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Fall 20

INTERNATIONAL LAWYERS NETWORK

BUYING AND SELLING : AN INTERNATIONAL GUIDE

ILN REAL ESTATE GROUP [BUYING AND SELLING REAL ESTATE] 2

This guide offers an overview of legal aspects of buying and selling real estate in the requisite jurisdictions. It is meant as an introduction to these marketplaces and does not offer specific legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney- client relationship, or its equivalent in the requisite jurisdiction.

Neither the International Lawyers Network or its employees, nor any of the contributing law firms or their partners or employees accepts any liability for anything contained in this guide or to any reader who relies on its content. Before concrete actions or decisions are taken, the reader should seek specific legal advice. The contributing member firms of the International Lawyers Network can advise in relation to questions regarding this guide in their respective jurisdictions and look forward to assisting. Please do not, however, share any confidential information with a member firm without first contacting that firm.

This guide describes the law in force in the requisite jurisdictions at the dates of preparation. This may be some time ago and the reader should bear in mind that statutes, regulations, and rules are subject to change. No duty to update information is assumed by the ILN, its member firms, or the authors of this guide.

The information in this guide may be considered legal advertising.

Each contributing law firm is the owner of the copyright in its contribution. All rights reserved.

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Table of Contents CHAPTER CONTRIBUTORS & FIRMS 4 BUYING AND SELLING REAL ESTATE IN ARGENTINA 7 BUYING AND SELLING REAL ESTATE IN 13 BUYING AND SELLING REAL ESTATE IN 33 BUYING AND SELLING REAL ESTATE IN CANADA - QUÉBEC 41 BUYING AND SELLING REAL ESTATE IN CHILE 50 BUYING AND SELLING REAL ESTATE IN 57 BUYING AND SELLING REAL ESTATE IN 63 BUYING AND SELLING REAL ESTATE IN CZECH REPUBLIC 70 BUYING AND SELLING REAL ESTATE IN ECUADOR 78 BUYING AND SELLING REAL ESTATE IN GREECE 82 BUYING AND SELLING REAL ESTATE IN 87 BUYING AND SELLING REAL ESTATE IN HUNGARY 94 BUYING AND SELLING REAL ESTATE IN INDIA 100 BUYING AND SELLING REAL ESTATE IN LATVIA 109 BUYING AND SELLING REAL ESTATE IN 120 BUYING AND SELLING REAL ESTATE IN THE NETHERLANDS 129 BUYING AND SELLING REAL ESTATE IN NORWAY 137 BUYING AND SELLING REAL ESTATE IN 140 BUYING AND SELLING REAL ESTATE IN PORTUGAL 144 BUYING AND SELLING REAL ESTATE IN ROMANIA 155 BUYING AND SELLING REAL ESTATE IN RUSSIA 162 BUYING AND SELLING REAL ESTATE IN SCOTLAND 170 BUYING AND SELLING REAL ESTATE IN 175 BUYING AND SELLING REAL ESTATE IN SLOVAKIA 181 BUYING AND SELLING REAL ESTATE IN TURKEY 189 BUYING AND SELLING REAL ESTATE IN ENGLAND AND WALES 194 BUYING AND SELLING REAL ESTATE IN THE UNITED STATES - FLORIDA 205 BUYING AND SELLING REAL ESTATE IN THE UNITED STATES - MASSACHUSETTS 211 BUYING AND SELLING REAL ESTATE IN THE UNITED STATES - MICHIGAN 219

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CHAPTER CONTRIBUTORS & FIRMS

“Buying and Selling Real Estate in “Buying and Selling Real Estate in Argentina” Czech Republic” Lawyers at Lawyers at Salaberren & López-Sansón Abogados PETERKA & PARTNERS – Prague – Buenos Aires

“Buying and Selling Real Estate in “Buying and Selling Real Estate in Australia” Ecuador” Lawyers at Lawyers at Kalus Kenny Intelex – Melbourne ConsorcioLegal– Guayaquil

“Buying and Selling Real Estate in “Buying and Selling Real Estate in Brazil” Greece” Lawyers at Lawyers at KLA - Koury Lopes Advogados – São A&K Metaxopoulos and Partners – Paulo Athens

“Buying and Selling Real Estate in “Buying and Selling Real Estate in Canada - Quebec” Hong Kong” Lawyers at Lawyers at Robinson Sheppard Shapiro – Canada - Sit, Fung, Kwong & Shum – Hong Kong Quebec

“Buying and Selling Real Estate in “Buying and Selling Real Estate in Chile” Hungary” Lawyers at Lawyers at PAGBAM |Schwencke – Santiago Jalsovszky Law Firm – Budapest

“Buying and Selling Real Estate in “Buying and Selling Real Estate in Colombia” India” Lawyers at Lawyers at Ahlawat & Associates – New Delhi Gamboa, García & Cardona Abogados– Bogotá

“Buying and Selling Real Estate in “Buying and Selling Real Estate in Costa Rica” Latvia” Lawyers at Lawyers at Cordero & Cordero – San José TGS Baltic – Riga

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“Buying and Selling Real Estate in

Mexico” “Buying and Selling Real Estate in Lawyers at Scotland” Martinez Algaba de Haro y Curiel and Lawyers at Martinez Berlanga Abogados – Miller Samuel Hill Brown – Glasgow Mexico City

“Buying and Selling Real Estate in “Buying and Selling Real Estate in the Netherlands” Singapore” Lawyers at Lawyers at PlasBossinade Advocaten N.V. – Goodwins Law Corporation – Groningen Singapore

“Buying and Selling Real Estate in Norway” “Buying and Selling Real Estate in Lawyers at Slovakia” Økland & Co DA – Oslo Lawyers at Slovakia – Bratislava

“Buying and Selling Real Estate in “Buying and Selling ” Turkey” Lawyers at Lawyers at Quijano & Associates – Republic of Özcan & Natan Attorney Partnership – Panama Istanbul

“Buying and Selling Real Estate in “Buying and Selling Real Estate in England, Wales & Northern Portugal” Ireland” Lawyers at Lawyers at MGRA & Associados – Lisbon Fladgate LLP – London

“Buying and Selling Real Estate in “Buying and Selling Real Estate in Romania” the United States – Florida” Lawyers at Lawyers at PETERKA & PARTNERS – Bucharest Shutts & Bowen - Miami, Florida, USA

“Buying and Selling Real Estate in “Buying and Selling Real Estate in Russia” the United States - Lawyers at Massachusetts” Lidings Law Firm – Moscow Lawyers at Davis Malm & D’Agostine – Boston, Massachusetts, USA

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“Buying and Selling Real Estate in the United States - Michigan” Lawyers at Howard & Howard – Detroit, Michigan, USA

ILN Real Estate Group – Buying and Selling Real Estate Series

Fall 20

INTERNATIONAL LAWYERS NETWORK

SALABERREN Y LÓPEZ SANSON ABOGADOS Buying and Selling Real Estate in Argentina

ILN REAL ESTATE GROUP

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER ARGENTINIAN LAW I. INTRODUCTION. expenses corresponding to his/her share, as Below you will find a brief outline of the legal well as of refunding other co-owners the regulation of the acquisition of real estate expenses in which they may have in Argentina, which is mainly governed exceedingly incurred in relation to their by the Argentine Civil and Commercial Code shares. Unless otherwise agreed, every co- (“CCC”). owner may require the legal partition of the and the division of the property. II. FORMS OF REAL ESTATE OWNERSHIP. c) . Argentine law regulates different forms of real estate ownership. A brief summary is provided (propiedad horizontal) below: confers rights of use and disposal of an independent and undivided share of a a) Sole Ownership. building (called a functional unit) and the Sole Ownership confers all the powers to proportional part of said building’s common legally use and materially and legally areas. The building’s different parts, as well dispose of a real estate property. All of the as the rights arising from them, are existing constructions belong to the owner, interdependent. This type of property which are presumed to be built by said exercised over the functional unit, which owner, except evidence to the contrary. may consist in a flat, a This kind of ownership extends to the or other space with functional subsoil and airspace, with the exception of independence and direct or indirect access specific cases determined by law. The to a street. The condominium is governed owner is also legally entitled to exclude by internal regulations which are third parties from said real estate property. incorporated to the . b) Joint Ownership. d) Residential Developments. Joint Ownership is the right over a real This category comprises country clubs, estate property that belongs to more than gated communities, industrial, one person, where each person owns an commercial, or nautical parks or any other undivided share of said property. Each co- type of residential developments regardless owner can, solely or jointly, use the of their destiny (temporal or permanent common property without altering its homestead or commercial), also including destiny, and also, they can agree either the those with mixed uses, in accordance with use of the common property at alternate local administrative regulations. The times or the exclusive use over determined residential developments are considered a parts of the property. type of condominium. Additionally, each co-owner can sell or The main characteristics of this encumber his or her undivided share developments are of the without the assent of the other co- owners, development, existence of common and while the sale of the whole property individual areas and the existence of an requires the consent of all the co-owners. internal regulations. All of the common and Each co-owner is responsible for paying the exclusive parts and areas are

ILN Real Estate Group – Buying and Selling Real Estate Series

[BUYING AND SELLING REAL ESTATE IN ARGENTINA] 9 interdependent, as well as the rights over can be granted for life if the holder them, conforming a non-divisible whole. of the right is an individual or for a Aspects in connection with authorized areas, maximum of 50 years if the holder is a corporation. dimensions, uses and other urbanistic elements of residential developments are III. LEGAL FORMALITIES IN RELATION TO REAL governed by local administrative ESTATE OWNERSHIP ACQUISITION. regulations of each jurisdiction. a) Preliminary Purchase Agreement. e) Surface rights. Under Argentine law, all transfers or Surface right is a temporary right over a creation of rights over real estate third party’s real estate property, which must be granted as a public deed before a confers to its holder the power to use and notary. The notary must conduct due dispose the legal right to plant, forest, or diligence to verify the soundness of the title construct in said property (or a right over of the seller over the relevant property, existing plantations, forestations, or obtain certificates attesting the ownership constructions), comprehending property’s and the inexistence of injunctions terrain, soil and/or subsoil, in accordance preventing the transfer. The notary also with the terms and conditions set forth in acts as a withholding agent of the the deed title. The third party remains connected with the transfer. owner of the real estate property. Although it is not mandatory, usually seller The term of the surface right cannot exceed and buyer execute a preliminary purchase seventy years for constructions, or fifty agreement (boleto de compraventa) of the years for plantations and forestations, both real estate property, in order to agree on terms considered as from the date of the terms of the transaction while all the acquisition of the surface right. The term required formalities for executing the can be renewed as long as it does not transfer deed are complied with. exceed said maximum terms. In order to enter into the preliminary The owner of the property keeps his right to purchase agreement each of the parties sell and dispose of the property as long as it must: (i) have general capacity in terms of does not interfere with the existing surface the CCC as for the performance of legal right. During the agreed term, the surface acts; (ii) have an Argentine ID number; right holder may transfer and encumber the and (iii) in the case of individuals married constructions without the prior consent of under regimes, obtain the owner. their spouse’s assent to the sale. f) Usufruct. Preliminary purchase agreements usually Usufruct confers the right to use a third include: (i) the identification of the parties; party’s real estate property. This right can (ii) the price and payment terms; apply over a whole property or just a (iii) a detailed description of the property share of said property. This right can only to be acquired; (iv) the current condition of be granted by the owner of the property. the property to be acquired; (v) time of conveyance of the possession over the property; (vi) tax treatment of the

ILN Real Estate Group – Buying and Selling Real Estate Series

[BUYING AND SELLING REAL ESTATE IN ARGENTINA] 10 transaction; (vii) general obligations of the IV. TAXES. parties; (viii) appointment of a notary public Please find below an outline of the main taxes for the granting of the transfer deed; and involved in the sale of real estate property (ix) provisions in connection with parties’ according to the latest tax reform. failure to compliance with their respective obligations. a) Real Estate Transfer Tax. b) Transfer Deed. If the real estate property was acquired before January 1, 2018, individuals selling Once the due diligence of the title has been real estate property are taxed at 1.5 % tax completed and the certificates have been rate over the price of the sale. This tax is obtained, which usually takes about withheld by the notary public. 30 days, the parties shall grant the transfer If the real estate property was acquired deed which has substantially the same after that date, individuals are taxed at 15% content as the preliminary purchase rate over net income (sale price minus agreement. acquisition cost). Parties may directly sign the transfer deed According to the last tax reform, the and not sign a preliminary purchase transference of any rights over real estate agreement. property are also taxed at 15% tax rate (this The notary public is usually chosen by the includes the transfer of participations in real buyer. The fees of the notary usually range estate trusts). from 1 % to 1.5 % of the purchase price. The b) Corporate . fees and expenses relating to the due diligence over the title to the property are Companies selling real estate must pay usually paid by the seller, while the corporate income tax over the sale of real remaining fees are paid by the seller. estate property at 30% rate (in 2019 and 2020) and at 25% rate (from 2021 onwards), c) Registration with the Real Estate in both cases over net income. Also, Registry. corporations are taxed if they pay dividends The final stage for acquiring property is the at 7% rate (in 2019 and 2020) and at 13% registration of the transfer deed with the rate (from 2021 onwards). Currently, some Real Estate Registry of the jurisdiction changes to the income tax law are being where the property is located. Once considered. registered, the buyer’s ownership over the c) Stamp Tax. property is enforceable before third parties. Such registration entails certain fees which This is a tax levied by each of the provinces are usually comprised in the notarial fees in Argentina and the City of Buenos Aires and are also assumed by the buyer. which applies over the purchase price or the registered value of the property, The times involved in the registration of the whichever is higher. The tax rate varies in deed will depend on the relevant each jurisdiction. Usually, this tax is borne in jurisdiction, but in average this should take equal parts by the seller and the buyer. between 1 and 2 months.

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V. AGENTS. forms provided by said governmental entity, Real Estate agents may be used by either buyer certain corporate information (e.g., or seller of real estate property, but their corporate bylaws, appointment of board members, latest financial statements, participation in real estate transactions in not mandatory. The agent fees are not determined identification of shareholders), certificates by law and may differ from one jurisdiction to of criminal record of the board members another. Usual fees range from 3 % to 4 % of and an investment project to be conducted the purchase price. in the real estate property to be acquired. The filing should be made by the investor. VI. SPECIAL CASES. The authorization is granted by way of a) Frontier Securities Zone Act (Decree exception and depends on showing that the 15,385/44 as Amended) (“FSZA”). investor (or its shareholders and officers) The FSZA regulates the acquisition by has not been convicted of crimes affecting foreign individuals or foreign companies of national security and proposing an rural real estate assets and certain urban investment project for the development of real estate assets located in frontier zones. the acquired real estate asset. The It also regulates the acquisition of shares in investment project is analyzed in the light of companies which own said real estate the following criteria: (i) that the project is assets, as well as corporate restructuring declared of national, provincial, or operations of said companies. municipal interest by the competent authority; (ii) purports to the social and The regulation of the FSZA considers the economic development of the region where following to be foreign companies: (i) it is located; (iii) it will be implemented in companies incorporated abroad from underdeveloped zones; and (iv) it mainly Argentina, (ii) companies incorporated in employs Argentine workers. Argentina, in which foreign companies or individuals hold the majority stake or have b) Protection of Rural Lands Ownership sufficient votes to make decisions in Act (Act 26,737) (“PRLO”). shareholders’ meeting; and (iii) companies The PRLO limits the ownership or in which foreign shareholders own more possession of rural land by foreign than 25% of the corporate capital. individuals or companies (which are Under the FSZA, all acquisitions of real referred to as Foreign Owners). Rural Land estate assets located in frontier zones or is defined as any real estate asset located shares of companies which own said assets outside the limits of cities. It provides that require clearance from governmental all Foreign Owners cannot own or possess authorities, with the exception of assets more than 15% of the total rural land of located in certain cities or urban assets Argentina. Likewise, Foreign Owners cannot which have a surface of less than 5,000 own or possess more than 15% of the total square meters, must be previously rural land in each Province or approved by the Internal Affairs Secretary. Administrative Department. Additionally, Foreign Owners of the same nationality In order to obtain said approval, foreign cannot own or possess more than 30% of companies must make a filing with the the rural land owned by Foreign Owners. Internal Affairs Secretary, including certain Moreover, a single Foreign Owner cannot

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[BUYING AND SELLING REAL ESTATE IN ARGENTINA] 12 own more than 1,000 hectares in the core Foreign Owners at national, provincial, and area or an equivalent surface in other municipal level. locations to be determined by the Before the granting of the deed of governmental authority. Finally, Foreign acquisition of the rural real estate asset the Owners cannot hold an interest on rural intervening notary must procure with the land adjacent to bodies of water of certain National Registry of Rural Land a certificate importance. Moreover, any change in the of clearance, confirming that the above composition of the corporate capital of local limits are not breached by the intended companies’ owners of rural land should be transaction. If the certificate of clearance is informed to the authorities to verify not obtained the transaction cannot be compliance with the PRLO. implemented. The PRLO considers the following to be c) “UVA” mortgage loans. Foreign Owners: a) Individuals of foreign nationality (although there are some UVA mortgage loans are a new form of exceptions for foreign nationals who have mortgage loans aimed at the purchase, resided in Argentina for more than 10 years, repair, or expansion of real estate property. or have Argentine children, or have been They are granted by both public and private married to an Argentine national for more banks and represent a comparative than 5 years); b) Companies, incorporated advantage over other forms of mortgage in Argentina or abroad, whose capital is loans, since they offer a more convenient owned in more than 51% (or a sufficient interest rate. percentage to adopt decisions in These loans are expressed in Purchasing shareholders’ meetings) by foreign Value Units (“UVAs”), which reflect the individuals or companies. average construction cost of one square The regulations of the PRLO provide that in meter and are updated based on the the case of usufruct and surface rights, it Consumer Price Index. This is an exception will only control the owner of the property to the general prohibition of adjusting and not the holders of said rights. based on inflation. They are expected to help individuals to acquire property, The PRLO has created a National Registry of protecting them from currency swings. Rural Land which oversees compliance with the PRLO. The application of the PRLO is triggered when dealing with the acquisition of real estate assets or participation in companies which own of real estate assets which qualify as rural land. As noted before, the PRLO bans the acquisition of rural exceeding 1,000 hectares in the core area, or adjacent to bodies of water of certain importance, or in excess of the 15% maximum of the rural land allotted to

ILN Real Estate Group – Buying and Selling Real Estate Series

Fall 20

INTERNATIONAL

LAWYERS NETWORK

KALUS KENNY INTELEX BUYING AND SELLING REAL ESTATE IN AUSTRALIA

I L N R E A L ESTATE GROUP

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER AUSTRALIAN LAW

INTRODUCTION commercial building on the land. Developers The majority of land in Australia consists of commonly subdivide large blocks of vacant land freehold title. Registration of ownership of into smaller blocks, (subject to local and freehold title is recorded using the Torrens planning restrictions) which are then on-sold to system. The Torrens system is a system of title purchasers. It is often a condition of the land by registration. This means that an interest will contract that purchasers must commence and only be a legal interest if it is registered on title. complete the construction of a dwelling on the Once the interest is registered, that interest is land within a certain timeframe. The type of indefeasible and takes priority over all other dwelling may be controlled by restrictions interests. Both the vendor selling the land and imposed by the vendor, or the planning the purchaser purchasing the land execute a authority (e.g., local council) such as a covenant, legal document transferring ownership. Once building envelope and/or design guidelines. settlement of the property has occurred, the Residential Dwellings (Existing and Proposed) transfer document is registered. Each State Existing Dwellings and Territory in Australia has its own register. The purchaser becomes the registered The purchase or sale of an existing residential proprietor of the land, which is recorded on the dwelling is a common transaction. This involves register. The registered proprietor the transfer of ownership of the land, including is issued with a specific certificate of title for any fixed dwelling, improvements, and other the property which typically contains a volume permanent fixtures on the property. The and folio number and a plan identifying the property is usually sold to a purchaser in its land, details of any restrictions (e.g., a current condition and subject to all defects. It covenant) affecting the land and details of any is important for purchasers to undertake their (e.g., mortgage). Titles may own due diligence enquiries concerning the comprise of land or spaces defined by a plan. property and to be satisfied with its state and condition. These enquiries should be In recent years, property settlements and conducted before a contract is signed. As registration of interests on the Torrens system contracts are prepared by the vendor, they have been effected electronically through the tend to be one-sided (except for certain Property Exchange Australia platform (“PEXA”). statutory protections). Alternatively, the One of the key benefits of using PEXA is that contract could be conditional on the purchaser registration of interests is effected immediately. being satisfied with certain enquiries and if not, Certificates of title were previously issued only then have a right to terminate the contract. in paper, but now titles can be issued Purchasers are entitled to attempt to negotiate electronically. contracts in order to make them more even COMMON TYPES OF PROPERTY handed. TRANSACTIONS Proposed Dwellings Land Purchasing “off-the-plan” involves purchasing a In Australia you can acquire or sell a vacant dwelling that is yet to be built on a lot which is block of land. Subject to zoning, the land yet to be created. Settlement occurs once the maybe used to construct a residential and/or subdivision has been registered (which creates

ILN Real Estate Group – Buying and Selling Real Estate Series

[BUYING AND SELLING REAL ESTATE IN AUSTRALIA] 15 a title for the lot), and construction of the sale of leased property can be GST free if the dwelling has been completed. Off-the-plan parties agree that it is the supply of a “going contracts are complex, but commonplace. Both concern”. To satisfy the going concern the land and what is being constructed on the exemption, certain requirements must be met. land may be subject to changes by the vendor. It is important that purchasers and vendors It is important for purchasers to obtain legal obtain legal advice in relation to the sale and advice before entering into such a contract. purchase of commercial property and any GST Depending on the State and Territory, there can consequences. be stamp duty savings when purchasing off-the- Retail Properties plan. It is important for vendors who are selling “off-the-plan” to obtain legal advice before the When buying or selling a retail property in contract is prepared. Settlement under an off- Australia, each state and territory has its own the-plan contract may take several years to specific retail legislation, which governs retail settle, as the vendor has a specified timeframe premises, the provisions and disclosure in which to register the plan and construct the documentation. If purchasing a leased property, dwelling. These types of contracts are typically it is important for a purchaser to review the drafted on a vendor favourable basis, with the lease documentation. A failure to do so could vendor having flexibility regarding construction adversely affect the purchaser’s rights as the and broad termination rights, especially if the future to enforce the terms of the development does not proceed. A purchaser’s lease. Some have termination rights, or right to terminate the contract is usually limited. rights under the retail lease legislation for Residential, commercial, and vacant land can be longer terms, and certain rent review purchased and sold “off-the-plan”. Selling “off methodology. The applicable retail lease the plan”, is possible because of a legislative legislation has a big impact on leases, so leases regime which allows this, so long as the parties are not always what they seem to be. may terminate the contract if the title is not DIFFERENT METHODS OF SALE created by an agreed date. Private Sale vs Auction Commercial Properties Private Sale Commercial properties include retail, industrial and office spaces. The acquisition or sale of a A property can be sold privately through a sales commercial property may be with vacant agent or by private sale directly between a possession or subject to a lease (i.e., tenanted). vendor and a purchaser. In most cases, a A property may comprise both commercial and vendor will engage a real to sell residential spaces (e.g., commercial space at the property, as this can be more efficient, and ground level, with adjoining residential space the vendor has the benefit of the real estate upstairs). If the property is leased and is sold to agent’s brand, reputation, and database of a purchaser subject to the terms of the lease, it potential purchasers. In these situations, is important for the purchaser to review the contracts may be negotiated and re-drafted to terms of the lease, especially if the purchaser is suit both parties and may include agreed relying on the rent for income. The sale of conditions. commercial properties is usually a taxable supply and subject to the payment of a Federal

Goods and Services Tax (“GST”). However, the

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Auction or reject any EOI in its absolute discretion A property can also be sold at a public auction. without giving reasons and the vendor is not This involves the engagement of a real estate bound to accept the EOI with the highest price or any EOI received. EOIs can be complying or agent, who is also an auctioneer. An auction date is set by the vendor and interested buyers non-complying and a vendor is free to accept can attend the property and submit their offers either. Once parties are close to agreement on by placing a public bid. Each State and Territory commercial terms, a contract of sale must be has its own legislation which governs auctions. entered into to effect a binding transaction. Sales of property by auction are unconditional. With an EOI, purchasers can be more casual The contract is signed, and the deposit is paid with their proposal. after the auction has concluded. Generally, the Tender vendor controls the bidding by setting a reserve The vendor invites offers from tenderers for the price, which is the minimum price a vendor will purchase of the property. The tender accept for the property. Sometimes, the document, which is usually prepared by the bidding at a public auction does not reach the vendor’s solicitor, sets out the terms of the vendor’s reserve price. When this occurs, the tender and attaches a copy of the contract of property is “passed in” and the highest bidder sale. The tenderer must deliver the tender to has first right to negotiate with the vendor at the tender box in a sealed envelope. The the reserve price. Generally, at auctions it is tender documents include the signed tender more difficult for a purchaser to renegotiate form, signed contract documentation, including the contract. guarantee and a cheque for the deposit. The Expression of Interest vs Tender key difference between a tender and an EOI is There are methods of gauging interest in a that each tenderer who lodges a tender is property without a public auction or directly deemed to have made an irrevocable offer to negotiating with a purchaser straight away. purchase the property for the tender price and Such methods may involve an expression of on the terms and conditions of the tender and interest or a tender. the contract of sale. The offer made by the tenderer remains open for acceptance by the Expression of Interest vendor for a certain period and it cannot be The vendor of the property invites potential revoked before that time by the tenderer. purchasers to submit an expression of interest Tenders can be complying, or non-complying (“EOI”). The EOI form may be prepared by the and a vendor is free to accept either. The or by the vendor’s solicitor. It vendor is under no obligation to accept any contains details of the purchaser, price, and tender, which is not lodged in accordance with terms such as the deposit, settlement period the terms of the tender and is not bound to and special conditions. The terms of the EOI accept the highest tender. This method of make it clear that the submission of an EOI selling is usually undertaken for large does not create a contract for the sale of the residential and commercial properties, like property. It is not binding. Therefore, no legal shopping centres, where the vendor prefers to rights or obligations except those contained in keep the sale as private as possible. If a tender the EOI document are deemed to arise until a is accepted, there will be a binding contract contract of sale is executed and exchanged and between the parties. the full deposit is paid. The vendor may accept

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DOCUMENTATION vendor is required to disclose certain Sale Documents to be in Writing information about the property in the form of a vendor’s statement or disclosure statement or Each State and Territory has its own specific by providing copies of certain prescribed legislation, which requires that a contract for documents (e.g., , plan, drainage the sale or disposition of an interest in land diagrams, registered dealings on title and must be in writing and signed by the person to council certificates). In other parts of Australia, be charged. the disclosure regime does not exist or is very Contract of Sale limited, with a requirement for the vendor to provide some statutory warranties about the Each State and Territory has available its own property. It is important that a purchaser standard contract of sale which is in a form obtains legal advice and conducts its own due approved by the relevant peak body for lawyers diligence enquiries and is satisfied in relation to (e.g., applicable Law Society or Law Institute) or all aspects of the property. real estate agents (i.e., the Real Estate Institute for the State or Territory) or both. The contract Statutory disclosure obligations provide some of sale includes among other things the parties’ protection to purchasers. Non-compliance by a details, the property (and any inclusions) to be vendor with statutory disclosure obligations purchased, the price and the settlement date. may give a purchaser the right to terminate a It is important for purchasers to obtain legal contract. advice before entering into a contract of sale Negotiated Amendments and for vendors when having a contract prepared. It is becoming common for contracts If a purchaser or vendor has concerns or issues regarding the property, then the parties can to be signed electronically. However, whether or not banks and other financial institutions are negotiate any required amendments to the prepared to accept electronically signed proposed contract before it is signed and contracts is an evolving matter. exchanged. For example, does the contract need to be conditional on the purchaser Prescribed Conditions undertaking due diligence enquiries or certain Generally, a contract of sale will contain works or obtaining reports which must be standard or general conditions of sale, with the satisfactory to the purchaser? Is there a ability for the parties to include additional particular issue concerning the property (e.g., conditions as “special conditions” or to amend contamination) which needs to be in a special the standard or prescribed conditions. In terms condition? Is the vendor obliged to carry out of priority, the special conditions of a contract works before settlement? will usually prevail over any standard or general Conditional Contracts conditions. When preparing a contract of sale for an off-the-plan purchase, conditions It is not uncommon for the contract of sale to imposed by statute must be included. The be subject to certain conditions. An off-the- requirements for each State and Territory vary. plan contract is one example of a conditional contract, as it is subject to the registration of a Disclosure Requirements plan of subdivision. A contract could also be The vendor disclosure requirements vary for conditional on finance, the purchaser’s due each State and Territory. In some States, a diligence enquiries (e.g., title and property searches, building and pest reports), either the

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[BUYING AND SELLING REAL ESTATE IN AUSTRALIA] 18 purchaser or the vendor procuring a permit for Options the property or the vendor agreeing to Before a contract of sale is entered into, the complete certain works before settlement. It is parties could enter into an option agreement. important that the condition is included in the Option agreements are commonly used by contract and drafted carefully to ensure that developers who wish to secure a right to the party relying on the condition can purchase a future development site. Generally, terminate the contract without penalty if the the option agreement will require the payment condition is not satisfied and is refunded any of an option fee which may or may not form deposit monies paid. part of the deposit which is payable under the Heads of Agreement contract of sale. The option to acquire the Before a contract of sale is entered into, the property is exercisable within a specified time parties may execute a preliminary agreement. frame, which could be several months or years. A heads of agreement (“HOA”) is one example. The contract of sale for the purchase of the A HOA is commonly used when the parties to a property should be attached to the option large transaction are seeking to secure an early agreement. If the option is not exercised within commitment from the other party and wish to the specified timeframe, it lapses. Any option impose obligations of exclusivity and fee paid is usually forfeited to the vendor. It is confidentiality. One of the advantages of having common for the grantee under an option to a HOA is that it sets the contractual framework have the right to assign the benefit of the for the parties at an early stage and helps option to a third party. identify the key terms. The HOA can create a There are several types of option agreements. timetable for certain events to happen. The A call option is where the purchaser has the parties can specify in the HOA if they intend to right to purchase the land, but no obligation to be immediately bound by its terms or if they do so. A put option is where the vendor has are only bound upon the signing and the right to sell the land to the purchaser, but exchanging of a formal contract of sale. If the no obligation to do so. A put and call option is HOA is meant to be binding, this needs to be where the purchaser has the right to call for the expressed clearly in the HOA. Careful drafting option to be entered into by the purchaser (i.e., is required. The disadvantages of using a HOA require the vendor to sell) or the vendor can are that it can be time consuming to prepare put the contract to the purchaser (i.e., require and it could potentially restrict a party’s the purchaser to buy). A put and call option negotiating position in the future. agreement is normally used where the Terms Sheet purchaser intends to proceed with the acquisition. Each State and Territory has its A terms sheet is another example of a own stamp duty regime when dealing with preliminary agreement. A terms sheet can be options. binding or non-binding between the parties. Just like a heads of agreement, a terms sheet Terms Contracts creates the framework for the sale or A terms contract is a special type of contract. acquisition of the property between the parties. Except for Victoria and Western Australia, these The same considerations which apply to a types of contracts are referred to as instalment heads of agreement also apply to a terms sheet. contracts. What constitutes a terms contract or an instalment contract will vary depending on

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[BUYING AND SELLING REAL ESTATE IN AUSTRALIA] 19 the applicable legislation of the State or consideration as to how property is owned is Territory. Terms contracts can be created important as this can have implications for inadvertently. Care must be taken. Generally, stamp duty, estate planning, finance, and tax a terms contract can arise when a purchaser is implications. The co-ownership of a property obliged to make multiple instalments of the can be registered as joint tenants or as tenants price under a contract or the purchaser is in common or a combination of both. entitled to possession or occupation of the Joint Tenancy property before settlement. In some States, the title to the property may be transferred A joint tenancy means that all co-owners own before the purchaser has paid the full price. the property jointly and equally and each co- While in other States the use of these types of owner is entitled to the whole of the property. contracts is either prohibited or their use is This means that upon the death of any of the severely restricted. Where terms contracts or joint tenants, the ownership share of the instalment contracts are permitted, the deceased person automatically passes to the relevant statutory requirements must be surviving joint tenant/s equally. It is the right of strictly complied with to avoid creating a survivorship, which is the principal difference contract which is voidable by the purchaser. between a joint tenancy and a tenancy in Terms contracts can impose restrictions on the common. It is important that legal advice be vendor’s ability to mortgage the property once obtained when determining whether a property sold. Depending on the State or Territory, the should be owned as a joint tenancy or as consent of the purchaser is required to any tenants in common. A joint tenancy form of mortgage of the property. Terms contracts are ownership is commonly used by not common but were used for the sale and spouses/domestic partners. In certain acquisition of rural properties (e.g., farms). circumstances, a joint tenancy can be severed Legal advice should be obtained when you are and converted into a tenancy in common. dealing with a terms contract or instalment Tenants in Common contract. A tenancy in common allows two or more DIFFERENT TYPES OF OWNERSHIP parties to record and specify the percentage in In Australia there are several distinct ways that which they will own a share in the property. property can be owned. This form of ownership is used when the contribution to acquire the property is unequal Sole Proprietor or where the ‘partners’ are not spouses. For If a property is acquired by an individual or by a example, the transfer of land would refer to single corporate entity, that individual or single shares as proportions. This type of ownership corporate entity will be recorded on the allows each owner to separately deal with their certificate of title as the sole registered respective share of the property as they require. proprietor. This also includes transferring their share to a Co-ownership third party or bequeathing their share in the property under their will. This form of If two or more parties purchase property ownership is commonly used in business together in Australia, those owners are co- acquisitions. owners. The two types of co-ownership are joint tenancy and tenancy in common. Careful

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DUE DILIGENCE CONSIDERATIONS purchaser with evidence of the right to sell, Vendor disclosure requirements such as the lodgement of a purchaser’s caveat. A purchaser should be satisfied in relation to all Restrictions /Encumbrances aspects of the property being purchased as A search of the title and plan will reveal most contracts will be vendor-biased and once information which is relevant for a purchaser. signed a purchaser will have little in the way of Such information will show if a property is rights unless those rights are specifically mortgaged or if there are restrictions, negotiated. It is important that purchasers , or encumbrances (any registered conduct their own due diligence as the interests or third-party agreements which disclosure requirements imposed on vendors in affect or limit ownership or use of the land), Australia varies from each State and Territory. which burden the property and potentially limit It is important that legal advice is obtained as what a purchaser can do with the property. A early as possible in the process. It is important title search will also reveal if any third parties that a vendor obtains legal advice to ensure have registered their interests, by a caveat or a they comply with any disclosure requirements mortgage. When a vendor sells and settles the which are imposed by the applicable State or property, the vendor must provide clear title at Territory legislation. Otherwise, a failure to settlement to the purchaser. All mortgages and comply may give a purchaser rights to caveats must be removed by settlement. A terminate a contract before settlement. vendor warranty to provide clear title is Caveat Emptor common in a contract. The doctrine of caveat emptor or “let the buyer Planning Checks beware” means that purchasers looking to buy Purchasers should check the local planning property in Australia should undertake their scheme or planning restrictions for the own due diligence enquiries. Due diligence property being purchased. This is important if a enquiries can be conducted before a contract is purchaser has a particular use for the property. signed or the contract can be signed subject to In Australia, such controls are achieved through the purchaser undertaking its due diligence legislation and planning policies and enquiries and being satisfied with them within a instruments. Each State and Territory has its specified timeframe. The extent of those own regulatory framework. Responsibility for enquiries will depend on the value of the implementing those requirements is usually property. with the State Government and the local Title Search councils. Contracts of sale often contain conditions, which provide that a purchaser buys Conducting a title search of the property is the the property subject to all restrictions, first step. It is important to check that the including those under the relevant planning vendor who is selling the property is actually scheme. It is important that a purchaser is the registered owner on title and to see a plan satisfied that they can use the property for the of the land being purchased. In Victoria, a desired purpose. For example, is a permit person can sell land before that person has required for the proposed use? In certain become the registered proprietor of the States, disclosure obligations will reveal the property. This can be achieved by providing a relevant zoning of a property, but full enquiries may be warranted.

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Property Inspections Environmental Checks A physical inspection of the property by the Each State and Territory has its own regime for purchaser is important. They may include dealing with contaminated land. Generally, the expert building inspections and pest and person who causes the contamination is termite inspections. A purchaser should check responsible. However, if that person no longer that the improvements on the property are owns the land, or cannot be found, then the sound and compliant with the applicable relevant authorities may require the owner of building legislation. A contract of sale will often the land to deal with any contamination issues. include an acknowledgement that the It is important for purchasers to check the purchaser accepts the condition of the property environmental condition of the property, as at the day of sale. It is equally common that especially if they have a particular use in mind the vendor need only deliver the property at or the property may be contaminated. settlement in the condition it was in on the day Although this is less of an issue for existing of sale. A contract can be conditional on the residential land, it is a relevant consideration purchaser obtaining a satisfactory pest/termite for industrial or commercial sites. If the land is inspection and if not satisfactory, then the contaminated, certain uses may be prohibited purchaser can terminate the contract. by the relevant planning regime, unless certain Survey requirements are met (e.g., remediation of the land). If a purchaser is looking to use the Purchasers should check the title boundaries of property sensitively (e.g., residential or the property. Are all fences and improvements childcare), it is essential that the purchaser is erected within the title boundaries of the satisfied with the environmental condition of property? If not, there could be issues in the the property. It is common in contracts of sale future if the owner of a neighbouring property for a vendor to sell a property in its current seeks to enforce its rights. The principle of condition and subject to any contamination. A means that a person may vendor will seek a release and indemnity from a claim land by long usage. The requirements for purchaser in respect of any claims, which may adverse possession claims vary from State to arise from contamination. If a vendor has a State. However, adverse possession claims are contamination report, the report will often be not part of the in the Northern disclosed to the purchaser and the purchaser Territory or the Australian Capital Territory. will be expected to purchase the property Services subject to that report. As the vendor disclosure regimes vary from Finance each State and Territory, it is important that a If a purchaser requires finance to purchase the purchaser is satisfied with the level and quality property, then the contract can be made of the services (i.e., water, sewerage, electricity, conditional on finance being obtained. and gas) at the property. Do they exist? What is the state and condition of the services at the Land Tax property? A failure to check for services could When purchasing a property, it is important to result in a purchaser incurring substantial cost if understand what annual outgoings are payable they need to be installed to the property and such as council rates, water rates and land tax. connected. Land tax is calculated as a percentage based on the value of land and is an annual charge. The

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[BUYING AND SELLING REAL ESTATE IN AUSTRALIA] 22 purpose of land tax is to assess an owner of Securities Act 2009 land on the aggregate value of all taxable land Purchasers should check whether the vendor they hold in a particular State or Territory. has granted any security interests under the Land tax is payable in each State and Territory Personal Property Securities Act 2009 (Cth) in Australia except for the Northern Territory. (“Act”). This Act came into operation on 30 The thresholds for when land tax is payable January 2012 and it relates to personal vary for each State and Territory. property. A security interest in personal If the property being purchased is held on trust, property includes most forms of tangible and a trustee surcharge may apply. New South (e.g., motor vehicles, goods, Wales, Queensland, Victoria, and South long term leases). However, the Act excludes Australia have a trustee surcharge regime. dealings in land. If there are security interests Depending on the State, different tax-free registered against the vendor, then a purchaser thresholds apply for property held on trust. should check if the security interest affects any Land tax is not payable by an owner who uses goods, plant, or equipment, being purchased by the property as their principal place of the purchaser. If a security interest exists, the residence. Foreign owners are obliged to pay purchaser must ensure that the contract additional absentee duty. requires the security interest to be released at Leases settlement. The release of registered security interests is usually dealt with in the conditions If the property is leased, then the sale of the of the contract. property will be subject to the lease, unless the lease expires before settlement occurs. In GOODS AND SERVICES TAX some States and Territories, leases of a certain GST is a Federal tax of 10% introduced in duration must be registered on title. If a Australia on 1 July 2000 under A New Tax property is leased, this means that vacant System (Goods and Services Tax) Act 1999 (Cth). possession of the property will not be provided It is similar to a value added tax, whilst the to the purchaser at settlement. The type of primary liability for GST is on the vendor, or property (e.g., residential, commercial, or supplier, a contract may transfer responsibility retail) will determine the type of lease. For to the purchaser. GST is imposed on the example, if the property is used for retail supplier in respect of taxable supplies. purposes (e.g., a shop), then the lease will likely Whether GST applies to a particular property be a retail lease and will be subject to the transaction will depend on whether the supply relevant retail tenancy legislation. Each State is taxable. and Territory has its own retail tenancy Threshold Requirements legislation, which is very prescriptive. It is important for a purchaser to review the terms Whether a supply is taxable will depend on four of the lease to ensure it is enforceable, the threshold requirements: vendor has been complying with the retail • Consideration (monetary or otherwise, but tenancy legislative requirements and there are not a gift); no tenant rights in addition to those contained in the lease. • Australia (transaction must occur in Australia);

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• Registered entity (supply must be made by If GST is payable on a property transaction (i.e., an entity registered for GST); and the four threshold requirements have been satisfied), then the supplier (i.e., vendor) must • Enterprise (supply must be made in the provide the purchaser with a tax invoice for the course of an enterprise). GST. A contract of sale is not usually a valid tax Just because a vendor is not registered for GST, invoice. Stamp Duty is payable on the higher of does not mean that GST is not payable on the value and the purchase price for the transaction. GST can still be payable if the property plus GST. supplier is not registered for GST but is required GST Free Supplies to be registered for GST. To avoid unexpected GST liability, it is important that the right Not all supplies of property will attract GST. questions are asked at the outset and legal and Some supplies are treated as being GST free accounting advice is obtained. (i.e., no GST is payable). The following are examples of GST free supplies: Whether Price Inclusive or Exclusive of GST Sale of a farm In property transactions, it is the vendor as the supplier of the property who is primarily liable In order for the sale of a farm to be GST free, to remit the GST to the Australian Taxation the property must have been used as a farm for Office (“ATO”). If GST is payable, then 5 years before the sale. purchasers should pay attention as to whether Going Concern the price for the property is inclusive or exclusive of GST or GST free. If the purchase The sale of leased commercial/retail or price is exclusive of GST, the additional cost of industrial property can be GST free. This is GST can be significant, depending on the price referred to as the “going concern” exemption. for the property. In order for the exemption to apply, certain criteria must be satisfied: The imposition of GST is an important consideration for a vendor when preparing the • The purchaser is registered for GST; contract of sale. If a vendor expects to receive • The vendor and purchaser agree in writing a certain price for the property, then GST needs that the supply of the property is that of a to be factored into the price. Otherwise, the going concern; vendor could receive 10% less at settlement. How GST is dealt with under the contract is • The vendor must supply everything important. For example, if a vendor expects to necessary for the continued operation of receive a particular price for a property, then the enterprise (i.e., the enterprise of the price should be stated in the contract as leasing); and GST exclusive. There should be a provision • The vendor must carry on the business until which requires the purchaser to pay or settlement. reimburse the vendor for GST in addition to the If the going concern exemption is not satisfied, price. Similarly, for a purchaser, GST is an it is critical that the contract contains a claw important consideration when purchasing a back provision for GST. The claw back provision property. The imposition of GST needs to be will enable the vendor to recover the amount factored in when considering the purchase of GST from the purchaser. It is important for price. the claw back provision to remain enforceable

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[BUYING AND SELLING REAL ESTATE IN AUSTRALIA] 24 after settlement has occurred for a certain The application of the margin scheme will differ period of time in case there is an issue. It is not depending on when the property was acquired: uncommon for a claw back provision to remain • If the property was owned by the vendor as enforceable for a number of years after of 1 July 2000 (i.e., was acquired before 1 settlement. July 2000 when GST was introduced); or Input Taxed Supplies • If the property was acquired by the vendor The sale of existing residential property (i.e., after 1 July 2000 (i.e., after GST was not new residential property) is input taxed. introduced). This means that no GST is payable. Even if the If the property was owned by the vendor as of property is owned by a company, provided the 1 July 2000, then GST is calculated on the property has been used as residential premises, margin or difference between the valuation of it will be input taxed. New residential premises, the property as of 1 July 2000 and the sale price. the sale of new residential or commercial If the property was acquired by the vendor residential property will attract GST if sold in after 1 July 2000, then GST is calculated on the the course of an enterprise. margin or the difference between the Mixed Supplies acquisition cost (i.e., what the vendor paid for Certain supplies of property are considered to the property) and the sale price (i.e., what the be a “mixed supply”. That is, both taxable and vendor is now selling the property for). nontaxable (i.e., input taxed) for GST purposes. Assuming the margin scheme is available, the An example of a mixed supply is the sale of parties must agree in writing that it applies. commercial or retail property, which also has Such agreement is usually contained in the existing residential premises. It is important contract, but it can sit outside of the contract. that the contract deals with the mixed supply GST Withholding Regime issue. It will be necessary to apportion the price and determine what portion of the Since 1 July 2018, purchasers of certain types of property constitutes the taxable supply and the residential premises and potential residential non-taxable supply. land are required to withhold GST and pay it to the ATO. Margin Scheme The withholding regime applies to supplies by If GST is payable on a property transaction, the way of sale or a long-term lease where the amount of GST payable can be reduced if the contract is entered into: vendor can adopt the margin scheme. Developers prefer to apply the margin scheme • On or after 1 July 2018; or (if it is available) to the calculation of GST. It is • Before 1 July 2018 where the first important to understand that the margin consideration (excluding the deposit) is scheme is not automatically available. Certain received on or after 1 July 2020. criteria have to be satisfied before it can be applied. Generally, a vendor can only sell The GST withholding regime applies to supplies property using the margin scheme if they for: purchased the property using the margin • New residential premises (that are not scheme, or no GST was payable. created through substantial renovations or commercial residential premises); and

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• Potential residential land that is included in Depending on the State or Territory, there may a property subdivision plan at the time of be some exceptions to the cooling off rights. supply (i.e., settlement of the transaction), Exceptions may include if the property is where: purchased at a public auction or within three days of auction or is over a specified size. It is

important that legal advice is obtained if there o The land does not contain buildings is a statutory right to cool off and a purchaser used for commercial purposes; wishes to exercise that right. If the cooling off o The recipient is not registered for right is not exercised in strict compliance with GST and does not require the land the relevant legislation, then a purchaser will for a creditable purpose. be legally bound under the contract. A vendor of residential premises or potential Registration fees residential land must give the purchaser written Each State and Territory has its own land titles notice before making a supply. The notice must registry office which charges a registration fee contain details as to whether the purchaser will for transferring the ownership of the property. be required to make a withholding payment. This transfer fee is charged in addition to any The notification requirements also extend to stamp duty which may be payable on the existing residential premises even if the property transfer. The transfer of land supplier is not registered or required to be registration fees varies depending on the State registered for GST. Failure to comply with the or Territory and are often calculated on a scheme is a strict liability offence. sliding scale according to the purchase price. OTHER IMPORTANT CONSIDERATIONS Registration fees are also charged to register any other dealing against the property title Cooling off (such as a mortgage or caveat). Generally, once a contract of sale for property PEXA fees has been properly entered into, it is binding on the parties. However, in Australia, certain PEXA is an electronic lodgement platform, States and Territories have legislation which which enables property settlements to occur provides a purchaser of residential property electronically online and in real time. PEXA is with a statutory right to “cool off” under a currently operating in Victoria, Queensland, contract. The cooling off right means that New South Wales, South Australia, Western subject to certain conditions being met, a Australia, and the Australian Capital Territory. purchaser may bring the contract to an end by This electronic process has replaced the former notice in writing to the vendor. The cooling off paper settlement method. PEXA allows the right has to be exercised within a specified parties to a property transaction to settle, period of time from when the contract of sale stamp and register the transfer of the property was signed (usually 3-5 business days). online. All parties to the transaction are charged a PEXA fee. This fee Each State and Territory has their own covers services provided by PEXA, which statutory requirements, including the include pre-population of land registry data, timeframe, the percentage of money to be lodgement verification checks and the use of forfeited and the notice requirements, except the PEXA platform. The PEXA fee varies for Tasmania and Western Australia. depending on the transaction.

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Stamp duty payable on acquisition of land (or a company (private or public) or a unit trust an interest in land) scheme which has land holdings of a minimum If you acquire property in Australia, each State threshold value, which varies amongst each State or Territory. What constitutes and Territory requires ‘stamp duty’ to be paid on the acquisition. Stamp duty is charged at a landholdings is broadly defined and depending flat rate or an ad valorem rate (based on the on the State or Territory includes interests in value of the transaction). The rate of duty land (including leases), fixtures on the land or payable on a property acquisition varies fixtures held separately on the land and may between each State and Territory. It can also include certain rights in relation to the land depend on whether or not you are an ‘owner- such as mining tenements and derivative occupier’ or an investor. In some cases, the mining rights. In Victoria, economic location and nature of the property (whether entitlements in relation to the land can rural or suburban) can affect the rate of duty constitute a landholding. A landholder may be payable. The timeframe for paying stamp duty entitled to land in different ways by direct varies for each State and Territory and there ownership (e.g., registered proprietor), indirect are various stamp duty concessions and ownership (e.g., constructive ownership) or exemptions available. Generally, stamp duty is deemed ownership (e.g., uncompleted payable by the purchaser. It is important to agreements). The acquisition of an interest in a understand how much stamp duty is payable in landholder which is subject to the regime has to any property transaction and to obtain legal satisfy a threshold requirement before duty is advice. payable (e.g., constitute a significant interest). Exemptions or concessions may apply for Depending on the State or Territory, you may landholder duty if the acquisition is due to a be able to apply for a stamp duty exemption or corporate reconstruction or consolidation. reduction. This is generally where there is no Duty is charged at the same general rate as if it change in the underlying ownership. In were an acquisition of the real estate held by Australia, first home buyers can apply for a the landholder. Liability for payment of stamp duty and in some States, landholder duty varies. In some States, liability pensioners can also apply for a concession. for landholder duty is joint and several between Higher rates of duty are payable on property the acquirer and landholder. In other States, acquisitions if you are a foreign purchaser. A landholder duty is payable by the person who higher rate of duty will be imposed on trusts makes the acquisition. It is important to seek with foreign beneficiaries who purchase legal advice. property. Economic entitlements In the wake of COVID-19, some states are Landholder duty in Victoria on economic removing or reducing stamp duty payable to entitlements has impacted developers and stimulate activity. affected how development agreements are Landholder duty drafted. When the economic entitlement provisions were introduced, they were limited Each State and Territory has its own landholder in their application and only applied where the duty regime, which imposes duty on certain landholder was a private company or a unit acquisitions of interests in companies and unit trust and there was a 50% threshold. The trusts that own land. A landholder is generally provisions did not apply to landholdings of

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[BUYING AND SELLING REAL ESTATE IN AUSTRALIA] 27 individuals or discretionary trusts. However, taken reasonable steps. If a person resides since 19 June 2019, the 50% threshold has been overseas, the VOI check can be undertaken by a removed and the provisions apply to any type notary public who certifies that they have of landholder. A person who acquires an verified the identity of the party and provide economic entitlement in relation to land is certified copies of the identity documentation taken to have acquired a beneficial ownership (e.g., passport and driver’s licence). The VOI of the land. If the arrangement does not documentation is considered valid for 24 specify the percentage of economic entitlement, months and can be relied upon across multiple it is deemed that the person has acquired a conveyancing transactions. 100% interest in the relevant land. Economic Adjustments at settlement entitlements include an arrangement under which a person is entitled to participate in the In addition to the payment of the price and GST income, rents, or profits of the land, proceeds (if applicable) by the purchaser to the vendor at of sale or capital growth. It is important that settlement, there is an adjustment of certain legal advice is obtained when drafting annually payable outgoings. Subject to the agreements for these types of arrangements. terms of the contract, certain outgoings are apportioned between the vendor and Verification of identity purchaser. The vendor is usually responsible It is a requirement of the land titles office in for all outgoings up to and including the day of each State and Territory that the identification settlement and the purchaser is responsible for of the parties in a property transaction be all outgoings from settlement. The outgoings verified (“VOI”). VOI checks are intended to which are commonly adjusted are council rates, protect against identity and fraudulent water rates, land tax, owners’ corporation land title transactions. This VOI requirement fees/levies and rental income (as applicable). applies to individuals as well as corporate Before settlement, a statement of adjustments entities. The existence of the company must be is prepared for the parties. This is usually confirmed and the identity of the persons prepared by the purchaser’s solicitor. The signing on behalf of the company must be adjustment amount for the outgoings is paid or verified. If an attorney has been appointed offset against the balance of the purchase price under a power of attorney, the attorney’s to be paid by the purchaser at settlement. identity must also be verified. Unless the contract provides otherwise, there is Solicitors are required to certify to the relevant no adjustment for utilities such as electricity, land titles office that the VOI checks have been gas, or telephone services. It is the vendor’s completed. This verification process is responsibility to ensure that all utilities are particularly important due to property cancelled from settlement and it is up to the transactions in Australia now being settled purchaser to make their own arrangements online using PEXA. Verification checks are regarding the utilities from the date of usually completed by a solicitor for the party or settlement. Australia Post. “Reasonable steps” are required Settlement – using PEXA to verify the identity of a party. The Australian Registrars National Electronic Conveyancing As previously discussed, PEXA is an electronic Council has issued a “verification of identity lodgement platform that enables legal standard” (“Standard”). If the Standard is practitioners, conveyancers, and financial followed, then that person is deemed to have institutions to prepare, lodge and register land

ILN Real Estate Group – Buying and Selling Real Estate Series

[BUYING AND SELLING REAL ESTATE IN AUSTRALIA] 28 registry documents and effect property Capital Gains Tax settlements online in real time. Using PEXA has Generally, tax is payable on the capital gains led to a significant reduction in the manual made from selling property. Discounts are processing of paperwork by allowing land available in certain circumstances. However, registry documents to be lodged electronically. this does not apply to gains made from the sale PEXA also facilitates the transfer of funds in real of a principal place of residence. time. PEXA as a platform has its limitations, but it is still evolving and will continue to develop. Death duties This means that in some cases the parties are Australia does not have a death duties regime. required to complete their standard conveyancing process outside of PEXA (i.e., IMPORTANT FOREIGN INVESTMENT contract reviews, ordering of property CONSIDERATIONS certificates, preparing the statement of Foreign resident capital gains withholding adjustments). Foreign resident capital gains withholding Agents applies to vendors who sell certain taxable It is common to engage a real estate agent property under contracts entered into from 1 when selling property in Australia. Real estate July 2016. It applies to sales of property where agents must be licensed and will require the the contract price is $750,000 or more. The tax vendor to execute a sales authority or rate is 12.5%. It imposes an obligation on agreement. Each State and Territory has its purchasers to withhold 12.5% of the price at own legislation which governs the real estate settlement and to remit it to the ATO if the industry. If a real estate agent is engaged, the vendor is a foreign resident. A foreign resident vendor will be required to pay the agent a vendor can claim a credit for the foreign commission as agreed in the sales authority or resident capital gains withholding payment by agreement. A common structure can be lodging a tax return with the ATO. Australian negotiated. The trigger for payment of the resident vendors can avoid this requirement by commission is usually when the contract providing the purchaser with a clearance becomes unconditional. The vendor will also certificate. The withholding obligation applies be required to pay advertising and marketing to both Australian resident and foreign resident costs associated with the sale of the property. purchasers. Some real estate agents offer a ‘flat fee’ or Foreign Investment Review Board – foreign ‘fixed fee’ . It is becoming common for purchasers buyers to engage agents as buyers’ advocates. The Foreign Acquisitions and Takeovers Act Consultants frequently engaged 1975 (Cth) (“FATA”), Foreign Acquisitions and Takeovers Regulations 2015 (Cth) and the The types of consultants commonly engaged in Australian Federal Government’s specified property transactions from time to time include Foreign Investment Policy provide the builders, building surveyors, land surveyors, framework for dealing with a “foreign person” environmental and geotechnical consultants, or a “foreign government investor” who town planners, valuers, feasibility analysts, propose to purchase property in Australia. architects, and engineers. In addition to these Depending on the type of property being consultants, it is also important to obtain legal purchased, if you are a “foreign person” for the and accounting advice.

