. of the State, of municipalities or of regional self-governments. 4.3 What rights in land are compulsorily registrable? 3.2 Are there any scenarios where the right to a What (if any) is the consequence of non-registration? real estate diverges from the right to a building constructed thereon? The rights portrayed in question 4.1 must be registered with the Land Registry. Rights in rem acquire the effects of substantive law As illustrated under the Civil Code, buildings do not form part of upon their registration with the Land Registry. Thus, if an owner the land plots. This can be explained by the reasoning that buildings (a person in possession of a real estate or a tenant, who is a natural are eligible to transfers of ownership rights independently from the person) fails to notify the Land Registry of any changes of data land plots. Thus, making it possible to own a building situated on within the time limits prescribed by law, they may be held liable for the land plot that is owned by a different natural or legal person. committing an administrative offence, for which a fine of up to EUR 33.19 may be imposed. 3.3 Is there a split between legal title and beneficial title in your jurisdiction and what are the registration 4.4 What rights in land are not required to be registered? consequences of any split? In principle, only rights in rem (e.g., mortgage or easement) are There is not a prevailing split between a legal title and a beneficial recommended to be registered with the Land Registry. title under the traditional Slovak system. The legal and beneficial owner is one person, who is registered with the Land Registry. The hiding of ownership may be used by joint stock companies or 4.5 Where there are both unregistered and registered land instead, offshore companies who will act as the owner of the real or rights is there a probationary period following first registration or are there perhaps different classes estate in question. or qualities of title on first registration? Please give details. First registration means the occasion upon which unregistered land or rights are first registered 4 System of Registration in the registries.

4.1 Is all land in your jurisdiction required to be Under Slovak law, there is no probationary period following first registered? What land (or rights) are unregistered? registration, nor are there different classes or qualities of title on first registration. All land in the Slovak Republic must be registered with the Land Registry, recorded and kept by the respective cadastre 4.6 On a land sale, when is title (or ownership) transferred administrations that form part of the state administration of the to the buyer? Slovak Republic. Rights over real estate, i.e., ownership rights, easements, mortgage, pre-emptive rights (if they have the effects In case of a land sale, the ownership title to the land passes from the of an in rem right), right of lease (if it extends or is expected to seller to the buyer at the moment of the decision of the competent exceed at least five years in duration) as well as rights occurring Land Registry Administration on authorising registration with the from the administration of a state property, municipal property, Land Registry becoming final. or the property of regional self-governments shall also be

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Such data from the Land Registry is also available at the internet 4.7 Please briefly describe how some rights obtain portal (www.katasterportal.sk) of the Land Registry for use of free priority over other rights. Do earlier rights defeat later of charge, however, its use is exclusively of an informative nature rights? thus cannot be used for legal purposes.

Due to Slovak law, the principle of priority applies to rights in rem. Rights to the similar real estate shall be registered with the Land 5.4 Can compensation be claimed from the registry/ Registry in the order in which the contracts, public deeds, or other registries if it/they make a mistake? deeds on the creation, change or cessation of a right to the real estate, were delivered to the Land Registry Administration for registration Yes, compensation can be claimed from the registry in the event they make a mistake. In the rare case of the Land Registry issuing with the Land Registry. Hence, all Land Registry Administrations Slovakia maintain files of delivered motions for registration, containing the a mistake, resulting in damage, the resented person may claim date, hour and minute of delivery of the motion for registration. damages from the state pursuant to the Act No. 514/2003 Coll. on Motions for registration sent earlier in time bestow priority. Liability for Damage Caused in the Course of Performing Public Authority. The Geodesy, Cartography and Cadastre Authority of the Slovak Republic shall act on behalf of the state. 5 The Registry / Registries 5.5 Are there restrictions on public access to the 5.1 How many land registries operate in your jurisdiction? register? Can a buyer obtain all the information he If more than one please specify their differing rules might reasonably need regarding encumbrances and and requirements. other rights affecting real estate?

In the Slovak Republic, there is one Land Registry in place to Information in the Land Registry is publicly available information, cover all real estate located in the territory of the Slovak Republic. i.e., accessible to everyone, including via the internet (see question Institutionally, the competence over the Land Registry is given to 5.3). Public access is restricted with regard to the collection of District Offices and Cadastral Departments of District towns; “Land documents which is, in principle, accessible only to owners and Registry Administration”. their legal predecessors (not taking into account the persons entitled to access it on account of their profession, such as land surveyors). From the above it follows that a buyer may be granted all of the 5.2 Does the land registry issue a physical title document information regarding rights in rem (and also information on to the owners of registered real estate? leases exceeding five years in duration) relating to a real estate in a given moment, however he/she cannot verify such information The Land Registry shall, upon request, issue a title deed (list v retrospectively (please also see question 4.2). lastnictva) to any natural or legal person. Such effluence is subject to an administrative fee of EUR 8. The title deed issued by the Land Registry can only be used for legal means. 6 Real Estate Market

5.3 Can any transaction relating to registered real estate 6.1 Which parties (in addition to the buyer and seller be completed electronically? What documents need and the buyer’s finance provider) would normally to be provided to the land registry for the registration be involved in a real estate transaction in your of ownership right? Can information on ownership of jurisdiction? Please briefly describe their roles and/or registered real estate be accessed electronically? duties.

It is possible to perform Land Registry proceedings electronically. (i) Real estate agencies In case of filing the motion electronically, all the attachments (in Real estate agencies provide various services to clients with respect one counterpart only) have to be submitted as an electronic form to the transfer of ownership title to real estate, including market and furnished with the authenticated electronic signature and research, real estate research by criteria set by the client/buyer, appropriate time stamp. search for potential buyers for clients/sellers, assistance in acquiring For the purpose of ownership right registration, the application for the necessary funds for the purchase of a real estate (in particular, the registration of the ownership right into the Land Registry should assistance with obtaining bank loans), preparation of contractual be submitted to the Land Registry Administration together with all documentation, development services, etc. the following required annexes: (ii) Lawyers/attorneys-at-law i) two copies of particular agreement; Lawyers mainly provide legal consultancy services before ii) public deed or other deed proving title to the real estate; proceeding with the transaction, and legal services in the process of iii) land plots identification; concluding agreements for the transfer of the ownership title to real iv) geometrical plan, if the land plot is being divided or joined or estate and the registration of rights over real estate with the Land if the easement is being created over the land plot; Registry, drafting contracts and other legal documentation. v) agreement on authorisation (Power of Attorney) if the (iii) Notaries proceeding’s participant is represented by the proxy, the Notaries mainly provide the following services: signature proxy’s signature has to be notarised if such authorisation is authentication (pursuant to Slovak law, the signature of the seller requested; and affixed to the deed providing for the transfer of a real estatehas vi) paper notification, in case the application for registration was to be authenticated), drafting purchase agreements in the form of a posted electronically, which shall be provided to the Land notarial deed and also, attestation of significant legal events (e.g., Registry upon registration of the ownership right. prescription of a real estate).

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(iv) Other persons accelerated the development of the Business Services (BPO, SSC, There are additional persons who may participate in the transfer of R+D and ITO) and the CEE region as a result of its well-educated the ownership title to real estate, such as appraisers, land surveyors, workforce and competitive cost base acting as one of its main tax advisors, technicians, employees of state authorities (e.g., the beneficiaries. Public Health Authority, Work Inspectorate), architects, building engineers, banks, insurance companies, and alike. 7 Liabilities of Buyers and Sellers in Real Estate Transactions 6.2 How and on what basis are these persons remunerated?

Slovakia 7.1 What (if any) are the minimum formalities for the sale (i) Real estate agencies and purchase of real estate? The remuneration of real estate agencies is, in most cases, agreed in advance in writing. Payment is usually due after the conclusion of Regarding real estate transfers, the Civil Code needs the the real estate transfer agreement. The fee varies between different visibility of a contract that is concluded in writing and where the real estate agencies, usually representing an amount between 2% transferor(s) (seller(s)) signatures are authenticated by a notary and 10% of the purchase price. public. Manifestation of intent of the parties must be enclosed in the same document, otherwise the agreement on the transfer of (ii) Lawyers/attorneys-at-law real estate is deemed to be null. The agreement on the transfer In practice, attorneys’ fees are, in most cases, agreed upon of real estate must clarify and identify the parties, the object, the individually. place and time of performance of the legal act in question, the real (iii) Notaries estate, in accordance with the requirements of the Cadastral Act, Notarial fees are, in principle, regulated by the Ministry of Justice and the purchase price. The ownership title to the respective real of the Slovak Republic Decree No. 31/1993 Coll. on Notarial Fees estate is acquired when the decision of the respective Land Registry and Reimbursement. Authority on authorising registration with the Land Registry (iv) Other persons becomes final. There are supplementary requirements contained in Act No. 182/1993 Coll. on the Ownership of Apartments and Non- Remuneration of other participants is, in most cases, agreed residential Premises that must be fulfilled with regard to contracts individually on a contractual basis. on the transfer of apartments or non-residential premises.

6.3 Do you feel there is a noticeable increase in 7.2 Is the seller under a duty of disclosure? What matters the availability of capital to finance real estate must be disclosed? transactions in your jurisdiction, whether equity or debt? What are the main sources of capital you see active in your market? Should it be the case that the property which is subject to a sale has defects of which the seller is aware, the seller is then required to There has been a significant increase in Slovak investment volumes. notify the buyer about these defects in the course of negotiating the 2016 investment volumes exceeded a record of EUR 845 million. purchase agreement. These defects may be factual defects (such as Prime yields have increased in these specific markets, correlating defects concerning quality or functionality) or legal defects (such as as appropriate sources of capital in areas such as industry (7.5%), limitations on the transferability of ownership). office buildings (6.5%) and shopping centres (6%). 7.3 Can the seller be liable to the buyer for misrepresentation? 6.4 What is the appetite for investors and developers in your region to look beyond primary real estate markets and transact business in secondary or even In case the seller assured the buyer that the property had certain tertiary markets? Please give examples of significant qualities or that it had no defects and if such assurance later proves secondary or tertiary real estate transactions, if to be untrue, the buyer shall be entitled: (i) to withdraw from the relevant. contract; (ii) to have a price reduction from the agreed purchase price, corresponding to the nature and the extent of the defect; (iii) There are fewer barriers to entry, cheaper property, higher returns, to the reimbursement of necessary expenses incurred in connection less competition and more office space which are acting as prime with asserting his/her claims regarding the liability for defects; and incentives for investment in these areas. (iv) to damages pursuant to the general provisions of the Civil Code. In case of apparent defects or defects that can be determined from 6.5 Have you observed any trends in particular market the respective records of the Land Registry, it is not possible to sub sectors slowing down in your jurisdiction in assert claims for the liability for defects, unless the seller explicitly terms of their attractiveness to investors/developers? assured the buyer that the property did not have any defects. Please give examples.

7.4 Do sellers usually give contractual warranties to the No, instead there has been an increase in certain areas based upon buyer? What would be the scope of these? What is progressive and customary trends in the modern economy. These the function of warranties (e.g. to apportion risk, to trends consist of ‘Globalisation’, ‘Outsourcing’, ‘Offshoring’ and give information)? Are warranties a substitute for the ‘Nearshoring’. These trends also affect real estate and labour costs buyer carrying out his own diligence? alongside operational costs. The use of companies’ cost sensitivity supports the decision to move part of the business i.e. back- or The purchase agreement (i.e., also a contract on the transfer of a mid-office to cost-effective countries. Furthermore, this trend has real estate) may include various representations and warranties of

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the seller, which could serve as a legal basis for asserting claims against the seller regarding its liability for defects of the subject 8.2 What are the main methods by which a real estate of the contract/subject of transfer or for other breaches of law lender seeks to protect itself from default by the borrower? occurring in connection with the transfer of the ownership title. Representations and warranties may relate to the characteristics of real estate, rights over real estate (such as mortgage and easement) Generally, lenders (banks) require that a mortgage is established or use of real estate, etc. Representations and warranties mentioned over real estate to secure the loan. In most situations, it is possible in this section are predominant in transferring real estate of a to get a mortgage in order to finance the purchase of real estate. It is higher value and serve the purpose of decreasing the buyer’s risks, also possible to get a mortgage to finance the purchase of unfinished to the disadvantage of the seller. Legal due diligence is generally constructions. Supplementary options are pledging movables or performed before purchasing real estate or a company owning (also) securities, a bill of exchange, life insurance or having the real estate Slovakia a specific real estate of a higher value. It is recommended that legal insured, and blocking the respective insurance payment in favour due diligence is established instead of relying on the representations of the bank. Under the Slovak Banks Act, real estate loans may be and warranties, as claiming damages later may be complicated and secured by a mortgage over domestic real estates. time-consuming. 8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a 7.5 Does the seller warrant its ownership in any way? mortgagee to realise a mortgaged property without Please give details. involving court proceedings or the contribution of the mortgagor? Most of the contracts on the transfer of a real estate (purchase agreements) include a representation that the seller is the owner of Pursuant to the Slovak Civil Code, there are certain options in place the real estate and that the real estate is at liberty of third parties’ to determine a mortgaged property: rights restricting the owner of the real estate (e.g., easements, (i) the realisation of mortgaged property in the format agreed mortgage), or a representation that such rights exist, although such by the mortgage agreement. In most situations, this would representations do not form part of the essentials of a contract on be a direct sale of the mortgaged property. Such realisation transferring the ownership title to a real estate. These facts may does not require the court to be involved in the realisation of be checked with the Land Registry. Land Registry information is, mortgaged property; however, binding as long as the contrary is not proven. (ii) the sale of mortgaged property in voluntary auction under the Act No. 527/2002 Coll. on Voluntary Auctions; it requires no court involvement; or 7.6 What (if any) are the liabilities of the buyer (in addition to paying the sale price)? (iii) the sale under the Act No. 233/1995 Coll. on Court Executors and Execution Activity (Execution Order). This way, however, involves court proceedings as the mortgage Usually, the buyer will bear the costs of registering the ownership agreement by itself is not a title to enforcement needed for title with the Land Registry. He may also bear notaries’ or attorneys’ mortgage realisation. fees incurred in relation to concluding the contract on the transfer of a real estate; this is, albeit, subject to the agreement of the Thus, concluding that this direction of realisation is not widely used. contracting parties. 8.4 What minimum formalities are required for real estate lending? 8 Finance and Banking The loan contract on the provision of funds to finance the acquisition 8.1 Please briefly describe any regulations concerning of a real estate does not require any special formalities, as compared the lending of money to finance real estate. Are the to other loan contracts. Formalities to be fulfilled by the contract rules different as between resident and non-resident are of a general nature, i.e., mainly that both contracting parties have persons and/or between individual persons and legal capacity to perform legal acts, thus the contract may not be in corporate entities? breach of the law, circumvent the law, or contravene good morals. Generally, when granting a loan to finance real estate acquisition, in The lending of money to finance real estate is governed by the addition to a loan contract, a mortgage contract is also concluded, general legal regulations of the Commercial Code (or the Civil in order to secure the claim under the loan contract. A mortgage Code, respectively). There is an absence of special provisions contract has to be made in writing. To create a mortgage over a that would specifically concern the lending of money to finance real estate, the registration of the mortgage with the Land Registry real estate. The most frequently used contract is the loan contract is needed. pursuant to the Commercial Code, under which the lender (in most cases a bank) shall provide funds up to a proposed amount and the borrower undertakes to pay back such funds together with added 8.5 How is a real estate lender protected from claims interest. Legally, there is no distinction made between the individual against the borrower or the real estate asset by other persons and the corporate entities, or between resident and non- creditors? resident persons. Nonetheless, lenders do adjust the conditions for the provision of a loan depending on the fact if the borrowers are The most predominant way of protection is establishing a lien over individual persons or corporate entities, or resident or non-resident the borrower’s, or, possibly, a third person’s property. Pursuant to persons, respectively. Slovak law, to satisfy a secured creditor, the order of registration of the security interest in the respective registry shall be of decisive importance (in case of real estate, it is the Land Registry). Earlier registration enjoys priority. As already stated above in question 4.2,

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it is recommended to verify the ownership title to the property used as security – in the case of real estate – 10 years retrospectively, 9.5 What other tax or taxes (if any) are payable by the including the first directly preceding acquisition title. seller on the disposal of a property?

No other taxes are payable by the seller on the disposal of a property. 8.6 Under what circumstances can security taken by a lender be avoided or rendered unenforceable? 9.6 Is taxation different if ownership of a company (or There are various circumstances where security taken by a lender other entity) owning real estate is transferred? can be avoided or rendered unenforceable such as “unfair practices; breach of public policy; breach of good faith; criminal act; improper Real estate transfer tax has been abolished in the Slovak Republic; for Slovakia form of contract; and violation of a statute during the performance the application of VAT and income tax see questions 9.1, 9.4 and 9.5. of the contract”. 9.7 Are there any tax issues that a buyer of real estate 8.7 What actions, if any, can a borrower take to frustrate should always take into consideration/conduct due enforcement action by a lender? diligence on?

(i) The defence against execution may be a “proposal to stop Buyers of real estate should always take into consideration and/ execution”, which may be filed 15 days from delivery or conduct due diligence on the following tax issues: income tax; notification of initiation of an execution. A proposal to stop development fees; and real estate (property) tax. an execution must be valid. (ii) A borrower has the option to ask for a postponement for a social reason, for example, in a hard life situation, which will 10 Leases of Business Premises prevent him from fulfilling his/her obligations resulting from execution. 10.1 Please briefly describe the main laws that regulate (iii) A borrower may ask an executor to allow fulfilment as an leases of business premises. enforced claim for cash payment, distributed in instalments. The lease of business premises is regulated by Act No. 116/1990 9 Tax Coll. on the Lease and Sublease of Non- Residential Premises with subsidiary application of the Civil Code. The Lease and Sublease of Non-Residential Premises Act specifically regulates lease 9.1 Are transfers of real estate subject to a transfer tax? agreements, the rights and duties of landlords and tenants, sub-lease, How much? Who is liable? rent, termination of the lease and other matters relating to the lease of business premises. Since January 1, 2005, transfer tax on the transfer and transition of real estate is abolished. 10.2 What types of business lease exist?

9.2 When is the transfer tax paid? Pursuant to Slovak law, there is no separation between the various types of business leases. Instead, Slovak law categorises residential Transfer tax is not applicable in the Slovak Republic. Please see and non-residential leases while the latter in most scenarios cover question 9.1. the term “business lease”.

9.4 Are transfers of real estate subject to VAT? How (a) Length of term much? Who is liable? Are there any exemptions? This aspect is regulated by the lease agreement and can be agreed upon for a definite or indefinite term. In general, pursuant to Act No. 222/2004 Coll. on Value Added Tax, (b) Rent increases real estate transfers are considered as delivery of goods, whereby a This is not regulated by the Act on Lease and Sublease of Non- buyer acquires the right to dispose with such goods as the owner. Residential Premises. The amount of rent, as well as its increase, is The Act stipulates events, whereby real estate transfers are exempt determined by the agreement of the contracting parties. Generally, from the payment of a tax. The transfers of a land (except for building an annual rent indexation is agreed in the lease agreement and it is plots) as well as the delivery of a construction, or its part, including the based on the harmonised consumer price growth index (HICP) of delivery of a building plot, if such delivery (transfer) is made five years the Euro area. following the issuance of the first occupancy permit for a building or (c) Tenant’s right to sell or sub-lease five years following the day of the commencement of the first use of a building, are exempt from the payment of a transfer tax. Occasional As pursuant to law, the tenant is not permitted to sell the object of the transfer of a building, its part or a building plot is exempted as well. lease. However, the tenant is permitted to sub-lease the object of the lease (as a whole or its part) only with the approval of the landlord. The value added tax is currently 20% of the tax base.

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(d) Insurance (i) if the tenant uses the business premise in breach of their In relation to business premises, this can be concluded both by the agreement; landlord and the tenant, subject to their agreement. This insurance (ii) if the tenant is more than one month late with the payment of contract usually covers the following insurance risks: damage the rent or for the provision of services which are connected endured from unforeseeable events; such as natural disasters, fire, to the lease; burglary; damage caused in connection to the performance of (iii) if the tenant who has the obligation to provide certain activities in the object of the lease; and losses inflicted upon the contractually-agreed services to the landlord fails to provide object of the lease. such services duly and in a timely manner; (e) (i) Change of control of the tenant (iv) if the tenant or the persons using the business premises jointly with the tenant grossly disturb the peace or violate order, in

As explained under Slovak law, this does not affect the lease. The spite of a written warning; Slovakia contracting parties may, nonetheless, agree to certain requirements (v) if the use of the business premises is connected to the use on the tenant’s part or certain rights on the landlord’s part in their of an apartment and the tenant was obliged to vacate the contract in the event of change of control of the tenant. apartment; (ii) Transfer of lease as a result of a corporate restructuring (vi) if the removal or alteration of the building, whereby the use (e.g. merger) of the business premise is disabled, was ordered; Again, under Slovak law, this does not affect the lease. The (vii) if the tenant sub-leases the business premises or its part contracting parties may, withal, agree in their contract for such without obtaining the consent of the landlord; cases, for instance an obligation of the tenant to contact the landlord (viii) if the leased business premises are located in real estate that or some other requirements of the tenant, or specific rights of has been released to the entitled person pursuant to Act No. the landlord vis-à-vis the tenant. In the case of a change of the 403/1990 Coll. on Mitigation of Some Property Injustices; and ownership to a real estate, the lessee has the right to terminate the (ix) if the leased business premises are located in real estate agreement even if it was agreed for a definite term. It is disputable that has been returned to the entitled person pursuant to if such right can be effectively waived by the tenant under the lease Act No. 229/1991 Coll. on Modification of Land and other contract. Agricultural Property Ownership. (f) Repairs Whereas, the tenant may terminate the agreement in the following Unless agreed upon otherwise, the landlord is compelled to maintain cases: the business premises in a proper condition for its agreed or (i) s/he loses the capability to perform the activity for the customary use, at its own costs. performance of which the business premises have been leased; (ii) the business premises have become unfit for the agreed use, 10.4 What taxes are payable on rent either by the landlord with no fault of the tenant; and or tenant of a business lease? (iii) the landlord grossly violates his duties. (i) Income Tax Contract for an indefinite term The landlord is an income tax payer. The tax rate is 21% in case of Any of the contracting parties may terminate the lease in writing, legal persons and 19–25% in case of natural persons of the tax base. without the need for stating the reason for such termination. (ii) Value Added Tax The Civil Code states that should the tenant continue using the The lease of real estate or its part are exempt from value added tax, property after the termination of the lease and the landlord does not with such exceptions of a lease and sub-lease of accommodation file a motion for the release of the property or the vacation of the facilities (hotels, guesthouses, etc.), parking facilities, permanently real estate within 30 days, the lease agreement is renewed under the installed devices and machines, safe-deposit boxes, which are same terms as originally agreed. Leases agreed for a period longer subject to value added tax. A payer of value added tax that leases than one year shall be renewed for one additional year each time; real estate or its part to another payer of value added tax may leases agreed for a shorter period of time shall be renewed for such determine that the lease is not exempt from the tax. The tax rate is shorter period of time. 20% of the tax base (see question 9.3) and is paid by the landlord. The aggrieved party may assert its claim at the court for unlawful (iii) Real Estate Tax termination of the lease. The landlord, as the owner of the building is, additionally, a real estate tax payer (see question 9.4). 10.6 Does the landlord and/or the tenant of a business lease cease to be liable for their respective obligations under the lease once they have sold their 10.5 In what circumstances are business leases usually interest? Can they be responsible after the sale in terminated (e.g. at expiry, on default, by either party respect of pre-sale non-compliance? etc.)? Are there any special provisions allowing a tenant to extend or renew the lease or for either party In the event of a change of ownership of the leased real estate, the to be compensated by the other for any reason on termination? acquirer of the real estate shall proceed forward in the legal position of the landlord. The lease shall advance between the former tenant The Act on the Lease and Sublease of Business Premises provides and the new owner as landlord. In principle, the new landlord takes for a list of methods by which business leases can be terminated. over the rights and the obligations of the original landlord. Without having reviewed the lease agreement in question, nonetheless, one Contract for a definite term cannot establish with pure certainty that the original landlord ceased In the case of a lease for a definite term, the landlord may terminate to be liable for all of its accountability under the lease (for instance, the lease early by written termination notice in the following it might have been contractually agreed that assigned obligations situations: should be performed directly by the original landlord). The same

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is applicable to the liability for the pre-sale non-compliance after the sale. The change of ownership of the leased premises may be a 11.4 Would there be rights for a landlord to terminate a reason for terminating the lease by the tenant, even in cases where residential lease and what steps would be needed to achieve vacant possession if the circumstances the lease was agreed for a definite term. In such a case, a notice existed for the right to be exercised? of termination must be given in the next termination period, unless agreed otherwise. A change simply in the ownership composition The new law also provides a list of reasons entitling both the landlord of the landlord shall have no effect on the continuation of the lease. and the tenant to terminate the contract. It is a demonstrative list since the provision concerned explicitly states that parties may agree 10.7 Green leases seek to impose obligations on upon other reasons for termination in the lease agreement. However, landlords and tenants designed to promote greater

Slovakia the grounds for termination agreed in the lease agreement must be sustainable use of buildings and in the reduction of of such a nature that the parties cannot reasonably be expected to the “environmental footprint” of a building. Please continue their relationship under the lease agreement. briefly describe any “green obligations” commonly found in leases stating whether these are clearly If the apartment is not vacated or handed over to the landlord defined, enforceable legal obligations or something within 10 days of termination of the lease agreement or within not amounting to enforceable legal obligations (for five days of rescission of the lease agreement, the landlord has a example aspirational objectives). right of retention with regard to the tenant’s movable items in the apartment, except for items excluded for reasons of debt collection As regulated by Act No. 555/2005 Coll. on Energy Performance and where the remaining part of the deposit is insufficient to satisfy of Buildings, when leasing a building, an energy performance the outstanding receivables due from the tenant. certification is needed, i.e., a classification by energy categories. The energy performance certificate, valid for a maximum of 10 years, is an attestation of carrying out the prescribed energy performance 12 Public Law Permits and Obligations certification. Further “green obligations” may be prescribed in the lease agreement (pursuant to the principle of the freedom of contract of the parties). A contractual obligation that is possible 12.1 What are the main laws which govern zoning/ permitting and related matters concerning the use to be performed and is permitted by law, which is not breaching or and occupation of land? Please briefly describe them circumventing the law, agreed between the landlord and the tenant, and include environmental laws. shall represent an obligation that may be legally asserted. The main legislative provisions in place governing zoning and the 11 Leases of Residential Premises use of land, is Act No. 50/1976 Coll. on Territorial Planning and Building Code (the Building Act) and related ordinances. The territorial planning documentation, especially the zoning plan of 11.1 Please briefly describe the main laws that regulate a municipality and of a region, emanates a basis for rendering a leases of residential premises. zoning decision. There are four specific types of zoning decisions which are distinguished, whereas their aim is to define rules for Civil Code and Act No. 98/2014 Coll. on short term lease of an sitting and the functional use of a territory, harmonise the interests apartment. and activities which have an impact on territorial development, the environment and ecological stability. Environmental protection is further regulated by Act No. 17/1992 Coll. on the Environment, Act 11.2 Do the laws differ if the premises are intended for multiple different residential occupiers? No. 543/2002 Coll. on the Protection of Nature and Landscape, Act No. 24/2006 Coll. on Environmental Impact Assessment, and Act No. 478/2002 Coll. on Air Protection. No, the same laws would apply where the premises are intended for multiple different residential occupiers. 12.2 Can the state force land owners to sell land to it? If so please briefly describe including price mechanism. 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the The Building Act regulates expropriation, through which the state tenant’s rights to remain in the premises at the end of can attain plots of land and buildings that are appropriate for the term; and (d) the tenant’s contribution/obligation constructing buildings and adopting measures in the public interest to the property “costs” e.g. insurance and repair? (expropriation is also regulated by the Constitution of the Slovak Republic and the Civil Code). Expropriation is only allowed in According to the Act on the Short-term Lease of Apartments, a short- the public interest and solely for those uses as enumerated in the term lease is based on a written lease agreement for a fixed term of a Building Act (the reasons are also mentioned in other legislative maximum of two years. During the lease, the lease agreement may acts, such as the Mining Act and the Aviation Act), for example, – with the agreement of both contracting parties – be extended by the building of motorways. Expropriation must be precisely two years on no more than two occasions under the same conditions. compensated, in cases concerning plots of land and buildings, Hence, the total maximum duration of a short-term lease is six years. resolute as a sum of money corresponding to the market price as Typically, automatic rent increases and a tenant’s rights to remain in created by an expert opinion. The market price is the price of a the premises at the end of the term do not apply. homogenous or a comparable real estate at the same time and place and of comparable quality. Competent compensation can also be On the other hand it is very common to include a provision that implemented by giving a plot of land or a building of such quality a tenant repairs minor defects which can occur in the apartment proportionate to the expropriated real estate. during the lease term up to certain fixed amount (for example, up to EUR 50 per month).

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longer in case of larger and/or complex projects, in particular if EIA 12.3 Which bodies control land/building use and/or is required. The costs of issuing zoning decisions or building permits occupation and environmental regulation? How do are influenced by the scale of the applicable administrative fees. buyers obtain reliable information on these matters? The administrative fees are in general very low. The cost relating to the above-mentioned proceedings may be more so increased The body controlling land/building use and/or occupation and by additional expenses affiliated with attaining the prescribed environmental regulation within the Slovak Republic, are the documentation. It is important to mention the relatively new Act building authorities, which are the municipalities. For certain No. 447/2015 on Local Development Fee. As it is evident from its buildings (motorways, airports, etc.) a clear-cut entity acts as the name, the Act implements Development Fees. Land buildings in the building authority, in most cases the respective Regional Building territory of the municipality, for which a valid building permit has

Authority. Among the competences of building authorities are been issued to permit the construction, are subject to Development Slovakia provisions for a change of land use, administering building Fees. The liability to pay commences on the final validity date of proceedings, the supply of building permits, and levying respective the building permit. The Development Fee is calculated using the administrative sanctions. floor area of the above-ground part of the building in 2m . The floor The Slovak Environmental Inspection Authority, through its area of the above-ground part of the building means the sum of the inspectorates, supervises compliance with generally binding floor area of all rooms in above-ground storeys of the building. The environmental legal regulations. Development Fee rate ranks from EUR 10 to EUR 35 per each m2, Buyers can obtain the necessary information on building proceedings or a part thereof, of the floor area of the above-ground part of the from the respective building authorities that are obliged to provide building. It is up to the municipalities to set Development Fee rates information on their activities pursuant to Act No. 211/2000 Coll. on for various buildings. Free Access to Information (subject to certain restrictions). 12.7 Are there any regulations on the protection of historic 12.4 What main permits or licences are required for monuments in your jurisdiction? If any, when and how building works and/or the use of real estate? are they likely to affect the transfer of rights in real estate?

The location of buildings is permitted upon the issuance of a zoning Such historical monuments are guaranteed under Act No. 49/2002 decision by the respective building authority. In certain cases EIA Coll. on Protection of Monuments and Historic Sites. Pursuant proceeding is required. to this act, the state (Slovak Republic) has a pre-emption right to The construction of a building, their changes and maintenance works buy culture heritage monuments, which binds the seller to offer the on these, may be carried out only upon the issuance of a building culture heritage monument to the state. permit by the building authority or on the basis of a notification to the building authorities (notification is sufficient in cases of simple constructions, etc.). 12.8 How can e.g. a potential buyer obtain reliable information on contamination and pollution of real After constructing a building that needed a building permit, it can be estate? Is there a public register of contaminated land used only upon obtaining the occupancy permit from the competent in your jurisdiction? building authority. A permit from the building authority is also required in case of As pursuant to the Ordinance No. 340/2010 Coll. (which amended changing the use of a building, its removal or ground works. Ordinance No. 51/2008 Coll.), the Registry of Environmental Burdens was established. The registry is available on the internet and maintained by the Ministry of Environment. The register 12.5 Are building/use permits and licences commonly obtained in your jurisdiction? Can implied permission contains three main parts. Part A exhibits records on likely be obtained in any way (e.g. by long use)? environmental burdens, part B includes records on environmental burdens, and part C includes records on regeneration and reclaimed Due to fixed exceptions bound by law (e.g., simple constructions sites. Its use is free of charge. Information therein does not combine where a notification shall suffice), it is appropriate to secure a zoning the latest information for all monitored areas. Hence, it is always decision and a building permit for all constructions. Furthermore, a recommended to carry out your own research and request the latest building permit is needed to carry out changes in buildings, mainly information from the responsible state authorities. for additional buildings or parts. In such events, a finished building may be used only upon attaining an occupancy permit (see question 12.9 In what circumstances (if any) is environmental clean- 11.4). up ever mandatory? In such cases where a building has been built without a building permit or in breach thereof, proceedings for further authorisation According to the Act No. 409/2011 Coll. on Some Measures in the of a building can commence. The building authority shall make Field of Environmental Burden the rules for the classification of an assessment whether to issue an additional building permit or to a person liable for the environmental burden were enacted. The order the demolition of such a building. liable person under this Act can either be the originator or an obliged person in case the originator has ceased to exist. An obliged person is designated based on the decision of the Regional Office for the 12.6 What is the appropriate cost of building/use permits Environment and it is usually the legal successor of the originator. and the time involved in obtaining them? The inheritor or person who had their real estate returned subject to a certain statutory act (e.g. on the basis of restitutions) is not The breadth of the procedures for issuing zoning decisions or assumed to be a legal successor. The act sets forth rights and building permits may vary and depend on numerous factors. obligations for the originator and obliged person in connection with Relatively, both proceedings take two to three months, but can last the removal of environmental burdens as well as exceptions for a

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non-considered person to be an obliged person. However, in some cases it is impossible to assign liability to the originator or their 13 Climate Change legal successor, the owner of the real estate is usually liable for the clean-up of the environmental burden on the basis of a decision of 13.1 Please briefly explain the nature and extent of any the Regional Office for the Environment. regulatory measures for reducing carbon dioxide emissions (including any mandatory emissions trading scheme). 12.10 Please briefly outline any regulatory requirements for the assessment and management of the energy performance of buildings in your jurisdiction. Currently, the following acts and ordinances regulate reducing carbon dioxide emissions, including trading emissions: Act No. Slovakia In the Slovak Republic, the subject is regulated by Act No. 555/2005 414 2012 Coll. on Emission Allowance Trading; Ordinance of Coll. on Energy Performance of Buildings, altering Directive the Ministry of Environment No. 271/2011 Coll. on criteria on 2002/91/EC of the European Parliament and of the Council on permanent sustainability and target for greenhouse gas emission the Energy Performance of Buildings of December 16, 2002 into reduction; and Ordinance No. 85/2014 Coll. which states maximum Slovak legislation. Under this prescribed Act, every new building amounts of pollutants. has to meet the minimum requirements for the energy performance of buildings (set forth by technical norms). If it is functionally, 13.2 Are there any national greenhouse gas emissions technically and economically feasible, the existing buildings have reduction targets? to meet the minimum requirements for the energy performance of new buildings, upon carrying out major repairs. The act further As a member of the EU, the Slovak Republic will respect all enacted sets up the commitment of an energy performance certification EU legislation. One of the targets is to reduce gas emissions in (i.e., classification by energy categories) in the event of a sale or the transport and agricultural sectors and in energy efficiency of a lease of a building or upon the construction of a new building buildings by 12 percent by 2030. The Slovak Republic in general or performing major reconstructions to an existing building. In does not have problems with fulfilling the acquired objectives. other circumstances, a certification can be voluntary. The energy performance certificate, valid for a maximum period of 10 years, 13.3 Are there any other regulatory measures (not already constitutes an attestation of completion of the energy performance mentioned) which aim to improve the sustainability of certification. both newly constructed and existing buildings? Another act regulating requisites for the assessment and management of the energy performance of buildings is Act No. 476/2008 Coll. on In addition to Act No. 555/2005 Coll. on Energy Performance Efficiency in Energy Use (Energy Efficiency Act) and number of of Buildings (see question 10.7 and question 11.10), there is Act ordinances. No. 314/2012 on the Checking of Heating and Air-Conditioning Systems.