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[BUYING AND SELLING REAL ESTATE IN AUSTRALIA] 29 purposes of FATA, you must apply for foreign increase the number of new residences being investment review board (“FIRB”) approval developed. prior to the property being transferred. This There is no threshold for the purchase of means that contracts of sale for property by a residential property, but there is a threshold for “foreign person” are typically conditional on the purchase of developed commercial the purchaser obtaining FIRB approval within a property. If you are a foreign non-resident specified time. If FIRB approval is not obtained, investing in commercial land, there are specific then the contract can be terminated. thresholds that determine whether you are A “foreign person” not only includes an required to notify the FIRB prior to acquiring an individual who is not ordinarily resident in interest in property. However, if you are Australia, but it also includes: purchasing commercial vacant land, there is no threshold, and you must notify the FIRB. The • a corporation or the trustee of a trust in same situation applies if you are a foreign which an individual not ordinarily resident government investor. in Australia, a foreign corporation or a foreign government holds a substantial Contracts of sale are generally conditional upon interest; and a purchaser obtaining FIRB approval within 30- 45 days of the day of sale. • a corporation or the trustee of a trust in which 2 or more persons, who together If you are a permanent resident in Australia or hold an aggregate substantial interest, are: if you are from , exemptions apply and FIRB approval is not required prior to (a) not ordinarily resident in Australia; acquiring an interest in Australian property. If (b) a foreign corporation; or you are a temporary resident, it is likely that (c) a foreign government entity. you will be granted FIRB approval to purchase vacant land or a residential dwelling off-the- A “substantial interest” for the purposes of the plan, however, the approval is likely to be above means an interest of 20% or more in the subject to conditions. relevant company or trust. Recent changes due to the Coronavirus There are certain restrictions imposed when dealing with the purchase of residential and From 29 March 2020 onwards, the Treasurer commercial property by “foreign persons”. announced that due to the impacts of the Generally, foreign persons are unable to coronavirus all monetary screening thresholds purchase existing residential dwellings unless will be temporarily reduced to $0. The Foreign they are a temporary resident (at a minimum). Acquisitions and Takeovers Amendment By way of contrast, foreign non-residents have (Threshold Test) Regulations 2020 have the ability to purchase ‘new dwellings’ within effected this change. This means that a Australia. A new dwelling is defined as being a greater number of investments made by dwelling that has not been previously occupied foreign persons in Australia will need approval. or a dwelling within a development that has not OWNERSHIP STRUCTURE been occupied for more than a total of 12 When looking to acquire property in Australia, months. These parameters aim to encourage it is important to consider the most appropriate the creation of jobs within Australia and also legal structure in which to own the property. The key issues will be asset protection, taxation

ILN Real Estate Group – Buying and Selling Real Estate Series

[BUYING AND SELLING REAL ESTATE IN AUSTRALIA] 30 issues, stamp duty, land tax, estate planning, the company (i.e., shareholders) to third parties complexity, and cost. It is important that is generally limited to the amount (if any) which specific legal and accounting advice is obtained is unpaid on their shares. There are public before deciding upon what is the most companies and proprietary companies (i.e., appropriate structure for ownership of the private). A proprietary company is simpler and property. The most common structures are less expensive to administer than a public individual, company, trust, partnership, and company. The process for incorporating a joint venture. It is also possible to buy an proprietary company in Australia is a relatively interest in a property by buying shares or units straightforward process and inexpensive. A in the ownership structure. company can be registered within a couple of Individual days. One disadvantage with using a company structure is that if the property is sold and a Ownership by an individual is the simplest capital gain is made, the company cannot claim option. It means that all debts and liabilities the 50% capital gains discount on any resulting attached to the property will be the capital gain. responsibility of the individual. The individual will have sole control of the property. An Trust advantage of an individual is that if the Under a trust structure, the trustee (who may property is held as an investment and it is be an individual or company) holds all income subsequently sold and a capital gain is made, and capital (e.g., the property) on trust for the the individual will be able to take advantage of beneficiaries. The beneficiaries can be the 50% capital gains discount. The capital individuals, trusts or companies. The trust is gains tax is a Federal tax imposed on the capital created by a document called a trust deed. The gains realised from the sale of assets. To take trust is governed by the terms of the trust deed, advantage of the capital gains discount, the State or Territory legislation and the common property must be held by the individual for 12 law. months or more. If the property is held by a Whilst the trustee must be a legal entity, the foreign resident individual, the 50% discount is trust is not a legal entity. It is merely a body of removed or reduced on capital gains made rules around ownership, management, and after May 2012. The main disadvantage with control. The Torrens system of recording individual ownership is that it does not offer ownership of land in Australia struggles to any asset protection. The individual’s creditors recognize the existence of a trust as only the will have the right to claim against the personal trustee is registered on title. No particulars of assets of the owner, including the property. any trust are recorded in the register which Company provides anonymity, and also some flexibility. A company is a legal entity and has the same There are three main types of trusts. rights and obligations as an individual person Discretionary Trust but is subject to regulation by the Corporations Act 2001 (Cth). This means that a company can A discretionary trust means that the trustee has incur debt, can sue, and be sued and it is taxed the discretion to distribute the income and as a separate legal entity. One of the capital of the trust to a range of beneficiaries. advantages of using a company to own the Discretionary trusts (also known as a family property is that the liability of the owners of trust) commonly have specified beneficiaries,

ILN Real Estate Group – Buying and Selling Real Estate Series

[BUYING AND SELLING REAL ESTATE IN AUSTRALIA] 31 as well as classes of general beneficiaries Joint Venture (with or without nominee) (which may include the family members of a A joint venture is another example of a named beneficiary and associated companies structure, which may be considered when and trusts). Under a discretionary trust, the dealing with property. A joint venture is when trustee can but is not obliged to make two or more parties come together in order to distributions, which consider the beneficiaries undertake a specific project. For example, the individual tax circumstances. A discretionary acquisition and development of a property. trust may also provide a reasonable level of asset protection as the beneficiaries of the trust The parties usually enter into a joint venture are generally not entitled to income or capital agreement which contains the rights and until the trustee decides to make the obligations of each joint venture party. Each distribution. Another benefit with using a trust party is treated individually or separately for is that a trust can take advantage of the 50% tax purposes, so each party can use their own capital gains tax discount if the trust held the preferred tax structure. In this type of joint property for at least 12 months before it is sold, venture, a nominee is often used to hold the and the capital gain is distributed to an joint venture property as bare trustee. The individual or another trust. nominee can provide a corporate identity for the joint venture and also act as the operator of Unit Trust the joint venture. Under a unit trust, the beneficiaries (which are Partnership (with or without nominee) referred to as unit holders) subscribe for units in the trust. Each unitholder has a fixed Another alternative structure to consider when interest in the capital and income of the trust dealing with property is a partnership. Unlike a that corresponds with the proportion of units joint venture, a partnership is an arrangement they hold. Units can be bought and sold. Unit between two or more entities to carry on a trusts have the benefit of conferring a clearly business together with a view to a profit. defined entitlement and are considered to be Except for certain professional partnerships, more appropriate than a discretionary trust for business partnerships cannot have more than non-family ventures. 20 partners. A partnership is created by an agreement among the partners, which is Fixed Trust usually documented in writing. The partnership Unlike a discretionary trust, a fixed trust is a is regulated by the terms of the partnership trust where beneficiaries have a fixed agreement (if there is one), the common law entitlement. The trust deed fixes the and the relevant partnership legislation, which proportion of income and capital that each applies to the applicable State and Territory. beneficiary is entitled to throughout the A partnership is not a separate legal entity and income year. With a fixed trust, the trust can each partner is jointly and severally liable for take advantage of the 50% capital gains the debts of the partnership. Partners also discount if there is a sale of the property where share in the profits of the partnership. Limited a capital gain has been derived and the partnerships can also be established in some property has been held for 12 months or more. states under specific state legislation. Limited partnerships allow some partners to limit their liability for debts. Limited partnerships are generally taxed as companies.

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It is common for a partnership to operate through a nominee company. The nominee’s role is usually very limited with no control or decision-making powers in relation to how the partnership should be conducted. It is the partnership rather than the nominee which actually carries on the business. The nominee provides a corporate identity for the partnership.

ILN Real Estate Group – Buying and Selling Real Estate Series

Fall

20 INTERNATIONAL LAWYERS NETWORK

KLA – KOURY LOPES ADVOGADOS Buying and Selling Real Estate in Brazil

I L N R E A L ESTATE GROUP

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER BRAZILIAN LAW 1. OVERVIEW OF BRAZILIAN HISTORY current constitution, formulated in 1988, Brazil is a federative republic and the largest defines it as a democratic federal republic. country in both South and Latin America. It is The federation comprises the union of also the world's fifth-largest country the Federal District of Brasília, 26 States, and by area and sixth by population. In the 5,570 Municipalities. The legal system of all Americas, it is the only country where States and the Federal District is governed by Portuguese is the official language. the Civil Law system, derived from the French Bordered by the Atlantic Ocean on the east, Napoleonic Code, as reflected primarily in the Brazil has a coastline of 7,491 kilometers Civil Code. (4,655 mi). It borders all other South American In practice, this means that just Brazilian State countries except Ecuador and Chile and covers regulations on notarial and conveyancing 47.3% of the continent's land area. The matters, together with the municipal is a world-renowned vast tropical forest, home ordinances on urban property taxation bring to diverse wildlife, a variety of ecological over 5,597 different enacted provisions into systems, and extensive natural resources consideration when acquiring real estate in spanning numerous protected habitats. This Brazil! unique environmental heritage makes Brazil 2. DIFFERENT TYPES OF focal point of significant global interest and debate regarding foreign ownership of rural The classification of a property depends on its land, deforestation, and environmental use and it is, therefore, irrelevant where the protection. property is located (i.e., property located in an urban area with municipal zoning regulations Explorer Pedro Álvares Cabral claimed the area will be considered rural property if used for for the Portuguese Empire in 1500. Brazil rural purposes). There are two main types of remained a Portuguese colony until 1808, when property: the capital of the empire was transferred from Lisbon to Rio de Janeiro. In 1815, the colony a) Rural property. was elevated to the status of kingdom upon the b) Urban property. formation of the of Portugal, Brazil and the Algarves. Independence was Urban properties can be classified as residential, conferred in 1822 with the creation of commercial, and industrial. The ownership of the Empire of Brazil, a unitary state governed urban property may be classified as fractional by a constitutional monarchy and a ownership, joint ownership in a condominium parliamentary system. The ratification of the building or a co-ownership in an ordinary first constitution in 1824 led to the formation of condominium. a bicameral legislature, now called the National All the regulations applicable to property Congress and also marked the introduction of cadastre, rules, restrictions and other the real property registry system. The requirements depend on the classification of country became a presidential republic in 1889 the property. following a military coup. A military junta came to power in 1964 and held power until 1985, after which civilian rule was reinstated. Brazil's

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3. TYPES OF REAL ESTATE DEVELOPMENTS Federal Law no 13,465/17, this type of Brazil law basically recognizes the following condominium entails division of plots types of land development: into lots, without improvements, created/developed as individual units a) Urban properties: with the remaining areas registered as a.1) Allotment - the division of a plot of communal property. land into lots with the installation of b) Rural properties: the necessary infra-structure, i.e.,

serviced lots (e.g., streets, water, b.1) Allotment - same concept as above; sewage, electricity for transfer to b.2) Land division - same concept as above. public agencies upon conclusion) The development of urban real estate projects prepared and ready for sale. There has in Brazil typically occurs through a sales process been a notable impact on this type of that begins prior to construction of the project development following the enactment where buyers purchase units 'off-plan', i.e., of new Federal Law no. 13,465/17 that based on architectural plans and models. now permits a local municipality to control access to allotments, which A typical urban real estate project would has resulted in a fierce debate about comprise the following stages: the legality of access control to such a) Land Analysis. Mainly involves the allotments which, as a result, ended; calculation of the: a.2) Land division - the division of a plot of a.1) Maximum amount of built area that land into lots without the installation could be constructed on the land, as of infrastructure (because the plot prescribed by local zoning, and use already has access to the necessary category legislation; infrastructure); a.2) Unit sale price, which varies according a.3) - real estate to project and the property location, developments are regulated by Law its distinctiveness, as well as the 4,591/64, thus created by dividing a characteristics of the units on which piece/portion of real estate into the analysis is based; several individual/separate and private constructed units, whereby an a.3) The cost of the project, which undivided interest in the real estate is primarily comprises construction established/registered in each unit. costs, marketing costs, brokerage For the development and sale of expenses and taxes; and units with the hotel and lease a.4) Environmental and zoning administrations included the requirements pursuant to local Securities Commission’s Normative regulations (Federal and State Ruling nº 602/18 must be also regulations) might be also applicable. observed; b) Project approval. Any real estate project a.4) Plots under the condominium regime - must be approved by the relevant brand new type of real estate Municipality prior to the commencement development also regulated by new of the project.

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c) Project development. A property j.4) seizure. developer is permitted to start selling the 5. GUIDELINES AND MAIN STEPS IN THE units of a real estate project only after PROCESS OF REAL PROPERTY ACQUISITION obtaining regulatory approval and the relevant permits referred to above and Acquisition of a real estate property in Brazil, after the project development has been whether urban or rural, essentially involves the registered with the relevant Real Estate following steps: Register Office. ✓ Finding a property for sale, possibly with d) Due-Diligence. the assistance of a real estate broker/realtor, whose assistance is not

e) Project Launch. Essentially the start of the mandatory. The broker's fee and payment units’ sale. The sale of units may only take thereof, which is negotiable between the place after a project has been approved parties and broker, and may be up to 6% and the development has been duly of the purchase price. registered before the relevant Real Estate Registry Office. ✓ The purchaser, whether an individual or company, must have a Brazilian Tax

f) Construction. Registration Number issued by the 4. TYPES OF IM REM RIGHTS IN BRAZIL Federal Revenue authority. The a) ownership; registration procedure is straightforward and can be carried out by a third party b) surface; (attorney–in-fact). c) use; ✓ Execution of a private sale and purchase d) right-of-way; agreement. This is not a mandatory step but is recommended given that such an e) enjoyment; instrument entitles the parties concerned f) habitation; to not only establish all the conditions to be met to conclude the real property g) right to acquire; acquisition, but also to outline all the h) pledge; obligations with respect to the formalities i) right of floor slab ("Direito de Laje", which to be complied with prior to the roughly translates to the Right of the acquisition, among which, notably, due Floor Slab, allows to obtain a distinct title diligence. to construction on top of or under ✓ Property legal due diligence. It is highly another building even though it sits on recommended that a legal due diligence the same land) - regulated by the new on the property is conducted by a lawyer Federal Law no 13,465/17; appointed by the purchaser, which would j) right to guaranty: include a detailed audit of the rights of the seller and his/her predecessors, as j.1) mortgage; well as a research on any encumbrances j.2) fiduciary ; that may be registered over the property (mortgages, claims, etc.). The property j.3) antichresis; due diligence is a very important step,

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given that Brazilian Notaries are not of a notarized Power of Attorney; or (iii) obliged to (and hence will not) perform choose for the digital signing, which will such due diligence, moreover, given that be done by a videoconference held by it is possible to waive in the deed of the Notary Public. The deed must be purchase the right to certain information drawn in the Portuguese language only. and to obtain the basic clearance The Notary Public will read the deed certificates. It is important to note that aloud to the parties. Therefore, a non- recent changes in Brazilian Law could Portuguese-speaking party (if attending facilitate the legal due diligence measures the execution of the deed in person) will given that, among other provisions, the need to appoint and have a translator law now states that any claims, present. Regarding the digital signing, it encumbrances or (with some is important to mention that electronic exceptions) will affect the sale of a real signatures in Brazil are regulated property only if such encumbrances or through Provisional Measure No. 2200-2 liens were duly registered and therefore / 2001 (“MP 2200-2”), which created appear in the property ownership record the Brazilian Public Key Infrastructure file, with the relevant Real Estate Registry (“ICP-Brasil”), the national system of Office (the ownership record file is a digital certification. Therefore, to mandatory certificate for the execution of properly execute a digital deed, the the real property sale deed). parties must have an ICP-Brasil digital ✓ Technical (e.g., engineering, geological or certificate. The issuance of an ICP-Brasil archeological) and environmental due digital certificate requires: (i) a taxpayer registration in Brazil (“CPF”); (ii) a face- diligence would also be recommended, depending on the status of the property, to-face meeting before a Certification its historical data or the prior (or future) Authority to collect biometric use of the property. (fingerprint and face). ✓ ✓ Execution of the purchase deed before a Payment of the property ownership Notary Public. In Brazil, the acquisition transfer tax. In general, the property of any real property occurs solely by ownership transfer tax (a Municipal tax) virtue of a notarial deed (save for must be paid upon the execution of the certain exemptions, as in the event of deed, but the rules on the payment of this the permission obtained for the tax and its rates vary in accordance with acquisition of a property for a price the applicable rules imposed by the lower than the official minimum wage, municipal authority where the property is or in case of participation of a financial located. institution by means of a private ✓ Registration of the deed of sale with the instrument). The Notary Public is usually relevant Real Estate Registry Office (in chosen by the purchaser, who also pays contrast with the choice of Notary Officer, the notary fees. Both the seller and the who may be chosen by one of the parties, purchaser may (ii) appear in person the Real Estate Registry Office’s before the notary to execute the deed; jurisdiction is defined by State Law and, (ii) appoint attorneys-in-fact to do so in therefore, cannot be selected by either their name and on their behalf by virtue party). Under Brazilian law, a purchaser of

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real property only becomes the property’s Upon payment of the purchase price - loaned rightful owner after the notarial purchase amount - directly to the seller, the bank secures deed is duly registered with the its interest over the property by registering a competent Real Estate Registry Office, as guarantee with the Relevant Real Estate Office indicated in the real property ownership to guarantee the loan (commonly a mortgage certificate. or a fiduciary lien). 6. FEES AND EXPENSES RELATED TO THE 8. SPECIFICITIES WITH RESPECT TO RURAL ACQUISITION OF REAL PROPERTY LAND - PROPERTY BOUNDARIES Notarial and Real Estate Registry Office fees DESCRIPTION AND ITS ENVIRONMENTAL vary from State to State and are regulated by DATA State law. In each State, the same fees will be Brazilian Law prescribes particular provisions in charged by every Real Estate Registry Office relation to rural land, and anyone with the and Notary Public practicing in that State. intention of acquiring rural land must be aware Lawyer’s fees can be negotiated and are of (i) specific rules/regulations with respect to established by the Brazilian Bar Association in the description of the boundaries of rural land its main fee guidelines. Under the law, a lawyer that detail satellite geo-referenced coordinates does not need to be present at the execution of in accordance with the proper topographical the deed of sale; however, to ensure the rules established by the National Institute of validity of negotiations and compliance with Colonization and Agrarian Reform ("INCRA"), the relevant legal formalities, it is advisable to and (ii) specific rules/regulations with respect have a lawyer present. Furthermore, the to demarcated preservation areas on such presence of a lawyer also serves to ensure the properties and cadastre thereof with the State accuracy of the deed’s content in relation to and the federal environmental agencies. the description of the property, the description It is important to note that the description of of the succession of rights of the seller and rural properties by way of satellite geo- his/her predecessors, in addition to other legal referenced coordinates must be certified by requirements. INCRA and may lead to other legal Depending on circumstances, other costs might measures/requirements with respect to the be applicable, such as the laudemium, applied property regularization, given that the to marine land (properties located on islands or description must be recorded in the property properties that fall under an regime ownership record file. In addition to or a permit issued by the Federal Government). certification by INCRA as a requirement for the valid execution of a deed of sale of rural land, 7. FINANCING registration with the relevant Real Estate The most common way to finance the purchase Registry Office is also required if the property in of a real estate property is through a bank loan. question comprises an area of more than 100 To grant a loan, Brazilian banks examine the hectares in extent. purchaser’s credit history and financial It is also important to note that the registration situation in addition to having the current of rural property data with the State and the commercial value of the property appraised by Federal environmental agencies is a further a civil engineer. requirement for the execution of deed of sale for the acquisition of rural land, coupled with

ILN Real Estate Group – Buying and Selling Real Estate Series

[BUYING AND SELLING REAL ESTATE IN BRAZIL] 39 its registration with the relevant Real Estate 10. IMPORTANT PROVISIONS TO BE Registry Office. CONSIDERED AT TIME OF In addition, the rural property must be PURCHASE/ACQUISITION OF A REAL PROPERTY registered with the Federal Revenue, since the property must have an identification number Right of first refusal: A provision stipulating that (“NIRF”). in the event of a sale, sale commitment, 9. RESTRICTIONS ON REAL PROPERTY assignment, or commitment to the assignment ACQUISITION BY FOREIGNERS of rights in connection with a leased real property, the tenant has the right of first Brazilian law does not impose restrictions on refusal to acquire the leased real property, and urban real property ownership by foreign that the landlord must bring the transaction to entities or persons. tenant´s knowledge. Further, in case of joint However, foreign entities or persons are ownership, members of the condominium also currently not permitted to own rural real have the right of first refusal. properties without governmental authorization. Validity Clause: A type of clause, which if It is worth noting that over the course of the included in a lease agreement and registered at last two decades fierce debate has been the Real Estate Registry Record, grants the right ongoing in on the issue of property ownership to a tenant to see out the lease for the entire by foreign entities. Up until the end of 2016, in term should ownership be transferred to a third São Paulo State the mere fact that an entity party. was duly registered with the São Paulo Board of Restraint of mortgage/Non- Commerce, with no consideration given to the clause: This type of clause prohibits the nationality of its shareholders, was sufficient encumbering of a property with a mortgage; for such an entity to be treated as a Brazilian only applied on specific circumstances. entity, hence making it possible for the entity to own rural property in São Paulo State. Non-communio bonorom clause: This type of provision prevents the property from becoming However, the Supreme Court suspended this part of a joint estate due to marriage or union, practice. Presently, the position is that a foreign regardless of the regime governing the union or entity is the one under direct or indirect foreign marriage. control. Inalienability clause: This clause restricts the With the edition of the INCRA’s Normative owner’s faculty/ability/capacity to dispose of Ruling nº 88/2017, the exigence of INCRA’s pre- the property. approval on rural real properties acquisition by foreigners was pacified, however, changes on 11. NOTES/OBSERVATIONS ON TAXATION this issue are still expected, considering there is Real property transfer tax varies between no clear period for implementation. of a final municipalities and, therefore, depends on ruling by the Supreme Court, or from the where the property is located. It is important to several bills put forward for consideration by note that in case of donation of real property, the National Congress. Municipal transfer tax shall not be levied, but State Donation and causa mortis shall be the payable tax instead.

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Urban Real Estate (“IPTU”). All transaction as a prerequisite to the payment of urban real estate property in Brazil owned by realtor’s commission. individuals or legal entities as of January 1st of Realtor’s commission may vary in accordance each year, is subject to Urban Real Estate with the arrangement between the party and Property Tax payable to the municipality within the broker, with an upper limit of 6% per cent whose jurisdiction the property is located. IPTU of the purchase price, established by law in is the main annual tax imposed on urban real general/standard/conventional cases. estate properties, and the surface area of the real estate property, its location, the value of its constructions etc. are used to calculate such tax. Rural Real Estate Property Tax (“ITR”). All rural real estate property in Brazil owned by individuals or legal entities as of January 1st of each year, is subject to Rural Real Estate Property Tax, payable to the Federal Government. Calculation of ITR is based on information provided by the property owner to the Federal Revenue (information includes the surface area, the purpose of its use, extent of preserved native forest, agricultural production, among several other considerations). Tax on income from property rental, or the sale of property (capital gain tax), pursuant to federal tax provisions, apply on real property leases or sales. Given the frequent amendments to tax legislation, it is highly advisable that all property related taxes are revisited and re-calculated, as necessary. 12. NOTES ON THE REAL ESTATE REALTOR ACTIVITIES Under Brazilian law, a Real Estate Realtor must be registered with the relevant agency (“CRECI”). A broker’s participation in a transaction is not mandatory but if a broker has been hired, even if the broker is not responsible for the effective conclusion of the transaction, regardless whether the transaction is duly concluded, the realtor’s fees would be still be due. The parties may (and should) agree to incorporate a provision in the deed of sale stipulating effective conclusion of the

ILN Real Estate Group – Buying and Selling Real Estate Series

Fall 20

INTERNATIONAL

LAWYERS NETWORK

ROBINSON SHEPPARD SHAPIRO LLP

BUYING AND SELLING REAL ESTATE IN CANADA - QUÉBEC

ILN REAL ESTATE GROUP

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER CANADIAN (QUÉBEC) LAW

Unlike the other Canadian provinces and (iii) Undivided co-ownership – Share territories, which are all common law of a chiefly residential jurisdictions, Québec is a civil law jurisdiction. It immovable held in undivided co- is governed by the Civil Code of Québec, ownership originally inspired by the French Napoleonic (iv) Residential lease Code, and therefore quite distinct from other Canadian legal systems. In Québec, real estate (v) Sale of a mobile home situated is categorized as being immovable (real) on leased land property, as opposed to movable (personal) • Lease documents: property. Both lawyers and notaries handle Québec real estate transactions, but only (i) Promise to lease notaries may receive creating (ii) Counterproposal encumbrances (hypothecs, known as liens or (iii) Lease amendments mortgages in other jurisdictions). Québec notaries are not analogous to notaries public in • Sale / Purchase documents other jurisdictions; they receive the same legal (i) Promise to purchase training as lawyers but are members of the Chamber of Notaries and graduate from its (ii) Counterproposal to a promise to distinct post-university program, specializing in purchase real estate matters. (iii) Amendments I. STANDARD FORMS OF AGREEMENTS (iv) Waiver of conditions (e.g., Residential Transactions – Pre-Sale Documents financing, inspection) All Québec licensed real estate brokers (v) Annex F – Financing governed by the Real Estate Brokerage Act (vi) Annex R – Residential (Québec) and its Regulations are required to Immovable use the following forms provided by the

Organisme d’autoréglementation du courtage (vii) Annex RC – Remuneration and immobilier du Québec (OACIQ) when preparing Costs brokerage contracts as well as the following (viii) Declarations by the seller of the agreements for the purchase, sale, and lease of immovable (land and buildings, immovables: appurtenances, and dependencies) • Exclusive brokerage contracts for the sale or purchase of: (ix) Declarations by the seller of the immovable - Divided co- (i) Chiefly residential immovable ownership containing less than 5 dwellings excluding co-ownership (x) Enhancements prior to acceptance (ii) Divided co-ownership – Fraction of a chiefly residential immovable held in divided co- ownership

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Commercial Transactions – Pre-Sale Documents purchaser (although the latter is less common). In commercial purchases, either party may As noted above, the brokerage contract is a prepare the offer to purchase or sell (as the prescribed form in residential, but not commercial, land sales. Under Québec case law, case may be), which are often highly negotiated and tailored documents. They generally set out even though the broker or agent has usually the legal description of the immovable property, been retained by the seller, they are still the sale terms including price, deposit, subject to the obligation to be deal honestly conditions to be met to the satisfaction of the with both parties and not mislead the buyer. purchaser (such as financing, title search, Where the broker or agent acts only for the environmental and other inspections), the seller, the seller pays the commission; where outside date and the date and time by both parties are represented by brokers or which the offer must be accepted, failing which agents, the two brokers or agents typically it will be null and void. share the commission. The obligation to pay the commission is governed by the brokerage Purchase and Sale Agreement contract, but generally in order to trigger the In both residential and commercial sales, the obligation to pay a commission, the broker or purchase and sale agreement takes the form of agent must have introduced the buyer and a deed of sale, signed by both parties, which seller. There is usually a clause in the brokerage sets out all the terms and conditions of the contract protecting their rights to a commission transaction, including the date of occupancy, if the property is sold within a specified period what warranties are being provided by the (generally 90-180 days) after the expiration of seller (e.g., title, condition of the property, the brokerage contract to a party introduced to seller’s matrimonial regime in the case of the property while it was in effect. individuals, seller’s residency), the purchase III. BUYER’S INSPECTIONS price and any payment terms, as well as the 5% federal goods and services tax (“GST”), 9.975% Residential: Québec sales tax (“QST”) or mutation taxes due Most offers are made conditional upon on the transaction. The deed must be signed inspection and/or financing, although in a before a Québec notary if there is a balance of heated real estate market, a buyer who is price or an encumbrance is being assumed by prepared to make an offer without conditions the buyer; otherwise, it may be signed either in may have an advantage in a situation where notarial form or under private signature before there are competing bids. The buyer will two witnesses, who must also sign. typically retain the services of a licensed II. BROKERS AND AGENTS building inspector, who will visit the property and check for structural issues, both interior Real estate brokers and agents are governed by and exterior, as well as the heating, ventilation, the Real Estate Brokerage Act (Québec) and its plumbing and electrical systems, the type and Regulations. All brokers are licensed real estate state of the roof, underground storage tanks, agents, but not all agents are licensed brokers. etc. and generally identify any issues which Real estate agents work for a broker or should be rectified, and which could influence brokerage firm, either as salaried employees, the value of the property (and therefore on commission or both, and the broker is potentially reduce the price). legally responsible for its agents. Agents or brokers in Québec may act for the seller or the

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The buyer’s notary will conduct a formal title contracts relating to the operation of the search on the property to establish the chain of property. title and to identify any hypothecs, prior claims, or other encumbrances; any servitudes (easements), concurrent or priority rights of In both residential and commercial sales, any ownership, and any other right or charge title issues which cannot easily be resolved reducing the value of its ownership of the prior to the sale may be covered by the property. The notary will also obtain and verify issuance of a title insurance policy, generally an up to date (not more than 10 years old) applied for by the buyer as beneficiary but at certificate of location (survey) to be provided the seller’s expense. by the seller (and which will be required by the IV. FORMS OF OWNERSHIP buyer’s lender if the purchase is being financed). Finally, the notary will verify the zoning and any Residential property is commonly held in an permits for renovations to the property, as well individual’s personal name (or both spouses’ as payment of the property taxes (municipal, names in the case of a couple) but may also be school, water, etc.) affecting the property, held in a family trust or by a holding including the right of tax authorities to claim corporation. A family trust is created by arrears of property taxes, the creation of a prior signature of a notarial trust deed naming 3 claim in their favour, the registration of a notice trustees, at least 1 of whom must be of sale of the property for non-payment of the independent (i.e., neither the settlor nor a property taxes followed by the sale of the beneficiary), which identifies the beneficiaries property, and the registration of a notice of and defines the trustees’ powers. legal hypothec by the tax authorities. The Commercial property may be held in a variety notary will, in preparing the deed of sale, also of ways, including directly in the name of the prepare any adjustment of taxes, charges, owner, or through a corporation, partnership, utilities, etc. and confirm that the buyer has limited partnership, unlimited liability company subscribed insurance for the property as of the or trust. It may also be held in emphyteusis for date of transfer of ownership. up to 99 years, in which case the beneficial and Commercial legal (or “bare”) ownership, which would otherwise be united in a single owner, are In addition to the inspections performed by divided among one or more individuals or residential buyers, commercial buyers also entities. usually obtain at least a Phase 1 environmental review (with Phase 2 follow-up where the V. REGULATION AND DISTINGUISHING Phase 1 report raises concerns), and a use and FEATURES OF EACH TYPE OF OWNERSHIP zoning/permitting analysis, particularly if the Corporations buyer is planning any renovations to or Canadian corporations may be incorporated particular usage of the property. federally, under the Canada Business If the property is leased, the buyer’s due Corporations Act (the “CBCA”), or under the diligence would include a thorough review of all corporate statute of a particular province or leases, including an assessment of the rentals territory (in Québec, the Business Corporations stipulated compared to current market Act or “QBCA”). A federal corporation “carrying conditions, as well as all maintenance and other on business in Québec”, which definition

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[BUYING AND SELLING REAL ESTATE IN CANADA - QUÉBEC] 45 includes owning immovable property, must and they may obtain an extract from the register with the Québec Register of Enterprises, register on payment of a reasonable fee. The and update that information at least annually, information may not be used by any person as well as within 15 days of any change. One except in connection with (i) an effort to disadvantage to incorporating federally is influence the voting of shareholders of the therefore the requirement to file two annual corporation (for example, a proxy solicitation); returns and pay two annual filing fees, whereas (ii) an offer to acquire securities of the only one return and one annual filing fee are corporation; or (iii) any other matter relating to required for a Québec corporation. Additionally, the affairs of the corporation. Failure by the 25% of a CBCA’s corporation’s directors must corporation as well as its directors and officers be Canadian residents; there is no residency to establish or maintain the register without requirement for QBCA directors. reasonable cause, the recording or provision by Another potential disadvantage of a director or officer of false information, and incorporation under the CBCA is that all the failure by a shareholder to reply accurately corporations which are not publicly traded are and completely to a corporation’s request for required to maintain “a register of individuals information, are all punishable by fines and a with significant control over the corporation” maximum of 6 months’ imprisonment. Similar (an “ISC”). This is defined as any individual who, requirements are at various legislative stages in as registered holder or beneficial owner, each province and territory, so this controls any number of shares carrying 25% or requirement will eventually become universal more of the voting rights attached to all of the throughout Canada, regardless of the corporation’s outstanding voting shares or jurisdiction of incorporation. equal to 25% or more of all of the corporation’s Unlimited Liability Company (“ULC”) outstanding shares measured by fair market ULCs, which are similar to American limited value. Two or more individuals can each be liability companies (LLCs), can currently be considered an ISC if they have joint ownership formed only under the laws of the Provinces of or control of 25% or more of the shares in votes Nova Scotia, British Columbia, and Alberta; or value. The CBCA corporation must maintain a however, they can hold property in Québec if register containing each ISC’s name, date of they register with the Québec Register of birth and address, jurisdiction of residence for Enterprises. These entities permit flow-through tax purposes, the day they became or ceased to treatment for profits and losses to their be individuals with significant control, and a shareholders; however, tax treaties may impact description of why they qualify as an ISC. This the ability to utilize same. However, Canadian information must be confirmed, and updated if ULCs do not provide limited liability protection, necessary, at least annually and may be and it is therefore common practice to maintained at the corporation’s registered interpose a single purpose holding corporation office or at any other place in Canada between the ULC and its shareholder(s). designated by the corporation’s directors (such as the law firm where the minute books are Partnerships / Limited Partnerships maintained). The information is accessible to These are formed under provincial/territorial shareholders and creditors of the corporation law by the agreement of the partners in the or their personal representatives upon request case of a general partnership, or the general during the corporation’s usual business hours,

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[BUYING AND SELLING REAL ESTATE IN CANADA - QUÉBEC] 46 and limited partners in the case of a limited Nominee or prête–nom agreements partnership. Nominee or “prête-nom” agreements are General partnerships do not usually require any commonly used in real estate transactions to other formality in order to be created, whereas register property in the name of a nominee a limited partnership generally exists only from corporation, which holds legal title only, with its registration date. The partnership the beneficial ownership retained by the true agreement or limited partnership agreement, owner(s). Nominee corporations are often used as the case may be, takes the place of the to collect rent and pay expenses, or to acquire certificate and articles of incorporation and by- family assets such as a residence. Even if laws, and will govern the issuance of already disclosed in the taxpayer’s tax return, partnership units and the operations of the all Québec taxpayers must file prescribed form entity. TP-1079.PN disclosing all nominee agreements: Typically, in a limited partnership, the general • Signed on or after May 17, 2019, on the partner (which is often a shell corporation) is later of (i) 90 days following the date of responsible for all the obligations and liabilities signature and (ii) December 23, 2020; or of the limited partnership. The liability of the • Signed before May 17, 2019 but having limited partners is restricted to the amount of income tax consequences continuing on or their respective contributions, provided that after May 17, 2019 (e.g., deduction of expenses, they do not become involved in the attribution of rental income, imposition of a management of the limited partnership. To capital gain, principal residence exemption retain limited liability protection, the limited claims, creation of tax attributes such as partner must remain a passive investor rather adjusted cost base, etc.) by or before December than an active participant in the operation of 23, 2020. the limited partnership. Nominee agreements signed before May 17, Both general and limited partnerships formed 2019, but not having income tax consequences under Quebec law or carrying on business in on or after May 17, 2019 need not be disclosed. Quebec must register with the Quebec Register of Enterprises and provide information The information to be disclosed includes the analogous to that required of a corporation. date and a copy (if in writing) of the nominee agreement or other document evidencing same, Trusts the identity of the parties, a full description of A trust carrying on a commercial enterprise, the transaction (or the series of transactions) such as a business, investment, or real estate covered by the nominee arrangement and the trust (whether or not profitable), which is not identity of any person or entity for which there managed by a registered trustee (such as a are resulting tax consequences. Disclosure by trust company) must also register with the one party to the nominee agreement is deemed Québec Register of Enterprises in the same to be disclosure by all parties. manner as a sole proprietorship, partnership, or Failure to disclose a nominee arrangement can legal person (corporation) within 60 days of result in an initial penalty of $1,000 plus an beginning operations. additional daily penalty of $100 (up to a maximum total penalty of $5,000). As well, Revenu Québec can suspend the taxpayer’s tax

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[BUYING AND SELLING REAL ESTATE IN CANADA - QUÉBEC] 47 assessment period, such that prescription does Adjustments not begin to run on any tax claims for that The buyer and seller adjust for taxes, utilities, period. and other prepaid expenses as at the date of VII. CLOSING COSTS / ADJUSTMENTS transfer of ownership. In addition, in the case Mutation (“welcome”) tax of commercial property, adjustments are also made for rents, third party operating expenses The buyer must pay the mutation or transfer and common area maintenance expenses. tax (colloquially referred to as the “welcome tax”) to the Québec Minister of Revenue under Typically, the offer and deed will provide that the Mutation Tax Act (Québec) within 31 days the buyer chooses the notary and pays the of issuance of the first tax bill, subject to certain notarial fees, including the cost of copies for exceptions for transfers between related the seller. If the purchase is financed, the parties (e.g., two spouses, or a corporation and lender will choose the notary to receive the its shareholder, provided the shareholder holds deed of hypothec (mortgage), who will ideally at least 90% of the shares and the buyer does also handle the sale, and the buyer will assume not re-sell or “flip” the property within 24 those costs. If there are existing encumbrances months of the initial exempt sale). on the property (e.g., the balance of a hypothecary loan) to be paid out at closing, the Mutation tax rates are calculated on the higher notary will obtain a payout letter from the of the purchase price and municipal evaluation lender, arrange for payment from the sale of the property (both of which are identified in proceeds and have the prior lender’s security the deed, as is the amount payable, even where radiated, all at the seller’s expense. an exemption applies). The 2020 rates are as Sales Tax follows: (i) 0.5% of the first portion of the taxable amount up to $51,700; plus (ii) 1% of The sale of a new residential property, or of an the portion of the taxable amount between existing property that has undergone major $51,700.01 and $258,600; plus (iii) 1.5% of the renovations, from the builder / developer is portion of the purchase price in excess of subject to the GST and QST, with a partial $258,600.01. Québec municipalities are entitled rebate available for individuals only. If the to impose a surcharge of up to 3% for purchase price is between $350,000 and properties having a purchase price or municipal $450,000, then up to 36% of the amount of GST evaluation over $500,000, as is the case in not exceeding $6300 is refundable. If the many cities including the Island of Montreal purchase price is between $200,000 and and its various suburbs and surrounding areas. $300,000, then 50% of the amount of QST not Even where an exemption applies, the city has exceeding $19,950 is refundable. the right to charge a supplemental tax as The sale of an existing residential property follows: none if the taxable value is less than which is occupied by its owner and not rented $5000, 0.5% of the taxable value between property is not subject to GST or QST; however, $5000 and $40,000, plus a fixed amount of if the owner of the property resides in part of it $200 if the taxable value exceeds $40,000. and rents part (e.g., a duplex or triplex), the portion not used by the owner as a residence, determined on a pro-rated basis, will be taxed in the same manner as the sale of a commercial property.

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It is the buyer’s obligation to collect and remit premises are desirable and the rental is below the GST and QST, so the seller’s tax numbers market. should be verified; if they are invalid, the buyer Title documents can be filed, and title can be will be liable to pay these amounts to the tax searched, electronically via the Index of authorities. Immovables, using the lot number. The The sale of a commercial property is subject to municipal evaluation is also generally accessible both GST and QST, unless both parties are on-line, depending on the municipality, using registered for both taxes, declare this, and the civic address, which will also yield the lot provide their respective tax numbers in the number(s). Copies of the registered deeds may deed, and file an election to have the also be ordered on-line. transaction be treated as non-taxable. VIII. ANNUAL COSTS FOR PROPERTY If the seller is not a Canadian resident, the OWNERSHIP buyer must withhold 25% of the gross proceeds In addition to the purchase price, a buyer must in trust (typically with the officiating notary) typically budget for the following annual until the Canada Revenue Agency confirms the expenses of property ownership: amount to be paid and issues a certificate of compliance (“tax clearance certificate”) when A. (including boiler and the tax has been fully paid, at which time any machinery, fire, damage and, liability). excess funds may be released to the seller. A B. Property Taxes (municipal, school, water, buyer who fails to withhold and remit the special assessments); if all or part of the required tax could be held liable for the entire property is rented out, the rental income will amount, plus penalties and interest. be subject to income tax in the hands of the VII. RECORDING REAL ESTATE DOCUMENTS landlord. Title in Québec is based on a land registry C. Operating expenses (e.g., utilities, system, in which all deeds are published, based maintenance, repairs). on lot numbers. The overall system is known as CONCLUSION: the Cadastre du Québec, and the province is divided into various registration divisions, each Real estate is an area of interest for most one of which has its own registry office. people, regardless of their profile and focus, whether as an owner, tenant, or landlord, or Leases under Québec law are a personal, rather merely someone who keeps an eye on the than a real, right. However, notice of the lease economy, given that the fluctuations in the real may be published against title. This protects the estate market are a reliable barometer of its tenant by ensuring that if the property is sold, state and condition. In addition to demanding a the new owner must respect the balance of the deep understanding of the ever-changing real term of the lease, including any renewal estate market and conditions, it covers a vast options. If the lease has not been published, landscape of legal issues, such as leasing, the new owner is only obliged to continue the commercial and corporate law, litigation lease for the shorter of the balance of the term (including alternate dispute resolution such as (not including renewals) and 12 months from arbitration and mediation), financing, the date of the sale, which puts the tenant is a construction, tax, co-ownership and very precarious position, particularly if the condominium law, municipal law, bankruptcy

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[BUYING AND SELLING REAL ESTATE IN CANADA - QUÉBEC] 49 and insolvency and environmental law, many of which come into play in any .

ILN Real Estate Group – Buying and Selling Real Estate Series

Fall 20

INTERNATIONAL LAWYERS NETWORK

PAGBAM | SCHWENCKE Buying and Selling Real Estate in Chile

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER CHILEAN LAW I. STANDARD FORMS OF AGREEMENTS Seller usually states that the Buyer's failure 1. Offer to Purchase sets forth Buyer's to obtain credit is considered a breach of offer of price, date for closing, contingencies for the agreement and not a condition for inspections, financing, etc., and date for signing declaring the agreement void. a formal purchase and sale agreement. Seller The parties also usually agree that the may accept or reject that if there is reason to purchase price will be paid through bank reject and are informed the reject is considered documents that will be left in the custody of a counteroffer. the notary public that authorizes the deed 2. The most usual form of commitment to of sale, with instructions to deliver said sell and purchase real estate, notwithstanding documents once the Property is registered the Property's purpose, features of the parties, to the name of the Buyer in the competent or other conditions, is through a Promise Real Estate Registrar, with no Agreement. The Promise Agreement must encumbrances except those that are detail the terms and conditions of the purchase unrelated to guarantees provided by the as thoroughly as possible, or it may be deemed owner (i.e., Co-ownership Bylaws, invalid and unenforceable. Purchase and Sale easements) and those accepted by the Agreement shall repeat the terms sets forth in Buyer to guarantee payment of credits for the Promise Agreement. the purchase (i.e., mortgages, prohibitions to sell). 3. If there is no Promise Agreement, the complete terms of the purchase and sale, which If the parties agree that the purchase price will be paid in installments, the Seller does are the same as those described herein, are included in the Purchase and Sale Agreement, not waive its resolutory action and does not except that in this case, the Buyer may agree to grant the Buyer settlement. accept the Property's titles without actually C. Form of sale and delivery: how the reviewing them. In this case, the Seller inserts a Property will be sold: usually ad corpus, in clause having the Buyer acknowledge this its current state which the Buyer declares situation and waiving its actions to sue the acknowledging, free of any encumbrances Seller for hidden flaws in the Property ("vicios and in general any limitations to redhibitorios"). ownership. However, for large plots, 4. The most used agreements of the mainly rural real estate, the parties usually Promise Agreement for the purchase of real agree to review the Property's exact estate are: surface through a topographical survey, setting a unitary price per square meter A. Description of the Property: It includes sold, which may produce an adjustment the address, boundaries, land tax against or for each party regarding the identification number, and registration price. For example, if the topographical number in the competent Real Estate survey reveals that the Property's actual Register. surface is less than 2% of the Property's B. The price and payment form: Usually, surface in its titles, that difference is the Buyer pays part of the price with a loan accepted by the Buyer. If the difference is granted from a financial institution. The higher, the Buyer has the right to request a

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price reduction. This also applies in case Law to authorize, through an the Property's actual surface is more than extraordinary shareholders meeting, 2% of the Property's surface in its titles: if the sale of real estate if it represents the difference is higher, the Seller has the 50% or more of the company's assets). right to collect an increased price that • The Property is not subject to considers the actual surface of the encumbrances and limitations that may Property measured in the survey. hinder its transfer or its full exploitation There are some additional conditions, and use by the Buyer, due to, for depending on the regime of the Property: example, leases, seizures, mortgages, • In case the Property is part of a prohibitions, mining permits, condominium, it is sold with the Co- easements, expropriations, , ownership Bylaws that regulate how environmental conservation rights, co- the condominium is managed. The ownership regulation, etc. Property must be delivered empty, with • Technical and environmental conditions no debts of any kind, i.e., land tax, that may affect the transfer or full utilities, common expenses, etc. exploitation and use of the Property by • In the case of rural Property, it must be the Buyer: For example, farming and delivered with no workers of any kind. forestry subsidies, debts owed to public The Seller guarantees that the labor institutions for land taxes, subsidies, contracts of any workers who worked declarations of public utility (which in the Property have been terminated. means part, or all of the Property may be subject to future expropriation due D. Titles: the sale is usually subject to the to ), the approval of the condition of having the Buyer's attorneys exploitation of the Property by review the legal titles of the Property. If Environmental Impact Evaluation the titles do not conform to the Law, the System (SEIA). condition fails, and the promise agreement ▪ becomes void with no party liability. In the case of urban real estate purchased for the construction of any A review of the Property's legal titles seeks building, both the city and the district's to verify, at least, that: land-use master plans must be reviewed • The Seller, either directly or by adding to verify if the construction in the the possession of the Property by prior Property is authorized based on the use owners, has owned the Property for at of the land included in the master plan. least ten consecutive years since this 5. Term and place of execution: the parties term is the statute of limitations for agree on a term to sign the Purchase acquiring real estate through Agreement, usually based on the time prescription. necessary for the Buyer's counsel to review • The Seller (and prior owners), the Property's legal titles and, when especially in the case of corporations, applicable, to obtain financing for the were legally entitled to acquire, purchase. They also agree on the notary maintain, and sell the Property (i.e., public's office where the deed will be Stock corporations are mandated by signed. In case the Property's price is paid

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partially or entirely using a loan, the notary 2. Broker collects a commission of 1-2%

public concerned is usually appointed by of the sale price, from both the Seller and the financial institution that grants the loan. the Buyer, unless negotiated otherwise. 6. Guarantees: The usual security to 3. Brokerage is not mandatory. It is ensure the complying of their obligations usually used in the sale of used real estate, set forth in the Promise Agreement (for the although Seller can offer directly, and Seller providing the legal titles of the sellers of new Property and signing the deed on the residential/commercial/industrial/forestry agreed date; for the Buyer signing the deed /agro projects hire established brokerage on the agreed date), the parties provide firms to look for potential buyers, and to cross-guarantees in the form of banking preparing bidding processes, usually for documents with a sum usually equivalent to large properties with 10-20% of the sale price, which may only be commercial/industrial/forestry/agro collected if the counterparty breaches its potential. contractual obligations. III. BUYER'S INSPECTIONS

7.Conflict resolution: Any disagreements 1. Inspections are not mandatory, between the parties, including any although the Buyer usually performs a differences regarding the legality or visual inspection of the Property, to verify completeness of the Property's titles, are its state. Technical checks are not usually resolved through ordinary courts of customary but are generally requested for justice, but there does not impede having old properties. The Seller usually imposes a the conflict resolved by arbitration. sale "as is" of the Property, meaning the 8. Formalities. Promise Agreements may Buyer accepts to purchase the Property in be executed as private documents, or as the state verified during visual inspection. public deeds. In the case of a public deed, if Buyer reviews technical information as part authorized by the Seller, the Buyer may of the legal review necessary to confirm the register the Promise Agreement in the Seller has owned the Property, either by her competent Real Estate Registrar to notify directly or by adding possessions of prior third parties that the Seller has formally owners, for at least ten years. promised to sell the Property. 2. When buying new Property, the 9. Prohibitions: The Seller may also accept, Buyer usually inspects the Property with an at Buyer's request, to abstain from offering architect to verify any flaws or construction the Property to third parties or defects that must be repaired before encumbering it during the term of the receiving the Property. Additionally, the promise agreement. If authorized by the sale of new Property, especially for Seller, this prohibition may be registered in residential purposes, is subject to Chile's the competent Real Estate Registrar. Consumer Protection Act in all aspects II. BROKERS unrelated to construction quality. Therefore, the inspection may reveal 1. Real estate brokerage is an unregulated differences between the conditions offered activity in Chile, no special qualifications or by the Seller versus the actual needs of the permits are required to operate as a broker. Property, which may configure deceptive

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advertising and leave the Seller liable for granting settlements and waiving resolutory

infringing Chile's Consumer Protection Act. actions. IV. FORMS OF OWNERSHIP VI. CLOSING COSTS/ADJUSTMENTS 1. Residential Property is usually held to 1. The notary public's costs for authorizing an individual's name or the name of a the Sale and Purchase Agreement are company controlled by the Buyer. Joint usually borne 50% by each party, although ownership is allowed in the percentage the Seller may impose the full payment of determined by the joint purchasers, even if all charges by the Buyer. Costs of registering it is not a 50-50% assignment. the Sale and Purchase Agreement before 2. Commercial Property is usually held to the competent Real Estate Registrar are a commercial real estate ("inmobiliaria") borne by the Buyer. The fee paid to the Real company's name. Estate Registrar is of 0,002% of the sale price, considering a maximum price ceiling 3. Rural Property is usually held either to of CH$ 128,000,000.- (USD 205,000.- an individual's name (especially in case of approx.) small plots of at least half a hectare) or to a rural real estate ("agrícola") company's 2. Buyer and Seller adjust for land taxes, name. which must be paid every quarter. In addition to the previous, if the Property is V. FORMALITIES commercial Property, adjustments are also 1. The purchase of a real estate in Chile is made for rents, third party operating categorized in Chilean law as a formal expenses and everyday area maintenance agreement. This means that the transfer of expenses. ownership does not happen when the 3. Land that has been subjected to parties sign the Purchase and Sale agricultural purposes may be subject to Agreement, but only when two copulative taxes and payments derived from obtaining requisites are fulfilled: i) execution of the agricultural/forestry subsidies. Those Purchase and Sale Agreement through a subsidies must usually be respected by the public deed granted before a notary public, Buyer or previously terminated by the and ii) the deed is then registered in the Seller. For example, subsidies for irrigation competent Real Estate Registrar. works make the Property owner, even after 2. If any of the parties needs to appear it is sold by the owner who obtained the through a proxy, either because they are subsidy, liable for failure to maintain the unable to be physically present on the day irrigation works that were paid through the of execution, of because any of them is subsidy. legally incapable (i.e. a minor, or a person 4. The sale is subject to VAT if the Property that has lost the administration of its is sold fully furnished, or in other specific patrimony), a power of attorney must be cases, i.e., in case of a rural property, if the granted by public deed, and said power of Seller obtained fiscal credit derived from attorney must give all the necessary investments in the Property. authorities to the proxy, including agreeing the sale price and form of payment,

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VII. OTHER CLOSING DOCUMENTS encumbrances on the Property, including

prohibitions, seizures, litigation, easements, 1. Condominiums: The Seller will provide the Buyer with a copy of the corresponding Co- usufructs, Co-ownership, Bylaws, etc. ownership Bylaws, in the case of properties 3. Since the recommended form of that form part of a condominium regulated transferring Property is to settle all by Law 19.537 of Real Estate Co-Ownership. obligations that arise from the sale and The Buyer also usually requires the Seller to purchase agreement in the same deed, this provide a certificate, issued by the must be reconciled with the Seller's interest condominium's administrator, stating that of not materially delivering the Property the Seller does not owe any ordinary until he receives full price paid, and the expenses for his unit. Buyer's interest of not delivering the payment of the purchase price until the 2. Land tax: Real estate subject to land tax may not be transferred if land tax payments inscription of the Property to the Buyer's name in the Real Estate Registrar is are owed to the Treasury. Therefore, a land tax debt certificate issued by the Treasury completed. To leave no obligations pending, or the Tax Authority showing no the parties agree in the Sale and Purchase outstanding land tax payments is attached agreement to state that the Seller received to the sale deed. payment in that act, and the Buyer received the Property in the same act. Then, besides 3. Utilities: Seller is usually required to signing the Sale and Purchase Agreement, prove to the Buyer that all bills for utilities, the parties also sign a separate document such as sanitary services, electricity, gas, with instructions to the notary public that cable TV/ services have been duly legalizes the deed. The Buyer provides the paid and no outstanding debts for these notary with the payment documents, which services exist. Buyer may request that some are safeguarded by the notary public. As of these services, especially telephone and instructed, the notary will hand over the cable TV/Internet services, be terminated payment documents. Once the notary has before the sale. verified that the Property is registered to VIII. RECORDING REAL ESTATE DOCUMENTS the Buyer's name in the competent Real Estate Registrar and that the only 1. Since real estate must be encumbrances that lien the Property are transferred by a public deed registered those that existed before the sale or those before the competent Real Estate Registrar, constituted by the Buyer. If the instructions copies of the deed are always available are not completed in a predetermined firstly in the notary public office that period, the notary will return the payment legalizes the deed, and then in the documents to the Buyer once the Buyer competent Judicial Archive. signs a deed annulling the Purchase and 2. Regarding the actual registration, the Sale Agreement. sale deed is registered in the Property IX. ANNUAL COSTS FOR PROPERTY Registry of the competent Real Estate OWNERSHIP Registrar, who may then issue copies of the Property's registration to the Buyer's name 1. Property Insurance: it is not and a certificate that shows all the liens and mandatory, but very common. For condominiums, insurance is contracted for

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the condominium's common Property.

When Property is purchased through loans by banks or other financial institutions, the lender requires the Buyer to hire fire and . Unemployment insurance for the Buyer, a natural person, is also usually demanded by financial institutions, which may be enforced contractually but is not legally mandatory. 2. Real Estate Tax: This tax is levied on a property’s assessed value. It is an annual tax but can be paid in four installments in April, June, September, and November.

ILN Real Estate Group – Buying and Selling Real Estate Series

Fall Fall 19 20 INTERNATIONAL LAWYERS NETWORK

GAMBOA, GARCÍA & CARDONA ABOGADOS Buying and Selling Real Estate in Colombia ILN REAL ESTATE GROUP

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER COLOMBIAN LAW

1. Standard Forms of Agreements to buy will be executed; (iv) the agreement must and sell Real Estate: determine the purchase and sale agreement, in Despite the existence of different type of such a way that to proceed with the closure, agreements to make real estate transactions in only the formalities or the legal means to Colombia, the most common forms of transfer and delivery the property are missing agreements used to acquire real estate to be completed. properties are the promise to sale and purchase The last requirement mentioned above, means agreement and the sale and purchase that the promise must contain on one hand, a agreement. full description of the property, including its 1.1 Promise to Sale and Purchase identification name, address, boundaries, Agreement (Promesa de Compraventa) registration number, tax identification number and, also those of the condominium, if the Considering that there are some formalities to property is part of one, including the public acquire real estate properties in Colombia and deeds by means of which the property is under the need of the parties to be bound by a legal such condominium regime. On the other hand, document, regularly the parties enter first into the price agreed by the parties and its form of the promise to sale and purchase agreement. payment. Under this agreement, the parties set the terms and conditions agreed by them to do the Some measures are included in the promise in transaction of purchase and sale of the order to guaranty the fulfillment of the contract, which means the execution of the property, and the buyer paid a percentage of the price agreed as a down payment of the promised purchase and sale agreement by the transaction. Under the promise to sale and parties, the transfer of the property by the purchase agreement, the seller promise to sell, seller and the payment of the price by the and the buyer promise to purchase the buyer. Among others, it might be found the property when some conditions are fulfilled, inclusion of penalty clauses equivalent at least normally when a specific date arrived, to 20% of the price agreed, accounts, depending on the complexity of the banking letters of credit or, indication of the transaction. down payment amount as a confirmatory payment or prepaid penalty in case of breach of There are some legal requirements to make the contract by any of the parties, as applicable. valid and enforceable the promise to purchase and sale agreement, as follows: (i) the 1.2 Sale and Purchase Agreement (Contrato agreement must be done in writing; (ii) the de Compraventa) object of the agreement, in accordance with The sale and purchase agreement is the regular the law, must not be prohibited or invalid; (iii) it form of agreement used to acquire real estate must include the specific date or condition that properties. When it is preceded by a promise to sets the date to celebrate the purchase and sale sale and purchase agreement, this agreement agreement. In relation to this requirement, as accomplishes the object of the promise and it stated by case law, it is also necessary to usually replicates the terms and conditions indicate the Public Notary and the time where agreed on the promise to sale and purchase the purchase and sale agreement public deed agreement, unless the parties agreed to modify

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some of those terms by means of the sale and must include the revision of the property titles, purchase agreement. Under the sale and and the urban or land use analysis, when purchase agreement, the seller sells, and the applicable. buyer buys the property specified in detail in 2.1 Revision of Property Titles: this agreement for the price set therein, just as it was mentioned before in relation to the The revision of the property titles is conducted promise agreement. mainly to determine that the seller is the entitled owner of the property and, that there When the sale and purchase agreement is used are not any circumstances that affect or may to make a transaction over a real estate potentially affect the ownership right over that property, it must be done in writing by a in case of acquisition (e.g., deed executed by the parties before a Public encumbrances, limitations to the property Notary. The agreement by public deed itself rights or registered lawsuits). In relation to constitutes only the title by means of which the residential properties, it is important to transaction is done, however, according to the highlight the existence of some legal figures to Colombian applicable law, in order to duly protect family housing, which are transfer the property, it is required the encumbrances to the ownership right, named registration of the public deed under its Family Housing Assignment (“Afectación a registration number at the Registration Office vivienda familiar”) and Unattachable Family to which the property is linked (according to Assets (“Patrimonio de familia inembargable”). geographic location). Only when the public deed is duly registered, the property is Such revision refers to those legal acts in considered transferred and the main object of relation to the property that are duly registered the sale and purchase agreement is fulfilled. under the registration number of the property, which are reported under a no liens’ certificate The same guarantees indicated for the promise (certificado de tradición y libertad). Such to sale and purchase agreement may be certificate should have an issuance date no included under the sale and purchase longer than ten previous days and, in any case, agreement. Those guarantees are included in before the execution of any agreement, a new order to secure, among others, the registration one should be checked to prevent new of the public deed, any breach of the contract unknown registrations after the due diligence in relation to the reps and warrants included process. therein or, the existence of hidden flaws (vicios ocultos o redhibitorios) that could not be found Depending on the criteria used by the legal beforehand in a due diligence process and that expert in charge of the due diligence, the may affect the property right of the buyer after revision could refer to the registered acts of the the acquisition. property since the beginning of the transference chain of the property, the last

2. Due Diligence: twenty years, or the last ten years. However, In order to have certitude about the legal such acts that are part of the titles chain situation of the property at the time of the referring encumbrances and property transaction, it is highly recommended to limitations, that have not been duly cancelled proceed beforehand with a due diligence or those that reveal some inconsistencies under process over the property. Such due diligence the certificate, must be revised in detail.

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Some other documents are revised under this projects, but it can also be used as a form of part of the due diligence process. For instance, simple ownership. proof of payment of property taxes at least of 3.2 Real Estate Investment Funds and the last five years, its cadastral certificate to Private Equity Funds: verify and compare the constructive information of the property and its correct A real estate investment fund is a legal and address based on the information managed by financial vehicle (mutual fund) which mainly the public entities. invest in real estate properties, in order to generate long-term income and asset valuation

2.2 Urban or Land Use Analysis: which become financial returns for its An urban or land use analysis pretends to investors. In the same the real estate verify, according to the applicable urban law, investment funds are managed by professional which kind of building can be constructed on ant its investors have their investment the property or which limitations are imposed represented in participation titles of the fund. over the property to be develop or use. If this The real estate investment funds are highly analysis is performed over a property that has regulated by the Colombian financial already a building, it will determine if the authorities. construction complied with the planning 3.3 Condominium Regime: regulations applicable at the time of the construction and if the building can have its There is a special ownership type called current or intended destination. Condominium Regime (Regimen de propiedad horizontal) in which exclusive property rights Some of the documents revised in this due over and co-ownership rights diligence are the construction permits and all over the land and other common parts of the the urban legal licenses or documents of the property concur, to guarantee the security and property, as well as the specific regulations peaceful coexistence of the co-owners. This applicable to the property. kind of ownership is very usual in the 3. Forms of Ownership in Colombia: residential or commercial buildings. It In Colombia, the ownership is the legal right of constitutes a limitation to the ownership right a person to use, enjoy and dispose over a thing and generates to the owners of private (including real estate properties), without properties the obligation to contribute to the violating the law or the rights of other people. maintenance of common property areas, Nevertheless, there are some special forms of through a monthly administration fee which is ownership in Colombia that are relevant to paid to the condominium administration. mention herein. 3.4 Joint Ownership: 3.1 Fiduciary Trust Property: Joint ownership consists of two or more people A fiduciary trust is a legal vehicle whereby a owning the same property. This joint ownership settlor transfers the property to a trustee in is allocated in each person according to the exchange for fiduciary rights. Usually, but not percentage determined in the public deed by always, the settlor is at the same time the means of which they are acquiring the beneficiary of the Trust. This legal vehicle is ownership right over the property. If it is not usually use for the development of construction indicated in the public deed the participation

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percentage of ownership to which each person pubic notary will inquire which legal transaction is entitled of, it is understood that the is going to be held and request the documents ownership right is distributed in equal required for each specific deal; in the case of percentages. the sale and purchase agreements, the required

documents are: (i) No liens’ certificate 3.5 Usufruct: (certificado de tradición y libertad) of the

There is an ownership retaining usufruct, that properties involved in the transaction; (ii) consists in the kind of ownership in which the Documents of existence and legal owner conserves the right to dispose over the representation of the parties; (iii) Proof of property but not the right to use and enjoy the payment of property taxes of the last five years; property, which are given to another person. (iv) No debts certificate issued by the applicable The usufruct title is an example of this tax authorities in relation to the properties; ownership form. and, (v) No debts certificate issued by the 3.6 Rural Property: administration when the properties are subject to the condominium regime. In relation to rural property is important to mention that the acquisition of these kind of The deed process takes approximately 5 properties must consider the accomplishment business days and the notary fees are regulated of legal requirements related to the statutory by decree for the entire national territory. limitations to acquire rural property in Afterwards, the public deed must be registered Colombia according to the Colombian agrarian at the Registration Office to which the property legislation. is linked. 4. Notarial Aspects: 5. Registration Aspects: As it was mention before, the transfer of real Public deeds in Colombia must be registered to estate in Colombia must be done with the considering transferred the property, because formality of a public deed held before a Public without registration there is no transfer of Notary. Similarly, when fiduciary contracts ownership rights. The registration offices are involving transfer of real estate are constituted, divided into registry circles that are distributed the formality of a public deed must be according to the location of the real estate complied, even though the transfer of fiduciary properties. The purpose of the registration is to rights over them can be made by means of a give knowledge to everyone about the private document. The public deed content is transactions and legal acts that have been done public which means that anyone can access the or that may affect the property. information of a real estate transaction. The registration process takes about 15 business days and its fees to register are set by The process to prepare a public deed begins the authorities at the national level, however, when the interested party approaching any registration taxes must be paid as well, and Public Notary office in the country, since there they are set by each municipality government, is freedom of choice except when dealing with so they may vary among municipalities. To transactions in which the state participates as a register a deed, the first copy of the document party, because there it would apply a issued by the Public Notary must be taken to distribution system to select among notaries. the Registration Office of the circle to which the Once the request is made, the officials of the property belongs with the proof of payment of

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the applicable registration fees and registration 6.4 Administration Fees: taxes. Once the Registration Office receives the The administration fees are the amount documents, it proceeds with the registration charged to each private property under a after checking that everything was made building or a group of buildings subject to the accomplishing the applicable laws, if not, the condominium regime. Such amount is intended Registration Office can make return notes to cover administration costs such as indicating the motifs of such return and/or surveillance, cleaning, equipment maintenance those aspects that must be corrected before or replacement, public utilities of the building, presenting them again for registration. among others.

6. Costs related to Real Estate Property: 7. Brokerage:

6.1 Property tax (Impuesto Predial): The real estate brokerage contract has as It is a tax that municipalities charge annually to object to put potential buyers and sellers in real estate properties. In general, the tax contact to enter a sale and purchase authorities set the tax amount to be paid, transaction over real estate. Brokerage is a however, sometimes there is a form of self- partially regulated activity in Colombia; assessment in which the owners declare the however, a license is not required to operate as value of the real estate to set the property tax a real estate broker. to be paid, and the tax authority may present Commission rates are freely agreed by the or not an objection to such value. parties but generally the commission is 6.2 Valuation contribution (Contribución por equivalent to 3% of the sale price of the Valorización): property when located in urban areas and 5% It is a tribute that eventually the municipalities when located in rural ones. charge when they are going to carry out public It is not necessary to have a real estate agent, it works that may increase the value of a is simply an additional activity. However, real property. For the State, it is a financing estate agents serving under this kind of mechanism, and it is usually used to finance the transactions may help to find the best property construction of city infrastructure, among and to save time to complete it. others, roads, bridges, and public spaces. 6.3 Added value tax (Participación en Plusvalía): It is a tax charged when by means a public action the municipality generates the possibility that in a property the construction index raised, the destination of the land changed to a more profitable one or, the land is incorporated from urban-to-urban expansion. This tax is set only once by each municipality, and the law defines when its payment become enforceable to the property owner.

ILN Real Estate Group – Buying and Selling Real Estate Series

Fall 20

INTERNATIONAL LAWYERS NETWORK

CORDERO & CORDERO ABOGADOS Buying and Selling Real Estate in Costa Rica

ILN REAL ESTATE GROUP

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER COSTA RICAN LAW

General parties wishing to carry out any type of Real estate law in Costa Rica is governed by the construction comply with the established principles established in the Costa Rican Civil regulations, including zoning laws. Some Code for acquiring, selling and in any way Municipalities, due to lack of funding, have not disposing of property. The official registration been able to legislate on subjects such as land of real property is made through a registry use planning and building requirements. In such system, which is administered by the Real cases, the Costa Rican Construction Code and Property Registry of the Costa Rican National the regulations issued by the National Institute Registry. This system consists of a registration of Housing and will govern deed system, which provides for the public construction. Most Municipalities that do have registration of instruments affecting land. regulations on building and construction abide by the standards and regulations contained in Non-Resident Ownership the Costa Rican Construction Code, but specific Property ownership in Costa Rica is an laws, such as those passed by the Municipalities individual right legally protected by our will prevail over general legislation such as the Constitution, which states that no person can Construction Code. be deprived of his or her property unless it is Title Registration for a necessary public use, in which case it will be compensated. The constitution grants the As it was stated above, title registration in same rights to foreign citizens. A person or legal Costa Rica is based on a Registry System. This person that has acquired property can dispose system applies to the entire territory of Costa of it in any way by selling, , encumbering, Rica and therefore all properties must be mortgaging, or using it for any desired purpose, registered in it. The Real Property Registry as long as it is in accordance with the law and contains the registration of all real estate the regulations for land use. All physical or legal properties and those liens or encumbrances persons, whether Costa Rican nationals or that affect them, such as easements, mortgage foreigners, may purchase, sell, own and in any liens, encumbrances, and any other sort of way dispose of property that belongs to them. limitation on property rights. In order for a property to be sold, it must be duly registered Land Use Planning in the Costa Rican Public Registry and possess a Local governments known as Municipalities, registered land map that describes it. Transfers govern the use of land in the towns, cities, and of property as well as the registration of all rural areas of their jurisdiction. These entities kinds of deeds relating to real property must be levy and collect real estate ownership taxes, carried out through a Public Notary, who will and they pass bylaws and legislation to draft the deed for the desired property determine the use that will be allowed for transaction, which will require that all private and public properties. As a consequence, interested parties participate in the granting of local governments can regulate matters such as the deed. Once the deed has been prepared, the type of construction that can be built, its reviewed, and signed, the Notary will pay all height, density, and other building the required duties and taxes and will submit it requirements. They also issue building and to the Real Property Registry, in order to have it remodeling permits, requiring that interested registered.

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Taxes on Real Property from goods or rights that are part of the The local Municipality collects taxes on the taxpayer´s lucrative activity, or when the gains ownership of Real Property with jurisdiction come from an ordinary activity. over the area in which the property is located. The transfer of real estate is not subject to VAT There is an annual tax of 0.25% of the property because it is a transaction subject to the value declared before the Municipality and, in transfer tax (1.5% of the sale price) according to most cases, payment is collected on a quarterly Law No. 6999, Real Estate Transfer Tax Law, of basis. Owners are responsible for the payment September 3, 1985, and its reforms and the of this tax and noncompliance could result in Law No. 7088, Tax Readjustment and fines, interest, and possible encumbrances Resolution 18th Central American Tariff and upon the property by the local Municipality, Customs Council, of November 30, 1987, and its leading to possible of the property reforms. in severe cases. Also, when transferring real Nevertheless, services associated with the property, the Tax Administration and the Public transfer of real estate such as notary fees, Registry charge a series of taxes and duties that brokers fees, etc. are subject to a 13% VAT. must be paid in order process and register the deed, as follows: There are also some properties that are subject to a tax commonly known as “luxury home tax”. Transfer Tax: 1.5% of the highest of: a) fiscal Every 3 years, homeowners must perform a value; b) purchase price. luxury home tax valuation with the purpose to Registration Fees: 0.9% of the highest of: a) determine if their , condominium, or fiscal value; b) purchase price. in Costa Rica is subject or not to the Luxury Home Tax. The Tax Administration The indicated taxes and fees represent 2.4% of the property fiscal value or purchase price should first publish the new valuation (highest of) and they must be paid before the parameters required to calculate this tax, at deed is submitted to the Property Registry. least 45 days before the year end. If the new Since Public Notaries are private parties who parameters are not published pursuant to the are authorized to perform public functions, above set dates, the values and amounts for their fees are set by the Costa Rican Bar, in the previous year will apply. The amount of the conjunction with the legislative power through tax will depend on the appraisal done to the a specific legislation, which is updated home. The parameters of the tariff may start periodically. At this time, Notary fees for the with 0.25% up to 0.55% depending on which drafting, issuing, and submitting for registration parameter the home is value. a deed for the sale of a real estate property are Starting July 1st, 2019, Costa Rica has new rules set at 1.25% of the property value. related to capital gains. Capital gains derived Transfers of real estate by individuals are not from the disposal of a property are taxed at a 15% tax rate. Owners that became property subject to income tax However, if an individual st sells a real estate which is directly linked to a owners prior to July 1 , 2019, have the lucrative activity carried on by this individual, alternative to pay 2.25% of the purchase price then the proceeds of that sale could be instead of 15% on the gain. There is a whole considered as taxable income. The applicable new chapter that regulates the taxation of principle is that the law excludes capital gains capital income and capital gains of Costa Rican from gross income, unless the gains are derived source. It is highly advisable to retain the

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[BUYING AND SELLING REAL ESTATE IN COSTA RICA] 66 services of a tax advisor and/or an accountant ❖ Limitations to Possessing Concessions to obtain proper professional advice regarding The Shoreline Zone Act establishes that the these new rules. following persons and corporations cannot be Taxation is basically the same if ownership of a granted concessions in the Shoreline Zone: i- company (or other entity) owning real estate is foreigners who have not resided in the country transfer. However, it is important to take into for at least five years; ii- corporations with consideration that when and if the company or bearer shares; iii- corporations registered or corporation decides to distribute dividends established abroad; iv- corporations and among its members / shareholders, there will entities constituted by foreigners; and v- be an additional 15% withholding/dividend tax, corporations in which more than fifty percent on top of any ordinary income tax – if of the capital stock is owned by foreigners. New applicable – to be paid by the company or legislation is currently being discussed in the corporation. Costa Rican Congress to eliminate the prohibitions restricting the concession of Shoreline Concessions shoreline areas to foreigners. In 1973, Costa Rica passed legislation that ❖ regulated the ownership, sale and purchase of Regulatory Plans properties located on the Shoreline. The In order to file a concession request, the area in Shoreline is a trip of land measuring of two which the concession is located must have an hundred meters wide, starting from the line set approved and published Municipal Regulatory by the lowest tide and moving inward two Plan. However, due to lack of adequate funding hundred meters. Of those two hundred meters, in some Municipalities, local regulatory plan the first fifty have been declared to be of public has not been issued and concessions cannot be domain and therefore cannot be owned by any validly granted. In the face of this obstacle, physical or legal person. Access to that fifty- some investors and real estate developers have meter strip is free since it is meant to be for opted to prepare a regulatory plan on behalf of public use. The administration of the remaining the Municipality, assuming the costs involved. strip measuring one hundred and fifty meters Municipalities will most likely accept this kind wide, also known as the Restricted Area, has of offer, as long as the regulatory plan complies been awarded to the local Municipalities, who with the conditions set forth by the may grant concessions for its use. These Municipality. regulations are governed by the Shoreline Zone ❖ Procedure to Register a Concession Act (“Ley Zona Marítimo Terrestre”), which establishes several conditions and regulations The procedure to be followed for a land grant instated for the use of concessions granted in or concession consists mainly of submitting a the maritime-terrestrial zone. These conditions request before the local Municipality. The and regulations are described below. request will be reviewed, and the land will be inspected, and if approved, the local ❖ Requesting a Concession Municipality will issue a notice that must be Concessions for land use can be requested by published in the official newspaper, providing those persons who are in valid possession of a an opportunity for interested parties to property located within the Shoreline Zone or manifest the concerns, complaints or by persons who owns properties bordering on opposition regarding usage rights that may the restricted area. have existed previously. Once this procedure

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[BUYING AND SELLING REAL ESTATE IN COSTA RICA] 67 concludes, the Municipality will be able to pass Registry and the number will always include the a resolution approving the concession and letter “F”. authorizing the drafting of a contract with the ❖ Areas Within the Condominium selected beneficiary and such document must also be approved and signed by the Costa Rican Two types of areas are established in a Tourism Board. After this contract has been condominium property, and together they signed, a Public Notary must notarize the comprise the total land area of the contract and file it before the Concession Condominium: i-Common Areas, which Registry of the Costa Rican Public Registry, to normally are for general use of the guarantee that the grant will be protected from condominium owners, but such use may be potential future claims by third parties. restricted to only a portion of the owners, depending on numerous variations of the ❖ Term of the Concession concept and, ii- Private Areas, which belong Concessions are granted for terms ranging from exclusively to each unit owner, who will have five to twenty years, but they may be extended complete domain over the property. for equal time spans if the beneficiary of the ❖ Rights of the Condominium Owner concession has complied with the Municipality’s requirements and established The unit owner is therefore the exclusive owner concession fees have been paid on the required of his filial property and owner of a dates. proportional right over the general common areas. Such proportional ownership will be ❖ Payment of Concession Rights determined by the size of the filial ownership as At the moment in which the concession is compared to the total land area of the granted, the Municipality will establish an condominium. No owner can be limited in the annual cannon (recurring tax obligation) that use and enjoyment of the general common the beneficiary must pay in order to enjoy the areas, nor may he claim a preemptive right over rights granted to him by the Municipality. other owners for having a larger percentage of Condominium Property ownership of the total property. ❖ Condominium property in Costa Rica is Condominium Owners Assembly and governed by the Condominium Condominium Administration ❖ Registration of Property in the The Condominium Owners Assembly is the Condominium Property Regime (System) governing body with maximum authority within any property subjected to the condominium Private property developments may be property regime. Its members are the owners admitted into the condominium property of the filial or branch properties and their task regime, if the owners have complied with the is to oversee the general administration of the necessary legal requirements established for condominium, including matters such as this special category of property ownership. budgeting, condominium fees, repairs and The system operates under the principle of one maintenance and other issues of general principal or main property from which filial or interest which will be voted on in the branch properties will be derived. Each of these assemblies or meetings that will be called. filial properties will be assigned a different There is also an administrative entity, which will registration number in the Real Property be in charge of the administration of the

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[BUYING AND SELLING REAL ESTATE IN COSTA RICA] 68 condominium, including the collection of Tourist Development” or “Polo Turístico del condominium fees, maintenance of the Golfo de Papagayo.” common areas, minor repairs, and the judicial ❖ Master Plan and private representation of the condominium. Such functions may either be carried out by a The project has been developed in strict person or by a corporation, as appointed by the compliance with the regulations and Assembly. restrictions contained in the Master Plan to develop the area. Any new projects or ❖ Condominiums in the Shoreline Zone development must comply with such Condominiums may also be constituted on regulations and restrictions. These vary in concession areas within the Shoreline Zone. accordance with the location of the project and The most essential requirement for this kind of the tourist activity to be developed. Investors condominium is that the respective are advised to consult legal counsel before Municipality must have validly granted the engaging in any activities in this special area. concession and that it has been registered in ❖ Managing Council for the Project the Concession Registry, in order for it to be submitted to the Condominium Property A Managing Council to oversee the project was regime. Expenses such as the payment of the also created in the Papagayo Development Law, annual concession fee are distributed amongst under the authority of the Costa Rican Tourism the condominium owners, and compliance with Institute. This council reports directly to the the dispositions included in the concession Board of Directors and is in charge of directing, contract and provisions of the Shoreline Zone coordinating, administering, and controlling the Act will be the responsibility of the development of the project. The council has a Condominium Administrator, who may carry total of five members, three representing the our actions against condominium owners who Tourism Board and two persons from the in any way violate such dispositions. private sector, with experience in tourism, which will be elected by the Board of Directors The Gulf of Papagayo Tourist Development of the Tourism Institute. Project ❖ Term of the Concession ❖ General Concessions may be granted for a minimum The area of Bahía Culebra was designated as an term of ten years and a maximum of fifty. area of public interest in August 1979. This These terms can be extended for equal periods declaration allowed the creation of a major as those granted, as long as the beneficiary of tourist development project in June 1982, the concession has complied with the whose stated purpose was to develop an area obligations stated in the specific concession dedicated exclusively to tourism projects such contract and the laws and regulations that as , residences, golf courses, marinas, and govern a project. other major tourism activities. The land is leased to applicants in the legal form of a ❖ Procedure to Obtain a Grant, Purchase, Sell concession, much like those granted for the or Transfer the Rights to a Concession Shoreline Zone described above, but with the In order to obtain a grant or concession over special regulations detailed below. This tourist lands currently owned by the Costa Rican development is known as “Papagayo Gulf Tourism Board, interested parties must

ILN Real Estate Group – Buying and Selling Real Estate Series

[BUYING AND SELLING REAL ESTATE IN COSTA RICA] 69 participate in a public bid, which will be ❖ Financing the Purchase and Development reviewed by a technical office reporting to the of a Concession Board of Directors. This review and Through the creation of the Tourism recommendations will be presented to the Development Project, all the banks belonging Board of Directors of the Tourism Institute, who to the Costa Rican banking system were will have the final word on the approval or authorized to grant loans to the owners of denial of the petition. The approval by the concession rights in the Project, accepting as Board of Directors is also required when a the conceded land itself and any request is made to transfer totally or partially, improvements or constructions made upon it. establish a lien or transfer concession rights This is an incentive for Financial Institutions to into a trust. provide loans to develop the project since they Concessions that have already been granted to have the certainty of having sufficient and third party applicants may be validly purchased authorized collateral and they can also count by new applicants and transferred, either on the legal rights granted to them by the totally or partially, by those legally empowered registration of the lien in the Project’s to do so. The transfer of the rights to a Concession Registry, which is a public record concession must be approved by the Board of registry. Directors of the Costa Rican Tourism Institute and those interested in acquiring the rights to a concession must comply with the regulations stated for the original concession as well as comply with all the applicable requirements. The transfer of rights to a concession is made through a public deed in which the representative of the Tourism Board and the purchaser and seller are present to grant the transfer. This deed is ultimately registered in the Project’s Concession Registry, which will be explained in full in the following section. ❖ Registration of a Concession As stated above, once the Board of Directors has approved the granting of the concession, the interested party must register the concession in the Project’s Concession Registry. This is a registry, which is part of the Concession Registry, an office under the jurisdiction of the Costa Rican Public Registry. In addition to the registration of new concessions, the Project’s Concession Registry will also register mortgage liens, leases, and transfers of concession rights to trusts.

ILN Real Estate Group – Buying and Selling Real Estate Series

Fall 20

INTERNATIONAL LAWYERS NETWORK

PETERKA & PARTNERS Buying and Selling Real Estate in Czech Republic

ILN REAL ESTATE GROUP

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER CZECH LAW I. Types of Real Property Transactions ownership status of the seller, existing a) Purchase of an undeveloped plot mortgages, and possible ongoing of land proceedings. Registered there are also records called “notices” concerning the b) Purchase of a developed plot of important information regarding the land registered property or its owners or the c) Purchase of a building (that is people holding any other rights to the not part of plot of land) property, for instance, information regarding dispossession, execution d) Purchase of an apartment proceedings, prohibition of disposition, e) Purchase of a right to build and prohibition of establishing a pledge. f) Through a share deal with a c. Description of needed repairs or corporation that purchases and other regulations the seller/buyer sells the real estate has to comply with. Note: The right to build is right in d. Date of handover to the buyer/date rem related to a plot of land of transfer of ownership (N.B. the consisting in a right to have an ownership is transferred on the day overground or underground of registration in the land register structure whether yet existing or retroactively on the day of filing the future. It is considered according request). to Czech law as an immovable e. The conditions of the change of asset. ownership. II. Essential Content of the Purchase f. Real estate charges. Agreement g. Declaration regarding the required a. The contracting parties, as well as municipal decisions such as, for the price and the payment terms. instance, the occupancy permit b. Exact description of the real estate, determining the purpose of the use i.e., the land, any fixtures and of the real estate. fittings of the building or apartment h. Detailed representations and and existing easements, pledges, warranties regarding the current etc. Czech law expressly regulates ownership and substantial the description of the land and characteristics of the property such buildings used for the purpose of as: access, connectivity to media their registration in the land supplies (gas, electricity etc.). register. Therefore, the most important document containing the i. Energy Performance Certificate of description of the land is the land the building must be prepared by register. the purchaser, and it is recommended to include it in the Note: The review of the land register is purchase agreement as its annex. of major importance regarding the

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Note: There are collateral provisions in the conclusion of the purchase the purchase agreement, which can be agreement. constituted as rights in rem and b. To ensure that the purchase price is registered in the land register. These transferred to the seller after the collateral provisions may facilitate the registration of the ownership in negotiations of both contractual parties favour of the buyer, the parties by ensuring their specific requirements mostly use a deposit of the purchase through these rights in rem. The price at a notary, attorney-at-law, or collateral provisions in the purchase bank. The parties to the contract agreement are namely: (i) reservation of thus conclude, mostly with purchase the ownership right, (ii) reservation of agreement, also an escrow the repurchase, (iii) reservation of the agreement with the bank, notary, or resale, (iv) pre-emption right, (v) attorney-at-law. According to the purchase testing, (vi) reservation of a escrow agreement the better buyer. A detailed description of bank/notary/attorney-at- law is these institutes exceeds the scope of obliged to transfer the purchase this article however they may be very price after the fulfilment of the practical in some cases. We will gladly conditions stated in the escrow provide more detailed information upon agreement, which usually includes request. the registration of the buyer in the III. Conclusion of the Purchase Agreement land register as the owner of the a. The purchase agreement has to be transferred real estate and payment concluded in writing and the of the tax on acquisition of real signatures of both parties must be estate. on one document. For the purpose V. Agents of the registration in the land a. The Buyer or Seller can both use a register, it is required that the real estate agent. The contract with parties to the contract prove their the agent can be concluded as an identity by their officially certified exclusive agreement. signatures. The purchase agreement shall be thus concluded in writing b. The real estate agent's commission with the officially certified is generally determined by the signatures of both parties on one market situation and is usually document. around 3% of the purchase price. IV. Transfer of Ownership VI. Forms of Ownership a. The parties provide for who will a. In general, all individuals and legal apply for the registration in the land entities can invest into and own real register in the purchase agreement. estate assets. In most cases, it is stated that the b. It is irrelevant if the owners and seller has to apply for the purchasers are resident or non- registration in the land register resident or which country they come within a certain period of time from from. However, it is important that

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the Czech land registry recognizes 1. Limited Liability Company – s.r.o. legal personality of any foreign d. Most widely used legal form for company or individual. corporations.

A. Acquisitions e. Highly flexible, with relatively few c. Real estate can be acquired by way obligations. of an asset or a share deal. The legal a) Legal Entity entities in the case of a share deal are mostly organized as limited f. A legal entity acts autonomously, liability companies or joint stock represented by executive director(s). companies. g. Independently subject to taxation. B. Residential Property h. The particular rights and obligations Most frequent forms of ownership of of an s.r.o. exist autonomously from the residential property: those of the shareholders and the executive directors. 1. Sole ownership: The owner is the only person authorized to control b) Formation and dispose of the land in question. i. The foundation act is a 2. Co-ownership: More than one Memorandum of Association or person owns an undivided share of land. Foundation Deed in the case of a Each co- owner is entitled to dispose of sole shareholder. It has to be its share. notarized. 3. Joint ownership of spouses: j. Setting up an s.r.o. is uncomplicated Each of the spouses is entitled to a and can be accomplished easily. share of the joint property, but is not Registration is done either directly entitled to dispose of it independently, by the notaries or via Court. i.e., without the consent of the other k. A supervisory board is not an joint owner (spouse). obligatory company body. Ownership by legal entities is however c) Costs of Formation not excluded. The estimated total notarial costs for C. Commercial Property the formation of a standard s.r.o. are Owners of commercial property are amounting approximately to CZK 6,800 most frequently legal entities of either CZK (€ 250) (In case of registered capital private or public law. The most – CZK 200,000 (€ 7,300)) plus court costs, commonly used entities under Czech about approx. CZK 6,000 CZK (€ 220) private law are joint-stock companies and fees for a legal counsel for the (a.s.) and limited liability companies drafting of the Foundation Deed or (s.r.o.). As regards the entities of public Memorandum of Association. The law, they are usually insurance notarial costs are calculated according companies, banks, funds, or purely real to the amount of the company's estate companies. registered capital. It is also possible that the registration of the established

ILN Real Estate Group – Buying and Selling Real Estate Series

[BUYING AND SELLING REAL ESTATE IN CZECH REPUBLIC] 74 company can be performed directly by a The executive directors act in all notary based on a certificated notarial matters on behalf of the company deed. The total costs are in this case a in the way of acting that is little lower. registered in the Commercial d) Minimum Registered Capital Register. The Foundation Deed and the Memorandum of Association l. The minimum registered capital may state that the executive required for an s.r.o. is CZK 1 but it is directors constitute a collective recommended to set up a company body. The internal restriction of the with higher capital covering the executive directors' powers is not initial company´s expenses in order effective against a third party. to exclude situation of insolvency (at

least CZK 100,000 (€ 3700). p. Under Czech law, a violation of these duties by an executive m. Nevertheless, at least 30% of each director will not affect the validity shareholder’s monetary contribution of a contract with a third party, but must be paid-up in a special bank the s.r.o. may hold the executive account before the company's director in question liable for registration in the Commercial damages. Register. In case of sole shareholders, the registered capital 2. Czech Joint-Stock Company – a.s. has to be paid-up entirely. q. An a.s. (akciová společnost) is a legal e) Limited Liability entity in which the shareholders are not liable for the debts of the • The shareholders of the entity are company during its existence. not personally liable for the r. It is much more complicated to form company's debts. The shareholders' and operate than an s.r.o. liability is joint and several and is limited to the extent of their unpaid s. Hence, the rules of the a.s. are contribution in the registered capital generally less flexible compared to according to the Commercial the rules of forming a limited liability Register at the time they are invited company. by the creditor to meet a) Formation performance. t. At least one founding shareholder is n. The limitation of liability arises once required, which can be an individual the s.r.o. has been registered in the or a legal entity. Commercial Register. u. The minimum share capital is CZK Note: If the corporate share is not yet 2,000,000 (EUR 80,000). fully paid, the shareholders must, if need be, pay the outstanding difference v. The Articles of Association must be privately in full. notarized and contain certain mandatory information. o. The company's statutory body is one or more executive directors. w. Application for registration in the company’s register takes place in

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the district where the company is orientation of business located. management. The Statutory Director Note: Previously, the founding is the company's statutory body with management powers (these powers shareholders had to pay a minimum contribution. In case of cash are shared with the Management contributions: each of the founders had Board) and it is elected by the to pay of at least 30% of its subscribed Management Board. registered capital by the time of the dd. The dualistic structure, which was submission of the proposal to the originally the only structure used for Commercial Register. a joint-stock company in the Czech x. Tax registration is at the local tax Republic before 1 January 2014, and authority. currently used also in , is the more common structure of a y. The company must establish a joint-stock company in the Czech website containing the obligatory Republic. information concerning the

company without undue delay after ee. A company with a dualistic structure its registration into the Commercial has a Board of Directors and a Register. Supervisory Board. The Board of Directors is the company's statutory b) Structure – 2 options body which is in charge of the z. There are two options regarding the company's business management. company's structure: (i) the monistic Nobody is authorized to instruct the structure, (ii) the dualistic structure. Board of Directors in business Both options are not implemented management matters. The in Czech law in their pure forms. The Supervisory Board is a controlling company may freely change its corporate body supervising the structure by changing its Articles of performance of the Board of Association. Directors and the acting of the company. Nobody is authorized to aa. The monistic structure is a new instruct the Supervisory Board in option. This structure is typical in Board of Directors controlling European countries such as Italy, matters. France and Switzerland, and this structure is also used for a European ff. The General Meeting is the third Company (Societas Europaea). body of the a.s. in both company structures. It consists of all company bb. A company with a monistic structure shareholders. Its most important has a Management Board and a rights consist of (i) electing new Statutory Director. members to the Board of Directors cc. The Management Board has the in the dualistic structure if the controlling powers towards the Memorandum of Association does Statutory Director and also not delegate this right to the determines the fundamental Supervisory Board; (ii) electing new members in the Supervisory Board

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in the dualistic structure or b. The buyer normally has to provide a Management Board in the monistic certain amount of the overall costs structure except for members of the from its own sources. For large Supervisory Board who are not development projects banks usually elected by the General Meeting; (iii) require a pledge on all possible deciding on the distribution of claims which the buyer can gain in profits and amending the Articles of connection with the real estate. Association. c. In this connection, the buyer often c) Liability has to present the seller with an gg. Only the company is liable towards irrevocable acceptance of loan the company's creditors, not the financing by a reputable bank or shareholders. show proof of sufficient funds before signing the purchase Note: Persons acting on its behalf are agreement. liable for the obligations which arise

before the company's incorporation in d. Normally, the mortgage/loan is the Commercial Register. If there are provided for about 60%, up to 70%, more persons acting together, they are of the purchase price. liable for such acting jointly and e. For special transactions such as large severally. The company can individual properties or real estate acknowledge the effect of such acts portfolios, a common alternative to within three months from its a bank loan is the use of capital incorporation and then it is bound by market products, for instance, such acts from when it began. bonds, receivables, or credit 3. Other types of entities derivatives.

There are two other types of companies VIII. Payments and Costs Limited partnership company (k.s.) and a. The costs and taxes are normally Unlimited partnership company (v.o.s.), borne by the buyer. However, that are however not often used in real usually the seller has to bear the estate transactions. costs of deleting old mortgages from The same applies to private law the land register. associations that are not considered to b. Usually, the purchase price is be legal entities and where the liability transferred to an escrow account of the members is unlimited. maintained by a notary, bank, or VII. Financing attorney-at-law, whereby the money solely gets transferred to the seller a. The usual way of financing real when the registration in the land estate is a bank loan/mortgage for registry is completed. at least a part of the purchase price.

Thereby, a bank generally insists on c. The tax on acquiring real estate was a collateral. abolished. No notary or important registration fees are due. Official

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registration stamp to be paid is only EUR 100. d. Agent fees are usually around 3 % of the purchase price. IX. Examinations before closing a. The buyer is advised to check the title to the property for any potential or actual deficiencies and the financial health of the seller too. b. Commercial buyers should additionally check if there are any planning restrictions: mostly, a construction or alteration as well as a change in use or the demolition of a building requires a building permit. The building project has to comply with the content of the local (or regional, as the case may be) development plans. Therefore, with regard to prospective plans of construction, the development and land use should be reviewed very carefully before the closing of the contract. c. In addition to this, environmental issues should be checked before closing too. Note: It is strongly recommended to undertake a due diligence review before the closing of the contract.

ILN Real Estate Group – Buying and Selling Real Estate Series

Fall

20

INTERNATIONAL LAWYERS NETWORK

CONSORCIOLEGAL Buying and Selling Real Estate in Ecuador

ILN REAL ESTATE GROUP

[BUYING AND SELLING REAL ESTATE IN ECUADOR] 79

KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER ECUADOREAN LAW

I. STANDARD FORMS OF AGREEMENTS inspection for structural issues, title, and if requested, a plot plan of the premises, A. Offer to Purchase sets forth Buyer’s offer of price, date for closing, contingencies especially when the building is relatively for inspections, financing etc. and date for new, and plans are available. signing a formal Promise of Purchase and B. Commercial: In addition to the Sale agreement, which for validity has to inspections performed by residential be a notary public deed. buyers, commercial buyers also usually B. Promise of Purchase and Sale Agreement obtain a survey, an environmental review, sets forth the complete terms of the and a use and zoning/permitting analysis purchase and sale. which is issued by the corresponding municipality. C. Note: In Ecuador, a Promise of Purchase

and Sale Agreement may be enforced as a IV. FORMS OF OWNERSHIP binding contract; better if registered at A. Residential Property is usually held in an the City Real Estate Registry. individual’s own name; some owners D. The costs of Promise of Purchase and Sale prefer the Stock Company kind of Agreements are very low, since the “shield”. Joint owners may take title as: notarial fees are in that case charged on 1. Tenants in Common (each own 50%); the down payment or even considered as 2. Tenants by the Entirety if the owners an undetermined sum deed, not on the are a married couple (they each own Purchase price which will be stated the undivided whole of the property). afterwards in the final Purchase deed. 3. Individual or solo owner. II. BROKERS 4. Horizontal Property where each

A. All Brokers in Ecuador whether they are owner owns an apartment or unit and working with the Buyer or the Seller the corresponding portion of the represent the Seller unless the Buyer common areas as yards, halls, enters into a separate Buyer’s Broker or staircases, pools. Dual Agency Agreement. Brokers are officially registered, so they are good B. Commercial Property may be held as people. However, it´s always important to follows: see if they are affiliated either to the 1. As the Owners pursuant to the forms Chambers of Commerce or the Brokers´ set forth in A above. Local Associations. 2. Stock companies B. Seller usually pays the brokers commission unless negotiated otherwise 3. Limited Partnership (not customary). 4. Other types of businesses III. BUYER’S INSPECTIONS incorporations, as personal, limited copartner-ship (less frequent). A. Residential: Prior to Closing, the Buyer performs property inspections including

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V. TAX REGULATIONS directed by beneficiaries – legally an A. The excise (Alcabala) tax is the highest in “agent”- for beneficiaries. Real Estate Purchase-Sale Contracts (only 3. Third parties are entitled to rely on in definitive or final ones; not in Promise certificates signed by trustees of record. of Sales agreements), 2% on the purchase 4. Beneficiaries may terminate or amend price or on the Official Record of the Real trust at any time. Estate municipal appraisal, whichever is higher. Capital gain tax applies when 5. On termination, the trust property is there is a profit made in the sale, it is 10% conveyed to beneficiaries. of such profit but there are many 6. Advantages deductions that have to be made including the real estate annual municipal 1. Beneficiaries are undisclosed taxes paid for the property while owned (privacy). by seller, repairs, maintenance costs; and 2. Trust property can be effectively it is diminished by 5% of tax each year conveyed by assignment of after the second one of having been beneficial interests. Useful for intra- acquired by seller, until at the 20th year family gifts; albeit there is income when there will be no capital gain tax. taxation on trust level in Ecuador. Capital Gain is on the seller´s account 7. Disadvantages unless otherwise agreed in the deed. 1. No limited liability for beneficiaries. B. Regarding income tax, it all depends if the property is a productive estate, as for 2. Deeds excise tax on transfer of instance for renting, in which case, either beneficial interest. in the form of a stock or other company B. JOINT PERSONAL TITLES: If title in the or as individual property, the income tax name of all the co-owners, all must sign level is between 22%-25% of net income. the deed. Corporations are subject to a “double tax,” once on the corporate level, and Attachments against co-owners again on dividends or distributions to individually can affect the title even if shareholders, which directly affect the referring to an individual obligation or stockholders and not the company itself. debt. Companies have more options to deduct C. STOCK COMPANIES general expenses from their income tax Shareholders can be individuals or other filings than individuals. companies. VI. DISTINGUISHING FEATURES 1. Advantages A. PROPERTIES HELD IN TRUSTS 1. Limited liability of shareholders by 1. Fiduciary relationship between statute. “trustee” and beneficiaries listed on the 2. Free transferability of stock. corresponding trust contract. 3. No deeds excise tax on sale of 2. Trustee has no power to deal with the stock. trust property except as specifically

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2. Disadvantages document of proof of being the authorized 1. Double-taxation for corporation. company officer to sign on behalf of the company. 2. Two-thirds or as statutory

shareholder vote required to IX. RECORDING REAL ESTATE DOCUMENTS approve sale of all or substantially A. Title Documents are recorded on a Canton all assets. (city) basis in Ecuador. Notary Publics can 3. Dissolution by Superintendence of be from any city, not necessarily from the Companies– but reinstatement city where the estate is located. possible. Assets can be sold after Recording procedures are very well dissolution during liquidation. organized and fast in most cities. VII. CLOSING COSTS/ADJUSTMENTS X. ANNUAL COSTS FOR PROPERTY A. Buyer pays the transfer taxes due at the OWNERSHIP time of the definitive Purchase-Sale A. Property Insurance Contract. As stated before, Capital Gain is B. Real Estate Taxes on seller´s account. (BOTH ITEMS RATHER LOW). B. Adjustments are made for rents; buyer has the legal right to file court petition for Real estate is a good, permanently on-going termination of prior rent contracts. business in Ecuador, despite the normal lowering of productive activities worldwide. VIII. OTHER CLOSING DOCUMENTS IN ORDER TO REACTIVATE THE REAL ESTATE Buyer has to obtain a municipal lien certificate BUSINESSES, the Municipality of Guayaquil –the from the Town/City where the premises are main commercial city of Ecuador- and some located stating the current status of real other municipalities of big and medium sized property, taxes payments and balances due. cities; have enacted rules exempting all real And, if Horizontal Property, a certificate of the estate from property tax for the next five years Administration on payment of condominium after the purchases. In order to foster real aliquots. If Buyer or Seller are corporations it is estate sell-buying activities for the establishing necessary to also annex copy of the of new businesses; like stores, cafeterias, shareholders’ minutes authorizing the sale if restaurants, etc. requested by statutes and copy of the

ILN Real Estate Group – Buying and Selling Real Estate Series

82 Fall 20

INTERNATIONAL LAWYERS NETWORK

A&K METAXOPOULOS AND PARTNERS Buying and Selling Real Estate in Greece

ILN REAL ESTATE GROUP

[BUYING AND SELLING REAL ESTATE IN GREECE] 83

KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER GREEK LAW 1. PROCEDURE – MAIN STEPS OF REAL ESTATE any illegal constructions which need to be ACQUISITION UNDER GREEK LAW. settled, according to the relevant laws. Acquisition of a real estate property in Greece • Issuance of the required certificates and includes mainly the following steps: other documents. In order for a property purchase to take place, a number of certificates • Finding of the property to be purchased, with the possible assistance of a real estate must be produced to the notary public, which agent. Usually, the agent’s fee amounts to 2% however pertain to the seller. upon the purchase price but can be negotiated • Execution of the notarial purchase deed. between the parties. In Greece, purchase of any real estate property • Obtain a Greek Tax Registration is performed solely by virtue of a notarial deed. Number. This procedure is simple and does not Execution of such a deed takes place before a require the presence of the foreigner in Greece, notary public. The notary public is usually since it can be carried out by a third party, by chosen by the purchaser, who also pays the virtue of a Power of Attorney. relevant notary fees. Both the seller and the purchaser may either appear in person before • Legal due diligence of the property. the notary in order to execute the deed, or they After having found the property and before may appoint someone else to execute it in their proceeding to the execution of any deed or name and on their behalf, by virtue of a agreement, the purchaser should appoint a notarized Power of Attorney. lawyer to perform a complete legal due • diligence of the property, which includes a Registration of the notarial purchase detailed audit of the rights of the seller and his deed with the Land Registry or Cadastre. In predecessors, as well as a research on any Greece, a purchaser of a property becomes the possibly existing encumbrances (mortgages, property’s owner only after the notarial claims, etc.). Legal due diligence is performed purchase deed is registered with the with the Land Registry or Cadastre of the region competent Land Registry or Cadastre. Such in which the property lies. It is noted that the registration entails certain fees which are paid responsibility for this very important step lies by the purchaser (and their amount is indicated with the purchaser, given that Greek notaries herein below). are not obliged to (and will not) perform such a 2. TIMELINE due diligence. The time required for the conclusion of a • Technical due diligence. It is performed purchase of a real estate property depends on by a civil engineer and is mostly needed in the complexity of each case. In regular cases, cases where the property to be purchased is a after the property has been found, purchase non-constructed land or lies outside the urban procedures are normally concluded within a plan. Technical due diligence aims to ensure period of 1,5 – 3 months approximately. that the property meets all legal requirements 3. MAIN CONTENT OF THE PURCHASE DEED for the construction of buildings to be allowed, and, in cases where the property to be - The Contracting Parties purchased is already built, to determine - Detailed description of the property whether the already existing building(s) include