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Mgr. Vladimír Kordoš, LL.M. Konečná & Zacha Ventúrska 12 811 01 Bratislava Slovakia

Tel: +421 905 838 337 Email: [email protected] URL: www.konecna-zacha.com Slovakia Mgr. Vladimír Kordoš LL.M. (Tilburg) studied at Comenius University in Bratislava and earned his LL.M. degree in Tilburg, The Netherlands, where he specialised in international and European business law and competition law. Currently, Mr. Kordoš is a Real Estate Partner at Konečná & Zacha in Bratislava. Mr. Kordoš’ first language is Slovak. He is also fluent in business English and has a basic knowledge of German. He focuses on providing legal advice to clients on M&A, insolvency, regulatory and real estate law and is also in charge of commercial and corporate matters. Mr Kordoš is an active member of INSOL – The European organisation of professionals who specialise in insolvency, business reconstruction and recovery, and CIArb – International Centre of Excellence for the Practice and Profession of Alternative Dispute Resolution (ADR). He has strong communication skills, leadership and management skills. Clients appreciate his individual approach and sensitivity to the specific needs of the client.

Konečná & Zacha, s.r.o. is a distinguished law firm operating as a part of a regional network of law firms in Czech Republic, Romania, Bulgaria and Russia under common brand Konečná & Zacha, Attorneys at Law. Since 2000 it has been providing top quality legal services to both international and local clients, specialising in commercial law, especially in the fields of real estate law, dispute resolutions, intellectual property, mergers and acquisitions, project financing and restructuring, energy, telecommunications, transportation and others. Konečná & Zacha is usually ranked by international agencies (such as Chambers Europe, ACQ Law, DealMakers, The Lawyers World, InterContinental Finance Magazine) among leading law firms and has been constantly expanding its team with top experts in order to satisfy a growing interest in its services. Konečná & Zacha is an active member of The Association of European Lawyers (AEL), associating high-quality, progressive and independent law firms throughout the Europe. The main aim of this prestigious association is to increase the quality and efficiency of provision of legal services through its member firms. Our membership in this association provides us with broad international experience and contacts, which further increases our opportunities of international development in terms of our clientele. The law firm also enjoys benefits of its membership in The Association for Real Estate Market Development (ARTN) and the Czech Transport Law Society, of which it is a founding member.

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Slovenia Damijan Brulc

Brulc Gaberščik & Partners, Law Firm, Ltd. Marjetka Kenda

■ EU nationals, citizens of member countries of the OECD and 1 Real Estate Law European Economic Area (no limitations); ■ nationals of candidate countries for EU accession (reciprocity 1.1 Please briefly describe the main laws that govern required); and real estate in your jurisdiction. Laws relating to ■ citizens of third countries (can only inherit real estate in leases of business premises should be listed in Slovenia; reciprocity is required). response to question 10.1. Those relating to zoning and environmental should be listed in response to question 12.1. Those relating to tax should be listed in 3 Real Estate Rights response to questions in Section 9.

Real estate is mainly governed by the Law of Property Code 3.1 What are the types of rights over land recognised in (Stvarnopravni zakonik), the Land Register Act (Zakon o zemljiški your jurisdiction? Are any of them purely contractual knjigi), the Real Estate Recording Act (Zakon o evidentiranju between the parties? nepremičnin), the Agricultural Land Act (Zakon o kmetijskih zemljiščih), the Housing Act (Stanovanjski zakon) and the Protection The rights over land are exhaustively listed in the Law of Property of Buyers of Apartments and Single Occupancy Buildings Act Code and are the following: (Zakon o varstvu kupcev stanovanj in enostanovanjskih stavb). ■ ownership (lastninska pravica); ■ mortgage (hipoteka); 1.2 What is the impact (if any) on real estate of local ■ servitudes (služnosti); common law in your jurisdiction? ■ encumbrance (pravica stvarnega bremena); and ■ building rights (stavbna pravica). Slovenia is a civil law country and the impact of local common law These rights exist only if they are registered in the land registry and is therefore relevant only for the interpretation of statutory law. therefore have erga omnes effect. Apart from the above, parties can freely agree upon contractual 1.3 Are international laws relevant to real estate in your rights over land. Some of those can be registered (e.g. lease, option jurisdiction? Please ignore EU legislation enacted rights) and in this way become effective with regard to third parties locally in EU countries. as well. Certain facts related to real estate can be annotated in the Land The Constitution of the Republic of Slovenia (Ustava Republike Registry (e.g. annotation of a dispute over real estate, annotation of Slovenije) provides that foreign nationals may acquire ownership priority); the purpose of annotations is to protect the rank of a right right to real estate only under conditions provided by law or a treaty that might later be entered into the registry. ratified by the National Assembly. International agreements that enable foreign nationals (apart from nationals of EU members) to acquire real estate in Slovenia are therefore relevant in this aspect. 3.2 Are there any scenarios where the right to a real estate diverges from the right to a building constructed thereon? 2 Ownership There are two such options: the building right (stavbna pravica) – the right to own a building above or under somebody else’s land 2.1 Are there legal restrictions on ownership of real estate by particular classes of persons (e.g. non-resident (can be established for 99 years maximum); and condominium persons)? (etažna lastnina) – the combination of sole ownership of one part of the building (apartment) and co-ownership of shared parts of the As explained above, foreign nationals may acquire ownership right to building (including the land below it). real estate only under conditions provided by law or a treaty ratified by the National Assembly. In general, there are three different categories of foreign nationals with regard to these limitations:

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3.3 Is there a split between legal title and beneficial title 4.6 On a land sale, when is title (or ownership) transferred in your jurisdiction and what are the registration to the buyer? consequences of any split? The ownership of real estate can only be transferred by registration The legal title or legal ownership is separate from the beneficial title in the Land Registry. The buyer therefore obtains the title when he or beneficial ownership, and the legal owner will not necessarily is registered as the owner. be the same as the beneficial owner. A person who has a beneficial title enjoys the benefits of ownership, even though legal title is in 4.7 Please briefly describe how some rights obtain priority another name. over other rights. Do earlier rights defeat later rights?

The legal title belongs to the person, who is registered in the Slovenia Land Registry. It provides the right to possess, use and control The prior tempore, potior iure rule applies for rights of the same the property. Owners with legal title can take legal action against kind. This is especially relevant for mortgages – in the case of parties who breach their ownership rights. execution, the debts secured by mortgages will be repaid in the Non-registered rights cannot be exercised or enforced against third same order the liens were registered in the Land Registry. Once persons who obtained their right relying on information in the Land a procedure of registration in the Land Registry is initiated, it is Registry. published in the Land Registry with a special entry.

4 System of Registration 5 The Registry / Registries

4.1 Is all land in your jurisdiction required to be 5.1 How many land registries operate in your jurisdiction? registered? What land (or rights) are unregistered? If more than one please specify their differing rules and requirements. All land in Slovenia is required to be registered. Only one Land Registry, as a register of rights, exists in Slovenia. The factual features of the land (location, dimensions, value, etc.) 4.2 Is there a state guarantee of title? What does it are registered in the cadaster. guarantee?

The Land Register Act stipulates that a person that acts in good faith 5.2 Does the land registry issue a physical title document and relies on information from the Land Registry shall not suffer to the owners of registered real estate? any adverse consequences because of this. The said rule ensures that the transfer of the registered title is efficient. The Land Registry is in electronic form and can be accessed online. The registry court and notaries can issue physical documents of title.

4.3 What rights in land are compulsorily registrable? What (if any) is the consequence of non-registration? 5.3 Can any transaction relating to registered real estate be completed electronically? What documents need Under the Land Register Act, rights in rem over real estate are to be provided to the land registry for the registration of ownership right? Can information on ownership of acquired the moment they are registered in the Land Registry, and registered real estate be accessed electronically? also cease from the moment they are deleted from the Registry. Non- registered rights can therefore not be exercised or enforced against Transactions of rights over real estate are conducted in stages. A third persons who obtained their right relying on information in the sales contract, for example, is first signed by the parties (written Land Registry. form is mandatory), and then the seller’s signature on the grant deed for transfer of the title over the land to the buyer (clausula 4.4 What rights in land are not required to be registered? intabulandi) must be notarised. With these documents, the buyer has three options to register the transfer of ownership right: Rights that are not listed as rights in rem in the Law of Property ■ the buyer can submit the request for registration electronically Code (see the answer to question 3.1) are not required to be (the Land Register Act poses certain requirements regarding registered – i.e. contractual rights that can only be enforced inter the security of a digital signature); partes (for example, a lease). ■ if the buyer is not represented by an attorney, they can submit the request for registration to the court in physical form; even in this case, the court clerk then converts the request to 4.5 Where there are both unregistered and registered land electronic form; or or rights is there a probationary period following first registration or are there perhaps different classes ■ the request can be submitted via an attorney in the real estate or qualities of title on first registration? Please give agency which organised the transaction, or a notary public details. First registration means the occasion upon (most commonly) – both of these require the request to be which unregistered land or rights are first registered submitted in electronic form. in the registries. The documents that need to be provided to the Land Registry are: the contract, including the obligation of the seller to transfer their All land in Slovenia should be registered in the Land Registry. ownership right to the buyer; the grant deed to transfer the title over Cases of unregistered land are uncommon and can arise only as a the land to the buyer with a notarised signature (the deed is usually consequence of administrative mistakes. already part of the contract); a certificate of intended use of the land (issued by the municipality); and a tax payment confirmation.

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Information of ownership of real estate, as well as of all other rights (Notarska tarifa), and the remuneration of attorneys by the Attorney over land, can be accessed at: https://evlozisce.sodisce.si/esodstvo/ Tariff (Odvetniška tarifa). By both tariffs, the price of the service is index.html without charge; registration of an email address is determined by the value of the transaction. required. The remuneration of real estate agencies is limited by the Real Estate Agencies Act (Zakon o nepremičninskem posredovanju) to 5.4 Can compensation be claimed from the registry/ 4% (+ VAT) of the purchase price. registries if it/they make a mistake? 6.3 Do you feel there is a noticeable increase in The Land Registry is administrated by the courts. As the employer the availability of capital to finance real estate of court personnel, the state is liable for damages that occur as a transactions in your jurisdiction, whether equity or Slovenia consequence of their wrongful actions. There have already been debt? What are the main sources of capital you see cases in which compensation was awarded to plaintiffs that relied active in your market? on erroneous information in the Land Registry and suffered adverse consequences because of it. The banks and savings banks slightly relaxed their credit standards on housing loans in 2017. The main sources of capital for purchasing real estate in primary real estate market are housing 5.5 Are there restrictions on public access to the loans and savings. register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and The secondary market (used real estate property) in Slovenia is other rights affecting real estate? heavily driven by recent foreclosures and bankruptcy proceedings. Many properties are put on the market at auction, as the Bank The Land Registry can be accessed without restriction, as explained Assets Management Company (Družba za upravljanje terjatev in question 5.3. On the electronic portal of the court, it is possible bank), a government-owned “Bad Bank”, and privately held to get all the essential information about real estate – ownership, banks are actively managing the liquidation of their real estate encumbrances, other rights in rem, as well as historical data about portfolios. The main sources of capitals for purchasing real estate real estate (previous owners, previously existing encumbrances, etc.). in the secondary real estate market are investments of foreign and Documents relating to entries (contracts, court decisions, etc.) are not domestic companies. publicly available. The court can grant access to those documents to persons with a legitimate interest upon written request. Intent to buy 6.4 What is the appetite for investors and developers real estate is considered a legitimate interest in this regard. in your region to look beyond primary real estate markets and transact business in secondary or even tertiary markets? Please give examples of significant 6 Real Estate Market secondary or tertiary real estate transactions, if relevant.

6.1 Which parties (in addition to the buyer and seller Several purchases of non-performing bank loans (NPLs) have been and the buyer’s finance provider) would normally be involved in a real estate transaction in your made by foreign funds, which came with a sizeable portfolio of real jurisdiction? Please briefly describe their roles and/or estate collateral or real estate property. Active management of those duties. portfolios brought a systematic institutional approach to secondary market transactions. Most of the secondary market is therefore The only party that is indispensable for a real estate transaction is a driven by asset liquidation policies. A notable exception to this notary public, since the seller’s signature on the grant deed must be rule is the hotel industry real estate market, where due to industry notarised. As explained in question 5.3, the notary public is usually standards in acquisitions, asset deals are prevalent. Fragmentation also authorised to file the request to transfer the ownership to the of ownership in industrial zones and housing, and a restrictive Land Registry. It might also draft the entire sales contract or give regulatory framework, inhibit redevelopment ventures. an already drafted contract the form of a notary deed. In these two cases, the notary public also examines the validity of the contract in 6.5 Have you observed any trends in particular market relation to mandatory statutory requirements. sub sectors slowing down in your jurisdiction in Real estate agencies are involved in less than half of real estate terms of their attractiveness to investors/developers? transactions. Their role is determined in the agency contract and Please give examples. is typically limited to finding buyers for certain real estate or vice versa, and advising their clients about the terms of transaction, and At the moment, there is no slow-down in any particular sector. the legal and factual state of the real estate. Contracts for real estate transactions are typically drafted by 7 Liabilities of Buyers and Sellers in Real attorneys, especially for institutional and corporate buyers. Their Estate Transactions mandate often also includes an examination of the legal and administrative status of real estate. The role of an escrow agent is usually taken by a notary public, or 7.1 What (if any) are the minimum formalities for the sale less commonly, by attorneys or real estate agents. and purchase of real estate?

See the answer to question 5.3. 6.2 How and on what basis are these persons remunerated?

The remuneration of notaries is regulated by the Notary Tariff

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Any loan-giving may be considered a business model that requires a 7.2 Is the seller under a duty of disclosure? What matters banking or a savings bank licence. must be disclosed?

The seller is obligated to transfer to the buyer the object of the sales 8.2 What are the main methods by which a real estate lender seeks to protect itself from default by the contract in the agreed upon state. This indirectly creates a duty borrower? of disclosure, since it gives the buyer the right to remedies for a breach of contract in case any defects of the sold real estate were not The most commonly used collateral is mortgage, as well as, to a disclosed to the buyer at the time of the conclusion of the contract. lesser extent, sureties and bank guarantees.

7.3 Can the seller be liable to the buyer for Slovenia misrepresentation? 8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a mortgagee to realise a mortgaged property without The Code of Obligations (Obligacijski zakonik) provides that in involving court proceedings or the contribution of the the case of misrepresentation, the aggrieved party can demand the mortgagor? termination of the contract and claim compensation for damages arising out of misrepresentation. The mortgage can be established in an ordinary contract (which has to contain a notarised grant deed allowing the registration of the 7.4 Do sellers usually give contractual warranties to the mortgage in the land registry) or in the form of a directly enforceable buyer? What would be the scope of these? What is notary deed. the function of warranties (e.g. to apportion risk, to To avoid the litigation phase, the mortgage is usually established give information)? Are warranties a substitute for the in an agreement in the form of a directly enforceable notary deed. buyer carrying out his own diligence? In this case, the mortgagor expressly agrees that after the default of the claim, the real estate will be sold, and handed over empty The interests of the buyer are to a large extent already protected of persons and things within one month from the sale and the date by the law (see the answer to question 7.2). Additional contractual the mortgagee’s claim is repaid. With this type of mortgage, the warranties are therefore common only in complex transactions. mortgagee can initiate the execution procedure directly which In such cases, the buyer can efficiently rely upon the contractual significantly shortens the duration of the process. warranties. Otherwise, the mortgagee has to file a lawsuit demanding that the real estate is sold and the claim that is collateralised with mortgage 7.5 Does the seller warrant its ownership in any way? on that real estate is repaid. Standard litigation procedure needs to Please give details. be carried out. After the decision of the court is final and binding, the mortgagee has to initiate a procedure in which the real estate is Warranty of ownership is implied in the sales contract unless first evaluated and then sold, usually in a public auction. explicitly excluded. Since the Land Registry is easily accessible, For the moment, there are no options that would enable the the buyer usually verifies the ownership of the seller by itself before mortgagee to avoid court involvement in the procedure of realisation the conclusion of the contract. The sales contract can, however, be of the mortgaged property. validly concluded by a non-owner.

8.4 What minimum formalities are required for real estate 7.6 What (if any) are the liabilities of the buyer (in addition lending? to paying the sale price)? The Code of Obligations (Obligacijski zakonik) does not require The buyer may be liable for damages, and is usually liable for costs any formality for credit agreements. Contracts of suretyship and and taxes connected to the property if he does not take possession. the establishment of mortgages are required to be in written form (in which case the signature of the mortgagor must also be notarised). 8 Finance and Banking If there is real estate lending as an ongoing business activity, a banking or loan-house licence is required. In practice, corporate lenders always conclude loan agreements in 8.1 Please briefly describe any regulations concerning writing, usually even in the form of a directly enforceable notary deed. the lending of money to finance real estate. Are the rules different as between resident and non-resident In the case that the loan is given to an individual person, the persons and/or between individual persons and mandatory provisions of the Consumer Credit Act (Zakon o corporate entities? potrošniških kreditih) apply. The credit agreement must be concluded in writing and must contain numerous clauses and data, Financing of real estate is not specifically regulated; general listed in the said act. If the loan is secured with a mortgage, the regulations for lending of money apply. There are no relevant agreement must have the form of a notary deed. differences between residents and non-residents. Individual persons, however, enjoy a higher level of protection by the 8.5 How is a real estate lender protected from claims law in comparison to corporate entities. Loans given to individual against the borrower or the real estate asset by other persons are subject to mandatory provisions of the Consumer Credit creditors? Act (Zakon o potrošniških kreditih). Securitisation with mortgage bonds is only possible for public That depends entirely upon the collateral given for the loan. In the entities. case of a mortgage, the prior tempore, potior iure rule applies –

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the loan, secured with a mortgage that has a priority order, will be building (i.e. the transfer is made before the building is first used or repaid from the sale proceeds first. If no collateral is given and within the first two years of its use), or land suited for construction. an insolvency procedure takes place, the real estate lender has no The tax rate depends upon the use of the building: priority over other creditors. ■ for the sale of residential buildings measuring up to 120m² (apartments) or 250m² (houses), the tax rate is 9.5%; and 8.6 Under what circumstances can security taken by a ■ for other buildings and land suited for construction, the tax lender be avoided or rendered unenforceable? rate is 22%. The payment of VAT is the liability of the seller. If the loan agreement has all the necessary components and is composed in the form of a notarial record, the borrowers can delay Slovenia the payment but ultimately cannot avoid the final payment. 9.5 What other tax or taxes (if any) are payable by the seller on the disposal of a property?

8.7 What actions, if any, can a borrower take to frustrate In 2012, the Fiscal Balance Act (Zakon o uravnoteženju javnih enforcement action by a lender? financ) introduced a new tax on profits arising from sales of real estate that was not suited for construction at the time of its Borrowers may only file an objection against the enforcement order, acquisition and obtained that purpose before its disposal. but its objections are very limited. The borrowers can only claim The tax base is the difference between the value of the land at its to have repaid the loan in cash or in some other way (e.g. netting). disposal (diminished for the costs of disposal) and the value of the land at its acquisition (increased for the costs of acquisition). 9 Tax The tax rate depends upon the time that has passed between the date that the purpose of the land was changed and the date of transfer. It is currently: 9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable? ■ 25% if that time period was shorter than one year; ■ 15% if that time period was longer than one but shorter than Transfers of ownership of real estate or building rights (for three years; and definitions, see the answer to question 3.2) are subject to taxation, ■ 5% if that time period was longer than three but shorter than governed by the Real Property Transaction Tax Act (Zakon o davku 10 years. na promet nepremičnin). The tax rate is 2% of the purchase price of real estate. The tax must be paid by the seller if the sales contract 9.6 Is taxation different if ownership of a company (or does not provide otherwise. Newly built objects are subject to VAT, other entity) owning real estate is transferred? and not to real property transaction tax. Taxation of the transfer of business shares or stock is entirely 9.2 When is the transfer tax paid? independent from the real estate owned by the respective company. It is common practice in B2B real estate deals to use special purpose The seller (or, if so agreed, the buyer) must report the intended transfer vehicles, namely holding companies, for larger transactions. of real estate to the tax office within 15 days of the conclusion of the contract, and provide the obligation to transfer the ownership or 9.7 Are there any tax issues that a buyer of real estate establish or transfer the building right. The tax must be paid within should always take into consideration/conduct due 30 days after the tax assessment is served to the seller (or, if so agreed, diligence on? the buyer). In addition, the Land Register Act stipulates that the confirmation of payment of real property transaction tax must attached There are no tax issues that a buyer of real estate should take into to the request for registration of the transfer in the Land Registry. consideration, except if so agreed.

9.3 Are transfers of real estate by individuals subject to 10 Leases of Business Premises income tax?

Under the Personal Income Tax Act (Zakon o dohodnini), the 10.1 Please briefly describe the main laws that regulate income of tax residents from the transfer of real estate is considered leases of business premises. as capital gain if it was held as a private asset for less than 20 years. The tax base is calculated as the difference between the value of The main law regulating the lease of business premises is the Act real estate in the moment of disposal and its value at the moment on Business Buildings and Business Premises (Zakon o poslovnih of acquisition. stavbah in poslovnih prostorih). The Code of Obligations applies subsidiarily for the issues that are not governed by the said Act. The tax rate depends upon the years of ownership of real estate before disposal. If the real estate is disposed in the first five years of ownership, the tax rate is 25%; after five years it drops to 15%; after 10.2 What types of business lease exist? 10 years to 10%; and after 15 years to 5%. The Act on Business Buildings and Business Premises does not 9.4 Are transfers of real estate subject to VAT? How provide for more types of lease. Apart from standard lease contracts, much? Who is liable? Are there any exemptions? financial leasing contracts that provide a transfer of ownership with the payment of the last annuity are in use, although declining. Transfers of real estate are subject to VAT if the real estate is a new

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out of breach of contract is governed by the general provisions of 10.3 What are the typical provisions for leases of business the Code of Obligations. premises in your jurisdiction regarding: (a) length of term; (b) rent increases; (c) tenant’s right to sell or sub-lease; (d) insurance; (e) (i) change of control of 10.6 Does the landlord and/or the tenant of a business the tenant; and (ii) transfer of lease as a result of a lease cease to be liable for their respective corporate restructuring (e.g. merger); and (f) repairs? obligations under the lease once they have sold their interest? Can they be responsible after the sale in Typical provisions are the following: respect of pre-sale non-compliance? (a) for length of term: usually definite (2–10 years); The sale of the object of a lease contract is subject to provisions

(b) rent increases: if rent increases are provided for in the Slovenia of the Code of Obligations. If the tenant has already started using contract, they usually follow the consumer price index, defined by the Statistical Office of the Republic of Slovenia; the premises when they are sold, the new owner steps into the legal position of the previous owner and is bound by the lease contract. (c) tenant’s right to sell or sub-lease: the tenant cannot transfer The previous owner remains liable for obligations of the new owner the lease contract without the landlord’s consent; sub-lease is only possible if it is expressly allowed for in the contract, (that arose before the transfer) as a guarantee. which is not common; (d) insurance: the costs of insurances are subject to negotiation; 10.7 Green leases seek to impose obligations on (e) (i) change of control of the tenant: typically not dealt with in landlords and tenants designed to promote greater the lease contract; sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please (ii) transfer of lease as a result of a corporate restructuring: briefly describe any “green obligations” commonly typically not dealt with in the lease contract; and found in leases stating whether these are clearly (f) repairs: there are no provisions that could be characterised defined, enforceable legal obligations or something as typical in this aspect; the default provision of the law is not amounting to enforceable legal obligations (for that the owner of the building or premises bears the costs of example aspirational objectives). investment-type repairs. The tenant usually bears the costs of standard maintenance (cleaning, paint jobs). The environmental issues are not yet a common element of lease contracts. 10.4 What taxes are payable on rent either by the landlord or tenant of a business lease? 11 Leases of Residential Premises There are no taxes on rent payable by the tenant of a business lease. The income of individual persons who are leasing their real estate is 11.1 Please briefly describe the main laws that regulate subject to income tax, at a rate of 25%. leases of residential premises. The income of business entities from rent is generally not subject The main law regulating the lease of residential premises is the to VAT, yet this is often agreed upon by the parties of the lease Housing Act (Stanovanjski zakon). The Code of Obligations and the contract, since such agreement enables the landlord to deduct input Law of Property Code (Stvarnopravni zakonik) apply subsidiarily, tax. Such agreement is allowed under the condition that the tenant for the issues that are not governed by the said Act. uses the leased premises for business activity that is subject to VAT and that the tenant has the right to deduct input VAT. The tax rate in this case is 22%. 11.2 Do the laws differ if the premises are intended for multiple different residential occupiers?

10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party The laws do not differ if the premises are intended for multiple etc.)? Are there any special provisions allowing a different residential occupiers. The Housing Act regulates all types tenant to extend or renew the lease or for either party of residential buildings. to be compensated by the other for any reason on termination? 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: If a business lease is concluded for an indefinite term, it can be (a) length of term; (b) rent increases/controls; (c) the terminated by either party with a termination period set out in the tenant’s rights to remain in the premises at the end of lease contract that cannot be shorter than one year. If a lease is the term; and (d) the tenant’s contribution/obligation concluded for a definite term, it expires with the lapse of time. to the property “costs” e.g. insurance and repair? However, if the tenant keeps using the premises after the expiry, the landlord must file a demand for the emptying of the premises to the Typical provisions are the following: court within one month. If the landlord fails to do so, the duration (a) for length of term: there are no provisions that could be of the contract is by law converted to an indefinite term. Apart from characterised as typical; this, the tenant cannot extend or renew the lease unilaterally. (b) rent increases: if rent increases are provided for in the Apart from the possibility of termination of the contract concluded contract, they usually follow the consumer price index, for an indefinite term, the lease contract can only be terminated on defined by the Statistical Office of the Republic of Slovenia; the grounds that are listed in the Act on Business Buildings and (c) tenant’s right to remain in the premises at the end of the Business Premises. term: the tenant cannot remain in the premises at the end of the term without the landlord’s consent; If the tenant keeps A lawful termination of the contract itself is not a basis for claims for using after the expiry, the landlord must file a demand for the compensation from either party. The liability for damages arising

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emptying of the premises. If the landlord fails to do so, the duration of the contract is by law converted to an indefinite 12.4 What main permits or licences are required for term. Apart from this, the tenant cannot extend or renew the building works and/or the use of real estate? lease unilaterally; (d) insurance and repair: the costs of insurances are subject to Before the beginning of building works, a building permit must negotiation; and be obtained (simple buildings are exempt). After the conclusion (e) repairs: there are no provisions that could be characterised of the building works, their compliance with the building permit is as typical in this aspect; the default provision of the law is confirmed in an operating permit. that the owner of the residential premise bears the costs of Under specific circumstances (buildings with greater environmental investment-type repairs. The tenant usually bears the costs impact), an environmental permit must be obtained as well.

Slovenia of standard maintenance (cleaning, paint jobs).

12.5 Are building/use permits and licences commonly 11.4 Would there be rights for a landlord to terminate a obtained in your jurisdiction? Can implied permission residential lease and what steps would be needed be obtained in any way (e.g. by long use)? to achieve vacant possession if the circumstances existed for the right to be exercised? A building permit and operating permit must always be obtained; the law does not provide for any possibility of an implied permit. If a residential lease is concluded for an indefinite term, it can be terminated by a landlord with a termination period that cannot be shorter than 90 days. The lease contract can only be terminated 12.6 What is the appropriate cost of building/use permits for the guilty grounds that are listed in the Housing Act. Any other and the time involved in obtaining them? reasons must be listed in the lease contract or alternatively, the landlord must provide another suitable residential premises. The administrative fee for the building permit and operating To achieve vacant possession, the landlord must file a demand for permit is relatively low (maximum EUR 272, depending upon the value of the project), especially in comparison with the municipal the emptying of the premises to the court. contribution that can amount to several thousand euros and has to be paid before the building permit can be obtained. 12 Public Law Permits and Obligations The time necessary to obtain the building permit depends on whether any permits or consents are required for it to be issued. Usually the permit should be issued within one or two months (depending on 12.1 What are the main laws which govern zoning/ certain factual features of the building); however, this is rarely the permitting and related matters concerning the use case in practice. and occupation of land? Please briefly describe them and include environmental laws. 12.7 Are there any regulations on the protection of historic The use and occupation of land is mainly governed by the Spatial monuments in your jurisdiction? If any, when and how Management Act (Zakon o urejanju prostora), Spatial Planning Act are they likely to affect the transfer of rights in real estate? (Zakon o prostorskem načrtovanju), the Construction Act (Zakon o graditvi objektov), the Environment Protection Act (Zakon o varstvu narave), the Nature Conservation Act (Zakon o ohranjanju narave) Historic monuments are subject to a special regime of protection and the Waters Act (Zakon o vodah). under the Cultural Heritage Protection Act (Zakon o varstvu kulturne dediščine). Real estate that is classified as a cultural monument or as land in the effective area of the monument is 12.2 Can the state force land owners to sell land to it? If subject to pre-emptive right of the state or municipality. In the case so please briefly describe including price mechanism. that archaeological remains are found on real estate, the owner must allow archaeological excavations to take place. The right of the state to compulsory purchase is set out in the Constitution and is only permissible for the public good; an 12.8 How can e.g. a potential buyer obtain reliable appropriate compensation (monetary or in the form of equivalent information on contamination and pollution of real land) must be given, which is subject to expert evaluation estate? Is there a public register of contaminated land (standardised real estate evaluation methods are applied). in your jurisdiction? Compulsory purchase is governed in detail by the Spatial Management Act. No public register of polluted land exists in Slovenia, nor does any other centralised collection of data relating to pollution. Reports 12.3 Which bodies control land/building use and/or on pollution of land (especially agricultural) are often issued occupation and environmental regulation? How do by municipalities. Monitoring of pollution of land and water is buyers obtain reliable information on these matters? also regularly done by the Agency of Republic of Slovenia for Environment, which can represent a source of information on the The main bodies of control over those issues are the Construction, environmental situation of a certain area. Surveying and Housing Inspectorate and the Inspectorate for Agriculture and the Environment, both under the responsibility of 12.9 In what circumstances (if any) is environmental clean- the Ministry of the Environment and Spatial Planning. up ever mandatory? Architectural bureaus usually offer specialised reports of spatial planning limitations; information can also be obtained from the Environmental clean-up can be mandatory in a variety of different local authorities, i.e. municipalities and state administrative units. circumstances, ranging from agricultural protection, to public health and safety, to protection of drinking water, etc.

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emissions of greenhouse gases will not increase by more than 4% in 12.10 Please briefly outline any regulatory requirements comparison to the emissions in 2005 and shall not exceed 12.117 kt for the assessment and management of the energy CO ekv³. The programme is focused on the sectors that represent performance of buildings in your jurisdiction. 2 the main sources of pollution outside the European Union Emission Trading Scheme. In 2014, the Energy Act (Energetski zakon) introduced so-called energy certificates. An energy certificate must be obtained ifa building is sold or being leased. It contains information on the 13.2 Are there any national greenhouse gas emissions energy performance of the building and recommendations for reduction targets? improvement. Apart from that, the Construction Act and Energy See the answer to question 13.1. Act contain certain mandatory standards for the energy performance Slovenia of newly built as well as existing buildings. 13.3 Are there any other regulatory measures (not already mentioned) which aim to improve the sustainability of 13 Climate Change both newly constructed and existing buildings?

13.1 Please briefly explain the nature and extent of any One important incentive on the field of sustainability of buildings is regulatory measures for reducing carbon dioxide the Eco Fund, a Slovenian Environmental Public Fund that provides emissions (including any mandatory emissions subsidies and other financial aids for investments in sustainable trading scheme). development such as passive buildings, wastewater treatment plants and heating with renewable energy sources. In 2014, the government of the Republic of Slovenia adopted an operative programme for the reduction of emissions of greenhouse gases by 2020. The aim of the programme is to ensure that the

Damijan Brulc, Ph.D., Marjetka Kenda Brulc Gaberščik & Partners, Law Firm, Ltd. Brulc Gaberščik & Partners, Law Firm, Ltd. Dunajska cesta 9 Dunajska cesta 9 1000 Ljubljana 1000 Ljubljana Slovenia Slovenia

Tel: +386 59 119 900 Tel: +386 59 119 900 Email: [email protected] Email: [email protected] URL: www.bgp.si URL: www.bgp.si

Damijan Brulc completed his studies at the Faculty of Law in Ljubljana Marjetka Kenda graduated from Faculty of Law in Ljubljana in 2016. in 2004 with honours and founded his own law firm four years later, In May 2017, she joined the Brulc, Gaberščik & Partners, Law Firm which later in 2010 expanded to today’s Brulc, Gaberščik & Partners, as junior associate, focusing mainly on real estate, corporate law and Law Firm. His initial focus was civil, corporate and labour law. The labour law. core of his practice today lies in real estate, corporate law and overall legal support for business and finance. Real estate is also the centre of his academic engagements – in 2016 he obtained a doctorate degree at the European Faculty of Law in the field of real estate law.

Brulc Gaberščik & Partners, Law Firm is a team of legal experts covering all major private law fields. The core of the team is the partners Damijan Brulc and Luka Gaberščik. Att. Brulc mainly works for pharmaceutical and chemistry-related companies and is an expert on real estate and property law, Att. Gaberščik works on investment and banking issues. Apart from the cited specialisations, all attorneys cover labour, corporate and general civil matters, with their services ranging from consulting and business support to litigation and transactions. The team is supported by one junior partner, one senior associate and two junior associates and offers services in a variety of languages, from English, German, Spanish and Italian to Croatian and Serbian.

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South Africa

Norton Rose Fulbright South Africa Inc. Pieter Niehaus

1 Real Estate Law 1.3 Are international laws relevant to real estate in your jurisdiction? Please ignore EU legislation enacted locally in EU countries. 1.1 Please briefly describe the main laws that govern real estate in your jurisdiction. Laws relating to leases of business premises should be listed in As both land and the process of acquiring land involve an attorney’s response to question 10.1. Those relating to zoning trust account, it has been noted that certain criminals use the and environmental should be listed in response to acquisition of land as a means to engage in money laundering question 12.1. Those relating to tax should be listed in activities. Accordingly the US and UK legislation (i.e., FCPA and response to questions in Section 9. Bribery Act) are enforced in terms of the Financial Intelligence Centre Act (FICA) in South Africa so as to prevent the same. The right to property is enshrined under section 25 of the Constitution Furthermore, FATCA (US-based tax legislation) and CRS (Common of the Republic of South Africa, 1996. The registration of rights Reporting Standards) also impact South African property law and in land and other immovable property is regulated by the Deeds especially the finances related thereto. Registries Act, 1937 which sets out the registration requirements and processes necessary for the transfer of ownership or creation of real rights in respect of land, including the process whereby security 2 Ownership is registered in favour of creditors. All regions’ and cities’ planning legislation (called provincial ordinances/laws and bylaws) are now subject to framework legislation that was enacted in terms of the 2.1 Are there legal restrictions on ownership of real estate Spatial Planning Land Use Management Act, 2013 (SPLUMA). by particular classes of persons (e.g. non-resident persons)? There is a myriad of other statutes regulating real estate law but the aforementioned are the main pieces of legislation to consider. At present there are no restrictions on foreign ownership or occupation. However, at the start of 2015 the government mooted 1.2 What is the impact (if any) on real estate of local legislation to prevent foreigners owning agricultural and rural land, common law in your jurisdiction? instead favouring long term leasehold tenure for foreigners. The proposed legislation will, however, not apply retrospectively and Since 1994, the ownership of land in South Africa has been the no draft legislation has been circulated yet. As part of the same subject of a number of legal and administrative changes. Most discussion, the government also proposed introducing maximum notably, in 2014 government promulgated the restitution of the land areas that can be owned by one individual or entity, but again, Land Rights Amendment Act, which reopened the time period no draft bills have been tabled for comment. within which to submit land claims until 30 June 2019, as part of the redress following the dispossession of rights, and/or land, pursuant There are formal requirements for a foreign company to register to racially discriminatory legislation in effect since 1913. However, under the Companies Act, 2008 if it wishes to acquire immovable in 2016 the Amendment Act was found to be unconstitutional property in South Africa. Ownership of shares by a foreign person on technical grounds and new legislation is still envisaged by in a local entity that owns real property is also permitted, subject to Government to ensure new land claims after the initial cut-off date of certain tax implications relating to withholding tax, capital gains tax 31 December 1998 can be lodged. This process impacts mostly rural and exchange control. and agricultural land, although land claims have, in some instances, also affected urban areas. The Act is clear as to how an existing owner may deal with land that is subject to a claim. Under the land 3 Real Estate Rights claims process, successful claimants can either be compensated for the land, or rights in land, that were dispossessed, or alternatively 3.1 What are the types of rights over land recognised in the land can be restored in ownership. In both instances though, it your jurisdiction? Are any of them purely contractual is important to note that the current owner’s rights are enshrined in between the parties? terms of the Constitution and such landowner will be compensated in accordance with the process set out in the Expropriation Act. It Freehold, Sectional Title, Leasehold and Long Term Lease are the has been noted though that since 1994, the majority of claimants manner in which an owner can enjoy tenure. Freehold means out- preferred compensation instead of restitution of land.

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and-out ownership, subject to the conditions of title and real rights (e.g., a mortgage bond registered in favour of a bank) applicable to 4 System of Registration the property. Sectional title ownership is a manner in which one owns a defined area in a complex or building, together with proportionate 4.1 Is all land in your jurisdiction required to be rights to the common property and some exclusive rights to defined registered? What land (or rights) are unregistered? areas as designated on a sectional plan. Leasehold is a remnant of our history, in terms whereof the government restricted who could Yes, save for short term leases (less than nine years and 11 months), own land, and it is gradually being phased out in urban areas, most which need not be registered unless contractually agreed otherwise notably the townships where all non-white people were allowed to between lessor and lessee. Other real rights in land e.g., mortgages, reside. A long term lease is a form where two parties agree that a servitudes and restrictive conditions of title must also be registered. specific piece of land or entire land area is let to the lessee for a defined period of time against payment of a consideration. This South Africa lease must be notarially executed and is tantamount to “land” in 4.2 Is there a state guarantee of title? What does it guarantee? terms of the provisions of the Deeds Registries Act (i.e. can be mortgaged). The long term lease is the only purely contractual tenure model, which could influence the lessee’s continued tenure. There is no formal state guarantee of title. The constitution For example, if the lessee is in breach, the lessor may terminate enshrines the rights to property and states that no one can be the lease if the breach is not remedied. The rest mentioned above deprived of property except in terms of general law and no law can convey rights in land pursuant to an agreement but once registered permit arbitrary deprivation of property. in the deeds registry, the contract has been implemented and hence, is fulfilled. 4.3 What rights in land are compulsorily registrable? What (if any) is the consequence of non-registration?

3.2 Are there any scenarios where the right to a real estate diverges from the right to a building Ownership and real rights, such as mortgages and servitudes. constructed thereon? Consequently, the rights in land, including the risk and benefit of profit and loss, effectively do not transfer. Based on common law principles, the registered owner of the land is also the owner of the buildings and other fixed improvements 4.4 What rights in land are not required to be registered? situated on the land. However, there may be exceptions in terms of certain long term lease structures (whereby certain rights in the Short term leases (less than nine years and 11 months in duration) domain are retained by one party and another still owns the land). are not required to be registered. The Sectional Titles Act 1986 also provides great application in certain residential commercial real estate developments. This can result in multiple owners owning defined sections and exclusive 4.5 Where there are both unregistered and registered land use areas within a building or property, together with an undivided or rights is there a probationary period following first registration or are there perhaps different classes share of the common property and specifically denoted exclusive or qualities of title on first registration? Please give areas assigned to that particular section. The common property in a details. First registration means the occasion upon sectional title setup is controlled by the body corporate. Ownership which unregistered land or rights are first registered of the land or the sectional title section and exclusive use area, is in the registries. recorded in all instances in the 11 deeds registries located throughout South Africa. There is no probationary period applicable. In terms of ownership of land, the rights take effect on registration of the deeds in the deeds 3.3 Is there a split between legal title and beneficial title registry. In terms of leases though, the rights take effect on the date in your jurisdiction and what are the registration agreed between lessor and lessee in the lease and are not necessarily consequences of any split? dependent on the date of registration.

With reference to long term lease structures, there is usually a 4.6 On a land sale, when is title (or ownership) transferred notarial lease registered in the deeds registry where the lessee to the buyer? is entitled to exercise a real right both against the owner of the property and the world at large. The same principle may apply in Upon registration in the deeds registry. respect of praedial servitude holders (e.g., right of way). The owner, in dealing with the property (e.g., granting further servitude rights to another third party) may, depending on the wording of the lease 4.7 Please briefly describe how some rights obtain or servitude, have to engage the lessee/servitude holder to seek its priority over other rights. Do earlier rights defeat later rights? permission. In another scenario, if the owner sells the property, they may do so without the lessee’s/servitude holder’s permission, but the successor in title to the land will still be bound to the terms of In general, South African law recognises a system of first in time the lease or servitude and thereby the rights afforded to the lessee is stronger in law. However, our deeds registry and legal system or servitude holder. recognises that even the most complete right of all, ownership, can be limited by the real rights of others, such as mortgagee/ bond holders and servitude holders and registered lessees, which real rights are registered at the same time as the owner acquires ownership or later.

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5 The Registry / Registries 6 Real Estate Market

5.1 How many land registries operate in your jurisdiction? 6.1 Which parties (in addition to the buyer and seller If more than one please specify their differing rules and the buyer’s finance provider) would normally and requirements. be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or There are 11 deeds registries, including the head office in Pretoria. duties. Each deeds office has a specified area of practice, meaning a piece of land may only be recorded in one deeds office. The main services Estate agents and specialist attorneys known as conveyancers and provided by the deeds registry are the registration of land and real notaries public in relation to notarial deeds that have to be registered South Africa rights in land and the provision of land registration information. For (e.g., notarial leases and notarial deeds of cession of exclusive use more information of South Africa’s land registration system visit areas in sectional title matters or notarial deeds of servitude). http://www.ruraldevelopment.gov.za/. 6.2 How and on what basis are these persons remunerated? 5.2 Does the land registry issue a physical title document to the owners of registered real estate? The estate agent industry is governed by the Estate Agency Affairs Yes. Title is evidenced by a deed of transfer (or title deed) and Board and all estate agents are to be registered members. The notarial deeds (required for long term leases and other limited commission charged by estate agents varies, depending on the real rights such as servitudes) and mortgage bonds (in case of the agreement reached with the party paying the commission. If no land being mortgaged as security for the repayment of a debt to a agreement is reached, the default rate prescribed in terms of the Act creditor). and in terms of the regulations is 7.5% plus Value Added Tax (VAT) thereof at 14%. The parties are, however, free to negotiate the agent’s commission (whether a fixed fee or a percentage). Conveyancers 5.3 Can any transaction relating to registered real estate and notaries public are governed in terms of the Attorneys Act and be completed electronically? What documents need the Law Society issues guidelines in respect of conveyancing fees to be provided to the land registry for the registration of ownership right? Can information on ownership of payable which are based on a sliding scale depending on the value of registered real estate be accessed electronically? the property or mortgage bond, or deed to be registered.

No. We still work on a manual system of submission of deeds 6.3 Do you feel there is a noticeable increase in but South Africa boasts one of the world’s most efficient and the availability of capital to finance real estate sophisticated systems of land registration. Every piece of land is transactions in your jurisdiction, whether equity or shown on a diagram and ownership is recorded in one of the regional debt? What are the main sources of capital you see deeds registries, where documents are available for public viewing, active in your market? both at the deeds registries and online. The system does provide owners with security of title. Yes. Since the introduction of REIT legislation in 2014, the commercial and listed property sector has really shown tremendous growth, with investors looking to invest in a stable and growing 5.4 Can compensation be claimed from the registry/ asset class. Also, the average property price index has shown steady registries if it/they make a mistake? increases over the last 10 years since the GFC. Property investment, depending on the asset class, varies in relation to the equity and No. If a mistake is made in relation to the registration in a deeds debt. registry, the deeds registry and its officials cannot be held liable to pay compensation, based on a specific inclusion in the Deeds Registries Act which exempts it from liability for acts or omissions. 6.4 What is the appetite for investors and developers The responsibility that the documents are correct lies with the in your region to look beyond primary real estate markets and transact business in secondary or even conveyancing attorney signing/executing the deeds. tertiary markets? Please give examples of significant secondary or tertiary real estate transactions, if 5.5 Are there restrictions on public access to the relevant. register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and To the extent relevant, several of South Africa’s biggest REITs have other rights affecting real estate? already expanded into other markets in Sub-Saharan Africa and even in European and Australian markets, and although the rewards can There are no restrictions on public access to the register. A Buyer be good, investors and developers realise that it will take significant may obtain any and all information he might reasonably require capital, and time, before dividends are available. regarding encumbrances and other rights affecting real estate.

6.5 Have you observed any trends in particular market sub sectors slowing down in your jurisdiction in terms of their attractiveness to investors/developers? Please give examples.

No definite trends save to state that investment in underlying real estate assets associated with mining and other commodity-based

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products has declined slightly due to depressed world commodity prices. The investment in traditional agricultural land has been 7.6 What (if any) are the liabilities of the buyer (in addition slightly depressed but the Renewable Energy sector has had a real to paying the sale price)? positive influence on the value that owners can gain for their land. Some of the Buyer’s legal responsibilities during include: ■ Obtaining a mortgage bond grant, where third party financing 7 Liabilities of Buyers and Sellers in Real is utilised. Estate Transactions ■ Paying transfer fees including Value Added Tax or Transfer Duty to the South African Revenue Service. ■ Paying any other charges (e.g., due diligence and inspection 7.1 What (if any) are the minimum formalities for the sale costs) that may have been agreed upon in the sale agreement. and purchase of real estate? South Africa

The Alienation of Land Act, 1981 prescribes the essentialia; an 8 Finance and Banking agreement, in writing, signed by the Buyer and the Seller, where the property, price payable and payment terms are clearly set out. 8.1 Please briefly describe any regulations concerning the lending of money to finance real estate. Are the 7.2 Is the seller under a duty of disclosure? What matters rules different as between resident and non-resident must be disclosed? persons and/or between individual persons and corporate entities? Yes. The Seller has the “duty to disclose” any defects that are prevalent, especially those which are not obvious. If the Seller hides Financing of the acquisition of large real estate portfolios or defects in the property on purpose, the Seller will not be protected. companies holding real estate varies, depending on the value of Therefore, the voetstoots clause will not protect a Seller who knows the transaction and the parties involved. Non-residents may only of a defect in the property but does not tell the Buyer about the borrow up to the value of the equity they inject into the property defect. (i.e., half of the value can be financed and half must be equity). The National Credit Act (NCA) protects primarily individual persons who are borrowers against unscrupulous lending practices. 7.3 Can the seller be liable to the buyer for misrepresentation? 8.2 What are the main methods by which a real estate Yes. Proper recourse is to institute an action for damages against lender seeks to protect itself from default by the the Seller. borrower?

Lenders providing finance usually require security packages 7.4 Do sellers usually give contractual warranties to the consisting of one or more of the following forms of security: buyer? What would be the scope of these? What is the function of warranties (e.g. to apportion risk, to ■ Mortgage bonds over the immovable property. give information)? Are warranties a substitute for the ■ Suretyship and/or guarantee by parent company or directors, buyer carrying out his own diligence? or even shareholders. ■ Notarial bonds (both general and special in nature over The most common warranties are: movable property such as plant and equipment). ■ warranty of ownership or right to dispose of the property. A ■ Cession of rental income and any other proceeds derived person or entity is entitled to sell something that does not vest from the property. in ownership in that person in terms of common law but the ■ Pledge of shares in the property owning entity. requirement for transfer of ownership is delivery, which is evidenced only by registration in the deeds registry; In addition to security packages, lenders usually require a portion of the acquisition to be equity funded, the percentage varying ■ that there is no prior agreement, which may be stronger in law, to grant any rights to other persons relating to disposal depending of the nature of the property or the project. of the property; ■ that the buildings on the property are built in accordance with 8.3 What are the common proceedings for realisation of municipal approved plans; and/or mortgaged properties? Are there any options for a ■ that on registration of the property in the deeds registry, mortgagee to realise a mortgaged property without vacant and undisturbed occupation and possession, free from involving court proceedings or the contribution of the encumbrances, will be granted and given to the Buyer. mortgagor?

A lender cannot enforce a system of summary execution in respect 7.5 Does the seller warrant its ownership in any way? of the repossession of immovable property over which they hold Please give details. a registered mortgage. The lender will have to obtain a court judgment against the borrower to proceed to a sale in execution Yes. Based on our Roman Dutch law principles, no one can transfer of the immovable property. As a result of a mortgage bond in its more rights than they possess so there is always an implied warranty favour, the lender will, however, not have to first execute against of ownership which is evidenced by the deeds registry records. the movables of the borrower, but can apply for an order of special executability against the property and proceed with a sale in execution.

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debts of a related company and the necessary Financial Assistance 8.4 What minimum formalities are required for real estate provisions of the Companies Act, 2008 (sections 44 and 45) having lending? not been complied with.

A mortgage bond is to be registered. It is perfected by registering it in the same Deeds Registry where the immovable property (over 8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? which the bond is granted) is registered. A number of preconditions must be fulfilled before a mortgage bond or real security right can come into existence: A borrower enjoys the rights afforded to them in terms of the common law and if enforcement is done through the Courts or ■ the parties must have capacity to enter into a legal transaction; through Arbitration, the borrower will be a defendant and may then and use the rules of Court or Arbitration Rules to defend the action taken South Africa ■ the owner of the property must consent to the creation of against them to the fullest extent. the real right in property by signing a power of attorney and instructing a conveyancer to register the mortgage bond. 9 Tax 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other creditors? 9.1 Are transfers of real estate subject to a transfer tax? How much? Who is liable? To reduce risk to the lender, the law has devised a process which offers some protection to the lender, so that he may recover the Yes. If a Seller is not registered for VAT purposes the Buyer will money he is owed in the event that the borrower does not meet his have to pay transfer duty in addition to the purchase price. The rates obligations. Registration of mortgage bonds are done in terms of for individuals, corporates and trusts are the same, and with effect a ranking system whereby the first bond registered provides the from 1 March 2017, changed to apply as follows for the following strongest right to that bondholder. property values: ■ ZAR0 to ZAR900,000: Exempt; Real security rights give the lender the power to prevent the borrower from disposing of it, as well as a right of preference. ■ ZAR900,001 to ZAR1,250,000: 3% of the amount (i.e. total Where the borrower is unwilling to repay the principal debt, or is of ZAR10,500); insolvent, the lender may, after the immovable property has been ■ ZAR1,250,001 to ZAR1,750,000: 6% of the amount (i.e. attached and sold in execution, claim the proceeds from that sale on total of ZAR30,000) plus ZAR10,500; a preferent basis before any other creditor. They confer limited and ■ ZAR1,750,001 to ZAR2,250,000: 8% of the amount (i.e. specific entitlements on their holders and are enforceable against total of ZAR40,000) plus ZAR40,500; third parties as they are registered in the public deeds registry. ■ ZAR2,250,001 to ZAR10,000,000: 11% (ZAR852,000) plus ZAR80,500; Unless otherwise agreed by the parties, a real security right is indivisible, securing the entire debt and binding the borrower until ■ ZAR10,000,001 and above this threshold: 13% of the amount it is paid. Also unless otherwise agreed, a real security right secures exceeding the threshold plus R 852,000. not only the principal debt but all its “incidents” as well. These may VAT is payable either at the rate of 14% or in some instances 0% include: (e.g., property is sold as a going concern) or in some instances ■ costs incurred by the lender in preserving the security; exemptions may apply, for example, to charitable institutions. ■ interest charged by the lender; and ■ costs incurred by the lender in enforcing his rights. 9.2 When is the transfer tax paid? Real security rights do not entitle the lender the use and enjoyment of the property, unless otherwise agreed by the parties. Duty is payable within six months from the date of acquisition (i.e., the signing of the sale agreement). If the Transfer Duty is not paid within this period, Transfer Duty penalties will be levied. 8.6 Under what circumstances can security taken by a lender be avoided or rendered unenforceable? 9.3 Are transfers of real estate by individuals subject to The most important legislative provisions are found in the income tax? Insolvency Act, 1936. In terms of section 88 (commonly referred to as hardening periods), in general a mortgage bond passed for the Yes. Upon disposing a property, each property owner is liable for purpose of securing the payment of a debt not previously secured, in Capital Gains Tax (CGT) unless an exemption applies. which debt was incurred more than two months prior to the lodging of the bond with the registrar of deeds, or for the purpose of securing 9.4 Are transfers of real estate subject to VAT? How the payment of a debt incurred in novation of or substitution for any much? Who is liable? Are there any exemptions? such first-mentioned debt, shall not confer any preference if the estate of the mortgage debtor is sequestrated/liquidated within a period of The sale of property attracts either VAT or transfer duty, depending six months after such lodging. Also, a registered mortgagee (i.e., on the VAT status of the Seller. If the Seller is a registered VAT lender) may run a risk of its bond not being enforceable and even set vendor and the sale of the property is a supply subject to the VAT, aside, if the borrower obtained financing for purposes of acquiring the Buyer must pay VAT on the purchase price, provided the a business and the sale of the business was not properly advertised Buyer’s consideration is set out in the agreement. “Rx plus VAT” or in terms of section 34 of the Insolvency Act. Another instance “excluding VAT”. If not then VAT is deemed to be included in the relates to a mortgagor granting security as a surety/guarantor for the purchase consideration. The applicable rate of VAT is 14%.

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Exemptions may apply in the following scenarios: referred to as short term leases. Most commercial leases have ■ Certain statutory exemptions apply in relation to intra-group renewal options included which may take the lease period to longer transfers between companies/entities, or if the Buyer has the than 10 years. Long term leases that are to be endorsed against the requisite public benefit organisation/institution of learning/ title deeds must be in writing and need to be executed in front of a charity/religious status. notary public so that they can be registered in the deeds registry. ■ The sale of the property may be part of a business being sold Tenants have to contractually negotiate the right to assign the as a going concern, which may lead to VAT being levied on lease or even sub-let the leased premises. Usual provisions state the transaction at a zero rate. that the tenant can only assign or sub-let with the landlord’s prior written consent and on such terms as the parties may agree. Some 9.5 What other tax or taxes (if any) are payable by the commercial leases have more strict change of control provisions seller on the disposal of a property? included. South Africa The Competition Commission authorities generally frown upon Capital Gains Tax (CGT), or if the Seller is a non-resident and the exclusivity clauses included in commercial retail leases. value of the sale is more than ZAR2 million, then a compulsory s35A Withholding Tax applies as provision for the CGT liability. 10.4 What taxes are payable on rent either by the landlord or tenant of a business lease? 9.6 Is taxation different if ownership of a company (or other entity) owning real estate is transferred? Should the landlord be registered as a vendor in terms of the Value Added Tax Act, 1991 as amended, the tenant shall pay VAT on the The Transfer Duty Act was amended to change this and strictly monthly rental and on all applicable recoveries payable in terms of speaking the same taxes as aforementioned apply (VAT or Transfer the lease. Duty) unless there are statutory exemptions.

10.5 In what circumstances are business leases usually 9.7 Are there any tax issues that a buyer of real estate terminated (e.g. at expiry, on default, by either party should always take into consideration/conduct due etc.)? Are there any special provisions allowing a diligence on? tenant to extend or renew the lease or for either party to be compensated by the other for any reason on If the Buyer of real estate elects to buy shares in a property owning termination? company as opposed to buying the property, then it is extremely important to do a comprehensive check of ALL the property owning If the CPA applies, the tenant does have the right to cancel the company’s different taxes and tax liabilities. A tax clearance lease even though he may have signed an agreement to occupy the certificate relating to the company’s affairs can be obtained from premises for a specified fixed period. The tenant can do this without SARS but it is also important to investigate whether a potential CGT giving any legitimate reason; however, tenants are obliged to give liability arises in case the property is disposed of in the future. the landlord and/or his agent at least 20 business days’ notice and the landlord is empowered to charge a reasonable cancellation penalty. The landlord is fully entitled to recover all reasonable costs and 10 Leases of Business Premises losses incurred through the tenant exercising his right, as per the CPA, to terminate the fixed term agreement (or lease in this case). In general, though, leases terminate based upon the effluxion of time 10.1 Please briefly describe the main laws that regulate or in case of unremedied default, usually on the part of the tenant. leases of business premises.

There are various laws which govern the way one does business, 10.6 Does the landlord and/or the tenant of a business particularly when it comes to renting out premises. With the lease cease to be liable for their respective promulgation of the Consumer Protection Act (CPA) there are obligations under the lease once they have sold their interest? Can they be responsible after the sale in various rules and requirements which apply to leasing. In a lease respect of pre-sale non-compliance? agreement, the parties are bound by obligations which include invariable obligations, provisions that the parties have contracted Yes. The landlord will be absolved as the rights and obligations into and residual obligations. The CPA does not necessarily apply to transfer to the new owner of the property on which the leased all business premises leases though as there thresholds based on the premises are located. The tenant’s liability may transfer, subject tenant’s annual turnover or asset value (currently ZAR 2 million). to the consent of the landlord granting permission for the tenant’s rights and obligations being transferred to a third party. 10.2 What types of business lease exist?

10.7 Green leases seek to impose obligations on Commercial, Industrial and Retail leases (short and long term). landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please 10.3 What are the typical provisions for leases of business briefly describe any “green obligations” commonly premises in your jurisdiction regarding: (a) length of found in leases stating whether these are clearly term; (b) rent increases; (c) tenant’s right to sell or defined, enforceable legal obligations or something sub-lease; (d) insurance; (e) (i) change of control of not amounting to enforceable legal obligations (for the tenant; and (ii) transfer of lease as a result of a example aspirational objectives). corporate restructuring (e.g. merger); and (f) repairs?

Please refer to question 13.1. Leases for a term shorter than nine years and 11 months are usually

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authorities in terms of the local government planning ordinances. 11 Leases of Residential Premises In 2013, the Spatial Planning and Land Use Management Act (SPLUMA) was promulgated. This will serve as a guideline 11.1 Please briefly describe the main laws that regulate legislation that will provide for the enactment and, where necessary, leases of residential premises. amendment of provincial and local planning legislation to ensure uniformity. From an environmental perspective the National The Rental Housing Act prescribes mandatory provisions relating Environmental Management Act, 1998 (NEMA) is extremely to leasing of residential properties. The rights of property owners important in relation to use of land and liability for rehabilitation. and tenants are also governed by the Prevention of Illegal Eviction See also question 12.8 below. and Unlawful Occupation Act (commonly referred to as PIE Act) which prevents arbitrary and unlawful actions. The common law as 12.2 Can the state force land owners to sell land to it? If South Africa adjudicated by the Courts also offers invaluable guidance on what so please briefly describe including price mechanism. rights and obligations exist between landlord and tenant. Property can only be expropriated in terms of law of general 11.2 Do the laws differ if the premises are intended for application for a public purpose or in the public interest, subject multiple different residential occupiers? to compensation being paid on a basis agreed by those affected, or decided or approved by a court (section 25, Constitution 1996). No, the same principles would apply. The amount of compensation payable must be just and equitable, by reflecting an equitable balance between the public interest and those affected by the expropriation. 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the 12.3 Which bodies control land/building use and/or tenant’s rights to remain in the premises at the end of occupation and environmental regulation? How do the term; and (d) the tenant’s contribution/obligation buyers obtain reliable information on these matters? to the property “costs” e.g. insurance and repair? In almost all instances the local municipal authorities have a) Residential leases are mostly for a year but can be for longer the relevant jurisdiction but in cases of heritage properties and periods; b) if a lease is for multiple years, an annual escalation environmentally sensitive properties, mining properties and/or depending on market conditions is applied upon anniversary of agricultural properties, various other statutes may apply which will the lease term; c) tenants who do not vacate at the end of the lease require additional permissions. term may be evicted with the landlord using the PIE Act, but most leases have a provision which automatically converts the lease into a month-to-month lease at a higher rental, or a penalty may be applied 12.4 What main permits or licences are required for building works and/or the use of real estate? in addition to the rental payable; and d) it depends on the agreement between the parties what obligations regarding contribution to costs and maintenance and repair exist. Commonly, a tenant pays a fixed Change of land use (or rezoning) approval will require: monthly amount plus usage and consumption charges in relation ■ Traffic impact assessments. to water, gas and electricity and if damage is caused to the leased ■ Environmental impact review. premises, such amounts may also be recovered from the tenant. ■ Consent from adjacent property owners. ■ Review of title conditions and other conditions of 11.4 Would there be rights for a landlord to terminate a establishment relating to the broader township. residential lease and what steps would be needed ■ Consideration of what servitudes (or example, access and to achieve vacant possession if the circumstances egress) may be required over adjacent properties. existed for the right to be exercised? ■ Filing of a proposed site development plan. ■ Building plan approval in accordance with the relevant local Yes. Breach provisions usually require a landlord to place the authority process and national building guidelines. recalcitrant tenant on terms to rectify the breach, failing which the landlord may cancel the lease and claim damages and eviction of the tenant. The steps to be taken are detailed in the PIE Act read with 12.5 Are building/use permits and licences commonly the rules of Court in case the tenant fails to vacate as requested. The obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)? landlord also enjoys a statutory hypothec in terms whereof they may attach the tenant’s movable property in case of failure to pay rental. The hypothec is usually enforced together with the cancellation, In almost all instances of commercial development, rezoning recovering of damages and eviction processes. applications will have to be made to ensure that the desired density and bulk is allocated to the property from a services and infrastructure perspective. 12 Public Law Permits and Obligations 12.6 What is the appropriate cost of building/use permits and the time involved in obtaining them? 12.1 What are the main laws which govern zoning/ permitting and related matters concerning the use and occupation of land? Please briefly describe them The price can vary depending on the development. The time frame and include environmental laws. also varies depending of the various departments involved.

Planning in each jurisdiction is currently governed by the local

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12.7 Are there any regulations on the protection of historic 12.10 Please briefly outline any regulatory requirements monuments in your jurisdiction? If any, when and how for the assessment and management of the energy are they likely to affect the transfer of rights in real performance of buildings in your jurisdiction. estate? The Department of Energy is currently embarking on or developing The South African Heritage Resources Agency (SAHRA) is the an EE Target Monitoring System through the Energy Efficiency national administrative body responsible for the protection of South Monitoring and Implementation Project which is done jointly with Africa’s cultural heritage. According to South African legislation, the South African Local Government Association (SALGA). This historical and cultural resources fall within the scope of the natural project is supported through a collaboration between the Department environment for the purposes of environmental law. The National of Energy and the Swiss Agency for Development and Cooperation Heritage Resources Act, No. 25 of 1999 makes provision for the (SDC). The purpose is to introduce and institutionalise an Energy South Africa protection of heritage objects. SAHRA is the custodian of the Efficiency Target Monitoring System for measuring and reporting country’s heritage resources which form part of the national estate. the achievement of the sectoral targets set out in the National Energy Some heritage objects are located in public institutions and others Efficiency Strategy. In addition, the Minister of Public Works are privately owned. Declaration of a specifically declared heritage launched the National Green Building Framework in December object does not change its ownership status. 2011, which also has elements of energy efficiency in buildings. The National Building regulations are also being amended to 12.8 How can e.g. a potential buyer obtain reliable include mandatory energy efficiency standards for new buildings to information on contamination and pollution of real support the improvement of energy efficiency buildings. estate? Is there a public register of contaminated land in your jurisdiction? 13 Climate Change The National Environmental Management: Waste Act, 59 of 2008 (“NEMWA”) came into operation, in July 2009. NEMWA (section 13.1 Please briefly explain the nature and extent of any 40(1)) provides that no person may transfer contaminated land regulatory measures for reducing carbon dioxide without informing the person to whom that land is to be transferred emissions (including any mandatory emissions that the land is contaminated and, in the case of a remediation site, trading scheme). without notifying the Minister or the MEC and complying with any conditions that are specified by them. These provisions have direct Various initiatives, in accordance with international treaties and co- consequences for alienation of land that may be contaminated, operation agreements have been initiated and post COP21, we expect including potentially impacting on the right of freedom to contract these objectives to be translated into firmer legislative measures for the purchase and sale of the land. In the event of non-compliance over the next few years, with real sanctions for transgressors. with the obligation to provide information on contaminated land in the event of transfer of such land, the same penalty provisions as are 13.2 Are there any national greenhouse gas emissions applicable to non-compliance with section 36(5), discussed above, reduction targets? will apply. Owners of potentially contaminated land or persons undertaking There are no formal targets yet to reduce greenhouse gas emissions activities that have the potential to contaminate land are advised from building in South Africa. The Green Building Council of to take note of the operation of the Contaminated Land Provisions South Africa is a full member of the World Green Building Council particularly the issues discussed above. and issues GreenStar ratings in respect of building projects. There are limited legislative requirements at this stage contained in local 12.9 In what circumstances (if any) is environmental clean- authorities’ bylaws. up ever mandatory? 13.3 Are there any other regulatory measures (not already The general principle applicable is “polluter pays” and any mentioned) which aim to improve the sustainability of transgression of the environmental legislation and local both newly constructed and existing buildings? municipal bylaws require the owner of the property to attend to the environmental remediation. If the current owner was not the Increasing awareness is prevalent in the development of commercial polluter, the legislation nonetheless holds the owner liable, who in properties. Tenants, especially global entities, seek to commit turn may have a claim against prior owners who were liable for the developers to more environmentally sustainable building practices, pollution. and in some instances even insist on including penalty clauses in development lease agreements if the developer does not meet a required standard. Johannesburg recently hosted the C40 Cities Summit, which targets climate change and plans to mitigate the impact on communities.

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Pieter H. Niehaus Norton Rose Fulbright South Africa Inc. 15 Alice Lane Sandton, Johannesburg, 2196 South Africa

Tel: +21 11 685 8619 Email: [email protected] URL: www.nortonrosefulbright.com

Pieter is a real estate lawyer and head of the South African real estate South Africa practice. He specialises in all property related matters including, amongst others, providing town planning advice, attending to the full spectrum of conveyancing services, property financing (commercial and residential) and general notarial work, with specific reference to notarial bonds, all types of leases, and servitudes. Pieter presently advises and assists all the major commercial and private banks and some foreign financial institutions in relation to financing and security arrangements, and also provides property advice to a wide range of clients including renewable energy, mining, professional services firms, student accommodation developers, property developers and from time to time also acts on behalf of the local authority in a variety of property-related matters. In 2015 and 2016 The Legal 500 Europe, Middle East & Africa edition recommended Pieter as a leading lawyer in the field of real estate law.

Norton Rose Fulbright is a global law firm. We provide the world’s preeminent corporations and financial institutions with a full business law service. We have more than 4,000 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia. Recognised for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare. Through our global risk advisory group, we leverage our industry experience with our knowledge of legal, regulatory, compliance and governance issues to provide our clients with practical solutions to the legal and regulatory risks facing their businesses. Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact. Norton Rose Fulbright Verein, a Swiss verein, helps coordinate the activities of Norton Rose Fulbright members but does not itself provide legal services to clients. Norton Rose Fulbright has offices in more than 50 cities worldwide, including London, Houston, New York, Toronto, Mexico City, Hong Kong, Sydney and Johannesburg.