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- Detailed description of the ownership rights of approximately to 0,475% upon the value of the the seller and his predecessors deed and are subject to VAT 24%. - The price 5. FINANCING - The payment terms in detail The most common way of financing the - Other clauses depending on each case. purchase of a real estate property is through a bank loan. In order to grant a loan, Greek banks The notary will read the deed aloud for both examine the financial situation of the purchaser. parties, but purchase deeds are drafted only in Greek banks have the current commercial value Greek. Therefore, non-Greek-speaking of the property estimated by a civil engineer of purchasers (if personally attending the their own choice and grant loans for an amount execution of the deed) will need to appoint a not exceeding the 70 – 75% of such estimation. translator. Before the loan is disbursed (directly to the 4. FEES AND EXPENSES CONNECTED WITH THE seller) the bank shall register a mortgage upon EXECUTION OF THE NOTARIAL PURCHASE the property for an amount of approx. 120% of DEED. TO BE PAID BY THE PURCHASER. the loan. • Notarial Fees. They are calculated 6. TAX TREATMENT gradually, as a percentage upon the value of a. Taxes imposed at the time of purchase of the purchase deed, ranging from 0,80% for the the property. To be paid by the purchaser. part of the value • Transfer Tax • up to 120.000,00 € to 0,10% for any Before the execution of the notarial purchase amount beyond 20.000.000,01 €. Notarial fees deed, the purchaser is obliged to pay the are subject to VAT 24%. corresponding transfer tax. Such tax amounts • Lawyer’s Fees. The presence of a lawyer to 3% upon the value of the property. at the time of execution of the purchase deed is It should be noted that Greek Law also provides no longer required under law. It is, however, for an exemption – under certain conditions – strongly recommended, in order to secure the from the payment of the transfer tax. These accuracy of the deed’s content in relation to exemptions apply only to purchasers that the description of the property, the description already reside or intend to be established in of the sequence of rights of the seller and his Greece and fall into the following categories: (i) predecessors, etc. Lawyer’s fees for the Greeks, (ii) repatriates from Albania, Turkey, performance of the legal due diligence and the and countries of the former Soviet Union, (iii) attendance of the execution of the purchase EU citizens and citizens of the European deed are agreed between the client and the Economic Area, (iv) acknowledged refugees, lawyer and depend on the value of the and (v) nationals of non-EU countries who transaction and the complexity of each case. enjoy the status of long-term residency in Lawyer’s fees are subject to VAT 24%. Greece. • Registration Fees. The fees for the • Value Added Tax for new buildings registration of the notarial purchase deed with the Land Registry or Cadastre amount When it comes to new buildings, namely buildings the building permit of which has been

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issued or revised from 01.01.2006 onwards, a • Special Real Estate Property Tax VAT of 24% upon the value of the property shall This is a special property tax imposed upon be imposed at the time of their first sale / natural or legal entities residing or having their transfer by a manufacturer, or by a person who registered seat in countries with a privileged deals professionally with the construction and tax regime and possessing full or bare sale of buildings. In cases where VAT is ownership or usufruct of properties located in applicable, the purchaser is not required to pay Greece. Such tax amounts to 15% upon the any transfer tax. The application of VAT on new value of the property. This tax has been buildings is currently on suspension until imposed in order to deal with the phenomenon 31.12.2022. of tax evasion of offshore companies Important Note: due to frequent legislative possessing real estate property in Greece. Law amendments in taxation of property, it is provides for a number of exemptions from the strongly recommended that all property related application of the above tax. taxes are re-visited and re-calculated before • Tax on Income from Property Rents any purchase. Annual income from property rents is taxed by b. Annual fiscal obligations of property owners. a rate of 15% on the amount of income up to • Real Estate Property Tax (sic: “ENFIA”) 12.000 €, by a rate of 35% for the amount of Any real estate property located in Greece income between 12.001 € and 35.000 €, and by belonging to individuals or legal entities on the a rate of 45% on any amount above 35.001 €. 1st of January of every year, is burdened with Rents of properties leased for business or Real Estate Property Tax. This is the major professional purposes is surcharged by a stamp annual tax imposed on real estate properties. duty of 3,6%, which however is usually paid by Such tax is calculated on the basis of the the lessee, subject to an agreement. surface of the real estate property, its location, Important Note: due to frequent legislative etc. When it comes to buildings, it ranges from amendments in taxation of property, it is to 2,00 € per m2 to 13,00 € per m2, while when strongly recommended that all property related it comes to plots of land, it ranges from 0,003 € taxes are re-visited and re-calculated as need per m2 to 11,25 € per m2. Especially in relation may be. to the Real Estate Property Tax for the year 2020, the Greek Government has applied 7. RESTRICTIONS IN ACQUIRING REAL ESTATE reductions of 10-30% to such Tax, in proportion PROPERTY IN GREECE to the total value of the real estate properties • Cross-border Areas. belonging to the same owner. Greek law provides restrictions for the • Real Estate Duty (sic: “TAP”) acquisition of property rights in cross border This is a special duty imposed upon real estate areas of Greece, by individuals or legal entities properties, in favour of the Municipal that are not nationals of the European Union or Authorities. It is calculated by multiplying the the European Free Trade Association (“EFTA”). value of the property by a rate ranging from Furthermore, the transfer of shares or the 0,25 ο/οο to 0,35 ο/οο. This duty is collected change of partners /shareholders of companies through the Electricity Bills of the property. not located in the EU or EFTA that own real estate property in cross-border areas of

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Greece, is also prohibited. Any such natural or timeshare agreement, or have leased hotel legal persons (which are not nationals of the EU accommodations for at least 10 years. The or EFTA) wishing to acquire real estate minimum value of the real estate property and properties located in cross-border areas, must the contractual value of the hotel apply to a special Committee in order to obtain accommodations lease agreement has been set permission to acquire or rent the real estate to the amount of 250.000 Euros. Such property. Any transaction taking place in residence permit may be renewed for an equal breach of the above provisions is null and void. period (5 years) for as long as the real estate The following areas of Greece are considered as property remains in the ownership of the non- cross-border areas, in which the above EU citizen or the timeshare-lease agreements restrictions apply: Dodekanisa, Evros, remain in force. Thesprotia, Kastoria, Kilkis, Lesvos, Xanthi, Said non-EU citizens may be accompanied by Preveza, Rodopi, Samos, Florina, Chios, Thira their family members (spouse, children under (Santorini), Skiros, as well as certain regions of 21 years old, parents), to whom a separate the areas of Drama, Ioannina, Pella and Serres. residence permit may be also granted following Restrictions are lifted depending, in principle, their request. Their permit shall be terminated on the legal form of the requested transaction, at the same time as the permit of the property its monetary value, the exact location or value owner. of the property, and unless national security reasons exist. • Purchase of Islands Greek law also provides that in order for a natural or legal person to acquire ownership of or rent a privately owned island or a property located in a privately owned island, they have to apply for the issuance of a permit by the Minister of Defense. When it comes to public islands, acquisition of ownership is not possible; such islands may only be leased under the same above conditions (prior issuance of a permit by the Minister of Defense). 8. IMMIGRATION RULES RELATED TO PROPERTY INVESTMENT Greek law provides that a residence permit of 5 years shall be granted to citizens of non-EU countries who are the owners (either personally or through a legal entity the shares of which belong entirely to them) of real estate property in Greece, or who have concluded a

ILN Real Estate Group – Buying and Selling Real Estate Series

Fall 20

INTERNATIONAL LAWYERS NETWORK

SIT, FUNG, KWONG & SHUM Buying and Selling Real Estate in Hong Kong

ILN REAL ESTATE GROUP

[BUYING AND SELLING REAL ESTATE IN HONG KONG] 88

KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER HONG KONG LAW

Introduction instruments shall be determined by the sequence of their respective dates of Hong Kong is one of the most densely populated cities over the world. With very little registration, the special rule is that priority shall available land, real estate developers tend to take effect by reference to the date of build multi-story buildings ranging from 30-to- execution instead of the date of registration if 70-storey high. Due to historical reasons, such registrable instruments (excluding almost all lands in Hong Kong are leasehold charging orders and lites pendentes) are tenures. Over the centuries, the Government registered within one month after the date of leased or granted to individuals or corporations execution. Failure to register a registrable a piece of land for use or for development. interest will render the same to be null and Therefore, a sale and purchase of landed void against any subsequent bona fide purchaser or mortgagee for valuable property in Hong Kong is in fact a transfer or assignment of a lease. In a sale and purchase consideration but will not affect the legality, transaction, the vendor agrees to sell, and the validity, and enforceability of the instrument as buyer agrees to purchase both the legal estate between the parties of the unregistered and the equitable interest of and in the landed registrable instrument. property. This article provides a brief The procedures of the common sale and introduction to land law in Hong Kong and sets purchase of landed properties in Hong Kong out a summary of the procedures of sale and Provisional Agreement for Sale and Purchase purchase of landed properties in Hong Kong. Before a potential purchaser decides to System of Deeds Registration purchase a landed property, he/she usually Unlike other common law jurisdictions, the inspects the landed property Hong Kong registration system is not one of (flat/apartment/house) through the registration of title but a deeds registration arrangement by an estate agent first and to system. Under such deeds registration system, consider if he/she requires any financing when it provides a register of the instruments purchasing the property. It is advisable that, at affecting a particular lot of land. Registration of least, a rough estimate verbal valuation of the instruments alone does not confer title. Only relevant property should be obtained instruments affecting the landed property can beforehand in order to apply to bank(s) for be registered and registration serves as a notice . Around 60%-70% mortgage of having an interest in the landed property. As loan is the most of the market value of the such, documents such as deeds, conveyances, property that can be obtained nowadays. In or other instruments in writing and judgments the circumstance, a purchaser should consider creating or dealing with an interest in land, or carefully whether he/she is affordable to pay affecting land, are considered as registrable for the remaining purchase price and also instruments. They are required to be registered payment for the Ad Valorem Stamp Duty. at the Land Registry in Hong Kong in order to When a purchaser agrees to purchase and a have priority over any other subsequent vendor agrees to sell a landed property, both registrable interests in land. While the general parties will enter into a written agreement. In rule is that the priority of the registrable Hong Kong, preliminary agreement, also known

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[BUYING AND SELLING REAL ESTATE IN HONG KONG] 89 as the provisional agreement for sale and Formal ASP is also required to be submitted for purchase (the “PASP”), is not required by law registration at the Land Registry. but commonly used. Such written agreement is Formal Agreement for Sale and Purchase usually prepared by estate agents which contains basic main terms such as the subject After signing the PASP, the parties have to property, parties, consideration, and appoint their respective solicitors as soon as completion date etc. in relation to the sale and possible. (However, in the sale and purchase of purchase transaction. Upon signing of a PASP, firsthand property, separation of legal the purchaser will pay to the vendor or to the representation might not be necessary.) vendor’s solicitors (as stakeholders) a sum Solicitors for the respective parties will being the initial deposit (which is usually 3%-5% negotiate and agree on the terms and of the consideration) to show his/her sincerity conditions of the formal agreement for sale and to purchase the landed property. The purchase (the “Formal ASP”). After execution of purchaser will usually register the PASP at the the Formal ASP, Ad Valorem Stamp Duty will be Land Registry (after stamping of the PASP). It is payable, and the Formal ASP will be presented advisable that both the vendor and purchaser for registration at the Land Registry. One should expressly set out the special agreed should note that in the event that Ad Valorem term(s) (if any) in the PASP since the PASP only Stamp Duty is payable on the PASP in the contains the basic terms and parties should circumstances as aforesaid, the Formal ASP will better let their own solicitors peruse/comment be stamped a nominal sum of HK$100.00 on the PASP before signing the same. before it is presented for registration at the Land Registry. The PASP generally contains, inter alia, a standard clause which gives both the vendor Use of Power of Attorney in the Sale and and the purchaser a chance to “get out” of the Purchase contract after signing the PASP. The vendor is It is common for a purchaser or a vendor to entitled to forfeit the deposit paid by the execute a Power of Attorney (the “POA”) in the purchaser if the purchaser decides not to sale and purchase of a landed property, proceed further whereas the vendor shall especially when the purchaser or vendor is refund the deposit to the purchaser and physically unable to be present in person when compensate the purchaser with a sum executing the Formal ASP and/or Assignment equivalent to the amount of the deposit paid if (as hereinafter defined). A POA is an instrument the vendor decides not to sell the property to that allows a person (or corporation) to give the purchaser. However, both the vendor and power to an attorney to act for and on the purchaser can choose to enter into a his/her/its behalf in performing certain acts or “binding” agreement without the chance to get obligations, for example, for the purpose of out of the contract unless the title to the enabling the sale or purchase of a landed property is defective. property. To determine whether a POA is in Ad Valorem Stamp Duty will only be payable on order, a number of criteria have to be fulfilled:- the PASP when the terms of the Formal ASP (as (1) whether the POA has been property hereinafter defined) cannot be finalized, and executed; (2) whether the specified power(s) the Formal ASP (as hereinafter defined) cannot is/are clearly defined therein; and (3) whether be signed within 14 days of the PASP. The the POA is still valid and not revoked as at the time when the relevant instruments such as

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Formal ASP and/or Assignment is/are executed. financing to pay the balance of the purchase Generally, the validity period for a POA is 12 price of the landed property. months from its date of creation. Prior to completion, unless otherwise agreed by If a POA is being relied upon by any party in a the parties, the vendor shall be under a duty to sale and purchase transaction, it is important prove good title to the purchaser of the landed for the purchaser’s solicitors or the vendor’s property by (1) delivering to the purchaser all solicitors to produce the POA to the other side relevant title deeds and documents in respect for verification. More importantly, it is always of the landed property; and (2) answering advisable to consult your own solicitors before requisitions on title raised by the purchaser executing the POA for ensuring the proper satisfactorily. As previously mentioned, one procedures to be observed especially where cannot prove his/her title of the landed the POA will be executed abroad for use in property under the said deeds registration Hong Kong. For POA executed abroad, it is system. Hence, it is always the purchaser’s always a good conveyancing practice that solicitors’ duty to check the title to the landed execution of the POA to be witnessed by a property by perusing all the relevant title notary public and sometimes to be further documents provided and delivered by the authenticated/legalized depending on different vendor’s solicitors. This also explains why jurisdictions. lawyers are actively involved in a sale and Notwithstanding the foregoing, a POA might purchase transaction in Hong Kong. The not be applicable or acceptable to all landed purchaser’s solicitors’ rights to investigate title property transactions. For example, if a and to raise requisitions are also generally set out in the Formal ASP. The vendor’s solicitors purchaser needs to obtain mortgage loan for financing the purchase of the property, a bank have to satisfy the purchaser of the vendor’s or financial institutions may not accept POA good title to the property or the vendor’s title when executing the mortgage deed. As such, it agreed to be delivered to the purchaser. The is advisable to obtain legal advice and/or purchaser has the right to insist on a good title consent from the relevant bank prior to the being proved and showed and the vendor is execution of a POA for use in a landed property obliged to clear all title encumbrances or to transaction. remedy all the title defects upon completion. Title requisitions: proving & investigating title Mortgage financing The parties shall abide by the terms and In Hong Kong, if the purchaser requires conditions set out in the Formal ASP and financing for payment of the balance of the prepare for completion after the execution of purchase money, the purchaser will apply for the Formal ASP. If the landed property is the mortgage loan as soon as practicable subject to any existing mortgage, the vendor before completion and/or even to get an will have to arrange for discharge or release of indication from the bank(s) before entering into the existing mortgage before the completion to the PASP. When choosing a bank or financial ensure that the landed property shall be sold to institution for mortgage loan, purchaser should the purchaser free from all encumbrances. The also consider the following (not exhaustive) :- purchaser is advised to apply for mortgage loan (i) the landed property valuation and from the relevant mortgage bank reasonably in mortgage amount to be offered; advance of completion if he/she requires

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(ii) the repayment term, number of Preparation before Completion: Inspection of installments and the amount of each the Landed Property installment; Purchaser will make a final inspection of the (iii) the criteria for determining interest landed property through the arrangement with rates; and the estate agent before the completion date if (iv) the early redemption penalties and the the property will be sold to the purchaser with notice period. vacant possession. There may be fixtures and fittings which have been agreed to be sold/ Depending on the value of the landed property, delivered to the purchaser together with the the bank or financial institutions usually offer landed property upon completion. One must purchaser a loan of up to 60%-70% of its note that if the purchaser discovers that market value. any/part of the fixtures and fittings which have Usually, the purchaser’s solicitors also act for been agreed to be sold to the purchaser is/are the purchaser’s mortgagee in respect of the not available upon final inspection, he/she is mortgage transaction by preparing all the not entitled to terminate the PASP/Formal ASP relevant mortgage and security documents. The on this reason alone and the only claim which is purchaser's solicitors will receive written available to the purchaser is a claim for instructions from the purchaser's mortgagee damages. bank before completion, instructing them to Execution of Assignment prepare the mortgage document to secure the loan to be granted to the purchaser. On completion, the vendor shall execute a deed of assignment (the “Assignment”) upon receipt Preparation before Completion: apportionment of the purchase money of the landed property. of the outgoings Assignment shall be in form of a deed. It is Before completion, purchaser’s solicitors have required for transferring the legal estate of and to make enquiries with the management in the landed property from the vendor to the company or the incorporated owners of the purchaser upon completion. In usual practice, building as to whether there is any outstanding the purchaser will execute the assignment in management or other fees payable by the escrow (i.e., to execute the completion owner of the property. The vendor’s solicitors documents before completion and the will usually prepare an apportionment account completion documents will only become to the purchaser’s solicitors to show how all the effective upon all the conditions having been relevant outgoings will be apportioned satisfied). between the vendor and the purchaser. It is Completion of the Sale and Purchase common that management fee, rates and Government rent and rental payment (if any) Completion for sale and purchase of the landed will be apportioned as at the date of property usually takes place by way of solicitors’ completion. The vendor usually pays up to and undertaking. This form of completion places an inclusive of the actual day of completion. important reliance on the solicitors by requiring Nonetheless, utility payments such as the solicitors giving their professional electricity, gas and water will be dealt with by undertakings (i.e., promises). the vendor and the purchaser with the On the completion date, the purchaser’s respective utility companies directly. solicitors shall deliver the balance of purchase

ILN Real Estate Group – Buying and Selling Real Estate Series

[BUYING AND SELLING REAL ESTATE IN HONG KONG] 92 money in exchange for an undertaking given by residential property in Hong Kong at the time of the vendor’s solicitors to return (1) the acquisition of the subject properties. assignment duly executed in the purchaser’s Any instrument executed on or after 5 favour by the vendor; (2) all original title deeds November 2016 for the sale and purchase or (which relate exclusively to the landed property transfer of residential property, either by an and are required for giving good title to the individual or a company will be subject to AVD landed property) including the release or at the rate set out under “Part 1 of Scale 1” discharge of the existing mortgage/legal charge under Schedule 1 to the Stamp Duty Ordinance (if any); and (3) the keys of the landed property (Cap.117) (i.e., a flat rate of 15% of the (if vacant possession is agreed to be delivered consideration or value of the residential to the purchaser on completion). property, whichever is the higher), unless After the vendor has delivered a duly executed specifically exempted or provided otherwise. assignment to the purchaser, the purchaser’s Part 1 of Scale 1 does not apply to an solicitors will then arrange to pay stamp duty agreement /conveyance for a residential on the assignment (which is also a nominal sum property where the purchaser/transferee is a of HK$100) and register the assignment at the Hong Kong permanent resident (“HKPR”) (or Land Registry. he/she is a tenant or an authorized occupant of Stamp Duty Implications the Housing Authority who acquires the Under the Stamp Duties Ordinance (Cap.117) residential property under the Tenants (“SDO”), the vendor and/or the purchaser may Purchase Scheme) acting on his/her own behalf be liable for the payment of Ad valorem duty and does not own any other residential (“AVD”), Buyer stamp duty (“BSD”) and Special property in Hong Kong at the time of stamp duty (“SSD”) for sale and purchase of a acquisition of the subject property. In those landed property. However, payments of AVD, circumstances, only the rate set out under BSD and SSD are not mutually exclusive. The “Scale 2” under Schedule 1 to SDO (i.e., rate following stamp duty implications will have to ranging from $100 to 4.25% of the be carefully considered prior to entering into a consideration or value of the residential sale and purchase transaction in relation to property, whichever is the higher) will apply to landed property:- such agreement/conveyance. Ad valorem duty Any agreement executed on or after 23 February 2013 for the sale and purchase or Unless specifically exempted or otherwise transfer of non-residential property, either by provided in the law, the sale and purchase or an individual or a company will be subject to transfer of more than a single residential AVD at the rate set out under “Part 2 of Scale 1” property under a single instrument executed on under Schedule 1 to SDO (i.e., rate ranging from or after 12 April 2017 will be subject to AVD at 1.5% to 8.5% of the consideration or value of a flat rate of 15% of the consideration or value the residential property, whichever is the of the residential property, whichever is the higher), unless specifically exempted or higher, irrespective of whether or not the provided otherwise. purchaser/transferee is a HKPR who is acting on While it is typical for the purchaser to agree to his/her own behalf and does not own any other bear the AVD, it is important to note that the purchaser, the vendor, and any person who

ILN Real Estate Group – Buying and Selling Real Estate Series

[BUYING AND SELLING REAL ESTATE IN HONG KONG] 93 uses the instrument, under the Hong Kong law, will be jointly and severally liable to pay AVD. In other words, the purchaser, the vendor, and any person who use the instrument will have the same extent of liability to pay for any AVD payable on the chargeable instruments, irrespective of any agreement to the contrary made between them. Buyer’s stamp duty (“BSD”) Unless specifically exempted or provided otherwise, BSD is chargeable on an agreement/conveyance for the sale and purchase or transfer of any residential property acquired on or after 27 October 2012, except where the purchaser or transferee is a HKPR acquiring the subject property on his/her own behalf. It is the purchaser (not the vendor) who is liable to pay BSD, the rate of which is 15% of the consideration or value of the residential property, whichever is the higher. Special stamp duty (“SSD”) SSD is chargeable on a transaction involving the sale and purchase or transfer of a residential property if the subject property is acquired on or after 27 October 2012 and resold within 36 months after acquisition. The rate of the SSD payable varies from 10% to 20% of the consideration or value of the residential property, whichever is the higher, depending on when the subject property was resold within those 36 months. The purchaser and the vendor to the property transaction and any person who uses the instrument will be jointly and severally liable to pay SSD.

ILN Real Estate Group – Buying and Selling Real Estate Series

Fall 20

INTERNATIONAL LAWYERS NETWORK

JALSOVSZKY LAW FIRM Buying and Selling Real Estate in Hungary

ILN REAL ESTATE GROUP

[BUYING AND SELLING REAL ESTATE IN HUNGARY] 95

KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER HUNGARIAN LAW 1 Types of real estate transactions the condominium must always be checked In the Hungarian market, the typical types in advance, to see whether such right of real estate transactions can be applies or not. differentiated as follows. 1.5 Transfer of an agricultural land 1.1 Transfer of an undeveloped plot of land A real estate is deemed to be an Plots of land are often bought for the agricultural land if it is recorded in the purposes of construction. In this regard, Land Registry as such. The typical forms first and foremost the relevant Hungarian are , meadow, lake, or forest. zoning and construction regulations The acquisition and use of agricultural should be previously checked, to ensure lands are subject to wide and strict that the desired facility can indeed be limitations as to who can acquire or use developed on the given land. them and under what conditions, and a transfer procedure may take up to 6-8 1.2 Transfer of a developed plot of land months to complete. As a general rule, buildings located on a 1.6 Share deal of a corporation that owns real estate are considered to be the part real property of the land and are treated as one and the same property. It means that generally, by During the planning of a property buying the land, the purchaser acquisition, if the owner of the real estate automatically acquires its buildings as is a company, it often seems to be a well. reasonable solution to acquire the legal entity that owns the respective property. 1.3 Transfer of the building and the land separately 2 Restrictions for acquiring real estate in Hungary The ownership of the land and the buildings thereon however may also be 2.1 General rules separated and registered as independent In general, EU/EEA citizens and entities real estates, and in that case, they may are freely allowed to purchase and sale also be sold separately. real estates in Hungary, while non-EU/EEA 1.4 Transfer of a condominium property citizens and entities may only purchase a (typically flats) Hungarian real estate with the permission of the competent Government Office. A condominium property consists of separately owned (typically the flats 2.2 Agricultural real estates itself), and jointly owned (e.g., garden, Unlike in case of regular real estates, for staircase) parts, but the separately owned agricultural lands there are numerous part automatically includes the connected serious limitations for the purchase of ownership ratio in the jointly owned those. parts. In case of a condominium, the co- Non-EU/EEA citizens and entities are owners might have a right of first refusal, completely excluded from acquiring and therefore the deed of foundation of agricultural lands in Hungary. As per

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EU/EEA citizens and entities, private (ii) Section 2: ownership rights persons must fulfil certain criteria to Here one can find the data of the become entitled to own agricultural lands, owners, and the date and legal title of while in case of entities only certain types their acquisition. may own agricultural lands (the state, municipalities, churches). Other EU/EEA (iii) Section 3: encumbrances (e.g., pledge, legal persons, if they fulfil certain special buy option, prohibition of alienation and conditions, may only use agricultural encumbrance) lands, but are not entitled to own them. The third part contains the existing Apart from the above, there are also encumbrances and third-party rights limitations for the maximum size of related to the property. It is always agricultural lands that can be owned (or essential to check the registered used) by one and the same person or encumbrances / third party rights before entity, plus agricultural real estates are any transaction. also encumbered by law with a 3.2 Ranking complicated system of rights of first refusal of certain persons like local The most important principle of the Land farmers or even the Hungarian State. Registry is the principle of ranking, meaning that the Land Registry (with only a very few 3 Land registry exceptions) will proceed with the pending The Hungarian Land registry is a unified requests according to the order of their system keeping records of all kinds of real submission, and will not deal with any estates, and the records are public and submission until all previous pending authentic. Publicity means that anyone may requests have been completed. obtain the title deed of a respective real 3.3 Procedural deadline estate from the Land Registry. The general procedural deadline for the 3.1 Title deed Land Registry to proceed with any request is The title deed of a real estate consists of 60 days. An urgent procedure may also be three parts, with the following main request, subject to the payment of a content: separate fee, in practice this can shorten the procedure to approximately 12-15 days. (i) Section 1: main data and characteristics of the real estate 4 The sale and purchase agreement This part contains the size and The sale and purchase agreement of a real qualification of the property, its estate has certain, strict formal and content topographical lot number and address requirements that must be met in order to (if the property has a separate address), be suitable for registering the transfer of and a note if there are any pending ownership in the Land Registry. procedures in progress relating to the 4.1 Formal requirements property at the Land Registry. The most important formal requirements for the transfer documentation of any real estate are the following:

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(a) the agreement must be concluded in hand it over to the buyer at contract writing; signing). (b) it must be prepared and 4.3 Typical further elements of an agreement countersigned by a Hungarian Although the inclusion of the below attorney-at-law or public notary; elements is not legally required, according (c) in case of a multiple-page document, to market practice the parties apply them all pages must be signed by the frequently. contracting parties and the (a) Payment of the purchase price in more countersigner. instalments

4.2 Compulsory elements In case the purchase price is paid in The Hungarian law prescribes several more instalments, there are two elements that must be included in the typical scenarios regarding the property sale and purchase agreement. transfer of title. Some notable elements are: • The first option is when the parties (a) detailed definition of the property; submit the request to registration, but with a request for suspension, (b) certain scope of data of the contracting parties (among others, meaning that the Land Registry birth name, place and date of birth, will not deal with the request until address, mother’s maiden name, tax the seller issues the registration identification number, or registered consent after the payment of the seat, registration number, statistical full purchase price. This method number, tax identification number in ensures that, due to the ranking case of legal persons); principle, the buyer’s request cannot be preceded with any (c) the exact legal title of the transfer other request, so the legal status (e.g., sale and purchase); of the property existing as at (d) unconditional and irrevocable contract signing is secured. statement of the registered owner on Typically, the registration consent consenting to the transfer of the title is put into lawyer’s escrow by the (“registration consent”) (which seller at contract signing and is statement may also be made later on released by the escrow agent upon separately, especially if the payment the payment of the full price. It of the purchase price is made in should be noted that such instalments); suspension procedure can only last for 6 months, so this can be a (e) regulations on the handing over of an solution only if the transaction is energetic certificate (energy certificate closed the latest within 6 months is a document made by an authorized after signing. expert that gives information about the energy features of the property, • The other option (especially used generally the seller is obliged to if the period between signing and prepare such energy certificate and to closing is more than 6 months) is

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the sale of the property with the 5 Transfer of ownership retention of title clause. This As a general rule, the ownership is means that the Land Registry transferred with the registration into the makes an entry into the Land Land Registry, but with retroactive effect to Registry on the fact of the sale the date when the request for registration with retention of title, by also has been submitted. indicating who is the buyer, but will only actually register the 6 Usual fees and costs buyer’s ownership once the full 6.1 Transfer duty price is paid. This entry works similarly to a prohibition for In case of the acquisition of a real estate, alienation and encumbrance, a transfer duty must be paid by the buyer. meaning that until the entry exists, The rate of the duty is 4% of the value of the property cannot be sold or the real estate up to the value of 1 billion encumbered without the consent HUF, and 2% of the exceeding part of the of the buyer. value (but maximum 200 million HUF per property). (b) Earnest money In certain cases, the buyer can be entitled A typical real estate transaction is to a duty exemption or discounted duty. sealed with the payment of The most typical cases of duty exemption earnest money, a special form of and discounts are the followings: advance payment, with a typical sum of 10% of the purchase price. • transfer between affiliated companies If the transaction is completed, the (no duty is payable); earnest money will be deemed as • buying a building site if the buyer an advance payment. If the develops a residential building transaction is not completed, the thereon within 4 years after the party being responsible for that purchase (no duty is payable); loses the amount of the earnest • buying/selling between close relatives money. or spouses (no duty is payable); (c) Transfer of possession • acquisition by real estate funds (the Designating the date of duty is 2% of the value instead of 4%). transferring the possession is 6.2 Procedural costs important, as normally the buyer takes over the burdens, the risk of For making any entry or registration in the damages, and all other relating Land Registry, a procedural fee is to be liability for the property from the paid, which is normally borne by the date of the possession transfer. buyer. The transfer of possession typically 6.3 Legal fees follows the payment of the full purchase price. If both parties are represented by their own legal advisors, usually both parties bear their own advisor’s fees. Since in

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case of the sale of a real estate, legal representation before the Land Registry is mandatory (meaning that it should be a lawyer who submits the documents to the Land Registry), in most of the cases it is the buyer’s lawyer who proceeds in that respect. 7 Our firm Jalsovszky is one of Budapest’s fastest growing and most innovative law firms. The key to our success is a business-focused approach paired with logical thinking. Clients appreciate that we are never afraid to voice our opinion even in critical situations. We regard ourselves as a boutique law firm. No matter how experienced our associates are, we cannot be fully conversant in every area of the law, even in the field of commercial law. But when it comes to what we specialise in, we consider ourselves to be among the best. Whether with regard to our clients or our staff, it is a human-oriented thinking that defines us. It is important for us to build personal relationships with our clients. We believe a personal relationship does not get in the way of providing a high-quality professional service – on the contrary, it makes the co-operation even more effective. We aim, further, to provide our colleagues with a friendly and supportive environment in which they can find fulfilment and motivation. Our firm’s market-leading role and the exceptional quality of our legal team is acknowledged year in, year out by numerous international rating agencies (including the publications Legal500, Chambers and Partners, IFLR and International Tax Review).

ILN Real Estate Group – Buying and Selling Real Estate Series

Fall 20

INTERNATIONAL LAWYERS NETWORK

AHLAWAT & ASSOCIATES ADVOCATES Buying and Selling Real Estate in India

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER INDIAN LAW

INVESTMENT AND CONVEYANCE OF REAL whatsoever. Neither the International Lawyers ESTATE IN INDIA Network or its employees, nor any of the The contents of this chapter are purely for contributing law firms or their partners or informational and educational purposes and employees accepts any liability for anything are not intended to be exhaustive nor to be a contained in this guide or to any reader who binding legal opinion. It is clarified that this relies on its content. Before concrete actions or chapter is not intended as a substitute for decisions are taken, the reader should seek consultation with a licensed practitioner in the specific legal advice. The contributing member field of Real Estate or Law. The use of this book firms of the International Lawyers Network can implies your acceptance of this disclaimer. advise in relation to questions regarding this guide in their respective jurisdictions and look The author of this chapter is providing the forward to assisting. Please do not, however, content herein on an “as is” basis and makes no share any confidential information with a representations or warranties of any kind with member firm without first contacting that firm. respect to this chapter or its contents. The author hereby disclaims all such 1. INTRODUCTION TO REAL ESTATE IN INDIA representations and warranties, including but Since the liberalization of Indian economy, not limited to warranties related to law or real the real estate sector has been gradually estate for a particular purpose. In addition, the growing and adopting to technologies that author assumes no responsibility for errors, improve the market access, efficiency, inaccuracies, omissions, or any other quality, and consumer experience. In the inconsistencies herein. The author hereby gives last fifteen years, post liberalization of the no guarantees or a conclusive opinion as to the economy, Indian has eventual or practical success of any transaction taken an upturn and is expected to grow undertaken based on this chapter. multifold in the next decade. This chapter offers an overview with respect to The developments in real estate sector has investment in and conveyancing of real estate been influenced by the all-around in India. The contents of this chapter are not developments in the retail, hospitality, intended to create and do not constitute, an entertainment, education, and information attorney-client relationship, or its equivalent in technology sectors. Major factors the requisite jurisdiction. contributing to this development are This chapter describes the law and procedure in favorable demographics, increased force in India at the date of preparation of this purchasing power, existence of customer- chapter and the contents, statutes, regulations, friendly banks and housing finance and/or rules are subject to amendments and companies and favorable reforms initiated alterations in due course. The author hereby by the government to attract global does not assume any duty to update the investors. Further, increase in the business contents of this guide. opportunities and migration of the labor forces acting as a fuel has increased the The information in this guide may also not be demand for commercial and residential considered as legal advertising in any manner space.

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The real estate sector in India is being of an individual to contract. A contract recognized as a developing sector that is pertaining to realty can be entered into, driving the economic growth engine of the among others, by an individual (who is country. At present, there are various not a minor or of unsound mind, as per developments and elevations which are the Indian laws), partners of a firm, a taking place in the real estate sector, on the corporate legal entity, a trust, a sole basis of which Non-Resident Indians and corporation, the manager of an undivided Person of Indian Origin (PIO) have been family, and a foreigner, however, all the permitted to own immovable property in essential requirements of a valid contract, India. On this basis, the past and future i.e., consideration, intention to contract expected transformation of India, the real and validity under the law of the land estate sector is being looked at as a unique must be satisfied. market to invest for a long term with high 2.3. The Registration Act, 1908 possible rate of return. The Act was enacted to ensure

2. LEGISLATIONS GOVERNING REAL ESTATE conservation of evidence, assurances, title, Despite there being plethora of laws publication of documents and prevention governing the real estate sector in India, of fraud. It details the formalities for most of the enactments are quite old and registering an instrument and specifically major amendments to existing laws are enumerates the instruments which are required to make them relevant to modern mandatorily required to be registered. An day requirements and transformations in unregistered document, effectuating the ever-changing dynamic sector. The transfer, will not affect the property Central laws governing real estate include: comprised in it, nor such unregistered 2.1. Transfer of Property Act, 1882 document be received as an evidence of any transaction affecting such property The transfer of Property Act is a central (except as evidence of a contract in a suit act regulating the transfer of property for specific performance or as evidence of particularly immovable in nature and part-performance under the Transfer of enumerates the general principles of Property Act or as collateral), unless the realty, like part-performance. The Act also document/instrument has been duly specifies provisions for dealing with registered. property through sale, exchange,

mortgage, lease, lien, and gift. A person 2.4. The Indian Stamp Act, 1899 acquiring immovable property or any The Stamp Act is a fiscal enactment on the share/interest in it is presumed to have basis of which stamp duties are levied on notice of the title of any other person transactions and the instrument who was in actual possession of such effectuating the transaction, and the property. same is directly linked to the 2.2. The Indian Contract Act, 1872 aforementioned Registration Act. The stamp duty is required to be paid on all This legislation is the primary enactment instruments which are registered, and the governing essentials of a contract rate varies from state to state. Some including parameters to ascertain capacity states even have double stamp incidence,

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primarily on immovable property and repealed this Act in relation to most then on the development thereupon. areas, it is still in effect in certain states. 2.5. The Real Estate (Regulation and 3. CATEGORIZATION OF REAL ESTATE Development) Act, 2016 3.1. On the basis of ownership The Central Government, through the 3.1.1. Freehold Property Ministry of Housing and Urban Alleviation, has enacted the Act. It is an Refers to an estate which is free Act to establish the Real Estate Regularity from the hold of any entity, besides Authority for the regulation and the owner. In its true essence the promotion of the real estate sector and to owner alone enjoys the complete ensure sale of plot, apartment or building, ownership and can utilize the estate or a real estate sector project in an for any purpose (renovate or efficient and transparent manner and to transfer or lease) in accordance with protect the interests of the consumers in the local regulations. In its strict the real estate sector and to establish an interpretation, sale of such estate adjudicating mechanism for speedy will not require any prior legal or dispute redressal and also to establish the government consent and thus has Appellate Tribunal to hear appeals from less paperwork attached. For such the decisions, directions or orders of the reasons, a freehold asset is more Real Estate Regulatory Authority. expensive when compared to a leasehold asset. 2.6. The Indian Evidence Act, 1872 3.1.2. Leasehold Property Under the Act, in the event status of any person as the owner of a piece of Refers to an estate which has been immovable property is questioned, of leased to a person for a certain which such person is shown to be in number of years but the estate at all possession of, the burden of proof times remains under the ownership clarifying that such person is not the of the state. Utilization of the owner lies on the person who asserts that Leasehold estates if affixed to the person in possession of immovable purpose for which it was obtained. property is not the owner. Since the person in possession of such estate is not the owner and

2.7. Urban Land (Celling and Regulation) property is not freehold, transfer of Act, 1976 such estate requires prior state This legislation affixed a ceiling on the consent (obtained at the land vacant urban land that a ‘person’ in urban office). clusters can acquire and hold. Under the 3.2. On the basis of land use Act, excess vacant land is either to be surrendered to the Competent Authority 3.2.1. Residential appointed under the Act for a small Such land is utilized exclusively or compensation, or to be developed by its intended to be used for family holder only for specified purposes. Even dwelling or associated uses for though the Government of India has residential purposes. Zoning for

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residential use may permit some moved from being a fundamental right to services or work opportunities or be a constitutional right under article 300A. may totally exclude business and The said article of the Constitution of India industry. It may permit high density embodies the doctrine of eminent domain land use or only permit low density which specifies that the Government of uses. India has the right to acquire immovable 3.2.2. Commercial property of person in India in public interest. Such land is utilized for development of such structures or A foreign national of non-Indian origin office buildings, medical centers, resident outside India cannot buy any hotels, malls, retail stores, immovable property in India. At present, warehouses, garages etc. apart from Indian non-residents as specified below, no person who is resident outside 3.2.3. Mixed Use India can acquire any immovable property Refers to the provision for in India. undertaking non-residential activity • Citizen of India residing outside; and in residential premises/land. Such land allows access to commercial • Person of Indian origin residing outside. activities in the proximity of the The aforementioned persons are permitted residences and reduces the need for to acquire immovable property in India, commuting across zones in the city. however, cannot acquire agricultural However, at the same time, it needs property, plantation property or a to be regulated in order to manage farmhouse, provided that the payment for and mitigate the associated adverse purchase of the same has been made out impact related to congestion, of: increased traffic, and increased • Funds received in India through normal pressure on civic amenities. banking channel by way of inward 3.2.4. Industrial remittance from any place outside Such land is typically a premise for India; undertaking industrial activity with • Funds held in any non-resident account non-hazardous, non-polluting maintained in India in accordance with performance and may include a the foreign exchange regulations. group of small industrial units with 5. PRE-REQUISITES TO PURCHASE OF common services and facilities of IMMOVABLE PROPERTY non-polluting nature. 5.1. Verification of title and ownership of 4. PURCHASE OF IMMOVABLE PROPERTY Seller: In the earlier constitutional regime, the buyer should conduct due diligence over was guaranteed by the the immovable property to ascertain the Constitution of India as a fundamental right. existence of the title with the seller, the However, later vide 44th constitutional nature of the title and its marketability amendment, the right to property was

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and the ability of the seller to convey a purchased. In case of a vacant land, it is clear and marketable title free from any recommended to identify and demarcate kind of encumbrance over the immovable the boundaries and access to the property property. and further, ascertain any other physical 5.2. Verification of identity and authority of attributes that may impede enjoyment of Seller the property.

Similar to verification of title to the 6. MODES OF CONVEYANCING IMMOVABLE property, the purchaser must ascertain PROPERTY the identity of the seller and any specific Conveyancing is the legal process for conditions, governing the ability of the transfer of ownership of property from a seller to convey the immovable property. seller to the buyer and this term is used in 5.3. Conversion and land use permission both buying and selling of immovable property. Amongst various modes of With increasing urbanisation and merging conveyancing, the most commonly used of revenue lands with urban means of transferring a property in India conglomerates, and restriction on are: purchase of agricultural property by non-

agriculturists, conversion of property for 6.1. Sale non-agricultural usage has assumed Sale is a transfer of ownership in crucial significance. In the event actual exchange for a price paid or promised or use of land is different from the notified part paid, and part promised. It is zoning, it is mandatory to obtain orders pertinent to mention that as per the from the Town Planning Authority Transfer of Property Act, 1882 immovable permitting change of land use. property does not include standing 5.4. Encumbrances search timber, growing crops or grass.

Inspection of registers and records at the 6.2. Gift jurisdictional sub-registrar of assurances, A gift can be movable or immovable where documents pertaining to property that is transferable and tangible. immovable property are registered and As gifting is a voluntary action, the information available on the official web instrument evidencing gift must mention portal of the Ministry of Corporate Affairs, that the instrument has been made in case of the seller being a corporate voluntarily and out of the donor’s own entity, must be conducted as the same choice without any force or coercion. The will reveal information of any registered deed should also declare that the donor encumbrance on the property. i.e. person who is gifting, is solvent (not 5.5. Physical inspection of the immovable bankrupt) and that is being made property without any consideration. However, there are certain aspects that need to be It is recommended that the purchaser kept in mind while making gift – (i) as must undertake a physical inspection and minor is not capable of entering into a confirm the extent and measurement of valid contract, so the minor cannot make the immovable property intending to be a valid gift deed; (ii) a gift once made

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cannot be revoked; (iii) gifts made to into effect after his death, however relatives defined by the Income Tax Act, certain formalities must be complied with 1916 are exempt from tax in the hands of in order to make a valid Will. It must be the donee. signed and attested, as required by law. A 6.3. Lease Will is primarily intended to dispose of property in the manner the Testator Section 105 of the Transfer of Property desires. Act, 1882 states that a lease of immovable

property is a transfer of a right to such 7. REGISTRATION AND MUTATION OF LAND property, for a certain time in RECORDS consideration of the price paid or The registration of a property involves promised or any other thing of value, to adequate stamping and paying the be rendered periodically on specific registration charges for a sales deed and occasions to the transferor by the having it legally recorded at the sub- transferee, who accepts the transfer on registrar’s office. If the property is such terms. In simple terms, a lease is a purchased from a developer, registering the contract that outlines the terms under property amounts of an act of legal which one party agrees to rent property conveyance. If it is the second or third owned by another party. It guarantees transaction for the property, it could the transferor, tenant, use of an asset and involve a duly stamped and registered guarantees the transferor, the property transfer deed. owned or landlord, regular payments The second step after registering a property from the transferor for a specific number is Mutation of land records with respect to of months or years. the same. Mutation refers to the change of 6.4. or Will title ownership from one person to another After the death of a person, his property when the property is sold or transferred. By devolves in two ways - according to his mutating a property, the new owner gets Will i.e., testamentary, or according to the the property recorded on his name in the respective laws of succession, when no land revenue department and the Will is made. In case an individual dies government is able to charge property tax intestate (no Will is made), the laws of from the rightful owner. The succession come into play. The law of documentation procedure and the fee succession defines the rules of devolution payable vary from state to state. In case of of property in case a person dies without ownership related to land, mutation is making a Will. These rules provide for a considered a vital document. category of persons and percentage of 8. REAL ESTATE INVESTMENT TRUST property that will devolve on each of such REIT is an acronym for Real Estate persons. Investment Trust, which is basically a Under the Indian Succession Act 1925, a company which develops and own ‘income Will is a legal declaration of the intention producing’ real estate properties. Initial of the testator, with respect to his Public Offering of India’s first REIT was property which he desires to be carried launched on 18th March’19. Shares of Indian

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REIT started trading from 01st April’19 in regarded as foreign investment if either the Bombay Stock Exchange. REITs are sponsor or the manager is not Indian registered with the Securities and Exchange 'owned and controlled' as defined in Board of India (SEBI) under SEBI (REITs) Regulation 14 of the Foreign Exchange Regulations, 2014 (the Regulation) as Management (Transfer or Issue of Security amended from time to time. The SEBI REITs by a Person Resident Outside India) Regulations, inter alia, set out the Regulations, 2000. registration requirements, procedure of 9. FOREIGN DIRECT INVESTMENT IN REAL registration, and eligibility requirements of ESTATE SECTOR REITs as well as that the primary players. It is mandatory for units of all REITs to be Foreign Direct Investment in India is listed on a recognised stock exchange governed in accordance with the FDI policy having nationwide trading terminals, and norms as laid out and amended from whether publicly issued or privately placed. time to time by the Government of India. Furthermore, FDI in India is also governed REITs are companies that own or finance by the Master circular on foreign income-producing real estate in a range of investments issued by the Reserve Bank of property sectors. They provide all investors India and Foreign Exchange Management the chance to own valuable real estate, (Transfer or Issue of security by any person present the opportunity to access dividend- residing outside India) Regulations, 2017 based income and total returns, and help (TISPRO). The ‘Consolidated FDI Policy communities grow, thrive and revitalise. Circular’ is issued annually by the REITs allow anyone to invest in portfolios of Department of Industrial Policy and real estate assets the same way they invest Promotion (DIPP) of the Ministry of in other industries – through the purchase Commerce and Industry which elaborates of individual company stock or a mutual the policies and processes with respect to fund or exchange traded fund. The FDI in India. stockholders of a REIT earn a share of the income produced through real estate At present, 100% FDI under automatic route investment – without actually having to go is allowed for construction development out and buy, manage, or finance property. projects including but not limited to development of townships, roads or bridges, REITS may invest either directly or through hotels, resorts, hospitals etc. However, it is a Special Purpose Vehicle (SPV). Where the important to note that FDI is not permitted investment is through a SPV, it is required in an entity which is engaged in Real Estate to hold controlling interest and not less activities or construction of farmhouses. than 50% equity in such SPV. Also, the SPV However, it has been clarified that the Real in turn is required to hold 80% equity in the estate business shall not include the REIT assets. development of town shops, construction Foreign investments have now been of residential/ commercial premises, roads permitted in REITs after a circular or bridges and Real Estate Investment notification by Reserve Bank of India. The Trusts (REITs) registered and regulated Reserve Bank of India clarified that under the SEBI (REITs) Regulations, 2014. downstream investment by REITs will be

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The present FDI policy also stipulate that each phase of the construction development project would be considered as a separate project. Further, the investor will be permitted to exit on completion of the project or after development of trunk infrastructure i.e., roads, water supply, street lighting, drainage, and sewerage. However, a foreign investor can exit and repatriate foreign investment before the completion of project under automatic route, provided that a lock-in period of 3 years has been completed.