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Spain

Hogan Lovells Emilio Gómez Delgado

■ Act on Urban Leases 29/1994 (Ley de Arrendamientos 1 Real Estate Law Urbanos), which regulates leases in urban properties for dwelling and commercial uses. 1.1 Please briefly describe the main laws that govern ■ Act on Rural Leases 49/2003 (Ley de Arrendamientos real estate in your jurisdiction. Laws relating to Rústicos), which regulates leases in non-urban properties. leases of business premises should be listed in ■ Government Housing Plan, which regulates government- response to question 10.1. Those relating to zoning supported houses for low-income families and individuals. and environmental should be listed in response to question 12.1. Those relating to tax should be listed in response to questions in Section 9. 1.2 What is the impact (if any) on real estate of local common law in your jurisdiction? The main applicable real estate legislation is: ■ The Constitution 1978, which states the right to a private Common law has no impact whatsoever on Spanish real estate. property and the right of any individual to access a respectable dwelling. 1.3 Are international laws relevant to real estate in your ■ The Civil Code 1889, which states general principles for jurisdiction? Please ignore EU legislation enacted contracts, and regulates leases and other general real estate locally in EU countries. issues. ■ The Mortgages Act 1946 (Ley Hipotecaria), which regulates Only EU legislation is relevant to real estate in Spain. International the registration of real estate with the Land Registry. law is not relevant since real estate in Spain is regulated by local ■ The Cadastral Act 1/2004 (Ley del Catastro), which regulates law. the registration of real estate with the Cadastre. ■ The Consolidated Text of the Land Act 8/2007 (Ley del Suelo), which states the economic and environmental principles for 2 Ownership the relationship between individuals and the administration relating to: 2.1 Are there legal restrictions on ownership of real estate ■ land titles; by particular classes of persons (e.g. non-resident ■ the economic valuation of land; and persons)? ■ building rights or obligations for land owners. This consolidated text of the Land Act incorporates and adapts Act There are no restrictions on foreign investors’ ownership or 8/2013, of 26 June, of building refurbishment, regeneration and occupation of real estate. urban renovation. Foreign investment and exit from Spanish real estate (when it ■ The Condominium Act 1960 (Ley de Propiedad Horizontal), exceeds EUR 3,005,060.52) or in Spanish companies must be which regulates properties divided into condominiums for declared to the Bank of Spain (Banco de España) for statistical separate and independent use and profitability. purposes. Investments from tax havens must be declared in ■ Planning laws of each autonomous community. The 17 advance, unless the investment is less than 50% of the share capital different Spanish regions each have authority to regulate of the Spanish company. planning in their jurisdictions. In Spain, all entities and individuals appearing before a notary public ■ The Construction Act 38/1999 (Ley de Ordenación de la in order to formalise title transfer must have a foreign identification Edificación), which regulates construction and the protection number (Número de Identificación de Extranjero) (NIE): of the environment. ■ Foreign individuals and entities investing in real estate in ■ Technical Construction Code (Código Técnico de la Spain. Edificación), which complements the Construction Act and ■ Foreign individuals acting as representatives of the deals with improving energy efficiency in buildings. transaction parties.

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3 Real Estate Rights 4.2 Is there a state guarantee of title? What does it guarantee?

3.1 What are the types of rights over land recognised in your jurisdiction? Are any of them purely contractual There is no state guarantee of title. Title insurance is not commonly between the parties? used because the legal system fully protects a third party acquiring title from the registered owner. Generally, real estate can be held by: ■ Freehold, under: 4.3 What rights in land are compulsorily registrable? Spain i. full ownership; What (if any) is the consequence of non-registration? ii. joint co-ownership; or Under Spanish law, a mortgage and a building lease are iii. a time share. compulsorily registrable and registration is required for the ■ Leasehold, under: validity and existence of these rights. i. a lease; ii. usufruct; 4.4 What rights in land are not required to be registered? iii. a public concession contract; or iv. a building lease. As mentioned in question 4.1 above, land registration is not compulsory; however, if not registered, any right or obligation over 3.2 Are there any scenarios where the right to a land will only remain valid and with full effects among the parties. real estate diverges from the right to a building constructed thereon? 4.5 Where there are both unregistered and registered land or rights is there a probationary period following first The general principle is that real estate is indivisible (section 334, registration or are there perhaps different classes Civil Code) and comprises: or qualities of title on first registration? Please give ■ land; details. First registration means the occasion upon which unregistered land or rights are first registered ■ buildings; and in the registries. ■ everything attached to land or buildings. Land and buildings located on such land are registered together First registration is the same for all types of unregistered land. The on the same title in the competent land registry (registro de la applicant must provide a detailed description of the property, including: propiedad) (Mortgage Act). ■ A description of the property and its nature. A description of land and relevant buildings is also registered with ■ The property’s boundaries. the Cadastre, a different registry under the control of the Ministry of ■ The ownership title and a chain of registration of title. Treasury, which aims to provide a base for property tax assessment. ■ Any charges and encumbrances. The way to split both the right over the land and the right over ■ The date of the registration of title, charges and encumbrances. the construction erected thereon is the building lease (derecho de Owners of adjoining properties and third parties with a potential superficie). interest have a trial period to challenge registration or details of such registration within two years (section 207, Mortgages Act). 3.3 Is there a split between legal title and beneficial title in your jurisdiction and what are the registration consequences of any split? 4.6 On a land sale, when is title (or ownership) transferred to the buyer? There is no split between legal title and beneficial title but the purchaser may declare that the acquisition of the property is for the Registration benefit of a third party (as a fiduciary). In any case the registered Transfer of title is formalised in a public deed of sale and purchase owner, vis-à-vis third parties, is the entity acquiring legal title. before a notary public. After that, the buyer can register the title with the corresponding land registry to protect the title against third parties. However, if there is a right of first refusal through an option to 4 System of Registration purchase, the beneficiary of the option can register his option with the land registry before executing the transaction, to protect his right 4.1 Is all land in your jurisdiction required to be to acquire the property against other potential buyers. registered? What land (or rights) are unregistered? When title transfers Title transfers on delivery of the real estate to the buyer; this Title to real estate is evidenced by the corresponding public deed normally occurs (unless agreed otherwise) when a notarial deed is of sale and purchase. Registration at the land registry is not signed (see above, Registration). compulsory. However, when registered, title is enforceable against bona fide third parties with a potential interest in the real estate. 4.7 Please briefly describe how some rights obtain priority Land registries are managed by the Registrars Bar, an administrative over other rights. Do earlier rights defeat later rights? body controlled by the Ministry of Justice (Ministerio de Justicia). Registered rights will prevail over other rights based on priority in applying for registration to the competent land registry.

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and sellers are usually advised by real estate consultants (one 5 The Registry / Registries advisor per party) and the seller’s advisor acts as broker of the deal. Technical advisors for the due diligence of the property are also 5.1 How many land registries operate in your jurisdiction? commonly used. Legal advisors provide legal support at all stages If more than one please specify their differing rules of the process and take care of drafting the legal documentation and requirements. (preliminary contracts, SPA, deed of sale and purchase). Parties appoint a Notary Public for the execution of the deed of sale and The Spanish territory is divided into land districts which are each purchase. Common practice is that the party assuming notarial costs assigned to a Land Registry. All land districts are governed by the decides on the appointed Notary Public.

same rules and are subject to the same requirements. Spain 6.2 How and on what basis are these persons 5.2 Does the land registry issue a physical title document remunerated? to the owners of registered real estate? Each party bears the costs of its own transaction advisors. These The Land Registry may certify the contents of the registry with remunerations are freely negotiated with the service providers and respect to land titles and other rights – mortgages, liens and may be determined as a percentage of the purchase price or a fixed attachments – over a property but that does not constitute a title remuneration. The Spanish Civil Code establishes the general rule document. Title to real estate is evidenced by the corresponding that the notary fees are borne by the seller and registry fees are borne public deed of sale and purchase. by the purchaser, but this rule may be changed by the parties.

No. All transactions relating to real estate will have to be completed Foreign equity has driven the recovery of the Spanish property in writing, by means of a public deed. Immediately afterwards, the market; initially the opportunistic international funds put their shoes notary is obliged to notify the land registry electronically in order to in the country in 2013, but now the bulk of the investment is driven get priority of registration, but this must be confirmed by delivering by Spanish REITs (SOCIMIs) and added-value funds. the original title deed for registration.

Information on ownership can be easily accessed electronically. The 6.4 What is the appetite for investors and developers competent land registry issues an online excerpt with all relevant in your region to look beyond primary real estate facts of the property (titleholder, third party rights and description markets and transact business in secondary or even of the property). tertiary markets? Please give examples of significant secondary or tertiary real estate transactions, if relevant. 5.4 Can compensation be claimed from the registry/ registries if it/they make a mistake? Tourism is a key sector in Spain and, as a consequence, the activity in the hotel and leisure industry in secondary areas is really high. Yes, it is feasible to claim compensation from a land registrar who Investment in the Canary Islands and Mallorca remains quite active, makes mistakes during the registration process. The registrars will similar to the South Coast (Malaga area). be legally liable for all damages and costs they have caused.

6.5 Have you observed any trends in particular market 5.5 Are there restrictions on public access to the sub sectors slowing down in your jurisdiction in register? Can a buyer obtain all the information he terms of their attractiveness to investors/developers? might reasonably need regarding encumbrances and Please give examples. other rights affecting real estate?

Nowadays in Spain, all sub sectors are increasing the levels of Registered information can be accessed by parties with a lawful activity exponentially. A slowing-down trend has only been seen interest in finding out the status of a property and its registered in some regions like Cataluña due to the political instability of the rights. If requested, the information may be translated into English region in the second half of 2017. and presented in a double column format, with all information in Spanish listed alongside its translated counterpart. 7 Liabilities of Buyers and Sellers in Real 6 Real Estate Market Estate Transactions

6.1 Which parties (in addition to the buyer and seller 7.1 What (if any) are the minimum formalities for the sale and the buyer’s finance provider) would normally and purchase of real estate? be involved in a real estate transaction in your jurisdiction? Please briefly describe their roles and/or Marketing duties. Major property companies and institutional investors usually engage a major consultancy investment firm to: This really depends on the complexity of the transaction. Buyers

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■ Conduct the sales process. ■ Organise the marketing materials. 7.4 Do sellers usually give contractual warranties to the buyer? What would be the scope of these? What is ■ Lead marketing actions. the function of warranties (e.g. to apportion risk, to Medium-sized companies prefer to conduct the marketing process give information)? Are warranties a substitute for the themselves. buyer carrying out his own diligence? Commercial negotiation Real estate warranties vary depending on the transaction. However, Negotiations usually occur between representatives from both the warranties most frequently given by the seller relate to: of the parties, supervised by lawyers and real estate advisers. In ■ Tenancy status and validity of the main conditions of the Spain some circumstances, negotiations are directly executed between the lease. parties’ lawyers and advisers. ■ The non-existence of charges and encumbrances other than Pre-contractual arrangements those registered at the land registry. Arrangements are usually related to: ■ Compliance with applicable planning rules. ■ Confidentiality. ■ Having lawful power of attorney to enter into the sale and ■ Non-disclosure. purchase agreement. ■ Temporary exclusivity for: ■ The validity of insurance policies. ■ due diligence; and ■ The absence of legal disputes or court proceedings affecting the real estate. ■ making offers (initial offers and subsequent binding offers). Pre-contractual arrangements are fully binding on both parties. 7.5 Does the seller warrant its ownership in any way? Sale contract Please give details. A private sale and purchase contract, exchanged between the parties, contains the transactions terms and conditions, including: This warranty on title is provided for by law (the Spanish Civil ■ Any conditions precedent. Code). In any event, a purchaser is fully protected if, acting as a ■ The timing for closing. bona fide purchaser, they acquire a title from a registered owner. ■ The conditions for closing. ■ The object of the sale (that is the real estate) and the purchase 7.6 What (if any) are the liabilities of the buyer (in addition price. to paying the sale price)? The contract is usually executed once the parties agree the terms and conditions and satisfactory due diligence has taken place. The buyer is only responsible to pay the purchase price and When legally binding applicable taxes. Parties are legally bound as soon as they agree (section 1450, Civil Code): 8 Finance and Banking ■ The object of the sale. ■ The price. 8.1 Please briefly describe any regulations concerning This applies even if other ancillary elements are not yet fully agreed. the lending of money to finance real estate. Are the In addition, parties can be legally bound by other pre-contractual rules different as between resident and non-resident persons and/or between individual persons and arrangements, which are usually agreed through a letter of intent. corporate entities? Such arrangements can include: ■ Confidentiality. The Spanish Mortgages Act is the relevant Act setting out the ■ A prohibition on disclosing know-how information. requirements to secure a loan via real estate properties.

7.2 Is the seller under a duty of disclosure? What matters 8.2 What are the main methods by which a real estate must be disclosed? lender seeks to protect itself from default by the borrower? The seller must act in good faith without concealing any information that, if known by the buyer, would prevent the buyer from completing (a) Security package. A security package for a real estate loan the transaction. The Civil Code allows legal actions against a seller will usually comprise: for title defects and buyers also have access to public registries (land ■ a mortgage over the asset; registry and cadastral office). ■ a charge over receivable rents; ■ a charge over all bank accounts into which all rents must 7.3 Can the seller be liable to the buyer for be paid; and misrepresentation? ■ a charge over all relevant contracts including leases, insurance policies and construction guarantees. Yes; the terms of this liability are mutually agreed among the parties. (b) Corporate guarantees. Corporate guarantees are sometimes demanded by lenders if the borrower is using SPVs.

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(c) Insurance coverage. Lenders will require the borrowers to take out appropriate buildings insurance. 9 Tax (d) Covenants. The loan documentation will also contain both financial covenants (loan-to-value, debt service cover) and 9.1 Are transfers of real estate subject to a transfer tax? non-financial covenants (obligations to maintain the asset in How much? Who is liable? good state of repair or disposal limitations) to be granted by the borrower in order to ensure that the value of the asset is Stamp duty and transfer tax (Impuesto sobre Transmisiones maintained. Patrimoniales) are different forms of the same tax. Stamp duty is paid when the transaction is formalised in a notarial, 8.3 What are the common proceedings for realisation of corporate or administrative document. The rates are defined by each Spain mortgaged properties? Are there any options for a mortgagee to realise a mortgaged property without regional government (commonly 1% of the real estate value). involving court proceedings or the contribution of the Transfer tax is payable when the sale or purchase of real estate mortgagor? is exempt from VAT. Rates for transfer tax are also set by each regional government, with a general rate of 7%, except for the In Spain, the lender with a secured loan needs to start a foreclosure Canarias which has a general rate of 6.5%. proceeding, where the main step is the public auction of the asset. The buyer pays stamp duty and transfer tax. There are two types of proceedings: (i) judicial proceeding, to be followed before Spanish courts; and (ii) extrajudicial proceedings, to be followed before a Notary Public. This extrajudicial proceeding 9.2 When is the transfer tax paid? may only be followed if agreed upon by the parties. Transfer tax is payable when the sale or purchase of real estate The ECJ judgment of 14 March 2013 (C-415/11) ruled that certain is exempt from VAT. Rates for transfer tax are also set by each provisions of Spanish law do not comply with the Unfair Terms regional government, with a general rate of 7%, except for the in Consumer Contracts Directive 93/13/EC. As a result of the Canarias which has a general rate of 6.5%. judgment, enforcement of mortgages against consumer borrowers will be more difficult. The buyer pays transfer tax.

8.4 What minimum formalities are required for real estate 9.3 Are transfers of real estate by individuals subject to lending? income tax?

A mortgage over real estate is granted in a public deed and is only Yes, for the difference between the sale value and the original valid when registered with the Land Registry. acquisition value (including all costs). A pledge over income arising from lease tenants is usually notarised, but notarisation is not mandatory. However, it is advisable to notify 9.4 Are transfers of real estate subject to VAT? How the tenants of the pledge. much? Who is liable? Are there any exemptions? In share deals, it is common to grant a pledge over the shares of the SPV acquired by the buyer; this must be granted before a notary public. Generally, VAT is payable for all sales or purchases of real estate when the transaction takes place in the framework of a business activity. The seller charges VAT to the buyer and the seller then pays the VAT 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other to the tax authorities. creditors? The general rate of VAT is 21%. However, a reduced rate of: ■ 10% applies to residential buildings. The protection of a real estate lender depends on the priority of ■ 4% applies to government-subsidised dwellings (viviendas the ranking of the secured loans, and this priority is subject to the de protección oficial). registration principle, unless mutually agreed between the borrower There are exemptions when the transaction relates to the: and the lender. ■ sale or purchase of rural land; ■ delivery of plots of land to a compensation committee (Junta 8.6 Under what circumstances can security taken by a de Compensación) to develop the land; or lender be avoided or rendered unenforceable? ■ second or subsequent sales or purchases of real estate. Spanish courts are ruling that the enforcement of a guarantee is not The abovementioned transactions are subject to transfer tax. valid unless a material condition of the loan agreement is breached However, the seller can waive the exemption, provided both of the by the borrower. following apply: ■ the buyer acquires the real estate as part of its business activity, for example, if it is a VAT taxable person; and 8.7 What actions, if any, can a borrower take to frustrate the buyer is entitled to a total reduction of the charged VAT. enforcement action by a lender? ■

Remediation of the breach during the enforcement proceeding. 9.5 What other tax or taxes (if any) are payable by the seller on the disposal of a property?

The seller is responsible for paying a municipal duty (the municipal increase of the cadastral value of the property).

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9.6 Is taxation different if ownership of a company (or 10.4 What taxes are payable on rent either by the landlord other entity) owning real estate is transferred? or tenant of a business lease?

This has to be analysed on a case-by-case basis. In principle, due to There are two taxes relevant to the occupation of business premises: a recent reform, in cases where the object of the transfer is the shares ■ Property Tax (Impuesto sobre Bienes Inmuebles). This of the company owning the property, the transfer is free of VAT and taxes the ownership of Spanish real estate. This tax is Transfer Tax if the underlying real property asset is connected to a calculated in accordance with the cadastral value. It is business activity (e.g. lease activity), unless the Tax Authorities can common to charge the tax to the tenant if the property is prove that the sale has been implemented as a share deal, the only leased. Spain purpose of which was to avoid Transfer Tax. ■ Tax on Economic Activities (Impuesto sobre Actividades Económicas). This taxes the economic activity of companies with a gross business income of more than EUR 1 million. 9.7 Are there any tax issues that a buyer of real estate Non-resident companies operating in Spain through a should always take into consideration/conduct due permanent establishment and with a gross business income diligence on? of up to EUR 1 million are exempt.

In case of share deal, latent capital gains of the SPV to be acquired and latent tax liabilities are the key area of concern for a buyer. In the 10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party event of asset deal, the relevant areas of concern are related to potential etc.)? Are there any special provisions allowing a application of Real Estate Transfer Tax (RETT) instead of VAT and tenant to extend or renew the lease or for either party tax liens and the assessment of potential contingencies arising thereto. to be compensated by the other for any reason on termination?

10 Leases of Business Premises Landlord Landlords can terminate leases early (both non-residential and 10.1 Please briefly describe the main laws that regulate residential) on the following grounds (unless agreed otherwise): leases of business premises. ■ Breach of contract by the tenant. ■ Lack of payment of the rent or service charge. The Act on Urban Leases 29/1994 (Ley de Arrendamientos Urbanos) ■ Carrying out activities which are: regulates leases in urban properties for dwelling and commercial uses. ■ aggravating; ■ unhealthy; 10.2 What types of business lease exist? ■ harmful; dangerous; or The Act on Urban Leases does not distinguish the legal regime ■ applicable to different types of business leases if the object of the ■ illegal. lease is only the real estate property. If the lease includes an industrial The landlord has the following additional grounds for terminating or a business activity, then the Act on Urban Leases does not apply, the lease early in residential leases: but a different regime governed by the Spanish Civil Code does. ■ Lack of payment of statutory deposit. ■ Subletting or assignment without the landlord’s prior consent. 10.3 What are the typical provisions for leases of business ■ Voluntarily causing damage to the premises. premises in your jurisdiction regarding: (a) length of ■ Carrying out non-authorised works. term; (b) rent increases; (c) tenant’s right to sell or sub-lease; (d) insurance; (e) (i) change of control of ■ The dwelling no longer being allocated for residential use. the tenant; and (ii) transfer of lease as a result of a Tenant corporate restructuring (e.g. merger); and (f) repairs? Under the Act on Urban Leases, the grounds for early termination by the tenant are: The term of a non-residential lease can be freely agreed by the The landlord’s execution of improvement works in the leased parties. An initial term of between two and five years is commonly ■ premises (subject to certain conditions). used, with extensions depending on the nature of the lease. ■ Execution of conservation works or works imposed by the In non-residential leases, unless agreed otherwise, the tenant can competent authority, provided these works prevent the tenant sublet the premises or assign the lease without the landlord’s from using the leased premises. approval. It is sufficient to give notice to the landlord ofthe ■ Breach of contract by the landlord. subletting or the assignment. However, the landlord is then entitled to increase the rent by 10% to 20%. In addition, in non-residential leases, any grounds for early termination agreed in the lease are enforceable by the tenant. Unless agreed otherwise, business premises can be shared by the tenant with companies belonging to its group by a subletting agreement. In most non-residential leases, the parties agree that the landlord is 10.6 Does the landlord and/or the tenant of a business lease cease to be liable for their respective responsible for structural and major repairs, and the tenant carries obligations under the lease once they have sold their out internal repairs and maintenance as well as interior decoration. interest? Can they be responsible after the sale in The Act on Urban Leases for residential leases otherwise applies to respect of pre-sale non-compliance? non-residential leases. The landlord insures the premises but usually recovers premiums Yes, unless mutually agreed by the parties in a different way. from the tenant as part of the ancillary costs under the lease.

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country planning in its designated territory. Consequently, there Spain The main “green obligation” lies with the landlord, since he is are 17 different planning law systems in Spain. However, these obliged to provide an energy efficiency certificate to the tenant systems are inspired by the same planning law system which was in before signing the lease contract. force before the Constitution. Therefore, the systems have common institutions and regulations. 11 Leases of Residential Premises Regional government legislation is generally confirmed by the corresponding regional Planning Act (Ley Urbanística) and regional Planning Decree (Decreto Urbanístico), which complements the 11.1 Please briefly describe the main laws that regulate Planning Act. They are passed by the corresponding regional leases of residential premises. parliament and regional government respectively. Parliament and the government have legislative and executive The Spanish law on Urban Leases (LAU) provides for the main powers for other planning matters, such as: regulation for residential premises. Touristic activities are governed ■ Land valuation. by Regional governments and some regions have enacted their own ■ Compulsory purchase. rules for this activity. ■ Protection of coasts and rivers. ■ Road legislation. 11.2 Do the laws differ if the premises are intended for multiple different residential occupiers? The city councils are the most important authorities concerning town planning and are responsible for the following: Not for the rental activities, but in some regions the touristic ■ Initiation and processing of the basic planning regulations regulations impose different requirements in case the residential (planeamiento urbanístico general), which are subsequently property is totally or partially devoted to touristic apartments. approved by the competent regional governments. ■ City design and development. ■ Classification of the land clasificación( urbanística) into: 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: ■ urban land (suelo urbano); (a) length of term; (b) rent increases/controls; (c) the ■ land fit for urban development suelo( urbanizable); and tenant’s rights to remain in the premises at the end of ■ land protected from urban development (suelo no the term; and (d) the tenant’s contribution/obligation urbanizable). to the property “costs” e.g. insurance and repair? ■ Defining the permitted uses and construction parameters in each of the types of land. The length of term is freely agreed by the parties but if this is less than three years the tenant has the statutory right to extend the lease ■ Granting authorisations of constructions and uses. on an annual basis up to three years. Rent increases are linked ■ Inspections. to the CPI variation (upwards/downwards). There is no right for ■ Sanctioning and expropriation. the tenant to remain in the premises at the end of the term, but the ■ Approving supplementary planning regulation (planeamiento Spanish Civil Code states that if the landlord consents the tenant urbanístico de desarrollo). to retain possession of the property for more than 15 days after expiration, then the lease is extended for an additional term of one 12.2 Can the state force land owners to sell land to it? If year. Landlord’s insurance is not normally charged to the tenant so please briefly describe including price mechanism. under the lease of a residential property.

Yes; land owners can be forced to sell land which is included in a 11.4 Would there be rights for a landlord to terminate a planning sector and is due to be developed with the backing of the residential lease and what steps would be needed majority of the land owners of such sector. to achieve vacant possession if the circumstances existed for the right to be exercised? Such land owner is compensated with the corresponding indemnity. The land is valued in accordance with the valuation methods established by law. It must be taken into account that in most cases, In Spain, the legal system is protective of the tenant in case of valuation will not be coincident with the fair market value of the dispute, so the eviction proceedings take a long time. In addition, land at that time; such valuation, however, can be challenged by the tenants have faculties to stop the eviction during the proceedings land owner in court. if the breach of contract is remedied. In turn, Spanish law allows the landlord to immediately recover possession of the residential property in case the landlord or relatives must use the property as its own residence.

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activities carried out by a hotel, factory or a car park). The city 12.3 Which bodies control land/building use and/or council grants an activity licence provided the activity requested by occupation and environmental regulation? How do the developer complies with environmental regulations. buyers obtain reliable information on these matters? Opening licence (licencia de apertura). Once the installation of fit- out works has been duly completed to allow the authorised activities Initial consents to be performed, municipal technicians inspect the property to In most cases, the city council grants initial and final planning assess that the fit-out works comply with the activity licence. If licences. they do, the opening licence is granted. Third party rights Planning licences for carrying out works Spain Third parties do not always have the right to object. This depends Works licence (licencia de obras). The developer must apply to the on the corresponding regional government. Regional planning city council for the works licence before the works begin, after the legislation generally sets out public information about administrative activity licence has been granted. The city council grants the works procedures to grant licences if third parties are affected by the city licence if the construction complies with the urban parameters in the council’s final decision (for example, an activity licence application planning regulations. to carry out industrial activities in a residential area). Occupancy licence (licencia de primera ocupación/funcion- In these circumstances, before the city council’s final approval, the amiento). Once the construction works have been duly completed, application form is published in official gazettes, and the procedure city council technicians inspect the property to assess that the works enters a public information stage for about one month, during which comply with the works licence. If they are satisfied, the occupancy any party can: licence is granted. ■ study the relevant documentation in the municipal offices; and 12.5 Are building/use permits and licences commonly ■ address written pleadings to the city council to enforce their obtained in your jurisdiction? Can implied permission own rights and interests concerning the licence. be obtained in any way (e.g. by long use)? Public inquiries The approval of basic planning regulation is always subject to See the answer to question 12.4. public information, and, in some cases, the granting of licences is subject to public consultation. 12.6 What is the appropriate cost of building/use permits Initial decision and the time involved in obtaining them? Depending on the regional planning legislation and the works or activities to be authorised, it takes between one and six months The fees for obtaining the relevant permits are defined locally by to obtain approval. The city councils must decide and notify the municipal authorities. parties within this time. If the maximum term expires and the city council has not notified 12.7 Are there any regulations on the protection of historic its decision, the licence is generally deemed to have been granted monuments in your jurisdiction? If any, when and how by positive administrative silence (silencio administrativo positivo). are they likely to affect the transfer of rights in real estate? Appeals

There is a right of appeal against a planning decision. Any party can The Spanish government enacted Law 16/1985 of 25 June to protect make a judicial appeal in court (recurso contencioso-administrativo) Spanish Historical Heritage. Regional governments have also against a public authority decision concerning planning or implemented their own regulations for local historical heritage not environmental issues provided the following conditions are met: protected by Spanish national regulations. ■ The decision to be appealed must be final, that is, the In addition, town master plans may establish different levels of administrative procedure for adopting the decision must be concluded, including any appeals to public authorities. protection in case demolition, change of uses, refurbishment or fitting-out works of an existing building. ■ The judicial appeal must be lodged at the competent court within two months from the date of notification or the date of publication of the decision in the Official Gazette. 12.8 How can e.g. a potential buyer obtain reliable information on contamination and pollution of real estate? Is there a public register of contaminated land 12.4 What main permits or licences are required for in your jurisdiction? building works and/or the use of real estate? The land registry provides for relevant information if a piece of The following are subject to authorisations, or licences (licencias), land has been declared as contaminated land by environmental from the city council: authorities, or in the event there is an ongoing investigation. In ■ Works. addition, the Ministry of Environment has created a public registry ■ Constructions. of contaminated land. ■ Divisions of plots. ■ Carrying out any activities. 12.9 In what circumstances (if any) is environmental clean- Environmental licences for carrying out activities up ever mandatory? Activity licence (licencia de actividad). The developer applies to the city council for this licence. The licence authorises the Environmental clean-up is always mandatory as from the activity for which the developed property will be used (for example, declaration of contamination by the environmental authorities until the remediation is complete.

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the Europe 2020 Strategy and under the Kyoto Protocol’s second 12.10 Please briefly outline any regulatory requirements commitment period (2013–2020). For 2020, the EU has made a for the assessment and management of the energy unilateral commitment to reduce overall greenhouse gas emissions performance of buildings in your jurisdiction. from its 28 Member States (including Spain) by 20% compared to 1990 levels which is one of the headline targets of the EU 2020 In Spain, the following regulations have been enacted to transpose strategy. Directive 2002/91/EU of the European Parliament and Council of 16 December 2002: ■ The new Building Technical Code, approved by virtue of 13.2 Are there any national greenhouse gas emissions reduction targets? Royal Decree 314/2006, which envisages specific measures Spain on energy efficiency and integration of renewable energies. Spain’s goal, in relation to the reduction of gas emissions, consists of ■ The Regulation on Thermic Systems in Buildings, approved by virtue of Royal Decree 1027/2009. compliance with the Kyoto Protocol and the objectives established by the EU. ■ The Regulation of the Energy Efficiency in External Lightning, approved by virtue of Royal Decree 1890/2008. 13.3 Are there any other regulatory measures (not already mentioned) which aim to improve the sustainability of 13 Climate Change both newly constructed and existing buildings?

The most relevant measure is Royal Decree 235/2013, which 13.1 Please briefly explain the nature and extent of any regulatory measures for reducing carbon dioxide transposed Directive 2010/31/EU, regarding energy efficiency in emissions (including any mandatory emissions buildings, which has an impact on real estate transactions and leases. trading scheme).

Spain, as part of the EU, is on track to meet its targets for cutting greenhouse gas emissions both under its own internal target in

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Emilio Gómez Delgado Hogan Lovells Paseo de la Castellana 36–38 28046 Madrid Spain

Tel: +34 91 349 82 00 Fax: +34 91 349 82 00 Email: [email protected] URL: www.hoganlovells.com Spain

Emilio is a partner in the Real Estate area of Hogan Lovells and heads the Madrid Real Estate practice. He provides broad experience in real estate developments and transactions, particularly in shopping and leisure centres, as well as business parks and hotels. He is a lecturer at the LL.M. at Universidad de Navarra and at the Planning Law LL.M. at Carlos III University in Madrid. He is also a member of the Advisory Board of the Law Faculty at Universidad de Navarra. Practices: ■■ Real Estate. ■■ Hotels & Leisure. ■■ REITS. ■■ Real Estate Finance. Education: ■■ Doctorate courses, Madrid Complutense University 2004. ■■ Master’s in Planning Law, IE Business School, Madrid 2002. ■■ Business Degree, University Pontificia Comillas (Madrid) 1999. ■■ Law Degree, University Pontificia Comillas (Madrid) 1998. Memberships: ■■ Madrid Bar Association. ■■ LAI, honorary society on land economics (www.lai.org). ■■ ULI (www.uli.org).

Hogan Lovells is a global legal practice, providing high-quality advice to corporations, financial institutions and governmental entities across the full spectrum of critical business and legal issues, globally and locally. We have over 2,500 lawyers operating in 47 offices in Europe, the United States, Latin America, the Middle East and Asia. The global real estate group is renowned for first-class legal skills and market knowledge. An integrated, cross-border group, we bring client-focused innovation to bear in pioneering new deal structures and in delivering legal services. The Madrid Real Estate team, led by partner Emilio Gómez, has broad experience in real estate transactions related to the acquisition, management and leasing of business parks and offices, shopping centres and industrial premises. The team advises property developers, investment funds and property companies in real estate transactions, construction contracts and planning developments. It also advises real estate companies in their investments in Continental Europe, the UK, the Arab Emirates and Asia.

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Switzerland Wolfgang Müller

Meyerlustenberger Lachenal AG Christian Eichenberger

made even stricter on the other. It is widely recognised that the Lex 1 Real Estate Law Koller is the only effective measure to reduce the demand for Swiss residential properties. 1.1 Please briefly describe the main laws that govern The acquisition of residential premises by non-Swiss persons real estate in your jurisdiction. Laws relating to remains restricted while the acquisition of business premises is, leases of business premises should be listed in as a rule, unrestricted under the Lex Koller. This spring the Swiss response to question 10.1. Those relating to zoning Federal Council presented a draft bill suggesting some major and environmental should be listed in response to question 12.1. Those relating to tax should be listed in amendments. These amendments were discussed intensively response to questions in Section 9. during the conciliation proceedings which ended on June 30, 2017. However, the debate regarding the Lex Koller is expected to Switzerland is a civil law country. Real estate is mainly governed continue for years to come. Therefore, we assume it will take years by written laws on a federal level, such as the Swiss Civil Code, the until amendments to the Lex Koller, if any, will enter into force. Swiss Code of Obligations, the Act on the Acquisition of Real Estate by Persons Abroad (the so-called Lex Koller), the Debt Enforcement 3 Real Estate Rights and Bankruptcy Act and the Ordinance on the Land Register.

3.1 What are the types of rights over land recognised in 1.2 What is the impact (if any) on real estate of local your jurisdiction? Are any of them purely contractual common law in your jurisdiction? between the parties?

As mentioned above, Switzerland is a civil law country. Hence, The most important types of rights over land are ownership, co- there is in principle no common law in Switzerland. Nevertheless, ownership (in particular, in the form of the condominium-principled there is case law which offers guidance on the interpretation of co-ownership), building rights and usufructuary rights on the one written laws. In particular, such case law has an impact in the hand. On the other hand, lease contracts play a major role, with field of landlord-tenant law, where a lot of cases are produced, in both residential and commercial properties. The latter are purely particular in the Western (French-speaking) part of Switzerland. contractual between the parties unless they are annotated in the land register. 1.3 Are international laws relevant to real estate in your jurisdiction? Please ignore EU legislation enacted locally in EU countries. 3.2 Are there any scenarios where the right to a real estate diverges from the right to a building constructed thereon? International laws do not play an important role with respect to real estate in Switzerland. The Agreement on the Free Movement of Yes, in the case of a building right, the right to a real estate diverges Persons, however, has impact on the Lex Koller mentioned above. from the right to a building constructed thereon. In such a scenario, there are two owners: one that owns the soil; and one that owns the 2 Ownership building built thereon.

3.3 Is there a split between legal title and beneficial title 2.1 Are there legal restrictions on ownership of real estate in your jurisdiction and what are the registration by particular classes of persons (e.g. non-resident consequences of any split? persons)?

Beneficial ownership cannot be based on property law provisions, The Lex Koller (see the answer to questions 1.1 and 1.3 above) because Swiss law does not know a legal principle comparable to restricts the acquisition of Swiss residential and other non- the common law concept of trust (even if trusts under foreign law commercial real estate by foreign (i.e. non-Swiss) persons. In recent are under certain conditions recognised under Swiss law – in the years, and in particular since 2007, it has been debated whether case of assets under a trust established abroad that are entered in the Lex Koller should be abolished altogether on the one hand, or the name of the trustees in the land register in Switzerland reference

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shall be made to the trust relationship by means of an annotation; a trust relationship that is not annotated in the land register in such 4.5 Where there are both unregistered and registered land a way may be considered invalid against bona fide third parties). or rights is there a probationary period following first registration or are there perhaps different classes Any beneficial ownership is therefore of purely contractual nature or qualities of title on first registration? Please give under Swiss law, which means, in particular, that the right of the details. First registration means the occasion upon beneficiary is not based on an in rem title to the property, but only which unregistered land or rights are first registered on a contractual claim against the holder of the property rights. If in the registries. that holder disposes of the property in violation of the contractual provisions, the beneficiary is limited to a claim for damages. No, there is no such probationary period following first registration Although a purchase of property on a fiduciary basis is considered to under Swiss law. be valid, such fiduciary purchase is void where the parties intended Switzerland to circumvent legal provisions; this may especially be the case if a non-resident foreigner or a company with registered office abroad, 4.6 On a land sale, when is title (or ownership) transferred to the buyer? respectively, intends to acquire a Swiss property in breach of the Lex Koller without disposing of the necessary permit (see question 2.1 above). A common method of acquiring a beneficial interest in Transfer of title occurs upon the respective entry into the “journal” land is by purchasing shares or the majority of shares in a real estate of the land register, provided, however, that the application is later company; the ownership of the property in an economical sense is registered in the “main register” of the land register. transferred simply by conveying the shares of the company owning the property – however, the restrictions of the Lex Koller also apply 4.7 Please briefly describe how some rights obtain in such a case. priority over other rights. Do earlier rights defeat later rights?

4 System of Registration Except for mortgages, which have an assigned rank among each other, irrespective of the time of registration, registered rights obtain priority over other rights in accordance with the “rule of seniority”, 4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered? which means, in principle, “first in time, first in right”. Such rule, however, can be contracted away. In principle, all privately owned land is registered in the land register. However, no rights of private ownership apply to public 5 The Registry / Registries waters or to land not suitable for cultivation, such as rocks and scree, fern and glaciers, or springs rising therefrom, unless proof to the contrary is produced. Immovable property which is not privately 5.1 How many land registries operate in your jurisdiction? owned and is in public use will be recorded in the land register only If more than one please specify their differing rules if rights in rem attaching to such property are to be registered or if and requirements. cantonal law provides for its registration. For land register purposes, the cantons are divided into districts. Hence, the 26 cantons are responsible for setting up the land 4.2 Is there a state guarantee of title? What does it registries, the demarcation of the districts, the appointment and guarantee? remuneration of officials and supervision arrangements.

There is no explicit state guarantee of title. However, the land register is assumed to be complete and correct and everyone may in 5.2 Does the land registry issue a physical title document good faith rely on it. Therefore, the state (i.e. the respective canton) to the owners of registered real estate? is liable for any losses arising from the undue maintenance of the land register. The land register issues (upon request of the owner) an extract from the land register. Such extract does not, however, qualify as a physical title document. Due to the legal assumption that the 4.3 What rights in land are compulsorily registrable? land register is complete and correct (see the answer to question 4.2 What (if any) is the consequence of non-registration? above), it is not necessary to issue a separate title document.

All acquisition of land ownership must be recorded in the land register. The consequence of non-registration is that the title 5.3 Can any transaction relating to registered real estate remains with the seller – hence, the respective transaction is not yet be completed electronically? What documents need to be provided to the land registry for the registration closed. In addition, all rights relating to the property and relevant to of ownership right? Can information on ownership of everyone (not just to a contractual party) must be registered in the registered real estate be accessed electronically? land register. The cantons can allow their land registries to communicate and 4.4 What rights in land are not required to be registered? conduct transactions electronically. The transferor of real estate (e.g. the seller) has to file to the land register an application for the Emption rights, pre-emption rights, repurchase rights and lease registration of the new owner (e.g. the buyer) and furnish supporting agreements, for example, are rights in land that are not required to documents (e.g. the purchase and sale deed). be registered.

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5.4 Can compensation be claimed from the registry/ 6.4 What is the appetite for investors and developers registries if it/they make a mistake? in your region to look beyond primary real estate markets and transact business in secondary or even Yes, the state (i.e. the respective canton) is liable for any losses tertiary markets? Please give examples of significant secondary or tertiary real estate transactions, if arising from the undue maintenance of the land register. relevant.

5.5 Are there restrictions on public access to the Yes, we have seen investors going off the beaten track of the primary register? Can a buyer obtain all the information he markets by transacting business in secondary or even tertiary might reasonably need regarding encumbrances and markets. For example, there are investments made in real estate other rights affecting real estate? development projects in mid-sized Swiss cities such as Lausanne Switzerland or Solothurn, or in commercial properties in cities like Thun and St. Any person is entitled to obtain the following information from the Gallen. Certain foreign investors have been interested in acquiring register without showing a legitimate interest: Swiss hotels or have invested in resorts in the Swiss Alps in recent 1. the name and description of the immovable property; years (e.g. Bürgenstock or Andermatt). 2. the name and identity of the owner; and 3. the form of ownership and the date of acquisition. 6.5 Have you observed any trends in particular market A person showing a legitimate interest is entitled to consult the full sub sectors slowing down in your jurisdiction in land register or to be provided with an extract. Hence, a buyer could terms of their attractiveness to investors/developers? also directly obtain from the land register all the information he/ Please give examples. she might reasonably need regarding encumbrances and other rights affecting real estate. Furnishing evidence to establish a legitimate An example is the vacancy rates regarding office space in some interest, however, takes time. In practice, it is thus more convenient cities and in particular city centres such as Geneva and Zurich which for the buyer to get an extract from the land register via the seller. have increased substantially in recent years.

6 Real Estate Market 7 Liabilities of Buyers and Sellers in Real Estate Transactions

6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally 7.1 What (if any) are the minimum formalities for the sale be involved in a real estate transaction in your and purchase of real estate? jurisdiction? Please briefly describe their roles and/or duties. The purchase and sale deed needs to be notarised by a notary public, and the seller (or the notary public, respectively) is to file to the land Lawyers who assist the seller and/or the buyer in conducting a due register an application for the registration of the new owner (i.e. the diligence, drafting and/or reviewing the contract documents are buyer). often involved. In addition, notaries public draft and notarise the purchase and sale deed. Other parties involved are, for example, banks, realtors, technical/environmental consultants and appraisers. 7.2 Is the seller under a duty of disclosure? What matters must be disclosed?

6.2 How and on what basis are these persons There is no formal duty of disclosure. However, the seller is under remunerated? a duty to act in good faith which implies, for example, that he has to answer questions of the buyer relating to the transaction truly and The fees of the notaries public are subject to the respective laws of accurately. the cantons. Realtors normally receive a certain percentage of the purchase price for their brokerage services. Lawyers, consultants and appraisers are normally remunerated on an hourly basis. 7.3 Can the seller be liable to the buyer for misrepresentation?

6.3 Do you feel there is a noticeable increase in Yes; if the seller does not disclose important information or gives the availability of capital to finance real estate false information, he/she may be liable for misrepresentation. transactions in your jurisdiction, whether equity or debt? What are the main sources of capital you see active in your market? 7.4 Do sellers usually give contractual warranties to the buyer? What would be the scope of these? What is In Switzerland, it has always been possible to access reasonable the function of warranties (e.g. to apportion risk, to finance for real estate transactions, even following the 2008 give information)? Are warranties a substitute for the buyer carrying out his own diligence? financial crisis. While real estate as an asset class is still attractive to insurance companies and pension funds, new standards put in place by the Swiss National Bank and the Swiss Bankers Association have According to the Swiss Code of Obligations, the seller is liable meant that banks have been forced to be more prudent when lending to the buyer for any breach of warranty and for any defects that money to private individuals (see the answer to question 8.1 below). would materially or legally negate or substantially reduce the value of the purchase object or its fitness for the designated purpose. Such warranty is, however, in practice, often contracted away (at

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least to some extent) in real estate asset transactions. However, any agreement to exclude or limit the warranty obligation is void 8.2 What are the main methods by which a real estate if the seller has fraudulently concealed the failure to comply with lender seeks to protect itself from default by the borrower? the warranty.

In Switzerland, the main method by which a real estate lender seeks 7.5 Does the seller warrant its ownership in any way? to protect itself from default by the borrower is the mortgage. Please give details.

According to the Swiss Code of Obligations, the seller is obliged 8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a to transfer the purchased real estate to the buyer free from any mortgagee to realise a mortgaged property without

Switzerland rights enforceable by third parties against the buyer. In practice, involving court proceedings or the contribution of the the seller simply provides the buyer with an excerpt from the land mortgagor? register confirming his ownership (see also the answer to question 5.2 above). If the creditor’s debt is secured by a mortgage, the pledged property is seized and sold at auction by the debt enforcement office (the 7.6 What (if any) are the liabilities of the buyer (in addition respective foreclosure proceedings are governed by the Debt to paying the sale price)? Enforcement and Bankruptcy Act and its respective ordinances). In a security agreement, the lender and borrower may, however, In addition to paying the purchase price, the buyer has to pay the also agree on the private realisation of the collateral. In the latter fees and taxes, as provided for by law and/or contract. case, there are no court proceedings to be initiated to realise the mortgaged property.

8 Finance and Banking 8.4 What minimum formalities are required for real estate lending? 8.1 Please briefly describe any regulations concerning the lending of money to finance real estate. Are the The establishment of a new mortgage certificate is to be notarised, rules different as between resident and non-resident and a respective application is to be filed with the land register. At persons and/or between individual persons and the same time, there are no formalities in place regarding entering corporate entities? into a credit facility.

The Swiss National Bank (SNB) and the Swiss Bankers Association have taken several measures against the continued increase of 8.5 How is a real estate lender protected from claims residential property prices and mortgage loans. These measures against the borrower or the real estate asset by other creditors? taken in 2014 have shown effects and – despite the persisting low interest rate environment, including negative interest rates – a certain slowdown (fewer transactions, decreasing prices) resulted in some Mortgages have a certain assigned rank among each other. In areas and some segments of the residential and commercial real general, the claims based on mortgage certificates prevail over estate market (see also the answers to questions 6.3 and 6.5 above). unsecured or unprivileged claims. Some players in the market have therefore raised the question as to whether the time has come to abolish or mitigate such measures. 8.6 Under what circumstances can security taken by a However, negative interest rates continue to make investments in lender be avoided or rendered unenforceable? real estate attractive and imbalances in the mortgage and real estate markets persist. The SNB has thus reserved the possibility to Under the Swiss Debt Enforcement and Bankruptcy Act, the introduce further measures if deemed required. following acts that disadvantage certain creditors, carried out by In 2014, the SNB and the Swiss Federal Council, respectively, the debtor or security provider before the opening of bankruptcy increased the countercyclical capital buffer from 1% to 2% of the proceedings, can be voidable (anfechtbar): risk-weighted positions secured by residential property situated in ■ The debtor or security provider disposes of assets against no Switzerland. The SNB rules apply to both resident and non-resident consideration or against inadequate consideration in the year persons. before the adjudication of bankruptcy or an equivalent event. Also in 2014, another set of regulations was put in place: the Swiss ■ The debtor or security provider carries out certain acts within Bankers Association’s guidelines on the minimum requirements for one year from the opening of bankruptcy proceedings, while it is over-indebted, including, inter alia, the granting of mortgage financing for owner-occupied residential property. Under collateral for previously unsecured debt. these guidelines, a deposit of at least 10% of the loan value must be ■ The debtor or security provider carries out any act during paid (with funds that do not come from the second pillar) for new the five years before the opening of bankruptcy proceedings purchases and mortgage increases. If the purchase price is higher that has the purpose of disadvantaging creditors or preferring than the loan value, the difference must be paid in full with own certain creditors to the detriment of others (that is, avoidance funds that do not come from the second pillar. The mortgage debt is the intent). must be reduced to 2/3 of the loan value of the property within a maximum period of 15 years, with repayments made on a straight- line basis starting at the latest 12 months from the date on which the 8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? deposit was paid.

According to Art. 17 of the Swiss Debt Enforcement and Bankruptcy Act, an appeal on the grounds of incorrect application of the law or

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inappropriate exercise of discretion is, in principle, possible against any order made by a debt enforcement or a bankruptcy office. No 9.6 Is taxation different if ownership of a company (or charge is made for the respective appeal proceedings (Art. 20a of the other entity) owning real estate is transferred? Debt Enforcement Act). A party which, however, appeals in temerity or in bad faith, or its legal representative, can be fined up to 1,500 The real estate transfer tax, if any, is owed in case of an asset or share Swiss francs. Against this backdrop, some borrowers seek every deal (see the answer to question 9.1 above). It may, however, be opportunity to appeal (without taking a big financial risk) in order to possible to reduce or eliminate taxes on capital gains if a company hold up the enforcement action by the lender. We have seen cases in holding a property instead of the property itself is sold. which it took the lender up to five years to enforce a mortgage. 9.7 Are there any tax issues that a buyer of real estate should always take into consideration/conduct due 9 Tax diligence on? Switzerland

9.1 Are transfers of real estate subject to a transfer tax? Real estate transactions regularly require an in-depth analysis How much? Who is liable? with regard to income tax, VAT and tax-optimised financing and structuring. The relevant issues depend on the specific case. The acquisition of real estate or the majority (in certain cantons even a minority stake) of the shares in a Swiss real estate company may be 10 Leases of Business Premises subject to real estate transfer tax of between 1% and 3%, depending on the canton where the property is located. Certain cantons do not apply a real estate transfer tax, such as Zurich, which abolished real 10.1 Please briefly describe the main laws that regulate estate transfer tax a few years ago. The tax is normally payable by leases of business premises. the buyer. Often, the buyer and seller are jointly and severally liable for the real estate transfer tax. Contractual agreements are possible The laws that regulate leases of business premises are, on one with respect to the internal allocation of the tax burden between hand, the Swiss Code of Obligations (Arts 253 to 301) and, on the buyer and seller. In certain cantons, tax laws may foresee a lien on other hand, the Ordinance regarding the Lease of Residential and the property to secure the transfer taxes. Also, registration fees of Business Premises. There is no separate Swiss act that deals with the land register may depend on the value of the property. the leases of business premises only.

9.2 When is the transfer tax paid? 10.2 What types of business lease exist?

It depends on the regulations of the respective canton. In an asset In practice, various types of business leases exist, such as fixed-term deal, the transfer tax is sometimes paid through the notary public. leases or leases that last for an indefinite period of time, ordinary In some cantons, the notary is personally liable for the payment of leases or leases which come close to double or triple net lease the transfer tax. agreements.

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Depending on the circumstances of the case at hand, business leases 11.4 Would there be rights for a landlord to terminate a can indeed be terminated at expiry, on default or by either party residential lease and what steps would be needed giving notice. The tenant may request the extension of a fixed-term to achieve vacant possession if the circumstances existed for the right to be exercised? or open-ended lease where termination of the lease would cause a degree of hardship for it that cannot be justified by the interests of the landlord. A commercial lease may be extended by up to six years. For valid reasons rendering the performance of the contract intolerable, the landlord may terminate any lease observing a notice period of three months. The landlord has to take court action 10.6 Does the landlord and/or the tenant of a business (eviction proceedings) in order to achieve vacant possession if the lease cease to be liable for their respective circumstances exist for the right to be exercised. obligations under the lease once they have sold their interest? Can they be responsible after the sale in respect of pre-sale non-compliance? 12 Public Law Permits and Obligations

As a basic rule, the lease passes to the acquirer together with 12.1 What are the main laws which govern zoning/ ownership of the property sold. The new owner may, however, permitting and related matters concerning the use serve notice to terminate a lease on commercial premises as of the and occupation of land? Please briefly describe them next legally admissible termination date if it claims an urgent need and include environmental laws. to use the premises itself. If the new owner terminates sooner than is permitted under the contract with the existing landlord, the latter The Swiss system of zoning and planning is performed on four levels is liable for all resulting losses. (federal, cantonal, regional and local). On each level, respective laws exist. Environmental protection is mainly addressed on a federal level. 10.7 Green leases seek to impose obligations on landlords and tenants designed to promote greater 12.2 Can the state force land owners to sell land to it? If sustainable use of buildings and in the reduction of so please briefly describe including price mechanism. the “environmental footprint” of a building. Please briefly describe any “green obligations” commonly found in leases stating whether these are clearly If the rules of expropriation are followed, the state can force land defined, enforceable legal obligations or something owners to sell land to it in order to achieve certain goals which not amounting to enforceable legal obligations (for are in the public’s interest. The basic rules of expropriation are as example aspirational objectives). follows: the state needs to establish that (i) there is a sufficient legal basis for the expropriation, (ii) the expropriation is in the public’s In Switzerland, there are commonly no such provisions in lease interest, (iii) the expropriation is in accordance with the principle of agreements. proportionality, (iv) the goal of the state cannot be achieved by other reasonable measures, and (v) the land owner is fully compensated. 11 Leases of Residential Premises 12.3 Which bodies control land/building use and/or occupation and environmental regulation? How do 11.1 Please briefly describe the main laws that regulate buyers obtain reliable information on these matters? leases of residential premises. Land/building use and/or occupation and environmental regulation The laws that regulate leases of business premises are, on one are in most cases controlled by authorities determined by the cantons hand, the Swiss Code of Obligations (Arts 253 to 301) and, on the and the communities. In order to get reliable information on these other hand, the Ordinance regarding the Lease of Residential and matters, the respective authorities have to be contacted. More and Business Premises. There is no separate Swiss act that deals with more information is available online. the leases of residential premises only.

12.4 What main permits or licences are required for 11.2 Do the laws differ if the premises are intended for building works and/or the use of real estate? multiple different residential occupiers? In most cases, a permit is necessary to build, modify, demolish or No, they do not. change the use of a building.

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12.5 Are building/use permits and licences commonly 13 Climate Change obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)? 13.1 Please briefly explain the nature and extent of any regulatory measures for reducing carbon dioxide It depends on the circumstances of the case at hand. Implied emissions (including any mandatory emissions permission is hardly ever seen. trading scheme).

12.6 What is the appropriate cost of building/use permits Under the heading “Energy Strategy 2050”, a comprehensive set and the time involved in obtaining them? of documents has been produced in recent years and the topic is currently heavily debated in the Swiss Parliament. As part of the Time and costs vary from canton to canton and community to energy strategy 2050, the CO2 Act has been revised and came into Switzerland community. They range (depending on the project) from several force on 1 January 2013 (it will be further revised and become hundred to several hundred thousand Swiss francs. harsher under the new Energy Law. As to the new Energy Law, see the answer to question 13.3 below. Under the revised CO2 Act, subsidies in the amount of 450 billion Swiss francs per year for the 12.7 Are there any regulations on the protection of historic reduction of CO2 from buildings will also be made available). The monuments in your jurisdiction? If any, when and how CO2 Act sets out targets for emission reductions until 2020 and are they likely to affect the transfer of rights in real estate? contains measures for buildings, transport and industry. Among others, a building programme has been established in order to There are regulations on the protection of historic monuments on a promote energy efficient technologies for the renovation of buildings federal, cantonal and community level. They do not directly affect and the investment in renewable energies, waste heat recovery and the transfer of rights in real estate. The buyer should, however, be the optimisation of building utilities. There is a plan to replace the aware that certain modifications to a building may be impossible existing concept of subsidies with a steering charge. and/or subject to negotiations with the authorities. 13.2 Are there any national greenhouse gas emissions reduction targets? 12.8 How can e.g. a potential buyer obtain reliable information on contamination and pollution of real estate? Is there a public register of contaminated land Based on the Kyoto protocol, the CO2 Act aims at reducing in your jurisdiction? greenhouse gas emissions by 2020 by 20% compared to 1990 levels. The Federal Council may tighten this reduction goal from 20% to Yes, each canton has a public register of contaminated real estate. 40%. More and more of such registers are available online. However, the fact that a property is not entered into such register does not 13.3 Are there any other regulatory measures (not already necessarily mean that the property is not contaminated or polluted. mentioned) which aim to improve the sustainability of both newly constructed and existing buildings? 12.9 In what circumstances (if any) is environmental clean- up ever mandatory? The Energy Strategy 2050 is being implemented gradually. By approving the revision of the Energy Act in May 2017, Swiss voters A property must be cleaned up if it is listed in the public register of gave the go-ahead to the first series of measures to restructure the contaminated real estate as being polluted. When it comes to the sale country’s energy system. These are intended to reduce energy or division of immovable property located on a site that is entered consumption, improve energy efficiency and promote the use of in the register of polluted sites, an authorisation of the competent renewable energies. Furthermore, the construction of new nuclear authorities must be obtained. power stations will be prohibited. By applying this strategy Switzerland can reduce its dependency on imported fossil fuels and strengthen domestic renewable energies. It can also create jobs and 12.10 Please briefly outline any regulatory requirements boost investment in the country. for the assessment and management of the energy performance of buildings in your jurisdiction. Moreover, the Environmental Protection Law also contains provisions relating to construction work and buildings and the The assessment and management of the energy performance is Environmental Compatibility Assessment Law provides that any regulated on a cantonal level. In general, it is not mandatory for the construction or building measures which materially influence the owners to perform respective tests. environment need to undergo an environmental compatibility assessment.

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Wolfgang Müller Christian Eichenberger Meyerlustenberger Lachenal AG Meyerlustenberger Lachenal AG Schiffbauplatz Schiffbauplatz 8005 Zurich 8005 Zurich Switzerland Switzerland

Tel: +41 44 396 91 91 Tel: +41 44 396 91 91 Email: [email protected] Email: [email protected] URL: www.mll-legal.com URL: www.mll-legal.com

Dr. Wolfgang Müller is a partner at Meyerlustenberger Lachenal and Dr. Christian Eichenberger specialises in real estate and rental law, Switzerland heads the real estate team. His practice focuses on real estate, in as well as construction and area planning law. He advises clients and particular real estate M&A, and capital markets. Wolfgang Müller represents them in court and before regulatory authorities. graduated from the University of Zurich in 1990, and in 1992 was Christian Eichenberger graduated from the University of Fribourg, conferred a doctoral degree by the University of Zurich (Dr.iur.). Switzerland in 2001. He was admitted to the Bar and licensed as a He was admitted to the Bar in Switzerland in 1993. After having notary public in Switzerland in 2004. In 2008, Christian Eichenberger successfully completed his MBA at the Australian School of Business was conferred a doctoral degree by the University of Berne (Dr.iur.). in Sydney/Australia and the University of Michigan Business School He holds an LL.M. from the University of Hawai’i at Mãnoa, William in Ann Arbor/USA, he joined the company in 1997 and has been a S. Richardson School of Law (2009) and a Master of Advanced partner since 2004. Studies in Real Estate from the University of Zurich (2012). He joined Wolfgang Müller is, among others, recommended by The Legal 500 Meyerlustenberger Lachenal in 2009. His professional languages as a leading individual for real estate and construction in Switzerland. are German and English. He is a member of the Royal Institution of Chartered Surveyors (RICS).

Meyerlustenberger Lachenal offers the full range of services relating to real estate and provides comprehensive advice from the acquisition to the sale of properties, and from the planning to the construction and use of buildings and properties. With its 90 lawyers and offices in Zurich, Geneva, Zug, Lausanne and Brussels, Meyerlustenberger Lachenal provides efficient solutions for its domestic and international clients in all areasof business law.

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Turkey Göktuğ Can Burul

BKA Attorneys at Law Onur Atakan

Turkish companies with foreign capital (i.e. under foreign control) 1 Real Estate Law may acquire real estate to carry out the activities set out in their articles of incorporation. This is also subject to a permission 1.1 Please briefly describe the main laws that govern process. real estate in your jurisdiction. Laws relating to leases of business premises should be listed in response to question 10.1. Those relating to zoning 3 Real Estate Rights and environmental should be listed in response to question 12.1. Those relating to tax should be listed in response to questions in Section 9. 3.1 What are the types of rights over land recognised in your jurisdiction? Are any of them purely contractual between the parties? In Turkey, the main laws that govern real estate are the Turkish Civil Code (“TCC”) and the Turkish Code of Obligation (“TCO”). In rem rights are the rights of ownership and mortgage, and easement rights such as the right of way. 1.2 What is the impact (if any) on real estate of local There are also certain rights which are purely contractual. These common law in your jurisdiction? arise from contracts such as preliminary sale agreements, repurchase agreements, right of first refusal, right of purchase or repurchase As Turkey is a civil law country, precedential court decisions do not agreements. Nevertheless, these agreements may be recorded have a binding effect. However, in litigation practice in Turkey, it in the land registries, which makes the rights arising out of such is important to present precedential court decisions to support your enforceable to third parties. Similarly, the rights to use arising from case. a lease agreement may also be asserted by the new owner as he automatically becomes a party to the lease agreement.

1.3 Are international laws relevant to real estate in your jurisdiction? Please ignore EU legislation enacted 3.2 Are there any scenarios where the right to a locally in EU countries. real estate diverges from the right to a building constructed thereon? No, local laws are applicable. In a condominium real estate, the ownership of one independent section is a separate right from the ownership of the land. A 2 Ownership purchaser, when purchasing a condominium, also acquires a share of ownership of the land on which the condominium is erected jointly with the other right holders. 2.1 Are there legal restrictions on ownership of real estate by particular classes of persons (e.g. non-resident persons)? 3.3 Is there a split between legal title and beneficial title in your jurisdiction and what are the registration There are certain restrictions for the ownership of real estate by consequences of any split? foreign individuals, foreign legal entities, and Turkish companies with foreign capital. No, there is no such split. The principle of reciprocity was abandoned in 2012. Currently, the Council of Ministers decides which countries’ citizens can acquire 4 System of Registration real estate in Turkey. In any case, currently a foreign individual may acquire real estate with an area of up to 30 hectares at most in Turkey. 4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered? On the other hand, foreign legal entities can acquire real estate only within the scope of special laws such as the Tourism Incentive Law. Except for public lands (unless there is a right established thereover), all land in Turkey is required to be registered.

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Cadastre. The regulations governing the directorates are the same 4.2 Is there a state guarantee of title? What does it and there are no substantial differences regarding the rules and guarantee? requirements.

The State maintains the land registries and guarantees the accuracy of the information contained therein. Therefore, the State is liable 5.2 Does the land registry issue a physical title document to the owners of registered real estate? for any damages incurred due to errors in the records of the land registers. Yes, the land registry issues a title deed to the owner.

Turkey 4.3 What rights in land are compulsorily registrable? What (if any) is the consequence of non-registration? 5.3 Can any transaction relating to registered real estate be completed electronically? What documents need to be provided to the land registry for the registration In rem rights such as ownership, easements and mortgage are of ownership right? Can information on ownership of required to be registered. Such rights cannot be established and are registered real estate be accessed electronically? deemed void without registration. It is not possible to complete a transaction related to real estate 4.4 What rights in land are not required to be registered? electronically. For registration of a ownership right, the land registries require a Registration of rights other than in rem rights is not compulsory. document showing identity (i.e. an identity card or a passport), a special power of attorney in case a party is represented by a proxy, photos for real persons, mandatory earthquake insurance for 4.5 Where there are both unregistered and registered land buildings and a document stating the real estate tax basis which is or rights is there a probationary period following first obtained from the relevant municipalities. registration or are there perhaps different classes or qualities of title on first registration? Please give Electronic access to information on ownership of a real estate is details. First registration means the occasion upon available for some public institutions and State-owned companies, which unregistered land or rights are first registered whereas it is generally not available for other persons or companies. in the registries.

There is no probationary period in Turkey. Nevertheless, for 5.4 Can compensation be claimed from the registry/ registries if it/they make a mistake? unregistered lands, provisional registration is possible.

Yes. The State is liable to compensate damages incurred due to 4.6 On a land sale, when is title (or ownership) transferred mistakes in the land registries. to the buyer?

On land sales, the title is only transferred upon registration in the 5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he land registry. might reasonably need regarding encumbrances and other rights affecting real estate? 4.7 Please briefly describe how some rights obtain priority over other rights. Do earlier rights defeat later Even though in principle the information on the land registries is rights? open to every person who proves a legitimate interest, in practice the land registries do not generally allow third parties to access the Rights in rem (“RiR”), except the right of ownership, have priority information. In practice, buyers usually obtain the information on over those established later. Therefore, the principle of “earlier encumbrances by requesting the seller to obtain a document showing rights defeat later rights” is applicable regarding RiR. the encumbrances on the title from the land registry. With regards to the mortgage, the priority is determined based on their assigned rank. For example, a mortgage established later 6 Real Estate Market but assigned to a higher rank would defeat a mortgage which was established earlier but assigned to a lower rank. As for priority between the mortgage and RiR, if the rank of 6.1 Which parties (in addition to the buyer and seller mortgage is reserved earlier (even though the mortgage itself is not and the buyer’s finance provider) would normally be involved in a real estate transaction in your yet established), the mortgage will have priority over RiR. jurisdiction? Please briefly describe their roles and/or duties. 5 The Registry / Registries Real estate agents and appraisers are usually involved in real estate transactions. 5.1 How many land registries operate in your jurisdiction? If more than one please specify their differing rules and requirements. 6.2 How and on what basis are these persons remunerated?

In Turkey, there are 970 land registry directorates and 81 cadastre Real estate agents are usually remunerated by the buyer based directorates. These operate under 22 regional units which also on a percentage of the sale price, which is generally around 6%. operate under the General Directorate of Land Registry and Appraisers are paid a fixed fee by the party who hires them.

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6.3 Do you feel there is a noticeable increase in 7.4 Do sellers usually give contractual warranties to the the availability of capital to finance real estate buyer? What would be the scope of these? What is transactions in your jurisdiction, whether equity or the function of warranties (e.g. to apportion risk, to debt? What are the main sources of capital you see give information)? Are warranties a substitute for the active in your market? buyer carrying out his own diligence?

For real estate transactions, it is safe to say that the main source The common warranties are the rightful ownership, absence of of capital is banks, thus leading to debt. However, there were encumbrances or expropriation. These are not a substitute for due successful campaigns for the sale of real estate in large residential diligence but generally function to appropriate the risk to the seller.

projects in 2017. Therefore, the records show that sales increased Turkey in 2017, which were mostly paid by equity, not debt, in contrast to 7.5 Does the seller warrant its ownership in any way? other years. Please give details.

6.4 What is the appetite for investors and developers TCO provides a warranty for quiet enjoyment and unless the buyer in your region to look beyond primary real estate is aware of the risk at the time of the sale, the seller would be liable markets and transact business in secondary or even for the seizure of the title of the real estate due to a claim existing at tertiary markets? Please give examples of significant the time of the sale. secondary or tertiary real estate transactions, if relevant. 7.6 What (if any) are the liabilities of the buyer (in addition to paying the sale price)? The secondary market is very significant in Turkey. As real estate prices constantly increase, transactions in secondary or tertiary The buyer is also usually liable to pay the costs of the sale. markets are still very profitable.

6.5 Have you observed any trends in particular market 8 Finance and Banking sub sectors slowing down in your jurisdiction in terms of their attractiveness to investors/developers? 8.1 Please briefly describe any regulations concerning Please give examples. the lending of money to finance real estate. Are the rules different as between resident and non-resident Even though there has been a slowdown in previous years, through persons and/or between individual persons and successful campaigns in 2017, the attractiveness of housing and corporate entities? construction is a rapidly increasing market, specifically in the Marmara Region. We observe that most of the interest in the real Lending of money is mainly regulated by the Banking Law and estate market in Turkey is from Middle Eastern States. the Regulation on Banking Loans. Moreover, real estate financing for consumers is also regulated under the Law on the Protection of Consumers (“LPC”). Foreigners (resident or non-resident) may also 7 Liabilities of Buyers and Sellers in Real use loans from Turkish banks. Estate Transactions 8.2 What are the main methods by which a real estate lender seeks to protect itself from default by the 7.1 What (if any) are the minimum formalities for the sale borrower? and purchase of real estate?

The main method for security used by the lenders is a mortgage on The sale and purchase of real estate shall be made with an official the real estate. Seeking security through a guarantor is also common. agreement to be signed at the land registry. An appointment is Moreover, almost all loan agreements include acceleration clauses. required from the relevant land registry.

8.3 What are the common proceedings for realisation of 7.2 Is the seller under a duty of disclosure? What matters mortgaged properties? Are there any options for a must be disclosed? mortgagee to realise a mortgaged property without involving court proceedings or the contribution of the There is no direct duty of disclosure for the Seller. However, under mortgagor? TCO, the seller is liable for defects decreasing the value, the use or the expected utility of the real estate (unless such defects would A mortgagee must resort to a court or enforcement office for the have been known upon adequate examination). foreclosure. The most common method is to initiate enforcement proceedings directly, in which the mortgaged property is sold through public auction. The courts may also be involved in these 7.3 Can the seller be liable to the buyer for proceedings if the mortgagor objects to the proceedings. misrepresentation?

Yes, under TCO the seller is liable for misrepresentation. 8.4 What minimum formalities are required for real estate lending?

The borrower should first apply for a loan and sign a loan agreement following the approval. This agreement does not need to be in an official form.

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8.5 How is a real estate lender protected from claims 9.5 What other tax or taxes (if any) are payable by the against the borrower or the real estate asset by other seller on the disposal of a property? creditors? There are none. The receivable of a mortgagee has priority over other receivables. Therefore, the receivable of the lender with a mortgage right will 9.6 Is taxation different if ownership of a company (or have priority in the foreclosure proceedings. In addition to that, other entity) owning real estate is transferred? when a mortgage is registered on real estate, the transfer of the title does not terminate the mortgage right.