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Fall 20

INTERNATIONAL LAWYERS NETWORK

TGS BALTIC Buying and Selling Real Estate in Latvia

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER LATVIAN LAW 1. Types of real estate is located, unless it is owned by another person (please see Section 3). 1.1. Land estate

Consists of one or several land plots. 2. Undivided share of the real estate 1.2. Land and building estate It is possible to acquire not the entire real estate, but an undivided share of the real Consists of one or several land plots and one estate, i.e., to acquire the undivided share of or several buildings or structures located on the joint property (Note: do not mix up with the the land plot (plots). joint property included in the composition of the 1.3. Building estate residential estate). The joint property is the undivided by several persons Consists of one or several – joint owners of undivided shares so that only buildings or structures. the substance of the rights is divided. In case of a building estate, the land plot, on A joint owner owns the undivided share of the which the respective buildings or structures joint property; therefore, the joint owner is are located, is owned by another person, and entitled to deal with the undivided share, does not belong to the owner of the building including alienating or pledging the respective estate (please see Section 3). undivided share. 1.4. Residential estate However, to deal with the joint property itself, Consists of: either in its entirety or with respect to a part of it, the consent of all the joint owners shall be - an individual property (apartment, non- obtained. The joint owners can agree on residential premises, or artist’s divided use of the joint property proportionally workshop in a residential house) in a to the amount of the undivided shares by residential building; and signing a respective agreement. - the relevant undivided share of the joint 3. Divided estate property (external enclosing structures, internal load bearing constructions and The general principle provided by Latvian law is intermediate coverings of the that buildings and structures located on the residential house, premises for plot are part of the land plot and therefore use, engineering communication owned by the landowner, and only in systems, devices servicing the exceptional cases, buildings and structures as residential building and other indivisible separate building property could be owned by elements functionally associated with another person, who is not the owner of the the exploitation of the residential land plot – the so-called divided estate. building, as well as the auxiliary In case of the divided estate, namely, if the buildings and structures belonging to building (structure) is located on the land plot, the residential building). The joint which does not belong to the owner of the property also includes the land plot, on building (structure), but is owned by another which the respective residential building person, the status of such building (structure) and therefore the legal consequences, which

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[BUYING AND SELLING REAL ESTATE IN LATVIA] 111 depending on the status of the building buildings on the leased land plot as (structure) may vary, should be evaluated. separate real estate objects. There are two forms of divided estates, The separate ownership of the building depending on the status of the building (structure) is established only during the (structure) on the land plot: validity of the lease agreement. First form. Compulsory divided estate Amendments to the Civil Law entered into Generally, a building (structure) built during force on January 1, 2017, by introducing a the Soviet time and until September 1, new institute of build-up rights, which 1992, when the Civil Law of the Republic of henceforward replaces the institute of Latvia entered into force. specific long-term lease for the voluntary established divided estate. The divided property was formed when the ownership rights of the land plot under the The build-up rights are rights in-rem, building (structure) were renewed to the established based on the agreement previous owners or their heirs during the entitling, during the validity of such rights, , or the land belonging to the to build and use non-residential buildings or state or local government, or building engineering structures on the land plot (structure) was acquired by privatizing the owned by another person. The building state or municipal undertakings or separate (structure) built based on the build-up real estate objects. rights is an integral part of the build-up rights. It is not permitted to build The owner of the building (structure) is residential buildings based on the build-up entitled to use the part of the land plot rights. functionally related to the building on the grounds of the so-called compulsory lease. The validity of the build-up rights cannot be In case of a compulsory lease, the parties less than 10 years, and the build-up rights should agree on the size of the leased area shall be registered with the Land Registry. of the land and on the amount of lease The build-up rights can be alienated and payment, and, if the parties cannot agree encumbered with rights in-rem, unless on the mentioned, the dispute shall be explicitly prohibited in the agreement on resolved by the court. The usual practice is granting of the build-up rights. to establish a lease payment of After expiry of the build-up rights, the approximately 6% of the cadastral value of building (structure) built based on the build- the leased part of the land plot per year. up rights becomes an integral part of the Second form. Voluntarily established land plot, i.e., becomes the property of the divided estate. land plot owner. The owner of the land plot Buildings built after September 1, 1992, acquires the building (structure) without when the Civil Law of the Republic of Latvia remuneration, unless such remuneration entered into force, based on a specific long has been provided in the agreement on term (at least 10 years) lease agreement granting of the build-up rights. In the agreement on granting of the build-up providing the rights to the lessee to build rights the parties may provide that, prior to the expiry of the build-up rights, the holder

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of the build-up rights shall vacate the land Austria, Belgium, Luxemburg, plot from the constructed buildings Czech Republic, Denmark, France, (structures). Greece, Estonia, Israel, South 4. Restrictions for acquisition of land in Latvia Korea, United Kingdom, Lithuania, the Netherlands, Norway, Poland, There are certain provisions and legal Portugal, Finland, Spain, restrictions for acquisition of real estate in Switzerland, Uzbekistan, Germany, Latvia; however, these restrictions are imposed Vietnam, Sweden); or only regarding ownership of the land, there are no restrictions regarding ownership of other d) private individuals or legal entities types of real estate such as buildings, structures, from the countries, which have , business premises etc. concluded an agreement with the Republic of Latvia for the Restrictions for acquisition of land vary Encouragement and Reciprocal depending on whether the land is located in the Protection of Investment after 31 city or in rural areas. December 1996, and the 4.1. In cities land may be acquired by: respective concluded agreement prescribes the rights of the private 1) the citizens of Latvia and any individuals and legal entities from European Union (EU) member state; Latvia to acquire land in the 2) the State and local government, and respective country (countries, state and municipal companies; which have concluded agreements for the Encouragement and 3) a capital company (a limited liability Reciprocal Protection of company or a joint stock company) Investment after 31 December registered in Latvia or any EU member 1996 are - Armenia, Azerbaijan, state, if more than a half of the share Belarus, Bulgaria, Egypt, Georgia, capital of the company belongs to: Croatia, India, Iceland, Canada, a) the citizens of Latvia and EU Kazakhstan, , Kirgizstan, member state; or Kuwait, Moldova, Rumania, b) the State and local government, Singapore, Slovakia, Turkey, and state and municipal Ukraine, Hungary, but regarding companies; or these countries the exact provisions of the agreements c) private individuals or legal entities should be reviewed); from the countries, which have concluded an agreement with the 4) a public joint stock company Republic of Latvia for the registered in Latvia or any EU member Encouragement and Reciprocal state, if its shares are quoted in stock Protection of Investment and such exchange; agreement has been approved by 5) religious organizations, which were the Parliament of Latvia prior to 31 registered in Latvia before 21 July December 1996 (such counties 1940; are: the United States of America,

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6) the state or municipal institutions of a) citizens of Latvia, citizens of the EU higher education. member states or EEA country, or Other private individuals and Switzerland; or companies that do not correspond to b) the Republic of Latvia or derived the aforementioned conditions may public persons; or acquire the land in Latvia with the c) private individuals or legal entities permission from the local from the countries, which have government; however, it is also concluded an agreement with the prohibited for such private individuals Republic of Latvia for the and companies to acquire the Encouragement and Reciprocal following types of land: land in the Protection of Investment and such border zone; agreement has been approved by - land in the protection zone of the Parliament of Latvia prior to 31 coastal dunes of the Baltic Sea and December 1996; or the Gulf of Riga and land in the d) private individuals or legal entities protection zones of public bodies from the countries, which have of water and water courses, concluded an agreement with the except if the build-up is allowed on Republic of Latvia for the the land in accordance with the Encouragement and Reciprocal spatial plan of the city; Protection of Investment after 31 - agricultural and forest land in December 1996, and the accordance with the spatial plan of respective concluded agreement the city. prescribes the rights of the private 4.2. In rural areas land may be acquired by: individuals and legal entities from Latvia to acquire land in the 1) the citizens of Latvia, citizens of the respective country; EU member states or European

Economic Area (EEA) states or 4) legal subjects registered in Latvia, EU, Switzerland; EEA country or Switzerland, if the respective legal subject has been 2) the Republic of Latvia or derived registered in Latvia as a taxpayer or as public persons (such as municipal or a commercial activity performer and if other public person established based the legal subject is: on law); a) an individual merchant owned by 3) a capital company (a limited liability a citizen of Latvia, citizen of the EU company or a joint stock company) member state or EEA country, or registered in Latvia, EU, EEA country Switzerland; or Switzerland, if the respective

company has been registered in Latvia b) an individual undertaking as a taxpayer and if all the registered by a citizen of Latvia, citizen of the EU member state or shareholders of the company are: EEA country, or Switzerland;

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c) a co-operative society, if all the - land in the protection zones of public members of the society are legal bodies of water and water courses; subjects mentioned in clause 1), - agricultural and forest land; 2), 3) or sub-clause a), b), d) of clause 4); - land in the mineral deposits of national significance. d) other legal subject registered in the EU member state, EEA country If, due to the changes, the status of the or Switzerland, which can be legal subject does not correspond to the compared to the above individual aforementioned conditions, in order to merchant, individual undertaking, keep the land in the cities or rural areas, the or co-operative society; permission from the local government should be received within a period of one

5) religious organisations registered in month, and if the permission is not granted Latvia; the activity whereof is at least the land should be alienated within a period 3 years; of two years.

6) associations and foundations If a private individual or a company, which registered in Latvia, the activity has acquired land in the cities or rural areas whereof is at least 3 years and the with the permission of the local purpose of activity whereof is related government, does not use the land for the to the environmental protection, prescribed purpose the land should also be production of agricultural cultivated alienated within a period of two years. plants or products, or hunting management or maintenance, if the 5. Agricultural land land is acquired to ensure the The additional limitations are set on the mentioned purpose of activity. acquisition of agricultural land in rural areas of Other private individuals and companies Latvia. Legal entities are entitled to acquire 5 ha that do not correspond to the of agricultural land in aggregate without abovementioned conditions may acquire additional limitations, but private individuals the land in Latvia with the permission from are entitled to acquire 10 ha of agricultural land the local government; however, it is also in aggregate without additional limitations. prohibited for such private individuals and In order to acquire more agricultural land, companies to acquire the following types of private individuals and legal entities should land: confirm that the acquired land will be used for - land in the border zone; agricultural activities, and the respective private individuals and legal entities shall - land in nature reserves and other comply with the specific criteria prescribed by protected nature areas in zones of law, including clear information on the true nature reserves; beneficiaries and statement that the amount of - land in the protection zone of coastal the possible tax debt does not exceed EUR 150. dunes of the Baltic Sea and the Gulf of In addition, the citizens of the European Union Riga; Member States, the Member States of the European Economic Area or the Swiss

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Confederation, if they wish to acquire the shall decide on giving its consent or refusal to agricultural land as private individuals, or if acquisition of the agricultural land. they are sole shareholders or shareholders In addition, one private individual or legal jointly representing more than a half of the entity can acquire up to 2,000 ha of agricultural share capital of the company intending to land. The local government has the right to acquire the agricultural land, or persons determine the maximum area of agricultural entitled to represent the respective company, land one private individual or legal entity can shall receive a registration certificate of the possess within their administrative area, but no Union citizen and the document certifying more than 2,000 ha. Related parties can knowledge of the official language (Latvian) at acquire up to 4,000 ha of agricultural land. least at B level grade 2 (namely, the person is able to communicate on everyday subjects and 6. Rights of first refusal professional issues, to clearly phrase and justify The rights of first refusal are priority rights to his or her opinion, reads and understands texts purchase a real estate if the owner sells the real of different content, is able to write the estate. documents necessary for work (for example, statements, summaries, minutes, reports, 6.1. Local government rights of first refusal deeds), as well as expanded texts regarding In case of alienation of the real estate, a local everyday life and professional topics, government shall have the rights of first comprehends, and understands naturally paced refusal of the real estate if the real estate is spoken texts on different topics). necessary for performance of local Upon the request of the local government, the government functions. person shall make a presentation in Latvian The local government decision on exercising explaining the intended usage of the land in its rights of first refusal or on refusal to agricultural activity. If the agricultural land is to exercise its rights of first refusal is adopted be acquired by a legal entity – the usage of the within 20 (twenty) days after submission of land in agricultural activity shall be presented the copy of the purchase agreement to the by the individual – the sole shareholder or local government. individual shareholder jointly representing The local government rights of first refusal more than one half of the share capital of the shall not apply to the following real estates: company (in case of beneficiaries – presentation shall be made by those - production objects with all their beneficiaries). accessories; For a person, who meets the criteria, to be able - real estate, from which an undivided to acquire agricultural land, he or she shall first part has been alienated and which submit an application to the local government remains in the joint property of the of the territory in which the relevant land is seller and the purchaser; located, and after examination of the - real estate that is being sold through application and offering to exercise the rights voluntary or compulsory auction; of first refusal to the registered lessee, if any, of the agricultural land and to the Land Fund of - real estate, to which third parties have Latvia, the commission of the local government the rights of first refusal or redemption

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rights based on the law, agreement or state significance (also the territory necessary will. for further development thereof) and the civil 6.2. Joint owners’ rights of first refusal aviation aerodrome is owned by a capital company where the state has a decisive If any of the joint owners of the real estate influence – the state has the rights of first alienates its undivided share (please see refusal, but if the civil aviation aerodrome is Section 2) to a person, who is not a joint owned by a capital company, where the local owner, then the other joint owner(s) shall government has a decisive influence – the have the rights of first refusal. A joint owner respective local government has the rights of is entitled to express the will to exercise its first refusal, or rights of first refusal to the rights of first refusal within a 2 (two)-month real estate in the territory of the port may be period as from the receipt of the purchase exercised by the local government, agreement. But, if by the fault of the seller, represented by the port authority, but the the joint owner is not able to exercise the rights of first refusal to the real estate in the rights of first refusal, such joint owner will territory of the port of Riga shall be exercised have the redemption rights, namely, within a by the port authority of Riga as a derived period of 1 (one) year as from the registration public person. of the acquirer’s title to the real estate with the Land Registry, the joint owner will be 7. Real estate registries entitled to claim for acquisition of the real There are two registries related to real estate in estate, by taking precedence over the Latvia: the Land Registry and the National Real acquirer and by assumption of the rights of Estate Cadastre Information System (Cadastral the acquirer. Registry). 6.3. Rights of first refusal in case of divided The Land Registry is the main real estate property registry and is kept by the respective Regional In case of divided property (please see Section Court Land Registry Offices, each of them 3), the owner of the land and the owner of operating within a particular administrative building (structure) have mutual rights of first territory. All rights (including ownership rights, refusal and redemption rights, if the all kinds of legal encumbrances, mortgages, respective land or building estate is alienated. restrictions, etc.) regarding real estate shall be The rights of first refusal shall not apply if the registered with the Land Registry. building (structure) is built based on the Ownership rights of real estate shall be build-up rights. registered with the Land Registry and only a 6.4. Other rights of first refusal person, whose ownership rights have been registered with the Land Registry, shall be Rights of first refusal can be established also considered the owner of real estate, except by the agreement or will. when the ownership rights of the real estate The law also provides for other specific cases are established by the law. when third parties have the rights of first Entries registered with the Land Registry have refusal or redemption rights to real estate, for public credibility. Thus, not only the owner of example, if the real estate is alienated in the the real estate is guaranteed credibility of its territory of a civil aviation aerodrome of the title registration, but also every third party is

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[BUYING AND SELLING REAL ESTATE IN LATVIA] 117 provided with valid information on the current 8. Permitted use of the real estate (zoning) status of the real estate. However, this does and environmental protection regulations not mean that transfer of title to real estate or Prior to the acquisition of real estate, the the title itself cannot be challenged (for permitted use of the real estate (zoning) and example, the seller has no rights to sell the possible restrictions for the usage, including respective real estate, or any third party’s rights construction, of the real property should be of first refusal have been violated and thus this additionally reviewed in the local government person may possibly exercise his or her spatial plan and Territory Usage and Build up redemption rights). Regulations. The Cadastral Registry is kept by the State Land Prior to the acquisition of real estate, it should Service. The cadastral value (determined mainly also be reviewed whether the territory of the for the real estate tax and Land Registry state real estate is not registered with the Register of duty purposes), detailed information on Polluted and Potentially Polluted Areas. buildings and structures (area, number of However, it should be noted that, even if the premises, etc.) as well as detailed information territory of the real estate has not been on every real estate object, including graphical registered as polluted or potentially polluted, information and technical encumbrances, are depending on the historical usage of the held in this register. respective real estate there is a risk that However, not all encumbrances prescribed by historical pollution may appear. law are actually registered in the registers, for 9. Agreement and re-registration of the title example, protection zones and consequential with the Land Registry restrictions and limitations are set by law, notwithstanding whether they are registered Any transfer of the title of the real estate with the Land Registry and/or Cadastral should be registered with the Land Registry. Registry, therefore the actual situation on site Agreement on alienating the real estate should shall be considered prior to the acquisition of be prepared in writing and signed by both the real estate. parties personally. It should be also noted that an oral agreement is binding to the parties, and In practice, frequently the information in the each party is entitled to claim from the other Cadastral Registry differs from the information party to express the oral agreement in a in the Land Registry. written form. The law also specifies buildings and structures, It is not required, but signatures of the which are not registered in the Land Registry as contracting parties on the agreement could be separate building property; for example, some certified by a notary public, as well as an transport structures, and such buildings and agreement could be concluded in the form of structures are registered in the Cadastral notary deed. Registry. Recently there have been discussions on Therefore, to obtain more detailed information establishment of a requirement that all real on the real estate, the information in both estate transactions should be concluded in the registries – the Land Registry and the Cadastral form of a notary deed. Registry should be reviewed and considered prior to the acquisition of the real estate.

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Agreement on alienation of real estate is The notary fees are determined by secondary binding upon the parties from the moment of legislation, i.e., the Regulations of the Cabinet its conclusion, but for any third party, only a of Ministers. person, whose ownership rights have been For the re-registration of the title with the Land registered with the Land Registry, shall be Registry, a state duty and a stamp duty should considered as the owner of real estate. be paid prior to the submission of the The title (ownership) is transferred to the buyer registration request with the respective Land from the moment of re-registration of the title Registry Office. with the Land Registry (i.e., a Land Registry The standard amount of the Land Registry state judge has adopted a decision on registration of duty is 2% of the value of the real estate, i.e., of the buyer’s title). This rule would be always the cadastral value of the real estate or the applicable in relation to reliance of third parties transaction amount, whichever is higher; on the owner of real estate; however, the however, for some transactions the amount of contracting parties may agree otherwise on the the state duty may vary, for example, if a legal moment of transfer of title. entity acquires a residential estate the state To re-register the title with the Land Registry, duty is 6% of the value of the real estate. the registration request to the Land Registry on The ratio of 1.5 is applied to the state fee, if the transfer of the title should be personally more than 6 months have passed as from the signed before a notary public chosen by the day of signing the respective agreement on contracting parties. alienation of the real estate. The notary verifies the identity of both parties, Costs for the re-registration of the title with the and in case of legal entity also the rights to Land Registry, including notary fees, are usually represent the legal entity. The persons signing covered by the buyer, or equally divided the registration request need to provide proof between both the seller and the buyer; of the identity – passport or ID card for private however, the seller usually bears the costs of individuals and also a representative of the deleting of the existing mortgage on the real legal entity. If the contractual party is a legal estate, if any. entity not registered in Latvia an excerpt from the company register certifying registration of The seller should also pay the real estate tax for the company and the representation rights of the entire year of the transaction, and no the representative should be provided. ownership will be transferred until the real Depending on the registration country of the estate tax is paid. legal entity, the excerpt from the company A registration request for the re-registration of register should be certified by a notary public the title with the Land Registry should be or by an authority of the company register of submitted with the respective Land Registry the respective country (for the EU or the EEA Office. The following documents should be countries, or Switzerland), or the excerpt enclosed with the registration request: should be legalized in accordance with the international regulatory enactments. The - an agreement on alienation of the real excerpt from the company register should also estate; be translated in Latvian and translation should - a refusal to exercise the rights of first be certified by a notary public. refusal (except the refusal of the joint

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owner or owner of divided property) (please see Section 6); - a consent from third parties, if such is required in the particular situation, for example, a consent from the bank in case of a mortgage, or a consent from the spouse of the seller, if the real estate is the co-property of spouses; - permission from the local government to acquire the land in Latvia, if such is required by the law (please see Section 4); - documents certifying representation rights of the parties; - receipts for the payment of the state and stamp duties

ILN Real Estate Group – Buying and Selling Real Estate Series

Fall 20 INTERNATIONAL LAWYERS NETWORK

MARTÍNEZ, ALGABA, DE HARO & CURIEL, S.C. MARTINEZ BERLANGA ABOGADOS, S.C. BUYING AND SELLING REAL ESTATE IN MEXICO

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER MEXICAN LAW

Preface developed in a more dynamic and secure Martínez, Algaba, De Haro y Curiel, S.C. economic sector in our country. However, it is (“MAHC”), and Martínez Berlanga Abogados, still a relatively new business in Mexico, in S.C. (“MBA”) are law firms in Mexico with which real estate agents are not yet required to recognized trajectory, based in Mexico City, be licensed and real estate professional committed to provide the highest standard of organizations are not that regulated nor professional legal counsel and representation. common as in other countries. MAHC was established in 1969, the firm is Investors now can find a variety of specialized comprised of a highly experienced and qualified agents and corporations that provide tailor- team of professionals in the diverse areas of made services, ideal for foreign investors that law practiced by the firm. MAHC is reputed to seek to buy or sell real estate in the country. be one of the few law firms in Mexico that These services are highly recommended offers first class litigation services, specially for those not familiar with the local encompassing virtually every aspect of real estate regulations and the Spanish commercial, civil, and administrative legal language. procedures, including domestic and II. Property Rights in Mexico and international arbitration, as well as a consulting Limitations legal area in matters related to corporate, In Mexico, all property rights come from the financial, banking, regulatory, real estate, State itself, who owns “the original property of energy, and communications. lands and water… and has had and has the MBA, established in 2006, is comprised by right to transfer ownership of property to professionals with high experience in general private persons, thus, transforming it into corporate, restructurings, corporate finance, private property. 1 Accordingly, the Mexican mergers and acquisitions, joint-ventures, cross Federal Civil Code (Código Civil Federal), as well border transactions, real estate, local and cross as those Civil Codes of each Mexican State, border trust structures, and testamentary provide that it is the people’s right to use, enjoy successions, as well as regulatory. and dispose of their property, under the These combination of practice areas and fields limitations and modalities established in of expertise allow our firms to render enhanced Mexican law. legal advice, a result of the synergy and There are also other several limitations to the collective experience of our trial and consultant ownership rights of real estate property lawyers that grants our clients a competitive imposed in the Mexican Constitution, like, for advantage hard to match by any law firm in example, the Nation’s direct domain over Mexico. natural resources such as oil, minerals and I. Real Estate General Overview underground water, or the expropriation of the land by the State in case of public interest The real estate business in Mexico has been increasingly growing during the last decades to the point that now it is considered as a serious, viable and promising economic activity among 1 Article 27 of the Mexican United States Political Constitution (Constitución Política de los Estados Unidos Mexicanos) (the “Mexican both Mexicans and foreigners. This growth has Constitution”).

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[BUYING AND SELLING REAL ESTATE IN MEXICO] 122 situations and pursuant to a prior or tourism related activities and generally those indemnification. used by entities pursuant to their corporate As a rule, only Mexican citizens, by birth or purpose, such as sales or transfers, urbanization, construction, or development of naturalization, and Mexican corporations have the right to acquire real estate property or to real estate projects. obtain concessions from the Mexican State to Finally, foreigners may acquire real estate exploit national natural resources. However, properties outside of the Restricted Zone the Mexican Constitution states that the Nation provided that they must obtain a permit from may grant the same rights to foreigners, the SRE for such purposes. provided that they agree with the Mexican III. Ways of Acquiring Real Estate Property Ministry of Foreign Affairs (Secretaría de in Mexico Relaciones Exteriores or “SRE”) to consider themselves as nationals in respect of such After the prospective buyer has find the desired acquired property and shall agree not to invoke real estate property and its offer has been the protection of their government in respect accepted by the seller, there are several legal thereof, under the penalty, in case of failure to vehicles or capacities classically used to own honor such commitment, to forfeit such real real property in Mexico. estate property to the benefit of the Mexican An individual may hold title over real estate Nation. This covenant or statement is known as property in Mexico, directly or indirectly, the “Calvo Clause”. allowing her/him to use, enjoy and dispose Another restriction to foreigners imposed in the such property, through three different means: Mexican Constitution is that they will not be (i) as the direct owner, holding a property title able to acquire real estate within 100 under her/his name; (ii) through a Mexican kilometers (approximately 62.13 miles) along corporation, as a stockholder; or (iii) through a the borders and 50 kilometer (approximately bank trust, as a beneficiary. As a foreigner, the 31.06 miles) from the coast, referred to in latter two would be the most recommended Mexican law as the “Restricted Zone”. However, vehicles to hold title. pursuant to the Mexican Foreign Investment (a) Foreign-Owned Mexican Corporation Law (Ley de Inversión Extranjera or “LIE”) and its regulations, foreigners may acquire property A foreign-owned Mexican corporation (a located in the Restricted Zone for non- “Mexican Corporation”) is a vehicle residential purposes, in which case, they would frequently used by foreign investment to require to give a notice to the SRE of such do business in the country, not just to acquisition within the next sixty (60) days hold title over real estate. As a national, following the date of the acquisition. In such provided that all LIE requirements are cases, as we will analyze hereinafter, a foreign- met, a Mexican Corporation complies owned Mexican corporation or a Mexican trust with the Mexican Constitution requisite in must be created to indirectly acquire real order to hold title over private property. estate property. However, it is important to point out that holding title of real estate through a Non-residential purposes pursuant to the Mexican Corporation has to be pursuant regulations of the LIE are considered as those to the corporate purpose of the entity. destined to time sharing, industrial, commercial

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A Mexican Corporation is typically reports, tax filings, LIE filings regarding its incorporated before “public faith officer”, foreign stakeholders, etc. such as Notarios Públicos (authorized by local (b) Mexican Trusts governments) or Corredores Públicos (authorized by federal authorities) and Mexican trusts are very useful and flexible requires a minimum of two (2) share or and therefore widely used as a vehicle by equity holders since, with a sole foreigners not only to acquire real estate, exception 2 , the concept of single- but for general business purposes as well. shareholder corporations is not allowed It provides solution to a wide range of under Mexican law. It will have to carry personal and commercial needs. Trusts out the corporate activities of any are mainly regulated by the Mexican company, such as annual stakeholders’ General Law for Negotiable Instruments meetings, have an active administrative and Credit Transactions (Ley General de body, file tax statements, etc. We strongly Títulos y Operaciones de Crédito) advice to seek local legal counsel in order (“LGTOC”). to properly incorporate and tailor-made Pursuant to the LGTOC, a Mexican trust is the Corporation’s purpose to the specific a commercial contract by which a settlor client’s necessities. transfers title and management of certain The main advantages of holding real assets and/or rights to a trustee — estate property through a Mexican generally a bank or any other financial Corporation could be, for example, that a institution—, so that the trustee manages national corporation, pursuant to them under agreed terms, for the benefit applicable immigration requirements, of a person —could be, among others, a would directly own the real estate, it Mexican Corporation, a foreign individual, could allow its stakeholders to live and or a foreign entity— appointed as work in the country and there is no limit beneficiary thereto. as to the number of properties it may The bank, as trustee, will be subject to own. fiduciary duties while representing the While the main disadvantages of a settlor interests in the trust assets. For Mexican Corporation could be, for example, should the trust purchase real example, the undertaking of the daily estate property, the trustee should only corporate activities, including, but not carry out the transaction after verifying limited, its administration, accounting that all the title documents, property dimensions and/or any other documentation related to the property, are in order. On the contrary, if the real 2 Simplified stock corporation (sociedad por acciones simplificada), estate is not in good standing or up to which is a recently created type of entity not useful to acquire real estate. It is allowed to be incorporated by an individual single- date with the applicable legislation, the shareholder (no entities allowed as shareholders). However, this type bank’s fiduciary duties shall prevent the of entity is not recommended for foreign investment purposes, since its main purpose is to regulate small and medium businesses. Its trust to acquire such irregular property. shareholders may not have any equity participation in any other Mexican entity that allows them to control such entity and the During the past few decades, it has been corporation’s annual total income shall not exceed the equivalent to very popular among foreign investors to $5.6 million Pesos (approximately $256,135.00 , as of September 2020). hold property of real estate through a

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Mexican trusts, where the individual and (iii) the Mexican Income Tax Law (Ley investor or a corporation transfers del Impuesto sobre la Renta) (“LISR”). financial resources to the trust and then The Mexican Congress, in order to make the trust itself acquires the real estate more attractive the investment of capital and holds title thereof. Thus, it can be in the real estate market in Mexico, created to indirectly acquire the property, included in the LISR special tax benefits whereby the real estate is settled in trust, for FIBRAs. since no real estate rights would be owned by the trust beneficiaries, only According to the Mexican Brokers-Dealers trust rights. Association (Asociación Mexicana de Intermediarios Bursátiles), FIBRAs that The maximum duration of such trust is 50 have placed public offerings in the years, subject to renewal; provided Mexican Stock Exchange have captured further that, in such cases it is required to resources equivalent to thirty-seven-point obtain a permit from the SRE in order for three percent (37.3%) of the total foreign such trust to own the relevant real estate investment in Mexico. property in the Restricted Zone. As of today, there have been no amendments According to the LISR, in order for a trust to the relevant laws in order to delete this to be considered a FIBRA and to have the foreign investment restriction on real tax benefits provided by the LISR, it needs estate. to comply, among others, with the following requirements: There are great benefits and advantages of holding real estate property through a (i) to be executed pursuant to Mexican Mexican trust, for example, the trustee laws and with a Mexican trustee. shall be responsible for the administrative (ii) to have as its main purpose the work and for the conservation and acquisition or construction of real protection of the trust assets —subject to estates in Mexico that may be an annual fee to the bank—, the destined for lease, or the right to investor’s heirs can inherit the rights to obtain income from the real estate. the trust and some tax advantages, among others. (iii) that the real estate contracted or acquired by the FIBRA be destined (c) Real Estate Investment Trusts to lease (or equivalent) and not be In recent years, Real Estate Investment sold within a period of 4 years Trusts (Fideicomiso de Inversión en Bienes following the date the construction Raíces) (“FIBRAs”) have also become of the real estate was completed or important investment vehicles for as of the date of the acquisition of foreigners who seek to invest their capital the real estate, as applicable. in Mexico. They are a specific type of trust (iv) that the trustee of the FIBRA issues designed for the real estate business and trust certificates to represent the are regulated by, among others: (i) the assets allocated in the FIBRA so that LGTOC; (ii) the Mexican Securities Law such certificates may be placed (Ley del Mercado de Valores) (“LMV”); through a public offering in the Mexican Stock Exchange and

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registered before the National within a certain period of time, having Securities and Intermediaries agreed upon the essential terms thereof. Registry (Registro Nacional de This type of agreement is different from a Valores); and “letter of intent” since, under Mexican (v) that the trustee of the FIBRA law, a promissory agreement is binding on distributes to the holders of the the parties and may be judicially relevant trust certificates issued enforced, in order to oblige the promisor through the public offer, at least to execute the final agreement. once a year and no later than March Meanwhile, a letter of intent is largely 15th of each year, at least ninety- used merely to express a non-binding five percent (95%) of the total intention of one party, lacking the taxable income accrued during the essential terms of the final agreement. immediately preceding fiscal year. The promissory purchase agreement, as IV. Promissory and Purchase Agreements well as the private purchase agreement — Once the buyer has decided in what capacity as analyzed herein after—, is commonly she/he will acquire title over the real estate, used as a preparatory agreement whether directly or through a Mexican providing the parties with an agreed Corporation, a regular Mexican trust or a FIBRA, timeframe generally used to finalize the transfer of ownership will take place through due diligence and formulate the final and the execution of an agreement. definitive agreement to be executed at a later date. For instance, before executing Note that it is strongly recommended, at all the final agreement, the public notary times but specifically before closing of the needs to draft the correspondent public contract takes place, to undertake a thorough deed comprising the definitive due diligence and seek proper legal advice agreement, collect data and personal before engaging in any transaction. information of the parties, file a The following are the agreements typically used preemptive notice and a lien certificate to formalize the real estate property acquisition before the Public Property Registry for in Mexico: priority or preference purposes, calculate taxes, etc. (a) Promissory Agreement (contrato de promesa) It is not uncommon to agree therein to a down payment from the promisor buyer, A promissory purchase agreement is a usually held in deposit by the promisor very common way to agree with a seller seller. After the agreed period of time, the acquisition of a real estate property, should the promisor buyer fail to buy, at without executing at that point the final no fault of the promisor seller, then the purchase agreement itself. Through a promisor buyer will forfeit the down promissory purchase agreement both payment. On the contrary, failure from parties reciprocally agree or promise, one the promisor seller to sell would generally to sell and the other to purchase real trigger an agreed penalty, usually property at a stated price, as well as to consisting of an amount equal to the enter into a final purchase agreement down payment, plus returning the deposit

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to the promisor buyer. In the case that not been delivered nor the second the promisor seller does not return the satisfied.4 down payment and/or pays the agreed The private purchase agreement, similar penalty, then the promisor buyer will to the promissory agreement, is have a strong claim against the promisor commonly used as a preparatory seller, in order to judicially demand either agreement providing the parties and the the deposit and penalty due or the notary public with an agreed timeframe execution of the final purchase to prepare the definitive agreement. As agreement, as some courts may consider mentioned above, before executing the some promissory purchase agreements — final agreement, preparations need to be pursuant to the provisions therein— as a made, such as drafting of the definitive private purchase agreement. correspondent public deed, filing a Upon the agreed period, the parties shall preemptive notice and a lien certificate execute the final purchase agreement before the Public Property Registry for before a public notary —as analyzed priority or preference purposes, etc. herein after—, pursuant to the essential Pursuant to the legal formal requirements terms agreed upon on the promissory stated on the applicable Civil Codes, a real agreement. estate purchase agreement shall be (b) Purchase Agreement (contrato de generally executed through a public deed compraventa) and recorded before the local Public Contrary to the promissory agreement3, Property Registry, in order to be effective against third parties.5 the purchase agreement itself is final. However, it may be executed either The public notaries will be responsible to privately, as a preparatory agreement — ensure the validity and enforcement of needing to later comply with the legal the transaction. Prior to closing, they will formal requirements—, or directly check for the existence of any debts or through a public deed granted before a liens against the property; that the notary public. As a rule, the sale is perfect correspondent taxes and other and obligatory for the parties when they government fees are paid in full, that the have agreed on the thing —the real real estate description is correct, and that estate— and its price, even if the first has the seller has the capacity to execute the transaction. In addition, they will take care of the tax matters of the transaction, for instance, that the property taxes, transfer fees/taxes and any capital gains taxes are paid at or prior to closing. They 3 However, pursuant to the terms and conditions set forth therein, courts may consider some promissory purchase agreements as final are also responsible to properly record agreements. “When a promissory purchase agreement contains the transaction before the local Public elements that belong to definitive transactions, such as the way in which the price will be paid, or it is stipulated that the purchased thing Property Registry. is delivered, the promissory purchase agreement is disrupted, because then the consent therein no longer refers to granting a future contract, but actually the final contract is being entered into.” Judicial precedent 4 Article 2249 of the Mexican Federal Civil Code (Código Civil Federal). entitled “PURCHASE UNDER APPEREANCE OF PROMISSORY PURCHASE” (“COMPRAVENTA BAJO ASPECTO DE PROMESA DE VENTA.”), with 5 Articles 2316 to 2322 of the Mexican Federal Civil Code (Código Civil registry number 241344. Federal).

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After closing, the notary public will be estate owner, direct or indirect, needs to responsible to provide each party with a take into consideration in Mexico, subject certified copy of the property title, duly to different local requirements that each registered before the relevant authorities. City or State may have in the V. Closing and Ongoing Costs correspondent local regulation:

(a) Closing costs (i) In case of a Mexican Corporation, issuance of annual financial For guidance purposes only, these are statements and filing fees before typically the expenses that a buyer needs the Public Commercial Registry in to take into consideration when acquiring case of Stakeholders Meetings real estate in Mexico, subject to different minutes required to be recorded local requirements that each City or State therein, for example, amendments may have in the correspondent local to by-laws, transformation, regulation: mergers, spin-offs, dissolution, (i) In case of a Mexican Corporation, liquidation and, optionally, the incorporation costs such as notary powers of attorney granted by the 6 public fees and registration fees — corporation ; regulated locally in each State—; (ii) In case of a regular Mexican trust or (ii) In case of a regular Mexican trust or a FIBRA, formalization and trustee’s FIBRA, if needed, notary public fees annual fees; and registration fees —regulated (iii) Annual property taxes, like real locally in each State—; estate tax (impuesto predial); and (iii) ; (iv) Payment of services, such as water, (iv) Notice to SRE, if applicable; electricity, and gas supply, among others. (v) Tax or services certificates, evidencing that no government fees Disclaimer or taxes are outstanding; This note is for general guidance only. Specific (vi) Taxes, whether local of federal, if legal advice should be obtained in all cases. applicable, such as income tax —for “Martinez, Algaba, De Haro y Curiel, S.C.” and the seller—, acquisition of real “Martínez Berlanga Abogados, S.C.” accept no estate tax, value added tax, etc.; liability for anything contained in this brochure and or for any reader who relies on its content. (vii) Notary fees and filing fees, such as, Before concrete actions or decisions are taken preemptive notices, certificate of by you or your business, you should seek encumbrances, registration of the specific legal advice. change of title thereof, expedition We remain at your disposal in relation to of public deeds, etc. questions regarding this note and in relation to (b) Ongoing costs your business and look forward to assisting you.

For guidance purposes only, these are 6 Articles 19 and 21 of the Mexican Commercial Code (Código de typically the ongoing expenses that a real Comercio).

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This paper was prepared by the law firms “Martínez, Algaba, de Haro y Curiel, S.C.” and “Martínez Berlanga Abogados, S.C.” Copyrights pending. September 2020.

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129 Fall 20

INTERNATIONAL LAWYERS NETWORK

PLASBOSSINADE ADVOCATEN NOTARISSEN Buying and Selling Real Estate in the Netherlands

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER DUTCH LAW Introduction of which he did not need to doubt, and also that it has the characteristics necessary for a The purchase of an immovable property is a mutual agreement. particular use which was foreseen in the agreement. Neither the seller nor the buyer has the obligation to make use of the services of a real The parties can derogate from this statutory estate agent. In practice actually one often sees main rule at the time of the purchase that the seller instructs a real estate agent to act agreement. This is often done by giving as an intermediary. A purchase agreement substance to the duty of disclosure and cannot be effected by the real estate agent examination and laying down the outcome in himself: he is merely the intermediary. Should the the agreement. seller engage a real estate agent, the seller must Elements purchase agreement also pay the charges arising from the use of his The following items require attention during services. the negotiations and in the purchase A real estate purchase agreement is often agreement: preceded by a pre-contractual stage. If the parties • object description have agreed upon essential conditions, a purchase agreement has been achieved. • purchase price Generally, no formal requirements need to be • transfer of ownership by means of a observed, which means that a written purchase notarial deed of delivery agreement is not necessary. This requirement • costs and taxes only applies in the event of consumer sale i.e., that a residence is purchased by a natural person. • current agreements with regard to the In case of a consumer sale a so-called reflection immovable property period applies. During three days after signing the • transfer and transmission of claims purchase agreement the consumer buyer has the right to dissolve the agreement without having to • guarantees seller give reasons and without consequences. • oversize/undersize Conformity – examination • environmental regulations The Dutch Civil Code (article 7:17) stipulates that a seller is obligated to supply to the buyer an • risk transfer of damage immovable property that must be in conformity • notice of with the agreement. The immovable property is default/omission/dissolution/penalty not in conformity with the agreement if it does not have the characteristics that the buyer, given • energy performance certificate its nature and the statements of the seller about • registration in the public records it, could have expected on the basis of the agreement. The buyer may expect that the • Municipalities Preferential Rights Act immovable property has the characteristics • suspensive or dissolving conditions necessary for a normal use and on the presence

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Various types of registered immovable property situation of a forced sale. However, after the rights execution sale the new leaseholder is again fully The Dutch Civil Code distinguishes four main bound by the leasehold conditions. immovable property rights which confer full Apartment right ownership or a limited right in rem to the The apartment right is a distinct share in an purchaser. These rights are: immovable property with its appurtenances, giving Property right entitlement to the sole use of a certain part of the The property right (ownership right) is the most immovable property. The immovable property is comprehensive immovable property right one may divided into apartment rights by way of a notarial acquire, free and unencumbered with any limited division deed, containing a division plan and rights right belonging to other (third) parties. The owner and obligations of the owners of the apartment of the immovable property is in the position to sell rights. The application of apartment rights is and dispose of the immovable property, to widely used as to legally structuring immovable encumber the immovable property with limited property, whether residential or commercial or rights in rem such as leasehold or mortgage. otherwise. Leasehold The notarial division deed contains, as required by law, the establishment of an owner association. All Leasehold ("erfpacht") is a limited immovable apartment right owners are members of this property right in rem and provides the leaseholder owner association by operation of law. The objects the right to hold and use the immovable property of the owner association are to manage the which is owned by another person or legal entity. immovable property and the general interests of The rights and obligations of the leaseholder are the joint owners directly relating to the immovable generally limited by law and can be specifically property. limited by the leasehold conditions which are concluded between the owner and the leaseholder. An apartment right may be encumbered with limited rights in rem such as leasehold or The following items are usually determined by mortgage. the leasehold conditions: Right of superficies - duration of the lease (temporary, permanent, or perpetual); The right of superficies ("opstalrecht") is a limited right in rem and provides the holder the right to - ground rent ("erfpachtcanon"); own or to acquire constructions and structures in, - designated use; on or above immovable property which is owned by a third party. The right of superficies may - (conditional) right of transfer; generally be compared with leasehold, but a - (conditional) right of sub-leasehold. distinctive contrast is that the leaseholder may use and hold the immovable property itself while the The leaseholder is entitled to mortgage the holder of the right of superficies has the ownership leasehold without the consent of the owner. and use of constructions and structures in, on or Therefore, in case the leaseholder requires the above a third party's immovable property. written consent of the owner under the leasehold conditions to transfer the leasehold, the A second difference between leasehold and the mortgagee is not bound by this condition in a right of superficies is that leasehold is an

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[BUYING AND SELLING REAL ESTATE IN THE NETHERLANDS] 132 independent right while the right of superficies may establish limited rights in rem, such as a mortgage. be an independent right or a right dependent on Notarial deeds are conclusive proof of the another agreement between the owner and the transactions laid down therein. holder, such as a lease agreement. In such case Dutch civil-law notaries are impartial legal ending of the lease agreement would mean the end professionals appointed by the Government. In his of the right of superficies. capacity the civil-law notary must consider the The rights and obligations of the holder of the right interests of all parties involved in a transaction of superficies are generally limited by law and can regardless who pays the notary's fee. Also, in be specifically limited by the conditions which are general, the interests of third parties who are concluded between the owner and the right's affected by a transaction must be considered. The holder, equal to leasehold conditions. civil-law notary advises the parties and oversees An independent right of superficies can be the transaction. transferred and encumbered by a limited right in The notarial deed containing the transfer of rem such as mortgage. Since the dependent right ownership or the establishment of the limited right of superficies depends on another agreement, such in rem are recorded by the notary with the right cannot be transferred nor be encumbered designated Public Registers, kept by the Land with a limited right in rem. Registry "Kadaster"), by way of filing a certified The right of superficies is widely used for copy (or an excerpt) of the deed. These Public pipelines, cable networks and other valuable Registers are accessible for everyone. The civil-law structures or equipment. notary is the custodian of the original deed and therefore it remains with the notary. Parties The property right, leasehold, apartment right entitled to it will receive a certified copy or, when and right of superficies can all be leased to a required, an authenticated copy. third party. In an immovable property transaction, the Nonregistered immovable property rights purchase price (or secured loan amount) must be (economic ownership) deposited with the (impartial) civil-law notary prior Economic ownership can be defined as the to the closing of the transaction. This has the separation of full ownership in legal ownership meaning that at the time of the transfer of and economic ownership. It is based on obligations ownership of the transaction, the purchase price is between involved parties by means of contracting. in place but out of the hands of the Buyer and The economic owner is usually entitled to the Seller alike. After the transfer of ownership has value and profits of the real estate. The legal been completed (by way of recording the deed of owner is registered at the Land Registry but does transfer in the designated public registers and not necessarily hold any economic or financial checks of various other registers), the civil-law interest of the real estate. For third parties only notary releases the funds to the Seller. Each civil- the legal owner is known due to registration. law notary is obliged to keep a special account in his name with a bank acknowledged by the Dutch The role of Dutch civil-law notaries in authorities, stating his capacity; this/these immovable property transactions, payment account(s) is/are exclusively intended for funds the procedure and the Public Registers civil-law notary retains in relation to his activities in Under Dutch law a notarial deed is compulsory in that capacity. order to transfer title to immovable property or to

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The aforementioned statutory provision further the initially reclaimed VAT in the following nine implies that the funds in this special account, years. When buyer in any year performs less than which is called a third-party account, do not belong 90% business activities for VAT, the buyer has the to the civil-law notary, but to the parties entitled obligation to partially pay back VAT. to them. This means that the balances in this Research on the tax history of real estate account cannot be attached by the civil-law between a tax advisor and a civil-law notary is notary’s creditors and that, should the civil-law highly recommended especially with regard to notary get into financial difficulties or go into commercial real estate. involuntary liquidation, the balances in the account cannot be involved in the financial Transfer tax difficulties or the liquidation. Transfer tax is imposed on the acquisition of The above has been included in the law to existing, used immovable property and limited protect the interests of the civil-law notary’s rights in rem thereto (not security rights such as clients who need to be able to rely on the fact mortgage). The tax rate is 2% for residential that the funds they have deposited with the properties and 6% (and proposed 8% as from civil-law notary will reach the parties they are 2021) for commercial and all other properties. It is intended for. The civil-law notary is the only proposed that as from 2021, persons between 18- party who can dispose of this account. 35 years can use a one-off exemption for transfer tax on residential property. The exemption is Tax issues intended to improve the market position of Value added tax (VAT) starters. In general acquisition of real estate is not subject The taxable base is the purchase price or the fair to VAT (21%), except for newbuilding and/or market value of the real estate when this value building sites. In case VAT is applicable, there is exceeds the purchase price. usually an exemption from Transfer tax. Subject to Transfer tax is the transfer of: Newbuilding is considered newbuilding in the building phase, when it is completed and occupied, I. Real estate including rights derived from up until two years after occupation. real estate such as leasehold, right of superficies and apartment right. In the event newbuilding is purchased within two years after occupation and the seller is subject to II. An economic ownership in real estate. The VAT, VAT and Transfer tax are both applicable. economic ownership includes the risks of Depending on the tax status from buyer for VAT change of value of the real estate. purposes, VAT can be reclaimed in the VAT tax Participation rights in real estate return. When a natural person – not subject to VAT investment funds are exempt when - is selling newbuilding within two years of acquiring interests below one/third in the occupation only Transfer tax is applicable. fund, interests above one/third are subject to transfer tax (including interests already In case seller and buyer are both subject to VAT held). and buyer will use the real estate for 90% or more for VAT business activities, they can opt for a III. So called fictitious real estate, to be transfer of real estate with VAT. Transfer tax is also distinguished as follows: payable. VAT can be reclaimed by buyer in the VAT return. A revision period is applicable for 1/10 of

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a. Shares in a (separate) real estate entity, The corporate income tax rates for: which possessions mainly consist of real 16,5 % for taxable income between € 0 - € 200.000; estate (acquisition of one/third or more of 25% for taxable income exceeding € 200.000. The shares, including interests already held). corporate income tax rates for 2021: b. Rights on memberships of association or 15% for taxable income between € 0 - € cooperation in case the rights include the 245.000; (exclusive) right to use of a building or a part from that building that is meant to be 25% for taxable income exceeding € 245.000. used separately. Income tax Several acquisitions of real estate are under Real estate (not the residence/permanent home in conditions tax exempt for Transfer tax among the Netherlands) can be taxed with (personal) which: Income tax within three categories (Box 1, 2 and 3). - the acquisition of newbuilding and/or Real estate which is part of a personal business building sites in the phase before (including partnerships that qualify as business) is occupation (subject to VAT 21%); subject to Box 1 progressive income tax rates with a maximum rate of 49,50%. Box 1 can be - acquisitions under the scope of applicable for personal held real estate leased to business/family succession; certain affiliated companies. Net income from real - acquisitions in the event of mergers, estate may also fall under the scope of Box 1 in restructuring and division of corporate case the owner performs active real estate entities. management in order to make more return on investment compared to passive real estate Corporate income tax management. A Dutch corporate entity investing in leased Box 2 is a flat rate of 26,25% (2020) for owners of real estate is subject to Corporate income tax. more than 5% of the shares in a corporate entity (a Real estate held by foreign corporate entities is substantial interest). The flat rate will be increased considered as a permanent establishment for to 26,90% as from 2021. Income from real estate Corporate income tax purposes. from the corporate entity is not directly taxed by Taxable income is profit (rental income, realized the shareholder but with the entity itself with capital gains) minus costs and depreciation. Corporate income tax. Valuation of the real estate Depreciation is limited to 100% of the determined held by the entity is directly related to the value of value of the leased real estate of for the purposes the shares held by the shareholder. In case the of the Valuation of Immovable Property Act. shareholder sells shares in the real estate entity a Depreciation of real estate that is used by the rate of 26,25% is applicable in case capital gain on corporate entity itself, is limited to 50% of the the value of the shares is realized. determined value of for the purposes of the of Box 3, wealth tax. Per 1 January of each year the Valuation of Immovable Property Act. Transfer tax market value of real estate minus debts related is not deductible as costs from taxable profit and is thereto is subject to a notional annual income of part of the cost price of the real estate on the 0,07% - 5,28% (2020, as from 2021: 0,03% - 5,69%). balance sheet. Interest on loans is in general The notional annual income calculated is taxed deductible from profit. with 30% (2020, as from 2021 31%).

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The abovementioned Boxes are also applicable for gains for Dutch and foreign held shares by Dutch non-resident investors subject to Dutch income tax. corporate entities under the following conditions: They are considered as non-resident taxpayers for - at least 5% of the shares is held by the Dutch Income tax purposes. The Netherlands have Dutch corporate entity; an extensive network of tax treaties with other countries in which the effects of double taxation - the shares are not held as an investment; are mutually arranged, with regard to Box 1, 2 and - the participation is subject to a corporate tax 3. The right to levy Dutch income tax on income, with a realistic tax rate compared to Dutch tax gains and assets of non-residents may be therefore rates, or less than 50% of the assets of the limited. participation consists of low tax rated Future plans box 3 investments (surplus liquidities, assets related to passive financing of group companies, or The state secretary of finance has announced assets that are placed at the disposal of group plans to adjust the regime of box 3. At this companies). moment, the valuation considers (deduction of) debts related to real estate. It is planned that as Dividend withholding tax from 2022, debts cannot be deducted from the Dividends are subject to Dividend withholding value of real estate anymore. As an effect, the tax. Below the current Dividend withholding tax tax burden will increase. rules for the following categories: Foreign investors in Dutch real estate are - dividends paid to shareholders natural persons strongly recommended to acquire further tax with a substantial interest; advice. - dividends paid to shareholders natural persons Capital gains on real estate or shares in a Dutch without substantial interest; corporate entity holding real estate - dividends paid to a resident corporate entity; Capital gains made by a Dutch corporate entity and a foreign corporate entity (also by means of a - dividends paid to a non-resident corporate partnership) is subject to Dutch Corporate income entity. tax. Capital gains made by individuals under the Dividends paid to shareholders (natural persons) regime of Box 1 of Income tax are progressively with a substantial interest (5% or more of the taxed. shares) are subject to 15% Dividend withholding In case there is an intention to reinvest a capital tax. Dividend withholding tax is an advance levy gain, profit from selling real estate can be reserved before Box 2 flat rate of 26,25% (2020) in Income in a fiscal reserve up until three years after selling. tax. In case the shareholder with a substantial Within these three years reinvestment has to take interest is a non-resident the same rules in place. If not, the capital gain is taxed in the third principle apply. The non-residential shareholder is year after selling, at the latest. considered as a non-resident taxpayer for Dutch income tax purposes. Dutch tax regulations and Capital gains on the sale of shares in a corporate tax rates may be overruled and/or adjusted in case entity by a Dutch corporate entity is in general a tax treaty is applicable with the country of exempt from Corporate income tax. The residence of the non-resident shareholder. Corporate income tax act provides for a participation exemption on dividends and capital Dividends paid to resident shareholders without substantial interest are subject to 15% Dividend tax.

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Dividend withheld tax is refundable and/or can be settled with due Income tax. Non-resident shareholders without substantial interest are also subject to 15% Dutch withholding Dividend tax. Dutch tax rates may be overruled and/or adjusted in case a tax treaty is applicable with the country of residence of the non-resident shareholder. On request the Dutch tax authorities will refund Dividend tax entirely or partly, depending on the applicable treaty. Dividends paid by a Dutch corporate entity to another Dutch resident corporate entity are exempt from withholding Dividend tax in case the participation exemption of the Corporate income tax applies. The participation exemption applies in case a corporate entity holds 5% or more of the shares in another corporate entity. Dividend tax withheld in other situations will be refunded and/or settled with Dutch Corporate income tax. Dividends paid by a Dutch corporate entity to a non-resident corporate entity is subject to 15% Dividend withholding tax unless the non-resident corporate entity holds more than 5% of the shares and the EU Parent Subsidiary is applicable. In other cases, the 15% Dividend tax rate may be adjusted due to the applicable tax treaty with the country of residence of the non-resident corporate entity, depending on conditions.

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137 Fall 20

INTERNATIONAL LAWYERS NETWORK

ØKLAND & CO Buying and Selling Real Estate in Norway

ILN REAL ESTATE GROUP

ILN REAL ESTATE GROUP

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER NORWEGIAN LAW

I. STANDARD FORMS OF AGREEMENT analysis of the property for potential problems, below here an inspection of the A. Offer to Purchase sets forth Buyer’s offer of price and date for closing. Seller property. may accept or reject. IV. FORMS OF OWNERSHIP B. The purchase contract sets forth the A. Residential property is typically held in terms of purchase and sale, including an individual’s name. The property might among other things, price, allocation of also be held by a company, a trust, or the costs of the transaction, date for closing, municipality. encumbrance, insurance, and default 1. Freehold housing – typically provisions. , row houses, freehold flats, and II. BROKERS holiday houses. A. Buyers and sellers are not required to 2. housing - an use a real estate broker or agent, but arrangement in which an association or normally the settlement is carried out by a corporation owns a group of housing real estate broker or a lawyer. The broker or units and the common areas for the use the lawyer shall be independent. Both the of all the residents. The individual real estate broker and the lawyer must be participants own a share in the licensed. cooperative which entitles them to B. The seller pays the broker’s commission. occupy an apartment.

III. BUYERS INSPECTION 3. Ground lease – a leased property is a plot that is rented out to the person A. Residential: using the plot. The person using the plot Inspection is not mandatory, but the buyer only owns the residence. will normally examine the property before 4. Commercial property is normally purchasing. Defects the buyer should have held in a company’s name but might discovered before buying the property also be held in an individual’s or trust’s cannot be claimed. After taking possession name. of the property, the buyer is obligated to

examine the property. Time of allowed V. DEED claims starts running from the point of time A. At the same time as the buyer pays for the buyer detect defect or should have the property, the seller is obligated to issue detected defects, so it’s important that the the deed. By issuing the deed, the buyer buyer examine the property after taking gets the title to the land. To get legal possession of it. protection from competitive acquisition the B. Commercial: buyer must register the deed in the Register of deeds. Before buying the property, the buyer will normally conduct due diligence on the property, including investigation and

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VI. CLOSING COSTS/ADJUSTMENTS 1. The sale must take place or be A. The buyer pays the documentary stamp agreed upon more than one year after duty. The fee is 2.5 per cent of the value of the property was acquired and the property at the time of registration. 2. The owner must have used the B. Among other things this do not apply to property as its own home for at least the following transfers: one year during the two-past year before the sale takes place. 1. transfers between spouses, E. Gains made on sales or other realization 2. transfers which is a consequence of plots of land will always be tax liable, and of separation, any loss will be deductible. 3. transfers which is a consequence F. Commercial properties are also of inheritance, taxable/deductible. 4. transfers which is a consequence VII. ANNUAL COSTS FOR PROPERTY of legacy, OWNERSHIP 5. transfers of properties which is A. Property insurance not used earlier, 1. Property insurance is not 6. transfers of buildings under obligated, but most people sign up for a construction, property insurance. 7. transfers of a leased property, B. Property tax 8. transfers which is a consequence 1. Municipalities can opt to introduce of termination of co-ownership, property tax. The fee differs between 9. transfers which is a consequence the municipalities within the country. of termination of cooperative housing and 10. transfers after mergers, demergers and restructuring of businesses. C. The buyer also pays the registration fee to the government. The registration fee is NOK 585. D. The general rule is that gains/losses made on the sale of residential property are taxable/deductible. Gains made on the sale of residential property are tax-free if certain occupancy and ownership conditions are met. The following conditions must be met:

ILN Real Estate Group – Buying and Selling Real Estate Series

Fall 20

INTERNATIONAL LAWYERS NETWORK

QUIJANO & ASSOCIATES Buying and Selling Real Estate in Panama

ILN REAL ESTATE GROUP

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER PANAMANIAN LAW

1) Once you find a real estate property that • When a real estate property is you want to acquire by yourself or through a registered, it is assigned with a parcel local real estate broker, it is strongly number, which will be used to identify recommendable to hire a local attorney to the specific property, as it will include perform a thorough due diligence on the information such as the name of the property. owner(s), its registered value, 2) Once the due diligence is finalized, and measures of its areas, borderlines and the property is clear from any restriction that any boundaries which have been will impede its sale, you or through your broker, registered on the specific property. should negotiate the terms and conditions of • Any person (foreign or national, the transaction, which will include the price and natural, or legal entity) can hold real payment method. estate title in the Republic of 3) The next step will be to subscribe a Panama. To proceed with the Promissory contract that will contain all the acquisition of a real estate, the buyer terms and conditions of the purchase/sale. will register the title under his/her/its name, with the registration of a Public 4) At the moment of the signing of the Deed at a Public Notary office, which promissory contract, a down payment is given includes the Purchase & Sale Contract, to the seller so that he may settle the taxes (5% and by paying the correspondent of the higher value between the purchase price taxes to the Panamanian Tax and cadaster value of the property) that Authority. generates the transaction. • The registration of this public deed at 5) Once taxes are paid by the seller and all the Public Registry is obligatory for the the documents for closing are in place, the transfer to be executed. parties will need to sign before a local notary the final purchase/sale contract, which will be b) Taxes subscribed in a Public Deed. The following is intended to provide basic 6) The final step of the purchase/sale is to information about taxes related to the register the final purchase /sale contract in the most common real estate transactions, Panama Public Registry, so that the transfer of and any tax liabilities enquiries should be the property can be consummated. handled on a case-by-case basis. Important Aspects: • Property Tax (Impuesto de Inmueble) a) Registration Real estate in Panama, whether in urban or rural areas, is subject to Panama has a public system where all matters related to real estate are property taxes. registered, including title, any • All properties registered at a value of improvement to the property, burdens, $30,000 or less, including improvements impediments, and limitations to of land, for instance, construction. ownership.

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• Land occupied exclusively for leases with a monthly rental fee up to agricultural purposes like farming and US$150, and the second category registered with the Ministry of covers residential leases with a monthly Agriculture and Development at no rental fee of US$150 or more, as well as more than $150,000. leases of premises for commercial, professional, industrial, or educational The real estate tax basis should be use (regardless of the amount of the understood as being the combination of the rental fee). value of land and the improvements of the property, which includes any construction • A leasing agreement must include: The on the land, as appraised by Land right of the lessee (in residential leases) Commission (Oficina de Catastro). Real to waive the minimum lease term, and estate transactions at prices surpassing the terminate the lease agreement at any appraisal value are automatically registered time (with a written notice sent at least with the new, higher value, and thus 30 days prior to the termination date), becomes the new basis for taxation. the right to sub-lease, the obligation to deposit with the Ministry of Housing a • Real Property Transfer Tax sum equal to the agreed rental fee, the When a property is sold, the Real Property right of the lessee (in residential leases) Transfer Tax is assessed and calculated on to exercise his/her profession inside the the greater of the total value, whether the leased property, unless it interrupts the sale price or the registered value, plus the peaceful enjoyment of the property or value of the improvements. The tax rate is violates the law. Lease agreements 2% of the greater of these two values, plus must be registered at the Ministry of 5% for each year since owning the property. Housing; and also, as a public deed at a • Real estate taxes season in Panama Notary Public (when its term exceeds six occurs 3 times every year, at the end of years) – being 20 years the maximum April, August, and December. time period a lease agreement is permitted. Nevertheless, both c) Financing categories of leasing could be registered • Local or Foreign Banks and/or Lenders at the Public Registry to inform are usually used to acquire / buy real potentially interested third parties. estate in Panama, which secure the e) Constructing buying through a mortgage agreement with the buyer. Mortgages must be • In order to build in Panama, prior to the granted in the form of a public deed beginning of construction, the necessary before a Notary Public in Panama and plans must be accordingly signed by a registered at the Public Registry to professional who is duly licensed by the perfect the security interest. Technical Board of Engineers and Architects of the Ministry of Public d) Leasing Works; and then approved by the • Panamanian Civil Code regulates Leasing Directorate of Municipal Works and in Panama, which are divided in two Constructions. categories: the first covers residential

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• After the construction is finished, an application for an occupancy permit must be submitted to the Directorate of Municipal Works and Constructions. In order to be granted with the occupancy permit, the builder must already have the construction permit, the permit issued by the Security Office of the Fire Department, an electricity permit, and a permit for installation of air conditioners (when applicable). • Panama's condominium law is called the “horizontal property regime” which regulates owners' rights when owning an apartment in a building built on commonly used land; and divides property into common and private areas and establishes the rights, obligations and the limitations that each unit owner has with respect to these areas.

ILN Real Estate Group – Buying and Selling Real Estate Series

Fall 20 INTERNATIONAL LAWYERS NETWORK

MGRA & ASSOCIADOS LAW FIRM Buying and Selling Real Estate in Portugal

I L N R E A L ESTATE GROUP

ILN REAL ESTATE GROUP

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER PORTUGUESE LAW I. INTRODUCTION excellent infrastructures for living and for leisure time, competitive operating costs, Portugal is an Iberian Peninsula country, bordered by the Atlantic to the west and south proactive pensions, an advantageous tax and Spain to the north and east. In addition to system for investors and flexibility in human its continental landmass, it also comprises the resource management systems. These archipelagos of the Azores and Madeira. singularities have made Portugal a privileged Portugal has around 10.2 million inhabitants. place to invest, to do business and to live. Portuguese territory is split up into three administrative divisions: the first division includes 18 administrative country districts, while the others include the autonomous regions of the Azores and Madeira. All country districts are sub-divided into 308 municipal districts and approximately 3,100 parishes.

Lisbon is the capital of Portugal and its largest III.OVERVIEW OF THE NATIONAL REAL ESTATE city with more than 510,000 inhabitants. MARKET Portugal’s second largest city is Porto, in the The real estate market in Portugal is highly northern, with more than 240,000 inhabitants. developed. It has a relatively high quality of Portugal is a democracy. Its sovereign bodies supply in all sectors, on par with the main are the President of the Republic, Assembly of European markets, dynamic demand, and a the Republic, Government, and the Courts. The considerable presence of foreign occupiers. The current President of the Republic (and head of market is highly transparent, with various state), elected in 2016 for a five-year term, is international consultants regulated by the most Marcelo Rebelo de Sousa. Elections for the 230 demanding professional organizations of the deputies of the Assembly of the Republic are commercial real estate sector. There is also a held every four years and are followed by the strong international contingent of developers appointment of the Prime Minister (the head of and investors looking for new opportunities in government, currently António Costa), who the Portuguese market. then forms the government (currently a PS III.1. REAL ESTATE INVESTMENT MARKET government, elected on October of 2019, In 1985, the road for real estate investment supported by a multi-party left wing alliance). funds in Portugal was opened. Since their Portugal has been a member of the European launch and up until the 1990s, these funds had Union since January 1st, 1986, and a founding typically been used as SPVs rather than as an member of NATO on April 4th, 1949. It has been actively managed, pooled, closed-end-fund. a member of the United Nations since the 14th The market in Portugal, up to 1998, was of December 1955. relatively small and not particularly II. REASONS TO INVEST IN PORTUGAL professional, with foreign investments being few and far between. Portugal has a pleasant weather, an extensive Atlantic coast, a wide system of motorways,

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The elimination of foreign exchange risk with • During the year of 2016, the value of most of other European markets, when real estate transactions stabilized Portugal joined the Euro in 1999, placed the around € 1.3 billion) and then reached a country more notably on the radar of new historical high in 2017, with € 2 international investors. Investment, in 1998, billion invested in real estate. ahead of the Euro’s launch, increased from • In 2018, a new historical high was around €180 million to more than €400 million, registered, with over € 3.5 billion of around 90% of which was foreign. Almost all investment. The value of housing asset transactions were in the office or transactions totaled € 24.1 billion. shopping center sectors; with retail property • In 2019, there was a new peak in the accounting for more than 60% of the capital number of transactions, which reached involved. 181, 478 thousand homes. €2.8 billion Portugal saw a steady grow in real estate were invested in commercial real estate, investment during the last decade: and the value of housing transactions totaled € 25.6 billion. • In 2008 and 2009, the real estate • During this period, it was also evident a investment was relatively low, mostly significant increase in the volume of the due to restrictions and scarcity of bank number of transactions, as evident in funding for the real estate sector. the figure below: • A slight recovery was noticed in 2010 with a total investment volume of €690 million. Number of real estate purchases of the last six • The two following years continued to reflect the sector investment tendencies. 2011 saw a total investment value of €167 million, while 2012 reached the lowest level of the century, recording only a total investment of € 108 million. • In 2013, the growth of the market activity began, and a total of €322 million in commercial real estate assets years. were closed, tripling the volume of the previous year, followed by a significant III.2. FOREIGN INVESTMENT IN REAL ESTATE growth also in 2014. The real estate investment market in Portugal • In 2015, numbers largely surpassed the came to notice by the foreign investors since investment of previous years, including the country joined the Euro in 1999. a historical high of 2007, with a registered €1.9 billion of transactions in Several billion euros of foreign capital have commercial real estate assets, doubling been invested mostly by Germans, British, the volume of the previous year. 90% of Dutch and Americans on the acquisition of the invested capital came from outside several real properties since then. Recently, the country. investors from China, Russia, Brazil, and

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France have also made a significant impact in IV.1. INDIVIDUAL (DIRECT ACQUISITION) Portuguese market. This value could have The formalization of a real estate acquisition been higher as the Portuguese market was, requires the compliance of some important on occasions, simply not large enough to steps, as follows: supply enough products in terms of number, quality and/or scale, to fully meet the demand recorded at the time. Portugal remained present in the investment intentions of several of the most important European investment houses over the past 15 years, with buyers, interested in effectively diversifying risk and achieving slightly higher income returns than those available from other markets, in a country offering security, IV.1.1. INVESTIGATION transparency and less competition. Investigating the property intended to be Dramatic changes impacting on European acquired by checking its commercial, legal, economic situation and in particular on fiscal, environmental, and urban status it’s Portugal had driven away the attention of essential for a clean and structured foreign institutional investors until 2013. execution of the sale and purchase However, the second half of 2015 brought agreement. back international investment into Portugal and, more particularly the last quarter of the Usually, it is done by commissioning due year, showed signs of what may be diligence procedures, which should ensure considered an upturn of real estate and guarantee that the property in question investment activity. The successful outcome is not subject to any encumbrance, costs, or of the political crisis, continued improvement limitations (registered with the respective of economic indicators, greater public debt Land Registry Office), or that any market stability and Portugal’s good impediments have been extinguished performance in terms of the adjustment before or after the sale. program, made important contributions to If the intention is to acquire a plot of land, the market recovery. the buyer should also verify, with the IV. HOW TO MAKE A REAL ESTATE competent entities, the urban planning in INVESTMENT all its different forms, as well as any Portugal, lined with other continental legal restrictions and licenses. systems such as France (propriété), Germany If the intention is to acquire a building, or (Voll Eigentum) and England (freehold), building unit, the buyer should also verify adopted the concept of “full ownership” which the use permit license which defines the is defined by the full and exclusive rights of use, purpose of the property. fruition, and disposal of the property.

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IV.1.2. SALE AND PURCHASE PROMISSORY IV.1.4. REAL ESTATE WARRANTY AGREEMENT According to Portuguese Law, the real Before the formalization of the real estate estate seller (and the property builder, sale, it is common practice to celebrate a when applicable) is responsible for any promissory agreement (or pre-contract defects or flaws in the property that may agreement) as an immediate binding occur in a five-year period upon delivery. document, in which case the signing of the The purchaser must report the defect or definitive sale agreement is usually flaw to the real estate seller or property conditional upon the parties compliance builder within one year from the date of with several obligations. detection of the defect (always within the The parties can also agree with a deposit five-year warranty period). The problems and down payment of the property price. In that have arisen during this period cannot the case of default by the promissory seller, be the result of bad use by the purchaser. the promissory purchaser may receive twice There may be warranties with distinct the amount paid; if the default is caused by deadlines when a conventional warranty is the promissory purchaser, the promissory stipulated between the parties and is seller can keep the amounts he has already expressly stated in the sale and purchase received. agreement. IV.1.3. SALE AND PURCHASE AGREEMENT This legal warranty can also be refused by The real estate sale is formalized either in a both parties, specifically if they agree to sell deed, signed before a notary, or by a the property “as it is” at the moment of the certified private document, which can be sale. signed in the presence of a lawyer. IV.2. SPECIAL PURPOSE VEHICLE (INDIRECT Altogether with the deed, or certified ACQUISITION) private document, there is the Land The second form of real estate investment is Registry Office record, which is one of the the indirect acquisition of property, via a main instruments of a real estate deal, special purpose vehicle, previously destined to make public the property’s incorporated, or acquired, for such purpose. actual legal status. This procedure requires the compliance of Due to the principle of the priority of some steps, as follows: registration, the first registered right is IV.2.1. DUE DILIGENCE effective before third parties and prevails As in direct acquisition deals, in indirect over their incompatible rights even if those acquisition deals it’s also recommended the rights have been established before the commission of a due diligence procedure by date of registration. the purchaser, in order to i.) verify the Accordingly, together with the sale and property legal status, as detailed above, and purchase agreement, the registry of the to ii.) analyze the investment vehicle’s property acquisition is vital to assure the commercial, financial, tax, corporate and protection of the purchaser before third legal status, ensuring the legal acquisition of parties. equity stakes as well as that no undesired

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obligations or rights are dragged along with After the incorporation, restrictions to the the entity to be used as vehicle. minimum number of shareholders no IV.2.2. SHARE DEAL longer apply. This process involves the acquisition of In its most common composition, the equity stakes in investment vehicles, such company’s is governed by a General as commercial companies (usually joint- Meeting, the Board of Directors, and the stock and limited liability companies) and Sole Supervisor, who should be a Statutory undertakings for collective investment of a Auditor. contractual nature or of a corporate nature. In most PLC companies, the share transfer IV.2.3. SALES GUARANTEES agreements require no special formalities, and its register is executed directly at the In special purpose vehicles acquisitions, it is company itself. common practice for the seller to accept liability for a specific length of time for any V.1.2. LIMITED LIABILITY COMPANIES BY infringement of its representations and QUOTAS (LTD) warranties on the object of the sale and Usually representing the small and medium underlying assets. sized companies, the LTD companies are V. TYPES OF SPECIAL PURPOSE VEHICLES the most found type of companies in Portugal due to the inexistence of a minimal It is standard practice in Portugal to make real initial share capital requirement and a estate investments through one of these three simpler functioning and structure, as well as vehicles which, in other words, represent the the bigger control given to the founder process of a special purpose vehicle acquisition partners. deal: (i) commercial companies, (ii) real estate investment funds and, (iii) real estate Its share capital is divided up into quotas, investment companies. with a minimum initial amount per quota of €1. The limited liability company can have V.1. COMMERCIAL COMPANIES or be incorporated by a sole quota holder Joint-stock companies as well as limited (in which case the company must bear the liability companies are on the Portuguese corporate expression: “sole quota holder frontline, representing most of the existing limited liability company by quotas”), or by national commercial entities. any other number of quota holders. V.1.1. LIMITED LIABILITY COMPANIES BY Differently from PLC companies, the SHARES (PLC) information about the quota holders’ identity is public, accessible through the In a PLC, share capital is divided up into commercial registry official records. shares, with a minimum initial amount of €50.000,00, and must, only at the moment The quota transfer requires writing form and of its incorporation, have a minimum of five an official registry of the transmission. shareholders, unless it is incorporated by V.2. REAL ESTATE INVESTMENT FUNDS another company, as its sole shareholder. Over the last few years, these vehicles of real estate investment took up the Portuguese

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[BUYING AND SELLING REAL ESTATE IN PORTUGAL] 150 market, mostly due to its favorable tax V.3. REAL ESTATE INVESTMENT COMPANIES regime. In 2010, Portugal included in its legislation a The so called “Fundos de Investimento possibility that already existed in most of Imobiliário” (“FII”) are autonomous assets European countries, which consisted in under the joint ownership of individuals or forming FII's with a corporate form (aside of corporate entities, usually called “unit- the contractual form previously mentioned). holders.” FII’s are also divided up into The so-called “Sociedade de Investimento identical investment units. Imobiliário” (“SIIMO”) are collective FII’s must assume one of three capital investment entities with legal personality, variability forms: which may take the form of a public limited i) Open-ended funds – with a number of liability company of variable capital ("SICAVI") investment units, variable according to or fixed capital ("SICAFI")' and whose the market demand; property assets is owned by such entity. ii) Close-ended funds – with a fixed number A SIIMO can be self-managed or managed by of investment units, established at the professional real estate investment fund moment of its emission, with the management companies (as FII with possibility of increasing or reducing its contractual form). The standard practice in number, if and when mentioned in the Portugal is to choose an already existing law and in the management regulation; investment fund management company. iii) Mixed funds – with a fixed number of Both SICAFI and SICAVI are subject to: investment units and variable number, included in two different categories. i) The regulations on the previously mentioned open-ended and close-ended FII’s are a type of undertaking for collective real estate investment funds, respectively investment of a contractual nature, which and, management and representation must be ii) The applicable regulations set out in the performed by third ones specialized in the Portuguese corporate legislation. real estate market. SIIMO’s must have a minimum share capital FII’s can be managed by real estate of €375.000 divided into identical nominative investment fund management companies shares with no nominal value. with effective registered office and activity in Portugal. Additionally, it is important to point out that the rules behind the incorporation of FII’s The creation of these entities requires a (contractual form) are equally applied to the formal process, which includes authorization SIIMO’s incorporation, as well as the and official supervision from Bank of Portugal applicable Portuguese corporate legislation. (“Banco de Portugal”) and of the Securities Commission (“Comissão do Mercado de V.4. INVESTMENT AND PROPERTY Valores Mobiliários” or “CMVM”). MANAGEMENT COMPANIES (SIGI) The assets of a FII may comprise liquidity, real Finally, on January 2019, a new type of estate property and shareholdings in real investment and estate companies. companies (SIGI) was legally established, aiming to (a) diversify companies’ funding

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sources, (b) increase the investment in the buildings (6.5%) and rural property (5%), or economy and competitiveness of the when the purchaser, not as an individual, securities market, and (c) attract foreign has office at tax haven (10%). Nevertheless, investment, and (d) dynamize the Portuguese Portuguese law foresees some exceptions real estate market, especially the leasing or postponements on IMT payments, some market. of them applicable when the acquisition is The SIGI corporate purposes are limited to: made by using some of special purpose acquisition vehicles identified above. i) Acquire property rights or other equivalent rights on real estate, to IS – stamp tax, calculated over the price, or subsequently rent them, for instance; the tax patrimonial value, if higher. IS tax ii) Acquire and maintain shares of others rate is fixed, in most frequent situations, in SIGI; 0.8%, although this rate can increase to 1% iii) Acquire and maintain shares in real estate on acquisitions of real estate valued at lease investment funds. at € 1.000.000,00, or when the purchaser, not as an individual, has office at tax haven However, the property rights should (7.5%). constitute the major assets of these companies. VI.1.2. VAT (“IVA”) The SIGI are limited liability companies by Under Portuguese law, real estate shares (PLC) and must have a minimum share acquisitions are exempted from VAT. capital of €5.000.000 (five million euros). VI.2. PROPERTY OWNERSHIP Debt limitations are applicable. VI.2.1. PROPERTY TAX - “IMI” VI. TAX REGIME IMI is levied on a property’s taxable value VI.1. PROPERTY ACQUISITION and is payable by the property owners on 31 December of each year. Nowadays, IMI VI.1.1. REAL ESTATE TRANSFER TAX reaches a variable rate between 0.3% and (“IMPOSTO MUNICIPAL SOBRE AS 0.45% for urban buildings and plots for TRANSMISSÕES ONEROSAS DE IMÓVEIS”) construction, a fixed rate of 0.8% for rural AND STAMP TAX (“IMPOSTO DO SELO”) property, and a fixed rate of 7.5% for The acquisition of real estate is subject to owners’ resident in tax havens. two types of taxes, which must be paid by VI.2.2. SPECIAL CONTRIBUTION the purchaser to the tax authorities before signing of the real estate acquisition Special Contributions are required when agreement. properties are destined to the construction of new buildings and whenever the value of IMT – Real Estate Transfer Tax, which is plots of land for construction increases calculated over the price of the real estate significantly due to major infrastructure or its tax patrimonial value, if higher (which public works carried out (mostly in Lisbon, is uncommon). Porto, and their outskirts). The applicable IMT tax rates for housing buildings are rate varies between 20% and 30% and is progressive between 0% to 8% and fixed for levied on the aforesaid increased value. plots for construction or other urban

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VI.2.3. TAX ON INCOME FROM PROPERTY non-housing leases whose initiate was from OBTAINED IN PORTUGAL BY NON- the landlord until September 30 of 2020. RESIDENTS VII.2. LEASES FOR NON-HOUSING PURPOSES Income from property obtained in Portugal The most relevant aspects of lease by non-residents (e.g., leases) is taxable at a agreements for non-housing purposes, special rate of 28% (applicable to usually for commercial or industrial purposes, individuals), or 25% (applicable to corporate can be freely stipulated by the parties, who entities), being in both cases subject to a are, accordingly, free to agree on issues 25% withholding tax. related to duration, termination, and VII. LEASING LEGAL FRAMEWORK opposition to the renewal of lease contracts, VII.1. GENERAL ISSUES with subsidiary application of the rules regarding leases for housing purposes. According to the law, the lease agreements may be entered into for fixed term or be of non-specified duration. The last option is not commonly used in the property market in recent years. If entered on a fixed-term basis, the duration may be freely agreed between the parties. The agreement can be automatically renewable unless the parties In Portugal, leasing is, day by day, acquiring a agree or any of them decide otherwise. more relevant economic weight. Maintenance works are freely regulated On 14 August 2012, in compliance with the between the parties. In this case, if no terms established in the memorandum of provision is made by the parties, the landlord understanding executed by and between is responsible for the property maintenance. Portugal, the European Commission, the The costs and expenses related with the European Central Bank and the International property are freely agreed between the Monetary Fund, a pack of Laws entered into parties, who are also free to agree the criteria force with the purpose of implementing for updating them. structural reforms in the Portuguese legal framework of real estate lease to boost the Parties can subject the transmission of market. tenant’s contractual position to landlord´s permission, although, if nothing is stipulated, The real estate lease is divided into two the transmission is possible in the most types: (i) leases for non-housing purposes and frequent situation of transfer of the (ii) leases for housing purposes. commercial or industrial business carried out It should be noted that Law no. 14/2020, of in the property (“trespasse”). May 9, suspended, due to the pandemic Any party may cancel the lease agreement caused by Covid-19 disease, the effects of the based on a serious breach of duty committed termination, expiration, revocation, and by the other. The legal framework specifies opposition to the renewal of housing and some of those situations that justify the

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[BUYING AND SELLING REAL ESTATE IN PORTUGAL] 153 termination of the lease agreement by the his own house, or the necessity of landlord, with a compensation for the tenants. construction work or maintenance that will Additionally, the contract can be simply result in the disappearing of the house. terminated by means of a written Otherwise, the agreement will be suspended communication sent by the landlord to the during the maintenance period, but the tenant in situations of delay or lack of tenant has the right to be re-housed in an payment of the rent. equivalent house. If the tenant lives in the house for more than 15 years, the agreement On all other serious breaches, the can only be terminated by demolishment or termination can be declared by the Court. severe works that do not allow remaining in It should be mentioned that, in the context of the house. the pandemic caused by Covid-19 disease, The tenant is entitled to oppose to the Law no. 14/2020, of May 9, has established renewal of the lease, by mean of a notice sent that the closure of premises and with a prior notice that may vary depending establishments in the context of the on the initial term or on the term of its pandemic cannot be invoked as a ground for renewal, as well as to terminate the lease terminating a non-residential leasing agreement at any time and without agreement or to support an obligation of the justification, provided that 1/3 of the lease tenant to vacate the premises on which they duration has elapsed, by means of a written are installed. communication sent to the landlord with a VII.3. LEASES FOR HOUSING PURPOSES prior notice provided in the applicable law. The lease agreements for housing purposes, As to non-fixed term agreements, the law unlike the lease agreements for non-housing provides the conditions and the prior notices purposes, have less contractual freedom. that the landlord and the tenant must comply Some of the most relevant matters are in order to legally terminate the agreement. imperatively established in the law. That is Like in the non-housing lease agreements, the case of rules regarding the early any party may cancel the lease agreement termination and the opposition to renewal of based on a serious breach of duty committed the lease agreements which were, by the other. Also, here the legal system nevertheless, softened in 2012, favoring and provides a non-exhaustive list of cases of strengthening the landlord position. breach justifying a landlord’s decision to These lease agreements may also be entered terminate the lease agreement. for a fixed term or be of non-specified Additionally, the contract can be simply duration. terminated by means of a written Regarding the fixed-term lease agreements, communication sent by the landlord to the the minimum period for permanent tenant in eligible situations of delay or lack of habitation is 1 year. These agreements are payment of the rent. necessarily renewable for 3 years, except In 2019, recent tax incentives were when the parties stipulate a different period. introduced, foreseeing a signification The landlord may terminate legitimately the reduction of taxes in longer renting contract if he alleges the necessity to live in agreements.

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VII.4. SPECIAL PROCEDURE FOR were built at least 30 years ago and that show One of the ultimate goals of the urban lease high levels of deterioration. According to this regulation’s reform in 2012 consisted of procedure, the execution of works in such speeding up the procedure for eviction. A buildings does not require a construction special eviction regime was established in license, usually a bureaucratic process, being order to ensure the effectiveness of the that a prior formal communication to the termination of lease agreements – regardless competent entity is requirement enough to of its purpose – applicable when the tenant allow the works to commence. has not vacated the leased property on the In case the property is leased, and the landlord date foreseen in the law or agreed by the intends to carry out refurbishment works or parties. deep restoration, in most situations, landlord is This eviction procedure is specially used when entitled to terminate the lease agreement the lease agreement was terminated by non- without having to resort to court and obtain judicial means. The landlord can cumulate the the release of the leased property, provided request for eviction with the claim of that the landlord relocates the tenant or, payment of rents and other expenses and alternatively, awards the tenant with the charges due by the tenant. This procedure compensation legally foreseen. takes place before an extrajudicial entity and *** is aimed to ensure fast procedures, although The information contained in this “Guide” is provided for it can, under certain circumstances, be informational purposes only and should not, under any transferred to court. circumstances, be understood as legal advice on any subject matter. Recipients of this document, clients or VIII. URBAN REHABILITATION otherwise, should not act or refrain from acting on the basis of any content included in the document without To promote the properties’ rehabilitation, the seeking the appropriate legal advice from an attorney on new reforms simplified the urban licensing their particular facts and circumstances. Mouteira procedure required for these operations as well Guerreiro, Rosa Amaral & Associados, Sociedade de as for termination of lease agreements when Advogados R.L. expressly disclaims all liability for any possible damages caused by actions taken or not taken the landlord desires to perform rehabilitation based on any or all the contents of this document. works on the property. This "Guide " and its contents are provided "AS IS" Urban rehabilitation of buildings must, however, without warranty of any kind, either expressed or implied, meet energetic efficiency, seismic vulnerability, including, but not limited to, the implied warranties of and accessibility requirements. merchantability, fitness for a particular purpose, or non- infringement. Reproduction, distribution, republication, Urban rehabilitation of buildings must, however, and/or retransmission of material contained within this meet energetic efficiency, seismic vulnerability, “Guide” is prohibited without prior written permission of Mouteira Guerreiro, Rosa Amaral & Associados, and accessibility requirements. Sociedade de Advogados SP R.L. There is a special procedure applicable to the prior licensing control regarding buildings that

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155 Fall 20

INTERNATIONAL LAWYERS NETWORK

PETERKA & PARTNERS Buying and Selling Real Estate in Romania

ILN REAL ESTATE GROUP

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER ROMANIAN LAW

I. Types of Real Property Transactions The persons who sign the agreement before the notary public must have proof of identity A. Purchase of an undeveloped plot of land (agricultural); (ID Card, Passport, etc.) and, if the case may be, proof of power of attorney (which must also be B. Purchase of a buildable plot of land (with authenticated by a notary public and must or without a building); expressly give power to sell/purchase the C. Purchase of a building without the land specific property). If the buyer/seller is a legal (with superficies right over the land); entity, proof of status of the company must also be provided. D. Purchase of a flat (condominium); The notary shall verify the status of the E. Purchase of a company having real estate property and shall obtain an authentication assets. excerpt from the relevant Land Book which II. Major Content of the Purchase Agreement shall block any further registrations in the Land Book until the agreement is registered after The contract must include parties’ identities, signing. All the Land Book registrations/de- description of the real estate (address, surface registrations in respect of the ownership title area, buildings, cadastral number, and Land shall be carried out by the notary public. Book registry number), purchase price (which must be serious – not derisory, real – not The parties will sign only one copy of the fictitious, and determined or determinable), as agreement which remains in the notary public’s well as the main obligations of the parties (i.e., archives. The notary shall provide as many to transfer the property rights and to pay the duplicates as necessary, which shall be only price). signed by him/her. The rest of the contractual provisions are, in It should be noted that in Romania there are principle, freely negotiated between the certain pre-emption rights or other statutory parties: conditions precedent, transfer date, (imposed by law) limitations potentially risk allocation (with certain legal exceptions), applicable in relation to some specific guarantees, payment date, etc. categories of real estate properties (outside city limits, agricultural). Examples include pre- III. Conclusion of the Purchase Agreement emption rights of the State, of the tenants of Validity requirements on the form of the agricultural land or public service providers purchase agreement. All in rem rights over real (public schools, hospitals), neighbours of estate (including ownership) must be forested land, etc. Land near the borders may transferred through authenticated agreements be sold only with the prior approval of the concluded before a Romanian notary public, Ministry of Defence. The rules for the exercise under the sanction of absolute nullity of the of the pre-emption right have been recently agreement. The notary public may be chosen changed (the amendment entered in to force by either of the parties. An agreement relating on 13th October 2020) and they have become to rights in rem over a real estate property more cumbersome. Currently, due to the fact located in Romania must be governed by that the methodological norms for the Romanian law. implementation of the recently enacted law

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[BUYING AND SELLING REAL ESTATE IN ROMANIA] 157 have not been published, the sale of any The “right of ownership” gives the owner the outside city limits agricultural land is blocked. It power to possess, use and dispose of the is expected that the norms shall be published in property. the early 2021. A. Acquisitions

IV. Transfer of Ownership A real estate deal in Romania may be As a general rule, the property right transfers made either (i) by way of an asset deal automatically upon the execution of the (direct acquisition of an asset) or (ii) by agreement, unless the parties have otherwise way of a share deal (acquisition of the agreed (e.g., until fulfilment of conditions shares in the asset’s holding entity). precedent). Share deals are often preferred to asset The registration in the Land Book is made for deals due to cost and tax optimization opposability purposes only and is to be carried purposes, as they are not subject to the out by the notary public following the fees and costs entailed by an asset deal, execution of the agreement. as they do not entail the transfer of Certain rules shall come into effect after the ownership of the real estate. However, according to Law 175/2020 entered into finalization of the cadastral works on all land in th Romania. Specifically, once the entire cadastral force on 13 October 2020, the company works for all land in Romania will be finalized (a who owns outside city limits lands and date which is difficult to estimate at this stage), which sells enough shares to ensure the registration of the property right transfers control over the company, shall pay a tax with the relevant Land Books shall no longer be of 80% from the difference between the performed for opposability purposes only but value of the lands calculated based on shall become constitutive of a right (i.e., the notarial official valuation (at the time of transfer will operate as of and on the basis of the acquisition, respectively at the time of the registration with the relevant Land Book). the sale of the shares). This rule is applicable if the sale of the control V. Agents package takes places before the Both parties may use a real estate agent. In anniversary of 8 years since the general, the agents conclude mainly exclusivity acquisition of such lands and such lands agreements. represent more than 25% of the company’s assets. The general commission on the market today is approximately 1-3% (depending on the value of B. Residential Property the transaction). The most frequent forms of ownership of VI. Forms of Ownership residential property are: In general, Romanian and EU 1. Sole ownership: The owner is the only individuals/entities may own land in Romania. person authorized to control and While there may be some restrictions for other dispose of the land in question. foreigners to own land in Romania, the practice 2. : More than one for foreign investors is to incorporate a owner over the property; there are Romanian legal entity which has no restriction two types: on owning lands.

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(a) joint ownership (ownership Shareholders may also be by two or more persons appointed as directors. holding undivided – No restrictions on citizenship or undetermined – shares residency apply for directors or over the property – such as shareholders. ownership by spouses); no deed may be concluded 2. Formation without the consent of the The main steps for the other co-owner. establishment of an SRL are: (b) co-ownership (ownership a. Applying for and obtaining by two or more persons reservation of the SRL’s holding determined shares trade name, over the property) which, in turn, can be ordinary co- b. Choosing a Registered ownership (e.g., two Office, buyers acquire 50% each of c. Drafting and submitting the a property) or forced co- SRL’s constitutive ownership (e.g., forced co- documents to the Trade ownership of the owners of Registry, and apartments in a building d. Subscribing the share over the common parts of capital. a building – stairs, lobby, elevator, rooftop, etc.) – An SRL may be also deeds may be concluded incorporated by a sole by each co-owner for its shareholder with some share of the property restrictions: C. Commercial Property (i) the shareholder may not be a sole shareholder in Owners of commercial property are most another company; and frequently legal entities. The most commonly used entities under Romanian (ii) the sole shareholder is not law are joint-stock companies (SA) and a legal entity which, in turn, limited liability companies (SRL). has a sole shareholder i. Limited Liability Company – SRL Timing: In principle, after all documentation is submitted, 1. Legal Entity incorporation is completed SRLs are the most commonly used within three (3) business days vehicles. as of the filing of the An SRL is managed by directors registration with the Trade who act under the control of the Registry (if no other issues general meeting of shareholders. arise and no additional documents are requested).

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3. Costs of Formation one or more The administrative fees are managers; approximately RON 1200 (ii) or by a supervisory (approximately EUR 250). board and a 4. Minimum Registered management board Capital (two-tiered management). The minimum share capital is RON 1. The board of directors, as well as the 5. Limited Liability supervisory board, The shareholders are liable for must hold quarterly the obligations of the company meetings. up to a limit equal to the 2. Formation amount of their contributions to the company’s subscribed The main steps of the capital. establishment of a joint-stock company ii. Romanian Joint-Stock are: Company – SA a. Applying for and 1. Legal entity obtaining The minimum number reservation of the of shareholders of an joint-stock SA is two. company’s trade name, An SA is more complex than an SRL. The b. Choosing a supreme corporate Registered Office, body is still the general c. Drafting and meeting of submitting the shareholders as in the joint-stock case of an SRL. company’s The management of a constitutive joint-stock company is documents to the carried out: Trade Registry, and (i) either by a director d. Subscribing the or a board of share capital. directors (one- Timing: Once all of the tiered documentation is management) – the available, incorporation board of directors is completed within may delegate the three (3) business days management to as of the filing of the

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registration with the (i) public notary fees for authenticating Trade Registry so long the SPA – up to 0.5% of the purchase as no issues are price, identified/additional (ii) Land Book registration tax – 0.5% of documentation the purchase price. required. In practice, usually the purchaser bears all of

3. Minimum the fees and taxes of the sale, but the parties registered capital may agree to split the costs between them. The minimum share The seller usually pays the sale tax for sale of capital is RON 90,000 immovable property. (approximately EUR VAT shall apply to the purchase price if the 20,000). land might be buildable (according to the 4. Liability urbanism certificate) or new buildings are The shareholders are being sold (or parts thereof). Standard VAT is 19% but there are special VAT percentages in liable for the st obligations of the some cases (e.g., starting with 1 January company up to a limit 2021 - 5%for a natural-person buyer of a equal to the amount of property under Euro 140,000, and with a their contributions to surface of maximum 120 sqm., provided that the company’s the property is fully constructed – the buyer subscribed capital. can immediately move in). Nevertheless, if both the seller and the buyer are registered VII. Financing for VAT purposes, VAT is not effectively paid Financing is typically secured by way of bank as the reverse charge mechanism is applied. loans. In most cases, banks will require B. Share deals: Related taxes securities (collateral) from the borrower. If the shares are sold at their nominal value, Securities or collateral may consist of one or no special taxes shall be imposed. However, if more of the following: mortgage of immovable the shares are sold at a price higher than their assets (typically, but not necessarily the real nominal value, the seller shall pay estate which is bought with the loan); mortgage profit/revenue taxes on the difference of movable assets (bank accounts, receivables, between the nominal value and the value of shares, cars, etc.), assignment of receivables for the transaction. guarantee purposes or autonomous bank guarantees. Also, certain fees must be paid to register the transfer of the shares with the Trade Registry VIII. Payments and Costs. Taxes Involved in (approximately EUR 200). Real Estate Transactions IX. Examinations Before Closing A. Asset deals: Related taxes The buyer should make the relevant The following fees are due in an asset deal examinations in order to determine any involving real estate: deficiencies in the property right or in the property itself.

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Pursuant to Romanian law, a legal conclusion The seller should disclose any relevant hidden on whether there is a valid title to certain real defects in the property itself or in the property estate may be given only after examination of rights. the whole chain of transfers in respect of the If the buyer intends to build on the land, particular real estate. There is no rule under verifications should be made in order to assess Romanian law that the last registered owner of the existence of restrictions on building in that the real estate is its true owner/holder. The area (general, zonal, and detailed urbanism registered owner is only presumed to own a plans). Note that a permit is, in most cases, valid title until proven otherwise by an needed for building, as well as for demolition. interested person. If any of the current owner’s/holder’s predecessors’ rights over If the acquired land is agricultural, its type may particular real estate suffer from any defect in be changed to buildable, in order to be able to title, such defect survives the subsequent right actually build on it, by requesting modifications transfer and affects the right of the current to the zonal urbanism plans – if the land is owner/holder. outside the city limits. However, in consideration of the Law 175/2020, which Thus, under Romanian law, if the ownership entered into force on 13th October 2020, this title over real estate is cancelled, all operation has to be carefully assessed as it subsequent acts of the ownership transfers might be extremely difficult to amend the might also be cancelled by Romanian courts, at zoning urbanisms plans and to move the land the request of interested persons. within city limits. If the land is within city limits, Cancellation of the subsequent acts may be modification of the zonal urbanism plans is requested at any time, no statute of limitations made automatically when requesting a building is provided by Romanian law in such cases, in permit. consideration of the fact that property right is In the light of the aforementioned, it is strongly guaranteed under the Romanian Constitution. recommended to undertake a due diligence Nevertheless, according to the Land Book Law, investigation prior to proceeding with real if no deficiency arises from the analysis of the estate investments in Romania. relevant Land Book, a third party may no longer be deregistered after three years from the moment the last owner was registered in the Land Book. This provision is applicable only if the third party is at least the third owner registered for that particular Land Book – i.e., if the Land Book is newly opened, this should not apply, and the third party may be deregistered at any time. Consequently, in practice, as the safeguarding of concluded transactions is preferred, it becomes more difficult to amend the content of the Land Book and implicitly, to challenge the ownership title once the aforementioned conditions are met.

ILN Real Estate Group – Buying and Selling Real Estate Series

162 Fall 20

INTERNATIONAL LAWYERS NETWORK

LIDINGS LAW FIRM Buying and Selling Real Estate in Russia

ILN REAL ESTATE GROUP

I L N REAL ESTATE GROUP

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER RUSSIAN LAW I. Types of real estate 1. Public ownership: • land plots; − comprising • buildings, facilities, and other objects ▪ federal ownership (real estate closely connected with land (i.e. objects owned by the Russian Federation); that cannot be removed without ▪ ownership of constituent entities of detriment to their designation); the Russian Federation; • constructions or developments under − municipal ownership; construction; − non-delimited public ownership (i.e., • objects qualified as real estate by public ownership, which is not explicitly operation of law (registrable aircraft, attributed to the ownership of certain ships, inland-waterways vessels); particular public owners – federal or • residential and non-residential regional). premises; Land plots in state or municipal ownership can • car parking space. be sold only by tender held in the form of auction or without tender in certain cases Land plots and buildings and constructions provided by the law (generally when land plots constitute two separate types of real estate provided for non-commercial, personal, objects, according to Russian law. In practice, agricultural purposes). this means that a land plot and a building located on it represent two separate real estate If title to the public non-delimited land plot is items and can be owned by different parties not registered, it does not prevent disposal of and even on different titles (for example, right such land plot. Generally, such land plots are of ownership to the building and right of lease disposed by local authorities, executive to the underlying land plot owned by another authorities of constituent entities of the party). State registration of title to buildings, Russian Federation or federal executive constructions on the one hand and underlying authorities in cases provided for in the law. land plots on the other hand, is carried out 2. Private ownership: separately, as well. However, there is a principle of “unanimous destiny of land plot − individual ownership; and objects closely connected to it” commonly − co-ownership (simultaneous enjoyment known in Russian law according to which the of right of ownership to the same real building inseparably follows the underlying land estate item by several persons): plot (see for more details section VII). ▪ joint ownership – co-owners enjoy II. Right of ownership to real estate (title to right of ownership to the real estate real estate) item in whole, without the There are the following types of real estate opportunity to separate the co- ownership: owner’s shares;

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▪ shared ownership – each co-owner and objections in respect of registered has precise separable share of rights; ownership to the real property. − data on existence of decision on withdrawal III. Data and documents on titles to real estate of real estate item for state or municipal Prior to making a real estate transaction, needs. parties are supposed to obtain authentic and A request for provision of extract from the up-to-date information on the real estate item Register can be filed with the Rosreestr in hard that is subject to transaction, evidence of copy in person or by post, in electronic form by existing titles, encumbrances, and other e-mail or by filling up a request form on the property details. website of the Rosreestr or in hard copy filing Right of ownership and other property rights to with the multifunctional center. The extract real estate, encumbrances of these rights, their from the Register can be provided in hard copy commencement, transfer, and termination are or in electronic form as well, and the respective subject to state registration in the Unified State form should be specified in the request. An Register of Real Estate (hereinafter – the extract shall be generally provided by the “Register”). It includes the following Rosreestr within 3-5 days from the receipt of information: the real estate objects; rights on request (3 for filing directly with the Rosreestr real estate; protected and special-use areas; office and 5 for filing with the multifunctional register books; tax map; document journals. center). The Register is managed by the Federal Service Documents confirming title to real estate for State Registration, Cadastre and registration. Cartography (hereinafter – the “Rosreestr”). IV. Sale and purchase of real estate The official website of the Rosreestr - 1. Preliminary agreement https://rosreestr.ru. Reference information on the real estate item such as location address, Prior to entering into the main sale and area, cadastral number, existence of registered purchase agreement (hereinafter – “SPA”) the rights and encumbrances is available to any parties are entitled to conclude a preliminary third party on the website of the Rosreestr. agreement. Upon the request of interested party, the Under a preliminary agreement, parties agree following information can be provided in an to conclude the SPA in the future on terms extract from the Register: specified in the preliminary agreement. − description of real estate item, including its A preliminary agreement should contain location address, area, cadastral number, conditions which allow the determination of a and permitted use; subject matter and other material terms of the SPA and should be concluded in the form − data on title holders; provided for the SPA. − data on registered encumbrances; A preliminary agreement should specify a term − data on third parties’ claims in respect of for entering the SPA. If no term is specified, the real estate items, legally asserted claims, SPA should be concluded within one year from

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[BUYING AND SELLING REAL ESTATE IN RUSSIA] 165 the date of conclusion of the preliminary Other important provisions: agreement. − Payment conditions Should one party to the preliminary agreement If payment of price under the SPA occurs after fail to conclude the SPA, the other party is the transfer of real estate to the purchaser (sale entitled to apply to the court to enforce on credit), additional provisions such as method, conclusion of the SPA by the other party. The terms, and amount of payment should be party failing to conclude the SPA shall provided for in the SPA. In case a real estate reimburse damages resulting from such failure item is sold “on credit,” it shall be considered to the other party. mortgaged in favor of the seller until the full 2. SPA price is paid by the purchaser, unless otherwise Under an SPA of real estate, a seller is obliged provided by the SPA. to transfer a real estate item (land plot, building, − Provisions in respect of real estate transfer construction, apartment, or other real estate) The seller is obliged to transfer the real estate to the ownership of a purchaser, and the item to the purchaser, and the purchaser is purchaser is obliged to accept the real estate obliged to accept the real estate item from the item and pay a certain sum of money (price) to seller. The transfer of real estate by the seller the seller. and its acceptance by the purchaser should be Material terms of the SPA: evidenced by a transfer and acceptance act − Subject matter of the SPA sighed by the parties. The risk of loss of the real estate item passes to the purchaser at the The SPA should provide for the data uniquely moment when the transfer and acceptance act identifying the real estate item that is subject is signed; until then, the real estate item is at to transfer to the purchaser under the SPA, the seller’s risk. including data on the location of real estate on a land plot or as a part of another real estate Form of the SPA: item. If no such data are specified, the SPA The SPA should be executed in writing by should be deemed not to have been concluded. means of drawing up one document signed by − Price the parties, otherwise the SPA is deemed invalid. Obligatory notarization of the SPA of The SPA should provide for the price of the real real estate is not provided for in the law. The estate item; otherwise, the SPA should be parties can notarize the SPA at their own will. deemed not to have been concluded. Rights to land plot when the − Specific provision for sale of residential building/constructions is being sold: premises Under the SPA of building, construction, or An SPA of residential premises should provide other real estate item, the purchaser along with for list of persons retaining rights to use such the title to such real estate item simultaneously premises after transferring them to the acquires rights to a land plot where such purchaser under the SPA with specification of building or construction is located, and which is such rights. required for their use.

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If a seller has a title to a land plot where real ▪ lease (with a term of more than a year); estate being sold under the SPA is located and ▪ mortgage; which is required for its use, the purchaser acquires a title to such land plot unless ▪ ; otherwise provided by the law. ▪ attachment; 3. Due Diligence ▪ pending court proceeding; Within the due diligence procedure, the ▪ preservation order. following legal risks are subject to examination, based on the following documents: 4. Warranties − Legal risks in respect of parties’ powers to The party provided untrue warranties on make transactions: circumstances significant for conclusion of the SPA, its performance or termination (including ▪ Constituent documents; in respect of subject matter of the SPA, powers ▪ Registration certificated; to conclude the SPA, compliance of the SPA with the applicable law, existence of necessary ▪ Powers to sign an SPA; licenses and permits, its financial condition or ▪ Necessary approvals, permits and in respect of third party) shall compensate to consents; the other party on its request damages resulted from the untruthfulness of warranties or pay a − Legal risks in respect of title to real estate penalty provided by the SPA. The party relying item: on untrue warranties also has a right to ▪ certificate of state registration of title; unilaterally terminate the SPA unless otherwise ▪ extract from the Register; provided for in the latter. ▪ documents of title (for example, SPA); Typical warranties in respect of real estate are the following: − Legal risks in respect of prior owners: − the seller is the registered sole owner of the ▪ documents - grounds for acquisition of real estate item; titles by all prior owners; − the real estate item does not have any − Legal risks in respect of compliance of real encumbrances; estate item with the purchaser’s requirements − the condition of the real estate item does not have any quality defects and does not ▪ act on ranging of a land plot within need any repair works; particular category of land; − there are no pending court proceedings in ▪ land management file/demarcation respect of the real estate item; plan; − all governmental approvals and permits for ▪ expert findings and competent construction of the real estate item have authorities’ reports; been obtained; − Legal risks in respect of existing encumbrances:

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− the seller has obtained all corporate prove that the purchaser knew or should have approvals for acquisition and disposal of the known about these grounds. real estate item; The purchaser’s liability − there are no third parties’ claims in respect Should the purchaser fail to accept the real of the real estate item. estate item, the seller has a right to: 5. Parties’ liability under the SPA − request the acceptance of the real estate The seller’s liability item by the purchaser; Should the seller fail to transfer a real estate − unilaterally terminate the SPA. item to the purchaser, the latter has a right to: Should the purchaser fail to pay the purchase − unilaterally terminate the SPA; price the seller has a right to: − request the transfer of the real estate item − request the payment of the purchase price; through a court order; − unilaterally terminate the SPA. − claim for reimbursement of damages. Contractual liability Should the seller transfer the real estate item of The seller and the purchaser can agree upon inadequate quality to the purchaser, the latter contractual liability for violation of particular has a right at its own choice to: provisions of the SPA. − claim for pro rata decrease of the purchase 6. Share deal price; Another method for acquiring real estate is a − demand the seller removes the defects at share sale – acquiring a share in a company its own expense within a reasonable term; holding title to real estate. A share deal can be − claim for compensation of the purchaser’s performed by acquiring shares in a Russian joint expenses resulted from removal of defects. stock company or by acquiring participatory interest in a Russian limited liability company. In case of substantial non-compliance with the In a share deal, the purchaser acquires the quality requirements, the purchaser has a right target company with all its rights, obligations, to unilaterally terminate the SPA and claim for and liabilities. repayment of the purchase price from the seller. Real estate acquisition through a share deal The seller shall transfer the real estate item may be preferable for the purchaser due to tax free of third parties’ rights unless the purchaser and other advantages of such a transaction. agrees otherwise. Should the seller violate said Sale of shares in a joint stock company or obligation, the purchaser has a right to: participatory interest in a limited liability − unilaterally terminate the SPA; company is not subject to VAT according to Russian legislation. Besides, share sales can be − claim for decrease of the purchase price. governed by foreign law selected by the parties Should the property be seized from the to transaction, while asset deals are subject purchaser on grounds that existed before only to Russian law. A share deal allows parties entering the SPA, the seller shall compensate to avoid state registration of transfer of real damages to the purchaser unless they can estate items belonging to the target company.