Turkey Yes, share transfers are not subject to income tax in case the shares of a joint stock company are held for two years. Moreover, share 8.6 Under what circumstances can security taken by a transfers are not subject to VAT. lender be avoided or rendered unenforceable?

9.7 Are there any tax issues that a buyer of real estate Unless established with an official agreement at the relevant land should always take into consideration/conduct due registry, a mortgage will be deemed void and unenforceable. diligence on? Moreover, in case the mortgage is established over a “matrimonial home”, the lender must obtain the approval of the borrower’s In practice, the seller and buyer usually agree to show the purchase spouse. Otherwise, the mortgage may be rendered unenforceable price to be lower than the actual transaction amount to evade higher by the courts. taxes. In such cases, both parties may face a fine for loss of tax.

8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? 10 Leases of Business Premises

The type of the enforcement proceedings differs according to the type 10.1 Please briefly describe the main laws that regulate of the mortgage obtained. Depending on the type of the enforcement leases of business premises. proceedings, the borrower may object to the proceedings or apply to the enforcement courts only to prove the debt is paid. The main law that regulates the leases of business premises is TCO. Please note that the effectiveness of some provisions under TCO 9 Tax is delayed. The Regulation on Shopping Centres also stipulates special provisions pertaining to leases in shopping centres.

9.1 Are transfers of real estate subject to a transfer tax? 10.2 What types of business lease exist? How much? Who is liable?

Under TCO, there may be three types of business lease agreements Yes, each party must pay a land registry fee of 2% of the purchase ((i) land lease (ordinary), (ii) roofed business lease, and (iii) price. Real estate sale transactions are exempt from stamp duty tax. usufructuary lease), each of which is subject to different rules.

9.2 When is the transfer tax paid? 10.3 What are the typical provisions for leases of business premises in your jurisdiction regarding: (a) length of Transfer tax must be paid before the transaction is made at the term; (b) rent increases; (c) tenant’s right to sell or relevant land registry. sub-lease; (d) insurance; (e) (i) change of control of the tenant; and (ii) transfer of lease as a result of a corporate restructuring (e.g. merger); and (f) repairs? 9.3 Are transfers of real estate by individuals subject to income tax? (a) Length of term is subject to the agreement between the parties. It may be for a specific or unspecific time. For Yes, transfers of real estate are subject to income tax in case (i) the roofed business leases, the agreement is renewed for one year real estate is obtained against remuneration, (ii) the real estate is unless terminated by the tenant 15 days prior to the end of the sold within five years from the acquisition date, and (iii) the gain term. generated from the sale is above TL 11,000.00 (as of 2017). (b) TCO limits the rent increase to the producer price index of the previous year (“PPI”) for roofed business and residential leases. Nevertheless, the effectiveness of this provision is 9.4 Are transfers of real estate subject to VAT? How delayed until July 2020 for roofed business leases. Currently, much? Who is liable? Are there any exemptions? parties may freely agree on the rate of the increase. (c) For roofed business and usufructuary leases, the tenant may Yes, real estate transactions are subject to VAT and the rate is 18%. only sublease with the written consent of the landlord. For However, for certain residential real estates with a net surface area of ordinary leases, the tenant may sublease unless otherwise less than 150 square metres, the VAT rate is 1%. The buyer must pay agreed. the VAT to the seller, who in return must pay it to the tax authority. (d) For roofed business leases, the owner must have mandatory Unless a company is active in real estate business, it would be earthquake insurance. Unless otherwise agreed, the tenant is exempt from VAT depending on certain conditions (i.e. if the real not obliged to have insurance. estate is held for two years). (e) (i) The change of control of the tenant does not affect the lease agreement.

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(ii) In cases such as a merger, as the company’s actives and passives are automatically transferred pursuant to the law, the 11.2 Do the laws differ if the premises are intended for written consent of the landlord is not required. multiple different residential occupiers? (f) The tenant is liable for small repairs, whereas the landlord is liable for large repairs. The tenant may make changes and There are no separate regulations for premises intended for multiple renewals if the landlord consents in writing. tenants.

10.4 What taxes are payable on rent either by the landlord 11.3 What would typical provisions for a lease of or tenant of a business lease? residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the Turkey For business leases, a stamp duty tax (0.189% of the annual rent) tenant’s rights to remain in the premises at the end of the term; and (d) the tenant’s contribution/obligation must be paid. Unless otherwise agreed, parties are jointly liable to the property “costs” e.g. insurance and repair? to pay the stamp duty tax. In case the landlord is a corporate entity, VAT (18%) must be paid by the tenant. If the landlord is an (a) Length of term is subject to the agreement between the individual, the tenant must pay a withholding tax (20%). parties. A lease may be for a specific or unspecific time. (b) TCO limits the rate of rent increases to PPI for residential 10.5 In what circumstances are business leases usually premises leases. terminated (e.g. at expiry, on default, by either party (c) The contract is renewed for one year unless terminated by etc.)? Are there any special provisions allowing a the tenant 15 days prior to the end of the term. Except for tenant to extend or renew the lease or for either party in certain situations, the landlord cannot force the tenant to to be compensated by the other for any reason on leave the premises. termination? (d) Unless otherwise agreed, the tenant does not bear the cost of insurance. He is responsible for small repairs and other costs For roofed business leases, the landlord may only terminate the related to the use of the premises. contract in very limited cases. The tenant may terminate the contract 15 days prior to the end of the term. Unless duly terminated, the contract is renewed for one year. 11.4 Would there be rights for a landlord to terminate a residential lease and what steps would be needed Under TCO, it is prohibited to stipulate provisions to the detriment to achieve vacant possession if the circumstances of the tenant. However, the effectiveness of this provision is delayed existed for the right to be exercised? until July 2020. Currently, it is possible to agree on penalty or compensation clauses for early termination. In the absence of such Landlords’ right to terminate the contract and evacuate the premises agreement, the landlord is entitled to claim a reasonable amount is very limited. Some of these are as follows: (three months’ rent) for the loss of rent. (a) If the contract is renewed for 10 years, the landlord may terminate the contract by notifying the tenant three months 10.6 Does the landlord and/or the tenant of a business prior to the renewal of contract. lease cease to be liable for their respective (b) In case a month’s rent is not paid within 30 days from the obligations under the lease once they have sold their landlord’s written notice, the landlord may terminate the interest? Can they be responsible after the sale in contract and evacuate the premises with a court order. respect of pre-sale non-compliance? (c) In case the rent is not paid two times within a lease year, the landlord may request termination of the lease and evacuation If sold, the new owner of the real estate automatically becomes a of the tenant one month prior to the end of the term. party to the lease agreement. However, the tenant would still be (d) In case the tenant promises in writing to evacuate the premises liable to the old landlord for the rents of the months before the sale. at a specific date, the landlord may request the evacuation one month prior to the end of the term from the court within one month of the promised date. 10.7 Green leases seek to impose obligations on landlords and tenants designed to promote greater (e) In case the new owner needs to use the property for his own sustainable use of buildings and in the reduction of or his next of kin, s/he should notify the tenant within one the “environmental footprint” of a building. Please month of the acquisition and s/he may request the evacuation briefly describe any “green obligations” commonly of the tenant six months from the beginning of the lease or found in leases stating whether these are clearly within one month from the term’s end. defined, enforceable legal obligations or something not amounting to enforceable legal obligations (for example aspirational objectives). 12 Public Law Permits and Obligations

Such obligations are uncommon. 12.1 What are the main laws which govern zoning/ permitting and related matters concerning the use 11 Leases of Residential Premises and occupation of land? Please briefly describe them and include environmental laws.

11.1 Please briefly describe the main laws that regulate The main law governing zoning and use of lands is the Zoning Code. leases of residential premises. The law, in general terms, specifies the conditions of constructing a building or use of land. Moreover, the Bosporus Code regulates The main law that regulates residential leases is TCO. Please note Istanbul’s specified Bosporus area and its surroundings, which that the effectiveness of some provisions under TCO is delayed. provides restrictions regarding construction in the area.

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the approval of the Ministry of Culture and Tourism. Privately 12.2 Can the state force land owners to sell land to it? If owned historical monuments are also subject to certain restrictions so please briefly describe including price mechanism. regarding their use.

Yes, under the Expropriation Code the State and certain governmental bodies may expropriate land owned by private persons. 12.8 How can e.g. a potential buyer obtain reliable information on contamination and pollution of real For regular expropriation, the Code stipulates that the price for estate? Is there a public register of contaminated land expropriation must first be negotiated with the land owner. In case in your jurisdiction? an agreement cannot be reached, governmental bodies will resort to the courts for the determination of the price and registration of the There is no fully operational and reliable public registry system for Turkey target real estate. contaminated lands. However, information on contaminated areas Through an immediate expropriation procedure, governmental may be obtained through the information system of the Ministry of bodies may expropriate the land before price negotiations and Environment and Urbanisation. completion of the procedure. In this case, the courts will determine the expropriation price. 12.9 In what circumstances (if any) is environmental clean- During court proceedings, the expropriation price is always up ever mandatory? determined by experts in related fields. The Environment Code (“EC”) prohibits contaminating the environment and, pursuant to the Code, whoever contaminates the 12.3 Which bodies control land/building use and/or occupation and environmental regulation? How do environment is liable for clean-up and may face administrative fines buyers obtain reliable information on these matters? and imprisonment. The clean-up liability may also arise due to activities such as construction pursuant to the Regulation on Control The Ministry of Environment and Urbanisation is the main body of the Excavation of Soil, Construction, and Demolition Wastes. that controls zoning and use of land. Municipalities, governorships, and other public authorities are also involved in zoning and 12.10 Please briefly outline any regulatory requirements planning. Buyers may obtain information from zoning plans and for the assessment and management of the energy land registries. performance of buildings in your jurisdiction.

The energy performance of buildings is mainly regulated under the 12.4 What main permits or licences are required for building works and/or the use of real estate? Energy Efficiency Code and Regulation on Energy Performance of Buildings. These pieces of legislation require the obtainment of an For building works, a construction licence is required before energy identity card for certain buildings and set forth the rules and construction. When the building’s foundation is constructed, a requirements for the energy efficiency of buildings. surface structure permit must be obtained. Following the completion of construction, a building use permit is required for the lawful use 13 Climate Change of the building.

13.1 Please briefly explain the nature and extent of any 12.5 Are building/use permits and licences commonly regulatory measures for reducing carbon dioxide obtained in your jurisdiction? Can implied permission emissions (including any mandatory emissions be obtained in any way (e.g. by long use)? trading scheme).

Construction permits are commonly obtained. However, application There is no regulation providing direct measures for reducing for building use permits are rejected most of the time due to carbon dioxide emissions under Turkish legislation. incompatibility with construction permits. There is no implied permission. Several regulations have been enacted with regards to greenhouse gas emission levels without setting specific emission targets or limits. These require reporting from specific industrial enterprises or 12.6 What is the appropriate cost of building/use permits factories regarding their emission levels. Although the regulations and the time involved in obtaining them? do not specify any limits, they have developed a monitoring system which is a breakthrough for Turkey. The costs for a building use permit depends on the size of the building and the municipality from which the permit needs to be obtained. Usually, around a 30-day period is required after a 13.2 Are there any national greenhouse gas emissions reduction targets? complete application is made.

Turkey is a party to the Convention on Climate Change and Kyoto 12.7 Are there any regulations on the protection of historic Protocol. In accordance with these agreements, the Regulation on monuments in your jurisdiction? If any, when and how Monitoring Greenhouse Gas Emission Levels was enacted in 2014. are they likely to affect the transfer of rights in real However, this regulation does not specify any emission reduction estate? targets. As part of the Paris Convention, Turkey submitted its first Intended Nationally Determined Contribution (“INDC”), which sets Historic monuments are protected under the Law on Protection of out a plan for the reduction of greenhouse gas emissions by up to Cultural and Natural Properties Code. Historic monuments are 21% by 2030. mostly owned by the State and these may only be transferred upon

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13.3 Are there any other regulatory measures (not already mentioned) which aim to improve the sustainability of both newly constructed and existing buildings?

There are certain regulations which aim to improve the sustainability of buildings and impose energy efficiency requirements such as the Regulation on Building Energy Performance and Regulation on Certification of Sustainability of Green Zones and Premises. Turkey

Göktuğ Can Burul Onur Atakan BKA Attorneys at Law BKA Attorneys at Law Nish İstanbul Residence B Blok, K: 5, D: 58 Nish İstanbul Residence B Blok, K: 5, D: 58 Bahçelievler, Istanbul Bahçelievler, Istanbul Turkey Turkey

Tel: +90 533 717 20 61 Tel: +90 530 220 14 59 Email: [email protected] Email: [email protected] URL: www.bka-law.com URL: www.bka-law.com

Mr. Burul is a partner of BKA Law, mainly focusing on antitrust, Mr. Atakan is a partner of the BKA Law. He successfully graduated corporate law, contracts, real estate law and dispute resolution from the Law Faculty of Istanbul Bilgi University, and focuses on matters. He is admitted to the New York State Bar as well as the administrative law, corporate law, and intellectual property law. He Istanbul Bar. received his LL.M. degree, specialising in international law, from Boston College Law School. Currently, he is continuing his Ph.D. He graduated from Istanbul Bilgi University and holds two LL.M. studies in administrative law at Istanbul Bilgi University. degrees, first in International Business and Economic Law from Georgetown University Law Center and the second in Economic Law Onur Atakan is experienced and specialised in Corporate and from Istanbul Bilgi University. Currently, he is continuing his Ph.D. Business Law, Intellectual Property Law, Labour and Social Security studies at Istanbul Commerce University. Law, Administrative and Tax Law and Contracts Law, particularly franchise, exclusive distributorship and international sale of goods Göktuğ has extensive experience in dispute resolution, mainly in agreements. He has drafted and reviewed various types of franchising complex legal matters related to commercial and real estate law and and distributorship agreements for multinational corporations that has been involved in many projects including construction, excavation, operate mostly in the textile and automotive sectors. transportation, and agriculture. With his proficiency and experience in intellectual property law, he has He also provides legal advice and consultancy services in his area of represented his clients in trademark, patent and copyright conflicts expertise to his clients, which include leading companies in real estate, and has provided consultation for international trademark holders with plastic building materials, organic farming, salt production, industrial regards to the Madrid Protocol and Paris Agreements. products, chemical products, and construction.

BKA Attorneys at Law is a boutique law firm located in Istanbul, Turkey. The firm’s practice mainly focuses on commercial, corporate, real estate, labour law matters and dispute resolution among others. BKA’s clientele includes leading Turkish and international corporations and the firm renders services to its clients with its dynamic and experienced team. The firm aims to be a trusted advisor of its clients as every member of the firm is dedicated to providing outstanding service and desired results. Our main objective is to implement rapid, accurate, up to date, reliable and protective solutions tailored for the needs of our clients in their respective transactions or existing or possible disputes. Keeping the client’s interest paramount, our team’s top priority is to create innovative and effective legal means to fulfil the expectations of our clients.

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United Arab Emirates

BSA Ahmad Bin Hezeem & Associates LLP John Peacock

Law No. 8 of 2007 Concerning Escrow Accounts for Real Estate 1 Real Estate Law Development in the Emirate of Dubai afforded protection for a buyer’s money invested in off-plan sales in developments 1.1 Please briefly describe the main laws that govern under construction; such protections were later reinforced by the real estate in your jurisdiction. Laws relating to introduction of the Interim Property Register in which off-plan sale leases of business premises should be listed in contracts were required to be registered. response to question 10.1. Those relating to zoning Law No. 26 of 2007, amended by Law No. 33 of 2008, regulates and environmental should be listed in response to question 12.1. the relationship between landlords and tenants and affords tenants protection against unscrupulous landlords. The United Arab Emirates (“UAE”) is a federation established in The Direction for Association Constitutions issued in 2010 in 1971 between seven Emirates, namely Abu Dhabi, Ajman, Dubai, accordance with Law No. 27 of 2007 (jointly, the “Strata Laws”) Fujairah, Ras al Khaimah, Sharjah and Umm Al Quwain; all of regulates multi-storey and multi-use property developments. which adopt a free market economy. Law No.13 of 2008 and Law No.14 of 2008 created a framework The UAE legal system is essentially a civil law jurisdiction for the registration of lenders’ pre-mortgage interests on the Interim influenced by Islamic, Roman and French law, and lately bythe Property Register, as well as mortgages on the main Property principles of Egyptian law. Register and mechanisms for the enforcement of the sale of property by public auction. UAE federal law is the law applicable to all of the Emirates; however, each Emirate passes its own legislation regarding mainly Law No. 9 of 2009 (amending Law. No 13 of 2008) introduced administrative issues; such law supplements the federal law. If dispute resolution mechanisms to deal with the process and federal law is silent on an issue, then the provisions of laws issued consequences of the cancellation of any real estate or project on Emirate level prevail, and should there still remain doubt as to development contracts. These provisions were confirmed by the legal position, then Islamic Shariah law is applied. UAE federal Executive Council Resolution No. 6 of 2010. laws also apply to all free zones and investment zones (essentially, Law No. 56 of 2009 established a special tribunal for settling cheque free trade zones offering full ownership to non-UAE nationals of disputes relating to real estate transactions. companies accompanied by a tax-free status), except for the Dubai Law No. 7 of 2013 officially established the Dubai Land Department International Financial Centre (“DIFC”) and the Abu Dhabi Global (“DLD”), initially established by a Declaration in 1960 that Market (“ADGM”), which have their own independent legal established its predecessor, the Tabou (Land) Department. systems and real estate legislation applicable to real estate situate The DIFC has its own real estate laws, based on English Law within these free zones. principles and consists of DIFC Law No. 4 of 2007, known as the The UAE does not have any specific property legislation at federal Real Property Law, and DIFC Law No. 5 of 2007, known as the level and each emirate’s particular real estate laws are promulgated Strata Title Law. The DIFC has its own property register and the at Emirate level by way of laws, decrees and resolutions passed at registration of property transactions for properties situated within various levels of Emirate governance, and resulting in each Emirate the DIFC are dealt with by the DIFC Registrar of Real Property. being discussed separately below. The laws were mainly initiated Emirate of Abu Dhabi: as a result of the federal codes not dealing with the specifics and complexities of real estate transactions which emerged after the Law No. 3 of 2005 initiated the regulation of the real estate market opening up of the real estate market to foreigners in the UAE. in Abu Dhabi by establishing a Land Registration Department at the Abu Dhabi and Al Ain Municipalities and requiring that every Emirate of Dubai: deed creating, transferring or extinguishing real property rights In Dubai, the legislative framework relating to real estate developed (including leases with a term exceeding four years) be registered existentially between 2002 and 2010. With the creation of Dubai’s and without which any transaction would be void. Real Estate Regulatory Agency (“RERA”) in 2007 by Law No. 7 of Law No. 19 of 2005 (later amended by Law No. 2 of 2007) 2006, and Law No. 16 of 2007, a strong regulatory authority was introduced provisions relating to ownership, development, created. Regulation No. 3 of 2006 determined the designated areas in leasing and mortgaging of land and real estate in Abu Dhabi and Dubai where real estate can be owned by non-UAE nationals. differentiated between the rights of UAE, Gulf Community Council Bylaw No. 85 of 2006 regulated the operation and regulated the real (“GCC”) and non-UAE/GCC nationals. This law also introduced the estate broker industry.

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creation of “investment zones” in which GCC and non-UAE/GCC Amiri Decree No. 15 of 2006 permits the registration of mortgages nationals were entitled to own real property rights and specifically by way of security over long-term leases (i.e. leases with a term excluded ownership rights to land for non-UAE nationals. exceeding 20 years) in a “Temporary Register” in the Ras Al Executive Council Resolution No. 64 set out specific directions Khaimah Lands Department. regarding the registration of ownership rights (including the Amiri Decree No. 22 of 2008 established the system for the sale of registration of long term leases) and directions to issue registration off-plan properties and of “Guarantee Accounts” similar to escrow certificates (title deeds) to non-UAE nationals for property rights accounts. It became compulsory for developers who sell off-plan located within the “investment zones”. It further dealt with the properties to be registered on the Real Estate Developers Register registration of property rights in respect of property located outside and to obtain permission/licence for all development projects. the “investment zones” and the registration of mortgages over Emirate of Ajman: property and property rights, both inside or outside the “investment Amiri Decree No. 7 of 2008 was introduced to permit UAE and zones”. GCC nationals (and companies/entities owned wholly by them), Law No. (3) of 2015 introduced strata laws in Abu Dhabi and together with public joint stock companies incorporated in the UAE United Arab Emirates established the requirements for new developments and projects and public corporations and authorities incorporated in Ajman) to and to protect the interests of investors. This law mandated the own a freehold right over land in Ajman. Non-UAE nationals are establishment of escrow accounts and lead to the establishment of only entitled to own a right of freehold or usufruct, including long real estate registers for developers, projects and interests therein, leases, for a term of 50 years, with the approval of the Ruler of including an ‘interim’ real estate register for off-plan sales. The law Ajman. also established the decennial (10-year) liability on the developer Amiri Decree No. (8) of 2008 requires all developers in Ajman for the structural integrity of a building. to register as such with the Ajman Land Department, and to open The Abu Dhabi Global Market (“ADGM”) is a financial free zone, an escrow account for the development project and also regulates established on similar principles as the DIFC, whose geographic the constitution of jointly-owned properties and common areas area of Al Maryah Island is governed by both property regulations within such property. Local Order No. 4 of 2008 contains further and strata title regulations. requirements for, and restrictions on, developers protecting There is, however, still minimal legislation and regulations regarding interested parties and even the previous owner of the development property rights within the “investment zones”, and although the laws property. have established legal principles, they do not yet have sufficient The Ajman Real Estate Regulatory Authority (“ARRA”) was enforcement provisions. established in 2008. Emirate of Sharjah: Emirate of Umm Al Quwain: Through Law No. 10 of 1972 and its implementing regulations, By way of Law No. 3 of 2006, UAE and GCC nationals and public Sharjah established a real estate registration office which allowed joint stock companies are allowed to own real estate property for UAE nationals to own property in Sharjah. Exceptions were anywhere in the Emirate. Non-UAE nationals were granted the permitted only with the Ruler’s approval. right to own “floors” without ownership of the land in terms of a Law No. 4 of 1980 regulates ownership of multi-storey buildings 99-year usufruct right or a 50-year “musataha” right (similar to which provided an early concept of strata ownership. Amiri Decree usufruct right but with development rights) in designated investment No. 1 in 1981 further regulated the rights and obligations of owners areas. in multi-owned buildings and provided for the formation of co- Law No. 3 of 2007 prevents any developer from carrying out owners’ associations. real estate development unless it is registered in the Developers’ Law No. 5 of 2010 Concerning Real Estate Registration and Register at the Survey and Planning Department in Umm Al Executive Council Decisions No. 32 and No. 38 of 2005 extended Quwain. A developer may also only sell units off-plan after the scope of Law No. 10 of 1972, thereby permitting GCC nationals applying to open a “Guarantee Account” in the name of the project, the right of ownership of property in Sharjah. to receive funds which are to be used exclusively for the purposes of In terms of Executive Council Resolution No. 26 of 2014, the sale construction. of usufruct rights was permitted, and non-UAE/GCC nationals were Emirate of Al Fujairah: permitted to purchase real estate through a usufruct property right There are no specific laws regarding property registration and for a maximum period of 100 years, which right may be assigned ownership in the Emirate of Fujairah and the provisions of the Civil to a third party subject to the approval of the Sharjah Real Estate Code, along with the instructions of the Ruler, prevail in respect of Registration Authority. This law also opened the real estate market the real estate sector. There is only one type of freehold property that to non-UAE nationals through what is essentially a long-term non-UAE nationals can own and a few areas, such as the Fujairah leasehold arrangement. Free Zone, where long-term leases are available. Emirate of Ras Al Khaimah: It can be seen that the real estate laws are somewhat scant and that A 2003 law introduced the concept of ownership of apartments there is no one comprehensive statute regulating the real estate and floors in multi-owned buildings and provided a system of industry in the UAE. registration of strata ownership of apartments and floors within a building. Decision No. 20 of 2005 provided that UAE and GCC 1.2 What is the impact (if any) on real estate of local nationals could own property in all areas of Ras Al Khaimah and common law in your jurisdiction? this was expanded to non-UAE nationals by Decision No. 12 of 2007, which specifically allowed non-UAE nationals and corporate As explained in question 1.1 above, the UAE is a civil law bodies owned by them to own freehold title to property in certain jurisdiction, and common law has no impact on real estate law in “investment projects” such as those owned by RAKIA, Al Hamra the UAE. and Rakeen.

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for a specific duration, but for a maximum of 50 years. The 1.3 Are international laws relevant to real estate in your musataha has the same principles as that of a usufruct, but jurisdiction? Please ignore EU legislation enacted grants an additional development right to the holder. The locally in EU countries. musataha holder has the right to assign or transfer the right along with any improvements to a third party. Termination of There are no international laws that specifically apply to real estate the musataha occurs upon the expiry of the period as agreed in the UAE. between the parties or when the holder buys the property over which the musataha right is held. Two years’ notice may also be given, or the right can be terminated in the event that 2 Ownership the musataha holder does not make an agreed payment for a period of two years. (5) Use and Residence Rights: The UAE Civil Code provides 2.1 Are there legal restrictions on ownership of real estate for “use and residence” rights, and states that the rules of by particular classes of persons (e.g. non-resident usufruct would apply to such rights. persons)? United Arab Emirates (6) Easements: An easement is a right by one party over the property of another and is usually registerable against the title Generally, only UAE and GCC nationals (and companies owned deed of the property, and includes rights to traverse property 100% by them) are permitted to own property throughout the UAE, or receive the supply of utilities over the property of another. and non-UAE nationals (including non-residents) can acquire the same ownership rights in “designated areas” or within “investment 3.2 Are there any scenarios where the right to a zones” as determined by each Emirate’s government or Ruler. real estate diverges from the right to a building constructed thereon? 3 Real Estate Rights Yes, in addition to the concept of musataha discussed above, due to the restrictions on commercial activities, owners of real estate who 3.1 What are the types of rights over land recognised in do not have the authority to conduct business as a developer would your jurisdiction? Are any of them purely contractual enter into a developer agreement with a licensed developer, whereby between the parties? the developer is granted development rights to the property and the right to sell the individual units within the development as provided The UAE Civil Code and various Emirate laws provide for various in the development agreement. The title to the land continues to types of tenure as follows: vest in the owner; however, the transfer of the development right is (1) Freehold/Ownership Rights: Freehold title of real estate is the registered at the DLD against payment of a transfer registration fee. most superior form of property right, and allows its owner to enjoy and occupy the property in perpetuity and such right is evidenced by the issue of a title deed by the relevant 3.3 Is there a split between legal title and beneficial title Emirate’s Land Department. in your jurisdiction and what are the registration consequences of any split? (2) Leasehold Rights: With leasehold property, “ownership” rights to the property are available to the tenant only for the length of the lease agreement with the freehold owner of There is no split between legal title and beneficial title in the UAE that real estate. With the regulatory registration of leases, with regard to real estate. leaseholders’ rights were elevated from mere contractual rights to rights in rem, allowing the holder of a registered right to deal with property, to a great extent, as a freehold 4 System of Registration owner would, including the ability to mortgage the leased property. The periods categorising leases requiring registration differ between Emirates. The same provisions 4.1 Is all land in your jurisdiction required to be regarding “designated areas” and “investment zones” will registered? What land (or rights) are unregistered? also determine the ability to register leases by non-UAE nationals; however, the contractual obligations between the Yes, all non-testamentary documents which create, declare, assign, parties are not extinguished merely by virtue of the fact that limit or extinguish any right, title or interest to or in any immovable the lease is not registered. There are provisions relating to property are subject to compulsory registration with the relevant the registration of short-term leases on simple registers held Emirate’s Land Registry, in accordance with the laws of the within the various Emirates, such as the “Ejari” system respective Emirate. All testamentary documents are registered with maintained by the RERA in Dubai. the notary public as per the relevant UAE laws. (3) Usufructuary Rights: Usufructs are where the right to use, enjoy and occupy a property is given by the property owner to another person for a fixed period not exceeding 4.2 Is there a state guarantee of title? What does it 99 years. The UAE Civil Code adds to the definition of a guarantee? usufruct the condition that the property subject to the usufruct “must remain in its original condition”, thus transferring There is no state guarantee of title in the UAE. the onus for repairs and maintenance to the holder of the usufruct. Usufructs terminate upon expiry of the term, unless otherwise agreed by the parties or terminated as a result of the 4.3 What rights in land are compulsorily registrable? destruction of the property or by court order due to misuse by What (if any) is the consequence of non-registration? the usufructuary. (4) Musataha Right: A holder of a musataha right has the right All rights in land are compulsorily registrable as stated in question to plant on the land of another or to build on the land and 4.1 and certain transactions, if not registered, shall be void. There thereafter the right holder owns all such buildings on the land are no penalties for non-registration.

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4.4 What rights in land are not required to be registered? 5.3 Can any transaction relating to registered real estate be completed electronically? What documents need As explained in question 4.1, all rights over land are required to be to be provided to the land registry for the registration of ownership right? Can information on ownership of registered, with the exception of certain grants provided by the UAE registered real estate be accessed electronically? government to certain businesses or industries that may not require registration; however, such grants will be regulated by statute. No; transactions relating to registered real estate cannot be completed electronically and must be executed in person. Apart 4.5 Where there are both unregistered and registered land from the provision of a valid proof of identity, such as a passport or rights is there a probationary period following first or UAE residency identity card of the parties involved and proof of registration or are there perhaps different classes residential address, document requirements differ between Emirates. or qualities of title on first registration? Please give Some Emirates require “short form sale agreements” in a standard details. First registration means the occasion upon which unregistered land or rights are first registered format and the documents are usually in Arabic or bifurcated into United Arab Emirates in the registries. Arabic and English. Information on ownership of registered real estate cannot be accessed electronically. Registered land rights will always prevail over unregistered land rights, and there is no probationary period following first registration 5.4 Can compensation be claimed from the registry/ of a title. registries if it/they make a mistake?

4.6 On a land sale, when is title (or ownership) transferred It is possible to challenge the validity of information in the various to the buyer? property registers on the grounds of fraud or forgery. In the event that a party has suffered loss as a result of an error within the land On a land sale, title (or ownership) is transferred to the buyer registry by reason of fraud or forgery, they will be entitled to certain upon registration of conveyance with the relevant Emirate’s land compensation; however, this is not legislated, except in the DIFC, department. where it may be possible to claim compensation for mistakes made by the DIFC Registrar of Real Property.

4.7 Please briefly describe how some rights obtain priority over other rights. Do earlier rights defeat later 5.5 Are there restrictions on public access to the rights? register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and other rights affecting real estate? In accordance with the UAE Civil Code, property rights must be registered in order to be effective and shall rank in priority according No, there are no public land registers in the UAE and so a buyer to the time of registration. is forced to complete extensive due diligence for any information about encumbrances and other rights affecting the real estate 5 The Registry / Registries property.

5.1 How many land registries operate in your jurisdiction? 6 Real Estate Market If more than one please specify their differing rules and requirements. 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally Each of the seven Emirates have their own property registry and be involved in a real estate transaction in your register the transactions in the relevant Emirate on their own jurisdiction? Please briefly describe their roles and/or electronic registration systems. In addition, the DIFC and ADGM duties. have their own property registers, independent from the land registries of the Emirate within which they are situated. It follows Apart from the buyer, seller and buyer’s finance provider, possible that each Emirate and certain free zones within these Emirates parties that may join as a confirming party to a real estate transaction have established separate rules and requirements pertaining to the may include parties holding beneficial rights or family inheritance process to be followed for the registration of real estate transactions; rights. however, generally, the procedures follow the same format with the Generally, the below-mentioned parties are also commonly involved signing in person of the conveyancing documentation at the relevant in real estate transactions: registry and only the supplementary documentation in support of the transaction differing. (1) Real Estate Brokers: Brokers act as intermediaries that introduce buyers and sellers and assist in processing the transaction. 5.2 Does the land registry issue a physical title document (2) Lawyers: Buyers and sellers generally engage lawyers to, to the owners of registered real estate? on behalf of the buyer, conduct a title due diligence and for both parties to draft, negotiate and finalise the transactional Yes, the relevant land department issues a physical title document documentation and advise their respective clients on matters to the owners of the registered real estate in all cases except for the relating to the transaction. holder of a musataha right, which is merely registered against the title deed and no separate title is issued.

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agreement (as prescribed by the various land registries) and the 6.2 How and on what basis are these persons registration thereof in the relevant land registry. remunerated?

There are no specific provisions regulating real estate brokers’ or 7.2 Is the seller under a duty of disclosure? What matters must be disclosed? lawyers’ fees within the UAE. Brokers are usually remunerated based on a fixed fee basis, payable by the appointing party, unless otherwise agreed and which may be determined on the basis of Yes, the seller is obliged to disclose any material defect in the “prevailing practice” dependent on the type of transaction and the property or in the seller’s title of which the seller is aware and the transaction value. buyer would not be capable of discovering with mere ordinary care. Fees chargeable by lawyers depend on the nature of the work done and the seniority of the lawyer attending to the matter, and may be 7.3 Can the seller be liable to the buyer for charged hourly or may be in the form of capped fees as agreed with misrepresentation?

United Arab Emirates the lawyer. A seller can be liable to the buyer for misrepresentation in the UAE.