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V. State registration absence of their state registration in the Transfer of title under the SPA is subject to Register. state registration. State registration is normally VI. Restrictions on sale of land done within 7-9 working days from receipt of Russian law provides for several restrictions on documents required for state registration (7 for ownership of particular types of real estate: filing directly with the Rosreestr office and 9 for filing with the multifunctional center). − Land plots taken out of circulation and owned by the Russian Federation cannot be To register the transfer of title, the parties shall privately owned and subject to real estate submit the following documents to the transactions (land plots occupied with state registration authority: nature reserves and national parks; facilities − an application for registration; of the Armed Forces of the Russian Federation, other armed forces, the Federal − an SPA or agreement/document – the Security Service, the state guard authorities; ground for title transfer; nuclear facilities and storage facilities for − documents confirming the applicants’ nuclear and radioactive materials, etc.); authority (corporate documents, power of − Land plots of limited circulation and subject attorney, etc.); to state or municipal ownership cannot be − confirmation of payment of state duty; privately owned unless otherwise provided − corporate and other approvals (if for in the law (land plots within specially applicable). protected territories, forest lands; lands occupied with space infrastructure objects; Should one party to the SPA avoid state lands underlying the sea and river ports, registration of the SPA, the other party has a hydro-technical utilities, etc.). right to apply to court to render a decision on state registration of title transfer. The party Certain restrictions on ownership of land are avoiding state registration of the SPA without a provided for in respect of foreign citizens: reasonable basis shall reimburse damages − Foreign individuals, apatrides and foreign resulting from such avoidance to the other legal entities cannot have a title to land party. plots located at the border territories the The purchaser acquires the right of ownership list of which is established by the President from the moment of state registration of title of the Russian Federation and at other transfer. territories as provided for in the law (within the borders of sea ports); Now there is a project of law approved by State Duma in 2nd reading establishing 1 (one) year − Foreign individuals, apatrides, foreign legal term for the owner of title on real estate to entities and legal entities with a share of register his rights on property in Rosreestr. more than 50% belonging to foreign These provisions will not apply if rights to real individuals, apatrides and foreign legal estate arise on the grounds established in the entities cannot have a title to land plots Civil code of the Russian Federation. According classified as agricultural lands and can only to the project of law rights to real estate possess such land plots on lease terms. objects will be recognized as valid in the

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VII. The principle of “unanimous destiny of − Value added tax (VAT): land plot and objects closely connected to The VAT is payable on sale of real estate at the it” rate of 20 % (comes into force as of January 1st, Despite the legal distinction made between 2019) of full purchase price. land plots and buildings located on them and VAT is not imposed upon sale of residential considering them as separate property interests, houses or premises and shares in such houses one of the basic principles in the sphere of land and premises; law is the principle of “unanimous destiny of land plot and objects closely connected to it” ▪ sale of land plots and shares in land plots; which is as follows. ▪ sale of shares in charter capital of A person, when acquiring a title to a building or companies holding title to real estate. construction located at the land plot belonging *** to the owner of such building or construction, About the firm acquires the title as well to such land plot necessary for use of building or construction, Lidings is a leading independent national law firm with a unless otherwise provided by the law. broad base of clientele in Russia and the CIS. The firm advises its predominantly international clients from its A person, when acquiring a title to a building or two offices in Moscow and St Petersburg. Since its launch construction located at the land plot belonging in the mid-2000s, the firm has achieved impressive growth and built a noteworthy reputation. Lidings has to another person, acquires the right as well to followed a consistent strategy of growth to become a use the respective part of such land plot high-quality provider of legal services with a clear focus necessary for use of building or construction on to advise almost exclusively international businesses the same terms and to the same extent as prior active in Russia and the CIS. It has also been successful in owner did. establishing sector expertise in certain industries where global investors play an important part, such as An owner of building or construction located at pharmaceuticals and life sciences, automotive, energy, the land plot belonging to another person has a FMCG, and aviation. preemptive right to buy or lease such land plot. The firm’s significant footprint, accompanied by a growing degree of brand reputation in the domestic Foreign individuals, apatrides, foreign legal markets, has been recognised by a series of awards from entities – owners of buildings or constructions independent global market analysts like The Legal 500 located at the land plot belonging to another EMEA, Chambers and Partners, ILFR1000, Martindale- person, have a preemptive right to buy or lease Hubbell, Who is Who Legal, and Best Lawyers. such land plot. However, the President of the Areas of practice Russian Federation can provide for the list of Antimonopoly, banking and finance, bankruptcy, and buildings and constructions that are not subject restructuring, corporate and M&A, criminal defense, to the aforementioned rule. dispute resolution, employment, government relations, , real estate and construction, and VIII. State duties/transfer taxes payable on the tax and customs. purchase of real estate

− State duty: State duty is payable for state registration of title transfer in the amount of 22 000 Rubles for legal entities and 2000 Rubles – for individuals.

ILN Real Estate Group – Buying and Selling Real Estate Series

170 Fall 20

INTERNATIONAL LAWYERS NETWORK

MILLER SAMUEL HILL BROWN Buying and Selling Real Estate in Scotland

ILN REAL ESTATE GROUP

ILN REAL ESTATE GROUP

[BUYING AND SELLING REAL ESTATE IN SCOTLAND] 171

KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER SCOTTISH LAW 1. Introduction aspect of a purchase/sale and conveyancing transaction. In these notes, we have attempted This guide applies to real estate in Scotland only. to highlight only the main topics. Each transaction has its own peculiarities and 2. Tenure potential problems. We shall be pleased to Real estate, both commercial and residential in answer more detailed questions and to advise Scotland may be either of the following: as required. Freehold INDEX Freehold real estate is the absolute property of Section Subject its owner, subject to any rights and title 1 The Survey burdens or servitudes in favour of third parties. These may affect how the real estate is used. 2 Home Report Leasehold 3 The Offer and Acceptance Leasehold real estate is held under a lease for a 4 The Title Deeds and fixed period of time, usually subject to the Conveyancing payment of rent and the performance of 5 Land and Buildings Transaction obligations specified in the lease. The terms of Tax the lease will dictate whether or not the leaseholder is entitled to transfer its interest to 6 Money Laundering Regulations a third party or whether it can sublet either the 7 Insurance whole or part of the real estate. 8 General 3. Know your client (KYC) 1. THE SURVEY It is necessary to carry out due diligence on the purchasing entity to comply with UK and Ideally a purchaser should always obtain the European-wide Anti-Money Laundering most detailed survey report on the property to Regulations. The documents which are required be purchased. Better to be “safe than sorry.” will vary depending on the purchasing entity, While a prospective purchaser is entitled to but they will need to establish the identity of instruct their own report, generally, they may the purchaser and its ultimate beneficial owner. choose to rely on the home report referred to Actual requirements are set out at greater in the following section. length in Section 4. 2. HOME REPORT 4. Guide to purchase and sale of Residential With a very limited number of exceptions (for Property example new build properties) all homes (all We are frequently asked by purchasers and types) that are advertised for sale in Scotland sellers to answer many basic and wide-ranging from 1st December 2008 require a home report. questions concerning all types of residential This is a statutory requirement. The report property and investments. It is difficult to consists of a pack of documents that will report produce a comprehensive guide covering every on the condition of the property. It will contain

ILN Real Estate Group – Buying and Selling Real Estate Series

[BUYING AND SELLING REAL ESTATE IN SCOTLAND] 172 a valuation of the property, and a report on the We always advise that a prospective buyer home’s energy efficiency. The responsibility for should obtain the most detailed Report providing the Home report rests with the seller, possible on a property, before proceeding with who will be responsible for the costs involved in any purchase and should be comfortable and obtaining the information required and satisfied with the terms of any home report or producing the report. A prospective purchaser survey instructed directly, before entering into will be able to rely on its contents and is a binding contract for the purchase of any entitled to ask the seller for a copy of the property. report. The report comprises three documents: 3. OFFER AND ACCEPTANCE – “MISSIVES” (1) THE PROPERTY QUESTIONNAIRE When a written offer is submitted, that itself This is completed by the seller and contains does not create a binding contract between the useful information helpful to a purchaser, for seller and purchaser. The offer for the property example, details of any alterations to the will, if generally acceptable to the seller as to property, the council (local authority) tax purchase price and entry date, be accepted banding, any managing agents’ details, and usually with legal qualifications. The offer, and details of repairs affecting the property. any qualifications made by the two solicitors on behalf of their respective clients as part of the (2) SINGLE SURVEY contract negotiations and the final acceptance Although instructed by the seller, the survey is will together constitute a binding contract prepared by a and will between the seller and the purchaser (called report on the valuation of the home and its “the missives”). Only after the final acceptance condition. A purchaser may rely on that survey is issued will there be a binding contract and and providing the purchaser is happy with the “missives will be concluded.” The contract must terms of that survey report and providing the be written. Verbal agreement is not sufficient purchaser’s lender (if any) is also satisfied with to conclude a contract. It should be the terms of that survey report, then a understood that individual purchasers and purchaser may feel it unnecessary to obtain sellers do not usually sign the missives and the and pay the cost of an independent report. contract is made binding by the signature of the (3) THE ENERGY REPORT purchaser’s and seller’s solicitors. Again, this is prepared by a chartered surveyor 4. TITLE DEEDS AND CONVEYANCING and will report on the energy efficiency of the Once there is a binding contract, the two property, its environmental impact and if solicitors (one for the seller and the other for appropriate will suggest ways to improve the the purchaser) will carry out the necessary property’s energy efficiency. conveyancing formalities and prepare the legal Home reports dramatically change the level of documentation. The purchaser’s solicitor will information that a seller is legally obliged to receive and examine all the relevant Title Deeds have available when selling their home. The of the property and will check the conditions, home report needs to be available to be which apply to ensure that there are no exhibited to prospective purchasers before a unusual and exceptionally oppressive or property is marketed for sale. onerous conditions. They will check to ensure that Local Authority Consents are in place for

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[BUYING AND SELLING REAL ESTATE IN SCOTLAND] 173 any structural or other alterations to the produced, then we may have to report the property requiring consent. The existence of transaction to the relevant authority. We would any structural alterations should be highlighted also likely withdraw from acting. We will need in the Survey/Home Report. During the to see the original of one of the following: UK Conveyancing process, checks are made to passport, resident’s permit issued to EU ensure, for example, that there are no previous nationals, UK (or EU equivalent) photo driving Securities or mortgage deeds affecting the license, Inland Revenue Tax Notification, property, which will remain undischarged after firearms certificate, or suitable ID from client the purchase has been completed, and to who reside outwith the EU and the original of ensure that there are no court orders (such as a one of the following: bank statement, utility bill, Bankruptcy Order) which prevent the seller council tax bill, mortgage statement, land from granting a good and marketable clear title registry confirming house purchase, to you. Similar procedures operate in reverse in confirmation of house purchase from other the case of a sale. The seller’s solicitors will solicitor, tenancy agreement or confirmation of answer any reasonable observations made on address from Electoral Register, or the the conditions in the title deeds and searches. equivalent from clients residing outwith the EU. Clients from the EU and further afield will also The purchaser’s solicitor will prepare the be required to provide information about the conveyance of title deed in favour of the source of funds to be used for their purchaser, and after settlement of the purchase. If the purchaser is buying or selling transaction takes place, ensure that the purchaser’s title is registered in the Land as a limited company, partnership, or other Registers. The registration system is electronic, body, but not as an individual, we still need to and all deeds are now held electronically by the carry out such money laundering checks, as are Scottish Land Registry. required by the laws in force at the time. We will supply prospective clients with details of 5. LAND AND BUILDINGS TRANSACTION TAX the current requirements at the outset of the (formerly Stamp Duty) transaction. This tax has been recently introduced by the 7. INSURANCE Scottish Government and replaces Stamp Duty. It is based on the price of the property We recommend that buildings insurance on the purchased, and the level of tax has been property and if relevant life policies on increased for more expensive properties. purchaser’s lives are effected (provided proper Please ask us for a calculation of the tax advice is taken and given) and, subject to that, payable when considering purchasing a put into force as soon as missives are property in Scotland. concluded in any purchase because from that date a purchaser will be under a legal 6. MONEY LAUNDERING REGULATIONS obligation to purchase the property and pay Every solicitor in Scotland must comply with the purchase price. The Law Society of Scotland’s money 8. GENERAL laundering regulations. This means that if we have not acted for a client in the past, we must Hopefully, we have covered some of the more in every case obtain verification of identity. If relevant issues that may arise during a the documentation required cannot be residential sale or purchase transaction. We did

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[BUYING AND SELLING REAL ESTATE IN SCOTLAND] 174 not set out in these notes to answer every question but have simply dealt with some of the most often raised questions. 5. Purchase/Leasing of Commercial Property The principles of commercial property practice in Scotland are not dissimilar to English practice. There will be differences in terminology, legal variances where the actual law differs in each country, and the Land and Buildings Transaction Tax payable. We would refer you to Fladgate LLP’s excellent guide for general information, but should you have a specific query relating to purchase or leasing in Scotland generally, or indeed any planned purchase, sale, lease, or development of commercial property in Scotland, please refer your query to us and our experts will be pleased to assist you.

ILN Real Estate Group – Buying and Selling Real Estate Series

175 Fall 20

INTERNATIONAL LAWYERS NETWORK

GOODWINS LAW CORPORATION Buying and Selling Real Estate in Singapore

ILN REAL ESTATE GROUP

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER SINGAPOREAN LAW

INTRODUCTION lease may grant a lease of 30 years to a sub- lessee), the creation of some estates or There are two systems of in Singapore: registration under the Registration interests may require the prior written approval of Deeds Act, known as “unregistered land”, from the relevant authority. and registration under the Land Titles Act, All land may be reclaimed by the State under known as “registered land”. Currently, most the Land Acquisition Act. land in Singapore has been converted and REAL ESTATE OWNERSHIP brought under the latter registration system. As such, most of this article will be concerned only Manner of Holding with land registered under the Land Titles Act. Property in Singapore may be held in sole or The entity overseeing the land registration in joint ownership. Joint ownership can come in Singapore is the Singapore Land Authority the form of joint tenants or tenants-in-common. (“SLA”). In joint tenancy, the joint owners own the Other relevant legislation governing real estate whole interest in the property and there is no law in Singapore include the Land Titles (Strata) separation in shares. Conversely, tenants-in- Act, the State Lands Act, the Land Acquisition common own the same property in distinct and Act, the Planning Act, the Residential Property separate shares. The right of survivorship Act, and the Housing and Development Act. applies only to joint tenancy, meaning the survivor will eventually own 100% of the ESTATES & INTERESTS IN LAND property. Land may be held in different ways such as: It is possible to convert one manner of joint i) estates in fee simple (or freehold); holding to the other. This is usually done by ii) estates in perpetuity; and way of registering with SLA a declaration which has been signed before a Commissioner of iii) leases (typically, 99-year leasehold); Oaths. Both estates in fee simple and in perpetuity are Public Housing where a person holds the land indefinitely. However, the latter is subject to covenants and Public housing in Singapore is subsidised and conditions such as the payment of quit rent. comes under the purview of the Housing and Development Board (“HDB”) and are more Leases are for definite terms and are also commonly known as “HDB flats”. Currently, subject to covenants and conditions. Leases are more than 80% of Singapore’s population live in distinguishable from tenancy agreements in HDB flats. that the latter are not considered disposals of land which require the approval of the The eligibility criteria for HDB flats are generally President. assessed based on Singapore citizenship, income, age, family nucleus and non-ownership While smaller estates or interests can be carved of other residential property. A person who out of larger estates (e.g., the owner of an owns a private property (whether in whole or estate in fee simple may grant a lease of 99 in part) is precluded from purchasing a HDB flat years to a lessee, or the owner of a 99-year unless he sells the private property.

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Executive Condominiums (“EC”) are a hybrid with the transaction, it is usually a term of the public housing property under the Executive Option that the initial sum paid shall be forfeit Condominium Scheme Act which resembles to the vendor. private condominiums with security and The purchaser will confirm the transaction by amenities such as swimming pools and countersigning the Option and paying the clubhouses. Strict eligibility criteria similar to remaining deposit amount to the vendor or the that for normal HDB flats are imposed. ECs may vendor’s appointed lawyer as a stakeholder – only be sold after the expiry of a minimum this is commonly known as “exercising the occupation period of five (5) years and until the th Option”. An exercised Option is considered the tenth (10 ) year, only to Singapore citizens or instrument effecting the sale and purchase of permanent residents, after which, they may be the property and no further agreement is sold like any other private condominium. required to capture the intention of the parties. Planning, Zoning & Use In some cases where the parties are certain of Planning and control of use of land and its the transaction, they may decide to enter a Sale development fall to URA under the Planning Act. and Purchase Agreement immediately. Land in Singapore can be zoned as residential, Completion (or closing) of the sale and commercial, or industrial, each type of zoning purchase typically takes place within 8 to 12 carrying its own set of rules for ownership, use weeks from the time of exercising the Option. and development. Permission from URA or such This period is to allow the purchaser to other relevant authorities may be required for complete the investigation of title and deviations such as change of use of properties, government requisitions on the property. This subdivision of land, etc. period also allows the purchaser to arrange for LEGAL FORMALITIES IN ACQUISITION financing of the purchase either through his Option to Purchase & Sale and Purchase own funds or a bank mortgage. Agreement Properties under Development The Civil Law Act requires agreements for the Developers of both residential and non- sale and purchase of property to be in writing residential properties are subject to specific and signed by the parties involved. rules under the Housing Developers (Control and Licensing) Act and the Sale of Commercial The majority of sales and purchases of property in Singapore are initiated with the issuing of an Properties Act respectively which are designed Option to Purchase (“Option”) by the vendor to to protect purchasers. the prospective purchaser in exchange for an Developers of residential properties are initial sum paid by the prospective purchaser to required to be licensed. The sale of property by the vendor which is typically 1% of the developers of residential and non-residential purchase price. properties alike are subject to terms and An Option is used to reserve the property for conditions prescribed and regulated by the an agreed period, typically 14 days, during relevant governing Act. which the prospective purchaser may confirm Registration whether he is proceeding with the transaction. A transaction of unregistered land is achieved In the event that he chooses not to proceed by way of a deed, signed, sealed, and delivered,

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[BUYING AND SELLING REAL ESTATE IN SINGAPORE] 178 and registered with the Registry of Deed to executed outside of Singapore, stamp duty is secure priority based on the date of registration. payable within 30 days. A penalty of up to four Tracing of title is important with unregistered (4) times the amount of unpaid duty may be land, and usually requires careful checking of at imposed for any late or non-payment. least 15 years prior to its registration to ensure For Purchasers a good root of title. A purchaser is liable for Buyer’s Stamp Duty Registered land relies on only one document of (“BSD”) and may also be liable for Additional title, on which every transaction affecting the Buyer’s Stamp Duty (“ABSD”). property is endorsed. Registration with SLA is required to effect the transfer of the interest in Prior to 20 February 2018, the BSD rate was up the land. Upon such registration, SLA will issue to 3%. With effect from 20 February 2018, BSD a certificate of title to the registered proprietor. rates differ for residential and non-residential properties, with the BSD rate for the former As most land in Singapore has now been going up to 4%, depending on the purchase converted to registered land, the change in price of the property. proprietorship of the property will be effected by the execution of the prescribed form. Upon Whether ABSD is payable depends on whether completion of the sale, this form is lodged and the purchaser is an individual or entity, the registered with SLA together with the pre- residency status of the purchaser and the existing version of the certificate of title. number of residential properties owned (in Following the registration of the form, SLA will whole or in part) by the purchaser prior to the update the land registry to reflect the new acquisition in question. proprietor(s) of the property and issue a new Prior to 6 July 2018, the ABSD rate was up to version of the certificate of title to the new 15%. With effect from 6 July 2018, the ABSD proprietor(s), and to reflect the mortgage or rate has increased to up to 25%. Where there charge, if any, over the property. are multiple purchasers, the ABSD payable will TAXES be computed based on the purchaser with the profile who attracts the higher rate. Stamp duty is payable on the acquisition or disposal of a property situated in Singapore, or It should be noted that there are also both. The amount of duty payable is computed remissions available such as remissions to based on the purchase price or market value of married couples of certain profiles and the property, whichever is higher. Such dutiable remissions under Free Trade Agreements. acquisitions or disposals include those by way Purchasers should also note that where a of gift or by way of a trust (where there is a mortgage is obtained to finance the purchase change in the beneficial ownership of the of the property, the mortgage is also subject to property), but do not include acquisition of a stamp duty of 0.4% of the loan amount, or if properties by way of inheritance under the an equitable mortgage, then 0.2% of the loan terms of a will or by effect of law. amount, both capped at a maximum stamp Stamp duty is payable within 14 days of the duty of S$500. date of the instrument effecting the acquisition or disposal of the property if the instrument is executed in Singapore. For instruments

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For Vendors An entity is considered a PHE if at least 50% of A vendor may be liable for Seller’s Stamp Duty its total tangible assets comprise prescribed (“SSD”) if the property is zoned as residential or immovable property pursuant to the Stamp industrial. Duties Act, being primarily residential properties. (i) Residential A qualifying acquisition occurs when equity Where a vendor had purchased the property interest in a PHE is acquired and the buyer concerned before 11 March 2017, he will be (together with any associates) already held 50% liable for SSD if he sells or disposes of the or more equity interest or voting power in the property before the expiry of four (4) years of PHE before the acquisition, or following the the date of his purchase. The applicable SSD acquisition, comes to hold 50% or more equity rate can go up to 16%, depending on the date interest or voting power in the PHE. on which the vendor had purchased the property and the holding period. A qualifying disposal occurs when the seller (together with any associates) holds 50% or Where the property was purchased on or after more equity interest or voting power in the PHE, 11 March 2017, the vendor will only be liable the equity interest being disposed of was for SSD if he sells or disposes of the property acquired on or after 11 March 2017 and is before the expiry of three (3) years from the being disposed of within three (3) years of its date of his purchase. The applicable SSD rate acquisition on a first-in-first-out basis. ranges from 4% to 12%, depending on the holding period. Currently, the applicable ACD rate for buyers on instruments executed on or after 6 July 2018 is (ii) Industrial up to 34%, while the applicable ACD rate for Where a vendor had purchased the property sellers is 12%. concerned on or after 12 January 2013, he will ONGOING COSTS OF PROPERTY OWNERSHIP be liable for SSD if he sells or disposes of the property before the expiry of three (3) years of Property Tax the date of his purchase. The applicable SSD Property tax on residential property is payable, rate ranges from 5% to 15%, depending on the whether owner-occupied or not, and at rates holding period. which follow a progressive scale. All other Additional Conveyance Duties (for companies properties are taxed at 10% of the annual value owning primarily residential properties) of the property (i.e., the estimated gross annual rent of the property if it were to be rented out). Additional Conveyance Duties (“ACD”) was introduced on 11 March 2017 and is applicable Property tax reliefs may be available in certain on top of the existing stamp duty for share scenarios such as where a residential property transfers to qualifying acquisitions or disposals is being demolished and rebuilt for subsequent of equity interests (e.g., shares or units) in owner-occupation, or where a non-residential property-holding entities (“PHEs”) that own property is owned and being used by a primarily residential properties in Singapore registered charity for charitable, public religious effected by instruments executed on or after 11 worship or educational purposes. March 2017.

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Conservancy & Maintenance Charges HDB properties are subject to monthly conservancy charges which are dependent on the relevant town council in charge of the property. Similarly, private condominiums and developments are subject to monthly maintenance fees payable quarterly to the relevant management corporation. PROTECTION OF LANDED RESIDENTIAL PROPERTY There is generally no restriction on foreign ownership of commercial or industrial property. However, transactions of restricted residential property (generally landed property) involving foreigners require prior approval by the Minister of Law in accordance with the Residential Property Act. Besides individuals who are foreigners, a foreign person is also defined in the Act to include a company incorporated in Singapore if the company has directors or members who are not Singapore citizens.

ILN Real Estate Group – Buying and Selling Real Estate Series

Fall 20

INTERNATIONAL LAWYERS NETWORK

PETERKA & PARTNERS Buying and Selling Real Estate in Slovakia

I L N R E A L ESTATE GROUP

ILN REAL ESTATE GROUP

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER SLOVAKIAN LAW

I. Types of Real Property Conveyance 7 drafted in the form of a notarial deed or (iii) the Transactions conveyance agreement is drafted by an a) Purchase of an undeveloped plot of land attorney-at-law (so called “authorisation”). b) Purchase of a developed plot of land A transfer contract may also be concluded in electronic form – by means of guaranteed c) Purchase of a building electronic signature. No signature certification d) Purchase of a flat is required in such case. e) Purchase of non-residential premises III. Contents f) Establishing a right to build8 a. Mandatory Content Note: • The identification of the legal transaction at hand (purchase, donation, etc.), place A separate form of acquiring real property and time of the legal transaction; (indirectly) is a share deal – acquiring control over the entity (see below) owning the real • Identification of the contracting parties; property through purchase of shares in such • The purchase price; entity. • An exact description of the real property, Conveyance of title to real property may also i.e., a description of the take the form of a donation (see below) or ▪ exchange contract (basically a mirrored land – the details of the cadastral purchase contract). territory, the exact plot number, the land register "C" or "E", the type of II. Formal Requirements land, and the area of the land; A contract for the transfer of real property ▪ building – the details of the (purchase, donation) must be in writing and the conscription number and the plot expressions of will of the parties must be number on which the building is contained in the same document. erected; The signature of the transferor (on a paper- ▪ apartment or non-residential form contract) must be certified by a notary or premises – details of the number, floor a municipality’s registry department. number, entrance number and co- Exceptions apply in cases where (i) the state, a ownership shares in common parts state body, a municipality, etc. is a party to the and common facilities of the house contract, (ii) the conveyance agreement is and on the built-up and adjacent land, the conscription number, and the plot number on which the building is 7 Please note that for the purposes hereof, we focus on erected; conveyance of real properties based on a contract (in contrast to other types of real property transfer, such as inheritance or in auction). Note: Under Slovak law, the land (solum) 8 The right to build is a right in rem related to a plot of land and the building (superficies) constitute consisting in a right to have an above ground or underground two distinct objects of ownership. Thus, structure whether yet existing or existing in future. It is not considered as real property per se under Slovak law. the land and the building built upon it

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may be owned by different persons. instance, the occupancy permit • Where the real property is jointly owned determining the purpose of the use of the by several owners, the ownership title real property; expressed as a fraction of the total (e.g., • Detailed representations and warranties 1/2) must be stated; regarding the current ownership and • Specific required contents in respect to a substantial characteristics of the real contract for transfer of a flat, such as property such as: access, connectivity to accession to the Agreement on supplies (gas, electricity, etc.); management of blocks of flats. • Determination of the technical condition b. Recommended Content of the flat based on expert appraisal with specification of the repairs to be carried • Specific payment terms reflecting, e.g., out within the next 12 months; loan, involvement of a bank, etc.; Note: Collateral provisions may be agreed Note: To ensure that the purchase price is in the conveyance agreement dealing transferred to the transferor, the parties with specific requirements of the parties, mostly use a deposit of the purchase such as (i) reservation of the ownership price at a notary, attorney-at-law, or bank right (e.g., until full payment of the (escrow account). The parties thus purchase price), (ii) repurchase clause, conclude a separate escrow agreement (iii) pre-emption right, (iv) trial purchase. with the bank, notary, or attorney-at- A detailed description of these institutes law. According to the escrow agreement exceeds the scope of this overview the bank/notary/attorney-at-law is however they could be useful in some obliged to transfer the purchase price cases. We will gladly provide more upon the fulfilment of the condition detailed information upon request. precedent(s) for the release of the

purchase price detailed in the escrow IV. Legal Title & Due Diligence agreement. These usually include Legal Title submission of an official extract from the The legal systems that have historically land register evidencing the registration governed the ownership of real property in the of the transferee in the land register as territory of the Slovak Republic have resulted in the owner of the transferred real a situation characterized by fractioned property (and additional content, e.g., ownership of lands and legal uncertainty due to that the real property is free from any the fact that the same lands can sometimes be mortgage and/or easement). concurrently recorded in different registers and • Handover procedure details; even in the name of different owners. • Liability for defects – from extended The records of ownership recorded in the land liability (compared to statutory standard) registry do not represent definitive proof of to no liability (using an “as is” condition ownership as these records are considered clause); veracious until proven otherwise. • Declarations, if necessary, regarding the Thus, a review of the land register is of major required municipal decisions such as, for importance where ownership status is

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[BUYING AND SELLING REAL ESTATE IN SLOVAKIA] 184 concerned. In particular, in major transactions V. Transfer of Ownership a detailed review of title records for the past The transfer of ownership to real property in 10 years is highly recommended. each case requires initiating a procedure before Due Diligence the local District Office (land registry In addition, depending on the location and department) on the basis of paper documents nature of the real property, the seller should and/or documents in electronic form. conduct a detailed due diligence review The proceedings for the entry of the ownership focussed on specific issues (as applicable): right in the land registry are instituted by - unrestricted right to transfer the real means of an application filed by any party; the property, pre-emption rights, long-term deadline for a decision on entry is 30 days, in lease of arable lands, existence of “accelerated” proceedings 15 days. mortgage over the real property; A frequent instrument used in the conveyance - specific historical forms of ownership, of real property in Slovakia is a “geometrical e.g., “Urbarium” and ramifications on the plan” which is a set of descriptive data and transaction or intended use; geodetic layouts used for outlining the new boundaries of separated lands or a corridor of a - (non)existence of unresolved ownership possible easement, etc. restitution claims raised by entitled persons persecuted by the Note: Since a recent amendment to Slovak law, fascist/communist regimes; any errors in writing, calculation or other obvious errors can be rectified only through an - construction planning amendment to the agreement. aspects/restrictions; The ownership is transferred to the transferee Note: Construction, alteration as well as a upon a decision of the land registry department change in use or the demolition of a (as of the date of application for entry in the building in most cases require a territorial case of flats). and (building) permit issued by the local

building authorities. The building project VI. Forms of Ownership has to comply with the local (or zoning, as In general, all individuals and legal entities can the case may be) development plans. invest into and own real property assets. It is Therefore, with regard to the prospective irrelevant if the owners and purchasers are plans of construction, the development resident or non-resident or which country they and land use should be reviewed very come from. It is only crucial that they have legal carefully before the closing of the capacity. contract. The most frequent forms of ownership are:

- environmental burdens and issues; 1. Sole ownership: The owner is the only - access to utilities networks; person with ownership right to the real - public law limitations (civil defence property. structures, inundation area, etc.); 2. Co-ownership: More than one person owns - sufficient access to the real property (e.g., an undivided share in the real property. public road connection). Each co-owner is entitled to dispose with its

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share. In case of transfer, the other co- documents used by them is generally not at a owners have pre-emptive right (save for level ensuring clear distribution rights and transfers to close persons such as a child, obligations among the seller, buyer, and the etc.) agent in case an issue should arise. 3. Joint ownership of spouses: Each of the VIII. Donations spouses is entitled to a share of the joint Real property can be donated by means of a property, but is not entitled to dispose with donation agreement. Please note that given the it independently, i.e., without the consent specific nature of the donation, the return of a of the other joint owner (spouse). gift can be demanded only if the beneficiary Residential property is typically owned by commits a gross violation of good morals individuals (90% of flats in Slovakia are in the against the donor or the members of their ownership of individuals/inhabitants). Owners family. of commercial property are most frequently IX. Financing legal entities under either private or public law. The most commonly used legal forms are joint- The usual way of financing real property is a stock companies (a.s.) and limited liability bank loan/mortgage for at least a part of the companies (s.r.o.). Also, forests and/or arable purchase price. A bank thus regularly insists on lands are, to a large extent, owned by the collateral. Catholic church. Typically, a buyer has to pay a certain portion Finally, owing to the historical developments, of the purchase price from its own sources (the especially agricultural/forest lands are quite use of such financial resources is usually a often co-owned by so-called “unidentified condition precedent to drawing the loan). For owners”, i.e., persons who are either not large development projects banks usually sufficiently identified, deceased, or not known require establishing a mortgage over the real at all. The acquisition of such lands may require property, shares in the buyer-legal entity as tracking down the current successors in well as a pledge over all kinds of possible claims ownership (heirs) and/or liaising with the the buyer is expected to possess in the future in competent authorities (e.g., Slovak Land Fund) connection with the real property such as rent, that represent such unidentified owners. insurance payment, etc. VII. Agents For special transactions, such as large individual properties or real property portfolios, a The buyer or seller can both use the services of common alternative to a bank loan is the use of a real property agent. Currently there are capital market products, for instance, bonds, several renowned firms on the market receivables, or credit derivatives. providing services for the intermediation of retail premises and industrial areas. X. Costs and Taxes The agent commission is determined by The costs associated with the registration of agreement of the parties without specific the transfer are typically borne by the buyer. limitations. However, the seller usually has to bear the costs of deleting of existing mortgages (e.g., Caution is recommended when using local securing the seller’s debts) from the land agents as the legal-technical quality of the register.

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The real property tax is a local tax the amount registered in the Commercial Register. of which is determined by the respective local The Foundation Deed (the Memorandum municipality for different types of land and of Association, see below) may state that premises. the executive directors constitute a The real property tax is paid for a tax period of collective body. The internal restriction of a calendar year in advance. The purchaser shall the executive directors' powers is not report the acquired real property within 31 effective against a third party. Under January of the following calendar year. The tax Slovak law, a violation of these duties by is payable upon receipt of the decision of the an executive director will not (alone) local municipality containing the calculation of affect the validity of a contract with a the tax (within 15 days of the decision third party, but the s.r.o. may hold the becoming final). executive director in question liable for damages. The transfer of real property may also involve many other tax aspects, particularly when a b) Formation VAT regime applies. We strongly advise that tax • The foundation act is a Memorandum of advisors are involved in order to ensure that Association or Foundation Deed in the these aspects are dealt with comprehensively. case of a sole shareholder. It has to be XI. Acquisitions notarized;

Real property can be acquired by way of an • Setting up an s.r.o. is not complicated and asset or a share deal. In the case of a share can be accomplished easily; deal, the legal entities used for these purposes • A supervisory board is not an obligatory are mostly organized as limited liability company body. companies or joint stock companies. c) Costs of Formation 1. Limited Liability Company – s.r.o. Typically, the estimated total public fees The most widely used legal form owing to its (signature certification & Commercial Register high flexibility, low capital requirement and fee) for the formation of an s.r.o. amount to relatively few obligations. approximately to €400 (€250 in the case of a) Legal Entity electronic filing). The attorney’s fees for services rendered in the process of establishing • A legal entity acts autonomously, and incorporating an s.r.o. vary depending on represented by executive director(s); the number of shareholders, business • Independently subject to taxation; authorizations sought and instruments the shareholders wish to put in place, such as a • The particular rights and obligations of an Shareholder Agreement, etc. s.r.o. exist autonomously from those of the shareholders and the executive d) Minimum Registered Capital directors; The minimum registered capital required for an • The company's statutory body is one or s.r.o. is €5,000. In the light of recent more executive directors. The executive developments in Slovakia’s corporate law, it is directors act in all matters on behalf of recommendable to set up a company with the company in the way of acting that is capital reflecting the amount of liabilities

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[BUYING AND SELLING REAL ESTATE IN SLOVAKIA] 187 assumed by the company in order to mitigate bearer shares are issued in book-entry the risk that the company could be considered form only; “in crisis” or even insolvent. • Corporate bodies mandatorily include a Nevertheless, at least 30% of each General Meeting, a Board of Directors, shareholder’s monetary contribution and a half and a Supervisory Board; of the total registered capital must be paid-up • A General Meeting consists of all before the company's registration in the company shareholders and takes place at Commercial Register. In the case of a sole least once a year. It is positioned as the shareholder, the registered capital has to be supreme body holding powers, e.g., in paid-up entirely. personal matters (electing, remunerating e) Limited Liability corporate body members) as well as The shareholders of the entity are not deciding on the distribution of profits and personally liable for the company's debts. The amending the Articles of Association. shareholders however provide a guarantee for b) Formation the company’s debts up to the extent of their The foundation act is either a Foundation Deed unpaid contribution in the registered capital. or Foundation Agreement in the case the 2. Slovak Joint-Stock Company – a.s. company is established without a call to a) Legal Entity subscribe shares or the minutes from the constituent General Meeting where the • An a.s. (akciová spoločnosť) is a legal registered capital is subscribed by more entity in which the shareholders are not shareholders on the basis of a call. All of these liable for the debts of the company during documents must include Articles of Association its existence; (By-laws) containing mandatory information • It is more complicated to form and and must be prepared in the form of a notarial operate than an s.r.o. and additional record. costs arise in connection with keeping the c) Costs of Formation register of shareholders; Typically, the estimated total public fees • Hence, the rules for an a.s. are generally (signature certification and Commercial less flexible compared to the rules for Register fee) for the formation of an a.s. forming a limited liability company; amount to approximately €900 (€600 in the • A company can be founded by one case of electronic filing). The attorney’s fees for founding shareholder – a legal entity; services rendered in the process of establishing otherwise, there must be two or more and incorporating an a.s. may vary significantly individuals or legal entities; depending on the number of shareholders, method of establishing, etc. • An a.s. may have the form of a private a.s. or, where its shares (or some of them) d) Minimum Registered Capital have been listed on the stock exchange in The minimum registered capital required for an any EEA member state, a public a.s.; a.s. is €25,000. At least 30% of its subscribed • Registered shares may be issued as registered capital must be paid up by the time certified or book-entry securities, whilst of the submission of the proposal for

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[BUYING AND SELLING REAL ESTATE IN SLOVAKIA] 188 registration to the Commercial Register. e) Limited Liability The shareholders of the entity are not personally liable for the company's debts. Note: Persons acting on behalf of the company before the company's incorporation in the Commercial Register are liable for the obligations which arise therefrom – these obligations can be assumed by the company within 3 months from its incorporation, and then it is bound by such acts from when it began. 3. Other types of entities There are three other types of business companies: a Limited partnership company (k.s.), an Unlimited partnership company (v.o.s.), and a Simple joint-stock company (j.s.a.) However, these forms are not very often used as vehicles in real property transactions. A specific form of entity, a “flat owners’ cooperative” is not unusual in Slovakia. However, it is more a residue from past cooperative ownership of blocks of flats. Only rarely is it used as an investment vehicle for developing blocks of flats today. This overview is for information purposes only. Under no account can it be considered as either a legal opinion or advice on how to proceed in particular cases or on how to assess them. If you need any further information on the issues covered by this overview, please contact Mr. Marián Lauko ([email protected]). PETERKA & PARTNERS is a full-service law firm operating in Central and Eastern providing one-stop access to an integrated regional service. The firm provides legal services to multinational companies active in the region, as well as leading local groups, providing them with complex legal solutions with exceptional commercial value.

ILN Real Estate Group – Buying and Selling Real Estate Series

189 Fall 20

INTERNATIONAL LAWYERS NETWORK

ÖZCAN & NATAN ATTORNEY PARTNERSHIP Buying and Selling Real Estate in Turkey

I L N REAL ESTATE GROUP

ILN REAL ESTATE GROUP

[BUYING AND SELLING REAL ESTATE IN TURKEY] 190

KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER TURKISH LAW 1. Agreement Types seller and buyer. It is revised annually by Pursuant to Turkish laws, a real estate sale and the Ministry of Finance. purchase agreement shall be in an official form b. Stamp tax and notary fee and the transfer of ownership of real estate is In case a real estate sale commitment only possible with an official deed and registry, agreement is signed before a notary which is signed at the Land Registry public, a stamp tax of 0,948% and a Directorates. notary fee of 0,113% of the purchase It is also possible to sign a real estate sale price shall be applied. Unless otherwise commitment agreement that sets forth the agreed by the parties, the buyer and seller conditions of the sale before a notary public. It shall be jointly liable for the payment of is advisable to annotate this agreement to the the stamp tax and notary fee. relevant land registry records to assert personal The annotation fee is 0,683% of the rights arising from this agreement to third purchase price and shall be paid in case of parties. In case the real estate has been annotation of a real estate sale acquired by third parties, a lawsuit for the commitment agreement to the land nullification of title deed can be filed. However, registry records. if the sale is not effectuated within five years of the annotation, the annotation will be The rates are revised annually by the automatically removed by the Land Registry Ministry of Finance. Directorates pursuant to the Land Registry Law. c. Value added tax 2. Buyer’s Inspection If commercial income is generated from Due diligence at the Land Registry Directorates the sale of real estate, the sale shall be carried out to determine if there are transactions shall be subject to VAT. VAT any encumbrances and limitations on the real rates for residential real estate vary from estate, such as mortgages, attachments, rights 1% to 18% depending on the net area. On in rem, lease annotation or any obstacle the other hand, the sale of commercial preventing the purpose of the sale. It is real estate shall be subject to VAT of 18%. advisable for the buyer to inspect that the In the case that real estate has been property tax for the real estate has been paid owned by companies for at least a two- and the real estate has been constructed in year period, the sale of such real estate compliance with the zoning plan. shall be exempt from VAT. However, 3. Financial Obligations companies that are engaged in real estate trading business cannot benefit from VAT The transfer and acquisition of real estate may exemption. give rise to title deed fees, annotation fees, stamp tax, notary fees, value added tax, income d. Income tax and corporate tax tax and corporate tax. Capital gains generated by individuals a. Title deed fee from the sale of real estate shall be subject to income tax, which varies from The title deed fee is 4% of the purchase 15% to 35%. However, if the term of price and shall be paid equally by the

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holding the title is longer than five years, area meter and quantity; limit, cease entirely or the sale of such real estate shall be partially or forbid the acquisition.” exempt from the income tax. There are legal restrictions for foreign real Capital gains generated by companies persons and foreign commercial companies in shall be subject to the standard corporate acquisition of real estate as follows: tax rate of 20%. However, 75% of capital • Areal restriction: The total area of the gains shall be exempt from corporate tax real estate that a foreign real person provided that the real estate has been may purchase cannot exceed 10% of the owned by the selling companies for at total area of private real estate within least two years. the related district and 30 hectares in 4. Acquisition of Real Estate by Foreign Real total within Turkey. Persons and Foreign Commercial • Territorial restriction: If the area desired Companies to be purchased is within the borders of The Land Registry Law regulates real estate a military forbidden zone or military acquisitions made by foreign real persons and security zone, foreigners cannot acquire foreign legal entities. such real estate. Foreign real persons are entitled to purchase • In case the acquired real estate is in real estate in Turkey, pursuant to the Land landform, foreign real persons and Registry Law. In accordance with Article 35/1 of foreign commercial companies should the Land Registry Law, “Foreign real persons submit the project that will be who are citizens of countries determined by the developed on the unconstructed real Council of Ministers pursuant to international estate to the relevant ministries for relations and the country’s benefits may acquire approval within two years. real estates and rights in rem in Turkey The real estate is subject to liquidation provided that the legal restrictions are to be provisions in following cases: complied with.” • if the real estate is acquired in violation Foreign commercial companies, which are of the laws; established pursuant to the relevant laws of their countries, are entitled to acquire real • if the relevant ministries and estate in Turkey only within the provisions of administrations determine that the real special laws such as the Law on Encouragement estate is used in violation of purpose of of Tourism. purchase; However, according to Article 35/3 of the Land • if the foreigners do not apply to the Registry Law, “In case the country’s benefits relevant ministry within the required necessitate, the Council of Ministers is time in case the property is acquired authorized to determine the acquisition of real with a project commitment; estates of foreign real persons and foreign • if the projects are not realized within commercial companies which are established the required time. pursuant to the relevant laws of their countries in terms of country, person, geographical area, In above-mentioned cases, if the liquidation duration, number, proportion, qualification, process has not been conducted by the owner

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[BUYING AND SELLING REAL ESTATE IN TURKEY] 192 within the period given by the Ministry of companies as explained above; the companies Finance, which shall not exceed one year, the shall notify such change to the Ministry of liquidation shall be carried out by the ministry Economy within one month following the and the amount acquired as a result of the transfer of shares. liquidation shall be submitted to the holder of The governorate checks whether the right. companies use the real estate in accordance 5. Acquisition of Real Estate by Foreign with their field of activity stated in their articles Invested Turkish Companies of association. If the governorate determines Foreign-invested Turkish companies as defined that the companies do not comply with such below are entitled to acquire ownership of real use, a period of six months will be given to the estate in Turkey only if such acquisitions shall companies to provide the compliance with the be in relation to scope of activities stipulated in regulation. In case of failure by the companies, their articles of association: the real estate shall be liquidated. 6. Necessary Documents for Application • If 50% or more shares are owned by foreign real persons, companies The owners of the real estate or authorized incorporated in accordance with the representatives shall make an application to laws of foreign countries, or the relevant land registry directorates. international institutions; or Necessary documents for the application are as follows: • If foreign real persons, companies incorporated in accordance with the • Title deed of the real estate or detailed laws of foreign countries, or information about the real estate. international institutions have right to • Identification document or passport assign or depose most of the persons together with its translation. having the management rights in that company established under Turkish • Property value statement document to laws. be provided from the relevant municipality. However, acquisition of real estate in a military forbidden zone or military security zone or a • Compulsory earthquake insurance strategic zone is subject to the approval of the policy. commanderships. The acquisition is also subject • Photos of the seller and the buyer. to the governorate’s approval if the real estate is in a special security zone. • If the power of attorney is prepared abroad, the original power of attorney The companies with foreign capital outside the and its certified translation. scope of above-mentioned companies are entitled to acquire real estate in Turkey with • Signature circular of companies. equal treatment to local investors. • Certified of authority of companies to It should be noted that if companies have real acquire and sell real estates issued by estate in Turkey and the shareholding relevant registry. structures have changed and the companies fall within the scope of the foreign invested Turkish

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In addition to above given documents, buyers with foreign nationality shall also obtain potential tax numbers from Turkish tax offices. 7. Annual Cost for Ownership of Real Estate The owners of real estate shall pay a real estate tax that varies from 0.1% to 0.6% of the tax- based market value determined by the relevant municipality and shall take out a mandatory earthquake insurance policy.

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Fall 20

INTERNATIONAL

LAWYERS

NETWORK

FLADGATE LLP Buying and Selling Real Estate in England and Wales

ILN REAL ESTATE GROUP

ILN REAL ESTATE GROUP

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER BRITISH LAW 1. Introduction property by the individual unitholders, with joint responsibility over common areas and Historically, there has been significant investment by overseas individuals and facilities. However, commonhold has, for corporations in real estate in England and various reasons, failed to gain traction in the Wales and in particular in central London, marketplace and is rarely used. Residential which is perceived as a safe haven for overseas apartments are, therefore, almost always investors. Much of the recent overseas owned under a long lease. investment has been focused on residential real 3. Know your client (KYC) estate, but there has also been substantial It is necessary to carry out due diligence on the investment in commercial real estate. purchasing entity to comply with UK Anti- This guide applies to real estate in England and Money Laundering Regulations. The documents Wales, but it is not applicable to other parts of which are required will vary depending on the the United Kingdom, namely Scotland and purchasing entity, but they need to establish Northern Ireland; or to dependencies such as the identity of the purchaser and its ultimate the Channel Islands or the Isle of Man, which beneficial owner have their own separate legal systems. 4. Individual stages in a real estate purchase 2. Tenure It is customary for real estate to be sold by a Real estate in England and Wales may be any of two-stage process. Firstly, the parties enter into the following: a contract in which the seller agrees to sell the property to the buyer. This process, known as Freehold “exchange of contracts”, has the effect of Freehold real estate is the absolute property of passing the beneficial interest in the property its owner, subject to any rights and title to the buyer. In the second stage, typically covenants in favour of third parties. These may about 28 days later, the seller transfers the affect how the real estate is used. legal title to the buyer. This is known as “completion”. It is possible, however, for the Leasehold parties to proceed straight to completion and Leasehold real estate is held under a lease for a this is sometimes done when timing is critical. fixed period, usually subject to the payment of Before signing the purchase contract rent and the performance of obligations or covenants contained in the lease. The terms of After the buyer’s offer has been accepted, but the lease will dictate whether or not the before the purchase contract is “exchanged” leaseholder is entitled to transfer its interest to (i.e., becomes legally binding), the buyer’s a third party or whether it can sublet either the solicitors will negotiate with the solicitors whole or part of the real estate. acting for the seller and conduct investigations relating to various matters, such as: Commonhold • the form of the purchase contract; This is a relatively new type of real estate ownership. It allows perpetual “strata” ownership of a multi-occupied residential

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• the title documents, including any leases the buyer does not “complete” (i.e., close) the and other matters subject to which the purchase. Completion of the actual transfer of real estate is being sold; and the real estate follows a pre-agreed period following exchange of contracts, typically about • searches with various local authorities or 28 days. statutory bodies to ascertain matters which may affect the real estate or its use, Once contracts have been exchanged, both including environmental matters. parties, subject to the terms of the contract, become bound to continue with the transaction It is important to note that, during this and neither party can withdraw. Where the investigatory period, the seller of the real buyer is borrowing all or part of the price, it is estate generally is not contractually bound to highly advisable that the lender’s financial the buyer and is free to deal with other commitment is in place before exchange of prospective buyers. It may be possible, contracts. The buyer may also need to arrange however, to negotiate an exclusivity agreement insurance as from exchange of contracts. that will prevent the seller from negotiating with a third party for a limited period. Registration of the buyer’s title A prudent buyer should always commission a Following completion, the buyer’s solicitor will structural survey of the real estate and this pay any purchase tax (in England, SDLT and in should be carried out prior to any exchange of Wales, LTT) due on the purchase and apply to contracts, as generally no warranties are given the Land Registry to have the change of by the seller as to the state and condition of the ownership and any mortgage registered. If the real estate. It may also be advisable for the buyer is a company, the mortgage will also buyer to have soil or other technical need to be registered at Companies House. investigations made, particularly where a 5. Lender’s requirements development site is being acquired or where it is possible that the real estate has been used Each lender’s requirements will vary depending for purposes causing contamination. The on the real estate, the identity of the borrower environmental protection legislation may and the nature of the transaction but, require the owner of a contaminated site to generally, on investment real estate a lender incur substantial clean-up costs in respect of will require the following: waste left by a previous owner, and a tenant • a satisfactory valuation from the lender’s can sometimes be liable for such matters under valuers; the terms of the lease either directly or indirectly through the service charge. • a satisfactory report on title from the lender’s solicitors confirming that the Exchange of contracts lender will obtain a good and marketable Once the contract has been negotiated and title to the real estate; agreed and the buyer’s investigations have • full information about the proposed been completed, the parties will then proceed borrower, including company accounts to “exchange” formal written contracts. It is (where applicable); and usual for a buyer to pay a deposit, often but not always of 10% of the purchase price on exchange, which sum is liable to be forfeited if

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• where the real estate is bought as an predetermined intervals (typically five years). investment, details of the occupiers of the The rent under a building or ground lease, real estate and the passing rents. however, is usually nominal, reflecting the fact that a capital premium has been paid on the 6. Leasing of commercial premises grant of the lease. Leases of commercial real estate generally fall The occupying tenant of business premises into one of two categories: normally has a statutory right to renew the • a building or “ground” lease at a premium lease on the expiry of the contractual term. This for a long period, usually at least 125 right can be excluded by agreement between years, possibly acquired as a capital the landlord and tenant by following a investment to be sublet to occupational prescribed procedure. Most underleases and subtenants; or short-term leases (e.g., five years or less) will exclude the right to renew. • an occupational lease for a shorter term (say, up to 25 years) at an open market Depending on the state of the market and the rent. particular real estate, the tenant of an occupational lease should seek to negotiate: Long-term leases of commercial real estate are not uncommon, especially where there are • an initial rent-free period; plant and machinery tax benefits (capital • an unconditional right to terminate the allowances) that the freeholder wishes to lease early (a “break right”); and retain or where the freeholder will not willingly part with the freehold (e.g., the Grosvenor • a limit on service charge payments. Estate). Residential apartments are also owned The first draft of a lease will normally be by means of a long lease. prepared by the landlord’s solicitor and the The liabilities of a tenant will depend on what is terms will be negotiated by the tenant's agreed between landlord and tenant and are solicitor who will make similar searches and subject to negotiation. Generally, however, an enquiries to those on a freehold purchase. A occupational tenant would expect to be landlord will frequently require security if the responsible for the costs of repairs, insurance, tenant is an overseas company or a private business rates (local taxes) and outgoings. limited company. This may take the form of a There may also be an obligation to contribute parent company guarantee or a “rent deposit”. by way of service charge for services provided A rent deposit is a sum of money equal to (say) by the landlord. The lease is also likely to six to 12 months’ rent, held by the landlord, to prevent the tenant from making substantial be used by the landlord in the event of a alterations. The lease may also prevent the default by the tenant; it will be returned at the tenant from subletting or disposing of the lease end of the lease or in other agreed to a new tenant without the landlord’s prior circumstances. written consent. A well-advised tenant will also want to The rent under an occupational lease generally commission a survey of the premises, especially reflects the open market letting value of the where the lease requires the tenant to repair premises and, depending on the length of lease and maintain the structure. term, there may be rent reviews at

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A tenant taking a transfer of a lease from an of control over the property in the event of existing tenant is unlikely to have the death or incapacity. The asset will be exposed opportunity to negotiate the terms of the lease to claims from creditors and potentially also on but will have to take it on its existing terms. divorce or relationship breakdown. A tenant who takes a transfer of a lease Company registered in UK originally granted before 1 January 1996 is Advantages: Annual running costs are usually likely to have to remain liable under its terms less than for offshore registered companies for the remainder of the lease period, even where corporate fiduciaries located in offshore though it subsequently transfers it to a new jurisdictions often provide the directors. The tenant, if there is a subsequent default. company affords limited liability. An original tenant or a tenant who takes a Disadvantages: Since June 2016, those owning transfer of a lease granted on or after 1 January more than 25% of the ultimate beneficial 1996 is likely to have to guarantee any new ownership of a company must appear on a tenant to whom it transfers the lease for the publicly searchable register held at the UK’s period that that particular tenant remains the Companies House. Corporate governance tenant, but its guarantee will cease if the new documentation, such as company articles and tenant later transfers the lease to another possibly shareholders’ agreements, in addition party. to a Will (a UK Will may not be the most 7. Ownership structure appropriate one in the circumstances) and a UK The choice of ownership structure is often tax Property and Financial Affairs Lasting Power of driven. We look at tax in the next section but Attorney, may be required in order to regulate here we focus on the non-tax facets of different who controls the company in the event of types of ownership. death, divorce or incapacity. The shares owned by the ultimate beneficial owner of the Personal ownership / Directly held company will still be considered in the event of Advantages: Simple and cost effective. There is financial claims but pre-emption rights in the no structure to maintain and no annual running company’s articles may prevent the shares costs. being transferred to satisfy creditors. Disadvantages: Details of land ownership are Company registered offshore (i.e., outside UK) held on a central, searchable register at the Advantages: The jurisdiction may not have Land Registry. If owned through a nominee (be introduced public registers of ultimate they a corporate entity or trustees of a bare beneficial owners. The use of a nominee to trust), only the nominee’s details appear on the hold shares may prevent the identity of the title, but UK corporate nominees have had to ultimate beneficial owner being disclosed. disclose their ultimate beneficial owner on a separate public register (see below) since June Disadvantages: Annual running costs can be 2016 and non-UK corporate nominees will also high. Provisions requiring the disclosure of have to do so with effect from 2021 (precise ultimate beneficial ownership, similar to the date not yet confirmed). A UK Will and UK rules that apply to UK companies, will be introduced in 2021. As with a UK company, Property and Financial Affairs Lasting Power of Attorney should be considered, to avoid a loss local corporate governance documentation and the most appropriate Will and a Power of