6.3 Do you feel there is a noticeable increase in the availability of capital to finance real estate 7.4 Do sellers usually give contractual warranties to the transactions in your jurisdiction, whether equity or buyer? What would be the scope of these? What is debt? What are the main sources of capital you see the function of warranties (e.g. to apportion risk, to active in your market? give information)? Are warranties a substitute for the buyer carrying out his own diligence? There has not been a noticeable increase in availability of capital to finance real estate transactions within the UAE recently. The main Although not specifically stated within the standard format sale active sources of capital are primarily personal or private equity (not agreements, representations and warranties are given contractually institutional). Mortgage financing has been on the rise in recent years. to the buyer by the seller by way of a comprehensive sale contract. Typically, the seller warrants that it is the sole and beneficial owner of and is well and sufficiently entitled to alienate the property 6.4 What is the appetite for investors and developers without encumbrances, or that it holds full rights to the property. in your region to look beyond primary real estate markets and transact business in secondary or even Warranties are mainly included to limit the buyer’s risk as property tertiary markets? Please give examples of significant searches, in the traditional sense, are unavailable without the seller’s secondary or tertiary real estate transactions, if consent; the buyer is expected to carry out its own due diligence relevant. before committing to the purchase. Some of the land registries have an electronic search mechanism to see if the developer, the project The appetite for investors and developers in the UAE to look beyond and the units are registered; however, no further information is primary real estate markets and transact business in secondary/ generally available. Accordingly, the warranties are not a substitute tertiary markets is on the rise. As an example, within Dubai, demand for a due diligence. is increasing in markets such as Dubai International City, Silicon Oasis, Dubai Sports City, and Dubai South, unlike in Downtown 7.5 Does the seller warrant its ownership in any way? Dubai (a primary market) due to higher yield expectations by Please give details. investors and developers. Similar activity can also be seen in a number of the other Emirates. Yes, as explained in question 7.4, except for the standard format sale contracts, sale contracts in the UAE almost always contain a specific 6.5 Have you observed any trends in particular market warranty from the seller on his title to the property and will pass sub sectors slowing down in your jurisdiction in such right free of encumbrances. terms of their attractiveness to investors/developers? Please give examples. 7.6 What (if any) are the liabilities of the buyer (in addition to paying the sale price)? There have been periods of decelerated activity in certain real estate market sub-sectors. Retail has slowed down due to lower consumer In addition to the property purchase price, the buyer will pay the expenditure and there has also been a lower volume of sale registration fees to the relevant land department. In this regard, transactions in certain prime locations for residential developments according to the laws, both the seller and the buyer are liable for due to lower investment sentiments. Moreover, although the hotel this payment, unless otherwise agreed by them. The buyer will also market maintains high occupancies, daily rates have decreased due pay the fees of the Registration Trustees (authorised representatives to an increase in supply of quality hotels. that electronically process the registrations on behalf of the land registries), the cost for the issue of the title deeds and the costs for 7 Liabilities of Buyers and Sellers in Real the issue of no-objection certificates (“NOCs”) payable to any home Estate Transactions owner’s association, developer or master developer.

7.1 What (if any) are the minimum formalities for the sale and purchase of real estate?

The minimum formalities for the sale and purchase of real estate in the UAE are the signature of a standard format sale and purchase

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8 Finance and Banking 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other creditors? 8.1 Please briefly describe any regulations concerning the lending of money to finance real estate. Are the rules different as between resident and non-resident The real estate lender is protected against claims from other creditors persons and/or between individual persons and of the borrower by virtue of the mortgage being a first charge against corporate entities? the property at execution. The security of mortgage bonds ranks in the order of registration. Mortgages are restricted to banks registered within the UAE, licensed to conduct the activity of mortgage lending by the UAE 8.6 Under what circumstances can security taken by a Central Bank, and subject to the rules and regulations imposed by lender be avoided or rendered unenforceable? them. Depending on the relevant Emirate, there are regulations that determine maximum loan to purchase prices percentages and Due to both, the strict monitoring of the mortgage registration United Arab Emirates maximum repayment to income percentages. These percentages process, mortgages are absolute and unchallengeable. also differ between first and subsequent properties. There isno distinction between residents and non-residents or individuals or corporate entities; however, there is a distinction between the loan 8.7 What actions, if any, can a borrower take to frustrate enforcement action by a lender? percentages available to UAE and non-UAE lenders.

The only actions available to a borrower to frustrate enforcement is 8.2 What are the main methods by which a real estate by court process. lender seeks to protect itself from default by the borrower? 9 Tax Under UAE law, security can either be by way of mortgage or pledge (which may be used over bank accounts and shares). It is customary for real estate lenders to ask borrowers to create a mortgage, put 9.1 Are transfers of real estate subject to a transfer tax? into effect pursuant to an authenticated deed which is attested by How much? Who is liable? the notary public and entered in the mortgage registrar with the land department or local municipality of the relevant Emirate. A There are no specific tax regulations applied in the UAE relating to mortgage is the only form of security over real estate in practice, real estate. However, transfers of real estate are subject to a transfer and can be created over leasehold property and an interest in an registration fee, with the rate varying between Emirates. In the off-plan property, provided the interest has been registered in the absence of any agreement between the parties, the buyer and the relevant Emirate’s off-plan sale register. UAE law does not provide seller are responsible equally for this amount. The standard rate is for security in the form of a floating charge. Mortgage interests in 4% of the value of the property or the transaction value, whichever land in free zones are generally also subject to their own regulations. is the greater.

8.3 What are the common proceedings for realisation of 9.2 When is the transfer tax paid? mortgaged properties? Are there any options for a mortgagee to realise a mortgaged property without With reference to question 9.1, the transfer registration fee is involving court proceedings or the contribution of the payable on registration; however, in certain registries, a penalty is mortgagor? payable in the event that the payment is not made within 28 days of the date of the sale contract. There are no statutory rights of enforcement or foreclosure remedies available under UAE law, which means that any enforcement must be undertaken through the courts (a mortgagee cannot exercise self- 9.3 Are transfers of real estate by individuals subject to help remedies and be a mortgagee in possession). income tax? If the court orders enforcement of the mortgage, it will organise the sale of the land by public auction. The sale proceeds will be Individuals in the UAE are not subject to income tax, however may distributed among the creditors in the order of priority set out under have capital gains tax implications applied in their home jurisdiction, UAE law: preferential debts (such as judicial costs of preserving and depending on their nationality. selling the property, government taxes (if any), employees’ salaries, lessors’ rental payments, and amounts due to contractors), secured 9.4 Are transfers of real estate subject to VAT? How creditors (such as mortgages) and then unsecured creditors (such as much? Who is liable? Are there any exemptions? judgment creditors). Currently, there is no VAT or stamp duty payable on real estate in 8.4 What minimum formalities are required for real estate the UAE, however VAT is to be introduced on 1 January 2018 at a lending? rate of 5%. Although the entire UAE VAT law is not available as at time of this publication, from the published provisions, developers Essentially, the mortgage lender may not lend in excess of the loan to will not have to charge VAT on the first disposition, either on sale purchase price or the repayment to income percentages as legislated, or lease, of a residential property as these transactions will be and the mortgage must be registered by the mortgage lender and the zero rated for VAT. Second sales of residential properties will be buyer in the registry of the relevant land department. treated as exempt supplies, however commercial properties sales will attract VAT at the standard rate of 5% as from 1 January 2018.

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The Executive Regulations to Federal Decree Law No (8) of 2017 (c) Tenant’s right to sell or sub-lease – With long-term leases, on Value Added Tax, once published, will clarify the application of if the lease is registered in the relevant Property Register, VAT on both residential and business real estate more fully. the lessee has the right in rem to assign the leasehold rights or sub-lease the premises after receiving written approval from the lessor. However, in the case of short-term leases 9.5 What other tax or taxes (if any) are payable by the or premises given on a licensed basis, the tenant/licensee seller on the disposal of a property? is generally not permitted to create any third party rights in respect of the premises without written consent. No taxes are payable by the seller on the disposal of a property. (d) Insurance – There are no statutory provisions regulating the insurance of leased premises. The onus of insuring the business premises varies depending on the terms of the 9.6 Is taxation different if ownership of a company (or contract between the lessor and lessee. However, if such other entity) owning real estate is transferred? provisions are not explicit in the contract, it is by default the lessor’s responsibility to insure the property. Commercial

United Arab Emirates Please refer to question 9.1. leases also generally enable the landlord to recover insurance costs from the tenant.

9.7 Are there any tax issues that a buyer of real estate (e) (i) Change of control of the tenant – Lease agreements should always take into consideration/conduct due generally contain provisions whereby the change of control diligence on? of the tenant may not occur without the landlord’s written consent, and in the event of failure to do so, the landlord will have a right to terminate the lease. Please refer to questions 9.1 and 9.4. (ii) Transfer of lease as a result of a corporate restructuring (e.g. merger) – As with the change of control of the tenant, 10 Leases of Business Premises information about a transfer of the lease as a result of corporate restructuring will have to be given to the landlord to obtain consent. 10.1 Please briefly describe the main laws that regulate (f) Repairs – Generally, minor repairs or adjustments to the leases of business premises. business premises will be done at the tenant’s expense after receiving the landlord’s written consent. However, the There are no separate laws governing leasing for commercial, landlord should be informed of major structural repairs and residential or industrial properties in the UAE, and a standard they should be executed within a specified period. format lease exists for all these types of properties. 10.4 What taxes are payable on rent either by the landlord or tenant of a business lease? 10.2 What types of business lease exist?

There are currently no taxes payable on rent either by the landlord or It is common for businesses to lease premises to conduct their tenant of a business lease, however as of 1 January 2018 all business operations; however, there are also other forms of occupancy leases will attract VAT at a rate of 5%, charged by the landlord to methods which include space usage agreements, licences and tenants of commercial premises. consignment agreements. The type of agreement varies depending on the location of the premises and the purpose for which the premises is required. These do not create any transfer of title in 10.5 In what circumstances are business leases usually favour of the occupant and are generally not registrable. terminated (e.g. at expiry, on default, by either party etc.)? Are there any special provisions allowing a tenant to extend or renew the lease or for either party 10.3 What are the typical provisions for leases of business to be compensated by the other for any reason on premises in your jurisdiction regarding: (a) length of termination? term; (b) rent increases; (c) tenant’s right to sell or sub-lease; (d) insurance; (e) (i) change of control of Business leases may be terminated by consent of the parties at any the tenant; and (ii) transfer of lease as a result of a corporate restructuring (e.g. merger); and (f) repairs? time during the lease, or by notice to the other party prior to expiry of the specified period of the lease, subject to certain notice periods (a) Lengths of Term – Business premises are generally leased and grounds given therefor. Notice for eviction in the case of default for a term of five to 10 years, although it may be shorter requires 30 days and can be delivered at any time during the lease depending on the agreement with the lessor. Leases are period; however, in the absence of default, landlords can only regain automatically renewed in the event that notice is not given by possession after notice giving grounds limited to reoccupation the parties. thereof by the landlord for personal use, for purposes of sale by the (b) Rent increases – Business premises are subject to annual landlord and for purposes of demolition or renovation as may be rent increases as provided for in the relevant contract. In required by the relevant municipal authorities and given at least 12 the absence of any agreement in the lease, rent increases months before the eviction date on condition that the eviction date is on renewals are calculated according to a Rental Increase not within the current lease term. Index Calculator (such as that maintained by RERA), and In most Emirates, leases are subject to automatic renewal and the amount of rent increase depends on the tenancy contract expiry date, the location of the premises, the type of premises, a tenant has the right to compensation for breach of the above the extent of the premises, and the current annual rent. provisions.

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relevant contract. In the absence of any agreement in the lease, 10.6 Does the landlord and/or the tenant of a business rent increases on renewals are calculated according to a Rental lease cease to be liable for their respective Increase Index Calculator (such as that maintained by RERA), obligations under the lease once they have sold their and the amount of rent increase depends on the tenancy contract interest? Can they be responsible after the sale in expiry date, the location of the premises, the type of premises, respect of pre-sale non-compliance? the extent of the premises, and the current annual rent. (c) Tenant’s right to remain in the premises at the end of the term The obligations of a landlord pass to any landlord taking the previous – As previously mentioned, leases are automatically renewed landlord’s place as in the case of any subsequent owner of a property, and rental increases are subject to the allowable increase and a tenant’s obligations only ceases on termination or expiry of allowed in terms of the Rental Increase Index Calculator. the lease period. The sale by a tenant of its interest does not release (d) A tenant’s contribution towards costs (insurance and repairs) the tenant from the obligations under a lease without the consent of – There are no statutory provisions regulating the insurance the landlord. Furthermore, parties also remain responsible for acts of leased premises. The onus of insuring the residential and omissions in the performance of their obligations committed to premises is typically paid by the landlord, who is also

responsible for repairs and maintenance of the residential United Arab Emirates prior to such sale and transfer. unit. There is, however, a usual provision that places the burden on the tenant to effect minor repairs. 10.7 Green leases seek to impose obligations on landlords and tenants designed to promote greater 11.4 Would there be rights for a landlord to terminate a sustainable use of buildings and in the reduction of residential lease and what steps would be needed the “environmental footprint” of a building. Please to achieve vacant possession if the circumstances briefly describe any “green obligations” commonly existed for the right to be exercised? found in leases stating whether these are clearly defined, enforceable legal obligations or something not amounting to enforceable legal obligations (for A landlord is obliged to give a tenant one year notice to vacate the example aspirational objectives). premises and this notice can only be given: (i) in the event that the landlord wishes to himself (or have close “Green obligations” are rarely found in lease agreements executed family) occupy the premises; in the UAE, and unless contractually specified between the landlord (ii) in the event of a sale by the landlord; and and tenant they do not amount to enforceable legal obligations. (iii) for purposes of demolition or renovation (however, also subject to certain provisions – see question 10.5). 11 Leases of Residential Premises The landlord may terminate the lease on the grounds of any breach of the terms thereof after giving notice to the tenant to remedy the breach in accordance with the terms of the tenancy agreement. 11.1 Please briefly describe the main laws that regulate Should the tenant not vacate the premises after notice has been given leases of residential premises. or failure to remedy a breach of the tenancy agreement, the landlord has the right to approach any rent committee appointed to adjudicate Each Emirate of the United Arab Emirates has its own real estate laws rental disputes or to approach the relevant court with appropriate pertaining to the regulation of residential premises. In the Emirate jurisdiction to obtain and order for eviction. of Dubai, Law No 26 of 2007 Regulating the Relationship between Landlords and Tenants in the Emirate of Dubai, Law No 33 of 2008 Amending Law No 26 of 2007 Regulating the Relationship between 12 Public Law Permits and Obligations Landlords and Tenants and Decree No 43 of 2013 Determining Rent Increases for Real Property in the Emirate of Dubai govern the regulation of residential premises. In the Emirate of Abu Dhabi, there 12.1 What are the main laws which govern zoning/ is only Law No 19 of 2005 that deals with leasing. The other emirates permitting and related matters concerning the use and occupation of land? Please briefly describe them have no law dealing directly with leasing of residential real estate. and include environmental laws.

11.2 Do the laws differ if the premises are intended for Each Emirate enacts its own laws to govern zoning and related multiple different residential occupiers? matters concerning the use and occupation of land and prior to development of any new project, both planning and building No, the same laws apply. approval from the relevant municipal authority is required. Free zone authorities also impose additional planning controls in relation to real estate in their areas. 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: Several Emirates have enacted municipal regulations such as that (a) length of term; (b) rent increases/controls; (c) the in Dubai, where the Dubai Municipality issued “Green Building tenant’s rights to remain in the premises at the end of Regulations and Specifications” to be met by governing bodies and the term; and (d) the tenant’s contribution/obligation private developers, applicable to all new buildings and to extensions or to the property “costs” e.g. insurance and repair? renovations to existing buildings in Dubai (including free zones) with the aim of: reducing the consumption of energy, water and materials; Typical provisions would include the following; improving public health, safety and general welfare; and enhancing (a) Lengths of term – Residential premises are generally leased for the planning, design, construction and operation of buildings. The a term of one year; however they are automatically renewed specifications that must be complied with include those relating to: in the event that notice is not given by the parties. ■ access and mobility (including parking and bicycle storage); (b) Rent increases – Residential premises (as for business premises) ■ ecology and landscaping (including the requirement to are subject to annual rent increases as provided for in the include indigenous plants in planted areas);

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■ light pollution restrictions; commonly obtained in the UAE and implied permission cannot be ■ solar reflection requirements for the exterior of buildings; obtained in any way. ■ responsible construction methods; ■ having an Environmental Impact Assessment (applicable to 12.6 What is the appropriate cost of building/use permits certain buildings only); and the time involved in obtaining them? ■ building vitality (including air quality and ventilation) – in accordance with the standards of the American Society of The cost of building use/permits and the time involved in obtaining Heating, Refrigerating and Air-Conditioning Engineers, and them depends heavily on the size and scope of the project and the in part refers also to various UK codes of practice; activities to be carried out. Therefore, it is not possible to make a ■ energy performance (including glazing and lighting, precise estimate of the same. electricity and air-conditioning metering and particular requirements for hotel rooms) – in part, this refers to the standard of the Chartered Institution of Building Services 12.7 Are there any regulations on the protection of historic monuments in your jurisdiction? If any, when and how United Arab Emirates Engineers; are they likely to affect the transfer of rights in real ■ water performance (including conservation and metering); and estate? ■ materials and waste (including a requirement that for all new buildings at least 5% of the total volumes of materials Currently, minimal regulations exist at the federal level for the used must be recycled and 5% of all material used must be protection of historic monuments in the UAE. However, the available regionally). federal government is in the process of drafting a federal law for the protection of antiquities, which are to be defined as items of national 12.2 Can the state force land owners to sell land to it? If interest and importance and which include historical monuments. so please briefly describe including price mechanism.

12.8 How can e.g. a potential buyer obtain reliable Local and state authorities expropriate real estate if required for the information on contamination and pollution of real public interest, such as for the construction of highways. Such an estate? Is there a public register of contaminated land approach is equivalent to the “right of eminent domain” in other in your jurisdiction? jurisdictions. The purchase price is generally determined to be the property’s market value. There is no public register of contaminated land in the UAE. The buyer must carry out his own inspection and assessment regarding 12.3 Which bodies control land/building use and/or contamination and pollution of real estate, and can take the necessary occupation and environmental regulation? How do representations, warranties and indemnities on these issues. buyers obtain reliable information on these matters?

12.9 In what circumstances (if any) is environmental clean- The local municipality in each Emirate controls the land/building use up ever mandatory? and/or occupation and environment regulation within the Emirate, and on a localised level the free zones and also master developers regulate There are no direct obligations regulating environmental clean-up additional controls by way of regulation or master development in the UAE; however, successors in title inherit this obligation in property declarations, which confer contractual responsibilities the event that any spillage or seepage causes damages to adjacent upon sub-developers and owners. Generally, the municipalities and properties or the environment. The environmental standards the free zone authorities publish these regulations and the property are mainly applied in oil or industrial entities in relation to the declarations are available from the master developers. disposal of waste and regulated at a federal level by various laws such as Federal Law No 24 of 1999 regarding the protection and 12.4 What main permits or licences are required for development of the environment. building works and/or the use of real estate?

12.10 Please briefly outline any regulatory requirements All business activities are regulated within the UAE and an for the assessment and management of the energy enterprise cannot conduct business unless authorised by licence performance of buildings in your jurisdiction. to do so by the relevant economic department of the Emirate concerned. Developers must reflect the “development of land” as The UAE has a variety of energy performance regulations and a an activity on their commercial business licence in order to develop range of building efficiency measures in place which are designed real property. In addition to obtaining municipal approvals for the to improve the sustainability performance of buildings from design project and the plans for any building, NOCs are often required through to construction, operation, and tear-down. Such regulations from master developers. Most importantly, the relevant Emirate’s are usually passed at Emirate level such as a programme called land department requires registration of the developer and the Estidama in Abu Dhabi, which regulates the design, construction, development with them prior to the commencement of any building and operation of buildings through phased approvals. Estidama works. Free zone authorities may impose additional planning also uses an assessment scale called the “Pearl Rating System”, controls in relation to real estate in their area. which measures the sustainability performance of villas, buildings, and communities. For Dubai, we refer to the “Green Building 12.5 Are building/use permits and licences commonly Regulations” mentioned in question 10.7. obtained in your jurisdiction? Can implied permission be obtained in any way (e.g. by long use)?

Yes, as explained in question 11.4, building/use licences are

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The Emirates Authority for Standardization and Metrology has 13 Climate Change regulated the standards for air-conditioning equipment and lighting for the UAE, and uses an international ranking of efficiency that 13.1 Please briefly explain the nature and extent of any divides the cooling capacity of each air conditioner by the total regulatory measures for reducing carbon dioxide electrical input to ensure optimal energy efficiency levels and which emissions (including any mandatory emissions monitors newly constructed and existing buildings for compliance trading scheme). at a federal level.

In accordance with the United Nations Framework Convention John Peacock on Climate Change, the UAE, as a non-Annex 1 country, is not BSA Ahmad Bin Hezeem & Associates LLP obligated to reduce carbon emissions. The UAE has, however, Level 6, Building 3, The Gate Precinct chosen to implement actions to reduce carbons emissions, albeit Dubai International Financial Centre without federal legislation therefor. Dubai United Arab Emirates Tel: +971 4 368 5555 13.2 Are there any national greenhouse gas emissions Email: [email protected] reduction targets? URL: www.bsabh.com

According to the UAE National strategy 2021, efforts are under way John Peacock is a Senior Associate with the Corporate and M&A and to reduce the UAE’s GHG emissions and the UAE is beginning to Real Estate practices, based in our DIFC office in Dubai. An admitted monitor and track GHG emissions and assess policies for reducing attorney and property conveyancer since 1995, he specialises in a vast such emissions. range of corporate matters including commercial contracts, and advises on all aspects of property transactions, including strata developments. John has been practising law for over 23 years in both South Africa 13.3 Are there any other regulatory measures (not already and the UAE. John is an admitted Attorney and Conveyancer of the mentioned) which aim to improve the sustainability of High Court of South Africa and registered with the Dubai Legal Affairs Department and the Kwa-Zulu Natal Law Society in South Africa. both newly constructed and existing buildings? John regularly advises on international commercial and property matters, including joint ventures, hotel and restaurant management, Each Emirate government is pursuing projects and implementing trademark licensing and property development transactions. He has strategies to improve the sustainability of both newly-constructed assisted clients in the drafting, review, and operation of strata plans for and existing buildings. large composite property development.

BSA Ahmad Bin Hezeem & Associates LLP was founded in 2001 and is a dynamic law firm whose character has been shaped through the adaptive innovation of its talented lawyers. Our firm has been a major contributor to the development of the real estate market in the UAE and had advised the public sector and private investors, collective investment funds, developers, real state regulatory authorities and individuals to create, regulate and maximise the investment opportunities of and within the UAE property market. The real estate department focusses on structuring of mixed-use developments with jointly owned property including strata arrangements. They assist clients with real estate financing, arbitration, litigation and dispute resolution. Legal services are also offered in licensing and registration of developers, projects and property with the relevant authorities and advising on escrow and the acquisition and disposal of all types of property including all due diligence work.

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USA

Greenberg Traurig, LLP Christina Braisted Rogers

1 Real Estate Law 1.3 Are international laws relevant to real estate in your jurisdiction? Please ignore EU legislation enacted locally in EU countries. 1.1 Please briefly describe the main laws that govern real estate in your jurisdiction. Laws relating to leases of business premises should be listed in While international laws do not govern real estate assets in the USA, response to question 10.1. Those relating to zoning foreign laws are relevant in a number of circumstances. Those and environmental should be listed in response to include foreign exchange controls and the ability to sue foreign question 12.1. Those relating to tax should be listed in investors in order to collect on judgments under guaranties, where response to questions in Section 9. the assets are in overseas jurisdictions. The other international law element that contributes to the structure of every transaction Each state within the United States (and the District of Columbia) involving foreign investors is home tax law or tax treaties. The debt follows a mix of statutory and common law (Louisiana, however, and equity investment authority of foreign financial institutions are employs a civil law system, derived from the Napoleonic Code). governed by their respective charters and home-country laws. There are three levels of laws in the USA: federal; state; and local. Under common law, changes in law come by way of case law and new legislation, each of which is given equal weight. Rules on parol 2 Ownership evidence, and requirements that agreements be in writing in order to be enforced, vary from state to state. Courts will generally rely on 2.1 Are there legal restrictions on ownership of real estate the express terms of the document unless the intent of the parties is by particular classes of persons (e.g. non-resident unclear. Courts in the USA may take into account the conduct of persons)? the parties if the terms of the document in question are ambiguous. In general, contracts for the sale or transfer of real estate should be There are few, if any, controls prohibiting a foreigner from owning in writing. real estate property in the USA. The one limitation that still exists in certain states pertains to ownership of U.S. agricultural and natural resources. 1.2 What is the impact (if any) on real estate of local common law in your jurisdiction? Reporting is required from foreign persons who: ■ purchase (directly or indirectly) at least 10% of a U.S. Each case that is decided has an impact on the way transactions are business (including real estate ownership), who must file a structured or documents are drafted for future transactions. For private report within 45 days (in addition to possible quarterly and annual reports) with the bureau of Economic Analysis of example, in New York in 2010, there was a State Supreme Court the U.S. Department of Commerce (under the International decision which ruled on the language of intercreditor agreements. Investment Survey Act (the International Investment and The large majority of intercreditor agreements between mortgage Trade in Services Survey Act) of 1976), though exemptions lenders and mezzanine lenders typically contain language that are available in certain cases; requires a mezzanine lender to cure “all defaults” under the mortgage ■ purchase or transfer U.S. agricultural land, who must file a loan in certain situations. The issue in the New York case hinged on public report within 90 days with the Secretary of Agriculture whether that requirement was a precondition to foreclosure on UCC (under the Agricultural Foreign Investment Disclosure Act of collateral by a mezzanine lender or whether the failure to cure would 1978); simply trigger the mortgage lender’s right to accelerate the payment ■ hold any direct U.S. real estate investments valued over obligations under the mortgage loan. In this instance, the court ruled $50,000 during the previous calendar year, who must file that the mezzanine lender could not foreclose without first curing an information return (under the Foreign Investment in an existing default, which meant paying off the already-accelerated Real Estate Property Tax Act of 1980, which also subjects mortgage loan in full. While there is disagreement within the legal any income of the foreign investor from U.S. real estate community regarding that decision, it should be noted that, in 2011, transactions to federal taxation); and a federal District Court in Arizona came to a similar conclusion. As ■ control a domestic or foreign corporation – the corporation a result, the relevant provisions in the common forms of intercreditor must file an information return annually with the Internal agreements are likely to be more heavily negotiated. Revenue Service (under the Tax Equity and Fiscal Responsibility Act of 1982).

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Additional reporting may be required under: the Hart-Scott Rodino is held by the trustee. A deed reflecting the ownership in trust Antitrust Improvements Act of 1976; the Internal Revenue Code would suffice and be recorded in similar fashion with a typical deed, and Executive Order No. 13224 on Terrorist Financing, effective without need for a separate recording. from September 24, 2001, and relating to Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism; and the Uniting and Strengthening 4 System of Registration America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”). 4.1 Is all land in your jurisdiction required to be registered? What land (or rights) are unregistered? USA 3 Real Estate Rights While property rights are recorded and not registered, the Torrens system of property registration, and remnants of this system, do 3.1 What are the types of rights over land recognised in still exist. The Torrens system was historically used extensively in your jurisdiction? Are any of them purely contractual Illinois, Massachusetts and Minnesota. Illinois repealed its Torrens between the parties? Act in 1992 and New York has also repealed its registration of title law. At one time, up to 20 states employed some form of the Torrens Land is usually owned by fee title. Record notice of title is system, including Colorado, Georgia, Hawaii, Massachusetts, established by recording an instrument of conveyance in the local Minnesota, North Carolina, Ohio and Washington. The Torrens recording office. Title can be owned in whole by an individual or system, until fairly recently at least, was in regular use only in an entity. Title can be owned by individuals as tenants in common certain parts of Massachusetts, Minnesota and Hawaii. In the or tenants by the entirety (marital). Legal title can be held by jurisdictions in which some form of the Torrens system is still in trusts for the benefit of the equitable owners. Parties can hold an effect, the system is voluntary, and it functions side by side with the interest in land by contract. A lender secures repayment of its loan more common title recording system. by obtaining a mortgage (or in some states a deed of trust, or in Georgia a deed to secure debt) (a “mortgage”) granting the lender 4.2 Is there a state guarantee of title? What does it a security interest in the property or ground lease being financed. guarantee? A trustee holds title for the benefit of trustors pursuant to a trust agreement. A tenant under a lease holds a contractual interest in No. Most owners obtain “insurance” that they have good title by the demised premises, which may or may not constitute an interest buying title insurance from title insurance companies, who search in real property, depending on the length of the lease term and and underwrite the title of the property. applicable state law. Parties may also hold the right to use or occupy property under a licence agreement. A licence may give a party an access right over the property of another, but it is easily terminated. 4.3 What rights in land are compulsorily registrable? The more common form of granting an appurtenant right across the What (if any) is the consequence of non-registration? property of another is by a recorded easement. Because most states require a recorded notice to enforce use rights against third parties, Unlike many legal systems, there is no requirement in the USA even agreements that do not “run with the land” are often recorded that title be registered. There is no obligation to record evidence of to give third parties notice of the rights accorded thereby. ownership, leasehold, easement or other rights. The act of recordation protects owners or benefited parties from prior, unknown, unrecorded and subsequently filed/recorded third party claims. 3.2 Are there any scenarios where the right to a real estate diverges from the right to a building constructed thereon? 4.4 What rights in land are not required to be registered?

Title to land may diverge from the ownership of a building As noted above, there is no requirement in the USA that title be constructed thereon in the case of a ground lease. In a ground lease, registered. the tenant will typically lease the underlying land for a long term, but, by the terms of the ground lease, the tenant will often own, rather than lease, the temporary or permanent buildings and other 4.5 Where there are both unregistered and registered land objects placed upon it during the term of the ground lease. At the or rights is there a probationary period following first registration or are there perhaps different classes end of the term of the ground lease, title to those improvements or qualities of title on first registration? Please give typically, by the terms of the ground lease, will revert to the details. First registration means the occasion upon landowner (most often at the end of their useful life). Similarly, which unregistered land or rights are first registered development within air rights parcels above the land has become in the registries. a popular means for utilising excess development rights associated with a parcel and enables developers to build taller towers with This is not applicable. highly profitable upper floors.

4.6 On a land sale, when is title (or ownership) transferred 3.3 Is there a split between legal title and beneficial title to the buyer? in your jurisdiction and what are the registration consequences of any split? In most jurisdictions, title passes upon the delivery of the deed. Recordation of the conveyance instrument follows to preserve rights This distinction arises in the case of a trust where the beneficiary of and protect against third party claims. Title insurance is utilised in a trust holds a beneficial interest in the trust property and receives many jurisdictions to protect against any “gap” interests or claims the benefits of ownership. Legal title to the trust property, however, arising between execution and recording of the deed.

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Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, Michigan, 4.7 Please briefly describe how some rights obtain Minnesota, Mississippi, Nevada, New Mexico, New York, North priority over other rights. Do earlier rights defeat later Carolina, Oklahoma, Pennsylvania, South Carolina, South Dakota, rights? Tennessee, Texas, Utah, Virginia, Washington, Washington, D.C., Wisconsin, Wyoming and the U.S. Virgin Islands. The Property rights are protected by recording. In virtually every purpose of the Act is to give county clerks and recorders the legal jurisdiction, recordation in the real estate records establishes priority. authority to prepare for the electronic recording of real property A mortgage becomes perfected only upon recordation and it must be instruments. Certain municipalities and counties already offer recorded within 10 days after execution to become perfected as of electronic recording systems, which may be accessed and searched

USA the date of delivery. Anything of record at the time of recording will by the general public. Typically, recording offices only accept be in right to the document that is recorded later. This basic premise fully executed documents, correctly notarised and meeting certain may be altered, however, as follows: other requirements, for recording. In order to record a transfer of ■ a significant change in the mortgage, such as the interest rate ownership rights, recording offices typically require, among other and/or maturity date, may result in the priority being brought things, transfer documentation (deed) and evidence of payment of forward to the date on which the modification is recorded; real estate taxes and real estate assessment valuations. an intervening lien or encumbrance would have priority (title insurance can be procured to insure priority where appropriate); 5.4 Can compensation be claimed from the registry/ ■ local taxes have priority over recorded deeds and mortgages registries if it/they make a mistake? irrespective of whether the taxes are due and payable after the recording of the deed or mortgage; No. Most documents are submitted to recording offices by third ■ federal tax liens may have priority; party title insurance companies. In consideration of the payment of ■ parties can allocate priority pursuant to intercreditor or other a premium, the title insurance companies issue a policy insuring that subordination agreements; or the deed or mortgage recorded has been validly recorded, subject ■ the filing and existence of mechanics’ and materialmen’s only to scheduled encumbrances. The title insurance company is liens. liable if there is a mistake, subject to limitations contained in the title insurance policies.

5 The Registry / Registries 5.5 Are there restrictions on public access to the register? Can a buyer obtain all the information he might reasonably need regarding encumbrances and 5.1 How many land registries operate in your jurisdiction? other rights affecting real estate? If more than one please specify their differing rules and requirements. There are no restrictions on public access to the recording office. Each county (or parish, in Louisiana) in each state has its own A buyer can learn certain matters at the recording office. A buyer recording office, and certain states have different recording offices/ can identify the owner of the property and research recorded liens, books for conveyances and for mortgages. Requirements are state- easements, and other encumbrances. The real estate records will specific, and may be county-specific. Some states require signatures not provide information as to whether a building has been built in black or blue ink. Every state requires a state-approved form of in accordance with local codes and is in compliance with zoning notary acknowledgment. The variations thereafter range from page ordinances with valid certificates of occupancy, but this information size and margins to legends that must be affixed to the document, to is also publicly available from the applicable jurisdiction. some state requirements that an attorney admitted to practise in the Additionally, while a search of the records will reveal the existence state must have prepared the document and/or be the stated party for of easements or other rights or appurtenances, only a survey of the return of recorded documents. the subject property will show the location and the impact of such easements or other rights or appurtenances on any improvements located thereon. 5.2 Does the land registry issue a physical title document to the owners of registered real estate? 6 Real Estate Market After recording an instrument in the official records, the county recording office will typically return an original document with recording information on its face, or a certified copy of the recorded 6.1 Which parties (in addition to the buyer and seller and the buyer’s finance provider) would normally original. These procedures are evolving with the implementation of be involved in a real estate transaction in your electronic recording in various jurisdictions. jurisdiction? Please briefly describe their roles and/or duties. 5.3 Can any transaction relating to registered real estate be completed electronically? What documents need In connection with an acquisition of real estate, different parties may to be provided to the land registry for the registration assist depending on the type of asset. In all cases, a broker is likely of ownership right? Can information on ownership of to be involved. A purchaser will typically engage structural and registered real estate be accessed electronically? environmental engineers to evaluate the property and improvements and they will evaluate zoning compliance, matters of title and The Real Property Electronic Recording Act, completed by the survey, and any existing leases. An expert in zoning and municipal Uniform Law Commissioners in 2004, has been enacted by codes, an architect, and contractors might also be involved to assess Alabama, Arizona, Arkansas, Connecticut, Delaware, Florida, the development potential of raw land.

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6.2 How and on what basis are these persons 6.5 Have you observed any trends in particular market remunerated? sub sectors slowing down in your jurisdiction in terms of their attractiveness to investors/developers? The seller normally employs a broker to sell the property. The Please give examples. commission is usually a percentage of the sale price, payable by the seller. The percentage varies by product type and locality. If It is difficult to identify a particular slowing trend for the entire the purchaser identifies the property through a different broker, the country. Some asset classes perform better in different regions, and seller’s broker or the listing broker will share its commission with the in some areas, a particular asset class may be considered over-built or on the verge of becoming so. Regional malls, power centres and purchaser’s broker. Other service providers are compensated on the USA basis of an agreed-upon hourly rate times the hours spent. Brokers shopping centres serving middle-income households have failed to are paid at the closing. Other service providers are paid a usual and rebound over the last several years, while top-tier shopping malls customary fee for the jurisdiction based on the arrangements made and urban/high street retail have prospered, and therefore these in advance. assets may be less appealing for development and investment. The hotel sector has thrived in recent years, but growth has flattened as the cycle has matured and labour costs have increased. In addition, 6.3 Do you feel there is a noticeable increase in suburban office assets have suffered in recent years as a result of a the availability of capital to finance real estate trend of companies relocating from the suburbs into urban centres to transactions in your jurisdiction, whether equity or debt? What are the main sources of capital you see attract young, talented employees. active in your market? 7 Liabilities of Buyers and Sellers in Real The sustained increase in capital allocation toward real estate over Estate Transactions the past few years slowed somewhat in both the debt and equity sectors. Capital is readily available for refinancing and acquisition debt, and on a more disciplined basis for development. Regulation 7.1 What (if any) are the minimum formalities for the sale under Dodd-Frank and Basel III has required large commercial and purchase of real estate? banks to be more conservative, but there is growth at the community and regional bank level. Life insurance companies make similarly Customarily, the parties enter into a contract of sale, which sets up conservative long-term investments, typically in “core assets”. the mechanics of the closing as well as the conditions and actions that CMBS lending remains a consistently important source of capital, must be satisfied or occur between the date of signing and closing. particularly in secondary and tertiary markets, but no longer While a contract is not required, it will protect both parties, neither maintains a large pricing advantage and the lack of flexibility of whom will be obligated to close if specified conditions precedent working with servicers can be a disincentive to borrower. Private are not met. The form of deed must be sufficient to transfer title debt funds and mortgage REITS provide more flexibility than the under the laws of the situs state. It must also be in recordable form regulated or core-asset focused lenders, but at a higher price. Equity so that a title insurance company will issue a policy of owner’s title investment comes from the traditional sources such as institutional insurance. Even in the case of a transfer of a single family home, a investors and REITS, but private equity is one of the fastest purchaser will want time to perform due diligence and will require growing sources of investment capital. International investment is seller representations with respect to the condition, water quality, significant, particularly in the gateway markets, by large institutions certificate of occupancy, appliances, etc. For office buildings and such as insurance companies or sovereign wealth funds, and by other income-producing properties, evaluation of the leases will be an individuals (including development capital made available under important due diligence consideration. In all cases, the requirements the EB-5 Immigrant Investor Program). of a lender providing purchase money financing must be satisfied.

6.4 What is the appetite for investors and developers 7.2 Is the seller under a duty of disclosure? What matters in your region to look beyond primary real estate must be disclosed? markets and transact business in secondary or even tertiary markets? Please give examples of significant The seller does not generally have a duty of disclosure in a secondary or tertiary real estate transactions, if commercial transaction. Sales of real estate are “caveat emptor”. relevant. However, if a question is asked and the seller answers fraudulently, the seller will be liable for damages. Specific disclosures are Surplus capital, as well as competition and rising prices in the customary in the residential context. traditional gateway markets, has led investors to expand their interest in secondary and tertiary markets. These markets tend to States and municipalities have laws which do require disclosures in have faster growing demographics (as the primary markets become specific instances. In New York City, the existence of lead paint less affordable), diverse job opportunities in desirable industries, must be disclosed in residential sales. Similarly, the existence of and intentional development of urban centres that offer the benefits asbestos must be disclosed. A statement regarding the potential of urban living at a significantly lower cost. A number of secondary presence of radon gas must be included in real estate contracts markets in the United States (Austin, Texas; Nashville, Tennessee; concerning Florida properties. These types of laws are local in San Antonio, Texas; Portland, Oregon; and Seattle, Washington nature. are examples) have become generally considered “hip” on account of their unique culture. While investments in the gateway cities 7.3 Can the seller be liable to the buyer for have traditionally provided the perception of security, the wealth of misrepresentation? data that is now available to investors enables them to focus more precisely on defined neighbourhoods and asset characteristics in Yes. The remedies for such misrepresentation will be set forth in other markets that suit their investment profile. the contract of sale. Customarily, a buyer may rescind the contract

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if the misrepresentation is discovered prior to closing; thereafter damages may be sought. Again, the representations must be in 8.2 What are the main methods by which a real estate writing. Parties will negotiate the period of time after closing that lender seeks to protect itself from default by the borrower? the representations will survive, and may agree to a cap on the seller’s maximum liability for the breach of such representations. Most real estate lenders “underwrite” commercial or multi-family properties by looking at the cash flow, the “projected” rent stream, 7.4 Do sellers usually give contractual warranties to the the physical and environmental condition of the property, and the buyer? What would be the scope of these? What is as-is value and the projected value of the property as compared the function of warranties (e.g. to apportion risk, to

USA to the amount of the loan. Borrowers look for commercial loans give information)? Are warranties a substitute for the buyer carrying out his own diligence? to be non-recourse, meaning that the borrower or its sponsor – individual or entity – will not be personally liable if the loan is not repaid, but lenders will in turn protect themselves with a Customarily, purchasers will acquire “as-is”, with certain specific guaranty from a sponsor triggered by the borrower’s bad acts, such representations given as to matters that are more difficult for a as misappropriation, fraud, malfeasance or voluntary or collusive purchaser to discover itself during its inspection period. The specific involuntary bankruptcy. Lenders require more equity if a property items warranted, caps on seller liability and the warranty survival is risky; such equity may take the form of upfront capital as well as period are heavily negotiated. The function of warranties is to letters of credit and payment guaranties. In addition, lenders often apportion risk; however, sellers will attempt to limit liability when impose cash management systems with varying levels of control possible. In the case of leases, sellers will attempt to get a purchaser over the property’s cash flow, depending on the type of asset and the to rely on estoppel certificates from tenants rather than provide underwriting of the property and the borrower, pursuant to which representation about the leases. Similarly, purchasers will rely on revenues are deposited by tenants or the property manager directly third party assessments as to environmental and structural concerns. into a controlled account and either applied directly to debt service or disbursed to the borrower, only so long as no default exists and 7.5 Does the seller warrant its ownership in any way? certain loan performance thresholds continue to be met. Please give details.

State statutes provide for the use of various types of deeds ranging 8.3 What are the common proceedings for realisation of mortgaged properties? Are there any options for a from full warranty deeds, which warrant title from the beginning of mortgagee to realise a mortgaged property without time, to forms that warrant only with respect to acts of the seller, to involving court proceedings or the contribution of the quit claim deeds which convey bare legal title. Subject to written mortgagor? agreement to the contrary, local custom typically dictates the extent of the warranty of title provided. Purchasers rely on title insurance Judicial foreclosure is available in every state (and required in to guarantee title, as noted above. many) and entails the foreclosing lender filing a lawsuit against the defaulting borrower. Upon judgment in the lender’s favour, 7.6 What (if any) are the liabilities of the buyer (in addition the property is typically subject to a public auction conducted to paying the sale price)? by a court-appointed officer. With the spate of foreclosures in recent years, certain states have attempted to ensure the integrity Risks are apportioned in the contract of sale. The buyer is obligated of the foreclosure process by imposing certain restrictions and to come to the closing table, ready, willing and able to close. That requirements on foreclosing lenders. In New York, for example, means bringing cash or cash equivalent (i.e., purchase money loan) a foreclosing lender must be careful to comply with all notice to the closing. If the buyer breaches its warranties or obligations, requirements, especially as this may concern residential occupants the seller will be entitled to damages, often limited to retention of of the subject property, and the attorneys of foreclosing lenders may an earnest money deposit. The buyer’s primary responsibility is be required to submit an affirmation that they themselves have taken to come up with funds when required. If the seller is paid in full reasonable steps to verify the accuracy of documents filed in support at closing, it is hard for the seller to show damages. Allocation of residential foreclosures. If non-judicial foreclosure is allowed of closing costs (such as transfer taxes, title insurance and escrow then, typically, if the borrower fails to cure a default after receipt charges) is dictated by local custom and is often negotiable. of a notice of default and intent to foreclose from the lender, or use other lawful means (such as filing for bankruptcy to temporarily stay the foreclosure) to stop the sale, the lender or its representative may 8 Finance and Banking conduct a public auction of the property in a manner similar to the auction conducted in connection with a judicial foreclosure. The timeframe necessary to complete any type of foreclosure can vary 8.1 Please briefly describe any regulations concerning widely depending on the circumstances and the requirements of the the lending of money to finance real estate. Are the rules different as between resident and non-resident jurisdiction. persons and/or between individual persons and corporate entities? 8.4 What minimum formalities are required for real estate lending? With respect to residential real estate, there are both federal and local requirements. At both levels, the purpose of the regulations In order to have an enforceable loan, most states require that contracts is to protect the consumer. The federal regulations make sure that relating to real estate be in writing. In particular, each state’s statute lenders fully disclose all costs and expenses of financing; i.e. all of frauds legislation will be applicable. In order for a lender to have interest payments, fees and closing costs over the life of the loan. a perfected security interest in the real estate, a mortgage or deed of Localities have regulations dealing with physical risks, such as lead trust meeting the requirements of state law must be recorded in the paint, radon gas and asbestos, among others.

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required recording office within 10 days of the execution thereof. In more) of real estate are subject to transfer tax. Some states impose order for a lender to have a perfected security interest over personal their real property transfer tax in cases where an interest in an entity property, accounts and receivables among other collateral that is that owns real property in the state is sold (usually requiring the categorised as personal property, the lender must record a financing transfer of a controlling interest in the entity). Many states also statement in the place and in the manner required by the Uniform have mortgage or intangibles taxes payable in connection with Commercial Code governing the collateral. indebtedness secured by real estate. The obligation to pay transfer taxes can be allocated by contract, but is typically allocated pursuant to local custom. In some states, the obligation to pay transfer taxes 8.5 How is a real estate lender protected from claims against the borrower or the real estate asset by other is joint and several, so even if the obligation is allocated to one party, creditors? the state is not bound by such allocation, so the state could seek USA payment from the other party if the proper amount of tax is not paid. If the real estate lender has a properly perfected security interest in Mortgage recording or note intangibles taxes are typically allocated the collateral securing loan, the lender’s security interest protects to the borrower. If not paid, recording offices will not record deeds. it from claims of other creditors. Title insurance insuring the first Both the purchaser and the seller typically have liability. priority of the lender’s lien on real estate assets securing a loan is an essential component of a real estate finance transaction. In 9.2 When is the transfer tax paid? transactions like mezzanine loans, where control over real estate assets is achieved by a pledge of ownership interests, the priority of Payment of the applicable transfer and/or mortgage recording or filings under the Uniform Commercial Code (“UCC”), adopted in all intangibles tax is a condition precedent to recordation of a deed 50 states, the District of Columbia and the U.S. Territories can also or mortgage, as applicable. Payments are, however, subject to be insured in many instances. It is important that security interests subsequent audit in many jurisdictions. In states that impose the in real property and other assets interests be perfected in compliance transfer tax on a transfer of a controlling interest in an entity that with local law and the UCC, and that appropriate filings are kept in owns real property, a return must be filed within a certain time effect. Covenants in loan documents generally prohibit additional period, typically 30 to 60 days of the transfer. debt and transfers that might result in claims against the borrower, and guaranties are required to support specific borrower covenants not to take actions that could jeopardise a lender’s security. 9.3 Are transfers of real estate by individuals subject to income tax?

8.6 Under what circumstances can security taken by a Unless the transfer of real estate qualifies for special treatment under lender be avoided or rendered unenforceable? the U.S. Internal Revenue Code of 1986, as amended (the “Code”), the transfer of real estate by a U.S. person is a taxable transaction. Insolvency laws, failure to comply with local law requirements The individual seller will have taxable gain or loss equal to the and formalities, and borrower fraud can cause security taken difference between the fair market value of the consideration by a lender to be avoided or rendered unenforceable. Lenders received (including any liabilities assumed or to which the real protect themselves against these risks by thoroughly investigating estate transferred is subject) and the tax basis that the individual the credit status of their borrowers, by engaging local counsel to has in such real estate, which tax basis is reduced by depreciation advise and opine as to specific local requirements and limitations deductions taken for tax purposes. The gain or loss will be capital of enforceability of loan covenants, and by obtaining third party in nature if the real estate was held as a capital asset (i.e., generally, guaranties that can be enforced upon a borrower’s breach of specific held for investment). Long-term capital gains (i.e., gains with representations, warranties and covenants. respect to capital assets held over 12 months) are currently taxed at significantly more favourable tax rates as compared with the 8.7 What actions, if any, can a borrower take to frustrate tax rates on ordinary income in the case of individuals and other enforcement action by a lender? non-corporate taxpayers. Exclusions from taxable income (up to maximum dollar amounts) are available for gains recognised by Filing for bankruptcy protection is the most common method used individuals on the sale of a principal residence. by borrowers to frustrate enforcement actions. At a minimum As mentioned above, if certain requirements are met, the exchange the lender will be significantly delayed in exercising its remedies of real property with other real property that is of a like-kind may and motivated to reach agreement regarding a forbearance. In qualify as an exchange under Section 1031 of the Code. Section jurisdictions where judicial foreclosure is required, borrowers can 1031 provides an exception to the general rule of current gain more readily contest and delay enforcement actions. As noted recognition and allows owners to postpone paying tax on the gain above, a borrower’s action to frustrate enforcement by a lender will from the sale of real estate if the owner reinvests the proceeds in typically trigger recourse to a third party guarantor. similar property that is located in the United States as a part of the like-kind exchange. The gain is deferred until the transferor exits out of its investment in the like-kind property received in the 9 Tax exchange.

9.1 Are transfers of real estate subject to a transfer tax? 9.4 Are transfers of real estate subject to VAT? How How much? Who is liable? much? Who is liable? Are there any exemptions?

In most jurisdictions, there are state and sometimes local transfer There is no VAT in the U.S. Most of the states in the U.S. do taxes on a deed transfer, which are usually calculated as a percentage impose a transfer tax on the transfer of real estate. The rate is not of the consideration being exchanged for the deed. In some uniform and it varies from state to state and may have an additional jurisdictions (New York, for example), long-term leases (49 years or tax imposed by a city, county, or other locality. Many states will

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require the purchaser to withhold state income taxes if the seller is valorem property taxes on the transaction, including the amount, not a resident of the state, or if the seller is a pass-through entity for schedule for payment, appropriate proration with the seller, and tax purposes, will require the entity to pay the estimated state taxes potential for reassessment or application of “rollback” taxes as a result owed by the partners who are not residents of the state. of a transfer or change in use or real property. With respect to the Many states exempt transfers of real estate, the gain from which acquisition of certain assets, sales taxes may be an issue as well, and a would be deferred for U.S. federal income tax purposes under buyer should obtain a tax clearance certificate from the taxing authority special provisions (for example, the like-kind exchanges discussed to confirm there are no outstanding tax liabilities that would transfer above or transfers of real estate to wholly owned entities). with the asset. Some jurisdictions have bulk sales laws in place, that require, among other things, a buyer to notify the seller’s creditors if

USA it is acquiring a significant portion of the seller’s business or assets. 9.5 What other tax or taxes (if any) are payable by the seller on the disposal of a property? 10 Leases of Business Premises While foreign investors are generally not subject to U.S. income or withholding tax on gains from the sale of U.S. investments (such as stocks and bonds), an exception applies in the case of interests in 10.1 Please briefly describe the main laws that regulate leases of business premises. real property located in the U.S., which are subject to tax pursuant to the Foreign Investment in Real Property Tax Act (“FIRPTA”). In such cases, the gain is treated as income from a U.S. business, In most states, leases are contracts and governed by applicable and is taxable to the foreign seller in the same manner in which contract law. Local law governs damages on breach and other a similar U.S. person (e.g., an individual or a corporation, as remedies, and procedures to evict defaulting tenants. Local law applicable) would be taxed. This requires the foreign seller to file will dictate whether a lease is subordinate to a mortgage, absent a U.S. tax return and to report and pay the tax liability. Foreign a provision in the lease that automatically subordinates the lease sellers of real estate that are corporations are also potentially subject to any mortgage. If a landlord or tenant files for bankruptcy, their to an additional branch profits tax on the gain at a 30% rate (which respective rights will be as set forth in the Federal Bankruptcy Code, may be reduced or eliminated by a tax treaty). Collection of the which pre-empts state law. tax under FIRPTA is enforced through an obligation of the seller or other responsible party to withhold, generally at a rate of 15% 10.2 What types of business lease exist? of the gross purchase price following a change of law late in 2015. (Prior to the change in law, the withholding rate was 10%.) The There are “modified gross” leases, generally used in office buildings, difference between the actual tax liability pursuant to FIRPTA and which build into the rent a base for real estate taxes and operating the amount withheld is either paid or refunded in connection with expenses; the tenant will be allocated its percentage share of annual the filing by the foreign seller of its U.S. tax return. Some states, increases above that base. A net lease on the other hand, is generally such as Georgia, have enacted similar withholding requirements for used for long-term leases of entire buildings, industrial/warehouse the sale of property by non-residents of the state. leases, retail outparcel leases and some retail leases. In this type of lease, the tenant pays directly for utilities, taxes and property insurance, 9.6 Is taxation different if ownership of a company (or and is responsible for the maintenance of the premises. However, in other entity) owning real estate is transferred? most cases, they are not responsible for certain structural repairs. A land lease or ground lease is a long term lease by which the tenant If equity interests in an entity that directly or indirectly holds rents and uses land, but during the term of such a lease the tenant also U.S. real estate are sold, apart from transfer tax considerations as owns the improvements it constructs on the land (and is therefore discussed above, the seller (or its owners in the case of a seller responsible for all maintenance, taxes and other costs related thereto). that is a partnership or other pass-through entity) will generally be subject to income tax on any resultant gain. In the case of foreign 10.3 What are the typical provisions for leases of business investors, gain from the sale of interests in an entity that directly or premises in your jurisdiction regarding: (a) length of indirectly holds U.S. real estate, including interests in a real estate term; (b) rent increases; (c) tenant’s right to sell or investment trust (“REIT”) or other corporation, may be subject to sub-lease; (d) insurance; (e) (i) change of control of U.S. income tax pursuant to FIRPTA (see discussion in question the tenant; and (ii) transfer of lease as a result of a 9.5 above). A variety of exemptions from FIRPTA are potentially corporate restructuring (e.g. merger); and (f) repairs? available, including for: (i) shares in corporations that have less than 50% of their business assets throughout a prescribed testing These terms are negotiated for each individual lease: period comprised of interests in U.S. real estate; (ii) small portfolio a) Length of term investors (owning less than 5%, or 10% in the case of a REIT) that The length of the term can vary. Landlords prefer a longer term with sell shares in a public company; (iii) sales of shares of REITs that frequent rent increases. Tenants may want to lock in space for 10 are domestically controlled (i.e., less than 50%-owned throughout a years, but will not want rent increases. No right to renew will be testing period by non-U.S. investors); and (iv) foreign pension funds afforded to a tenant unless set forth in the lease, and then the tenant that meet certain requirements. must exercise this right in a timely manner. b) Rent increases 9.7 Are there any tax issues that a buyer of real estate See above. Renewal rents may be stipulated in advance, increased should always take into consideration/conduct due based on an independent factor (such as the Consumer Price Index) diligence on? or reset based on the prevailing market rental rate. c) Tenant’s right to sell or sub-lease In addition to assessing local transfer and mortgage taxes as described above, a buyer should evaluate the impact of local ad See below.

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d) Insurance 10.6 Does the landlord and/or the tenant of a business Typically, the landlord will obtain property insurance for the lease cease to be liable for their respective building (the cost of which may be passed through to its tenants), obligations under the lease once they have sold their and the tenant will provide property insurance for the contents of interest? Can they be responsible after the sale in its premises and its tenant improvements. Each party will obtain respect of pre-sale non-compliance? liability insurance for its acts or omissions. Other coverages may be required according to the tenant’s use, the location of the property, a The answer to this question will depend on the language of lender’s requirements, and as the market dictates. the contract. The tenant signing the lease will be liable for the e)(i) Change of control of the tenant performance of the obligations thereunder. If the tenant assigns its USA See below. interest under the lease, it may cause a new tenant to assume its obligations, but the assignment will not release the tenant from acts (ii) Transfer of lease as a result of a corporate restructuring (e.g. merger) prior to or after the assignment unless specifically released by the landlord. If the tenant under a lease is a company and the shareholder Provisions of leases dealing with assignment and subletting as well sells the company, the shareholder will not have personal liability as mergers or reorganisations or changes of control are significant before or after the sale by virtue of the liability limits afforded to points of negotiation. In all events, the landlord will want the right such shareholder by the statutes governing entity liability. Leases to consent to a change of tenant, whether by assignment or subletting typically provide that the landlord’s liability is limited to its interest or change of control, but a significant tenant will want to preserve in the property and that the landlord will be released from further its ability to restructure. Minimum net worth requirements for the liability following a sale of the property. One of the documents assignee and continued liability of the assignor are often utilised. executed in a typical real estate sale will address the assignment The sale of stock of publicly owned companies, however, should of leases and assumption of obligations by the purchaser. The not be prohibited by the terms of the lease. State law varies as to contractual terms of an assignment of leases are negotiable as to whether a change of control constitutes an assignment where a lease whether such assumed liability includes liability arising prior to is silent or unclear. the transfer as well as liability arising from and after the transfer. f) Repairs In some instances, state law may require an explicit assumption of In most cases, interior repairs to the premises are the responsibility liability for tenant security deposits transferred in connection with of the tenant and structural and systems repairs and common areas a sale. maintenance are the obligation of the landlord (subject to the ability of the landlord to pass the related costs through to the tenants). The exact 10.7 Green leases seek to impose obligations on allocation of repair obligations will vary by property type and location. landlords and tenants designed to promote greater sustainable use of buildings and in the reduction of the “environmental footprint” of a building. Please 10.4 What taxes are payable on rent either by the landlord briefly describe any “green obligations” commonly or tenant of a business lease? found in leases stating whether these are clearly defined, enforceable legal obligations or something The landlord pays income tax on rental income. Real estate taxes are not amounting to enforceable legal obligations (for allocated between the landlord and tenant. State sales taxes on rents, example aspirational objectives). which apply in some states (Florida, for example), are usually allocated to the tenant. New York City has a commercial occupancy tax. Green provisions are becoming more prevalent in leases today. Much of the demand for green buildings is being driven by corporate tenants with enterprise-wide sustainability programmes and 10.5 In what circumstances are business leases usually terminated (e.g. at expiry, on default, by either party landlords who are marketing the cost savings provided by “green” etc.)? Are there any special provisions allowing a and energy-efficient projects and by municipalities tying bids for tenant to extend or renew the lease or for either party projects and incentives to similar objectives. Institutional investors to be compensated by the other for any reason on have also shown a heightened interest in such projects. “Green” termination? leases regularly include provisions which provide for compliance with established “green” standards such as the LEED Certification Except in the case of certain financing leases that can be terminated standards promulgated by the U.S. Green Building Counsel, the upon payment, leases generally terminate at the end of a lease term. most widely accepted green building standard. If a tenant fails to vacate its premises at such a time, the landlord can move to evict the tenant and typically has the right to charge a significantly escalated “holdover” rent during such period. Tenants 11 Leases of Residential Premises and landlords can typically terminate leases upon a substantial condemnation or casualty. The degree of damage or loss and the 11.1 Please briefly describe the main laws that regulate time that the tenant is unable to use the demised premises determine leases of residential premises. a tenant’s right to terminate, and these requirements are heavily negotiated. If the leased premises are being constructed, the tenant As with commercial leases, in most states, leases of residential may have the negotiated right to terminate the lease if the premises premises are contracts and governed by applicable contract are not completed by a certain date. A tenant may negotiate a right law. Local law governs damages on breach and other remedies, to terminate the lease if services are not provided for a designated and procedures to evict defaulting tenants. Generally, however, period of time. A tenant may also be able to negotiate a termination local law will provide for more protective treatment of residential right at one or more points during the term in exchange for payment tenants than commercial tenants. For example, in some states, of a termination fee to compensate the landlord for unamortised security deposits must be held in segregated and or interest-bearing tenant improvement costs and leasing commissions and a portion accounts, and must be returned to the tenant within a short period of future rent.

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of time following expiration of the lease or penalties will apply to water, and disposal on land. Real estate practitioners will want to the landlord. Tenants may have a legal right to a walk-through at pay particular attention to restrictions on development in or near the beginning and end of a lease term to confirm any damage to the wetlands and streams, discharges of storm water during construction premises for which the tenant could be held responsible. and after completion of a project, storage facilities for potentially polluting materials like chemicals or heating oil, and equipment that may cause air pollution such as large space heating boilers or stand- 11.2 Do the laws differ if the premises are intended for multiple different residential occupiers? by power generators. Similarly, certain materials raise questions if they are present in existing structures, and generally cannot be used in new buildings; examples include lead-based paints, asbestos, Local laws often provide exemptions from certain residential tenant- USA polychlorinated biphenyls, and urea formaldehyde foam insulation. protective requirements for owners leasing fewer than a stipulated number of units. 12.2 Can the state force land owners to sell land to it? If so please briefly describe including price mechanism. 11.3 What would typical provisions for a lease of residential premises be in your jurisdiction regarding: (a) length of term; (b) rent increases/controls; (c) the The state can condemn (force the owner to sell the property to the tenant’s rights to remain in the premises at the end of state) property for public use, but, based on recent cases, the courts the term; and (d) the tenant’s contribution/obligation are split as to whether economic development is a sufficient public to the property “costs” e.g. insurance and repair? use of the property which would enable them to acquire title and transfer it to a private entity. The state must provide the owner with Subject to requirements of local law, residential leases are typically “just compensation”. The price mechanism will vary from state for one year, with rents to be renegotiated upon renewal. Shorter to state, and from authority to authority taking land (as each may term leases may require premium rents, depending on inventory and have a different statutory obligation with respect to public uses and market conditions. A landlord’s acquiescence to a tenant holding compensation). over may establish a new tenancy (month to month or otherwise), which requires a landlord to monitor its lease expirations. A typical 12.3 Which bodies control land/building use and/or multi-family residential lease (for an apartment development), occupation and environmental regulation? How do would allocate responsibility for maintenance and insurance of the buyers obtain reliable information on these matters? real property to the landlord. A tenant would be responsible for insuring its personal property and for the cost of repairs of damage Federal and state governments have jurisdiction over environmental in excess of ordinary wear and tear at the end of the lease. law. As noted below, there are databases for violations of certain federal laws; states may maintain similar databases. Otherwise, 11.4 Would there be rights for a landlord to terminate a parties hire environmental consultants (third-party experts) to residential lease and what steps would be needed perform Phase I Environmental Site Assessments, which consist to achieve vacant possession if the circumstances of site inspections, interviews with people knowledgeable about existed for the right to be exercised? current and historical uses of the property, and searches of electronic databases of regulated and contaminated sites. The prior or existing Local law governs damages on breach and other remedies, and use of the property may require that sampling of soil, groundwater, procedures to evict defaulting tenants, but termination and eviction surface water, or other environmental media be performed. Such rights are typically provided to landlords. sampling is commonly referred to as a “Phase II Environmental Site Investigation”. Purchasers sometimes require the seller to provide extensive representations concerning environmental matters, which 12 Public Law Permits and Obligations may cause the seller to make disclosures of past environmental issues. 12.1 What are the main laws which govern zoning/ permitting and related matters concerning the use 12.4 What main permits or licences are required for and occupation of land? Please briefly describe them building works and/or the use of real estate? and include environmental laws.

Each local governmental entity has its own requirements. As a The main laws governing construction, zoning, use, and occupation general matter, a building permit is needed for construction and of the land are local in nature. Each state adopts governing legislation. a certificate of occupancy is needed specifying usage for each Local land use authorities then have their own ordinances, rules, separate space in a building. Local ordinances are likely to require and regulations. Be aware, however, that not every location in other forms of permission within the development stages, such as the United States is in an incorporated municipality, and not every “site disturbance permits” or permits for water or sewage use. locality regulates land use by zoning or land development under any mechanism. In some locations, federal or state law may affect land development or land use, often in special areas. For example, 12.5 Are building/use permits and licences commonly in California, there are specific provisions dealing with coastline obtained in your jurisdiction? Can implied permission property. In Maryland, development around the Chesapeake Bay is be obtained in any way (e.g. by long use)? specially regulated. In Florida, the Everglades are subject to special rules. Federal and state governments exercise more comprehensive Permits are obtained locally. Building permits must be issued before jurisdiction over environmental matters than do local governments, construction can take place. Certificates of occupancy, or their local who more typically regulate land development and land use. Under equivalent, must be issued before buildings (and tenant spaces) can these laws, landowners must comply with a variety of statutes be occupied. Requirements relative to reissuance and transfer of and regulations governing emissions to the air, discharges to certificates of occupancy are governed by local law.

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standards. Some states, including most notably New Jersey, also 12.6 What is the appropriate cost of building/use permits have laws requiring sellers to verify to state regulatory authorities and the time involved in obtaining them? the environmental condition of certain industrial and commercial property before it is sold, and if the property is contaminated, the This is totally dependent upon the request, the local requirements, seller must remediate it before the transaction can be consummated. and how busy the office granting the permits is at the time of the request. 12.10 Please briefly outline any regulatory requirements for the assessment and management of the energy 12.7 Are there any regulations on the protection of historic performance of buildings in your jurisdiction. monuments in your jurisdiction? If any, when and how USA are they likely to affect the transfer of rights in real There are no standards at this time. estate?

The federal government, through the Secretary of the Interior, 13 Climate Change maintains a National Register of Historic Places and the federal government administers certain grant programmes and encourages the preservation of these sites through various financial incentives. 13.1 Please briefly explain the nature and extent of any regulatory measures for reducing carbon dioxide State and local governments will generally have a historic emissions (including any mandatory emissions preservation commission that will designate certain sites or districts trading scheme). as historic and this commission will consider preservation interests before issuing building permits and review actions of the zoning There are none that are applicable to real estate on a nationwide and planning boards when historic sites will be affected. A historic basis, but certain states, such as California, have enacted regulatory designation may affect the use of the property, but generally it does measures for reducing carbon dioxide emissions and have begun to not affect the transfer rights. implement emissions trading regimes.

12.8 How can e.g. a potential buyer obtain reliable 13.2 Are there any national greenhouse gas emissions information on contamination and pollution of real reduction targets? estate? Is there a public register of contaminated land in your jurisdiction? There are certain states that have requirements. Generally, parties hire third party environmental consultants to perform Phase I Environmental Site Assessments, as described 13.3 Are there any other regulatory measures (not already in question 11.3 above. The Environmental Protection Agency, a mentioned) which aim to improve the sustainability of federal agency, maintains a “National Priorities List” of the most both newly constructed and existing buildings? contaminated known sites in the country, and many states have developed their own lists of contaminated sites. There are many Most action taken on this front, thus far, has been taken by state and contaminated sites that are not on federal or state lists, however. local governments. For example, New York and other jurisdictions Thus, an adequate Phase I Environmental Site Investigation have begun to require the auditing and reporting of energy and, if warranted based on the findings of the Phase I, a Phase II consumption at the building level. California and Washington have Environmental Site Investigation, are the best means for obtaining begun requiring owners of non-residential buildings (including the most reliable and comprehensive information regarding hotels) to release energy and water consumption data and ratings to environmental conditions at a subject property. parties in any transaction concerning the sale, lease or financing of a building. Many local jurisdictions in California have green building standards modelled on LEED or other standard building guidelines. 12.9 In what circumstances (if any) is environmental clean- up ever mandatory?

This is dependent on statute. Under certain federal and state laws, parties in interest, including some existing and prior owners, are liable for remediating property that is contaminated above applicable

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Christina Braisted Rogers Greenberg Traurig, LLP 3333 Piedmont Road, NE, Suite 2500 Atlanta, Georgia 30305 USA

Tel: +1 678 553 2100 Fax: +1 678 553 2212 Email: [email protected] URL: www.gtlaw.com USA

Christina Braisted Rogers focuses her practice on real estate matters, including acquisition, joint venture, disposition, leasing transactions and financing matters involving multifamily residential, office, retail and industrial properties. She represents institutional real estate investors, including investment trusts, pension fund advisors, and construction and permanent lenders and borrowers. Christina is experienced with conduit, traditional, mezzanine and construction lending, representing major financial institutions, conduit lenders and insurance companies. Ms. Rogers is a member of the State Bar of Georgia, the Atlanta Bar Association, the American Bar Association, the Fellows of the American Bar Association, and Commercial Real Estate Women (CREW). She is a member of the Board of Directors for Cool Girls, Inc., a non-profit organisation dedicated to the self-empowerment of girls and breaking the cycles of poverty, low self-esteem and teen pregnancy. She is listed in Best Lawyers in America, Real Estate, The Legal 500, United States, Real Estate, and Georgia Trend magazine’s “Legal Elite”.

Greenberg Traurig, LLP is an international, multi-practice law firm with approximately 1,900 attorneys serving clients from 38 offices in the United States, Latin America, Europe, Asia, and the Middle East. The firm is No. 1 on the 2015 Law360 Most Charitable Firms list, third largest in the U.S. on the 2015 Law360 400, Top 20 on the 2015 Am Law Global 100, and among the 2015 BTI Brand Elite. More information at: www.gtlaw.com. Greenberg Traurig provides integrated legal services for clients worldwide. The firm offers multidisciplinary teams that include senior lawyers who have been the chief legal officers at major multinational companies and have spent years solving real-world problems in the business, political and legal arenas. Teams are built around client needs, ensuring lean staffing, front-end planning and flexible billing, where appropriate. The firm’s experience in more than 100 practice areas and our network of contacts throughout the world position us to help clients achieve their objectives both domestically and in the global marketplace. The Greenberg Traurig Real Estate Practice is a cornerstone of the firm and recognised leader in the industry. Our attorneys deliver diversified and comprehensive legal solutions for property acquisition and investment, development, management and leasing, financing, restructuring, and disposition of all asset classes of real estate. The team draws upon the knowledge and experience of nearly 300 real estate lawyers from around the world, serving clients from key markets in the United States, Europe, the Middle East, and Latin America. Our clientele includes a broad range of property developers, lenders, investment managers, private equity funds, REITs, and private owners. We advise clients on a variety of matters across a broad spectrum of commercial, recreational and residential real estate, including structured equity and debt and the hybrids.

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