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Attorney (most likely in the jurisdiction of the UK tax liability. The Trust Registration Service is offshore company) may also be required to expected to be expanded to cover additional determine who controls the company in the trusts from March 2022, including those with event of death, divorce, or incapacity. no UK tax liability where the trust directly or Partnerships indirectly holds UK property. Limited partnerships are private arrangements 8. Tax implications of ownership structures whose terms do not appear on any central A major consideration for investors. The taxes register. The identity of the partners is not that need to be considered include: disclosed unless the partnership is a Limited • In England, stamp duty land tax (SDLT) at Liability Partnership, in which case the rates that differ significantly depending members of the partnership will appear on a on whether the real estate is commercial publicly searchable register at Companies or residential. House. o For commercial real estate, the rate of Trusts (UK or offshore) tax is 0% on the first £150,000 of the Advantages: Common law jurisdictions often purchase price, 2% on the next have a significant body of law associated with £100,000 and 5% on the remaining trusts and their operation, providing certainty amount. as to how they can be used. Trust assets can o For residential real estate, the rates benefit successive generations. Often are 0% on the first £125,000 of the beneficiaries do not hold a fixed share of trust purchase price, 2% on the next assets, so a beneficiary’s death or incapacity £125,000, 5% on the next £675,000; does not affect the administration of the trust’s 10% on the next £575,000 and 12% on assets. Appropriately structured trusts may the remaining amount. (For a limited also offer protection against claims by third period, from 8 July 2020 to 31 March parties, such as creditors or on divorce or 2021, the UK government has, in relationship breakdown. response to the Covid-19 pandemic, Disadvantages: Annual running costs can be introduced a concessionary rate of 0% high. The trust model may, in the opinion of on the first £500,000 of the purchase some, confer insufficient control on the person price.) The relevant rates for contributing the wealth to the trust structure. purchasers of additional residential In certain trust jurisdictions (especially the UK), real estate (whether buy-to-let the law may be perceived as allowing the property or second homes) are 3%, beneficiaries to have too much influence. The 5%, 8%, 13% and 15% respectively. trustees’ fiduciary obligation to act in the best First-time buyers of properties worth interests of the beneficiaries may prove too up to £500,000 may pay a reduced constraining. It is proposed that provisions rate of SDLT. An additional SDLT requiring the disclosure of the ultimate surcharge of 2% for non-residents beneficial ownership of trusts will be buying residential property in England introduced in 2021 in addition to the Trust will be introduced on 1 April 2021. Registration Service, which currently requires o Various reliefs may apply, such as a UK and offshore trusts to register if they have a reduced rate of tax for purchasers of

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multiple dwellings. These are complex o For commercial real estate, the and outside the scope of this guide. rate of tax is 0% on the first o With regard to leases, a 1% rate of £150,000 of the purchase price, SDLT will be due on the net present 1% on the next £100,000, 5% on value of the rent, above £125,000 the next £750,000 and 6% on the (residential) or £150,000 (non- remaining amount. residential/mixed), which is calculated o For residential real estate, the using a formula that considers various rates are 0% on the first factors, including the fact that rents to £180,000 of the purchase price, be received in the future have a lower 3.5% on the next £70,000, 5% on value than rents received the next £150,000, 7.5% on the immediately. (For residential leases, next £350,000; 10% on the next the UK government has, in response £750,000 and 12% on the to the Covid-19 pandemic, introduced remaining amount. (For a limited a concessionary rate of 0% on the period, from 27 July 2020 to 31 value of the rent up to £500,000 in March 2021, the Welsh respect of transactions with an government has, in response to effective date from 8 July 2020 to 31 the Covid-19 pandemic, March 2021.) introduced a concessionary rate o For commercial leases, where the net of 0% on the first £250,000 of present value exceeds £5m, the rate the purchase price.) Purchases of additional residential real estate of SDLT for the proportion of the net present value above £5m is 2% rather (or purchases of residential real than 1% estate by companies) attract an additional 3% on each band as is o A 15% SDLT rate applies to the entire the case for SDLT. There is no purchase price when residential real first-time buyer’s relief in Wales. estate costing more than £500,000 is o acquired by certain “non-natural With regard to commercial (but persons” (NNPs). These include not residential) leases, a 1% rate companies and partnerships with a of LTT is applied to the net corporate partner but not trustees. present value of the rent above Relief from the 15% charge (with the £150,000. Where the net effect that the normal rates apply) present value exceeds £2m, the may be claimed by NNPs carrying on rate of LTT for the proportion of real estate development or using real the net present value above £2m estate for commercial renting to third is 2% rather than 1%. parties. Conditions apply. o Unlike in England, NNPs of residential real estate do not pay • In Wales, land transaction tax (LTT) is an enhanced rate of LTT. payable instead of SDLT. The two taxes (and the reliefs that apply) are broadly • Annual Tax on Enveloped Dwellings similar but there are differences: (ATED) came into effect on 1 April 2013 and is currently payable only in respect of

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residential properties owned by NNPs UK land (commercial or residential) by worth in excess of £500,000 on 1 April non-resident persons who have a 2012 (or at acquisition if later). From substantial (25%) indirect interest in the ATED tax year 2018/19, the valuation date land are also chargeable to NRCGT or changed to 1 April 2017 for properties corporation rate (other conditions apply). held on that date. ATED is an annual For example, disposals of shares in charge of up to £236,250 per year (as at ‘property rich’ offshore companies are ATED tax year 2020/21), calculated by caught. reference to real estate value bands. • In certain situations, re-basing of assets to Rates increase in line with the Consumer their 5 April 2019 market value will be Prices Index each year. Relief may be applied automatically unless an election is claimed by NNPs carrying on real estate made. development or using real estate for commercial renting to third parties, • From 6 April 2020, disposals of UK commercial trade purposes or as residential property interests must be employee accommodation. Conditions reported, and any CGT paid within 30 apply. days of completion. • ATED-related Capital Gains Tax (ATED- • Income tax (IT) is payable by individuals related CGT) has been abolished for on rental income. Various deductions are disposals on or after 6 April 2019, in light permitted against rental income, of the extension of CGT (see below). including interest payable on a loan to purchase or improve the real estate. • For interests in UK land (residential or However, from 6 April 2017 a phased commercial) owned by non-resident withdrawal of interest deductibility individuals or trustees, Non-Resident applies to individuals (but not companies). Capital Gains Tax (NRCGT) may be Capital allowances may also be available payable at rates of either 18% or 28% for commercial real estate. (residential property) or 10% / 20% (non- residential property) (rate depends on • UK resident companies are liable to total UK income and gains) on gains corporation tax on their profits (rental realised on a disposal of the real estate. income, capital gains or trading income). Main home relief may be available to As from 6 April 2020, non-UK resident exempt some or all of the gain if relevant companies are subject to corporation tax conditions are met. on income deriving from UK properties. • Disposals of interests in UK land • (IHT). Non-UK domiciled (residential or commercial) directly individuals are liable to IHT on their UK owned by non-resident companies are situated assets, which includes UK real subject to UK corporation tax. The estate. Holding UK situated assets on current rate of corporation tax is 19%. No death, or gifting them in lifetime, can main home relief can be claimed. give rise to IHT liabilities of 20% or 40%, based on the open market value of the • From 6 April 2019, disposals of assets asset or, in relation to lifetime gifts, the deriving at least 75% of their value from loss in value caused to the giver’s estate

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by the gift. Since 6 April 2017, it is no • Value added tax (VAT). This is applicable longer possible to avoid an IHT exposure to commercial real estate only and is by holding UK residential property payable at the standard rate of VAT, through an offshore company – the which is currently 20%, unless it is company is now effectively transparent possible to structure an acquisition as a for IHT purposes if it is the equivalent of transfer of a going concern (TOGC). A a close company and its value is TOGC is generally available to a purchaser attributable, directly, or indirectly, to UK of investment real estate, but there are residential property. Trusts holding conditions that include the buyer shares in offshore companies with UK registering for VAT and submitting residential property interests require quarterly VAT returns to the UK’s revenue review, as they can now be subject to authorities. periodic charges to IHT and give rise to The interrelationship of each of these taxes and IHT issues for settlors who are also the formalities which need to be complied with beneficiaries. Loans made to third are complex and careful consideration needs to parties to facilitate the purchase of UK be given to their application to the acquisition residential property can, in certain of any specified real estate. By way of example, situations, cause the lender to have an the following table compares ownership by an IHT exposure. Certain debts, however, offshore company with personal ownership. remain deductible when calculating the value of an asset for IHT purposes. Ownership by Offshore Company Ownership by Individual

ATED Yes, annual charge, depending on value No CGT No Yes, on disposal on gains. At rates of 18% or 28% (residential) or 10% / 20% (commercial). Relief may be available if property used as main residence CT Yes, rental income (mortgage interest will No remain deductible) and on disposal on gains at 19%. No main home relief IHT Participators in offshore company have IHT Yes, immediate exposure (40% on exposure (40% on death, subject to death, subject to exemptions and exemptions and reliefs) reliefs) IT No (see CT above) Rental income taxed at 20%/40%/45%. No deductibility of mortgage interest SDLT Potentially at higher flat 15% rate if Stepped rates between 0% and 12%. purchase price >£500,000. Additional rates Higher rates apply to purchases of apply from 1 April 2021 to purchases by residential buy-to-let and second non-UK residents residences. Additional rates apply from 1 April 2021 to purchases by non- UK residents

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9. Expenses 10. Constraints on development The buyer will have to meet at least the Town planning legislation following additional expenses at completion of Development may generally not be undertaken the transaction: without obtained under • Land Registry fees ranging from £20 to the Town and Country Planning Act 1990 £910, depending on the value of the real (although there are various exceptions). estate. This is significantly less than the “Development” may take one of two forms: registration or cadastral fees payable in most other European countries. • the making of a material change in the use of land or of an existing building; or • Legal and other professional fees, which are generally agreed at levels to reflect • the erection of new buildings or the the purchase price and professional input. extension or other alteration of existing These fees will bear VAT at the then buildings. current rate (currently 20%), even for Applications for planning permission are made overseas investors. Each party usually to the local planning authority in the first meets its own professional advisers’ fees instance and there is a right of appeal to the unless agreed otherwise. A tenant who is Planning Inspectorate against a refusal of subletting or transferring the lease will permission. usually be required to pay the landlord’s professional fees for the consent to the Certain additional controls apply if subletting or transfer. development is proposed within a conservation area or if listed buildings are affected. • The seller, not the buyer, pays the selling agent’s fees. These typically vary from 1%- Other controls 3%, depending on whether the real estate The development and use of buildings may be is commercial or residential, with fees for governed by other statutory controls that auction sales generally higher than for regulate the quality and form of construction. private treaty sales. Payment of the Building regulations cover the technical agent’s fee is normally conditional on standard that building works need to meet and completion of the sale. the procedures that need to be followed. • Some buyers may instruct a buyer’s agent In the case of leasehold land, the lease may to help them find a suitable property. The have controls on both kinds of development. fee payable to the agent normally varies Disclaimer from 1-3%. These “finder’s fees” are common in the high-end London This note is for general guidance only. Specific legal residential market, where there may be advice should be obtained in all cases. Fladgate LLP is regulated by Solicitors Regulation Authority, number stiff competition for prime real estate. 484783. • Fees incurred in obtaining finance. Fladgate LLP accepts no liability for anything contained in • Miscellaneous expenses such as search this brochure or for any reader who relies on its content. Before concrete actions or decisions are taken by you or fees of approximately £1,000-£1,500 per your business, you should seek specific legal advice. We property and bank transfer fees. remain at your disposal in relation to questions regarding

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[BUYING AND SELLING REAL ESTATE IN ENGLAND AND WALES] 204 this note and in relation to your current or planned commercial activity in the UK and look forward to assisting you. ©Fladgate 2020. This material is the copyright of Fladgate LLP and is not to be reproduced in whole or in part without prior written consent. September 2020

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205 Fall 20

INTERNATIONAL LAWYERS NETWORK

SHUTTS & BOWEN LLP Buying and Selling Real Estate in the United States - Florida

ILN REAL ESTATE GROUP

ILN REAL ESTATE GROUP

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER FLORIDIAN LAW I. STANDARD FORMS OF AGREEMENTS 3. Letters of Intent may or may not be binding depending on the language A. Purchase and Sale Agreement sets forth the complete terms of the purchase and utilized; they are usually non-binding. sale including, among other things, price, C. While utilized in other states, an Offer to , allocation of costs of the Purchase is not commonly used in Florida. transaction, date for closing, inspection II. BROKERS period, financing, title contingencies, escrow information, representations, A. There are four general types of brokers: warranties, covenants, and default 1. Residential Brokers provisions. a. Sell homes, condos, vacant lots 1. Either party’s attorney can prepare the initial draft of the Purchase and 2. Commercial Brokers Sale Agreement. a. Office buildings, vacant land, 2. FARBAR Form – this is the pre-printed shopping centers, apartment form of Purchase and Sale Agreement buildings, raw land, warehouses, typically used in Florida for residential industrial facilities. Multi-family real estate transactions; parties can Apartments: include Retail, Office, freely negotiate the terms and and Industrial subcategories. provisions contained in the FARBAR. 3. Leasing Brokers 3. The assignment of a Purchase and Sale a. Specialize in leased properties (tend Agreement can be prohibited or to focus on commercial properties, restricted if expressly stated in the which includes retail, office, and document (for example, seller can industrial). restrict buyer to only being able to 4. Mortgage Brokers assign contract to an entity related to buyer). a. Facilitate mortgage lending in both residential and commercial B. Letter of Intent, like a term sheet, is transactions sometimes utilized in commercial transactions to outline the basic terms of b. They typically receive commission a transaction before drafting and based on a percentage of the loan negotiating a Purchase and Sale amount or a flat fee Agreement. B. Must be licensed in Florida and they are 1. Beneficial because allows parties to regulated by state law put to paper key terms to deal, which C. Real estate brokers usually enter into helps facilitate agreement on the listing agreements with sellers, and they remaining terms. typically receive a commission based 2. Signing letter of intent adds level of upon a percentage of the sales price formality and gravitas to negotiations. (generally 6%, but commonly negotiated); if there is a co-broker, the listing broker

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will usually share the commission with the IV. SURVEYS co-broker. A. As-Built Surveys – depict the D. Real estate brokers are paid by the seller, improvements over a given parcel of land and they owe fiduciary duties to the party and can be utilized both prior to that they represent. construction and post-construction. III. BUYER’S INSPECTIONS B. ALTA/ACSM – standards by which A. Residential: Prior to Closing, the Buyer will surveyors are held; many lenders require typically perform property inspections that the surveyors meet these standards including inspection for structural issues, and requirements (these are national radon, asbestos, pest infestation or requirements, not just Florida). damage, title searches, survey, and in C. Benefits of Surveys certain rare circumstances, lead paint and 1. Ensure property actually exists underground storage tanks (for oil or propane). Buyers should also order 2. Determine relationship of property to municipal lien/open permit searches to other properties confirm there are no outstanding 3. Ensure the record boundary lines are governmental violations, liens, or fines actually the ones being occupied/ and to confirm that all alterations and used renovations have been completed in compliance with permits and all permits 4. Determine physical location of are properly closed out. improvements and easements B. Commercial: In addition to the inspections 5. Determine whether there are any described above for residential buyers, encroachments on the property commercial buyers also usually obtain an V. FORMS OF OWNERSHIP environmental inspection (Phase I, and if A. Residential Property is usually held in a necessary, Phase II), and a land use and nominee trust, an estate planning trust, zoning/permitting analysis. or an individual’s own name (especially if C. The Purchase and Sale Agreement the property is the owner’s homestead so typically designates an inspection period that the owner is afforded certain (also known as due diligence period), homestead rights and protections during which buyer has a specified provided under Florida law). Joint owners amount of time (usually 30-45 days) to may take title as: conduct the above referenced inspections 1. Tenants in Common (each own 50%); as well as investigate any title issues or zoning and land use concerns; buyer 2. Joint Tenants with rights of generally may terminate the contract survivorship (they own the property during this inspection period for any or no jointly and upon the death of one of reason and receive a return its initial the joint tenants, the property deposit. automatically passes to the surviving joint tenant(s)); or

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3. Tenants by the Entirety if the owners 2. Most likely to see this form of deed in are married (they each own the the commercial context undivided whole of the property and if C. Quitclaim deed – least protection for one spouse dies, the property buyer automatically passes to the other spouse). 1. Contains no warranties of title B. Commercial Property may be held as 2. Typically used for gifting property or follows: for situations where necessary to correct title defects or issues 1. As the Owners pursuant to the forms set forth in A above, (highly unusual 3. Title companies do not like to insure for commercial properties to be held quitclaim deeds in an individual’s personal name for VII. CLOSING COSTS/ADJUSTMENTS liability purposes) A. Documentary Stamp Taxes (Doc Stamps) – 2. General Partnership/Joint Venture levied on documents that transfer interest 3. Limited Partnership in Florida Real Property (i.e., deeds) 4. LLPs 1. In most counties in Florida, the documentary stamp taxes are

5. LLCs (has become the most common calculated at the rate of $0.70 per form of ownership) $100 of purchase price; in Miami- 6. Business Trusts Dade County the rate is $0.60 per 7. Business Corporations $100 of purchase price plus an additional $0.45 surtax per $100 of (i) C corporation purchase price on documents (ii) S corporation transferring property other than a single-family residence VI. FORM OF DEED 2. The documentary stamp tax and, if A. General warranty deed – most protection applicable, the surtax, is paid to the for buyer Clerk of Court when the deed is 1. Grantor warrants title for all times recorded; the Clerk then sends the that the property has existed, money to the Department of Revenue. including before grantor took title to B. Title Insurance Commitment, Title Policy, the property and Municipal Lien Searches 2. Most likely to see this form of deed in 1. The cost of the title insurance the residential context commitment is usually paid by Seller, B. Special warranty deed – middle-level even if ordered by the Buyer or protection for buyer Buyer’s attorney. 1. Grantor warrants title for the period 2. The premium for the title insurance that grantor has owned the property policy is a promulgated rate based upon the purchase price for the property being purchased. The

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attorney for the party that is 1. Title Company will typically require on responsible for paying for the title Title Commitment as a requirement insurance premium generally is the for Title Policy to be issued. agent that issues the title insurance 2. Purpose of the Affidavit is for Seller to policy. Whether the Buyer or the provide assurance to the Title Seller pays for the title insurance Company and the agent for the Title premium is negotiable, but in most Company that no liens or other counties in the Florida, the custom is encumbrances have been placed on for the Seller to pay for the title the property in the past 90 days and insurance premium. The main that no work has been performed the exceptions are Miami-Dade County cost of which is remains unpaid; this is and Broward County, where the important because there is a gap custom is that the Buyer is responsible period between when the Title for paying the title insurance Commitment is issued by the Title premium. Company and when the Title Policy is 3. The cost of the municipal lien searches issued. (also known as lien letters) is usually C. FIRPTA Affidavit – IRS requires paid by the Seller. 1. Proof that grantor is a US entity

C. Inspections, Survey, Due Diligence, and paying US taxes Financing Costs are usually the responsibility of the Buyer. 2. If Seller is a foreign entity not paying US taxes, the transferee/settlement

D. Real property taxes, association agent must withhold 15% of the maintenance fees, special assessments, purchase price and remit it to the IRS rents, and operating expenses are usually to ensure that taxes will be paid on prorated as of the closing date, with the the income if any taxes are owed. Seller responsible for those costs/revenues incurred prior to the 3. One important exception to FIRPTA closing date and the Seller responsible for withholding is a transferee/settlement those costs/revenues incurred from and agent is not required to withhold after the closing date. when the Buyer is purchasing a home and the purchase price is not more

VIII. OTHER CLOSING DOCUMENTS than $300,000.

A. Bill of Sale – conveys personal property D. Assignments (i.e., refrigerator, washing machine, appliances, equipment, etc.); usually does 1. Can include Assignment of Leases, not get recorded. Assignment of Contracts, Assignment of Bulk Buyer Rights, etc. B. Seller’s Affidavit – also can be referred to as title affidavit, lien affidavit, gap (i) Would typically see these in the affidavit, or some combination of these context of buying and selling a terms i.e., title, lien, and gap affidavit. commercial building (ii) Both buyer and seller usually sign these assignments.

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E. Closing Statement – also typically called Settlement Statement 1. Sets forth the purchase price, closing costs and prorations of the transaction as debits and credits to Buyer and Seller. 2. Will usually include the financing costs for the Buyer’s loan; provided, sometimes in a commercial transaction, the Buyer’s lender will have its own, separate loan closing statement. IX. RECORDING REAL ESTATE DOCUMENTS A. Deeds need to be witnessed by two witnesses and notarized 1. Only the Grantor signs the deed (not the grantee) 2. Regarding recording, Florida is a Notice state, i.e., last bona fide purchaser without notice who pays value has priority 3. Must record the original of the deed (cannot record copies, except with e- recording but must have original in possession) B. Other than the Deed, most other conveyance documents are not recorded; sometimes a limited liability company affidavit is recorded to evidence authority for execution of the Deed C. If the conveyance is a condominium unit which requires the approval of the condominium association, then the condominium association approval is usually recorded with the Deed

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DAVIS, MALM & D’AGOSTINE Buying and Selling Real Estate in the United States - Massachusetts

ILN REAL ESTATE GROUP

I L N R E A L ESTATE GROUP

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER MASSACHUSETTS LAW I. STANDARD FORMS OF AGREEMENTS with a Title V inspection (with passing results) from the town in which the home is A. Offer to Purchase sets forth buyer’s offer of price, date for closing, contingencies for located. inspections, financing etc. and date for C. Commercial: In addition to the inspections signing a formal purchase and sale performed by residential buyers, agreement. Seller may accept or reject. commercial buyers also usually obtain a B. Purchase and Sale Agreement sets forth the survey, an environmental review, and a use complete terms of the purchase and sale. and zoning/permitting analysis. C. Note: In Massachusetts, an Offer to IV. FORMS OF OWNERSHIP Purchase may be enforced as a binding A. Residential Property is usually held in a contract even if it contemplates the nominee trust, an estate planning trust, or execution of a Purchase and Sale an individual’s own name. Joint owners may Agreement. take title as: II. BROKERS 1. Tenants in Common (each own 50%); A. All brokers in Massachusetts whether they 2. Joint Tenants with rights of survivorship are working with the buyer or the seller (they own the property jointly and the represent the seller unless the buyer enters survivor ends up with 100%); or into a separate Buyer’s Broker or Dual 3. Tenants by the Entirety if the owners Agency Agreement. are a married couple (they each own B. Seller usually pays the brokers commission the undivided whole of the property). unless negotiated otherwise. B. Commercial Property may be held as III. BUYER’S INSPECTIONS follows: A. Residential: Prior to Closing, the buyer 1. As the Owners pursuant to the forms performs property inspections including set forth in A above, (highly unusual for inspection for structural issues, radon, liability purposes) asbestos, pest infestation or damage, title, 2. General Partnership/Joint Venture and in certain rare circumstances, lead paint and underground storage tanks (for 3. Limited Partnership oil or propane). Buyers should also check 4. LLPs the town/city building file on the property to make sure all alterations and renovations 5. LLCs (most common) have been completed in compliance with 6. Business Trusts permits and all permits are properly closed 7. Business Corporations out. Buyer or its lender will also obtain a plot plan of the premises. i. C corporation B. Private Septic. If the property is on a private ii. S corporation septic system (rather than municipal sewer), then seller has to provide buyer

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V. THE “CHECK-THE-BOX” REGULATIONS 2. Trust property can be effectively A. Treas. Reg. §1.7701-1 et seq. provides that conveyed by assignment of domestic business corporations are always beneficial interests. Useful for intra- classified as corporations for Federal family gifts. income tax purposes; GPs, LPs, LLCs, LLPs, 3. No income taxation on trust level; and business trusts are automatically “pass-through” to beneficiaries. classified as partnerships (with pass- 7. Disadvantages through treatment) unless they “check-the- box” on Form 8832 electing to be taxed as 1. No limited liability for beneficiaries. corporations. 2. Sole trustee and sole beneficiary B. C corporations are subject to a “double may not be identical – merger will tax,” once on the corporate level, and again result. on dividends or distributions to 3. Poor draftsmanship can result in shareholders. S corporations are taxed only trust being treated as a “true trust,” at the shareholder level, with a few which may result in the trust being exceptions. Partnerships “pass-through” subject to tax on capital gains and income or loss to the partners. Single- undistributed income and inability owner LLCs and business trusts are to pass through losses. “disregarded entities.” 4. Ancillary probate for deceased non- VI. DISTINGUISHING FEATURES Massachusetts beneficiaries (who A. Nominee Trust are deemed to own Massachusetts real estate). 1. Fiduciary relationship between “trustee” and beneficiaries listed on an 5. Potential for fraud by beneficiaries. unrecorded schedule. 6. Creation of a partnership if two or 2. Trustee has no power to deal with the more beneficiaries. trust property except as specifically 7. Deeds excise tax on transfer of directed by beneficiaries – legally an beneficial interest (DD 95-2). “agent” for beneficiaries. B. General Partnership/Joint Venture 3. Third parties are entitled to rely on certificates signed by trustees of record. 1. GP is an agreement (oral or written) among two or more people to engage in 4. Beneficiaries may terminate or amend business. trust at any time. 2. A joint venture is a GP which is limited 5. On termination, the trust property is to a specific project or business. conveyed to beneficiaries. 3. Governed by Massachusetts Uniform 6. Advantages Partnership Act, G.L. c. 108A. 1. Beneficiaries are undisclosed 4. In absence of written agreement, a (privacy). numerical majority of partners control decision-making.

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5. Limited transferability of interests. 4. Fiduciary duties – self-dealing, 6. Limited life. Withdrawal of partner corporate opportunities. Can be dissolves partnership, but partnership modified by contract. can be reconstituted. C. Limited Partnerships 7. Advantages 1. A statutory entity governed by G.L. c. 1. Simplicity, informality. 109. Creation requires filing of a brief certificate of limited partnership. 2. Pass-through treatment. 2. Limited partnership is managed and 8. Disadvantages controlled by general partners (GPs). 1. No limited liability. Partners are Limited partners (LPs) are passive jointly and severally liable for investors. partnership liabilities. New partners 3. Certain extraordinary actions can liable only for future obligations; require approval of LPs. retired partners for past obligations. 4. Written limited partnership agreement 2. Limited transferability of interests. not required but highly advisable. 3. Conveyancing issues: 5. Advantages (i) If title to real estate is in the 1. Limited liability for LPs. name of the partnership, any

partner may convey title in the 2. “Pass-through” tax treatment. No name of the partnership. A BFP entity-level tax. may rely on the deed, 3. Names of LPs not publicly disclosed. notwithstanding any limitations 6. Disadvantages on the partner’s authority (G.L. c. 108A, §10(1)). 1. Unlimited liability for GPs, but a limited liability entity, such as an LLC

(ii) If title in the name of less than or a corporation, can be a GP. all partners (and the record does not disclose the partnership’s 2. Unlimited liability for LP who takes rights), the named partners may part in control of business or convey title to a BFP, knowingly permits his name to be notwithstanding the existence of used in the name of the limited an undisclosed partner (G.L. c. partnership. 108A, §10 (3)). 3. Limited transferability of interests (iii) If title in the name of all the requires consent of all partners to partners, all must sign the deed. admit a new LP; unadmitted (G.L. c. 108A, §10 (5). transferees are entitled to distributions but have no other

(iv) Attachments against partners rights as LP. individually can affect the partnership’s title if the claim 4. Fiduciary duties. relates to a partnership liability.

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D. LLP partnership); (iii) an “autocratic 1. A general partnership that files a model” LLC, with one or more registration form with the Secretary of managers having sole control of the State under G.L. c. 108A, §§45-47. LLC (like a limited partnership); or (iv) any combination of the above. 2. Same advantages and disadvantages as

a general partnership, but partners have 4. Can limit or eliminate fiduciary limited liability. duties.

3. Must renew LP status by annual filing 7. Disadvantages with Secretary of State. 1. Limited transferability. Effectively E. LLCs disqualifies LLCs from being public companies. 1. Governed by G.L. c. 156C. Requires filing

of certificate of organization naming 2. Operating agreements can be manager (of if no manager, at least one complex and expensive to create. person authorized to sign filings with 3. Uncertainty as to “corporate veil” the Secretary of State). doctrine. 2. Very flexible, can be member-managed 4. Uncertainty re legal status in other or manager-managed. states. 3. “Pass-through” tax treatment unless it F. Business Trust elects to be taxed as a corporation. 1. An unincorporated organization 4. Single-member LLCs can be treated as governed by the common law, but “disregarded entities” for tax purposes. subject to regulation under G.L. c. 182. 5. Written operating agreement 2. Written declaration or agreement of unnecessary, but highly desirable in trust and all amendments must be filed most cases. with the Secretary of State and the clerk 6. Advantages of every municipality in which trust has a usual place of business and recorded 1. Limited liability and pass-through in the registry of deeds if it owns real tax treatment. property. 2. Less formality than a corporation. 3. Trustees are the managing body of the No minute book, stock ledger, etc. trust and may delegate duties to Query: Is that an advantage or officers. Shareholders may elect disadvantage? trustees, but this may give rise to 3. Flexibility. Operating Agreement can personal liability. See Paragraph 4 create (i) a “corporate model” LLC, below. with officers and a board of 4. Trustees have personal liability for managers elected by members (like contracts, but typically limit liability to a corporation); (ii) a “partnership the trust assets. Shareholders who model” LLC, with management by participate in excessive control or the members (like a general

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management may be personally liable, 4. Advantages as partners, for the debts of the trust. 1. Limited liability of shareholders by 5. Shares are represented by certificates, statute. which are freely transferable subject to 2. Free transferability of stock. applicable securities laws. 3. No deeds excise tax on sale of stock. 6. The existence of a business trust may be subject to the Rule against Perpetuities. 4. Pass-through treatment for S Many trusts have specified dates of corporations. termination. 5. S corporation dividends are tax free 7. Advantages to extent of basis. 1. Free transferability of interests. 5. Disadvantages 2. Limited life. 1. Double taxation for C corporation. 3. May elect “pass-through” 2. No pass-through of C corporation treatment. loss. S corporation losses limited to shareholder’s basis (plus loans to

4. Once popular, now uncommon corporation and corporate liabilities outside the utility, mutual fund, and assumed by S corporation REIT industries. shareholders). Guaranties not 8. Disadvantages considered as debts. 1. Potential unlimited liability. 3. Unlike partnership, S corporation 2. Fiduciary duties. allocation of income and loss is inflexible. G. Business Corporations 4. Mass. “sting tax” to “big” S 1. Statutory entity – G.L. c. 156D. corporations with over $6 million in 2. C corporation taxable as an entity (max. income (1.87%) or $9 million (2.8%). Federal tax, 35%; Mass., 8%). (G. L. c. 63, §32(b)). 3. S corporation gives pass-through of 5. Corporation excise tax lien (G.L. c. income and loss (Federal and Mass.) pro 62C, §51). rata based on shareholdings. i. (NOTE: excise tax lien now 1. Requires election by all also applies to shareholders. unincorporated entities electing corporate tax 2. One class of stock. status). 3. 100 shareholder maximum. 6. Two-thirds shareholder vote 4. Shareholders must be individuals required to approve sale of all or (no non-resident aliens), certain substantially all assets. (G.L. c. 156D, trust and estates, certain tax- §12.02). exempt entities.

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7. Dissolution by Secretary of State – maximum tax liability on disposition is but reinstatement possible. (G.L. c. less than amount required to be w/held; 156D, §108). Note that assets can be installment sales rule exception, l/c or sold after dissolution as part of bond is posted etc.) “winding up.” - Buyer becomes withholding agent and 8. Corporate signatories: President or must remit by the 20th day of the date Vice President and Treasurer or of transfer; file Form 8288 Asst. Treasurer, who may be the IX. OTHER CLOSING DOCUMENTS same person. (G.L. c. 156D, §8.46). Corporate vote authorizing other A. Residential Properties: Seller has to have a officers may be recorded. smoke/carbon monoxide inspection performed by the town/city fire VII. FORM OF DEED department and provide a certification at A. The common deed in Massachusetts is the Closing. Quitclaim Deed whereby the Seller gives B. Title V Inspection Certificate – if the covenants as to Seller’s period of ownership property is on a private septic system. only. C. Buyer has to obtain a municipal lien VIII. CLOSING COSTS/ADJUSTMENTS certificate from the Town/City where the A. Seller usually pays the transfer taxes due at premises are located stating the current the time of the conveyance to the status of real property taxes payments and Commonwealth of Massachusetts. The tax balances due. This certificate also advises if is $4.56 per $1,000 of sale proceeds. water and sewer charges are due. B. Note: In a few jurisdictions in D. Residential Property – If the property is to Massachusetts the tax is higher. be used as a principal place of residence, C. Note: In Nantucket and Martha’s Vineyard, the buyer may want to consider filing a there is an additional land bank tax that is Homestead Exemption. paid at the time of conveyance. E. Sales by a Corporation are subject to the D. Buyer and Seller adjust for water, sewer, seller’s procurement of a Tax Lien Waiver. gas/oil, electricity, and taxes. In addition to The Commonwealth of Massachusetts has the foregoing, if the property is commercial an inchoate lien on the real and personal property, adjustments are also made for property of a seller if the sale of the rents, third party operating expenses and property constitutes a sale of all or common area maintenance expenses. substantially all of the seller’s assets in the Commonwealth and the waiver advises the E. Land that has been subjected to agricultural buyer that the lien has been waived and all purposes may be subject to certain taxes taxes have been paid. and payments if it the agricultural purposes are terminated. X. RECORDING REAL ESTATE DOCUMENTS

F. Withholding Tax – Foreign Seller A. Title Documents are recorded on a county basis in Massachusetts. In other states, title - 10% of amount realized (subject to documents are recorded in the towns and reduction in certain situations (i.e., city records.

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B. Unlike most other states in the United States, Massachusetts has two recording systems. 1. Registered Land. Some property is registered land whereby real estate documents are filed with the Registry District of the Land Court within each county in which the premises are located. Registered Land means that the land has been certified, all documents affecting registered land are confirmed at the time of filing, and the Commonwealth of Massachusetts guarantees the title to the property. The Land Court issues a certificate of title certifying title to the owner of each registered property. 2. Recorded Land. Unless the property is registered, it is recorded land and is recorded with the Registry of Deeds in the County where the premises are located. XI. ANNUAL COSTS FOR PROPERTY OWNERSHIP A. Property Insurance B. Real Estate Taxes A. Ad Valorem/Town & City Assessments B. Rental Properties (Florida – tax on rental income) C. Personal Property Taxes (Cars, Boats, etc.) NOTE: The tax implications of Foreign Purchases and ownership of US-based real estate are outside the scope of this outline.

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Fall INTERNATIONAL LAWYERS NETWORK

INTERNATIONAL LAWYERS NETWORK

INTERNATIONAL LAWYERS HOWARD & HOWARD ATTORNEYS Buying and SellingNETWORK Real Estate in the United States - Michigan

ILN REAL ESTATE GROUP

INTERNATIONAL

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KEY FACTS OF REAL ESTATE ACQUISITIONS UNDER MICHIGAN LAW

I. STANDARD FORMS OF AGREEMENTS III. BUYER’S INSPECTIONS A. Offers to Purchase that are accepted by A. Residential. It is typical that a buyer is sellers are the typical form of purchase provided with a 5 to 7-day window to contract for residential properties. The have the property inspected. The skill offer, often negotiated before being level of residential home inspectors signed by all parties, sets forth the varies greatly. Inspectors should review offered price, proposed closing date, the structural elements, roof, windows, buyer’s inspection and financing soundness of foundation, mechanical contingencies, type of deed conveyance equipment (AC and heating units, hot (warranty, special or quit claim), etc. water tanks, etc.) and check for radon Any proposed change by seller to the gas, asbestos, and pest infestation. In buyer’s offer is considered a older homes, especially in rural areas, counteroffer. the inspection should look for old fuel B. Negotiated Purchase and Sale oil tanks that can lead to environmental Agreements are typically utilized when issues if they were not properly closed. commercial or industrial properties are It is wise to hire an attorney to review bought and sold. the seller’s title to the property and that review (whether or not an attorney is II. BROKERS hired) is much more definitive if a A. Buyers and sellers are not required to survey of the property is obtained use a real estate broker or real estate (showing encroachments, easements or salespersons (a/k/a agents) in restrictions that might affect the ability connection with the sale of real estate. to add on to the home later, etc.). All real estate brokers and agents must B. Adverse Possession/Boundary Disputes. be licensed by the state of Michigan. All A survey obtained during the inspection real estate agents, while being licensed period should assist in determining any themselves, must be associated with a potential adverse possession claims or licensed broker. boundary line disputes (e.g., B. In most residential transactions, the encroachments by a fence, a shed, etc.). broker and agent must disclose which Adverse possession and acquiescence to party they are representing. Brokers a particular boundary line may happen and agents may, through a statutory after 15 years of uninterrupted dual agency disclosure, represent both possession (or location of a fence or the buyer and the seller in a residential boundary marker). A boundary line can transaction. be re-established by agreement (through conduct or writing) without a C. In the typical transaction, the seller pays 15-year waiting period. its broker a full commission and seller’s broker will share that commission with C. Private Septic. If the property is on a the buyer’s broker, if any. private septic system (rather than a municipal sewer), then, depending on

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the locale, a certificate of inspection can proceed. A certificate from the from the local municipality or health commercial tenants certifying the full department may be required. and complete lease and all amendments D. Seller’s Disclosures. For improved thereto and that the seller-landlord is residential property, the seller is not in default are often obtained as part required to provide a seller’s disclosure of the due diligence. statement where the seller discloses IV. FORMS OF OWNERSHIP certain conditions (water infiltration, A. Typically, residential property is held in condition of heating unit, etc.) of which a trust or an individual’s name. If held in it is aware. For houses built before a trust, the trust may be either 1978, a lead paint disclosure is also irrevocable or revocable. Irrevocable required. trusts typically cannot be modified or E. Certificates of Occupancy and Building terminated by the grantor without the Permits. Some cities and townships consent of all of the beneficiaries or require that a home be inspected to court approval. In Michigan, trusts are verify that it meets the applicable generally governed by the Michigan building codes before it can be sold. If Trust Code, MCL 700.7101 et seq. Joint code violations are cited, the parties owners to property may take title as: often negotiate a price reduction if the 1. Tenants in Common. Tenants in seller is not willing or able to cure the common each hold a separate violation(s). A buyer should also check and distinct interest in property the municipality building department to but share a right of possession. determine if there are any open permits There is no right of survivorship. for work that have not been approved In other words, if property is through a final inspection. owned by two individuals, and F. Commercial: In addition to the property one individual dies, the inspections, commercial buyers also deceased’s interest reverts to his usually obtain a survey, an or her estate, and not the other environmental review, and a use and owner. zoning and/or permit compliance 2. Joint Tenants. Joint Tenants review. Depending on the municipality, hold equal and undivided a certificate of occupancy may also be interests in property, with a right needed before commercial property can of survivorship. In other words, if be transferred. If commercial tenants property is owned by two occupy the premises, a thorough review individuals, and one individual of the leases is advised (buyers are dies, the deceased’s interest advised not to rely on rent rolls or lease reverts to the other owner of the summaries) and it is not uncommon for property. commercial leases to contain a right of first refusal to buy the property 3. Tenants by the Entirety. A (granted to the tenant) that must be married couple can hold real complied with or waived before a sale property as tenants by the

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entirety, where each spouse of the partnership. All entities except holds equal and undivided for C corporations generally avoid interests in the real property, double taxation. with rights of survivorship. VI. DISTINGUISHING FEATURES

B. Commercial property may be held as A. GP/Joint Venture follows: 1. A partnership is an association of

1. By an individual pursuant to the two or more persons to carry on as forms set forth in IV.A above (not co-owners of a business for profit. recommended for liability MCL 449.6. A partnership is a purposes). distinct legal entity, separate from 2. General Partnership (“GP”)/Joint its owners. Venture. 2. GPs (sometimes referred to as co- 3. Limited Partnership (“LP”). partnerships) generally must file a 4. Limited Liability Partnership certificate of partnership in the (“LLPs”). county where the partnership conducts its business. MCL 449.101. 5. Limited Liability Company (“LLCs”)

(most common). 3. A joint venture is a partnership which is limited to a specific 6. Corporation: duration or scope. (i) C corporation; or 4. GPs are governed by the Michigan (ii) S corporation. Uniform Partnership Act, MCL 449.1 et seq (“MUPA”). V. TREASURY REGULATIONS 5. Although not required by statute, it A. Under Treas. Reg. §301.7701-1 et seq., is strongly recommended that corporations are always classified as partnerships have a Partnership corporations for federal income tax Agreement. A Partnership purposes. On the other hand, GPs, LPs, Agreement sets forth the duties and LLCs (with more than one member), and obligations of the partners towards LLPs are classified as partnerships for one another and to the partnership. federal income tax purposes, unless Absent a Partnership Agreement, they elect to be taxed as corporations. the MUPA creates default rules B. C corporations are subject to a “double” governing the relationship between income tax because they are taxed at partners. For example, absent an the corporate level, and shareholders agreement to the contrary, the are taxed on the dividends they receive MUPA provides that partners will from the corporation. Subject to certain share equally in the partnership’s exceptions, S corporations are generally profits and losses, and that all taxed only at the shareholder level. partners have equal rights in the Partnerships and LLCs pass through management of the partnership. their income and losses to the partners MCL 449.18 (a); MCL 448.18(e).

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6. Absent a Partnership Agreement to business of the partnership, the contrary, partnership interests unless (i) the conveying are generally transferable. However, partner lacks the authority to the transfer of an ownership make the conveyance, and interest in a partnership only (ii) the purchaser has actual transfers the right to receive knowledge of the fact that distributions, and not any other the conveying partner lacks rights of ownership (including the such authority. MCL 449.9. right to participate in management). (ii) If title to real estate is in the MCL 449.27. name of multiple partners in 7. The withdrawal of a partner their individual capacities, all dissolves the partnership. MCL such partners must sign the 449.29 deed. 8. Advantages 2. Fiduciary Duty. Partners have a 1. A partnership is a pass-through duty to render true and full entity. The partnership passes information to the partnership. through its profits and losses to MCL 449.20. the partners and there is no B. LPs entity level income tax. 1. A LP is a statutory entity governed 2. Partnerships can be informal, by the Michigan Revised Uniform depending on the partnership Limited Partnership Act agreement (or lack thereof). (“MRULPA”), MCL 449.1101 et seq. 9. Disadvantages The MUPA also applies to LPs, except to the extent that it conflicts 1. Partnerships are not limited with the MRULPA. liability entities (like an LLC or a

corporation). The partners of a 2. In order to form a LP, a Certificate of partnership are jointly and Limited Partnership must be filed severally liable for partnership with the Michigan Department of Licensing and Regulatory Affairs liabilities. MCL 449.15. (“LARA”). MCL 449.1201(a). Conveyancing issues: 3. A LP must have at least one general (i) Any partner of a partnership partner and one limited partner. may generally convey title to MCL 449.1101(8). General partners partnership real estate (i.e., have managerial authority over the title to the real estate is in business. Limited partners are the partnership’s name). A generally not liable for the purchaser may rely on a obligations of the partnership, deed signed by any partner, unless (i) the limited partner is also a so long as the partner who general partner or, (ii) the limited executed the deed is carrying partner takes part in the control of on in the usual way of the business. MCL 449.1303(a).

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4. Certain actions may require outs, a debt, obligation, or other approval of the limited partners. liability of an LLP is solely the debt, 5. A written limited partnership obligation, or other liability of the agreement is not required but registered LLP. MCL 449.46(1). strongly recommended. However, a partner in a registered LLP will be liable for the partner’s 6. Advantages own negligence, wrongful acts, 1. The limited partners of the omissions, misconduct, or partnership have limited liability. malpractice, or that of any individual MCL 449.1303(a). who is under the partner’s direct supervision and control, that results 2. A LP is a pass-through entity. The in a debt, obligation, or other LP passes through its profits and liability of the registered LLP. MCL losses to the partners and there 449.46(2). is no entity level income tax. 2. Partners in an LLP have some 7. Disadvantages liability protection, but not as much 1. There general partners are protection as limited partners in a generally fully liable for the LP’s LP. liabilities. Notwithstanding this 3. Must file an application to register liability, a limited liability entity, an LLP with LARA. such as an LLC or a corporation, can serve as a general partner. D. LLCs MCL 449.1403. 1. Governed by the Michigan Limited 2. A limited partner who takes part Liability Company Act, MCL in the control of the business 450.4101 et seq. An LLC must file may be subject to unlimited Articles of Organization with LARA. liability. MCL 449.1403(a). A MCL 450. 4202. limited partner who “knowingly 2. LLCs are very flexible and can be permits his or her name to be tailored to the needs of the used in the name of the limited members. LLCs can be member- partnership”, except under managed or manager-managed. certain circumstances permitted Profits, losses, and distributions can by statute, is liable to creditors generally be divided in any manner of the LP, provided that the agreed upon by the members with creditors do not have actual certain restrictions. knowledge that the limited

partner is not a general partner. 3. LLCs receive pass through income MCL 449.1303(d). tax treatment unless the LLC elects to be taxed as a corporation or is a C. LLP disregarded entity. 1. Similar to GPs, except with more 4. A written Operating Agreement is limited liability for partners. unnecessary, but strongly Specifically, except for certain carve

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recommended. This is the document have an attorney draft a complex that describes how the LLC will be operating agreement. managed and operated. Operating E. Corporations Agreements can be drafted in a manner that best suits the needs of 1. A corporation is a statutory entity. the company and its members. Corporations are governed by the Michigan Business Corporation Act,

5. Advantages MCL 450.1101 et seq.

1. Unless otherwise provided by 2. Corporations must file Articles of law or in an operating Incorporation with LARA. MCL agreement, the members and 450.1202 et seq. mangers of an LLC have limited liability. MCL 450.4501(4). 3. A C corporation is subject to double income taxation. It is taxed at the

2. There is no entity level income entity level, and then the tax on an LLC. The profits and shareholders are taxed on dividends. losses of the partnership are passed through to the members. 4. A S corporation passes through income and losses pro rata based on

3. LLCs have fewer statutory ownership. S corporations are requirements than a corporation generally not taxed at the entity and are generally more flexible. level. S corporation status requires:

4. There are very few statutory 1. Election by all shareholders. requirements about what must be contained in an Operating 2. The filing of form 2553 with the Agreement. Operating Internal Revenue Service. Agreements can be as simple or 3. Only one class of stock. as complex as the members desire. However, Operating 4. A maximum of 100 shareholders. Agreements generally cover 5. Only certain individuals or issues like management, entities may be shareholders. membership, income or loss Shareholders may be individuals, allocations, cash and property certain trusts, and estates, and distributions, and transferability may not be partnerships, of ownership. corporations, or non-resident 5. The Operating Agreement can aliens. limit or eliminate the duties 5. Directors and officers owe a members owe to each other. fiduciary duty to the corporation. 6. Disadvantages They must: (i) perform their duties in good faith, (ii) with the care an 1. In order to enjoy some of the ordinarily prudent person in a like benefits of an LLC, the members position would exercise under must create a tailored operating similar circumstances, and (iii) in a agreement. In can be expensive to manner he or she reasonably

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believes to be in the best interests of Incorporation (except under of the corporation. MCL certain circumstances) (MCL 450.1541a(1). Shareholders 450.1611(3)), adopting a plan of generally do not owe a fiduciary merger or share exchange (MCL duty to other shareholders (unless 450.1703a(1)), and selling all or the duty is set forth in a shareholder substantially all of the agreement). corporation’s assets outside of 6. Advantages the ordinary course (MCL 450.1753). Most changes require 1. Shareholders have limited approval from the majority of liability for acts of the shareholders and may require corporation. approval from an affected class 2. Shareholders can generally of shareholders. Shareholder freely transfer their stock (unless agreements may require subject to a shareholder approval from a greater agreement stating otherwise). percentage of shareholders for certain actions. 3. S corporations receive pass through income tax treatment VII. FORM OF DEED (no double taxation) A. The common deed in Michigan is the 4. S corporations may lead to “warranty deed” where the seller savings on self-employment warrants title. “Special warranty” and taxes. “Covenant” deeds are becoming more accepted and popular whereby, in each 7. Disadvantages case, the seller gives warranties against 1. C corporations are subject to title defects arising during seller’s double income taxation. period of ownership only. Quit claim deeds are also frequently used where 2. A C corporation cannot pass the seller conveys whatever interest it through its losses to its has and provides no warranties of title, shareholders. IRC 172. in which case the buyer should obtain 3. Unlike an LLC, S corporation and would be relying entirely on title allocations of income or loss are insurance to address title defects. rigid. VIII. CLOSING COSTS/ADJUSTMENTS 4. The Michigan Business A. Seller usually pays the transfer taxes Corporation Act is more due at the time of the conveyance. stringent than other applicable There is a standard county tax of $0.55 entity statutes in terms of per $500 of consideration, however, a requirements applicable to county with a population over 2 million corporations. may charge as much as $0.75 per $500. 5. Certain corporate activities The state transfer tax is $3.50 per $500 require shareholder approval in consideration. There are several including, amending the Articles transfer tax exemptions mostly

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involving family or related party should be executed by the seller and transactions with little consideration. buyer. B. Buyer and seller adjust for water, sewer, C. Title insurance is always recommended gas/oil, electricity, and taxes. and an effective review of title to the Depending on what part of the state the property is nearly impossible without a property is located, proration of taxes title commitment (and copies of all varies by local custom. The most exceptions to the seller’s title that common methods for pro rating taxes survive closing) being provided, which are: (1) paid in advance, due date basis commitment is the basis for the title (favors seller), (2) calendar year and (3) policy issued at closing. Typically, the paid in arrears, due date basis (favors seller pays the premium charged to buyer). With retail or multi-family issue the title insurance policy. Buyer is commercial properties, closing responsible for a title policy required for adjustments also include, among others, any purchase money financing. rents, management/operating X. RECORDING REAL ESTATE DOCUMENTS expenses, and common area maintenance expenses. Deeds and any other documents evidencing an encumbrance on title are recorded at the

C. Certain lands used for agricultural Register of Deeds for the County where the purposes pay reduced taxes that, in property is located. some instances, may be clawed back if the agricultural use is terminated. XI. PROPERTY TAXES D. Standard federal income tax A. Real Estate Taxes withholding for sellers who cannot 1. Real property is assessed for taxes provide a non-foreign FIRPTA affidavit. based on its true cash value which is IX. OTHER CLOSING DOCUMENTS to be determined annually by the local assessing unit. The assessed

A. Residential Property – If the property is value is to represent 50% of the true to be used as a principal residence, the cash / fair market value. seller should rescind any PRE, or “Personal Residence Exemption” seller 2. Michigan has a “cap” on increases in may have (results in lower property a property’s taxable value that is taxes) and the buyer should promptly tied to inflation. The taxable value file a PRE form with the local assessing stays low (no more than 5% increase unit. annually) regardless of any increase in the FMV of the property and is

B. If the property is leased (residential or reset to equal assessed value commercial/industrial), if the lease is to anytime there is a non-exempt be terminated at or before closing, a “transfer of ownership.” A transfer lease termination instrument signed by includes (with a few exceptions) the the tenant should be provided and if the sale of stock or lease(s) is to continue, an “assignment membership/partnership interests and assumption of lease(s)” instrument

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(not a deed) in the entity having title to the property. 3. Only businesses pay personal property taxes, and they are structured the same way and subject to the same “cap” as real property. There are many exemptions that apply to personal property, depending on the value and/or the type of personal property involved.

ILN Real Estate Group – Buying and Selling Real Estate Series